Are Private Equity Firms the New Health-Care Fraud Target?

Private equity firms were placed on notice recently they may fall into an expanding False Claims Act liability net after the DOJ revealed it will proceed against one such firm for alleged fraud by a compounding pharmacy in which it held a majority stake.  Justin C. Linder discussed the implications of the DOJ’s decision to intervene in U.S. ex rel. Medrano v. Diabetic Care Rx, LLC in the June 1 issue of Bloomberg Law News.

Read the complete article: Are Private Equity Firms the New Health-Care Fraud Target?

Congressional Leaders Express Concern Over Medicaid Rebate Program Drug Misclassification; Enhanced Enforcement Authority Forthcoming?

By Justin Linder

A report by the Department of Health and Human Services (HHS) Office of Inspector General (OIG) concluding that Medicaid may have lost $1.3 billion in rebates, allegedly due to improper classification of drugs by pharmaceutical manufacturers, has drawn the attention of a bipartisan group of key House and Senate committee chairs and ranking members. In a March 22, 2018 letter to Seema Verma, Administrator of the Centers for Medicare and Medicaid Services (CMS), the congressional leaders expressed their “deep[] concern[] about these potentially longstanding weaknesses in the agency’s oversight of the accuracy of drug classifications” and requested additional information regarding CMS’s oversight activity and authority.

The OIG report prompting the letter (OEI-03-17-00100), followed an OIG investigation undertaken to evaluate the accuracy of manufacturer-reported data in the Medicaid Drug Rebate Program, and CMS’s oversight of that data. The Medicaid Drug Rebate Program, authorized under Section 1927 of the Social Security Act, requires that manufacturers enter into, and maintain, a national rebate agreement with HHS, guaranteeing a minimum mandated rebate in exchange for outpatient drug coverage by State Medicaid programs.  Under their rebate agreements, manufacturers are required to pay quarterly rebates to State Medicaid agencies designed to reduce the cost of Medicaid outpatient drug benefits to the Federal and State governments.  According to the OIG report, Medicaid paid a total of $60.5 billion for drug coverage in 2016.

CMS calculates unit rebate amounts (URAs) using drug pricing and product data, such as drug classifications, reported by manufacturers. Each calendar quarter, for each unit of drug covered by a State Medicaid program, each manufacturer must pay either a basic rebate based on a percentage of the drug’s average manufacturer price, as defined in 42 C.F.R. §447.504 (AMP), or a rebate based on the best price available to wholesalers and other customers, as computed in accordance with 42 C.F.R. §447.505.

As part of their rebate agreements, manufacturers are required to provide CMS with AMP and best price, if applicable, for each of their covered outpatient drugs. Manufacturers must also submit to CMS drug classification data that identifies the drug as either an “innovator” single-source or multiple-source product or a “noninnovator” multiple-source product, among other categories.  Manufacturers report and must certify drug classification data in the Drug Data Reporting for Medicaid System (Reporting System), and URAs are computed in reliance on this data.

The Medicaid URA owed by a manufacturer to a State government varies substantially, contingent on whether the drug is classified as an innovator (or “brand”) drug or a noninnovator (or “generic”) drug. With limited exceptions, the URA for innovator and noninnovator drugs is calculated as follows:

  • Innovator Drugs – the greater of 23.1% of the AMP (17% of AMP if it is exclusively pediatric or a clotting factor) per unit or the difference between the AMP and the best price per unit.
  • Noninnovator Drugs – 13% of the AMP per unit.

Manufacturers are required to pay an additional, inflation-adjusted rebate if a drug’s price increases faster than inflation.

On account of the substantial differential between URAs for the two drug categories, improper classification by a manufacturer of an innovator drug as a noninnovator drug could result in miscalculation of rebate amounts, causing State Medicaid agencies to invoice manufacturers much less than is actually owed.

Misreporting of drug classification data to CMS previously has been the province of False Claims Act litigation. For example, the alleged misclassification of EpiPen as a noninnovator drug prompted the filing of a False Claim Act whistleblower action against the manufacturer of the drug, Mylan, which in 2017 agreed to pay $465 million to resolve claims that they overcharged the government by manipulating the rebate amounts owed under the Medicaid Drug Rebate Program.

In light of concerns arising from misclassification, Congress requested that the OIG conduct an investigation to explore the magnitude of the potential problem and identify weaknesses with respect to CMS’s exercise of its Medicaid Drug Rebate Program oversight power.

OIG’s methodology for performing its investigation involved comparison of CMS drug classifications with the Food and Drug Administration’s (FDA’s) manufacturer-reported marketing categories, which include New Drug Application (NDA), Biologic License Application (BLA), Authorized Generic, and Abbreviated New Drug Application (ANDA). The first three of these FDA classifications would qualify a drug as an innovator product, subject to a higher rebate under the Medicaid Drug Rebate Program, while a drug falling under the ANDA categorization would be eligible for a lower Medicaid rebate as a noninnovator product.

