Supreme Court Overturns HHS Regulation Reducing the Medicare Outpatient Drug Reimbursement Rate for 340B Hospitals

Supreme Court Overturns HHS Regulation Reducing the Medicare Outpatient Drug Reimbursement Rate for 340B Hospitals

Legal Sidebar

Supreme Court Overturns HHS Regulation
Reducing the Medicare Outpatient Drug
Reimbursement Rate for 340B Hospitals
September 16, 2022
On June 15, 2022, the Supreme Court unanimously decided American Hospital Association (AHA) v.
Becerra, holding that the Secretary of Health and Human Services (HHS) lacked discretion to cut
Medicare’s reimbursement to selected hospitals for certain outpatient drugs by 28.5%. As the Court
indicated, the payment cut at issue implicated “immense economic consequences” of about $1.6 billion
annually for these hospitals, which purchase such drugs at significantly discounted prices through what is
known as the 340B Program. Beyond the significant financial stakes at issue for both the hospitals and the
Medicare program, this case garnered attention because many commentators expected it to serve
potentially as a vehicle for the Court to make changes to the scope of Chevron deference enjoyed by
agencies. Ultimately, however, the Court concluded that HHS exceeded its discretion in reducing the
reimbursement rate without directly addressing the Chevron doctrine. This Sidebar provides an overview
of the 340B Program and the rate cut at issue, a summary of the Court’s decision, and some
considerations for Congress.
Background
Under the 340B Program, drug manufacturers agree, as a condition of having their drugs covered by
Medicare, to provide substantial purchasing discounts to specified “covered entities,” which generally
include nonprofit hospitals and other health care providers that care for underserved populations. Because
the covered entities generally receive some form of federal financial assistance, Congress imposed the
required drug discounts to enable such providers to “stretch scarce Federal resources as far as possible.”
Separately, Medicare Part B reimburses hospitals for certain drugs (known as “specified covered
outpatient drugs” or “SCODs”) using a specific statutory formula provided in 42 U.S.C. § 1395l(t)(14),
which specifies two paths for determining these drug reimbursement rates. Under the first option,
payment is equal to the average acquisition cost for a given year, as determined using “hospital
acquisition cost survey data.” Alternatively, if hospital acquisition cost data are not available, payment for
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a drug is based upon the manufacturer’s average sales price of the drug for the relevant year “as
calculated and adjusted by the Secretary of HHS as necessary.”
Historically, the hospital survey data have not been available because HHS found the survey process
inaccurate and “very burdensome on the hospitals.” Therefore, using the second option, Medicare
generally reimbursed all hospitals’ purchases of SCODs at 106% of the average sales price. In 2018,
however, HHS promulgated a rule that “adjusted” the average sales price determination for these hospitals
such that the reimbursement rate was reduced to 77.5% of a drug’s average sales price. According to
HHS, this reduced reimbursement rate “better, and more appropriately” reflected 340B hospitals’
acquisition costs, given the discrepancy between the 340B discounts they receive and the relatively higher
reimbursement rates under Medicare Part B. The rate reduction was based on a study by the Medicare
Payment Advisory Commission (MedPAC) showing that, on average, 340B hospitals acquired SCODs
from manufacturers at a 22.5% discount.
Several hospitals and hospital associations challenged the reimbursement reduction. They argued that
without the hospital drug acquisition survey data, the only permissible basis for the reimbursement
amount is the average sales price. They also argued that the 106% reimbursement rate allows 340B
hospitals to offset the costly care they provide to low-income patients, and that Congress intended this
outcome. A lower reimbursement rate, they contended, would require hospitals to “dramatically curtail
other crucial programs that provide a wide range of medical services in low-income and rural
communities.”
HHS countered that judicial review of the rule was precluded by Section 1395l(t)(12). HHS also argued
that the “adjustment” to the average sales price was not clearly precluded by the statutory text, and so
should be upheld as a reasonable interpretation of the statute under the Supreme Court’s decision in
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. Under that framework, courts generally
defer to an agency’s interpretation of a statute if its text is ambiguous and the agency’s interpretation is
reasonable. As part of its rationale for changing the reimbursement rate after more than a decade, HHS
contended that the 106% reimbursement rate was an “overpayment” that “generate[d] significant profits”
for 340B hospitals, which were already able to purchase drugs at lower rates than other hospitals.
In July 2020, the D.C. Circuit held that judicial review of HHS’s action was not precluded and that the
downward adjustment to average sales price was a reasonable interpretation of the statute. The Supreme
Court subsequently agreed to review both issues.
The AHA v. Becerra Decision
In AHA v. Becerra, the Supreme Court held that (1) the Medicare statute does not preclude judicial review
of HHS’s rate reimbursement determinations; and (2) HHS violated the statute by lowering the rate for
340B hospitals without first conducting a drug acquisition survey.
First, reiterating the Court’s long-standing “strong presumption” favoring judicial review of an agency’s
final agency action unless the underlying statute expressly prohibits it, the Court found no statutory
provision expressly forbade judicial review of the reimbursement rate-cut at issue. Although HHS cited
other statutory provisions that expressly preclude judicial review—including § 1395l(t)(12)(A) and (C)—
the Court concluded those provisions relate to HHS’s “general methodology” for calculating Medicare
reimbursement rates for services rendered. Those provisions, in the Court’s view, are separate from the
drug reimbursement rate methodology at issue here, which is specific to SCODs. The Court further
rejected HHS’s argument that judicial review would be impractical because a rule invalidating the rate-cut
would potentially require the agency, under Medicare’s budget neutrality requirement, to recalculate
reimbursement rates for all other Part B services during the relevant years. Although the Court did not
discuss the potential remedies available to 340B hospitals or how any offset should be taken into account,

