Medicare Payment and Reimbursement

Supreme Court unanimously finds that CMS veered out of bounds when it lowered drug payments for 340B hospitals

June 16, 2022 4:59 am
  • In a 9-0 ruling, the Supreme Court said CMS didn’t have the authority to lower drug reimbursement rates for 340B hospitals as it did in 2018 and 2019.
  • CMS still may be able to reduce the reimbursement rate in future years if it follows certain procedures.
  • Questions surround the pending determination of the remedy owed to hospitals after Wednesday’s ruling.

The Supreme Court gave hospitals participating in the 340B Drug Pricing Program a decisive victory Wednesday, ruling unanimously that CMS should not have reduced reimbursement for covered outpatient prescription drugs purchased by those hospitals.

Hospitals had challenged the 2018 and 2019 payment rates for 340B organizations after CMS dropped the rate for covered drugs from average sales price (ASP) plus 6% to ASP minus 22.5%. Meanwhile, the general reimbursement rate for Medicare Part B drugs remained ASP plus 6%.

The Supreme Court’s ruling remands the case to a lower court for further proceedings, which could shed light on a framework for remedies. The lesser reimbursement rate has remained in effect through 2022.

“For all the length of time and the different decisions at lower-court levels, the Supreme Court just kind of narrowed it down and said, ‘It’s perfectly clear to us,’” said Stephanie Kennan, senior vice president of Federal Public Affairs with McGuireWoods Consulting. “How many times do we get a unanimous decision, especially in healthcare?”

Where the court says HHS and CMS erred

During the legal proceedings, the U.S. Department of Health and Human Services (HHS) built part of its defense around the argument that the Medicare statute provides authority to vary payment rates by hospital category, meaning reimbursement for the same drug could be less for 340B hospitals than for other hospitals.

A federal district court rejected HHS’s argument in a case brought by the American Hospital Association, the Association of American Medical Colleges and America’s Essential Hospitals, but an appeals court reversed that ruling. That set the stage for the case to reach the Supreme Court, which on Wednesday ruled 9-0 in favor of hospitals.

“Absent a survey of hospitals’ acquisition costs, HHS may not vary the reimbursement rates only for 340B hospitals; HHS’s 2018 and 2019 reimbursement rates for 340B hospitals were therefore unlawful,” the court wrote in an opinion authored by Justice Brett Kavanaugh.

The point of such surveys is “to determine whether there is in fact meaningful, statistically significant variation among hospitals’ acquisition costs,” the opinion states. “The data regarding variation in hospitals’ acquisition costs in turn help HHS determine whether and how much it should vary the reimbursement rate among hospital groups. But absent that survey data, as Congress determined, HHS may not make ‘billion-dollar decisions differentiating among particular hospital groups.’”

The court also didn’t put stock in HHS’s argument that “Congress could not have intended for the agency to ‘overpay’ 340B hospitals for prescription drugs.”

“Indeed, the hospitals claimed that members of Congress not only were aware, but actually intended for the 340B program’s drug reimbursements to subsidize other services provided by 340B hospitals. The hospitals noted that Congress had never singled out 340B hospitals for lower Medicare reimbursements for outpatient prescription drugs. Nor, until 2018, had HHS ever done so.”

Key questions remain

A payment reduction still may be permissible at some point. As alluded to in Kavanaugh’s opinion, setting different reimbursement rates for different groups of hospitals is allowed per the Medicare statute if HHS first conducts a survey of hospitals’ acquisition costs.

Such a survey was organized in April and May 2020, and CMS initially used the results to set the payment rate at ASP minus 28.7% for 2021. The agency backed off the proposal in that year’s final rule for hospital outpatient payments, keeping the rate at ASP minus 22.5% and citing the need to maintain “consistent and reliable payment” during the COVID-19 public health emergency.

Linking any future survey to payment rates may not be straightforward.

“Somebody’s always going to challenge the data, so you could still be looking at a long haul if someone thinks that the survey really wasn’t done correctly and they can figure out a case against it,” Kennan said.

The impact of the Supreme Court ruling figures to be more apparent after CMS issues the 2023 proposed rule for hospital outpatient payments. The rule, which likely will be released in July, could indicate how the agency intends to respond to Wednesday’s decision.

It’s possible that a single reimbursement rate would be applied to all hospitals, but any such rate might well be lower than ASP plus 6%. The Medicare statute allows HHS agencies to set a uniform rate based on ASP “as calculated and adjusted by the Secretary.”

Kennan said uncertainty also looms regarding the process of determining a remedy for the past underpayments.

“They’re probably going to have figure out how to incorporate some of this into the ongoing rates, or some other way,” she said. “I don’t know exactly how they would do that.”

Some type of public notice-and-comment period seems likely to ensure “everybody’s on the same page.”

In a joint statement issued after their court victory, the AHA, AAMC and AEH said they look forward to “working with the administration and the courts to develop a plan to reimburse 340B hospitals affected by these unlawful cuts while ensuring the remainder of the hospital field is not disadvantaged as they also continue to serve their communities.”

The comment hints at the fact that non-340B hospitals have benefited financially from the reduced reimbursement rate for participating hospitals. Budget neutrality provisions require the savings to be redistributed via higher payments for other outpatient services. 

A program in turmoil

The 340B program also faces a separate set of legal questions stemming from multiple disputes over whether drug manufacturers can restrict sales of 340B-covered drugs to contract pharmacies. The Health Resources and Services Administration, which administers the 340B program, has sided with providers in those arguments.

In May, the advocacy group 340B Health released survey results that found such restrictions had led to a median annual loss of $2.2 million for larger 340B hospitals.

“Hospitals are in a huge money crunch since COVID, in particular,” Kennan said. “[Wednesday’s ruling] is a huge win for them, but what happens to the program? How do they do the remedy, and how do you mesh this in with everything else that’s gone on in that program?”


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