On June 15, in American Hospital Association v. Becerra, the Supreme Court ruled the payment cuts made by the Department of Health and Human Services’ (“HHS”) Centers for Medicare & Medicaid Services (“CMS”) for 340B eligible outpatient drugs were not permissible under the governing statute. The Court’s opinion rejected HHS’s argument that courts were barred from reviewing the agency’s setting of the challenged reimbursement rates and held that HHS’s failure to conduct the statutorily required survey in 2018 and 2019 barred the agency from changing reimbursement rates only for 340B hospitals in those years.

The unanimous opinion by the Court does not apply or directly overturn the longstanding Chevron analysis.

Background

CMS reimburses hospitals for care when the hospitals provide outpatient care to patients using Medicare Part B. Certain hospitals that have a high Medicare Disproportionate Share Percentage (“DSH”) qualify for the 340B program that allow hospitals take part in the federal 340B Drug Pricing Program for underserved populations. However, starting in 2018, HHS reduced the reimbursement rate for the 340B covered drugs from the Average Sales Price (“ASP”) plus 6% to the ASP minus 22.5% for 340B eligible hospitals. Following HHS’s decision, the American Hospital Association (“AHA”) challenged the payment reduction, stating that the decision “rests on an impermissible construction of the governing statute.”

Analysis

Justice Kavanaugh, writing for the unanimous majority, stated the 340B payment reductions were unlawful. The basis for this reasoning stems from a strict interpretation of the statutes created by Congress to set reimbursement rates for outpatient drugs. CMS has long used the second option based on the drugs’ average price. The Court emphasizes this option does not allow for any variation in this methodology. Because the 340B Payment reduction was a variation to this methodology, the Court reasons the first option then becomes the controlling law. The first option requires CMS to survey hospitals’ average acquisition costs prior to making rate changes. Because no survey was conducted, CMS failed to follow the statute, and the payment cuts contradict the statute.

Further, Justice Kavanaugh dismissed the government’s argument that other statutes precluded any judicial review of the 340B Payment Reduction and stated there was nothing in the Medicare statute that prevented the AHA from challenging the 340B Payment reductions.

While this is a legal win, there is no clear practical resolution for the hospitals affected by these 340B payment reductions, as the case has been remanded to the agency. Additionally, while after oral arguments for this case there was speculation this decision might alter the long-standing Chevron analysis for evaluating challenges of agency actions, the Supreme Court does not explicitly refer to that analysis in reaching its decision. But the opinion does make clear that courts should start—and potentially resolve—administrative law disputes “employing the traditional tools of statutory interpretation.” That position was directly advanced by AHA before the Court—and opposed by HHS—as a means reining in lower courts’ willingness to defer to agency interpretations under Chevron.

Practical Takeaways

  • The Supreme Court stated the law requires a survey if payment rates are proposed to be varied by groups, and because CMS did not conduct a survey, the payment reduction for hospitals’ 340B drugs is unlawful.
  • This is a win for hospitals eligible for the 340B Program, but how the agency will implement this decision is unknown for now.
  • The Supreme Court did not explicitly cite the Chevron analysis in reaching its decision but, in doing so, opened the door for courts—and litigants—to advocate for a refocus on traditional statutory interpretation arguments in administrative appeals before jumping to agency deference under Chevron.
  • Health care providers should carefully monitor CMS actions, especially those that affect payment, and continue to preserve appeal rights when aggrieved by government agency action.