The “silence strategy”: Can we just say no?

CMS has conceded it lacks the statutory authority to compel hospitals to complete the survey. Nonetheless, the agency has threatened to apply an “adverse inference” principle to nonrespondents. The agency has suggested that it may treat failure to report as a signal that the hospital’s drug acquisition costs are negligible or otherwise may use estimates of the hospital’s drug acquisition costs that are likely to depress the average drug acquisition costs across similar hospitals or even all hospitals, potentially leading to punitive rates in CY 2027.

In addition to the financial consequences of CMS setting future drug acquisition rates artificially low due to hospitals not reporting data, hospitals should be aware that failing to report could complicate future litigation against CMS for using such rates under the theory of “self-inflicted injury.” The case law related to this concept is evolving, and hospitals should consider how a challenge to rates based on data that is flawed due to hospitals’ own failure to report might play out in court. Consultation with legal counsel may be helpful in making the decision whether to report some or all drug acquisition cost data in response to the CMS survey.

A compliance trap: The “two books” problem

For hospitals that choose to respond to the survey, the operational burden carries a hidden compliance risk: data consistency.

The Medicare cost report conflict

The survey requires net acquisition cost data for July 1, 2024, to June 30, 2025. The hospital’s Medicare cost report for the overlapping period already accounts for drug costs, albeit at a different level of aggregation.

• The risk: A significant divergence between the granular survey data and the drug costs allocated in a hospital’s cost report could serve as a red flag for regulators. If the numbers don’t reconcile, it could trigger an audit of both the Medicare cost report and the drug acquisition cost survey under the theory that one must be materially inaccurate. Hospitals should understand that material errors in Medicare cost reports can affect payment and in some instances can be consider false claims under the False Claims Act.

The HRSA audit baseline

For 340B covered entity hospitals paid under OPPS, the survey creates an additional risk related to the reporting of 340B-purchased units of each reported drug.

• The risk: If CMS shares the survey data with the Health Resources and Services Administration (HRSA), HRSA could use the data as an additional element in its audits of 340B covered entities. Mismatches between 340B purchases reported to HRSA and those reported to CMS could result in audit findings or trigger further investigation into the hospital’s drug purchasing practices.

Next steps

General counsel and compliance officers who work with hospitals subject to the CMS drug acquisition cost survey should familiarize themselves with the survey tool and reporting guidance and consider the following steps:

• Feasibility and “silence” assessment. If you work with 340B hospitals, determine if your hospitals can produce the required 340B/non-340B split without manual fabrication. Consider how best to address whether submitting flawed or misrepresentative data is the appropriate course of action.
• Methodology memorandum. If responding to the survey, draft a privileged legal memo defining the process, protocol, and approach to survey-defined terms that the hospital will use in responding to the survey. Ensure that this memo captures all permissible allocable drug acquisition costs (shipping, handling, inventory overhead) in the event that it becomes necessary to defend the reported figures to federal regulators or in court.
• Cross-reconciliation audit. Perform a “mock audit” comparing the draft survey data against your Medicare cost report. Document the rationale for any variances in the above-referenced memorandum before submitting the survey or the Medicare cost report.
• Litigation hold. Preserve all internal deliberations regarding the survey. Whether you submit or opt out, all hospitals should expect future litigation regarding any use of the survey data and, even if not a named plaintiff, potential obligations to participate in such litigation.

For more information, please contact your regular McDermott Will & Schulte lawyer or the authors of this article.