Legal Intelligencer article by Lamb McErlane Health Law Chair Vasilios J. (Bill) Kalogredis*.

In a unanimous opinion delivered by Justice Brett Kavanaugh on June 15, 2022, the U.S. Supreme Court sided with hospitals and held that Medicaid funding was unlawfully cut to certain hospital groups. In the American Hospital Association v. Becerra holding, the Supreme Court has made it clear that the cuts in 2018 and 2019 to only one group of hospitals is contrary to the associated reimbursement statute and unlawful.

In 2018 and 2019 the U.S. Department of Health and Human Services (HHS) changed the Medicare reimbursement approach for a certain group of hospitals titled “340B” hospitals. The hospitals in this group fall under section 340B of the Public Health Service Act. These types of hospitals include many health organizations that care for uninsured and low-income patients. The range of organizations are anything from rural referral centers, to critical access hospitals. To understand the June 15^th ruling it is necessary to have a clear understanding of the details of the two complex health services that are at play.

340B DRUG PRICING PROGRAM BACKGROUND

The 340B Program, housed within the Public Health Service Act, requires pharmaceutical manufacturers to sell outpatient drugs to qualifying hospitals at discounted prices. These 340B hospitals can then charge insurance companies at full price to partially offset the higher associated costs of serving vulnerable and low-income communities.

The 340B Program has existed for thirty years and has provided significant benefits to communities during its existence. The Program was created in 1992 under the Bipartisan Veterans Healthcare Act and was expanded in 2010 under the American Recovery and Reinvestment Act. Sixty-two percent of 340B hospitals are in rural areas and forty-five percent are specifically critical access hospitals. The 340B Program has grown over the years to encompass roughly five percent of the total US drug market. In 2015, the American Hospital Association reported that 340B eligible hospitals provided $51.7 billion in benefits to their communities.

The 340B Program has thus become critical for health care access in the United States. A large portion of the funds that 340B hospitals now use to operate comes from the 340B Program. Without the Program many of these hospitals would be forced to severely reduce patient support or even close their doors permanently.

The details of the purchasing program are relatively straight forward. The Program requires drug manufactures to enter into a pharmaceutical pricing agreement with HHS in exchange for having their drugs covered by some Medicaid and Medicare programs. These discounts range from 20-50% of the market cost and the 340B hospitals are then meant to make a surplus by billing insurance companies for the full costs of the drugs. Significantly, a large portion of 340B hospital’s patients are only covered by governmental insurance, meaning that the surplus that these hospitals rely on to operate comes largely from HHS itself. Regardless, the existence of this surplus was always in the original design of the Program.

Even with these forms of assistance, the 340B hospitals often operate in the negative margins. 340B hospitals reliance on the surplus the Program provides has meant they could stay operational but not necessarily profitable.  In 2017, for outpatient services, the 340B hospitals operated at a margin of negative 18.5%, despite the discounted selling prices for the drugs. This was decimated by the 2018 Medicaid reimbursement cuts by the HHS which led to the Supreme Court case American Hospital Association v. Becerra.

MEDICARE REIMBURSMENTS EXPLAINED

The Centers for Medicare & Medicaid Services (“CMS”) is the HHS agency that delivers the Medicare program and made the 2017 decision to alter Medicare’s payment methodology. Essentially, the agency separated non-340B hospitals from the 340B hospitals, creating two groups of hospitals that would receive different reimbursement rates for their Medicare drug purchases. In 2018 and 2019 this meant that 340B hospitals had a nearly 30% cut in their reimbursements, equating to roughly $1.6 billion in lost funding per year.

Under 42 U.S. Code § 1395l, CMS has two options for setting the reimbursements rates. The first option is to conduct a survey and determine the acquisition costs of hospitals and determine reimbursements on a drug-by-drug basis. This has been considered an administratively taxing approach. So instead, the CMS has favored the second available option for close to twenty years.

Since 2005 the CMS has reimbursed using the second option available under 42 U.S. Code § 1395l. This approach uses the average price of the drug, which the CMS calculates quarterly, with an additional 6% added for administrative costs. As such, reimbursement rates were standardized across the board at 106% to fully cover the drug cost and related administration expenses. That is until 2018, when 340B hospitals were given reimbursement cuts.

The premise of the cuts was that 340B hospitals were already receiving discounts on purchasing drugs and the previously standard reimbursement rate of 106% equated to an overpayment to these hospitals. Proponents in favor of the cuts also highlighted that co-pay for patients would also be reduced for those with Medicaid. These arguments of course ignored significant factors such as the principle that 340B hospitals rely on overpayment by design or that many drug manufacturers are currently and unlawfully refusing to abide by the 340B discount program.

However, these factors were not the principal reason for why the Supreme Court held unanimously in favor of 340B hospitals this June.

THE UNAMIMOUS RULING IN FAVOR OF 340B HOSPITALS

The Supreme Court found that grouping hospitals for reimbursement rates exceeded the statutory authority provided to CMS, specifically because it arbitrarily changed the reimbursements without conducting the required survey of the hospitals.

In the American Hospital Association v. Becerra opinion, the Court touched briefly on the threshold issues of judicial review regarding this agency’s action. The holding is clear that there is no dispute in lower courts or at the federal level regarding the “strong presumption in favor of judicial review of final agency action.”. As such, the Supreme Court had jurisdiction to rule on this matter.

Justice Kavanaugh opened the opinion by remarking on the “straightforward” nature of the case because of the clear statutory violation. The statutory violation is blatant as there are two options for changing reimbursement rates and neither of them allow for an entire group of hospitals to be reimbursed differently with no supporting evidence for such a change.

The Supreme Court was in full agreement when determining that Congress had no intention of differentiating between 340B hospitals and other hospitals “when requiring that the reimbursement rates by uniform under option two”. Congress was aware of the 340B Program when the statute was created, as the Program predated the statute by over a decade. As such, its specifications on uniformity clearly intended to include these hospitals and continue to assist them in off-setting the larger costs of providing to and for low-income and rural communities.

American Hospital Association v. Becerra is a win for the 340B Program and a promise for extensive future litigation. The 340B Program faces current and future challenges from not only the CMS’s continued attempts to pursue option one, but also continued opposition from pharmaceutical companies looking to push back to full price drug purchasing across all hospitals.

Read the article online on Law.com / Legal Intelligencer here.

Vasilios J. (Bill) Kalogredis, Esq. has been exclusively advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

*Lamb McErlane PC Summer Associate Elyda Joyce, contributed to this article.