June 22, 2022

Opinions are like grandma’s holiday fruitcake: they typically contain questionable ingredients and rarely receive universal approval.  Let’s face it, we all come from different backgrounds, with different perspectives, and we are not going to always agree on every issue.  Given these individual differences, it is exceedingly difficult to get any good-sized group of Americans to come to universal agreement on any topic of the day—especially when that group is comprised of highly informed, fiercely independent people.  Nevertheless, that is exactly what happened last week when the Supreme Court of the United States (SCOTUS) handed down an opinion on behalf of hospitals that was unanimous—yes, nine to nada. 

In 2018, the U.S. Department of Health and Human Services (HHS) initiated a change affecting the reimbursement of certain drugs used in the outpatient setting.  Because this was widely seen as a pay cut within certain segments of the hospital sector, the American Hospital Association (AHA), along with three independent hospitals, filed suit against HHS later that same year.  The case worked its way through the courts, ultimately landing before the U.S. Supreme Court late last year.

Impetus of the Issue

Prior to the 2018 revision in the drug rule, HHS had set drug reimbursement rates that were standard, regardless of hospital class/type.  However, the 2018 change that led to lower reimbursement for drugs only applied to the so-called 340B hospitals.  In the eyes of many, these are the very hospitals that could ill afford to see lower reimbursement rates as this hospital class primarily serves low-income and rural communities. 

Others have raised questions over the basis for the government’s action in 2018.  It turns out that the HHS decision to lower reimbursement for drugs relative to these 340B hospitals was issued without the required survey data.  According to HHS attorneys, such surveys were “very burdensome on the hospitals” and provided inaccurate data.  However, according to the underlying law, the government is granted two options for setting outpatient drug rates. One sets a rate for all hospital classes based on the average sales price from drug manufacturers. The other allows the HHS to vary the rates by hospital class, but only if the agency has taken a survey of hospitals and has that data available.  The lack of a survey, then, would become a critical issue in the legal case going forward.

The AHA asserted in its suit that these cuts would amount to a loss of $1.6 billion annually for these hospitals.  Clearly, there was much at stake for the parties concerned.

Before the Bar

In 2020, the U.S. Court of Appeals for the District of Columbia, issued a victory for the government, with two of the three judges siding with HHS.  The opinion issued by the court in that case indicated that the cut in the reimbursement rate was “a fair, or even conservative, measure of the reduction needed to bring payments to those hospitals into parity with their costs to obtain the drugs.”  However, this rationale and ruling was overruled last week when the U.S. Supreme Court issued a unanimous ruling in favor of the AHA.

The court’s 14-page opinion, written by Justice Brett Kavanaugh, found that HHS failed to follow the law when it changed the rate of payments under the 340B drug discount program from the average sales price of the drugs plus six percent to the average sales price minus 22.5 percent.  The opinion went on to assert that, without a survey, HHS should not have cut rates only for one class of hospitals. 

Reactions and Implications

In a statement released after the SCOTUS ruling, the AHA issued the following statement:

Now that the Supreme Court has ruled, we look forward to working with the Administration and the courts to develop a plan to reimburse 340B hospitals affected by these unlawful cuts while ensuring the remainder of the hospital field is not disadvantaged as they also continue to serve their communities.

While the AHA and the 340B hospitals ultimately prevailed in this legal action, the drug discount program may face some hurdles in coming days.  One lobbyist for the pharmaceutical industry, as well as a few members of Congress, have been critical concerning a general lack of oversight in the program.  In addition, HealthcareDive is reporting that some pharmaceutical companies have stopped giving the ceiling price for providers dispensing the drugs through contract pharmacies, which then set off a flurry of lawsuits from HHS’ Health Resources and Services Administration—the agency that administers the program.

It remains to be seen if Congress will make future adjustments in the drug discount program in light of these recent legal actions and stated concerns.  For now, however, 340B hospitals have dodged a significant bullet.  To reach us, please go to info@miramedgs.com.