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The Trump Administration Won A Legal Fight To Slash Federal Payments To Hospitals During The Coronavirus Pandemic

The DC Circuit ruled the administration could cut a Medicare reimbursement rate by nearly 30% for hospitals that serve patients with low incomes.

Posted on July 31, 2020, at 12:45 p.m. ET

Brendan Smialowski / Getty Images

Secretary of Health and Human Services Alex Azar (left) with President Donald Trump.

WASHINGTON — A federal appeals court ruled on Friday that the Trump administration didn't violate federal law when it scaled back a billion-dollar drug reimbursement program that benefitted public and not-for-profit hospitals serving patients with low incomes.

The legal fight predated the coronavirus pandemic, but the stakes of the case became higher this year as hospitals have lost tens of billions of dollars as nonessential services and elective surgeries were put on hold.

Starting in 2018, the Department of Health and Human Services slashed the reimbursement rate paid to certain hospitals for outpatient drugs prescribed to elderly and disabled patients covered by the Medicare program. Under what's known as the 340B program, these hospitals buy drugs at a discounted rate, and then file claims with the federal government for reimbursement.

Hospitals participating in the program collectively have earned billions of dollars annually through the program because of the difference between what they paid and the higher reimbursement rate paid out by the government.

The Trump administration argued hospitals shouldn't be earning a windfall from the discounted drug rates and approved a plan to cut the reimbursement rate by approximately 30%. The hospitals argued that Congress intended to give hospitals a way to put the money they saved by paying a discounted rate for drugs back into services for poor and underserved communities.

A federal district judge in Washington, DC, sided with the hospitals, writing in a December 2018 opinion that the rate cut's “magnitude and its wide applicability inexorably lead to the conclusion” that the agency “fundamentally altered” what Congress intended. The lower rate has been in effect notwithstanding the judge's decision, though — he declined to block it while the litigation was pending, writing that forcing the government to pay back hospitals in the meantime was "likely to be highly disruptive."

HHS estimated that the rate change would save the Medicare program $1.6 billion in 2018 alone, and that money would be distributed back to hospitals through increases in other Medicare-related reimbursements.

Hospitals that participated in the 340B program argued they would still lose money even if the agency redistributed the money. Some hospitals filed affidavits in court saying they would lose millions of dollars each year.

In a 2–1 decision written by Judge Sri Srinivasan, the DC Circuit on Friday reversed the district judge's decision, finding that the Trump administration's decision to reduce the rate "rests on a reasonable interpretation of the Medicare statute."

Congress gave HHS two options for how to set the rate, using either an average of what hospitals were actually paying for drugs, or what the drugs cost in the marketplace. HHS had been using the average drug cost information because it didn't have survey data on what hospitals were paying, and the hospitals argued the law didn't allow HHS to use that data to make such a substantial cut. The hospitals also argued that a 30% cut was too big to qualify as an "adjustment" under the law.

Srinivasan wrote that Congress hadn't "unambiguously" prohibited HHS from using average drug costs to come up with a reimbursement rate to match what hospitals were paying for the drugs, even if they didn't have the actual purchase data. The hospitals' position would make Congress's decision to give the department an alternative way to calculate the reimbursement rate "superfluous," the judge wrote.

Srinivasan was joined by Judge Patricia Millett. Judge Nina Pillard dissented, writing that she agreed with hospitals that the Medicare law could only adopt "large reductions" if it had the specific survey data of what hospitals were paying for the drugs. She also wrote that the record showed Congress anticipated hospitals would earn revenue through the program.

"The net effect of HHS’s 2018 and 2019 OPPS rules is to redistribute funds from financially strapped, public and nonprofit safety-net hospitals serving vulnerable populations — including patients without any insurance at all — to facilities and individuals who are relatively better off. If that is a result that Congress intended to authorize, it remains free to say so. But because the statute as it is written does not permit the challenged rate reductions, I respectfully dissent," Pillard wrote.

Representatives of HHS and the Justice Department, as well as the American Hospital Association, one of the hospital groups that led the challenge, did not immediately return a request for comment.

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