U.S. Supreme Court 340B Ruling’s Practical Impacts

Today’s blog post is by Rebecca Rye and Cheryl Hetland

On June 15, 2022, the United States Supreme Court unanimously handed down its decision in American Hospital Association v. Becerra, a case that has significant impacts on the way that certain 340B hospitals are paid under the Outpatient Prospective Payment System (OPPS) are reimbursed for drugs provided to Medicare beneficiaries.

Background

Medicare statute outlines two options for the Department of Health & Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) to set outpatient prescription drug reimbursement rates:

• Option 1 involves CMS conducting a survey of acquisition costs for each covered outpatient drug, then using the data from the survey to set rates based on “average acquisition costs.”  Under option 1, HHS may vary reimbursement by hospital groups. 
• Option 2 HHS bases rates on the average sales price (ASP) charged by manufacturers for each drug, as calculated by the Secretary.  HHS may not vary reimbursement rates across hospitals groups when using Option 2.  From the creation of the statute in 2006 until 2018, CMS followed Option 2 and reimbursed covered outpatient drugs at the same rate of ASP +6% across all hospital groups. 

340B Reimbursement Cuts

Under the 340B program, hospitals that serve certain populations (e.g.: low income, rural populations) acquire outpatient prescription drugs at a much lower cost than other hospitals. Historically, the 340B hospitals received reimbursement at the same rate as other hospitals, resulting in a higher margin on outpatient prescription drugs. The monies saved through the 340B program are to enable “covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  

In 2018, and again in 2019, CMS released final OPPS rules that established a reduced reimbursement for certain hospitals that are a part of the 340B program. CMS’ final rules in 2018 and 2019 cut the reimbursement for 340B hospitals from ASP +6% to ASP –22.5%. In this sense, Medicare began reimbursing these hospitals less for drugs than other non-340B hospitals. Medicare then redistributed those “savings” within the Medicare payment system. This resulted in non-340B hospitals benefitting from these 340B savings while 340B hospitals faced a large financial impact on their 340B hospital income. The reimbursement cuts totaled approximately $1.6 billion annually, creating a significant impact on the viability of hospitals in the 340B program.

American Hospital Association v. Becerra

As a result of the 2018 and 2019 final rules and the impact they had on 340B hospitals, the American Hospital Association (AHA), along with several other groups and three individual hospitals, brought a suit against HHS in the U.S. District Court of Columbia. The suit argued that varying the reimbursement rates for 340B hospitals was not allowed under Medicare statute without the completion of a survey of acquisition costs. Prior to the 2018 and 2019 final rules, a survey had not been conducted. HHS countered that judicial review was precluded in the case of various statutory provisions, including the provision regarding rate setting for outpatient prescription drug reimbursement. In addition, HHS argued that the decision to vary rates by hospital group was within the scope of authority provided by the statute for Option 2 to “adjust price-based reimbursement rates.” The District Court found that HHS had acted outside of its authority when setting reduced rates. The DC Circuit Court of Appeals reversed the lower court’s position, upholding HHS’ rate setting. The case was appealed to the U.S. Supreme Court.

In a decision released June 15, the Supreme Court unanimously reversed the DC Circuit Court of Appeals ruling and stated that the reimbursement rate setting was outside the statutory authority provided to HHS. Justice Kavanaugh, in his decision, states that HHS’ argument for preclusion of judicial review “lacks any textual basis,” therefore upholding the lower court’s ruling in that matter. On the matter of the reimbursement rule itself, Kavanaugh states that the ruling is “straightforward.” The lack of a survey of acquisition costs prior to issuing a rule creating a difference in reimbursement between hospital groups meant that HHS “acted unlawfully” when it issued the 2018 and 2019 rules. 

Practical Implications

Although the Court ruled in favor of the 340B hospitals, it remanded the case back to the agency without providing any financial reprieve. However, the ruling does open the possibility that 340B hospitals may receive compensatory payments for the reimbursement not received because of cuts in 2018 and 2019.

While this decision is undoubtedly a win for 340B hospitals, the impact of the suit may be limited by the fact that some surveys of acquisition cost were conducted starting with the 2020 year. As a result, variation in reimbursement rates beginning with the 2020 final rule falls within the bounds of statute and is likely not able to be challenged in the same way as the 2018 and 2019 rules. On the other hand, the ruling in favor of the 340B entities additionally may provide some hope that manufacturer restrictions placed on 340B contract pharmacies may also be ruled unlawful.

Next Steps

The 340B program is complicated. For hospitals in the 340B program:

• Watch for how CMS will address this decision. CMS indicates given the timing of the Supreme Court ruling, it was: “…unable to adjust the proposed payment rates and budget neutrality calculations to account for that decision before issuing” its proposed CY 2023 OPPS rule and is “formally proposing a payment rate of ASP minus 22.5%.” CMS did say that it fully anticipates “applying a rate of ASP plus 6% to such drugs and biologicals in the final rule for CY 2023.” Further, CMS continues to evaluate “how to apply the Supreme Court’s recent decision to prior calendar years.”
• Understand the magnitude of cuts you faced in 2018 and 2019. There are many issues still in play here – from what CMS will do with repaying hospitals, whether it will decide to use budget neutrality, and how it will handle the same cuts but for years 2020 and beyond.
• Ensure regular compliance reviews

CLA can help. Reach out today for our 340B consulting advisory services.