Supreme Court rules in favor of hospitals in 340B lawsuit

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The Supreme Court on Wednesday handed up a ruling in favor of hospitals' claims to 340B drug reimbursement, but left questions for providers as to how they will be made whole for the two years they didn't receive billions from the Department of Health and Human Services, or what comes next.

"There's the outstanding question as to the remedy," said Jeff Davis, a partner at Bass, Berry & Sims, who represents hospitals, "the question of how hospitals will be made whole as a result of payment reductions."

The justices were unanimous in their opinion to reverse a 2020 circuit court opinion that went against the hospitals. The Supreme Court remanded the case for "further proceedings consistent with this opinion," wrote Justice Brett Kavanaugh, who delivered the opinion.

At question are the two years - 2018 and 2019 - that HHS cut an estimated $1.6 billion in annual reimbursement, and what the agency will issue in its next annual payment rule expected out in July, Davis said.

"I work with a lot of 340B providers. I think hospitals will view this as a victory. This was a big payment cut," Davis said. However, he said, "Someone needs to make a decision. The case will be remanded back to the lower courts, which will be remanded back to HHS. The justices did not dictate a solution."

Stephanie Kennan, a senior member of the Federal Public Affairs group at McGuireWoods Consulting, said in a statement that the ruling could have a big impact on hospital reimbursement policies, with the Supreme Court pushing HHS to compile the correct data to determine a reasonable reimbursement rate.

Ryan Bailey, vice president at Advis, said in a statement: "This is a big win for 340B hospitals that were negatively impacted by the reimbursement cuts in 2018-19 – some entities may stand to recover millions. It is yet to be seen how this decision will impact CMS policy from 2020 forward. There are likely to be downstream impacts, either in increases to 340B drug reimbursement, more scrutinous acquisition cost surveys, or a more thorough restructure of the drug payment system. Outside of solely 340B, this decision also signals that this SCOTUS may be taking a strict stance when it comes to interpreting agency regulatory authority." 

WHY THIS MATTERS

The HHS cuts have represented an annual $1.6 billion loss to hospitals.

They came about under the Trump Administration in the 2018 Outpatient Prospective Payment System final rule that cut drug reimbursement, first by 28.5%, and then by 22.5%.

Prior to the 2018 rule, Medicare paid 340B hospitals the average sales price of a drug, plus 6%, or $106%.

By statute, drug manufacturers are required to discount the price of the drugs to hospitals that serve large vulnerable or rural populations. The 340B hospitals generally paid 20-50% below the sales price and used the profits to offset the operational costs of providing care to patients. This was the intent of the program when Congress enacted the law in 1992, Davis said.

Opponents said hospitals were abusing 340B for financial reimbursement. 

In issuing its 2018 rule, the Centers for Medicare and Medicaid Services said Medicare should not be overcharged for the 340B drugs.

THE RULING

Kavanaugh wrote that the court is not the forum to resolve the policy debate that Congress did not intend for the agency to overpay 340B hospitals for prescription drugs. Instead, the court cited the Medicare statute and said HHS did not follow the law.

The Medicare statute lays out a formula to set reimbursement rates for certain outpatient prescription drugs provided by hospitals to Medicare patients. It allows HHS two options: conducting a survey of hospitals' acquisition costs for the drugs or setting reimbursement rates based on the average price charged by drug manufacturers for the drug, as calculated and adjusted by the HHS secretary. Option two does not allow HHS to vary reimbursement rates for different hospital groups, the court said.

From 2006 until 2018, HHS relied on option two. When it changed the reimbursement rate in 2018, it did not conduct a survey, but established a final rule establishing a separate reimbursement rate for hospitals that serve low-income or rural populations through the 340B program. 

HHS contended it had the authority to adjust the reimbursement rates. 

The American Hospital Association challenged, winning in the district court, but losing on appeal. On November 30, 2021, the Supreme Court heard arguments in AHA et al. v. HHS Secretary Xavier Becerra.

"Absent a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates only for 340B hospitals; HHS's 2018 and 2109 reimbursement rates for 340B hospitals were therefore unlawful,'' Kavanaugh wrote.

THE LARGER TREND

After the circuit court's decision of August 2020 that went against the hospitals, many drug manufacturers stopped providing discounted drug prices to 340B hospitals. 

To date, an estimated 17 drug manufacturers have issued restrictive 340B pricing through contract pharmacy arrangements, according to Davis. Others have said they would give the discounts if the hospitals shared their claims data, he said. 

The Public Health Service Act requires pharmaceutical manufacturers participating in Medicaid to sell drugs at a significant discount to 340B hospitals.

HHS has taken enforcement action against the drug manufacturers, claiming they have violated the law. Four decisions against the drug companies are on appeal, according to Davis.

The next step is for HHS to impose monetary penalties through the Office of Inspector General, which has such authority. The Health Resources Service Administration has referred seven cases to the OIG for this purpose, according to Davis.

Twitter: @SusanJMorse
Email the writer: SMorse@himss.org