SCOTUS Overturns 2018, 2019 Medicare Pay Cuts To 340B Hospitals

June 15, 2022

In a unanimous ruling, the U.S. Supreme Court on Wednesday (June 15) overturned a large pay cut to hospitals for drugs obtained through the 340B discount program because CMS failed to collect hospitals’ acquisition costs, but the justices left to a lower court the responsibility of how CMS will undo those budget-neutral cuts for 2018 and 2019.

Hospitals praised the ruling.

“The text and structure of the statute make this a straightforward case. Because HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals,” Supreme Court Justice Brett Kavanaugh says in the American Hospital Association v. Becerra opinion.

CMS cut Medicare pay for 340B drugs by almost 30% starting in 2018. A district court initially ruled the agency lacked authority to make that pay cut, but when the government appealed, two of the three appeals court judges sided with CMS. Appeals Judge Cornelia Pillard disagreed, saying the agency couldn’t cut pay for a subset of hospitals without first gathering the necessary data. AHA, Association of American Medical Colleges and America’s Essential Hospitals asked the high court to take up the case last year.

The Supreme Court said the case is clear cut; CMS’ ability to increase or decrease hospitals’ pay is distinct from its power to set separate rates by hospital group, and the agency can’t vary reimbursement for hospitals without conducting a survey, according to the opinion.

“So under HHS’s interpretation, the agency would never need to conduct a survey of hospitals’ acquisition costs. But why, then, would Congress have constructed this elaborate statute premised on HHS’s surveys of hospitals’ acquisition costs, including specifying when HHS could vary reimbursement rates by hospital group? HHS has no good answer to that question,” the opinion says.

Stephanie Kennan, senior vice president in the federal public affairs group at McGuire Woods Consulting, said it’s surprising that after years of litigation, every Supreme Court justice agreed the law is clear cut. The ruling also highlights why hospitals kept pressing the issue following the circuit court decision, she added.

HHS had pointed to the budget-neutrality requirement in the hospital outpatient pay rule as a concern and said invalidating the 2018 and 2019 cuts would require offsets elsewhere. A district court judge previously likened the situation to unscrambling an egg.

Kavanaugh, however, wrote that, “At this stage, we need not address potential remedies.”

The court’s decision only applies to cuts in 2018 and 2019. CMS conducted a survey of 340B hospitals’ acquisition costs in 2020 -- hospitals say that survey is flawed -- and Emily Cook, a partner with McDermott Will and Emery, pointed out that HHS says cuts for 2021 and 2022 can be tied to that survey. The 2020 pay cut remains an open question, she said.

Cook noted that lawsuits are pending on the cuts for 2020, 2021 and 2022.

“Today’s Opinion does not represent the end of litigation related to the 340B payment cuts. In addition to the continued deliberations that will occur when the case is remanded to the D.C. District Court, there are many other cases pending in various federal courts that address the payment cuts in 2020-2022,” Cook said in an analysis of the case.

The decision is so specific to 2018 and 2019 that CMS will likely have to go back and redo regulations around these cuts, especially for 2020, or risk litigation, Kennan said. There is a significant amount of money at stake and the remedy is especially important to hospitals given the financial squeeze they face in the aftermath of the pandemic, she added. It’s also unclear how the decision will affect patients.

The ruling is narrower than some expected, Kennan said, so agencies and stakeholders must determine how it meshes with the larger program, including controversy surrounding contract pharmacies.

AHA, AAMC and AEH called the decision “a decisive victory for vulnerable communities and the hospitals on which so many patients depend.”

“Now that the Supreme Court has ruled, we look forward to working with the Administration and the courts to develop a plan to reimburse 340B hospitals affected by these unlawful cuts while ensuring the remainder of the hospital field is not disadvantaged as they also continue to serve their communities,” according to a joint statement from the hospital lobbies.

340B Health President and CEO Maureen Testoni also said hospitals look forward to the next stage of the process on remedies. She called on CMS to drop cuts to 340B hospitals in the future, as well.

However, Ted Okon, executive director of the Community Oncology Alliance, said the ruling shows Congress needs to stop what he alleges are 340B abuses.

“What’s clear from this ruling is that the fix will have to come from Congress which needs to advance legislation aimed at curbing the worst of the 340B program, to ensure patients in need see the benefits and not huge health systems and the PBMs who have now found the pot of gold in 340B. COA wholeheartedly supports those reform efforts,” Okon said.

Kavanaugh said the Supreme Court is not the place for a policy argument on whether 340B hospitals should be paid more for drugs than it costs to acquire them. HHS has said Congress did not intend for CMS to overpay 340B hospitals, but Kavanaugh says that when lawmakers wrote the current statute, they knew 340B hospitals paid less for drugs than hospitals not in the program.

HHS may ask Congress to change the law, Kavanaugh wrote, though, “if HHS went to Congress, the agency would presumably have to confront the other side of the policy story here: 340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support.” -- Michelle M. Stein (