OIG’s Findings

In its report, the OIG found that 95 percent of drugs in the Medicaid Drug Rebate Program matched FDA data in 2016. These drugs accounted for 98 percent, or $59.7 billion in 2016 Medicaid reimbursement expenditures.  Of the remaining covered outpatient drugs, three percent had CMS classifications that contradicted FDA data, and were thereby designated by OIG as “potentially-misclassified” drugs.  Of the potentially-misclassified subset, 97 percent were categorized as noninnovator products in the Medicaid file but as innovator products in the FDA data.  The OIG observed that not only would have manufacturers paid a lower base rebate amount (using the noninnovator instead of the innovator URA calculation) for potentially-misclassified drugs in 2016, but, when applicable, manufacturers would not have paid additional inflation-adjusted rebates.

Though potential misclassifications identified by the OIG were associated with 54 different manufacturers, just four manufacturers were responsible for 54 percent of the potential misclassifications. The top ten of these drugs accounted for 68 percent of Medicaid reimbursement for potentially-misclassified drugs in 2016.

The OIG report concluded that between 2012 and 2016, Medicaid may have lost $1.3 billion in base and inflation-adjusted rebates for just the top ten potentially-misclassified drugs with the highest total reimbursement in 2016.

CMS Drug Rebate Program Oversight Weaknesses Identified by the OIG

The OIG report underscores that it is the responsibility of manufacturers to report accurate classification data to CMS. However, OIG further recognizes that “CMS operates the Medicaid [Drug] [R]ebate [P]rogram and is ultimately responsible for overseeing the accuracy of drug classification reporting by manufacturers.”  After examining CMS procedures, the OIG report details various weaknesses in CMS’s current oversight regime and offers recommendations for improvement.  These recommendations arise from the following three primary flaws identified by the OIG:

  1. Though CMS identifies potential errors in its classification system and instructs manufacturers how to correct these errors, CMS does not maintain a database to track the status of identified potential errors and was unable to provide specifics or results to the OIG regarding CMS’s outreach to manufacturers.
  2. Though CMS added new variables to and modified the Reporting System in 2014 and 2016 to better detect the submission by manufacturers of inconsistent classification data (i.e., by requiring a manufacturer to also report a drug’s FDA marketing category, and blocking the input of inconsistent FDA and CMS drug classifications), CMS did not review drugs that had been entered into the Reporting System prior to these changes.
  3. Most significantly, OIG concludes that CMS lacks the authority to compel manufacturers to correct inaccurate drug classification data. Though CMS potentially could determine that a manufacturer’s refusal to correct a misreported drug classification gives rise to good cause for termination from the Medicaid Drug Rebate Program, such action by CMS is disfavored because termination could result in adverse repercussions to Medicaid beneficiaries, potentially disrupting their access to life-saving drugs.

OIG’s Recommendations to CMS for Improved Oversight & CMS’s Response

With respect to OIG’s first observation, OIG recommends that CMS follow up with manufacturers of potentially-misclassified drugs identified during the OIG investigation to determine whether current drug classifications are correct. CMS concurred with the recommendation and indicated that it will begin contacting such manufacturers.  In light of CMS’s agreement with OIG and the additional pressure exerted upon CMS in the March 22nd letter to “provide a workplan and specific timeframe for CMS to initiate and complete its review”, manufacturers of drugs designated by the OIG as “potentially-misclassified” likely can anticipate receiving correspondence from CMS in the coming months.

OIG’s second recommendation is that CMS improve its Reporting System to minimize inconsistent data submissions and track potential classification errors for follow up. Specifically, OIG recommends that CMS: (1) add another variable in its system to identify drugs that may be misclassified to assist in identifying manufacturers that may be paying inaccurate rebate amounts for potentially-misclassified drugs; (2) maintain records of all attempts to follow up with manufacturers that submitted potentially inaccurate classification information; and (3) use such information to track any cases in which the manufacturer refused to change its classification data.  CMS again concurred with OIG’s recommendation, noting that the agency is in the process of developing a new Program System to help identify and reduce inconsistencies.  Additionally, CMS indicated that it “has implemented system edits to prevent manufacturers from submitting new drugs with an incorrect classification . . .”.

Finally, OIG recommends that CMS pursue a means to compel manufacturers to correct inaccurate classification data. Significantly, OIG notes that “in instances in which voluntary engagement [with a manufacturer] does not result in accurate classification data, CMS does not have the legal authority to compel manufacturers to correct classification data.”  Likewise, the “OIG believes that it lacks authority to affirmatively pursue [civil monetary penalties] for the submission of inaccurate drug classification data.  OIG suggests that CMS could: (1) seek legislative authority to compel manufacturers to submit accurate data or otherwise enhance CMS’s enforcement authority and (2) “determine whether it has the authority”, as an alternative to program termination, “to suspend potentially-misclassified drugs from participation in the Medicaid rebate program until the manufacturer corrects all inaccurate information.”