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it held that HHS’s arguments did not “override the text of the statute,” which does not expressly prohibit
judicial review.
Second, the Court held that HHS exceeded its statutory discretion in lowering the reimbursement rate for
340B hospitals without first conducting an acquisition cost study. In deciding this issue, the Court did not
mention the Chevron doctrine. Instead, the Court described the case as “straightforward,” highlighting the
two statutory options that HHS may use when setting reimbursement rates: (1) an acquisition cost study;
or (2) the average sales price charged by manufacturers. The Court reiterated that, under the first option,
the statute allows HHS to vary the reimbursement rate, meaning that HHS could reimburse different
hospital types at different rates. The second option to use the average sales price allows HHS to calculate
and adjust the rate “as necessary for purposes of” the section.
The Court held that HHS’s selective rate reduction for 340B hospitals was unlawful because the agency
did not first conduct a cost acquisition study, in accordance with option one of the statute. The Court
acknowledged that the statute’s second option permits HHS to “adjust” the rates “as necessary.” The
Court reasoned, however, that “HHS’s power to increase or decrease the price is distinct from its power to
set different rates for different groups of hospitals,” and “varying a rate by hospital group is not a lesser-
included power of adjusting price” under option two. HHS’s interpretation of the statute, in the Court’s
view, would make these two distinct options “irrelevant” because if HHS were allowed to vary the
reimbursement rate under the second option, then it would effectively never need to conduct an
acquisition cost survey under the first option. Finally, the Court rejected HHS’s argument that Congress
could not have intended for the agency to “overpay” 340B hospitals for the relevant outpatient drugs,
explaining that “Congress was well aware that 340B hospitals paid less for covered prescription drugs”
when it enacted § 1395l(t)(14) in 2003.
Considerations for Congress
The Court’s decision in AHA leaves open several unanswered questions, including the appropriate remedy
for 340B hospitals, the fate of the Chevron doctrine, and the Secretary’s discretion to set future
reimbursement rates. Each of these issues is discussed in turn.
What Is the Appropriate Remedy?
Although the Supreme Court found that HHS acted unlawfully in lowering the reimbursement rate for
340B hospitals without first conducting a cost acquisition survey, the Court did not comment on the
appropriate remedy. The determination of the appropriate remedy could have important financial
implications for 340B hospitals. The Court acknowledged that Medicare SCODs payments have
historically resulted in increased funding for 340B hospitals, which helps offset the cost of care for
underserved patients that they serve. The Court remanded the case for further proceedings; the case is
now pending before the D.C. District Court.
On remand, the parties are outlining their positions with respect to remedies, and several issues have
emerged. First, in light of the Court’s decision that the 2018 and 2019 reimbursement rates were unlawful
and the fact that HHS has continued using these rates to reimburse SCODs from 2018 to the present, the
plaintiffs want to be made whole for past SCODs reimbursements that were too low. Second, given that
HHS is currently using the unlawful rate for reimbursements in 2022, the plaintiffs have also asked the
court to protect plaintiffs from future harm by invalidating the 2022 rule and ordering HHS to increase the
reimbursement rate. Third, the parties dispute whether the court should remand the case to HHS for the
determination of an appropriate remedy or direct the remedy as part of its ruling.
Much of the parties’ arguments about past and future reimbursements center around the extent to which
the “budget neutrality rule” should determine past reimbursements. The statutory rule requires the

