Supreme Court Overturns Medicare Outpatient Drug Rate Cut for 340B Hospitals

King & Spalding

On June 15, 2022, the Supreme Court issued a unanimous ruling in American Hospital Assn. v. Becerra declaring that CMS’s 2018 and 2019 reimbursement outpatient drug rate cut to 340B hospitals was “contrary to the statute and unlawful.” In the 2018 OPPS Final Rule, CMS dramatically cut the Medicare reimbursement rate for outpatient drugs provided by 340B hospitals. Until then, Medicare reimbursed outpatient drugs for all hospitals at the drug’s average sales price (ASP) plus six percent as required by statute. Beginning with the 2018 OPPS rule, CMS dropped the reimbursement rate for drugs purchased under the 340B program to ASP minus 22.5 percent, citing the lower acquisition costs for these drugs. In a stern rebuke to CMS’s reading of the Medicare statute, the Court, in an opinion authored by Justice Kavanaugh, held that CMS may not vary the reimbursement rates for 340B hospitals from the statutorily prescribed amount unless it conducts its own survey of hospitals’ drug acquisition costs, which it did not do. The ruling reverses a 2020 decision by the U.S. Court of Appeals and remands the case for further proceedings consistent with the Supreme Court’s opinion.

By way of background, the 340B Drug Discount Program allows covered entities—including certain qualifying hospitals—to purchase drugs for outpatients at steeply discounted rates. Congress established the 340B program to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. Rep. No. 102-384(II), at 12 (1992); see also 82 Fed. Reg. 52362, 52493 & n. 18 (Nov. 13, 2017) (quoting House Report and noting that “[t]he statutory intent of the 340B Program is to maximize scarce Federal resources as much as possible, reaching more eligible patients”). Many of these same drugs are covered by Medicare as “separately payable drugs” under the outpatient prospective payment system. By statute, CMS is directed to set payment rates for all such drugs using one of two options, either the “survey” option or the “average sales price” option. The statutory language states:

  1. the Secretary may set the payment rate at the average hospital acquisition cost using “hospital acquisition cost survey data.” Using this data, the Secretary may also adjust rates by groupings of hospitals. 42 U.S.C. § 1395l(t)(14)(A)(iii)(I); or
  2. if “hospital acquisition cost data are not available,” the Secretary may use the average sales price for the drug established by 42 U.S.C. § 1395w-3a and “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II).

Prior to 2018, the Secretary paid all acute care providers for separately payable outpatient drugs using the second option above and established the payment rate for those drugs at ASP plus 6 percent as required by statute. 42 U.S.C. § 1395w-3a(b)(1)(A)-(B); see also 77 Fed. Reg. 68210, 68387-89 (Nov. 15, 2012) (acknowledging that hospital acquisition data is not available and adding the 6 percent to account for overhead and administrative costs).

Effective in 2018, however, CMS implemented its 340B rate cut policy to cut the rates for separately payable drugs purchased under the 340B program to ASP minus 22.5 percent. CMS justified the rate cut as an attempt to “better align” payment rates to hospitals’ true acquisition costs for 340B drugs. 82 Fed. Reg. at 52501. At least one commenter noted that the statute only gave CMS the authority to rely upon acquisition costs if such costs were determined based upon a survey conducted by the Secretary pursuant to standards set forth in the statute. Because CMS acknowledged that such survey data was not available, the statute required the Secretary to set rates based upon ASP. The Secretary adopted the proposed rate cut in the final rule.

A group of plaintiffs, consisting of 340B hospitals and hospital associations, challenged the Secretary’s 340B rate cut in federal court. Plaintiffs were initially successful in district court, which concluded that the Secretary violated the plain language of the statute. The district court’s decision was reversed by the D.C. Circuit, as discussed here. The Supreme Court took review of the case to determine whether the 340B rate cuts were lawful under the statute.

CMS had argued that the statute’s ASP rate setting option gives the agency the authority to make appropriate “adjustments,” and adjusting ASP to align with a 340B hospital’s true acquisition cost was appropriate for purposes of establishing rates for separately payable drugs. The Supreme Court’s decision squarely rejected this interpretation. In a strong rebuke to CMS’s reading of the statute, Justice Kavanaugh parsed through the statutory text and concluded that it only authorizes the Secretary to vary rates by hospital group (i.e. 340B hospitals versus non-340B hospitals) if CMS has conducted a hospital acquisition cost survey. Otherwise, where, as here, CMS did not conduct such a survey, the reimbursement rates cannot vary among hospital groups and must follow the statutory formula. In short, as Justice Kavanaugh explained, “[b]ecause HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals.”

The economic impact of this case is significant—it stands at around $1.6 billion annually for 340B hospitals. Importantly, CMS also extended its 340B rate cut policy to subsequent calendar years (i.e., 2020, 2021, etc.), which were not expressly included in the Supreme Court’s decision. It would be reasonable to expect, however, that the high court’s rejection of CMS’s policy for 2018 and 2019 would effectively vacate CMS’s policy for subsequent calendar years.

The decision is also significant for another reason. While the D.C. Circuit had deferred to the Secretary’s reading of the Medicare statute and permitted him to adopt an “adjustment” based upon non-survey acquisition data as he deemed appropriate, the Supreme Court’s unanimous decision corrected the D.C. Circuit’s error. Before reaching the question as to whether the Secretary was appropriately using his “adjustment” authority, the Secretary must follow the plain meaning of the statute which can only be determined by a rigorous exploration of the text of statute itself.

The Supreme Court’s Decision in American Hospital Assn. v. Becerra is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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