/>iThe U.S. Supreme Court’s ruling in American Hospital Association (“AHA”) v. Becerra (2022) sent shockwaves through the 340B drug pricing program when it held that CMS’ reduction of reimbursement for drugs purchased under the 340B program was not permitted by law.
The Supreme Court chose not to address potential remedies and remanded the case back to the D.C. District Court for further proceedings on how to correct the underpayments. Instead of vacating the unlawful reimbursement rates, the District Court decided to remand without vacatur, allowing HHS the opportunity to remediate its underpayments.[1] AHA v. Becerra (2023).
In response, the Centers for Medicare & Medicaid Services (CMS) issued a 2023 Final Rule mandating a retroactive lump-sum reimbursement to 340B participating hospitals for 340B underpayments made between 2018 and 2022. The Supreme Court’s decision, coupled with CMS’s administrative action, has led to significant contractual disputes and regulatory challenges as 340B contract hospitals seek restitution for past financial shortfalls while Medicare Advantage organizations (“MAOs”) grapple with the fiscal implications of these payment adjustments. The stakes are high, with hospitals seeking significant back payments and MAOs pushing back, arguing that their obligations are dictated by contracts, not federal rulemaking. As legal battles unfold, the question remains: Who is financially responsible for correcting these underpayments? This article analyzes these developments, focusing on the litigation between hospitals and MAOs and offering strategic contractual considerations in this shifting landscape.
Historical and Legal Context
The Supreme Court’s ruling in AHA v. Becerra represents a pivotal moment in healthcare law, particularly for hospitals participating in the 340B program. The litigation centered on the legality of CMS’s previous reductions in reimbursement rates for 340B drugs, a policy the Court ultimately found to be incompatible with statutory mandates. Hospitals that rely on the 340B program had long contended that CMS’s payment reductions disproportionately impacted their ability to provide essential care to economically disadvantaged populations. By invalidating CMS’s reimbursement policy, the Court reaffirmed that federal payment methodologies must meet certain statutory processes that support transparent and non-discriminatory reimbursement practices.
Following the ruling, CMS issued the 2023 Final Rule to remedy previous underpayments by providing a lump-sum reimbursement to 340B participating hospitals for the period spanning 2018 to 2022. CMS, however, did not extend this corrective measure to MAOs, which negotiate contracts independently with healthcare providers.[2] This regulatory gap has resulted in legal disputes over whether MAOs bear a similar obligation to rectify past underpayments.[3] Given the absence of explicit regulatory directives, hospitals and MAOs are now engaged in legal disputes with potentially far-reaching consequences for reimbursement policy and contractual obligations.
Medicare Advantage Regulatory Framework – Federal Law Considerations
Medicare Advantage (Part C) plans operate under federal law (42 U.S.C. § 1395w-22 et seq.), with regulations from the Centers for Medicare and Medicaid Services (CMS) (42 C.F.R. § 422.504) mandating that MAOs contracting with CMS must provide benefits that are “at least as favorable” as those under traditional Medicare Fee-for-Service (FFS) structure. Hospitals may argue that this federal requirement implies an obligation for MAOs to reimburse 340B providers at corrected rates, particularly in light of CMS’s 2023 Final Rule. They may further contend that CMS’s failure to extend the same correction to MAO reimbursements constitutes an arbitrary and capricious action under the Administrative Procedure Act (APA), as it undermines the statutory requirement for parity between MAO and FFS coverage.
However, MAOs will likely argue that CMS regulations do not require payment parity with 340B participating hospitals. Moreover, because reimbursement rates are determined through contractual agreements rather than statutory mandates, CMS’s decision to correct 340B payments for FFS Medicare does not automatically extend to MAOs. This position is supported by cases such as Caris MPI v. UnitedHealthcare, Inc. (5th Cir. 2024) and Wise v. UnitedHealthcare of Florida, Inc. (M.D. FLA. 2019), where courts upheld MAOs’ autonomy in structuring reimbursement rates with providers, distinguishing them from traditional Medicare FFS.
