In American Hospital Association v. Becerra, the U.S. Supreme Court held unanimously that if Health and Human Services (HHS) wants to reimburse Section 340B hospitals for certain outpatient prescription drugs provided to Medicare patients at a different rate than other hospitals, it must conduct a survey of hospitals’ drug acquisition costs.  

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 describes how HHS sets Medicare drug reimbursement rates. Per option 1, if the HHS Secretary “tak[es] into account the hospital acquisition cost survey data” the reimbursement rate is the “average acquisition cost for the drug for that year,” which importantly, the Secretary may “vary by hospital group.” Per option 2, if the Secretary doesn’t conduct a survey, drugs must be reimbursed based on the “average price for the drug” “as calculated and adjusted by the Secretary as necessary.”

HHS has never done a cost survey. Until 2018, HHS followed option 2 and set reimbursement rates for each drug based on the average-sales-price data provided by manufacturers and reimbursed all hospital at the same rates. In 2018, HHS decided to reduce reimbursement rates for 340B hospitals, which generally serve low-income or rural communities.

Federal law requires drug manufacturers to sell prescription drugs to 340B hospitals at prices below those paid by other hospitals. According to HHS, “the uniform reimbursement rates [under option 2] combined with the discounted prices paid by 340B hospitals for prescription drugs meant that 340B hospitals were able to ‘generate significant profits’ when they provided the prescription drugs to Medicare patients.”

Numerous states and local governments own and operate 340B hospitals. According to the Court, “HHS estimated that the reduction in the reimbursement rates for 340B hospitals would save Medicare (and deprive 340B hospitals of) about $1.6 billion annually, which by law would be re-allocated for other Medicare services.”

HHS argued that per option 2, even if HHS doesn’t conduct the survey, it may still “adjus[t]” the average price “as necessary for purposes of” this statutory provision,” which includes varying drug reimbursement rates for different types of hospitals. The Supreme Court disagreed in a brief opinion written by Justice Kavanaugh.

The Court looked to the text to explain why per option 2, the Secretary can’t vary reimbursement by hospital group. “[Option 2] requires reimbursement in an ‘amount’ that is equal to ‘the average price for the drug in the year.’ The text thus requires the reimbursement rate to be set drug by drug, not hospital by hospital or hospital group by hospital group. The only item that the agency is allowed to adjust is the ‘average price for the drug in the year.’”

The Court also explained that Congress’s option 1 and 2 scheme makes little sense if HHS can skip the survey under option 1 and vary the reimbursement rate by hospital type regardless. “To proceed under option 1 (based on cost) and vary the rate by hospital group, HHS must conduct a survey. In HHS’s view, the agency can decline to conduct a survey and can proceed under option 2, and then can still do everything under option 2 that it could do under option 1—including varying the reimbursement rates by hospital group. So under HHS’s interpretation, the agency would never need to conduct a survey of hospitals’ acquisition costs. But why, then, would Congress have constructed this elaborate statute premised on HHS’s surveys of hospitals’ acquisition costs, including specifying when HHS could vary reimbursement rates by hospital group?”

Finally, HHS argued that the Medicare statute precludes judicial review of the reimbursement rates. The Court disagreed, opining “the detailed statutory formula for the reimbursement rates undermines HHS’s suggestion that Congress implicitly granted the agency judicially unreviewable discretion to set the reimbursement rates.”

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