[co-author: Jamie Ehrlich]
The U.S. Supreme Court sided with medical providers on June 15, 2022, after the U.S. Department of Health and Human Services (HHS) cut Medicare Part B reimbursements to healthcare providers serving disadvantaged communities. The high court found that HHS improperly adjusted hospital reimbursement rates for outpatient drugs because it failed to survey the hospitals' acquisition costs. The decision implicates tens of billions of dollars in HHS reimbursement to hospitals for prescription drugs. Notably, the decision does not address agency deference under Chevron v. Natural Resources Defense Council, which had been the topic of active questioning during oral argument. Chevron deference remains alive and well for now.
In American Hospital Association v. Bacerra, the court interpreted a 2003 law that dictates how Medicare pays for prescription drugs dispensed to outpatient departments. The ruling narrowly applied to hospitals eligible for the 340B Drug Pricing Program, which are facilities classified as serving low-income or rural communities. As of 2020, there were 12,700 340B covered entities.1
Under Medicare Part B, the government pays for a majority of hospital services in bundled payments. However, specific outpatient drugs – that are often more expensive – are classified under a different statutory payment scheme. The 2003 statute directs HHS to calculate "the average acquisition cost for the drug that year" or "if the hospital acquisition cost data are not available … as calculated and adjusted by the Secretary as necessary."2
Under the statute, HHS has the authority to vary the reimbursement rates across hospitals only when the acquisition rates are collected through survey. Absent a survey, the statute sets the average price as 106 percent of the drug's average sale price. However, the rate cannot vary across hospitals – by statute, every facility calculated this way must be set at 106 percent.
Until 2018, HHS seldom conducted surveys, resulting in a 106 percent reimbursement payout rate across facilities calculated by the average sales price data of various drugs. The set rate did not vary across hospital groups. 340B hospitals were receiving the same rate as other hospitals, even if their discounted costs were below the reimbursement amount.
Given that federal law requires drug manufacturers to sell prescription drugs to 340B hospitals at a lower rate than average, significant revenue above actual cost was flowing to these hospitals. A 2015 report cited by the respondent's brief found covered entities were retaining approximately $1.3 billion in profit.3 Even for non-340B hospitals, the standard rate incentivized hospitals to use more expensive pharmaceuticals in order to reap the extra 6 percent of profit.
In 2018, HHS adjusted its Medicare payment rate for specified drugs acquired by 340B hospitals to the average sales price minus 22.5 percent, representing the average discount the hospitals received for drugs under the 340B program. HHS argued this adjustment would lower drug costs for Medicare beneficiaries at 340B hospitals whose 20 percent co-insurance is tied to the Medicare payment rate. HHS did not conduct a survey of 340B hospital acquisition costs, despite the statutory requirement for varying the rate across hospital groups.
In a unanimous opinion, Supreme Court Justice Brett Kavanaugh wrote that because HHS did not survey the hospitals' acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals. Despite having adjustment authority within the statute, unless HHS conducted a survey of acquisition costs, it could not vary the reimbursement rate. Further, Kavanaugh argued, Congress was well aware when the statute was passed that 340B got discounted prescription drugs. However, Congress made no differentiation within the law.
Kavanaugh kicked the issue back to both HHS and Congress: If HHS wishes, it can conduct a survey of hospitals' acquisition rate to justify its lowering of reimbursement rates paid to 340B hospitals. Alternatively, HHS can approach Congress and ask for a change to the law. The high court remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit, where the lower courts will sort out remedies.
Kavanaugh side-stepped revisiting the court's decision in Chevron v. Natural Resources Defense Council, which provides for legal deference to a government agency's interpretation of a statute which it administers.4 While both sides made mentions of the doctrine during oral argument and the justices posed questions about the doctrine, Chevron was not cited in Kavanaugh's opinion. The federal government frequently relies upon the Chevron doctrine to defeat legal challenges to its rule implementation across several administrative areas.
The Ruling's Implications
The ruling in American Hospital Association has broad implications for providers:
- 340B hospitals must now keep a closer eye on revenue. With significant streams of profit now vulnerable to HHS reduction should HHS conduct a survey, 340B hospitals could stand to lose a safety net that helped it provide service to vulnerable populations.
- 340B hospitals should keep an eye on lower courts' determination of remedies. It remains to be seen how HHS will remedy the providers for the loss associated with the reduced payments from 2018 to 2022.
- If HHS begins surveying both non-340B and 340B hospitals to cut costs, 340B providers could lose the additional revenue they have relied upon to fund other programs.
The Chevron doctrine has been narrowed over the years. Kavanaugh's cold shoulder leaves for another day whether the doctrine's days are numbered. If courts begin to interpret agency rulemaking without use of the doctrine altogether, government agencies may lose a significant amount of power obtained from interpreting legislative action.
1 Government Accountability Office, Drug Pricing Program, HHS Uses Multiple Mechanisms to Help Ensure Compliance with 340B Requirements (Dec. 2020).
2 42 U.S.C. § 1395l(t)(14)(A)(iii)(I)-(II).
3 Office of Inspector General, HHS, Part B Payments for 340B-Purchased Drugs, Executive Summary (Nov. 2015).
4 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).