Misreporting of drug classification data to CMS previously has been the province of False Claims Act enforcement, as exemplified by the whistleblower action against Mylan resulting in a $465 million settlement in 2017. However, the publication of a recent OIG report enumerating the purported weaknesses in oversight of drug classification reporting – particularly CMS’s lack of authority to compel reclassification, disincentives to the exercise of CMS’s authority to terminate rebate agreements and OIG’s lack of authority to assess civil monetary penalties – has invited congressional scrutiny, as reflected in the March 22nd letter to Administrator Verma.  To what extent the “deep[] concern[]” of the bipartisan group of congressional committee leaders will prompt administrative and/or legislative action – and the timeframe of such action – remains to be seen.  CMS’s response to the letter, due April 21, 2018, may provide further insight into the oversight and enforcement enhancements with which manufacturers may have to contend in the future.


Justin C. Linder, Of Counsel, is a seasoned life sciences and healthcare attorney with deep experience representing biopharmaceutical organizations, health systems, academic medical centers, integrated delivery networks and a variety of other healthcare entities.  As former General Counsel for a life sciences company, he is well-versed in market access and commercialization issues.  Justin’s focus includes sophisticated reimbursement negotiations involving pharmacy benefit managers and commercial insurers; pharmaceutical pricing issues; healthcare M&A matters; and negotiating a variety of managed care, vendor, pharmaceutical distribution, GPO, healthcare technology and physician alignment agreements, with an emphasis on pay-for-performance clauses.  Justin also provides practical regulatory and compliance counsel, specializing in state and federal fraud, abuse and privacy laws.  He can be reached at or (908) 272-0200.

Four Dughi, Hewit & Domalewski attorneys honored as Super Lawyers and Rising Stars for 2018

Dughi, Hewit & Domalewski is proud to announce that partners of the firm – Louis John Dughi, Jr. and Craig A. Domalewski – have been named by New Jersey Super Lawyers magazine as among the top attorneys in New Jersey for 2018.  Each year, no more than five percent of the lawyers in the state are selected by Super Lawyers to receive this honor.

In addition, the firm is also proud to announce that Brandon D. Minde and Kristin M. Capalbo were named to the 2018 New Jersey Rising Stars list. Each year, this designation is given to less than 2.5 percent of New Jersey attorneys recognized as the top up-and-coming attorneys who are 40 years old or younger, or who have been practicing for 10 years or less.

Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. For more information about Super Lawyers, visit

Hospital Groups and Government File Briefs in 340B Payment Reduction Appeal


Commencing January 1, 2018, non-exempt 340B covered entities reimbursed under the Medicare Outpatient Prospective Payment System (“OPPS”) have been on the receiving end of a nearly 30% reduction in reimbursements for prescription medication purchased through the 340B discount drug program.  The payment reduction, imposed under the Centers for Medicare and Medicaid Services’ (“CMS”) 2018 OPPS final rule, is the subject of ongoing litigation instituted by the American Hospital Association, various hospital groups and individual 340B hospitals (the “Hospital Plaintiffs”), seeking to enjoin its continued implementation.

Meanwhile, debate regarding the future of the 340B discount drug program has intensified on Capitol Hill, with competing bills vying for passage, and interest groups – most visibly, PhRMA, safety net hospital advocacy groups and the Community Oncology Alliance – jockeying for favorable legislative treatment and flooding editorial pages across the country.

The most notable recent development in what can only be described as a tumultuous year for the 340B program is the filing by the government on March 19th of its brief in a pending appeal of a district court ruling dismissing Hospital Plaintiffs’ action to enjoin CMS’ 340B payment reduction.  Following a December 29, 2017 Order by the United States District Court for the District of Columbia dismissing the lawsuit on jurisdictional grounds, the Hospital Plaintiffs appealed to the D.C. Circuit Court of Appeals, which subsequently granted the Hospital Plaintiffs’ request for an expedited appeal schedule.  The filing of the government’s brief follows the submission on February 15, 2018 of the Hospital Plaintiffs’ appellate brief and a February 22, 2018 Amici Curiae brief of 35 State and regional hospital associations.

In their brief, the Hospital Plaintiffs contend that the district court erred in dismissing their action as premature and that their continuing incurrence of actual damages following the January 1st payment reduction effective date weighs heavily in favor of preliminary injunctive relief.  More specifically, they argue that the OPPS final rule is causing irreparable injury to the Hospital Plaintiffs “by jeopardizing essential programs and services provided to their communities and the vulnerable, poor and other underserved populations, such as oncology, dialysis, and immediate stroke treatment services.”

