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June 17, 2022

Supreme Court sides with hospitals in ruling 340B cuts 'unlawful'

Daily Briefing

    The Supreme Court on Wednesday unanimously ruled that reimbursement rate cuts under the 340B drug discount program were "unlawful"—marking what stakeholders describe as a "decisive victory for vulnerable communities and the hospitals on which so many patients depend." But Advisory Board researchers Chloe Bakst, Lindsey Paul, and Gina Lohr remain concerned about the future of the 340B program for two key reasons.

    Cheat sheet: 340B drug pricing program

    Hospitals challenge 340B's reimbursement rate cuts

    The 340B program requires drug manufacturers to provide significant discounts on certain medications sold to safety-net providers. According to Modern Healthcare, hospitals that serve a high number of low-income patients, those designated as critical access facilities, children's and cancer hospitals, and federally qualified health centers are among those eligible to participate in the 340B program.

    In 2018, HHS reduced the reimbursement rates for hospitals participating in the 340B program by 28.5%—a move that generated roughly $1.6 billion in savings during the first year, which the agency said it would redistribute by raising Medicare payments to hospitals for non-drug items and services.

    After the agency cut reimbursement rates, they argued that 340B hospitals were able to "generate significant profits" under the system. The hospitals participating in the 340B program disputed HHS' claim, arguing that the funding helped offset the additional cost of treating uninsured and underinsured patients in low-income and rural communities.

    In addition, they noted that Congress never stipulated that 340B hospitals should be reimbursed at a lower rate for outpatient prescription drugs.

    Ultimately, the American Hospital Association (AHA), along with other provider groups, argued the rule exceeded HHS' authority and the cuts were illegal because CMS did not survey hospitals to determine their average drug acquisition costs. Instead, the agency used the "average price" for each drug—an option that is allowed under Medicare law to determine reimbursement amounts for drugs purchased by hospitals.

    In 2020, the U.S. Court of Appeals for the District of Columbia Circuit court upheld the policy.

    SCOTUS unanimously rules against HHS

    On Wednesday, the Supreme Court unanimously reversed the 2020 Appeals Court ruling. According to the opinion, authored by Justice Brett Kavanaugh, the policy is illegal because HHS did not survey hospitals' drug acquisition costs before making the cuts, effectively violating protections set against varying payment rates for certain hospitals.

    "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."

    "In short, the statute allows HHS to set reimbursement rates based on average price and affords the agency discretion to 'adjust' the price up or down. But unless HHS conducts a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates by hospital group," Kavanaugh continued.

    In addition, Kavanaugh noted that "340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support."

    What does this mean for hospitals?

    Following the Supreme Court's decision, AHA, the Association of American Medical Colleges (AAMC), and America's Essential Hospitals (AEH) released a statement, saying they were "pleased" with the unanimous ruling.

    Notably, the ruling could allow hospitals participating in the 340B program to reclaim some of the $3.2 billion in 340B payments that were withheld in 2018 and 2019.

    According to Allison Hoffman, a professor at the University of Pennsylvania Carey Law School, "[t]he implication of this decision is that HHS will have to repay the 340B hospitals the difference between their lower rate and a higher rate paid other hospital for the two years at issue (2018 and 2019)."

    "After that point, HHS collected survey data that will justify lower rates consistent with the Medicare statute," she added. "The larger policy issue, which this case leaves unresolved, is how to tailor federal support for hospitals that disproportionally care for underserved populations."

    However, how CMS will finance those retroactive payments is an "open issue," said Thomas Barker, a partner at law firm Foley Hoag. Since the original policy was budget-neutral and HHS already redistributed the savings, clawing back that money would affect a greater number of hospitals than higher 340B reimbursements will, he said.

    So when 340B pay cuts are reversed, other hospitals could see pay cuts—particularly among for-profit hospitals that aren't eligible for the discounts, STAT News reports.

    Still, the Court’s decision marks "a decisive victory for vulnerable communities and the hospitals on which so many patients depend. 340B discounts help hospitals devote more resources to services and programs for vulnerable communities and increase access to prescription drugs for low-income patients," AHA, AAMC, and AEH said.

    "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," they wrote.(Commins, HealthLeaders Media, 6/15; Sneed et al., CNN, 6/15; Goldman, Modern Healthcare, 6/15; AHA News, 6/15; Cohrs, STAT News, 6/15)


    Advisory Board's take

    Our take: Why AHA v. Becerra may be only a surface victory

    By Chloe Bakst, Lindsey Paul, Gina Lohr

    On its surface, the Supreme Court's ruling in AHA v. Becerra is a win for 340B covered entities, but there are two reasons why we think it's less a sweeping victory for 340B hospitals and more another round of 340B hot potato, with the Supreme Court tossing the controversial program back to Congress and the federal government to regulate.

    First, the Court's decision is purposefully narrow, focusing in on statutory language and determining that HHS did not have the authority to reduce reimbursement to hospital groups without conducting a survey of hospitals' acquisition costs. So, in the near term, CMS may need to pay the higher, pre-2018 rates to 340B covered entities. But it's unclear how long this higher rate will last. CMS surveyed hospital acquisition costs in 2020, and they could use this survey data to propose new rates in the upcoming 2023 outpatient payment rule.

    Second, it does little to resolve the tensions that exist between the government, 340B hospitals, and drug manufacturers related to the 340B program. The underlying question behind both this case and many of the tensions related to 340B is: What is the purpose of the 340B program? Is it to allow institutions that serve low-income communities to access medications at affordable prices, which they then pass along to patients? Is it to give those institutions access to savings opportunities that can improve their margins and help them keep the doors open for the populations they serve? According to the Supreme Court, "340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support." Is the purpose of the 340B program, then, to augment federal dollars for these institutions? It’s nearly impossible to answer these questions, largely because the program is so complex, and every stakeholder has their own perspective on its purpose.

    We don't expect to get a clear answer about the 340B program's ultimate purpose any time soon. As the 340B contract pharmacy lawsuits progress (this time a dispute between drug manufacturers and HHS), we may see another 340B case head to the Supreme Court. But SCOTUS has shown us that we shouldn't expect them to interpret anything more than the precise question at hand for 340B.

    Many industry leaders point out the need for congressional action to answer the underlying question about the 340B program’s purpose. However, it is unclear whether this Congress could successfully advance 340B legislation. For now, it will continue as it currently stands: a complex, controversial program that is deeply integrated into the U.S. health care ecosystem, and a policy quagmire that nobody has been able to touch.

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