At their core, these legal disputes revolve around the interpretation of contractual terms and obligations. The outcomes hinge on how courts construe key provisions governing pricing, reimbursements, and program compliance. Provider agreements that specify reimbursement at the Medicare allowable rates and in accordance with Medicare Advantage rules, laws and regulations, raises the question of whether CMS’s retroactive correction of 340B underpayments creates contractual obligation for MAOs to make corresponding adjustment, even in the absence of explicit regulatory mandates. Hospitals argue that references to Medicare rates imply a duty for MAOs to adhere to CMS’s updated methodology. See Baptist Health v. Health Value Management, Inc. (2024); see also University of Alabama Hospital v. UnitedHealthCare of Alabama, Inc. et al., (2024). However, MAOs will likely assert that their contractual obligations are limited to the reimbursement rates “in effect at the time services were rendered.” Further, because CMS’s remedy was issued post hoc, MAOs may contend that it does not alter historical payment obligations, thus precluding any duty to make retrospective adjustments. In support, MAOs may cite cases like UnitedHealthcare Ins. Co. v. Becerra, (2021) and Bowen v. Georgetown University Hospital (1988), where courts sided with insurers, concluding that CMS’s policy guidance did not mandate retroactive application. Moreover, many MAO contracts employ independently negotiated rate structures rather than directly incorporating Medicare payment policies, further complicating claims of automatic applicability.
State Law Considerations
The specific language in provider contracts is critical in determining payment obligations. Courts will assess whether MAOs agreed to pay Medicare-equivalent rates, whether contracts reference CMS payment policies, and whether such references include retroactive corrections. If contract language is ambiguous, courts may construe terms against the drafter (usually the MAO) under standard rules of contract interpretation.
Further, most states recognize an implied duty of good faith and fair dealing in contracts. Hospitals may argue that MAOs acted in bad faith by refusing to adjust payments after CMS corrected its 340B policy. MAOs, however, will likely assert that they followed their contracts as written and that good faith does not translate into retroactive payments unless explicitly stated. Courts have previously ruled in Empire HealthChoice Assurance, Inc. v. McVeigh, (2006) that contract disputes in federally regulated insurance contexts require explicit statutory or regulatory guidance to override private agreements.
Hospitals may also bring equitable claims, asserting that MAOs benefited financially from lower reimbursement rates while hospitals unfairly bore the losses. In Maine Community Health Options v. United States, (2020), the Supreme Court recognized the federal government’s obligation to honor payment commitments under statutory frameworks, which may be used to argue that similar obligations apply to MAOs operating under Medicare Advantage. Under quantum meruit (fair value claims), hospitals might argue that they provided services at a discounted rate due to an unlawful payment cut and should be reimbursed at corrected rates. MAOs will likely counter that they were not unjustly enriched, since they paid in accordance with contractual agreements at the time.
MAOs may also argue that federal law preempts state contract law in Medicare Advantage disputes, which could limit hospitals’ ability to seek remedies under state law. Prior cases, such as UnitedHealthcare Ins. Co. v. Becerra (2021) and Empire Health Foundation v. Becerra (2022), illustrate courts’ deference to clear CMS regulatory guidance in contractual disputes. Courts deferring to CMS’s lack of explicit guidance requiring retroactive MAO reimbursements, could further limit hospital recourse under state contract laws.
Additionally, statutes of limitations could play a role in determining the viability of hospitals’ claims. Federal law typically imposes a six-year statute of limitations for claims involving Medicare payments, while state contract laws vary widely, ranging from three to ten years depending on the jurisdiction. Further, some contracts contain “claim reconciliation” provisions, which establish a time limit for providers to submit adjustments or appeals for payment discrepancies. MAOs may use these statutory and/or contractual deadlines as a defense, arguing that claims for underpayments made in earlier years are time-barred, limiting hospitals’ ability to recover retroactively. Hospitals seeking reimbursement must be mindful of these limitations, as failure to file claims within the applicable timeframe could preclude recovery.
Given the complex interaction between federal administrative law and state contract enforcement mechanisms, courts will need to assess whether claims fall within permissible legal timeframes or if they are procedurally barred due to expiration of applicable statutes of limitations. In Heckler v. Community Health Services of Crawford County, (1984), the Supreme Court examined equitable tolling in Medicare disputes, a concept that could be relevant in assessing whether hospitals’ claims should be extended due to CMS’s prior miscalculations. In Sebelius v. Auburn Regional Medical Center, (2013), the Supreme Court ruled that administrative appeals involving Medicare payments are subject to strict statutory deadlines, which could be relevant in determining whether hospitals’ reimbursement claims are time-barred.
