Supreme Court Rejects Adjustments To Certain Prescription Reimbursements

Published date27 June 2022
Subject MatterFood, Drugs, Healthcare, Life Sciences, Food and Drugs Law
Law FirmHolland & Knight
AuthorScott O'Connell and Jamie Ehrlich

The U.S. Supreme Court sided with medical providers on June 15, 2022, after the U.S. Department of Health and Human Services (HHS) cut Medicare Part B reimbursements to healthcare providers serving disadvantaged communities. The high court found that HHS improperly adjusted hospital reimbursement rates for outpatient drugs because it failed to survey the hospitals' acquisition costs. The decision implicates tens of billions of dollars in HHS reimbursement to hospitals for prescription drugs. Notably, the decision does not address agency deference under Chevron v. Natural Resources Defense Council, which had been the topic of active questioning during oral argument. Chevron deference remains alive and well for now.


In American Hospital Association v. Bacerra, the court interpreted a 2003 law that dictates how Medicare pays for prescription drugs dispensed to outpatient departments. The ruling narrowly applied to hospitals eligible for the 340B Drug Pricing Program, which are facilities classified as serving low-income or rural communities. As of 2020, there were 12,700 340B covered entities.1

Under Medicare Part B, the government pays for a majority of hospital services in bundled payments. However, specific outpatient drugs - that are often more expensive - are classified under a different statutory payment scheme. The 2003 statute directs HHS to calculate "the average acquisition cost for the drug that year" or "if the hospital acquisition cost data are not available ... as calculated and adjusted by the Secretary as necessary."2

Under the statute, HHS has the authority to vary the reimbursement rates across hospitals only when the acquisition rates are collected through survey. Absent a survey, the statute sets the average price as 106 percent of the drug's average sale price. However, the rate cannot vary across hospitals - by statute, every facility calculated this way must be set at 106 percent.

Until 2018, HHS seldom conducted surveys, resulting in a 106 percent reimbursement payout rate across facilities calculated by the average sales price data of various drugs. The set rate did not vary across hospital groups. 340B hospitals were receiving the same rate as other hospitals, even if their discounted costs were below the reimbursement amount.

Given that federal law requires drug manufacturers to sell prescription drugs to 340B hospitals at a lower rate than average, significant revenue above actual cost was flowing to these hospitals. A...

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