The Hospital Plaintiffs contest the district court’s finding that they failed to “present” their claim to the Department of Health and Human Services (“HHS”), as required by the Social Security Act, asserting that their extensive comments challenging the legality of the payment reduction submitted during the OPPS rule comment period – which comments were addressed and rejected by the HHS Secretary in the OPPS final rule – satisfy the “presentment” standard.  In reaching this conclusion, the Hospital Plaintiffs reason that the comment period “was the only meaningful forum for presenting Plaintiffs’ position because once HHS issued the final regulation, no agency official could give Plaintiffs relief from the new reimbursement rate.”

On the merits, the Hospital Plaintiffs argue that the HHS Secretary’s near-30% rate reduction constitutes an improper exercise of his statutory rate-setting authority:

Under that authority, HHS must base the rate on acquisition costs if it has certain data specifically identified in the statute. If it lacks that data, the statute provides that the reimbursement rate is the average sales price of the drug (“ASP”) plus 6% to account for overhead and related costs – a rate the statute authorizes the Secretary to “adjust[] as necessary for purposes of this paragraph.” Here HHS acknowledged that it lacked the data required to use acquisition cost, but attempted to end-run the statutory requirement by adopting an acquisition-cost based rate in the guise of an “adjustment” to the ASP plus 6% statutory rate.

Additionally, the Hospital Plaintiffs complain that the HHS Secretary’s limited statutory “authority to adjust the ASP or overhead cannot be used to make significant changes to the 340B Program, which is not part of the OPPS system and therefore not the subject of an ‘adjustment as necessary’ under that system.”  In framing this argument, Hospital Plaintiffs reference Congress’s oft-cited purpose for creating the 340B program: “to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  The Hospital Plaintiffs then quote the Health Resources and Services Administration (“HRSA”), the HHS agency responsible for administering the 340B program, in support of their premise that the Secretary’s action undermines the fundamental structure of the 340B program:

As explained by [HRSA] . . ., the [340B] Program furthers this legislative purpose by “lower[ing] the cost of acquiring covered outpatient drugs” from drug manufacturers, thereby generating additional resources from “health insurance reimbursements” − including reimbursements under Medicare − that are “maintained or not reduced as much as the 340B discounts or rebates.” In other words, under the Program, 340B hospitals receive insurance reimbursements, including from Medicare, that exceed the discounted price paid by these hospitals to drug manufacturers. These increased resources, in turn, enable 340B hospitals to deliver programs and services to serve their communities, including vulnerable populations in those communities.

By contrast, the government’s brief rests primarily on jurisdictional arguments, specifically that: (1) the Medicare Act precludes judicial review of OPPS rate-setting activities by the HHS Secretary; (2) the district court correctly held that the Hospital Plaintiffs’ submission of comments did not satisfy the presentment requirement of 42 U.S.C. §405(g); and (3) that the Hospital Plaintiffs have not exhausted administrative remedies as required under 42 U.S.C. §405(g).

The government contends on its first point that 42 U.S.C. §1395l(t)(12) “precludes both administrative and judicial review of agency decisions concerning the Secretary’s administration of the [OPPS], including adjustments to payment rates for covered outpatient services such as 340B drugs at issue here.”  The government cites to D.C. Circuit precedent, Amgen, Inc. v. Smith, to explain Congress’s purported rationale for such preclusion – that “[P]iecemeal review of individual payment determinations could frustrate the efficient operation of the complex prospective payment system.”  The government argues that this concern is particularly acute with respect to the 340B payment reduction, because, in order to achieve budget neutrality, the Secretary in the final rule adjusted OPPS payments for services upward to offset the drug reimbursement reductions.  Accordingly, argues the government, the difficulty of unscrambling the egg that was cracked and whisked upon implementation of the OPPS final rule necessitates preclusion because “[i]f a court were to invalidate the adjustment at issue here, it would . . .  also [impact] the payment rates for services across the OPPS classification system, and would likely require CMS to recalculate payments made under other OPPS payment rates in order to preserve budget neutrality.”

The government concludes its preclusion argument by observing that the 340B payment reduction does not fall within §1395l(t)(12)’s narrow exception permitting judicial review of agency action that is ultra vires, reasoning that the HHS Secretary’s “statutory authority to ‘adjust[]’ OPPS payment rates ‘as necessary’ under subsection 1395l(t)(14)(A)(iii)(II) is unequivocal, and not subject to any express statutory limitation.”  Distinguishing the present circumstances from the D.C. Circuit’s holding in Amgen that “[l]imitations on the Secretary’s equitable adjustment authority inhere in the [statutory] text . . . which only authorizes ‘adjustments [to OPPS payment rates],’ not total elimination or severe restructuring of the statutory scheme”, the government contends that the 340B payment reduction – which it claims was imposed to “better, and more appropriately, reflect the resources and acquisition costs that [340B] hospitals incur” – does not eliminate or severely restructure the 340B statutory scheme.  Rather, the government asserts, in setting the ASP minus 22.5% reimbursement rate, the HHS Secretary chose a “conservative” number in order “to ensure both that beneficiaries ‘share in the savings on drugs acquired through the 340B Program’ and also that 340B providers would ‘retain profit on these drugs.’”

