Supreme Court Hears Arguments on 340B Outpatient Payment Cuts—and Discusses ‘Chevron Deference’

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. Becerra arguments.

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 receptive 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 me).

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 changes.

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