BY Rossanna Howard and Beth Anne Jackson, Brown and Fortunato
On June 15, 2022, the Supreme Court issued an opinion, American Hospital Association et al. v. Becerra, No. 20-1114, slip op. (2022), overturning a previously upheld $1.6 Billion dollar cut to the Medicare 340B drug discount program (the “Program”). The Program was enacted in 1992. It is implemented by the Department of Health and Human Services (HHS) and administered by the Health Resources & Services Administration (HRSA). The Program enables hospitals and other similar providers to stretch their federal dollars by receiving discounted prices on certain outpatient drugs for uninsured and other low-income patients. Manufacturers participating in the Program offer these outpatient drugs to hospital and provider participants at a discount, which generates savings for these providers. The savings achieved by these providers are, in turn, used to provide free care to uninsured and underinsured patients, such as free vaccines and mental health clinics.
In 2017, the Centers for Medicare and Medicaid Services (CMS) issued a final rule changing the reimbursement methodology under the Program. Prior to the final rule, the reimbursement under the Program was 6% above a drug’s average sales price. According to the final rule, starting in FY 2018, hospitals would be reimbursed according to the average sales prices of the drug minus 22.5%. The final rule built-in exceptions for certain hospital groups, including cancer hospitals, children’s hospitals, critical access hospitals, rural sole community hospitals, and non-excepted hospital outpatient departments that are reimbursed under the 
Medicare Physician Fee Schedule. The initial suit was brought in 2017 by hospital interest groups, including the American Hospital Association and the Association of American Medical Colleges. Hospital advocates argued that these massive cuts would result in significant losses to hospitals’ indigent care programs, putting their safety nets at risk. The lower court concluded that the suit was filed prematurely and declined to grant the relief requested by the hospital advocates.
The Supreme Court heard this case on November 30, 2021; the Court was only asked to review the cuts for FY 2018 and FY 2019. Per the Supreme Court opinion, there are two different methodologies available to HHS in setting reimbursement under the Program: (1) set reimbursement rates based on hospitals’ average acquisition cost of the drugs, which may vary by hospital group, or (2) set reimbursement rates based on the average price charged by manufacturers for the drug, which may not vary by hospital group. Notably, Option 1 applies only when HHS has conducted a survey of hospitals’ acquisition costs for each covered outpatient drug. The Supreme Court found that HHS acted outside of its scope of authority when it appeared to combine the two distinct reimbursement methodologies for FY 2018 and FY 2019. HHS did not collect surveys of hospitals’ acquisition costs, and prior to FY 2018, it used the option 2 methodologies for reimbursement. For FY 2018 and FY 2019, HHS permitted variance in reimbursement rates by different hospital groups, but without collecting the requisite surveys. The Supreme Court reversed the lower court’s decision and remanded the case back to the lower court without commenting on any potential relief.
Another potentially impactful outcome of this case relates to an ancillary argument by HHS. HHS attempted to argue that a judicial review of its reimbursement rates was precluded by statute. The Supreme Court disagreed with HHS and went one step further, stating that HHS’ arguments that a judicial review of the reimbursement rates was impractical “cannot override the text of the statute and the traditional presumption in favor of a judicial review of administrative action.” Commentators noted that some parties argued for the overturning of the Chevron standard in oral arguments. The Chevron standard arose from a previous Supreme Court case and requires judicial deference to reasonable interpretations of ambiguous statutes by administrative agencies. These oral arguments and the statements by the Supreme Court in this opinion potentially open the door to such a challenge of the Chevron standard, which could impact future challenges to administrative decisions by HHS. However, as demonstrated by the Supreme Court’s decision in Becerrra v. Empire Health Foundation (Empire Health), also issued in June, when the statute is not ambiguous and when the HHS interpretation is consistent with the statute, the HHS interpretation will be upheld. In Empire Health, the Supreme Court held that, in calculating the Medicare fraction of disproportionate share hospital (DSH) payments, the term “entitled to” means that a person was eligible for Medicare Part A benefits (that is, over 65 or disabled) and did not require that Medicare actually pay for the hospital days included in the calculation.
Overall, this ruling represents a big win for hospitals and their safety-net programs. Because the case was remanded to the lower court, relief has not yet been decided, and further legal proceedings may be required. Nevertheless, the American Hospital Association stated that it looks forward to working with the administration to develop a reimbursement plan for affected hospitals.