On presentment and exhaustion of administrative remedies, the government argues that the Hospital Plaintiffs’ action does not fall within any exception to the statutorily prescribed administrative review process and must therefore be channeled through HHS before it is eligible for judicial review.

The December 29, 2017 order, as well as the AHA Plaintiffs’ brief, Amici Curiae brief and the government’s brief, can be viewed at the following link:

The Hospital Plaintiffs’ challenge in this action to HHS’ broad interpretation of its rate-setting authority has potentially momentous implications beyond just reversing the 340B payment reduction.  In the event that Hospital Plaintiffs prevail, HHS’ freedom to substantially adjust reimbursement rates in the absence of statutorily prescribed actual acquisition cost data would be significantly cabined, requiring congressional action for the type of policy upheavals that HHS seeks to achieve through the 340B payment reduction.

The AHA’s reply brief in the D.C. Circuit appeal is due on April 2, and oral arguments scheduled for May 4th

Over the following weeks and months, Dughi, Hewit & Domalewski will continue to provide timely updates on 340B judicial, regulatory and legislative developments as the fight over the future of the program progresses.

Justin Linder, Of Counsel, is a seasoned life sciences and healthcare attorney with deep experience representing biopharmaceutical organizations, health systems, academic medical centers, integrated delivery networks and a variety of other healthcare entities.  As former Associate General Counsel for a Disproportionate Share Hospital, he managed the entity’s 340B program, and is a recipient of an Advanced 340B Operations Certificate.  Justin’s focus includes sophisticated reimbursement negotiations involving pharmacy benefit managers and commercial insurers; pharmaceutical pricing issues; healthcare M&A matters; and negotiating a variety of managed care, vendor, pharmaceutical distribution, GPO, healthcare technology and physician alignment agreements, with an emphasis on pay-for-performance clauses.  Justin also provides practical regulatory and compliance counsel, specializing in state and federal fraud, abuse and privacy laws.  He can be reached at or (908) 272-0200.

Justin C. Linder Quoted in March 6, 2018 Atlanta Journal-Constitution Article Concerning an 11th Circuit Appeal of a False Claims Action

In the March 6, 2018 edition of The Atlanta Journal-Constitution, Justin C. Linder discusses the potentially far-ranging implications on False Claims actions against hospices and other healthcare providers of the DOJ’s appeal of the District Court’s holding in U.S. ex rel. Paradies v. AseraCare, Inc., currently pending before the 11th Circuit.

 “This is going to be a pivotal case,” said Justin Linder, a New Jersey  attorney who concentrates on hospice and home health care and the federal False Claims Act.

If the court upholds the district judge’s ruling, “then you have some very far-ranging ramifications, not only to hospices but to any health care providers whose health care reimbursement is conditioned on providing medically necessary services,” he said.

More fraud cases will likely proceed to trial, rather than settle out of court, he said.

“It could also wipe out a number of cases that already have been filed,” said Linder, with the firm of Dughi, Hewit & Domalewski, who represents the health care industry in cases involving the False Claims Act.

Read the complete article:  Pending court ruling could be pivotal in health care fraud cases

Justin C. Linder Quoted in February 9, 2018 Bloomberg Pharmaceutical Law & Industry Report Article on 340B Reimbursement Reduction

Lobbying on behalf of biopharmaceutical manufacturers and 340B covered entities is spiking as the 340B discount drug program draws increased scrutiny from Congress and regulatory agencies.  In a February 9, 2018 Bloomberg article: Safety-Net Hospital Lobbying Surges as Medicare Slashes Payments, Justin Linder discusses the circumstances contributing to the increased pressure on Capitol Hill and the impact on Medicare beneficiaries of the recent CMS final rule redistributing 340B reimbursement dollars.

Read the complete article: Safety-Net Hospital Lobbying Surges as Medicare Slashes Payments

New Year’s Changes to the 340B Discount Drug Program Raise Compliance Concerns as New Billing Modifiers and Payment Reductions Take Effect

