The Supreme Court issued a long-awaited victory to 340B hospitals this week, when it held in American Hospital Association et al. v. Becerra et al. that the Department of Health and Human Services (HHS) had set unlawful Medicare reimbursement rates for hospitals participating in the 340B Drug Pricing Program in 2018 and 2019. The Court’s decision promises much-needed financial relief for 340B hospitals, which have weathered over two years of reduced savings from the 340B program as a result of new policies implemented by drug manufacturers, which are also still pending in the court system.

At issue in the case was a new Medicare payment policy announced in the calendar year (CY) 2018 and CY 2019 outpatient prospective payment system (OPPS), when HHS reduced payment rates for 340B drugs dispensed by hospitals by nearly 30%. These reductions were intended by HHS to approximate the discounts available to 340B hospitals on the price of purchasing drugs from drug manufacturers, reducing the savings generated by the 340B Program away from the 340B hospitals. The payment cuts were challenged by trade associations representing hospitals and certain individual non-profit hospital plaintiffs. Resolution of the issue has been pending since suit was first filed in 2017.

Supreme Court Opinion

Justice Kavanaugh delivered the opinion for the unanimous Court, stating that the Medicare statute provides HHS with two options when HHS sets reimbursement rates, depending on whether HHS has conducted a survey of hospitals’ acquisition costs for certain outpatient prescription drugs. First, if HHS has conducted such a survey, HHS may set the reimbursement rates to the hospitals’ average acquisition costs of the given drug for that year and may vary the reimbursement rates by hospital group. Second, if HHS has not conducted such a survey, HHS must set the reimbursement rates based on the average sales price of the drugs charged by their respective pharmaceutical manufacturers. 42 U.S.C. § 1395l(t)(14)(A)(iii).

The Court found that the proposed changes to reimbursement for only 340B hospitals was a variation of reimbursement rates by hospital groups, which, the Court opined, could not be done under the Medicare statute without conducting a survey of hospitals’ average acquisition costs in accordance with the first option described above. HHS implemented the separate reimbursement rates for non-340B hospitals and 340B hospitals in its 2018 and 2019 hospital OPPS final rules without such a survey. The Court concluded that if HHS has not conducted a survey of hospitals’ average acquisition costs, HHS may not vary the reimbursement rates for outpatient prescription drugs by hospital group, and as such, the reimbursement rates set in the CY 2018 and CY 2019 hospital OPPS final rules were unlawful.

Uncertainties Remain over Timing and Scope of Remedies

While the Supreme Court clearly held that HHS’s 2018 and 2019 reimbursement rate cuts for 340B hospitals exceeded its authority under the Medicare statute, it did not clearly address how the violation should be remedied. The Court remanded the case to the lower courts for further proceedings consistent with its order. 

Significant uncertainty remains, including around the timing and scope of financial relief to 340B hospitals. In 2019, a U.S. District Court hearing the same case held – as the Supreme Court would agree years later – that the rate reductions in the CY 2018 and CY 2019 OPPS final rules for 340B hospitals were unlawful. Rather than vacating the rules, the District Court remanded the CY 2018 and CY 2019 rules to HHS, so that it could “unscramble the egg.” HHS appealed the case before offering a proposal on remedies, but may now be again directed to outline its proposal for remedying the violation.   

Of particular interest is the potential for the remediation of the violation to impact both 340B and non-340B hospitals. This is because Medicare OPPS rate adjustments are applied in a budget neutral manner, meaning the reduction in payments to certain hospitals for 340B drugs led to an increase in payments for other services and for non-340B drugs under the OPPS, and a general shift of funding away from 340B hospitals toward non-340B hospitals. The complexity of unwinding such adjustments in 2019 prompted the Court to request that HHS “take the first crack at crafting appropriate remedial measures.” At this time, it is unclear whether HHS will propose to adjust all OPPS payments for CY 2018 and CY 2019 or to focus solely on remedying underpayments to 340B hospitals.

Also of interest is the potential for the remedies to impact additional fiscal years. The Supreme Court’s decision addressed only the OPPS rates included in the filing, which were CY 2018 and CY 2019. In 2020 (after the CY 2020 OPPS rates were already in effect), HHS conducted a survey of hospitals’ average acquisition costs. It is unclear whether HHS or the plaintiffs of the case just decided will also seek to adjust OPPS payments for CY 2020, CY 2021, and/or CY 2022 under the same reasoning outlined by the Supreme Court, or whether they will be considered outside the scope of the case and potentially distinguishable by the survey conducted. In addition, the proposed OPPS rule for CY 2023 is expected later this summer, and will also announce HHS’ intended policy with regard to reimbursement of 340B drugs for the next year.