On June 15, 2022, the United States Supreme Court issued a unanimous ruling (“Decision”) handing a substantial win to hospitals participating in the 340B program. In 2018, the Centers for Medicare and Medicaid Services (“CMS”) reduced reimbursement for hospital-administered outpatient drugs (excluding those dispensed by sole community hospitals, children’s hospitals, and certain cancer hospitals) covered under Medicare Part B.^[1] Since the inception of the current pricing mechanism in 2006, all hospitals had been paid 106 percent of the Average Sales Price (“ASP”) of outpatient drugs. Beginning in 2018, CMS reduced the reimbursement for 340B program hospitals to 77.5 percent of the ASP, arguing that Medicare was overpaying those hospitals for drugs that the hospitals acquired at a discount.^[2] CMS employed 340B-specific reductions in each subsequent contract year.

The American Hospital Association, 340B Health, and others challenged the discriminatory drug reimbursement scheme, arguing that CMS failed to follow the statutory requirement at Section 1833(t)(14)(A)(iii). The hospitals argued that if CMS conducted a survey, as described in Section 1833(t)(14)(A)(iii)(I), it could vary reimbursement by hospital group.^[3] If it did not, the hospitals argued, it had to apply a single reimbursement method for all hospitals as described in Section 1833(t)(14)(A)(iii)(II).^[4] CMS argued that it could “adjust” reimbursement for specific hospital groups even in the absence of a survey. The District Court ruled for the hospitals, but the Court of Appeals for the District of Columbia Circuit reversed in a 2-1 split decision.^[5]

In contract years 2018, 2019, and 2020, CMS varied reimbursement by paying 340B hospitals less without doing a survey, relying on “as calculated and adjusted by the Secretary” authority in the non-survey methodology. CMS conducted a survey in 2020 but maintained the same ASP minus 22.5% rate in 2021. It did not conduct a survey in 2021 and maintained the same rate for contract year 2022. CMS argued that the survey process was burdensome and inaccurate.^[6]

The Supreme Court unanimously held that Section 1833(t)(14)(A)(iii) only permitted CMS to vary Part B outpatient drug reimbursement rates for hospital groups if it conducted a survey.^[7]  Justice Kavanaugh, writing for the Court, determined that it would not be logical for Congress to have intended for CMS to be able to “adjust” rates in a discriminatory manner without doing a survey if it specifically dictated that it could use different reimbursement rates for different groups if it did a survey.^[8] Otherwise, the Court said, the survey provision would be useless because CMS could always make whatever adjustments it wanted without conducting one.^[9] The Court also agreed that the case was ripe for judicial review.^[10]

The decision could have a large financial impact on hospitals, especially with respect to contract years 2018, 2019, 2020, and 2022 – the years in which CMS did not conduct a survey. The Court did not address how CMS will remedy the illegal payments, which will be challenging considering the cuts have been applied in a budget-neutral manner. The $1.6 billion less that hospitals were paid in 2018 and 2019 was redistributed to non-340B hospitals and remedying that underpayment would seem to require a clawback from non-340B hospitals. Further, only 2018 and 2019 were the subject of the Decision, though it should apply to 2020 and 2022 just the same.

Beyond the financial impact to hospitals, the Decision is notable because the Court declined to side with CMS’ view that it is inappropriate for hospitals to “profit” from Medicare reimbursement for discounted drugs. The Court wrote that:

If HHS believes that this Medicare reimbursement pro­gram overpays 340B hospitals, it may conduct a survey of hospitals’ acquisition costs to determine whether and how much the data justify varying the reimbursement rates by hospital group—for example, reducing reimbursement rates paid to 340B hospitals as compared to other hospitals. Or if the statute’s requirement of an acquisition cost survey is bad policy or is working in unintended ways, HHS can ask Congress to change the law.

Of course, if HHS went to Congress, the agency would presumably have to confront the other side of the policy story here: 340B hospitals perform valuable services for low-income and rural communities but have to rely on lim­ited federal funding for support. As amici before this Court, many 340B hospitals contend that the Medicare reimburse­ment payments at issue here “help offset the considerable costs” that 340B providers “incur by providing health care to the uninsured, underinsured, and those who live far from hospitals and clinics.” As the 340B hospitals see it, the “net effect” of HHS’s 2018 and 2019 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.” In other words, in the view of those hospitals, HHS’s new rates eliminate the fed­eral subsidy that has helped keep 340B hospitals afloat. All of which is to say that the 340B story may be more compli­cated than HHS portrays it. In all events, this Court is not the forum to resolve that policy debate.^[11]

Thus, while the Court did not adopt the position that 340B hospitals should have some reimbursement margin on Medicare Part B drugs, it acknowledged that Congress may well have intended that since 340B program covered entities absorb many of the costs of caring for vulnerable patients.

For More Information

If you have any questions regarding the Decision or any other aspects of the 340B program, please contact Michael B. Glomb at mglomb@feldesman.com.

^[1] Am. Hosp. Ass’n v. Becerra, 596 U.S. ___, No. 20-1114 (June 15, 2022)

^[2] Medicare Program:  Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 82 Fed. Reg. 52,490, 52,494-95 (2017).

^[3] 42 U.S.C. § 1395l(t)(14)(A)(iii)(I).

^[4] Id. § 1395l(t)(14)(A)(iii)(II).

^[5] Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62 (D.D.C. 2018) (ruling in favor of the hospitals on ripeness for judicial review and on the merits); Am. Hosp. Ass’n v. Azar, 385 F. Supp. 3d 1 (D.D.C. 2019) (ruling in favor of the hospitals on the availability of a remedy); Am. Hosp. Ass’n v. Azar, 967 F.3d 818 (2020) (reversing the District Court and ruling against the hospitals on the merits but agreeing on ripeness for judicial review).

^[6] Decision, slip op. at 4.

^[7] Id., slip op. at 2.

^[8] Id., slip op. at 11-12.

^[9] Id.

^[10] Id., slip op. at 7-8.

^[11] Decision, slip op. at 13 (internal citations omitted).