U.S. Supreme Court Sides with 340B Hospitals in Significant $1.6 Billion Part B Drug Payment Ruling | Quarles & Brady LLP

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On June 15, 2022, after many years of ongoing litigation1, the U.S. Supreme Court unanimously overturned a substantial Medicare Part B payment reduction to many 340B Program participating hospitals related to certain outpatient prescription drugs provided to Medicare patients for fiscal years 2018 and 2019, totaling an estimated $1.6 billion across all affected entities. While the Supreme Court ultimately remanded the decision to the U.S. Court of Appeals to craft the appropriate remedies, this decision will likely result in a very positive financial outcome for the affected 340B hospitals. Given the ongoing 340B Program turmoil related to contract pharmacy arrangements, this is some excellent news for 340B Program hospitals affected by the Part B payment reductions.

This controversy began in 2017, when the Centers for Medicare & Medicaid Services (CMS) finalized a proposal relating to CY2018 outpatient prospective payment system reimbursement rates to reduce reimbursement by almost 27% for separately payable drugs purchased at reduced prices under the 340B Program by certain types of 340B Program hospitals. Specifically, this payment cut represented a significant change for disproportionate share hospitals, rural referral centers, and urban sole community hospitals (the “Affected 340B Hospitals”). The reduction does not impact Medicare drug reimbursement for: i) critical access hospitals; ii) rural sole community hospitals; iii) children’s hospitals; iv) PPS-exempt freestanding cancer hospitals; (v) HRSA grantee clinics; or vi) non-excepted off-campus provider-based departments established after November 2, 2015 that are paid under the Medicare Physician Fee Schedule.2 This new reimbursement rate resulted in significant losses in reimbursement for the Affected 340B Hospitals. In its Medicare hospital outpatient prospective payment system (OPPS) rulemaking, CMS justified the reduction by stating that CMS was currently “overpaying” Affected 340B Hospitals for drugs purchased at 340B prices.

Not surprisingly, Affected 340B Hospitals and their industry groups quickly struck back and filed responsive litigation to attempt to enjoin or overturn the payment adjustments. One of the key arguments advanced by these groups involved the fact that CMS failed to conduct a survey of the hospitals’ actual drug acquisition costs so as to allow CMS to adjust the reimbursement based on survey data.

Now, after roughly five years of litigation, the Supreme Court appears to generally agree with the Affected 340B Hospitals, finding that “the statute allows the United States Department of Health and Human Services (HHS) to set reimbursement rates based on average price and affords the agency discretion to “adjust” the price up or down. However, the statute does not permit HHS to vary reimbursement rates by hospital groups unless the agency conducts a survey of hospitals’ acquisition costs.3

While this is good news for Affected 340B Hospitals, there are a few caveats to keep in mind moving forward:

1. The Court’s decision was limited solely to reimbursement adjustments in fiscal years 2018 and 2019, before CMS conducted a drug pricing survey.

2. While the Court’s decision did not address the merits of “discriminating against” the 340B Program hospitals, the decision seems to suggest that CMS could have made such adjustments had it complied with the statutory survey requirement. This suggests that the 2020, 2021, and 2022 payment reductions, done in accordance with hospital survey data, may still hold.

For now, Affected 340B Hospitals can enjoy this win and await the scope and parameters of the remedy. Additionally, and although not directly applicable to its decision, it is also noteworthy that the U.S. Supreme Court had some positive comments about the 340B Program as follows:

“Of course, 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. As amici before this Court, any 340B hospitals contend that the Medicare reimbursement payments at issue here “help offset the considerable costs” that 340B providers “incur by providing health care to the uninsured, underinsured, and those who live far from hospitals and clinics.” As the 340B hospitals see it, the “net effect” of HHS’s 2018 and 2019 rules is “to redistribute funds from financially strapped, public and nonprofit safety-net hospitals serving vulnerable populations—including patients without any insurance at all—to facilities and individuals who are relatively better off.” In other words, in the view of those hospitals, HHS’s new rates eliminate the federal subsidy that has helped keep 340B hospitals afloat. All of which is to say that the 340B story may be more complicated than HHS portrays it. In all events, this Court is not the forum to resolve that policy debate.”&4

We will continue to monitor this issue and provide updates as appropriate. We are also developing strategies and approaches that Covered Entities can use to influence the relief and repayment process as it is developed at the Court of Appeals level.

1 For our earlier analysis and additional background related to this litigation, please see 340B Litigation Updates and Other Program Developments.

2 Note: The reimbursement reduction began to also apply to non-excepted off-campus provider-based departments of disproportionate share hospitals, rural referral centers, and urban sole community hospitals beginning in CY2019.

3 https://www.supremecourt.gov/opinions/21pdf/20-1114_09m1.pdf

4 https://www.supremecourt.gov/opinions/21pdf/20-1114_09m1.pdf

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