The Medicare program reimburses hospitals for providing outpatient care using prospective, all-inclusive fixed fees established under the ambulatory payment classification system. For certain drugs furnished as part of an outpatient service, CMS will pay an additional, separate amount.3 Under 42 U.S.C. § 1395l(t)(14)(A)(iii)(I), CMS may establish payment rates for separately reimbursable drugs for categories of hospitals based on the drugs’ “average acquisition cost,” after taking into account “survey data” collected by CMS. However, if survey data is unavailable, the statute provides that rates are to be set on the basis of a drug’s Medicare “average sales price,” “as calculated and adjusted” by the agency.4 From 2005 through 2017, the amount of such payment had been based on 106 percent of the Medicare average sales price (ASP) for the drug.
In 2018, CMS amended the outpatient payment rules to reduce the reimbursement rates for hospitals participating in the Public Health Service Section 340B drug discount program (340B hospitals), because those hospitals can obtain the covered drugs at significant discounts under the program. CMS reduced the amount payable for separately reimbursable drugs dispensed by 340B hospitals from about 106 percent of the ASP to 77.5 percent of the ASP.5 This rate was intended to “better, and more appropriately, reflect the resources and acquisition costs that [340B] hospitals incur,” while also ensuring that beneficiaries “share in the savings on drugs acquired through the 340B Program.”6 CMS invoked its authority to “calculate and adjust” drug payments under section 1395l(t)(14)(A)(iii)(II) without undertaking a cost survey.7
Several affected hospitals and hospital associations challenged the rule in the U.S. District Court for the District of Columbia. The district court held that CMS had indeed exceeded its statutory authority by reducing drug reimbursement rates for 340B hospitals because, in part, CMS did not have the acquisition cost survey data and because the reduction was not a mere “adjustment” to the ASP permitted under section 1395l(t)(14)(A)(iii)(II).8 However, on appeal, the D.C. Circuit reversed,9 ruling that CMS’s decision was based on a reasonable interpretation of the “adjustment” language sufficient to withstand scrutiny under Chevron.10
In 2021, the Supreme Court granted certiorari with respect to two distinct questions: (1) whether petitioners’ suit challenging CMS’s decision to lower drug reimbursement rates for certain hospitals is precluded by 42 U.S.C. §1395l(t)(12), which limits judicial review with respect to certain outpatient payment system matters; and (2) whether CMS’s rule is permitted as a reasonable interpretation of the Medicare statute under Chevron.
In this bulletin, we will consider the issues presented to the Court, the Court’s resolution of those issues, and the implications of the Court’s decision.
The Supreme Court’s decision
On June 15, 2022, in a unanimous decision authored by Justice Kavanaugh, the Supreme Court ruled in favor of the hospitals. Regarding the first question concerning judicial review preclusion, Justice Kavanaugh began by emphasizing the importance of “the text of the statute” and referencing the “traditional presumption in favor of judicial review of administrative action.” He went on to find that no provision in the Medicare statute precludes judicial review of reimbursement rates set under section 1395l(t)(14). While CMS cited two provisions – sections 1395l(t)(12)(A) and (C) – to preclude judicial review, those provisions refer to payment methodology issues that are different from the methodology for outpatient prescription drugs specified by section 1395l(t)(14).
Turning to the second question, the Court concluded that because CMS did not conduct a survey of hospitals’ acquisition costs, it acted unlawfully by reducing the reimbursement rates for 340B hospitals relative to other hospitals. The statute makes it clear, the Court reasoned, that if CMS does not conduct a survey of hospitals’ acquisition costs, the agency must proceed under section 1395l(t)(14)(A)(iii)(II), which does not provide for differentiation of rates by classes of hospitals and requires CMS to set the rates at 106 percent of the ASP. From there, the Court rejected CMS’s position that it could nevertheless “adjus[t]” the ASP-based rates “as necessary” under section 1395l(t)(14)(A)(iii)(II). Among other things, the Court emphasized that subclause (II)’s adjustment authority does not confer the ability to distinguish rates among classes of hospitals as permitted under subclause (I) following a survey.
Finally, the Court rejected CMS’s argument that Congress could not have intended for the agency to “overpay” 340B hospitals, noting that Congress was “well aware” that 340B hospitals paid less for covered prescription drugs and that “340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support.”11
1. Whither Chevron?
Prior to the decision, many commenters had suggested that the Court might use the case as a vehicle to overrule or curtail Chevron deference, given the D.C. Circuit’s reliance on it. Surprisingly, however, the opinion makes absolutely no reference to Chevron. With that said, however, Justice Kavanaugh’s analysis reflects a simple “Chevron step one” approach in that he emphasized that the statute was clear on its face.
