Supreme Court Unanimously Rules in Favor of Hospitals in 340B Decision

Additional reporting from Mary Caffrey.

The Supreme Court ruled that the HHS’ decision to reduce yearly Medicare payments to hospitals as part of the 340B program was unlawful. The decision was unanimous and written by Justice Brett Kavanaugh.

The case was brought by the American Hospital Association (AHA) and other hospitals, which were challenging the 2018 and 2019 reimbursement rates. The 340B program allows some hospitals and providers serving low-income patients to buy discounted prescription drugs from manufacturers, but then be reimbursed at prevailing rates by insurers. The health care organizations use the savings to provide free services for uninsured patients and cover other costs.

In 2018, the Trump administration had made a decision to reduce payments, and the Biden administration chose to stand by it. HHS established 2 payments: one for 340B hospitals and one for non-340B hospitals.

Kavanaugh explained in his opinion that the reimbursement rate of 106% for non-340B hospitals remained unchanged, but 340B hospitals received a reduced reimbursement rate of 77.5% based on “an estimate from the “Medicare Payment Advisory Commission that 340B hospitals obtained prescription drugs at an average discount of at least 22.5 percent below the average sales price charged by manufacturers,” the justice wrote.

The AHA released a statement touting the decision by the Supreme Court. “This decision is a decisive victory for vulnerable communities and the hospitals on which so many patients depend,” said AHA.

Although hospital groups argued that HHS decision created a hardship for those that relied on the 340B program, others, including community oncology organizations, said the program had mushroomed beyond its original purpose and put other providers at a competitive disadvantage.

The Community Oncology Alliance (COA) expressed its disappointment with the ruling. COA Executive Director Ted Okon said it's now up to Congress to advance legislation "curbing the worst of the 340B program."

He added that the decision will hurt rural hospitals and their patients, who are supposed to benefit from the program.

"Now the court will effectively allow hospitals to reap excessive drug profits for which they are not held accountable to help patients," Okon said in a statement. "Spoiler alert: hospitals already mark-up drugs excessively for patients and payers and now will profit at their expense even more."

The next step is to reimburse the hospitals that were affected by the cuts. Kavanaugh wrote in the opinion that the cuts had “immense economic consequences, about $1.6 billion annually.”

According to the ruling, HHS could have lawfully varied the reimbursement rates for different hospitals if it had conducted a survey of the hospitals’ acquisition costs and set reimbursement rates based on the average acquisition costs. Because HHS had not conducted the survey, it was not afforded the discretion to vary reimbursement rates, the court ruled.

“HHS has only once attempted to conduct such a survey—in 2020, after this litigation commenced,” Kavanaugh wrote.

Without conducting the survey, HHS is only allowed to set reimbursement rates for each drug based on the average sales price set by manufacturers of the drugs.

In its ruling, the court overturned the judgement of the US Court of Appeals for the DC Circuit.

In a statement, 340B Health called the decision "an important victory."

"Some safety-net hospitals have reported being forced to eliminate or scale back services to patients in need because of the reductions that have been in place since 2018," said 340B Health President and CEO Maureen Testoni.

Hospitals participating in the 340B program are facing other troubles. As many as 16 drug makers have decided to limit or halt 340B discounts to these hospitals. The most recent company to limit 340B discount pricing is Johnson & Johnson, according to 340B Health, a membership organization of hospitals and health systems participating in the 340B program.

“These drug companies are draining vital resources from the health care safety net by blocking hospitals’ access to 340B discounts through community and specialty pharmacy partners,” Testoni said in a statement. “By focusing their unlawful policies on some of the costliest specialty drugs on the market, these companies are pocketing 340B savings for themselves and circumventing penalties Congress included in 340B to inhibit massive drug price hikes.”

A recent survey of organizations participating in the program reported that as a result of the drug companies restricting their involvement, safety-not hospitals are facing growing financial losses.

On May 16, 340B Health, the AHA, America’s Essential Hospitals, the Association of American Medical Colleges, and the Children’s Hospital Association filed briefs with 2 federal appeals courts for cases involving Sanofi, Novo Nordisk, Novartis, and United Therapeutics. 340B and the other organizations are urging the courts hold drug companies must provide 340B discounted drugs to 340B entities.