The NCSL Blog


By Lisa Soronen

In American Hospital Association v. Becerra the U.S. Supreme Court will decide whether the U.S. Department of Health and Human Services (HHS) may set the reimbursement rates for drugs covered by Medicare based on acquisition cost and vary such rates by hospital type if HHS has not collected hospital acquisition cost data.

supreme courtWhen hospitals provide outpatient care for those insured by Medicare Part B, the federal government reimburses the hospitals for the cost of care.

Until 2018 the federal government reimbursed all hospitals for prescription drugs at the same rate. Then the federal government reduced the reimbursement rate for 340B hospitals, who serve underserved populations, by 28.5%. 340B hospitals can obtain drugs much more cheaply than other hospitals. 

Subclause I of the Medicare statute allows HHS to calculate reimbursement rates for covered drugs using acquisition cost “taking into account . . . hospital acquisition cost survey data.”

If acquisition cost survey data isn’t available, Subclause II requires HHS to use the average price for the drug, adjusted by [HHS] as necessary for purposes of this paragraph.” Hospital acquisition cost data has never been available; so, until 2018 HHS used the average price metric to calculate one reimbursement rate.

HHS points out that it has long understood average price to serve as a proxy for average acquisition cost. For 340B hospitals the average drug price exceeded the cost of the drugs. So, for 340B hospitals, per Subclause II, HHS “adjusted” payments “as necessary” based on cost. 

The American Hospital Association argued that reimbursing hospitals based on the cost of drugs is impermissible under Subclause II. “Because Congress required HHS to ‘tak[e] into account’ robust study data when setting [drug reimbursement] rates at average acquisition cost under subclause (I), the Hospitals argue, HHS cannot use its subclause (II) authority to adjust [the average sale price] in order to approximate acquisition cost.” 

Applying Chevron deference, which presumes implied agency action to be correct,  the D.C. Circuit concluded HHS’s interpretation of Subclause II was reasonable.

According to the D.C. Circuit: “For the Hospitals’ argument to carry the day under Chevron, we would need to conclude that Congress unambiguously barred HHS from seeking to align reimbursements with acquisition costs under subclause (II), or that HHS's belief that it could do was unreasonable.

“Given that the survey data contemplated by subclause (I) aims to assure the reliability of cost-acquisition data, we do not read the statute to foreclose an adjustment to [average sale price] under subclause (II) that is based on reliable cost measures of the kind undisputedly at issue here.” 

The Supreme Court added a second question regarding whether the American Hospital Association may even bring a lawsuit in this case. The statute states “[t]here shall be no administrative or judicial review” of certain enumerated actions undertaken by HHS. HHS argues that changing the drug reimbursement rate is one of such unreviewable actions. The D.C. Circuit disagreed.

340B “disproportionate share hospitals” (DSH) hospitals likely stand to lose the most under this interpretation rule. 340B DSH hospitals serve a significantly disproportionate number of low-income patients and account for about 80% of 340B (discounted) drug purchases. All 340B DSH hospitals must have some connection to a state or local government.

This rule has generated $1.6 billion which has been redistributed “to all hospitals in a budget-neutral manner by raising other Part B reimbursement rates.”

Lisa Soronen is executive director of the State and Local Legal Center and a regular contributor to the NCSL Blog on judicial issues.

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This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.