On June 15, the U.S. Supreme Court found unlawful a payment cut of about 30% that the Department of Health and Human Services applied to drugs purchased through the 340B drug pricing program and dispensed by certain hospitals paid under Medicare’s outpatient prospective payment system (OPPS). The high court sent the case back to the D.C. District Court for further deliberations.
In AHA v. Becerra, the Supreme Court held that the statutory provisions that allow HHS to adjust payment rates for drugs paid under OPPS require that HHS conduct a survey of hospital drug acquisition costs before it can adjust the rates for a group of hospitals. Because HHS did not conduct such a survey in connection with the 2018 and 2019 340B payment cuts, those cuts were contrary to the statute.
This case represents a big win for 340B hospitals that have been advocating for almost five years for the payment cuts to be overturned, but the opinion does not result in any immediate changes to Medicare payments for 340B drugs, nor does it require that HHS restore the full payment rates for 340B drugs.
Remedying Past Cuts Like ‘Unscrambling an Egg’
The case heard by the Supreme Court involved only payments in calendar years 2018 and 2019. The opinion focused on a provision of the Social Security Act that requires HHS to conduct a survey of hospital acquisition costs before implementing a change in drug payment rates under OPPS for a group of hospitals and the fact that HHS did not conduct a survey before implementing the payment cuts in 2018 and 2019.
HHS did eventually conduct a survey of 340B hospital drug acquisition costs in 2020, the results of which it considered in its decision to maintain the payment cuts in 2021 and 2022. Therefore, while the reasoning in the opinion arguably extends to the payment cuts in 2020, it would not apply to the payment cuts in 2021 or 2022.
The manner in which HHS remedies the payment cuts will be overseen by the D.C. District Court. Because the payment cuts were implemented in a “budget neutral” manner, developing and implementing a remedy may be more complicated than it would be if the funds generated by the cut had gone back to the U.S. Treasury.
Instead, the funds were redistributed by increasing the payment rates for all other items and services paid under OPPS. Therefore, a remedy may involve recouping payments from all hospitals paid under OPPS and re-redistributing it back to the hospitals that were subject to the payment cuts.
When the D.C. District Court originally reviewed possible remedies to address the past payment cuts in 2019, due to the budget neutrality component of the cuts, it compared the task of remedying the past cuts to “unscrambling an egg” and ordered HHS to use the “least disruptive means” to correct the underpayments.
Because of the subsequent appeal of the case to the D.C. Circuit Court, which upheld the payment cuts, a remedy was never finalized. HHS did, however, solicit and publish public comments on potential remedies in the CY 2020 OPPS rulemaking process.
These prior comments may help inform what a remedy may look like. Open questions remain as to whether and how HHS and the D.C. District Court may address payment cuts made in 2020, which were not explicitly subject to the Supreme Court’s opinion.
A Favorable View of 340B Program
Notably, the opinion includes several comments that suggest it has a favorable view of the 340B Program and 340B hospitals. For example, Justice Brett Kavanaugh states, “340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support.” The high court also recognizes the larger, on-going 340B Program policy debate, but notes that “this Court is not the forum to resolve [it].”
These quotes may provide some persuasive support for the government and stakeholders advocating for 340B covered entities in connection with the separate cases that are pending in other federal courts involving, among other issues, manufacturer restrictions on sales of 340B drugs.
The opinion is a positive development for 340B hospitals and the larger 340B-covered entity stakeholder community, but it does not represent the end of litigation related to the 340B payment cuts. In addition to the continued deliberations as to the remedy for the past cuts that will occur when the case is remanded to the D.C. District Court, many other cases are pending in various federal courts that address the payment cuts in 2020-2022 and will continue to be litigated—likely for years to come.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Emily Cook is a partner with McDermott Will & Emery in Los Angeles. She is a practice area leader for the Healthcare Regulatory & Compliance group.