By Justin C. Linder, Dughi Hewit & Domalewski PC

Judge Rudolph Contreras of the U.S. District Court for the District of Columbia on December 29,
2017 dismissed a lawsuit filed by the American Hospital Association (AHA) and various hospitals
and industry groups seeking declaratory judgment and a preliminary injunction blocking
implementation of a dramatic cut in Medicare Part B reimbursement to certain hospitals participating
in the 340B discount drug program (340B Program).[1] The dismissal of the action on jurisdictional
grounds—none of the plaintiffs had yet presented a claim reimbursed at the reduced payment rate—
is the latest setback for adversely impacted hospitals attempting to halt the reduced payment regime
and ensured that the reductions would go into effect January 1, 2018.
The Centers for Medicare & Medicaid Services (CMS) on November 1, 2017 released the 2018
Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center Payment
System Final Rule (Final Rule), which finalized a controversial proposal to significantly reduce
reimbursement for most drugs purchased through the 340B Program by disproportionate share
hospitals (DSHs) and rural referral center hospitals (RRCs).[2]
In the Final Rule, CMS cut the applicable payment rate for separately payable, non-pass-through
drugs (excluding vaccines) purchased by DSHs and RRFs through the 340B Program, including the
Prime Vendor Program, by approximately 27%, from the average sales price (ASP) plus 6% to ASP
minus 22.5% (collectively, the Payment Reduction).[3] For hospitals affected by the Payment
Reduction, a drug with an ASP of $1,000 would be reimbursed at $775 starting January 1, 2018,
down from the calendar year 2017 reimbursement rate of $1,060.
The Payment Reduction does not apply to 340B eligible entities classified as rural sole community
hospitals, children’s hospitals, or PPS-exempt cancer hospitals, nor does it affect critical access
hospitals, which are reimbursed outside of the OPPS.
Articulating the rationale for the $1.6 billion payment cut in a press release accompanying the Final
Rule, CMS Administrator Seema Verma explained that “Medicare beneficiaries would benefit from
the discounts hospitals receive under the 340B Program by saving an estimated $320 million on
copayments for these drugs in 2018 alone.”[4] This account is disputed by affected hospitals and
340B advocacy groups, including 340B Health, which, in a release following Judge Contreras’ ruling,
shot back: “If these cuts remain in place, many safety net hospitals will be forced to cut back on
services, close service sites, and let go clinicians and other caregivers. These payment cuts do
nothing to lower drug prices, do not save Medicare a dollar, and won’t reduce costs for seniors and
other patients.”[5]
To distinguish 340B hospitals that are subject to the Payment Reduction from those that are exempt,
the Final Rule establishes two new modifiers to identify whether a drug billed under the OPPS was
purchased under the 340B Program—”TB” for use by hospitals that are not subject to the Payment
Reduction and “JG” for those impacted by the Payment Reduction.[6]
The Final Rule itself left many details regarding operationalization of the new modifiers unaddressed,
hindering efforts by hospitals to implement billing system modifications prior to the Final Rule’s
effective date of January 1, 2018. However, on December 13, 2017, CMS released a Frequently
Asked Questions (FAQs) memorandum, at AHA’s request, to clarify the agency’s new modifier policy
for billing 340B-acquired drugs under the OPPS.[7]
The FAQ publication addresses a wide range of implementation issues, such as identifying drugs
that must be billed with modifier “JG,” the use of modifiers by non-excepted off-campus providerbased
departments, the billing of waste for 340B-acquired drugs and the definition of rural sole
community hospitals. Notably, the guidance clarifies that hospital-owned retail pharmacies that bill
340B-eligible claims under Part B are exempt from the Payment Reduction because they are not
reimbursed under OPPS.
The FAQs confirm that all hospitals that bill for separately payable, non-pass-through drugs (i.e.,
drugs assigned status indicator “K”) acquired with a 340B discount must use either the “JG” or “TB”
modifier, depending on whether they are subject to the Payment Reduction. Each drug should be
billed on a separate claim line with the appropriate 340B modifier, and for claims with multiple drug
lines, the appropriate 340B modifier is required on each line of a 340B-acquired drug. The only
hospitals excepted from these requirements are critical access hospitals and Maryland Waiver
The implementation of the Payment Reduction and modifiers less than six months after first
proposed, two months after release of the Final Rule, and just weeks after CMS’ release of subregulatory
guidance delineating the proper use of the new claim modifiers,[8] has left hospitals
scrambling to perform billing system upgrades necessary to comply with the Final Rule.
One of the most daunting obstacles confronting hospitals subject to the new modifier requirements is
the timely identification of which drugs were acquired at a 340B discount to determine whether a
modifier applies. Due to complex rules imposed on 340B Program participants by the Health
Resources and Services Administration (HRSA), which administers the 340B Program, not all drugs
purchased by a 340B eligible provider can be purchased at the 340B discounted price. Rather, drugs
not eligible for a 340B discount must be acquired by 340B Program participants at Wholesale
Acquisition Cost or at other price points exceeding the 340B ceiling price.[9]
Determining whether a drug prescribed at a 340B-participating hospital is considered a “Covered
Outpatient Drug” eligible for 340B discount pricing requires a fact-specific inquiry into multitudinous
interplaying elements, including service location, the outpatient status of the patient at the time of
prescription or administration, the relationship between the hospital and the prescriber, whether the
hospital maintains the patient’s medical records, whether the patient is Medicaid eligible and the
particular hospital’s policy for defining “Covered Outpatient Drug,” among other factors.
On account of these complexities, many hospitals utilize virtual inventory accumulation and/or split
billing software to aid in determining whether a particular prescription is eligible for a 340B discount.
These drug inventory and purchasing systems are distinct from hospitals’ patient billing systems and
there often exists a lag time of a few days or more before a hospital is aware of whether a particular
prescription qualifies for a 340B discount. The latency inherent in 340B inventory accumulation
