Key legal and regulatory developments driving and shaping M&A
The 340B Drug Pricing Program (340B Program) requires drug manufacturers to provide discounts on outpatient drugs in order to have their drugs covered by Medicaid.1 These discounts are in the form of reduced sales prices for participating "covered entities," which include disproportionate share hospitals, critical access hospitals, sole community hospitals, children's hospitals, freestanding cancer hospitals, rural referral centers, and grantee and look-alike federally qualified health centers. The U.S. Department of Health and Human Services' (HHS) Health Resources and Services Administration (HRSA) administers the 340B Program. HRSA describes the 340B Program as enabling "covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services."2 In the past several years 340B Program drug discounts have been questioned by HHS and the pharmaceutical industry. We discuss herein certain recent developments in the 340B Program.
In its calendar year (CY) 2018 hospital outpatient prospective payment system (OPPS) final rule,3 HHS's Centers for Medicare & Medicaid Services (CMS) reduced Medicare payment for separately payable 340B Program outpatient drugs from average sales price (ASP) plus six percent (ASP+6%) to ASP minus 22.5 percent (ASP-22.5%). This 340B Program new payment policy applies to most hospitals participating in the 340B Program, including disproportionate share hospitals. Rural sole community hospitals, children's hospitals and PPS-excluded cancer hospitals are not subject to the new payment policy.
Several hospital associations and hospitals filed a lawsuit against HHS seeking to block implementation of the 340B Program payment reduction. The U.S. District Court for the District of Columbia and later the U.S. Court of Appeals for the District of Columbia Circuit dismissed the lawsuit on jurisdictional grounds because none of the plaintiffs had presented a claim at the reduced payment rate at the time the complaint was filed.4 The plaintiffs cured the procedural deficiency by filing claims that had progressed through the appeals process and refiled their lawsuit in the U.S. District Court for the District of Columbia. In a December 2018 decision, the court ruled that HHS, in decreasing 340B Program payment rates from ASP+6% to ASP-22.5%, had exceeded its statutory authority and granted the plaintiffs' motion for a permanent injunction to stop enforcement of the payment reduction.5 The court also reinstated 340B Program payment to ASP+6% retroactive to January 2018.
In its CY 2019 OPPS final rule, CMS again included the 340B Program ASP-22.5% payment methodology.6 In May 2019, the U.S. District Court for the District of Columbia again ruled in favor of the plaintiffs, finding that HHS had exceed its statutory authority in reducing 340B Program payment rates.7 The court, however, did not vacate the rulemaking, which would have required the federal government to reimburse hospitals for the difference in 340B Program payment rates, but rather remanded the matter to HHS to determine equitable relief. In a July 31, 2020, decision, a three-judge panel for the U.S. Court of Appeals for the District of Columbia Circuit in a 2-1 decision upheld CMS's CYs 2018 and 2019 OPPS rulemaking lowering 340B Program reimbursement rates.8 The court determined that HHS had not exceeded its statutory authority in implementing the rate reduction, but rather the new payment policy was based on a reasonable interpretation of the Medicare statute. On October 16, 2020, the full U.S. Court of Appeals for the District of Columbia Circuit denied the plaintiffs' request to reconsider the three-judge panel's July 31, 2020, decision.
In its CY 2021 OPPS proposed rule, CMS proposed to reduce further 340B Program drug payment rates from ASP-22.5% to ASP-28.7%.9 However, in its CY 2021 OPPS final rule released on December 2, the agency continues the current 340B Program payment policy of paying ASP-22.5% for 340B Program acquired drugs.10 Rural sole community hospitals, children's hospitals, and PPS-excluded cancer hospitals remain exempted from this payment reduction. These exempted hospitals will continue to report modifier "TB" for 340B Program drugs and will continue to be paid ASP+6%. CMS described that while it is maintaining for now the 340B Program payment policy of ASP-22.5%, the agency will continue to consider and evaluate the appropriateness of using 340B Program hospital survey data to set future payment rates for 340B Program drugs.
In the last few months some pharmaceutical manufacturers have imposed limitations on access to 340B Program drug pricing. Certain drug companies have informed hospitals that the companies will no longer provide 340B Program pricing for drugs dispensed through contract pharmacies. Other drug manufacturers have notified hospitals that they now require submission of contract pharmacy claims data. The pharmaceutical companies cite to duplicate discounts related to contract pharmacies as necessitating their actions. The Pharmaceutical Research and Manufacturers of America maintains that HRSA's 2010 policy enabling covered entities to contract with an unlimited number of retail pharmacies to dispense 340B Program drugs has resulted in contract pharmacies making a significant profit on 340B Program drug sales.11 The American Hospital Association has requested HHS to direct pharmaceutical manufacturers to cease charging hospitals and other covered entities more than the 340B Program price for drugs dispensed by a contract pharmacy.12
Congress in the 2010 Patient Protection and Affordable Care Act provided for an administrative dispute resolution (ADR) process for health care providers to take action against pharmaceutical companies for violations of the 340B Program statutory requirements. Under the Obama administration in 2016, HHS issued a proposed rule to establish a binding ADR process. The Trump administration later withdrew the proposed rule. In October 2020, the National Association of Community Health Centers (NACHC) filed a lawsuit in the U.S. District Court for the District of Columbia seeking to compel HHS to implement the ADR process that would enable health centers to take action against the drug companies that have stopped shipping drugs to health centers' contract pharmacies and/or requiring extensive claims data, which actions NACHC claims are a violation of 340B Program statutory requirements. The Office of Management and Budget in a November 17, 2020, posting indicated that a final rule implementing the ADR process is under review.
1 42 U.S.C. § 256b.
4 American Hospital Association v. Azar, No. 18-5004 (D.C. Cir. July 17, 2018) https://www.cadc.uscourts.gov/internet/opinions.nsf/1F81EE00F708DE4C852582CD0052ADDC/$file/18-5004-1740887.pdf.
5 American Hospital Association v. Azar, No. 18-2084 (RC) (D.D.C. Dec. 27, 2018).
7 American Hospital Association v. Azar, No. 18-2084 (RC) (D.D.C. May 6, 2019) https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2018cv2084-50.
8 American Hospital Association v. Azar, No. 19-5048 (D.C. Cir. July 31, 2020) https://www.cadc.uscourts.gov/internet/opinions.nsf/B8E3F76510742B95852585B600531146/$file/19-5048-1854504.pdf.
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On May 26 2021, the district court of The Hague rendered a ground-breaking judgment in collective action proceedings initiated by several non-governmental organizations (including Friends of the Earth (Milieudefensie)) (the NGOs) against Royal Dutch Shell plc (Shell). The NGOs claimed, in short, that Shell had to reduce its overall CO2 emissions by at least 45% from 2019 levels, by the end of 2030 (the Target Reduction). The court ruled in favour of the NGOs and ordered Shell to reach the Target Reduction (the Shell Case). This is stated to be the first time that a court ordered a company to reduce its CO2 emissions in line with the climate goals included in the Paris Agreement.
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