The Health and Human Services Department does not have the discretion to change 340B reimbursement rates without gathering data on what hospitals pay for outpatient drugs, the Supreme Court ruled Wednesday.
The unanimous opinion, authored by Justice Brett Kavanaugh, reverses a 2020 decision by the U.S. Court of Appeals for the District of Columbia Circuit.
"Absent a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates only for 340B hospitals; HHS's 2018 and 2019 reimbursement rates for 340B hospitals were therefore unlawful," Kavanaugh wrote. "Under the text and structure of the statute, this case is therefore straightforward." The high court also rejected HHS's contention that the regulations aren't subject to judicial review.
The Supreme Court decision means University of Washington Medicine "can breathe another day," said Sumona DasGupta, the Seattle-based health system's director of pharmacy business and strategic development. "We can have more services that can sustain for a longer period of time."
The American Hospital Association, America's Essential Hospitals and the Association of American Medical Colleges, plaintiffs in the case, cheered the court's ruling. "This decision is a decisive victory for vulnerable communities and the hospitals on which so many patients depend," the trade groups said in a joint news release.
The Federation of American Hospitals supported CMS's actions and disagrees with the ruling, a spokesperson for the for-profit hospital association said.
The 340B program grants safety-net providers access to lower-cost prescription drugs. Hospitals that serve large numbers of low-income patients, hospitals designated as critical access facilities, children's and cancer hospitals, and federally qualified health centers are among those eligible to participate in 340B. In 2020, 50,000 providers—60% of which were hospitals—participated in 340B and saved a collective $38 billion on drugs, according to data compiled by the University of Southern California.
In 2018, the Centers for Medicare and Medicaid Services cut Medicare 340B reimbursements by nearly 30% for most outpatient drugs. The policy generated approximately $1.6 billion in savings in the first year, which the agency redistributed to hospitals through rate increases for non-drug items and services.
But the AHA and other provider groups argued the cuts were illegal because CMS didn't survey hospitals to determine their average drug acquisition costs. The agency instead used the "average price" for the drugs, another option allowed under Medicare law to determine reimbursement for hospital-purchased drugs.
The Supreme Court ruling concludes that CMS overstepped its legal authority by employing the second method and setting different payment rates for hospitals that do and don't participate in the 340B program. The 2018 cuts only reduced rates for 340B hospitals, which HHS claimed had been overpaid. The discounted prices and uniform reimbursement rates allowed 340B hospitals to profit from the program, according to HHS.
"Critically, that second option does not authorize HHS to vary reimbursement rates by hospital group. Instead, HHS must set uniform reimbursement rates for all hospitals for each covered drug, and the rates must be equal to the average price for that drug for that year," Kavanaugh wrote.
Although the decision is a win for the hospital groups, it may not have a large material impact, University of Pennsylvania law professor Allison Hoffman said prior to the Supreme Court announcement.
CMS will "have to adjust payments on a bunch of claims that were made in a couple of years where they didn't have survey data, but it will be really quite limited both from a practical perspective and from a legal perspective," Hoffman said.
Federation of American Hospitals President and CEO Chip Kahn described the ruling as "very narrow" and said, "the court made it clear that it wasn't making a decision on policy. It's very explicit about that, and so we look forward to the policy moving forward."
CMS surveyed hospitals about their acquisition costs in 2020, after the industry groups initiated their lawsuit. The agency subsequently proposed a further 6% decrease to 340B reimbursements but hadn't finalized the policy prior to the court's ruling. Only 7% of covered hospitals submitted comprehensive responses and 38% did not respond at all, according to the law firm Mintz.
"That still does not hold to the statutory reading, which is that you either have to survey everybody on every purchase or move forward with an average," said Beth Feldpush, senior vice president of policy and advocacy for America's Essential Hospitals, which represents safety-net facilities.
CMS could propose new 340B rates in the coming outpatient payment rule, which is expected next month. The agency should halt the cuts in 2023 and make hospitals whole for the lower payments they received in previous years, Feldpush said.
How CMS will finance those retroactive payments is an "open issue," Thomas Barker, a partner at law firm Foley Hoag, said ahead of the decision. The original policy was budget-neutral and HHS already redistributed the savings, and clawing back that money would affect a greater number of hospitals than higher 340B reimbursements will, he said.
The hospital associations that sued HHS will press the department and the district court tasked with implementing the Supreme Court ruling to rectify the past payments without disadvantaging other hospitals, they said in the news release.
It may take time for hospitals to see results from the ruling, said Emily Cook, a partner at the law firm McDermott Will & Emery. "If any hospital clients asked what this case means for them as a practical matter today: Nothing changes."
The Supreme Court may return to 340B as other lawsuits work their way through the system, DasGupta said. Pharmaceutical companies are challenging the federal government's position that they may not limit 340B discounts for hospitals that use contract pharmacies, for example.
Alex Kacik contributed to this story.
Correction: An earlier version of this article mischaracterized the Federation of American Hospital's response to the Supreme Court ruling as favorable.