Hospitals made their case before the Supreme Court Tuesday that reimbursement cuts to the 340B Drug Pricing Program made by the Centers for Medicare & Medicaid Services were made unlawfully.
The American Hospital Association, the Association of American Medical Colleges, America's Essential Hospitals and other provider groups asked the court to reverse a nearly 30% cut in 340B reimbursements CMS initiated in 2018, arguing the changes were illegal because the agency didn't conduct a survey to determine hospitals' average drug acquisition costs.
Instead, CMS based 340B payments on the "average price" for the drug, a calculation formulated by the secretary that resulted in a $1.6 billion reduction in reimbursements in the first year of the changes.
Those are the two options allowed under the law to determine Medicare reimbursement for drugs purchased by hospitals.
But the plaintiffs argued CMS illegally set different reimbursement rates for hospitals participating in the 340B program and non-340B hospitals, which are mostly for-profit institutions.
"Congress spoke directly to the question of when rates can be based on acquisition costs and vary by hospital groups and that's when it conducts a cost study," said Donald Verrilli, counsel for the plaintiffs in the case.
He later added: "If you don't want to do that, if you think it's too burdensome or you think it's bad policy, then you go to Congress and say 'change the law.' But they didn't do either of those things. Instead, they took a shortcut that the statute doesn't authorize."
The 340B drug pricing program allows providers serving large numbers of low-income patients to buy drugs at deep discounts from drug manufacturers and to sell them for higher prices to Medicare and commercial insurers. 340B providers and supporters of the program argue those "savings" help participating not-for-profit hospitals provide services to low-income patients and cover uncompensated care costs.
But the Trump administration in 2018 reduced reimbursement rates to 340B providers, arguing it needed to be brought more in line with what hospitals were paying for the drugs.
The government on Tuesday argued its cuts are allowed under under the law and that Congress permitted it to vary reimbursement rates between 340B hospitals and non-340B hospitals.
Non-340B providers are still reimbursed by Medicare for drugs at the average sales price plus 6%. Under the changes made in 2018, 340B providers are paid 22.5% less than the average sales price.
This still amounts to a profit for 340B hospitals, but not as large as what they received before the changes were made.
The justices on Tuesday expressed skepticism with the government's argument.
"You're reading the text of the provision ... as though the provision says 'use average acquisition cost if you have survey data or if you don't have survey data, do the same thing.' That's not what the provision says," Justice Elena Kagan said. "This provision says if you have survey data, you do one thing, and if you don't have survey data, you do a different thing."
The difference between reimbursement rates based on hospital acquisition data and rates based on average price could mean lost money for 340B hospitals.
Justice Clarence Thomas asked the government's attorney, Christopher Michel, why HHS would ever change rates under the first option—through conducting a survey—when it could just skip the survey and set reimbursement by average cost.
"The survey still provides a lot of benefit to the agency," Michel said.
But he added that HHS only conducted the study once— in 2020 while the case was pending—and that the data was similar to the average price used by the agency to calculate rates.
Hospitals and other onlookers worried that if the Supreme Court sided with CMS, it could give the government more power over how to interpret laws passed by Congress.
Justice Neil Gorsuch asked the government council how much ambiguity is necessary for an agency to claim they should be given wide latitude to interpret the law, but Michel said it believes the congressional statute is clear.
Verrilli revisited Gorsuch's question later on, saying: "How much ambiguity is enough? I think the answer is way more than you have here."
The Supreme Court agreed to hear the case after the U.S. Court of Appeals for the D.C. Circuit sided with HHS. A lower court earlier sided with AHA.