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 health care providers serving disadvantaged communities. The High Court found that HHS incorrectly adjusted hospital reimbursement rates for outpatient drugs because it failed to study hospital acquisition costs. The decision involves tens of billions of dollars in HHS reimbursement to hospitals for prescription drugs. Notably, the decision does not address the agency’s deference under Chevron c. Natural Resources Defense Councilwho had been the subject of active questioning during the 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 applied narrowly to hospitals eligible for the 340B drug pricing program, which are facilities classified as serving low-income or rural communities. In 2020, there were 12,700 entities covered by 340B.1
Under Medicare Part B, the government pays for the majority of hospital services in bundled payments. However, some specific outpatient drugs – which are often more expensive – are classified under a different statutory payment scheme. The 2003 law directs HHS to calculate “the average acquisition cost of the drug that year” or “if hospital acquisition cost data is not available…as calculated and adjusted by the secretary if necessary.2
By law, HHS has the authority to vary reimbursement rates between hospitals only when acquisition rates are collected through a survey. In the absence of an investigation, the law sets the average price at 106% of the average selling price of the medicine. However, the rate cannot vary from hospital to hospital – by law, each institution calculated in this way must be set at 106%.
Until 2018, HHS rarely conducted surveys, resulting in a 106% reimbursement rate across all facilities, calculated using data on the average selling price of various drugs. The established rate did not vary from one group of hospitals to another. 340B hospitals received the same rate as other hospitals, even though their discounted costs were lower than the reimbursement amount.
Because federal law requires drug manufacturers to sell prescription drugs to 340B hospitals at a lower than average rate, significant revenue above the true cost was flowing to these hospitals. A 2015 report cited in the Respondent’s brief found that Covered Entities retained approximately $1.3 billion in profits.3 Even for non-340B hospitals, the standard rate incentivized hospitals to use more expensive pharmaceuticals in order to reap the additional 6% profit.
In 2018, HHS adjusted its Medicare payment rate for specified drugs acquired by 340B hospitals to the average selling price minus 22.5%, which represents the average discount hospitals received for drugs under the program 340B. HHS argued that this adjustment would reduce drug costs for Medicare beneficiaries at 340B hospitals whose 20% coinsurance is tied to the Medicare payment rate. HHS has not conducted a survey of acquisition costs for 340B hospitals, despite the legal requirement to vary the rate between hospital groups.
In a unanimous opinion, Supreme Court Justice Brett Kavanaugh wrote that because HHS failed to investigate hospital acquisition costs, HHS acted unlawfully by cutting 340B hospital reimbursement rates. Despite the statutory adjustment power, unless HHS conducted an investigation of acquisition costs, it could not change the reimbursement rate. Additionally, Kavanaugh argued, Congress was well aware when the law was passed that 340B was benefiting from discounted prescription drugs. However, Congress made no differentiation in the law.
Kavanaugh referred the matter to both HHS and Congress: If HHS chooses, it can conduct an investigation into hospital acquisition rates to justify its lower reimbursement rates paid to 340B hospitals. Alternatively, HHS can approach Congress and request a change in the law. The High Court remanded the case to the United States Court of Appeals for the District of Columbia Circuit, where the lower courts will hear the appeals.
Kavanaugh avoided reversing the court’s decision by Chevron c. Natural Resources Defense Councilwhich provides legal deference for a government body’s interpretation of a law it administers.4 While both parties mentioned the doctrine during oral argument and the judges asked questions about the doctrine, Chevron was not cited in Kavanaugh’s opinion. The federal government often relies on the Chevron doctrine to overcome legal challenges to the implementation of its rules in several administrative areas.
The implications of the decision
The judgment in American Hospital Association has broad implications for suppliers:
- 340B hospitals must now monitor their income more closely. With significant profit streams now vulnerable to HHS cuts if HHS conducts an investigation, 340B hospitals could lose a safety net that has helped it provide services to vulnerable populations.
- 340B hospitals should keep an eye on lower court determination of remedies. It remains to be seen how HHS will remedy providers for the loss associated with reduced payments from 2018 to 2022.
- If HHS begins probing non-340B and 340B hospitals to cut costs, 340B providers could lose the extra revenue they’ve relied on to fund other programs.
The Chevron doctrine has tightened over the years. Kavanaugh’s cold shoulder leaves for another day if the days of doctrine are numbered. If courts begin to interpret agency regulations without fully utilizing the doctrine, government agencies can lose a significant amount of power gained from interpreting legislative action.
1 Government Accountability Office, Drug Pricing Program, HHS uses several mechanisms to help ensure compliance with 340B requirements (December 2020).
2 42 USC § 1395l
3 Office of the Inspector General, HHS, Part B Payments for 340B-Purchased Drugs, Executive Summary (November 2015).
4 Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984).