July Surprise - Supreme Court Agrees to Review Medicare Payment Cuts to 340B Drugs - McDermott Will & Emery

July Surprise – Supreme Court Agrees to Review Medicare Payment Cuts to 340B Drugs


The US Supreme Court has announced that it will take up review of the decision by the US Court of Appeals for the District of Columbia Circuit upholding Medicare’s 2018 payment cuts to 340B drugs. The case will be closely watched, given its potentially far-reaching impacts on reimbursements to most hospitals that participate in the Medicare program, not just those that participate in the 340B Program.

In Depth

Coming as a surprise to much of the 340B stakeholder community, the US Supreme Court announced in early July 2021 that during its next term it will take up review of the decision by the US Court of Appeals for the District of Columbia Circuit upholding Medicare’s 2018 payment cuts to 340B drugs. At issue in American Hospital Assn., et al. v. Becerra is whether the US Department of Health and Human Services (HHS) exceeded its statutory authority by reducing payments for 340B drugs under the Medicare Outpatient Prospective Payment System (OPPS) from average sales price (ASP) plus 6% to ASP minus 22.5% beginning in 2018—a reduction of approximately 30%—as well as whether Congress intended to allow review of HHS’ decision to make the payment cut.

The decision in the case, which is not expected until 2022, will likely have far-reaching implications for hospitals that participate in the Medicare program, both as to the reimbursement impact of the 340B-specific payment cuts and as to whether HHS has the authority to make future changes to payments for drugs under OPPS—and, if so, whether such decisions are subject to judicial review.

History of the 340B Payment Cuts and Appeals

Effective January 1, 2018, HHS reduced payments on most 340B drugs that received separate payment from Medicare under OPPS by approximately 30%. Rural Sole Community Hospitals, PPS-excluded Children’s Hospitals, PPS-excluded Cancer Hospitals and Critical Access Hospitals were not subject to the 340B payment cut. Savings to the Medicare program from the payment cut, estimated to be approximately $1.6 billion per year, were redistributed in a budget-neutral manner to all hospitals paid under OPPS through an increase in the payment rate, by approximately 3.2%, for non-drug items and services [1].

CMS justified the cuts using its authority under 42 USC § 1395l(t)(14)(A)(iii)(II). This statutory provision applies to setting payment rates under OPPS for “specified covered outpatient drugs” (SCODs), including 340B drugs, when hospital acquisition cost survey data is not available. In the absence of such survey data, which was the case in 2018 (and may still be the case), HHS is directed to use average acquisition cost “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph.” For many years, CMS applied this provision to pay for SCODs to all hospitals under OPPS at ASP plus 6%. The 2018 reduction targeting only 340B drugs, and only at a subset of 340B hospitals, marked a significant change in CMS’ interpretation of the statutory provision. At the time it was initially implemented, CMS stated that the 340B payment reduction was necessary to slow growth in the 340B program, shift trends of increasing amounts paid by Medicare for outpatient hospital drugs and reduce Medicare beneficiary out-of-pocket costs.

The 2018 payment cut was subject to immediate challenge in federal court by 340B hospitals and hospital groups representing 340B hospitals. Following dismissal of their original lawsuit on jurisdictional grounds (and a subsequent unsuccessful appeal), the hospitals and associations prevailed in the US District Court for District of Columbia in late 2018 on their claims that HHS overstepped its statutory authority in cutting OPPS payments for 340B drugs. The district court permanently enjoined HHS from applying the payment cuts and found that “the [approximately 30%] reduction’s magnitude and its wide applicability inexorably lead to the conclusion that the Secretary fundamentally altered the statutory scheme established by Congress for determining [SCOD] reimbursement rates, thereby exceeding the Secretary’s authority to ‘adjust[]’ SCOD rates under § (t)(14)(A)(iii)(II).” However, in its opinion, the district court noted that retroactively increasing 340B OPPS reimbursement rates for 2018 could create “havoc” due to the budget neutrality component, which had increased payments for all other items and services.

