On Friday, June 24th, the Supreme Court unanimously agreed with the American Hospital Association (AHA) and 340B hospitals regarding their challenge to outpatient prescription drug reimbursement methodologies issued by the Department of Health and Human Services (HHS) in 2018 and 2019. This means that 340B hospitals across the country could recoup an estimated 1.6 billion dollars in Medicare funding for outpatient drug reimbursement for year 2018 alone. This decision will also have impact on reimbursement for years 2020 and 2021 as HHS used the same framework challenged by AHA to set 2020 and 2021 drug reimbursement rates.
At the heart of the matter was the Medicare Statute that provides the methodology for HHS to annually set outpatient drug reimbursement rates to hospitals. Under the Statute, HHS has one of two options when setting these reimbursement rates:
- HHS may survey hospitals’ acquisition costs for each outpatient drug covered by Medicare; or
- HHS may set reimbursement rates on the average price charged by drug manufacturers for each outpatient drug covered by Medicare.
If HHS conducts a survey per option one, HHS is then permitted under the Medicare statute to “vary” hospital reimbursement rates “by hospital group.” If HHS pursues option two, it cannot vary reimbursement rates by hospital group type and must use the same reimbursement rate for all hospitals. Since this provision of the Medicare Statute has been in effect (since 2003) HHS has pursued option two for 15 straight years.
HHS changed this framework in 2018. Despite not conducting a survey as required under option one, HHS reduced outpatient prescription reimbursement rate for hospitals participating in the 340B drug program from 106% of the average sales price of the drug manufacturers to 77.5%. Non 340B hospitals continued to see the same 106% reimbursement rate.
HHS’ rationale for this change is that 340B hospitals are already receiving steep discounts from pharmaceutical manufacturers (an average of at least 22.5%) and thus do not require as high of a reimbursement rate from Medicare. HHS’ used this same rationale for 2019, despite also not conducting a survey.
In a plain reading of the Medicare Statute, the Supreme Court held that HHS did not have the authority to make the reimbursement methodology change without a survey.
This is welcome news for all hospitals, not just 340B hospitals. Per the Courts’ opinion, 340B hospitals nationwide are set to recoup an estimated 1.6 billion dollars. Further, this ruling will force HHS in the future to follow an onerous survey requirement before cutting reimbursement rates for particular types of hospitals. It is unclear how Medicare may go about funding the reimbursement. HHS has sought industry comment in proceeding Outpatient Prospective Payment System (OPPS) rulemaking; however, due to the complicated nature of these claims, and budget neutrality, further guidance from HHS will be required.
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