On June 15, the U.S. Supreme Court issued a unanimous decision finding Medicare payment cuts to hospitals participating in the 340B drug pricing program illegal. The decision in favor of 340B hospitals is the culmination of a years-long challenge first brought by hospital groups in 2018. The Court remanded the case for further proceedings and did not address a remedy. The losses to 340B hospitals due to the policy are estimated to be $1.6 billion annually.

While the Centers for Medicare and Medicaid Services (CMS) is not likely to alter payment rates immediately as a result of the decision, CMS is expected to propose Medicare payment policies for 2023 in the coming months. Although the Court found the current payment cuts to 340B hospitals to be illegal, the Court noted that CMS might be able to justify reduced payment rates to 340B hospitals based on a survey of hospital drug acquisition costs.

Background on Medicare’s 340B Payment Policy and Legal Challenges  

At issue in American Hospital Association et al. v. Becerra was a reimbursement policy implemented by CMS under the 2018 Outpatient Prospective Payment System (OPPS) Final Rule. Beginning January 1, 2018, Medicare began paying most 340B hospitals for certain outpatient drugs (high-cost, separately paid drugs under the OPPS) at the drug’s average sales price (ASP) – 22.5%, a payment reduction of nearly 30%. Prior to 2018, Medicare paid 340B hospitals at ASP + 6%, the same rate used for non-340B hospitals. CMS based the reduced payment rate on an estimate of the average minimum 340B discount, intending to pay 340B hospitals at a rate that is more closely aligned to 340B drug acquisition costs.

Public and nonprofit hospitals paid under the OPPS qualify for the 340B program based on their high volume of care to patients with low incomes. Hospitals access 340B savings by providing reduced-price drugs to patients and generating insurance reimbursement, using the savings to support patient care. The Medicare payment reduction resulted in a decrease in 340B savings to hospitals. Because CMS implemented the payment reduction in a budget-neutral manner, the savings to Medicare from the drug payment cuts were offset by a corresponding increase in OPPS payments for non-drug services to all hospitals.

In September 2018, hospital associations and hospital co-plaintiffs filed a lawsuit in the U.S. District Court for the District of Columbia against the Department of Health and Human Services (HHS), challenging the 340B payment policy. The hospitals argued that the Medicare statute does not authorize HHS to vary payment rates by hospital group unless HHS first surveys hospitals to determine drug acquisition costs. If HHS has not administered a survey, HHS must pay all hospitals at the statutory reimbursement rate of ASP + 6%. The district court ruled for the hospitals in December 2018. The plaintiffs amended their initial complaint to challenge 2019 payment rates, and the same federal district court issued a similar decision in May 2019, also finding the 2019 payment cuts illegal.

HHS appealed, and the D.C. Circuit Court of Appeals issued a decision in July 2020 reversing the lower court’s decisions, finding that HHS had the authority to impose the 2018 and 2019 payment cuts. The hospital plaintiffs appealed to the Supreme Court.

Court Holding on Medicare Authority 

The key question before the Court was whether the Medicare statute authorizes HHS to pay 340B hospitals at a different rate than non-340B hospitals without first surveying to collect hospital drug acquisition costs. The statute outlines the following two options for how Medicare can pay hospitals for separately payable drugs. Medicare can pay either:

  • The average acquisition cost for the drug, which may vary by hospital group, taking into account hospital acquisition cost survey data.
  • The average price for the drug, if hospital acquisition cost survey data are unavailable, as calculated and adjusted by the HHS Secretary as necessary.

HHS conceded that the agency had not conducted a hospital survey to support the 2018 and 2019 payment rates, but HHS argued that the statute nevertheless authorizes the lower payment rates to 340B hospitals because Medicare can pay hospitals at ASP + 6% and make adjustments to the payment rate as necessary. HHS argued that the agency was able to adjust payment rates to 340B hospitals down to ASP – 22.5%.

The Court ruled that, under the statute’s plain language, Medicare cannot vary payment rates by hospital groups unless the agency has first surveyed acquisition costs. Although the statute authorizes Medicare to adjust payment rates, there can only be one adjusted payment rate for all hospitals unless HHS has conducted a survey to support varying payment rates. The Court held that the 2018 and 2019 Medicare payment rates for 340B hospitals were unlawful.

Discussion of 340B Intent

In support of its payment policy, HHS argued that reimbursing 340B hospitals at the same rate used for non-340B hospitals would result in Medicare “overpaying” for 340B drugs, given that 340B hospitals purchase drugs at rates that are substantially less than ASP + 6%. The Court considered HHS’s argument but noted that, before implementing the payment cuts in 2018, Medicare paid 340B hospitals and non-340B hospitals at the same rate since first implementing the ASP-based payment policy in 2006. The Court also highlighted that Congress was aware of the lower prices paid by 340B hospitals when enacting the ASP-based payment provisions in 2003 but did not authorize Medicare to pay 340B hospitals at lower rates.

The Court also referenced arguments made by hospitals that Congress intended for Medicare to pay 340B hospitals at higher rates to offset costs incurred by safety-net hospitals treating patients with low incomes. Although the Court made clear it was not resolving these policy questions, the Court observed, “It may be that the reimbursement payments were intended to offset the considerable costs of providing healthcare to the uninsured and underinsured in low-income and rural communities.”

Implications and Next Steps for Hospitals

The Court’s decision is welcome news for 340B hospitals that have experienced significant payment reductions for separately paid Part B drugs since CMS implemented the 340B payment policy in 2018. However, the Court did not address the remedy to make 340B hospitals whole for payment reductions due to the unlawful policy. The Court noted concerns from HHS that unwinding the payment policy would be difficult given that OPPS payment is budget-neutral. As a result, drug payment reductions resulted in payment increases for non-drug services. Hospitals have argued that potential remedies are available to make hospitals whole without implicating the budget-neutrality rules.

Also of note, the Court’s decision is limited to CMS’s 2018 and 2019 payment policies, which were the payment policies subject to the hospital lawsuits. CMS has continued the same payment policy in 2020, 2021, and 2022, which the Court did not directly address.

Moving forward, the Court noted that the Medicare statute authorizes CMS to vary payment rates by hospital group if the agency first surveys hospital acquisition costs. CMS attempted a survey of 340B hospitals for the first time in 2020 and, as part of the 2021 OPPS Proposed Rule, proposed to further reduce payment rates to 340B hospitals based on the survey results. However, CMS did not finalize the proposal. CMS is expected to issue proposed OPPS payment rates for 2023 this summer, which may account for the Court’s decision. Hospitals are calling for CMS to pay 340B hospitals at the same rate used for non-340B hospitals.

Please contact the authors if you have any questions about the Court’s decision or other 340B program matters.