Supreme Court Rules Against Medicare Pay Cut on Discounted Drugs

Kerry Dooley Young

June 16, 2022

Medicare erred in creating a policy to pay hospitals less money for drugs they acquired at sharply reduced costs through a federal 340B discount program, according to a ruling from the US Supreme Court.

The Supreme Court on Wednesday released an opinion in a case known as American Hospital Association (AHA) v. Health and Human Services Secretary Xavier Becerra.

The case centered around a policy first announced by the Trump administration in 2017 as an attempt to compel hospitals to share directly with patients and taxpayers the benefit of the federal 340B discount drug program. The policy was intended as a step in addressing rising pharmaceutical costs, particularly those that people aged 65 and older pay for cancer medicines and other expensive drugs. The Biden administration has supported and defended this policy.

In a unanimous decision written by Justice Brett Kavanaugh, the Supreme Court found that Medicare's parent agency, the Department of Health and Human Services (HHS), failed to take the proper steps needed to support a reduction in pay for drugs purchased through the 340B program. Federal law required that HHS conduct a survey to support such a step and HHS did not do this.

"If HHS believes that this Medicare reimbursement program overpays 340B hospitals, it may conduct a survey of hospitals' acquisition costs to determine whether and how

much the data justify varying the reimbursement rates by hospital group — for example, reducing reimbursement rates paid to 340B hospitals as compared to other hospitals," Kavanaugh wrote in the opinion.

"Or if the statute's requirement of an acquisition cost survey is bad policy or is working in unintended ways, HHS can ask Congress to change the law," he added.

A Victory Against "Unlawful Cuts"

HHS told Medscape Medical News in an email that it is reviewing the decision. AHA, along with the Association of American Medical College and another trade group, America's Essential Hospitals, on Wednesday issued a joint statement about what they called a "decisive victory."

"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," the groups said.

Medicare's standard approach to covering drugs administered in hospitals and clinics, and thus covered by its Part B program, is to add a 6% premium to the reported average sales prices (ASP) of medicine. The 340B program allows certain hospitals and clinics to buy medicines for discounts, often cited in the 20%–50% range, and then charge higher prices for them.

There is no federal restriction on use of the resulting windfall. Hospitals in the 340B program can apply the savings as they choose, with many saying they use the money gained for community services and expanding access to care.

In response to concerns about rising drug costs, the Centers for Medicare & Medicaid Services (CMS) in 2018 sought to begin cutting the payment for drugs purchased through the 340B program to a 22.5% reduction on ASP.

So instead of paying 106% of the costs of drugs purchased for a discount, Medicare would pay about 77.5%. That reduced Medicare spending on these medicines by about $1.6 billion a year, Kavanaugh noted in the opinion.

In the opinion, Kavanaugh said the case was "straightforward" given the federal law on Part B drug payment.

"Because HHS did not conduct a survey of hospitals' acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals," he wrote.

Kavanaugh also suggested Congress would not be inclined to give HHS the power to make a cut in 340B drug payments.

"340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support," he wrote. "In other words, in the

view of those hospitals, HHS's new rates eliminate the federal subsidy that has helped keep 340B hospitals afloat. All of which is to say that the 340B story may be more complicated than HHS portrays it. In all events, this Court is not the forum to resolve that policy debate."

40% of US Hospitals Participate in 340B Program

The Medicare attempt to pay less for 340B drugs arose from growing concern about unanticipated consequences and remarkable growth of the program.

In 2015, for example, the investigative arm of Congress, the Government Accountability Office (GAO), noted that the structure of the 340B program created an incentive for prescribing of more expensive drugs, which would generate larger windfalls.

"While hospitals may be financially benefiting — which is not inconsistent with the legislative design of the 340B Program — this poses potentially serious consequences to the Medicare program and its beneficiaries," GAO wrote in a report. "Not only does excess spending on Part B drugs increase the burden on both taxpayers and beneficiaries who finance the program through their premiums, it also has direct financial effects on beneficiaries who are responsible for 20 percent of the Medicare payment for their Part B drugs."

The 340B program covered $38 billion in drug sales, or 7.2%, of the US pharmaceutical market in 2020, up from an estimated 2% a decade earlier, according to the Health Resources and Services Administration (HRSA). It's been estimated that about 40% of US hospitals participate in the 340B program.

Participation in the 340B Program swelled due to provisions in the Affordable Care Act in 2010 that allowed wider participation. In 2009, there were more than 800 340B-participating hospitals, compared with more than 2500 in 2019, GAO said in a 2019 report.

About 90 hospitals were involved at the start, wrote Samuel Thomas, MD, and Kevin Schulman, MD, of Stanford University in a 2020 article in the journal Health Services Research, titled "The unintended consequences of the 340B safety‐net drug discount program,"

Named for the section of federal law that created it, the 340B program emerged as a workaround to a problem created by a 1990 law on Medicaid drug discounts. That law had dried up some donations of low-cost medicines that pharmaceutical companies earlier made to certain hospitals and clinics. To fix this, Congress added a provision to a 1992 law on veterans program to allow continued access to low-cost drugs. ​​

Profits from 340B participation increased over the years as the prices of medicines administered or delivered in the outpatient settings rose, Thomas and Schulman wrote. That created "a strong incentive" to purchase physician practices that have the greatest opportunity to benefit from dispensing medications acquired through the 340B program, including practices in oncology, ophthalmology, and rheumatology, according to Thomas and Schulman.

"This modest program, implemented to address an inadvertent consequence of the Medicaid Drug Rebate Program, has seen its impact expanded, reverberating throughout the health care system," they wrote.

Kerry Dooley Young is a freelance journalist based in Miami Beach. She is the core topic leader on patient safety issues for the Association of Health Care Journalists. Young earlier covered health policy and the federal budget for Congressional Quarterly/CQ Roll Call and the pharmaceutical industry and the Food and Drug Administration for Bloomberg.  Follow her on Twitter @kdooleyyoung.

For more news, follow Medscape on Facebook, Twitter, Instagram, YouTube, and LinkedIn


Comments on Medscape are moderated and should be professional in tone and on topic. You must declare any conflicts of interest related to your comments and responses. Please see our Commenting Guide for further information. We reserve the right to remove posts at our sole discretion.