We offer some practical, if conjectural, reasons for the silence on Chevron. It is no secret that there is some antipathy among some Justices toward Chevron based on statutory and separation-of-powers concerns. Thus, the decision could conceivably be read as letting Chevron die a quiet death by simply resolving cases through statutory analysis. On the other hand, we think it more likely – particularly given the strength of the Chevron step one statutory analysis here – that the Court may plan to address Chevron in a later case, presenting the Chevron step two issue more starkly. Indeed, as many have noted, at least two long-pending certiorari petitions may present such an opportunity in challenges to the Department of Justice’s regulations restricting “bump stocks” as machine guns.12 By avoiding reference to Chevron in American Hospital Association, the Court may be saving its energy for the bump stock cases. Reed Smith will continue to monitor those cases, which may be significant for all regulated industries. In the meantime, regulated entities should continue to recognize the Chevron standard as a whole, even if leaning more heavily on Chevron step one in their advocacy and counseling.
2. 340B program stakeholder implications
Going forward, American Hospital Association is unlikely to have significant implications either for manufacturers providing discounts under the 340B program or for 340B hospitals that receive them, given that CMS conducted the requisite acquisition cost survey and has reduced payments in reliance on that survey in recent years.
Thus, at first glance, the case suggests that 340B hospitals should benefit from retroactive drug payment adjustments for prior years. But both the amount and process for such a remedy are unclear.
Previously, after extensive briefing by the parties, the district court remanded the matter to CMS for the agency to consider an appropriate remedy in the first instance,13 and the question of remedies was stayed upon the filing of the appeal.
With the appeals resolved, the remedial ball appears likely to be within CMS’s court upon the eventual remand to the district court. But whether, how, and how much of a refund to 340B hospitals will be available is far from clear. It is certainly possible, of course, that the agency will propose a straightforward refund process.14 But in setting hospital outpatient payment rates, as the district court previously acknowledged, CMS is generally obligated to follow numerous other rules, including budget-neutrality principles. Thus, it is also possible that positive retroactive adjustments to drug payments may need to be offset by reductions in payments for other hospital outpatient services – including services furnished by non-340B hospitals.
Moreover, although CMS regulations are ordinarily prospective in effect, the agency has limited statutory authority to engage in retroactive rulemaking if it specifically finds that solely prospective applicability would be “contrary to the public interest.”15 This authority has been only rarely invoked, but here, CMS subsequently gathered acquisition cost data for the years in question which it could rely on to support its previous payment reductions. Notably, CMS even suggested such a possibility in its calendar year 2022 final hospital outpatient payment rule.16 Thus, it is at least theoretically possible that American Hospital Association could end up a pyrrhic victory.
Given this remedial uncertainty, 340B program stakeholders should consult the upcoming CMS annual proposed rule to update the hospital outpatient payment system. CMS typically issues that rule in late July or early August, and Reed Smith will monitor that rulemaking.
- No. 20-1114 (U.S. June 15, 2022).
- 467 U.S. 837 (1984).
- 42 U.S.C. § 1395l(t)(14)(B).
- Id. § 1395l(t)(14)(A)(iii)(II).
- 82 Fed. Reg. 52,356, 52,494-52,495 (Nov. 13, 2017).
- Id. at 52,495, 52,497.
- In 2020, however, CMS conducted such a survey and did, in subsequent years, reduce outpatient drug payments on the basis of that survey.
- Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62 (D.D.C. 2018).
- Am. Hosp. Ass’n. v. Azar, 964 F.3d 1230 (2020).
- Under Chevron, courts must follow a two-part test when considering challenges to agency action alleged to be inconsistent with statutory authority. Under step one, if the intent of Congress is deemed to be clear, using traditional tools of statutory construction, then that is the end of the matter. Under step two, if the court determines that the statute is silent or ambiguous with respect to the specific issue, the question for the court becomes whether the agency’s answer is based on a permissible construction of the statute. 467 U.S. at 839.
- Am. Hosp. Ass’n v. Becerra, 596 U.S. ___, slip op. at 13 (2022).
- No. 19-1298. Aposhian v. Garland, No. 19-4036 (10th Cir. 2020); Gun Owners of Am., Inc. v. Garland, No. 19-1298 (6th Cir. 2021).
- Am. Hosp. Ass’n v. Azar, 385 F. Supp. 3d 1 (D.D.C. 2019).
- Technically, CMS will be doing this on its own and not as a procedural component of the district court litigation.
- 42 U.S.C. § 1395hh(d).
- 86 Fed. Reg. 63,458, 63,645 (Nov. 16, 2021).
Client Alert 2022-175