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June 27, 2022

Five Key Takeaways from Supreme Court Decision on Payments to 340B Hospitals

Ted Slafsky
Founder and Principal of Wexford Solutions, Publisher, 340B Report

For the second time in a little over a decade, the 340B program took center stage June 15 before the U.S. Supreme Court. For a refresher course, Justice Ruth Bader Ginsburg ruled in 2011 in a unanimous opinion (Astra USA v. Santa Clara County) that 340B providers do not have the right to sue drug companies, and only the HHS Secretary may enforce the manufacturer’s obligation to charge at or below the 340B ceiling price. Eleven years later, we once again have a unanimous opinion.

This time, the court ruled 9-0 that the federal government unlawfully slashed Medicare Part B drug reimbursement for 340B hospitals by almost 30 percent during 2018 and 2019. Writing for the court, Justice Brett Kavanaugh held that the Centers for Medicare and Medicaid Services (CMS) “acknowledged that it had not surveyed hospitals’ acquisition costs—the statutory prerequisite for varying the reimbursement rates by hospital group.” The court sent the case back to the federal appeals court in Washington, D.C., to find a remedy. The appeals court could remand the case to the federal district court in D.C, which originally ruled in the 340B hospitals’ favor.

Many questions remain regarding potential remedies and whether CMS will have second thoughts about continuing the cuts in its upcoming CY 2023 Outpatient Prospective Payment System (OPPS) proposed rule. Nevertheless, the court decision is a clear and much welcomed victory for 340B hospitals. 

After conferring with a half dozen attorneys who specialize in the 340B program, here are five key takeaways from this important decision:

1) 340B hospitals could be getting relief for more than 2018 and 2019

While the Supreme Court opinion explicitly focused on the first two years of the cuts (2018 and 2019), there is a good chance that 340B disproportionate share hospitals (DSH) will be made whole for at least the year 2020 and possibly additional years. As Emily Cook of McDermott Will & Emery pointed out, CMS did not conduct its survey of 340B acquisition costs until after the 2020 payment cuts went into effect. 340B advocates point out that although CMS referenced the survey in its 2021 and 2022 rules, it did not ultimately base those cuts on the survey either. 

Moreover, 340B hospitals have made the case that the survey data that CMS has collected is deeply flawed and that Congress intended for them to make a margin on Medicare payments to meet 340B’s purpose. Under both the Trump and Biden administrations, CMS has argued that 340B hospitals still benefit financially from the lower Medicare payments.

Cook anticipates that activity will heat up in the five lawsuits filed by various 340B hospitals that were stayed pending the outcome of the court’s decision. She says that the suits may be amended to address the flaws in the controversial survey specifically. According to Mintz Law, the survey of 340B hospitals, which was conducted just weeks after the start of the COVID-19 pandemic, resulted in only a 7 percent total completion rate. Critics of the survey also point out that it relied on data from only 340B hospitals, not the drug acquisition costs of the entire hospital community.

2) Supreme Court shares 340B advocates’ long-standing view on 340B’s intent

The court echoed the long-standing view of the Health Resources and Services Administration, the 340B hospital community, and its congressional champions regarding 340B’s intent and how the program is used. Throughout the opinion, the justices acknowledged the unique and important role that 340B hospitals play in the community. "340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support,” said Kavanaugh. The justices also cited the amicus brief filed by 37 state and regional hospital associations that contend that HHS’s new rates eliminated the federal subsidy that has helped 340B hospitals stay afloat. Cook expects that the government and 340B provider groups will cite the favorable language in their arguments in the ongoing (and any future-filed) cases related to the permissibility of manufacturer restrictions on 340B sales in the contract pharmacy setting. Todd Nova of Hall Render said he was pleased to see the court recognize the vital role that the 340B program plays in supporting the country's safety net. He says that those sentiments are also reflected in a number of the court decisions in the current contract pharmacy dispute.

Nonetheless, not all of the attorneys I talked to believe that the positive portrayal of the 340B program will have a meaningful impact. “The court is not a policy body. They are simply stating that CMS’s arguments about Congress’s intent are not a foregone conclusion,” said Andrew Ruskin of K&L Gates.

3) Justice Kavanaugh is a friend of DSH hospitals

During oral arguments, Justice Kavanaugh took umbrage over CMS’s contention that it was correcting for “overpayments” to 340B hospitals. “The word ‘overpayment’ with respect to 340B hospitals is questionable, isn’t it?” Kavanaugh said. “They provide a huge amount of the uncompensated care in the hospital.” Many “are in rural areas.”

In his unanimous opinion, Kavanaugh echoed those thoughts. “HHS’s argument that Congress could not have intended for the agency to ‘overpay’ 340B hospitals for prescription drugs ignores the fact that Congress when enacting the statute, was well-aware that 340B hospitals paid less for covered prescription drugs. It may be that the reimbursement payments were intended to offset the considerable costs of providing healthcare to the uninsured and underinsured in low-income and rural communities. Regardless, this court is not the forum to resolve this policy debate.”

This is not the first time that Kavanaugh has ruled favorably on behalf of DSH hospitals.  As Powers’ Barbara Straub Williams pointed out, Kavanaugh wrote an important decision favorable to DSH hospitals when he served on the D.C. federal court of appeals. According to the SCOTUS blog, Kavanaugh determined that the government neglected its notice-and-comment obligations when it issued a new policy that dramatically – and retroactively – reduced Medicare payments to hospitals serving low-income patients. The Supreme Court later upheld the decision.

4) Additional Implications for Contract Pharmacy Litigation

The Supreme Court opinion last week made it clear that the justices do not believe that the court system is the right place to resolve policy debates over the 340B program. Nonetheless, most of the experts I conferred with do not believe that would factor into whether the Court ultimately takes up the contract pharmacy case. Nevertheless, the court’s tilt towards giving less deference to agency interpretation of ambiguous statutes could have an impact.

Jason Reddish of Feldesman Tucker, who represents community health centers, was gratified with the court's decision. However, he points out that the decision was narrow in scope. He says while the court’s skepticism of the government’s position played out in favor of the hospitals in this case, it could potentially hurt their chances in the contract pharmacy case if the Supreme Court continues its movement away from deferring to federal agency interpretations of regulations and guidance. 

5) What DSH hospitals can do now

We eagerly anticipate CMS’s proposed OPPS rule, which is expected this July. CMS could continue the current cuts, abandon them or increase/decrease them. They could offer a new survey, try to rely on its previous survey, or skip the survey altogether. In the meantime, Kyle Vasquez of Polsinelli recommends “that impacted 340B hospitals assess claims from 2018 and 2019 for separately payable, non-pass-through Part B drugs that were paid at the lower ASP minus 22.5 percent rate and calculate what overall reimbursement should have been had the claims been paid at the standard ASP plus 6 percent rate. Impacted hospitals may need to conduct a similar review for 2020-present claims at some point soon.”

Stay tuned for more action in this fascinating drama.

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The views and opinions expressed in this blog are those of the authors. They do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Assumptions made in the analysis do not reflect the position of any entity other than the author(s). These views are always subject to change, revision, and rethinking at any time and may not be held in perpetuity.