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