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Our Take: SCOTUS sides with hospitals, says HHS ‘acted unlawfully’ in cutting 340B payments

Jun 20, 2022

Last Wednesday, the U.S. Supreme Court ruled in a unanimous decision that the Department of Health and Human Services (HHS) exceeded its authority when, in 2018, it initiated a steep cut in reimbursement rates for certain outpatient drugs only for hospitals participating in the 340B discount program.

Specifically, the court ruled that the reduced payment rates in 2018 and 2019 were “unlawful” because HHS did not conduct a required survey of hospitals’ acquisition costs for the drugs and therefore could not single out 340B hospitals for the lower rate of reimbursement.

Medicare has paid 340B hospitals, which typically serve low-income or rural populations, approximately $1.6 billion less per year since 2018 as a result of the lower reimbursement rate.

The Supreme Court’s ruling reverses a decision made in 2020 by the U.S. Court of Appeals for the District of Columbia Circuit.

The American Hospital Association, one of the six plaintiffs that originally challenged the payment cuts, released a statement in which it said the ruling “is a decisive victory for vulnerable communities and the hospitals on which so many patients depend. … 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.”

Our Take: The ruling is narrow, with SCOTUS essentially basing its decision entirely on the survey requirement.

Under Medicare’s Outpatient Prospective Payment System (OPPS), HHS has two options for calculating the reimbursement rate for specified covered outpatient drugs, or SCODs, which are often high-priced drugs used to treat cancer or rare blood disorders.

One option is to use the average acquisition cost for the drug, taking into account hospital acquisition cost survey data. Using this option, HHS can vary reimbursement rates for different hospital groups.

If survey data isn’t available, the other option is for HHS to use an average price metric. With this option, HHS must reimburse all hospitals at the same rate.

From 2006 until 2018, HHS used the second option rather than attempting to survey hospitals to determine their drug acquisition costs. In court, attorneys for HHS said such surveys are “very burdensome” for hospitals and those who conduct them, and the surveys don’t “produce results that are all that accurate.”

HHS calculates the average sales price (ASP) for drugs each quarter using sales data provided by drug manufacturers. This method has yielded a finalized payment rate ranging from ASP plus 4% to ASP plus 6%.

Until 2018, HHS paid all hospitals the same rate for SCODs. But in late 2017, HHS established two separate rates for the upcoming year. Non-340B hospitals were to be paid the usual rate, ASP plus 6%, while 340B hospitals were to be paid an adjusted rate — ASP minus 22.5%, or 28.5% less than what they and other hospitals had been paid for many years.

HHS justified the cut by claiming that 340B hospitals were being overpaid for the drugs because they purchase them from the manufacturer at a considerable discount — typically 20% to 50% less than other providers pay. (Drugmakers must give the discounts if they want their drugs to be covered by Medicaid.) HHS said the discounts amounted to more than the 22.5% it would be shaving off the ASP, so 340B hospitals would still achieve “substantial” savings.

Plus, HHS noted, Medicare beneficiaries would pay a lower cost share when receiving the drugs at a 340B provider, as their coinsurance is 20% of the rate Medicare pays.

Long story short, the AHA and other plaintiffs filed their lawsuit, and the district court eventually ruled against HHS. Subsequently, HHS appealed the ruling but in 2020 began collecting survey data from 340B hospitals — or trying to, anyway. According to Modern Healthcare, a law firm found that just 7% of covered hospitals submitted comprehensive survey responses and 38% didn’t respond at all.

In its ruling, SCOTUS did not address possible remedies for the hospitals affected by the “unlawful” reduction in reimbursement. HHS redistributed the money Medicare saved in 2018 and 2019 to all hospitals by raising other Part B reimbursement rates. The move garnered support from the Federation of American Hospitals (FAH), which represents “tax-paying” hospitals and health systems.

On its website, the organization states:

“FAH strongly supports CMS’ current policy under the Medicare Outpatient Prospective Payment System to reduce the payment rate on a budget-neutral basis for separately payable drugs and biologicals acquired with a substantial discount under the 340B program and to reinvest those savings into higher payments to all hospitals for primary care and other outpatient services. The policy aligns payments and costs more closely for 340B-acquired drugs.”

Citing a March 2021 report by Avalere, FAH further states that “reversing the policy would not only substantially increase the [Medicare] beneficiary cost burden for drugs acquired under the 340B program, it would also penalize with lower payments — in an already underfunded system — 89% of rural hospitals paid under OPPS and 80% of urban hospitals.”

The Supreme Court has spoken on this particular issue, but there’s still plenty of controversy surrounding the 340B discount program. Let’s see how HHS and CMS handle the reimbursement rate for 2023.

The Virtual-First Health Care Movement with Teladoc CEO Jason Gorevic

Nationally recognized thought leader and CEO of leading virtual health care company Teladoc Health, Jason Gorevic, joins us on this week’s Health Care Rounds. In navigating the company’s rapid growth throughout the pandemic, Jason shares how Teladoc is leveraging technology to meet the growing needs of consumers and health care professionals. John and Jason dive into the concept of “virtual-first health care” and address the impact of telehealth on primary care and how welcoming health care consumer engagement will drive better patient outcomes. Listen here or wherever you get your podcasts. And please rate and review us as it helps others find our content!

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