Cross-posted with permission from The Commonwealth Fund’s To the Point blog.

This month, the Supreme Court will hear a case involving the 340B Drug Pricing Program, which is designed to allow hospitals and clinics that treat low-income, medically underserved patients to purchase outpatient drugs at discounted prices. Pharmaceutical manufacturers are required to give these providers discounts to have their drugs covered by the Medicaid program. These discounts range from 25 percent to 50 percent of what providers would otherwise pay. Hospitals and clinics may administer the drugs they buy at a discount to any patients, including patients with Medicare or private insurance. The hospitals and clinics then retain the full difference between the discounted prices and the reimbursement rates they receive from private insurance or Medicare. These spreads can be substantial and allow them to subsidize other areas of their operations.

The Supreme Court case centers on a rule issued in 2017 by the Centers for Medicare and Medicaid Services (CMS) that stated Medicare would reimburse certain drugs purchased through the 340B program at lower rates to reflect the discounted prices. Specifically, reimbursement rates would be lowered for “specified covered outpatient drugs” (SCODs), which are covered under Medicare Part B and include treatments for conditions like cancer or rare blood disorders. Three nonprofit hospitals (Northern Light Health, formerly Eastern Maine Healthcare Systems; Henry Ford Health System in the Detroit area; and Fletcher Hospital in North Carolina) and three hospital associations (the American Hospital Association, the Association of American Medical Colleges, and America’s Essential Hospitals) challenged the CMS rule as inconsistent with the language in the Medicare statute. This language tells the U.S. Department of Health and Human Services (HHS) how to calculate reimbursement for SCODs: based on acquisition cost, which may vary by hospital group, if HHS collects survey data on those costs or on average prices “adjusted as necessary.”

The rule reduced SCOD reimbursement for 340B hospitals to 22.5 percent below the average sales price; non-340B hospitals continued to be paid 6 percent above average sales price. The change in payments saved Medicare and beneficiaries an estimated $1.6 billion in 2018. CMS justified the change by challenging the appropriateness of indirectly subsidizing the operations of 340B hospitals through Medicare payments for drugs and stated that the new rate “will better, and more appropriately, reflect the resources and acquisition costs that these hospitals incur.” It said this type of change was permitted by the statute, but the hospitals and associations countered that a change of this magnitude is more than the type of adjustment allowed by the statute. CMS further reasoned that the average 340B discount is higher than 22.5 percent, especially on brand drugs, so 340B hospitals would still achieve “substantial savings” even with the lowered Medicare reimbursement rates. CMS also highlighted that the lower reimbursement rate would reduce cost sharing paid by Medicare beneficiaries when they receive SCODs at 340B hospitals and clinics, since they are responsible for 20 percent of the rate Medicare pays as coinsurance.

Anticipated Legal and Policy Impact

From a legal perspective, the case could be significant if the Court uses it to revisit legal doctrine on when agencies deserve deference in interpreting statutory language, by considering whether the Court should defer to the agency’s interpretation of “adjusted as necessary.” However, from a policy perspective with respect to drug reimbursement, the case’s significance is more limited.

Even though Medicare drug pricing is hotly debated, the Court’s decision — whatever it may be — applies only to specific statutory language on reimbursement for a subset of outpatient drugs and will not have wider implications for Part B drug pricing. (SCODs are relatively high cost compared to other Part B drugs, however, and offer a targeted way for CMS to account for 340B discounts.) Moreover, even if the Court decides against CMS and strikes down the rule, the most the 340B providers would get is retroactive payments for the two years at issue in the case. After the 2018 federal district court ruling against CMS in this case, the agency began collecting survey data from 340B hospitals on what they pay for drugs. With this survey data, the statute unambiguously allows CMS to reimburse based on hospital acquisition costs, and to vary those reimbursements by hospital group, rather than on average prices.

Yet, the decision will affect a large number of hospitals and clinics, which is surprising as the 340B program was intended to be limited to safety-net hospitals and those serving disproportionately low-income populations. The number of 340B hospitals has ballooned in recent years, from 583 in 2005 to 2,140 in 2014. In 2014, 45 percent of Medicare acute care hospitals qualified for the 340B program. These trends have drawn scrutiny from the Medicare Payment Advisory Commission and arguably diluted the impact of the program while providing windfalls to many hospitals and clinics.

In this year’s proposed rule, CMS indicated it plans to continue to pay 340B hospitals average sales price minus 22.5 percent for SCODs, even though the survey data collected on acquisition costs justifies even lower rates. This reimbursement rate reduces Medicare spending and beneficiary cost sharing for these outpatient drugs received at 340B hospitals and clinics. Yet, doing also reduces the funds available to many vulnerable hospitals that provide care to low-income and uninsured populations. Regardless of how the Supreme Court decides, the case raises the question of whether there is a better way to subsidize the operations of hospitals serving low-income populations than the ability to retain excess reimbursement rates on discounted outpatient drugs.


Allison Hoffman

Allison Hoffman, JD

Professor, Law, Carey Law School

More on Health Care Access & Coverage