On June 15, 2022, the Supreme Court issued a unanimous ruling in American Hospital Association et al. v. Becerra, overturning Medicare rules that significantly reduced payments to 340B hospitals for outpatient drugs.

The specific issue in the case was whether the Department of Health and Human Services had the authority under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“the Act”) to pay one category of hospitals – 340B hospitals serving disadvantaged and underserved populations – significantly less than other hospitals for outpatient drugs without conducting a survey of hospitals’ acquisition costs for the drugs.  In an opinion based on a close reading of the Act, the Court held that Medicare did not have such authority.

Under the Act, the Medicare program can pay hospitals for outpatient drugs in one of two ways.  The first option is for HHS to conduct a survey of hospitals’ average acquisition costs for the drugs and set reimbursement rates based on those costs. In that instance, the Act allows HHS to vary the reimbursement rates for different groups of hospitals.  In the alternative, and in the absence of survey date, it can pay hospitals the “average price” for the drugs, which is statutorily set at 106% of the drugs’ sales price as “adjusted” by the Secretary of HHS.

Lacking the survey data, Medicare had historically used the second option to pay all hospitals 106% of the drugs’ sale price. In 2018, however, even in the absence of survey data, HHS issued rules that reduced payments to 340B hospitals for outpatient drugs to the average sales price minus 22.5%, or 77.5% of the average sales price, an estimated reduction of $1.6 billion. HHS had justified the rules on the basis that, in order for these drugs to be covered by Medicaid, pharmaceutical manufacturers must sell them to 340B hospitals at a steep discount.

The American Hospital Association challenged the rules, arguing that because CMS did not have the statutorily required survey data to set reimbursement based on acquisition costs, it was required by law to pay all hospitals the average sales price.  The District Court ruled in favor of the AHA, but the D.C. Circuit Court of Appeals reversed, ruling in favor of the Medicare program.  In the unanimous opinion written by Justice Kavanaugh, the Supreme Court reversed and remanded.

The opinion first considered HHS’s argument that the rules were shielded from judicial review.  Recognizing the Court’s “strong presumption” in favor of judicial review of final agency action unless “a statute’s language or structure” precludes judicial review, the Court found that HHS’s argument “lacks any textual basis” and held that “[n]o provision in the Medicare statute precludes judicial review.”

The opinion then examined the text and structure of the Act to analyze whether the Act granted HHS the authority to vary reimbursement rates by hospital group in the absence of survey data.  HHS had argued that it had that authority because the Act authorized HHS to “adjust” the drugs’ average price.  The Court disagreed:

 Under the text and structure of the statute, this case is…straightforward:  Because HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals.


Regardless of the scope of HHS’s authority to ‘adjust’ the average price up or down under the statute, the statute does not grant HHS authority to vary the reimbursement rates by hospital group unless HHS has conducted the required survey of hospitals’ acquisition costs.

The Court remanded the case for further proceedings consistent with the opinion.

Court observers had carefully watched AHA v. Becerra to see if the Court would use the case to overturn or narrow its ruling in Chevron U.S.A. Inc. v. Natural Resources Defense Council, which had held that courts should generally defer to agencies’ reasonable interpretation of ambiguous statutes.  It did not.

Because many Medicare Advantage plans pay hospitals based on a percentage of Medicare, the Court’s holding that the rules setting outpatient drugs’ reimbursement rates for 340B hospitals at a deep discount were unlawful could require these plans to make additional payments for past reimbursement for outpatient drugs to 340B hospitals.

The opinion is linked here.

The attorneys at Whatley Kallas, LLP will continue to follow this case on remand as well as any new rules issued by HHS.

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