Further, if MAOs knowingly underpaid hospitals despite CMS’s acknowledgment that its 340B reductions were unlawful, they could face claims under state bad faith insurance laws or deceptive trade practice statutes.
Budget Neutrality and Fiscal Considerations
A critical consideration in this area is CMS’s budget neutrality principle, which offsets the cost of the 340B reimbursement correction by reducing future outpatient payments to hospitals. CMS’s approach to correcting underpayments for 340B participating hospitals adhered to this principle by offsetting increased payments with corresponding reductions. However, the application of budget neutrality in the Medicare Advantage context is less defined, raising questions about how funding structures impact reimbursement obligations. Because the corresponding reductions are spread out over sixteen (16) years, it raises questions as to how the MAOs might benefit from this split process. However, CMS plans to adjust premiums for reductions beginning in 2026, so MAOs will likely argue they do not benefit from the split process. See CMS’s January 10, 2025 Advance Notice.
Hospitals may contend that MAOs should apply a similar adjustment framework, given that CMS’s corrective action was internally funded within the Medicare system. Without requiring MAOs to adjust payments, financial disparities could be further exacerbated, disproportionately impacting 340B hospitals already burdened by CMS’s budget neutrality offsets.
Conversely, MAOs may highlight that CMS’s corrective action did not allocate funding for retroactive adjustments to MAOs. MAOs operate within a fixed payment framework, with capitation rates determined by CMS based on actuarial assumptions. If compelled to issue retroactive payments to hospitals, MAOs may argue that such obligations would disrupt the actuarial stability of their reimbursement models and create an unanticipated financial burden. Unlike traditional Medicare, where CMS can implement budget-neutral adjustments across the broader system, MAOs do not have a direct mechanism to recover additional expenditures incurred due to retroactive payment obligations. They argue that imposing reimbursement obligations without corresponding federal compensation would constitute an unfunded mandate, contravening CMS’s budget neutrality principle. This raises other complex questions regarding whether requiring MAOs to adopt CMS’s revised methodology would necessitate a recalibration of their funding structure, potentially leading to increased premiums or reduced benefits for beneficiaries.
Key Takeaways – Strategic Considerations for Hospitals and MAOs
Hospitals pursuing retroactive reimbursement from MAOs should undertake a detailed review of their agreements with those MAOs to ascertain whether their reimbursement provisions provide a contractual basis for such claims. Key considerations include explicit references to Medicare FFS methodologies, provisions regarding compliance with CMS payment policies, and any clauses addressing retroactive adjustments. In cases where contractual language supports reimbursement at corrected Medicare rates, hospitals may pursue breach of contract claims or seek recovery for unjust enrichment, particularly where MAOs benefited from reduced payments now deemed unlawful.
Conversely, MAOs should conduct a rigorous evaluation of their contractual obligations to determine the extent to which retroactive adjustments may be required. If agreements do not explicitly incorporate Medicare FFS revisions, MAOs may argue that any retroactive payment obligations fall outside the scope of their contractual responsibilities.
Consequently, both hospitals and MAOs should consider negotiating more precise contractual terms regarding the applicability of CMS rate adjustments—particularly those with retroactive implications—to minimize financial uncertainty and potential disputes.
Conclusion
The battle over 340B reimbursement through MAO-hospital relationships highlights the complex interplay between contractual obligations, regulatory policies, and financial feasibility under Medicare’s budget neutrality framework. As this conundrum continues to unfold, hospitals and MAOs must carefully assess their contractual positions and financial exposure while remaining attuned to judicial and regulatory developments that will shape the future of 340B reimbursement obligations.
ENDNOTES
[1] The court reasoned that vacatur would be highly disruptive due to the complexity of the Medicare system and potential budget neutrality concerns.
[2] Per 42 U.S.C. § 1395w-24(a)(6)(B), CMS is prohibited from requiring a particular payment structure in contracts between MAOs and providers.
[3] CMS’s 2023 Final Rule restates that MAOs must pay non-contract hospitals at least the amount such hospitals receive under Original Medicare payment rules but fails to comment on MAOs obligations with respect to contracted hospitals. See 88 FR 77150, 77184.
