United States: Supreme Court Hears Arguments On 340B Outpatient Payment Cuts—and Discusses ‘

United States: Supreme Court Hears Arguments On 340B Outpatient Payment Cuts—and Discusses ‘Chevron Deference’

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Over the summer, my colleague Tom Barker discussed how the
Supreme Court was planning to hear several health care cases during
the October 2021 term. Last week, the Court heard oral arguments
for two noted cases: during Monday’s (November 29) arguments
for Becerra v. Empire Health Foundation, the Court
was asked to decide if the Administrative Procedure Act (APA) gives
HHS authority to interpret the Medicare statute and recalculate
payments made to disproportionate share hospitals (DSH); and on
Tuesday, November 30, the Court heard arguments
for American Hospital Association v. Becerra, which
focused on CMS’ 2018 change in Medicare reimbursement policy
for drugs acquired by hospitals under the 340B program. Since we
often write about the 340B program because of the inextricable link
between the discount-drug program and the Medicaid prescription
drug program, today, we are going to talk about the AHA v.

Procedural History of the Legal Fight Over 340B Outpatient
Payment Cut

As noted above, the dispute—and subsequent
litigation—between CMS and 340B hospitals began with a
payment change first announced in 2018. Hospital 340B covered
entities acquire discounted drugs through the 340B program and then
dispense these drugs to Medicare beneficiaries, whose care is paid
for under the Medicare Outpatient Prospective Payment System
(OPPS). Generally, Medicare pays for these drugs at the average
sales price (ASP) plus 6%, but after 2018, the agency began
reimbursing 340B hospitals for drugs acquired under the program at
ASP minus 22.5%. CMS finalized this change via rulemaking.

According to CMS, the reimbursement cut is to prevent hospitals
from acquiring the drugs at a discount and potentially profiting
from the difference between acquisition price and the sale of the
drugs. Hospitals argue that they need the more generous
reimbursement after acquiring discounted drugs because the
hospitals serve a disproportionate share of low-income patients.
Furthermore, the hospitals have argued that a price differential
was intended (or at least understood) as part of the program.
We’ve discussed how hospitals sued CMS over the policy change
and won at the trial court level, while CMS won on
appeal (in 2020). In its ruling for CMS, the D.C. Circuit Court
held that the OPPS payment change was a valid use of CMS’
regulatory authority—but also said that the case was subject
to judicial review. The hospitals then petitioned the Supreme Court
to hear the case, and the Court granted cert.

Chevron Deference’

In his blog, Tom noted that it was peculiar why the Supreme
Court agreed to hear the case: there was no conflict between the
appellate courts and CMS’ payment policy; the payment change
did not interfere with administering Medicare nationally; and most
importantly, under the 1984
landmark Chevron case, courts show deference
toward Federal agencies regarding interpretations of law (known as “Chevron deference”). Tom presciently explained why granting
certiorari telegraphed the Court’s interest in questioning the
scope of Chevron deference.

To summarize in 60 words or fewer, Chevron is
a two-step test: the Court first determines if Congress made its
intentions clear with a law (e.g., is the law ambiguous?). If the
law is unclear, the Court will then decide if the agency’s
interpretation of the law is permissible (meaning not “arbitrary and capricious”). If the interpretation is
permissible, then the Court will defer to the agency.

In their petition to the Court, the hospitals
posed the question as to “whether
the Chevron deference permits HHS to set
reimbursement rates based on acquisition cost and vary such rates
by hospital group if it has not collected adequate hospital
acquisition cost survey data.” According to the hospitals,
Federal law requires HHS to set Medicare reimbursement for covered
outpatient drugs based on one of two alternative payment
methodologies, one of which requires collecting “hospital
acquisition cost survey data;” and, in the absence of such
data, HHS must set its reimbursement rate based on a calculation
defined in statute, which CMS had, since 2013, set at ASP + 6%. In
short, the hospitals asked if CMS acted “arbitrarily and
capriciously” by using rulemaking in the manner that it did to
cut 340B hospital reimbursement for covered outpatient drugs from
ASP + 6% to ASP minus 22.5%.

What’s Next for the Supreme Court?

During the November 30 oral arguments, attorneys representing
the hospital association and CMS made their respective arguments.
According to some Court-watchers, a person trying to read tea
leaves could be inclined to believe some Justices were
 to the hospitals’ argument that CMS exceeded
its authority by cutting its payments to hospitals for 340B drugs,
based on certain questions asked (for example, Justice Thomas
opened questioning by pointedly asking if the hospital groups’
attorney was asking for Chevron  to be
overruled). In other recent Supreme Court cases involving questions
of administrative law, current Court members have shown varying
degrees of interest in reassessing Chevron. However,
it is impossible to make predictions about rulings, and any attempt
to infer Justices’ votes from their questions is an educated
guess at best (when it comes to predicting outcomes, the only axiom
I accept is the New York Jets will always find a way to disappoint

This said, if the Court does decide to
review Chevron—and possibly reduce its
scope—this would have a ripple effect throughout the
administrative state. In the short term, the D.C. Circuit
Court’s ruling stands, therefore CMS has not changed its
payment methodology. The Court is expected to release its decision
in June 2022. Until then, we will provide updates on any regulatory

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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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