Supreme Court Finds CMS’ Reduction of Medicare Hospital Outpatient Payment Rates for 340B Hospitals was Not Authorized by Statute

June 16, 2022By Faraz Siddiqui & Alan M. Kirschenbaum

In 2017, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule to significantly decrease the rate the government will reimburse 340B hospitals in 2018 for outpatient prescription drugs from average sales price (“ASP”) plus 6% to ASP minus 22.5%.  82 Fed. Reg. 52494 (Nov. 13, 2017).  CMS noted that 340B covered entities already enjoy significant discounts purchasing these drugs under the 340B drug pricing program—estimated to be as much as 33.6%  of ASP—and that CMS’ generous reimbursement rates “generate significant profit” for these hospitals.  CMS estimated a savings of $1.6 billion annually, and continued the same reimbursement cuts for 2019.

Within days after the December 2017 rule was published, several hospital groups sued to enjoin HHS from implementing the rule.  The hospitals argued that the profits helped them offset the considerable costs of providing healthcare to the uninsured and underinsured in low-income and rural communities, something that Congress was well aware of and intended when it passed the Medicare Prescription Drug, Im­provement, and Modernization Act in 2003.  In 2019, we blogged that the District Court found for the plaintiffs, holding that CMS did not have the statutory authority to make such a change without first conducting a hospital acquisition cost survey data. See  42 U.S.C. §1395l.  The District Court opinion was subsequently reversed by the D.C. Circuit, but today, the Supreme Court reversed again and upheld the District Court’s opinion in American Hospital Assn v. Becerra, No. 20-1114, 596 U. S. ____ (2022).

Writing for a unanimous court, Justice Kavanaugh explained that the Medicare statute provides CMS a choice between two options on how to set reimbursement rates for drugs provided in the hospital outpatient setting.  See 42 U.S.C. § 1395l(t)(14)(A)(iii).  Under option 1, the agency must conduct a survey of the amount that hospitals pay to acquire the prescription drugs, and set a reimbursement rate based on the hospitals’ “average acquisition cost” for each drug.  Op. at 3 (citing §1395l(t)(14)(A)(iii)(I)).  Under this option, HHS may vary the reimbursement rate for different groups of hospitals.  Id. Option 2 applies only if HHS has not conducted such a survey.  In this case, the agency must set reimbursement rates using each drug’s “average price” charged by the manufacturers for the drug, as “calculated and adjusted by the Secretary as necessary for purposes of” this statutory provision.  See id. (citing §1395l(t)(14)(A)(iii)(II)).  The statute sets this  “average price” as ASP plus 6%.  See id. (citing §1395w–3a).  Critically, option 2, unlike option 1, does not authorize HHS to vary reimbursement rates for different groups of hospitals.  Id.  Before 2018, CMS always relied on option 2 to set reimbursement rates at ASP plus 6%, and set this rate uniformly for all hospitals.  See op. at 3-4.

In reducing the 2018 and 2019 drug reimbursement rates for 340B hospitals, HHS acknowledged that it had not conducted a survey of hospitals’ acquisition costs.  82 Fed. Reg. at 52496.  Nonetheless, HHS pointed to its statutory authority under option 2 to “adjust” the average price “as necessary for purposes of” the statute.  Id. at 52499.  HHS claimed that its authority to “adjust” the average price for each drug also implicitly encompassed the authority to vary the reimbursement rates by hospital group.  Op. at 5-6.

After finding that the statute was subject to statutory review, the Court turned to the merits of the case.  According to the Court, under the text and structure of the statute, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals because it did not conduct a survey of hospitals’ acquisition costs.  The Court held that when it is setting or adjusting rates under option 2, HHS may not vary the reimbursement rate by hospital group.  According to the Court, Congress carefully crafted the goals and the means of ensuring proper reimbursement rates. Op. at 9.  The statute expressly authorizes HHS to vary rates by hospital group but only if it has conducted such a survey.  Id. at 10.  The Court characterized the survey requirement as “an important procedural prerequisite” or protection before HHS may target particular groups of hospitals for lower reimbursement rates.  Absent that survey data, as Congress mandated, HHS may not make “’billion-dollar decisions differentiating among particular hospital groups.’”  Id. (citing 967 F. 3d, at 837 (Pillard, J., dissenting).  Responding to HHS’s argument that the 340B hospital rate cut was within its authority to “adjus[t]” the average price as necessary for purposes of” the statute, the Court held that the authority to adjust the average price up or down does not confer authority to vary the reimbursement rates by hospital group unless HHS has conducted the re­quired survey of hospitals’ acquisition costs.  To read option 2 to allow CMS to vary the reimbursement rate by hospital group would render option 1 irrelevant.

Although this case concerned rate setting for 2018 and 2019, CMS has continued the same drug payment cuts for 340B hospitals in 2020, 2021, and 2022.  After the District Court struck down CMS’s rate cut, but before the DC Circuit’s reversal of the lower court decision, CMS announced that it would initiate a survey of 340B drug acquisition costs for 340B hospitals for certain quarters of 2018 and 2019, which might then provide a basis under option 1 for reducing drug payment for 340B hospitals in those years and subsequent years.  See 85 Fed. Reg. 85866, 86042-86052 (Dec. 29, 2020).  It is uncertain when the survey will be completed, or whether its results will justify the rate reductions that CMS has sought to impose.  Unless and until CMS is able to lawfully reduce drug payment rates to 340B hospitals based on the acquisition cost survey results, compliance with the Supreme Court decision will presumably require CMS to align its drug payment policy for 340B hospitals with the ASP+6% payment rate applicable to other hospitals in all affected years.