On June 15, 2022, the U.S. Supreme Court unanimously ruled in favor of “340B” hospitals in a notable statutory interpretation case concerning how the federal Medicare program reimburses hospitals for prescription drugs. The case, which was brought by the American Hospital Association, arises from reimbursement reductions imposed by the Department of Health and Human Services (HHS) in 2018 and 2019 on hospitals participating in the 340B program (which the Court noted are hospitals that “generally serve low-income or rural communities”). In those years, HHS sought to impose reductions in reimbursement due to favorable pricing available to 340B hospitals under that program. The hospitals challenged those reductions based on the process HHS followed when setting the reimbursement rates, claiming that HHS’s failure to conduct a survey of hospitals’ average acquisition costs for the drugs prevented HHS from varying reimbursement rates for this distinct group. Therefore, according to the hospitals, HHS was required to pay them based on the average sales price charged by manufacturers for the drugs.

The Supreme Court agreed with the hospitals, holding that under the 2003 Medicare Act (at 42 U. S. C. §1395l(t)(14)(A)), “absent a survey of hospitals’ acquisition costs, HHS may not vary the reimbursement rates for 340B hospitals” and therefore the 2018 and 2019 rates set by HHS were unlawful. See Opinion at 14. The Court further distinguished between HHS’s dual authority to set hospital outpatient prescription drug costs for Medicare patients and to establish varying rates for groups of hospitals, indicating that “HHS’s power to increase or decrease the price is distinct from its power to set different rates for different groups of hospitals.” Opinion at 11. Accordingly, HHS can either rely on the average price charged by manufacturers for all hospitals, or vary rates by hospital groups only after conducting a survey of hospitals’ acquisition costs for each outpatient drug. Therefore, HHS cannot target 340B hospitals for lower reimbursement based on the lower acquisition cost of outpatient prescription drugs purchased at a discount under the 340B program.

In its analysis, the Supreme Court also considered Congressional intent and the limits on its authority to review HHS’s rate-setting. Though HHS argued that Congress could not have intended for HHS to “overpay” 340B hospitals for prescription drugs, the Supreme Court indicated that on the contrary, when enacting the 2003 Medicare Act, Congress was “well aware that 340B hospitals paid less for covered prescription drugs” under the 340B program, which was enacted in 1992. Opinion at 12. Second, the Court affirmed its authority to review HHS’s actions here, stating that a preclusion argument from HHS “lacks any textual basis” because it “cannot override the text of the statute and the traditional presumption in favor of judicial review of administrative action.” Opinion at 8.

The Court does not, however, address the parties’ competing arguments related to remedies for the two years (2018 and 2019) in which HHS reduced reimbursement to 340B hospitals for covered outpatient drugs. Because HHS is required to operate the program for covered outpatient prescription drug reimbursement on a budget-neutral basis, HHS argued that invalidation of its reimbursement rates in 2018 and 2019 would require budgetary offsets to other HHS programs, whereas hospitals argued to the Court that “various potential remedies could make 340B hospitals whole for the past shortfalls without running afoul of the budget-neutrality provision.” Opinion at 8.

As we have discussed previously, the 340B program has experienced numerous challenges in recent years. This Supreme Court decision is positive for affected 340B hospitals, but it remains to be seen how HHS will react to address the rates for 2018 and 2019, and to set drug reimbursement going forward. In fact, HHS previously issued a notice for information collection in support of a “Hospital Survey for Specified Covered Outpatient Drugs” in response to a lower court’s decision that HHS had not collected the necessary data to set payment rates based on acquisition costs. DHHS, Agency Information Collection Activities: Submission for OMB Review; Comment Request, 85 Fed. Reg. 7306 (February 7, 2020). We will continue to monitor regulatory and judicial developments affecting 340B hospitals.