On June 15, 2022, the Supreme Court issued a unanimous opinion invalidating roughly $1.6 billion in annual reimbursement rate cuts under the 340B Drug Pricing Program.
Statutory Authority to Set Reimbursement Rates
Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 117 Stat. 2066, 42 U.S.C. § 1395 (Act), the U.S. Department of Health and Human Services (HHS) is authorized to set reimbursement rates for certain outpatient prescription drugs provided by hospitals. In setting these reimbursement rates, HHS has two options under the text of the statute.
If HHS tak[es] into account certain hospital acquisition cost survey data, it may set the reimbursement rate for a drug at the average acquisition cost for the drug for that year. 42 U.S.C. § 1395l(t)(14)(A)(iii)(I). Importantly, under this first option, HHS is authorized to vary reimbursement by hospital group. Alternatively, if hospital acquisition cost survey data is not available, the second option applies. Under this option, HHS must set reimbursement rates at the average price manufacturers charged for the drug in the year, which HHS may adjust as necessary. 42 U.S.C. § 1395l(t)(14)(A)(iii)(II).
Historically, HHS has set reimbursement rates for covered drugs based on the second option—meaning it has set reimbursement rates based on the average sales price data provided by manufacturers. However, in 2018, HHS proposed a change during its rulemaking to reduce reimbursement rates for hospitals participating in the 340B Drug Pricing Program.
Lower Reimbursement Rates for 340B Drug Pricing Program Participants
Established by Congress in 1992, the 340B Drug Pricing Program requires drug manufacturers to offer participating hospitals substantial discounts on prescription drugs as a condition of having their drugs covered by Medicaid. Participants in the 340B Program are generally safety net facilities that serve low-income or rural communities.
Due to the discounts afforded to participating facilities by the 340B Program, HHS noted that its existing prescription drug reimbursement rates were resulting in overpayments to participating hospitals—claiming that 340B hospitals were able to "generate significant profits" due to the difference between 340B hospitals' drug reimbursement rates and acquisition costs. Therefore, in a 2018 rule, HHS set a different prescription drug reimbursement rate for 340B Program participants than for non-participants.
The reimbursement rate for non-participating hospitals remained at its historical rate of approximately 106 percent of the average sales price for each drug. However, based upon an estimate that 340B hospitals obtained prescription drugs at an average discount of at least 22.5 percent below the average sales price charged by manufacturers, HHS set a new rate for 340B hospitals equal to 77.5 percent of the average sales price for each drug. Significantly, when setting this new reimbursement rate, HHS did not conduct a survey of hospitals' acquisition costs—leading to several legal challenges, including American Hospital Association et al. v. Becerra. See Am. Hosp. Ass'n et al. v. Becerra, Sec'y of Health and Human Servs., et al., No. 20–1114 (U.S. June 15, 2022).
The Fate of Chevron
In somewhat of a surprise turn in its Opinion, despite extensive briefing and discussion at oral argument respecting the continued vitality of the Chevron doctrine, the Court's decision here simply does not address that issue. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. established what, for the past forty years, has been the test for when courts should give judicial deference to agency interpretations of statutes. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Generally, if Congress has given an agency the authority to make rules with the "force of law," the two-step Chevron framework applies. During the first step, a court asks whether Congress has directly addressed the specific issue before the court. If it has, the court should defer to Congress's stated intent. However, if a statute is silent or ambiguous as to its textual meaning, the court will defer to an agency's interpretation of the statute so long as it is "reasonable."
When the Supreme Court granted certiorari of American Hospital Association et al., many commentators believed that the Court would use it as a vehicle to overturn Chevron and establish the judiciary as the arbiter of meaning of legislation, enabling agencies to engage in rulemaking and otherwise act. However, the Court implicitly declined to do so, at least at this juncture. In fact, the unanimous Opinion, authored by Justice Kavanaugh, contains no references to Chevron at all. If anything, the Court's analysis resembles the first step of Chevron, as it chooses to defer to the detailed statutory formula for reimbursement rates Congress provided in the Act. The Opinion and rationale are discussed in more detail below.
The Court's Rationale
In its Opinion, the Court engaged in a straightforward statutory analysis—finding that HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals by failing to conduct a hospital acquisition cost survey pursuant to the text of the statute. According to the Court, HHS's authority to proceed under option 1 and to vary reimbursement rates by hospital group thus depends on whether HHS has obtained acquisition cost survey data from hospitals. HHS advanced two main counterarguments in support of its 2018 rule: (1) certain statutory provisions precluded judicial review of its reimbursement rates; and (2) its authority to adjust the price-based reimbursement rates without conducting a survey of hospital acquisition costs authorized the reduction in rates for 340B hospitals. However, the Court ultimately rejected both.
The Court noted that the preclusion argument lack[ed] any textual basis, especially considering the detailed statutory formula Congress laid out in the Act. Regarding HHS's authority to adjust rates without conducting a survey, the Court found that this statutory language did not give HHS the authority to vary the reimbursement rates by hospital group unless [it] has conducted the required survey of hospitals' acquisition costs. According to the Court, HHS's broad interpretation of the term "adjust" would create a loophole that would render the provision of the statute requiring HHS to conduct a cost survey irrelevant.
Significance of Ruling
Most in the healthcare industry are viewing the Court's Opinion as a victory for 340B hospitals and clinics who saw roughly $1.6 billion in annual cuts to reimbursement rates for prescription drugs after the 2018 rule went into effect. Notably, the Court recognized that 340B hospitals can make profits on the differential between their acquisition cost and the reimbursement rate for Medicare. Though the Court declined to dictate remedies, 340B hospitals may be able to recoup some of the payments that were withheld under the rule.
However, in 2020 (after this litigation commenced), HHS conducted a hospital acquisition cost survey in accordance with the Act, which will limit the availability of recouping unlawful reimbursement rate cuts to payments made in 2018 and 2019. Moreover, HHS may use the 2020 survey to propose new rates for the upcoming year.
If you have any questions about this legal update or the decision's impact on facilities, please contact a member of the healthcare team.