Ultimately, CMS and hospitals paid under OPPS did not have to contend with such “havoc,” because the district court’s decision was reversed in July 2020 on appeal by HHS to the DC Circuit. Unlike the district court, the circuit court found that HHS was within the bounds of its statutory authority in using § (t)(14)(A)(iii)(II) to cut payments for 340B drugs by almost 30%. Specifically, the circuit court found that HHS was entitled to deference, under the principles established in Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to interpret the statute to allow it to cut OPPS payments for 340B drugs in order to better approximate the actual acquisition costs of 340B drugs.

Both the district court and the circuit court also addressed the threshold matter of whether Congress intended for judicial review of the payment cuts. A separate statutory provision, 42 USC § 1395l(t)(12), precludes judicial review of certain categories of OPPS payment rates. HHS argued that the 340B payment cuts fell within two of these precluded categories. As evidenced by the judicial review of the cuts, the courts disagreed with HHS and concluded that the payment provisions at § (t)(14)(A)(iii) were outside of the scope of payment decisions subject to preclusion of judicial review under § (t)(12).

Following the DC Circuit’s decision, the hospitals and hospital associations petitioned to the Supreme Court to hear their arguments in support of overturning the OPPS payment cuts, arguing that the circuit court erred in its decision that Chevron deference permits HHS to interpret the statute to allow it to make the cuts. Although not included in petition to the Supreme Court, in agreeing to take up the question of the applicability of Chevron deference to HHS’ interpretation of § (t)(14)(A)(iii)(II), the Supreme Court has also requested that the parties present arguments as to whether judicial review of the payment reduction is precluded by the Social Security Act.

Additional analysis of the history of the OPPS payment cuts to 340B drugs and the related litigation is available here, here and here.


The 340B payment cuts have gained significant attention, due to financial impact across all hospitals paid under OPPS, as well as the potential implications for HHS authority to make future “adjustments” to payments for SCODs under OPPS—and whether OPPS SCOD payment policies are subject to judicial review.

The 340B cuts are notable in that the budget neutral implementation of the cuts results in uneven outcomes across hospitals, particularly between 340B and non-340B hospitals. The cuts in payments are applied only to 340B-particpating hospitals (with exemptions for certain categories of 340-participating hospitals), such that no non-340B hospital is subject to the cuts. Because the “savings” to Medicare generated by the cuts are then distributed back to all OPPS hospitals, the hospitals that are not subject to the cuts receive a net benefit. In other words, due to the payment cut, all non-340B hospitals (and some 340B hospitals) receive more OPPS payments than they would in the absence of the cut. Further, because of the increase in reimbursements to these hospitals since 2018, any decision overturning the payment cuts and applying a retroactive remedy could result in recoupment of the additional payments made under the budget neutrality adjustment.

An important point—one that should not be lost in the focus on the 340B impacts of the case—is that the underlying questions before the Supreme Court are not specific to rates for 340B drugs. The Supreme Court has been asked to review the scope of HHS authority to set payments rates for SCODs based on average acquisition costs for specific groups of hospitals. Therefore, the opinion issued in this case could have much more significant implications for all hospitals paid under OPPS.

The Supreme Court could, for example, determine that Chevron deference grants HHS authority to interpret § (t)(14)(A)(iii)(II) to allow it to establish payment rates for SCODs based on varying average acquisition cost by virtually unlimited classifications of hospitals and data sources, resulting in authority to reduce OPPS rates for non-340B hospitals. In addition, because the Supreme Court has requested additional briefing and arguments as to whether CMS payment decisions related to rates for SCODs are subject to judicial review, the case has the potential to result in granting expansive authority to HHS to make future OPPS payment changes to SCODs without opportunity for any adversely affected hospitals to seek review or relief from the courts.

Oral arguments in the case are expected to take place in late 2021, with a decision issued in the first half of 2022.

[1] Effective January 1, 2020, CMS implemented a separate reduction to 340B drugs paid under the “site neutral” payment methodology applicable to hospital off-campus outpatient departments that first billed Medicare after November 1, 2015. The 2020 reduction was justified based on a different statutory provision and is not within the scope of the litigation discussed in this article.