software, coupled with the lack of integration between such software and hospital patient billing
systems, presents a multifaceted challenge to operationalization of the new modifier system.
Though it is unclear whether CMS took these factors into account when devising the modifier
provisions in the Final Rule, the FAQs released December 13 strongly suggest that CMS intends to
enforce the modifier requirements with minimal flexibility. For example, with respect to the
inadvertent reporting of a “JG” modifier (resulting in reduced reimbursement) rather than a “TB”
modifier (resulting in reimbursement at the normal OPPS rate) due to provider error, CMS exhorts
that “It is a provider’s responsibility to submit correctly coded claims,” explaining that such a mistake
would result in a lower reimbursement.[10] Accordingly, inadvertent coding of a drug with modifier
“JG” (indicating it was acquired at a 340B discounted price) may result in an underpayment.
Of greater concern, failure by a provider to properly code a drug purchased at a 340B discount with
the “JG” modifier could result in an overpayment, which must be returned to Medicare. In the event a
provider receives “credible information” of an overpayment, overpayment disclosure obligations are
triggered under the Affordable Care Act and its implementing regulations.[11] Subsequent failure to
disclose and repay an overpayment within 60 days of its “identification” could subject a provider to
crippling False Claims Act penalties. To this end, the FAQs affirm that: “Federal law permits
Medicare to recover its erroneous payments. Medicare requires the return of any payment it
erroneously paid as the primary payer. Providers are required to submit accurate claims . . . .”[12]
The FAQs offer little comfort to hospitals concerned about their inability to upgrade billing software
by January 1, 2018 to integrate the new modifiers, stating that: “providers have 12 months after the
date of service to timely file a claim for payment. If a hospital believes that it will not be able to
properly identify and bill accurately for 340B acquired drugs, it should contact its [Medicare
Administrative Contractor] to discuss whether holding claims or rebilling claims may be an
Judge Contreras’ December 29 ruling did not reach the merits of the AHA’s complaint, which asserts
under the Administrative Procedure Act that the Final Rule exceeds the Department of Health and
Human Services’ statutory authority. AHA and other petitioners will have the opportunity to refile their
lawsuit after the Payment Reduction goes into effect. In a statement following the ruling, AHA
President and Chief Executive Officer Rick Pollack vowed to “continue our efforts in the courts and
the Congress to reverse these significant cuts to the 340B program.”[14]
On the legislative front, H.R. 4392, a bill that would reverse the Payment Reduction, was introduced
by Representatives David B. McKinley (R-WV) and Mike Thompson (D-CA) on November 14, 2017
and has generated bipartisan support and 165 co-sponsors in the House. Whether Republican
opposition to the Payment Reduction is sufficient to pass a bill overturning a policy promoted by
CMS Administrator Seema Verma as “part of the President’s priority to lower the cost of prescription
drugs”[15] remains to be seen.
Though the litigation and pending legislation potentially could reverse the Payment Reduction,
neither offers relief from the provisions of the Final Rule requiring utilization of the new modifiers.
Moreover, it does not appear from the FAQs that CMS is inclined towards leniency regarding
enforcement of the modifier requirements.
For the time being, the options available to affected providers unable to integrate the new modifiers
by January 1 appear limited to working with 340B accumulation and patient billing software vendors
to quickly implement the new modifiers and collaborating with legal counsel and Medicare
Administrative Contractors to devise acceptable mechanisms for mitigating the consequences of
delayed operationalization of the modifiers.
Continued pressure by 340B stakeholders on legislators also may incent Congress to prioritize the
340B Program in the midst of a busy legislative season.
In the wake of the Final Rule, providers subject to the Payment Reduction would be prudent to
reassess whether the benefits of continued participation in the 340B Program justify the increased
burdens and costs of compliance, a determination that may very well be contingent on whether or
not the Payment Reduction is ultimately reversed.
Justin C. Linder (, Of Counsel at Dughi, Hewit & Domalewski in Cranford,
NJ, is a seasoned Health Care and Life Sciences attorney with extensive experience representing
an array of stakeholders across the full spectrum of the health care industry. His practice is
dedicated to counseling health care entities in a range of transactional matters and negotiating
complex vendor, pharmaceutical distribution, GPO, and health technology agreements. A recipient
of an Advanced 340B Operations Certificate, Mr. Linder also provides practical regulatory and
compliance counsel, specializing in the 340B discount drug program and state and federal fraud,
abuse, and privacy laws. Prior to joining Dughi, Hewit & Domalewski, Mr. Linder served as General
Counsel for a specialty pharmacy services and technology company and Associate General Counsel
for a multi-hospital regional health system.
[1] American Hosp. Ass’n v. Hargan, No. 17-2447 (D.D.C. Dec. 29, 2017).
[2] See Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical
Center Payment Systems and Quality Reporting Programs, 82 Fed. Reg. 52356 (Nov. 13, 2017).
[3] 82 Fed. Reg. at 52362.
[4] CMS, Press Release, CMS Finalizes Policies that Lower Out-of-Pocket Drug Costs and Increase
Access to High-Quality Care, available at
2017-11-01-2.html (last visited Jan. 1, 2018).
[5] Statement by 340B Health Regarding U.S. District Court on 340B Case, available at
(last visited Jan. 2, 2018).
[6] 82 Fed. Reg. at 52495-96, 52503-09.
[7] CMS, Medicare-FFS Program, Billing 340B Modifiers under the Hospital Outpatient Prospective
Payment System (OPPS), Dec. 13, 2017, available at
OPPS.pdf [hereinafter, Billing 340B Modifiers].
[8] Id.
[9] See 42 U.S.C. § 256b; 42 C.F.R. § 10.1 et seq.
[10] Billing 340B Modifiers, supra note 7, at 5-6.
[11] 42 U.S.C. 1320a-7k(d); 81 Fed. Reg. 7654, 7654-84 (Feb. 12, 2016).
[12] Billing 340B Modifiers, supra note 7, at 6.
[13] Id. at 6.
[14] AHA, Press Release, Hospital Groups to Continue to Pursue Lawsuit to Reverse Cuts for 340B
Hospitals, available at
(last visited Jan 2, 2018).
[15] CMS Finalizes Policies that Lower Out-of-Pocket Drug Costs and Increase Access to High-
Quality Care, supra note 4.
© 2017 American Health Lawyers Association. All rights reserved.