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Secretary to review and revise the payment methodology annually to account for changes in technology,
medical practice, and updated data. When making such adjustments, however, HHS cannot increase or
decrease the estimated amount of yearly expenditures that were otherwise allocated for that program year.
To this effect, in setting the rates for 2018 to 2022, HHS redistributed the $1.6 billion in yearly savings to
increase the reimbursement rates for other Part B services across all hospitals reimbursed for outpatient
services under Part B. Thus, if HHS were to recalculate payment rates for all of these years, this
recalculation would have consequences for other non-340B hospitals that were reimbursed under Part B
during those years.
What About Chevron?
Many legal scholars thought the Court’s decision in AHA would address the broader question of whether
Chevron continues to be the proper framework for judicial review of administrative rulemaking. Several
of the Justices have previously indicated their wariness of the Chevron analysis, but the Court was silent
on this issue and did not cite Chevron in its unanimous decision. Even if the Court had used the Chevron
analysis, however, the outcome would likely have been the same. The Court unanimously decided that
“[u]nder the text and structure of the statute, this case is . . . straightforward,” which is consistent with the
first Chevron prong, which analyzes whether the statute directly addresses the interpretive question at
issue. If the statute’s meaning is clear, the second prong of Chevron requires the Court to give effect to
that meaning. In AHA, the Court appeared to do so in finding that HHS violated the Medicare statute by
adjusting the reimbursement rates of 340B hospitals without first conducting an acquisition study, as
required by the statute. The Court has indicated a willingness to revisit the Chevron doctrine of agency
deference in other recent litigation involving the major questions doctrine.
Other Considerations
In addition to the questions about potential remedies and the fate of the Chevron doctrine, the Court
leaves open for Congress the question of how HHS might vary rates to different hospital types, given that
the agency seemingly believes its mechanism for doing so under option 1 is ineffective. To the extent
Congress determines that the Secretary should have the authority to vary rate reimbursement by hospital
types without a cost acquisition survey, it could amend the Medicare statute to clarify the circumstances
under which such variance may occur. The Court also did not address the issue of how much discretion
the Secretary has to “adjust” rates under the second rate reimbursement option, under which HHS uses the
average price manufacturers charge. Congress could respond to this aspect of the Court’s decision by
amending the Medicare statute to clarify how much discretion the Secretary has when making rate
adjustments to individual drugs, if it does not vary rates by hospital type.

Author Information

Edward C. Liu
Hannah-Alise Rogers
Legislative Attorney
Legislative Attorney

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