340B Hospital Payment Cuts Unanimously Overturned by Supreme Court

On June 15, 2022, the Supreme Court of the United States released its long-awaited decision in American Hospital Association v. Becerra in which it unanimously held that the United States Department of Health and Human Services (HHS) overstepped its statutory authority by cutting 340B-related reimbursement to hospitals.

While the decision is a substantial victory for 340B Program-participating hospitals, a number of questions remain, such as how HHS will refund affected entities, how covered entities and contract pharmacies may true-up contractual obligations, and whether similar rate cuts may be on the horizon. Nevertheless, covered entities are encouraged to begin data analysis processes aimed at preserving recovery rights in order to ensure appropriate refunding of underpayments resulting from the decision.

At its core, the case involves a technical provision under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which allowed HHS to set Medicare Part B prescription reimbursement rates in one of two ways. First, HHS could pay groups of hospitals variable reimbursement rates if it first conducted a national survey to determine the average cost for a particular drug that year and then adjusted the reimbursement rate by accounting for each hospital grouping’s acquisition cost. Second, if HHS did not perform a national survey, it could set reimbursement rates based on the average price charged by manufacturers for a particular drug, but it could not vary payment by hospital group types.

Central to the case was the fact that HHS had not conducted a successful survey under Option One since 2006. Instead, HHS paid all hospitals the same rate of 106% of the average price charged by drug manufacturers. In 2018, however, HHS deviated from its historical practice and established for the first time a differential rate based on whether the hospital was a 340B hospital. This resulted in 340B hospitals receiving 77.5% of the average manufacturer’s sales price, a significant reduction from prior reimbursement terms. In the Supreme Court’s view, “HHS’s power to increase or decrease the price is distinct from its power to set different rates for different hospital groups.” As such, while statutory law permits HHS to adjust the average price, the Court held that it could not create two different average prices for two different groups of hospitals. As a result, the Supreme Court effectively invalidated HHS’s price reductions to 340B hospitals and thereafter referred the matter to lower courts to determine an appropriate method for resolving HHS’s underpayments to covered entities.

As a result of the Supreme Court’s holding, hospital covered entities and their 340B program partners will need to identify and determine appropriate procedures for recovery of HHS underpayments as well as how to administer contractual payment obligations in light of additional funding being received. To this end, covered entities, contract pharmacies, and third-party administrators may benefit by engaging in detailed data and contractual analyses to streamline the financial recovery and reallocation process.

Dinsmore’s health care and life sciences attorneys have the depth of experience to help you and your organization navigate these uncertainties. Please contact our attorneys if you are interested in learning more about the 340B Drug Discount Program, Medicare reimbursement regulations, or how this important Supreme Court decision could impact your regulatory and compliance operations.