Justin C. Linder Quoted in January 3, 2018 Bloomberg Health Care Daily Report Article on 340B Reimbursement Reduction

Judge Rudolph Contreras of the United States District Court for the District of Columbia on December 29, 2017 dismissed a lawsuit filed by the American Hospital Association and various hospitals and industry groups seeking declaratory judgment and a preliminary injunction blocking implementation of a dramatic cut in Medicare Part B reimbursement to certain hospitals participating in the 340B discount drug program. The dismissal of the action on jurisdictional grounds – none of the plaintiffs had yet presented a claim reimbursed at the reduced payment rate – is the latest setback for adversely impacted hospitals attempting to halt the reduced payment regime, and ensured that the reductions would go into effect January 1, 2018.

In addition to cutting the applicable reimbursement rate for high cost drugs purchased by certain hospitals through the 340B Program by approximately 27%, a CMS Final Rule issued November 1, 2017 and effective New Years’ Day, imposes burdensome new coding modifiers on affected providers, requiring them to separately track and bill 340B-acquired drugs. Failure to properly do so could result in compliance issues and lost reimbursement.

In a January 3rd Bloomberg article: Hospitals Face Medicare Drug Pay Cuts as Court Fight Looms, Justin Linder discusses the implications of the rule on affected providers and the likelihood that legal and legislative efforts to roll back the payment reduction will succeed.

Justin C. Linder Joins Dughi, Hewit & Domalewski, P.C.

Dughi, Hewit & Domalewski, P.C. is pleased to announce that Justin C. Linder, Esq. has joined the firm.  Justin will be leading the firm’s Healthcare Transactional and Regulatory Practice Group.

Mr. Linder is a seasoned and highly-accomplished Healthcare and Life Sciences attorney with extensive experience representing stakeholders across the healthcare industry.  He handles sophisticated healthcare M&A negotiations, performing due diligence and drafting transaction and organizational documents, and negotiates complex vendor, pharmaceutical distribution, GPO and healthcare technology agreements. Mr. Linder also provides practical regulatory and compliance counsel, specializing in state and federal fraud, abuse and privacy laws, and collaborates directly with business leaders and C-Suite executives at a variety of healthcare entities to close joint venture and physician practice acquisition transactions.

For nearly forty years, Dughi, Hewit & Domalewski, P.C. has provided high-quality legal services to hospitals, physicians and other healthcare providers.  The firm’s healthcare practice is supported and complemented by its state-wide practice in medical malpractice cases, which has earned the firm its reputation as one of New Jersey’s premier medical malpractice defense firms.

To meet the varied needs of our hospital and healthcare clients, the firm broadened its practice areas over a decade ago to provide a wider range of services to its healthcare clients on transactional, regulatory, and litigation matters.  The addition of Mr. Linder to the firm’s Healthcare Transactional and Regulatory Practice Group will greatly expand and enhance the firm’s existing level of service to the healthcare industry.

A detailed description of Mr. Linder’s areas of expertise and accomplishments can be found on the firm’s website by clicking the following link:  Justin C. Linder