This Report summarizes opinions issued on June 15, 2022 (Part I).

Opinion: American Hospital Association v. Becerra, 20-1114

American Hospital Association v. Becerra, 20-1114. The Court unanimously held that the Department of Health and Human Services lacks discretion to vary prescription drug reimbursement rates among hospital groups without first conducting a survey of hospitals’ acquisition costs. Thus, HHS acted “unlawfully” by reducing the 2018 and 2019 reimbursement rates for certain hospitals. Medicare requires that HHS “reimburse hospitals for certain outpatient prescription drugs” provided to Medicare recipients. There are two options for setting reimbursement rates. 42 U.S.C. §1395l(t)(14)(A)(iii). Under Option 1, if HHS conducts a survey of “the amount that hospitals pay to acquire the prescription drugs,” it “may set reimbursement rates based on the hospitals’ ‘average acquisition cost’ for each drug.” (Quoting §1395l(t)(14)(A)(iii)(I).) Option 1 allows rate variations among different hospital groups. Option 2 applies “if HHS has not conducted a survey of hospitals’ acquisition costs.” It requires setting “reimbursement rates based on ‘the average price’ charged by manufacturers for the drug, as ‘calculated and adjusted by the Secretary as necessary for purposes of’ this statutory provision.” (Quoting §1395l(t)(14)(A)(iii)(II).) “Critically, option 2 does not authorize HHS to vary reimbursement rates for different groups of hospitals.”

Not until 2020 had HHS conducted the “burdensome” surveys of drug acquisition costs. Prior to 2018, HHS applied Option 2 and calculated uniform reimbursement rates. For 2018 and 2019, however, HHS continued to use Option 2 but established different rates for 340B hospitals—which serve uninsured and underinsured low-income and rural communities—and non-340B hospitals. Reimbursing 340B hospitals at a lower rate (77.5% of the average sales prices for each drug, as opposed to 106% under the uniform rate set by statute) caused them to suffer economic consequences of “about $1.6 billion annually.” HHS justified the change on the 340B hospitals’ profiting when reimbursed at the statutorily set higher rate than what they actually pay for the drugs provided to Medicare patients. The hospitals objected and maintained that the higher, uniform reimbursement rates allowed them to offset other costs relating to medical care for the uninsured and underinsured. The 340B hospitals ultimately sued, and HHS argued that (1) the Medicare statute precluded judicial review of the 2018 and 2019 rates, and (2) the statutory language for Option 2 authorizing the Secretary to “adjust[]” the average price as necessary permitted HHS to vary the rates. The district court ruled in favor of the hospitals, but a divided panel of the D.C. Circuit reversed. The D.C. Circuit concluded that the Medicare Act did not preclude judicial review, but did permit HHS to vary reimbursement rates without a survey under Option 2. In an opinion by Justice Kavanaugh, the Court reversed and remanded.

Addressing the procedural question first, the Court ruled that the Medicare statute did not preclude judicial review of the 2018 and 2019 reimbursement rates. The Court noted a “’strong presumption’ in favor of judicial review of final agency action” “unless ‘a statute’s language or structure’ precludes judicial review.” (Citations omitted.) The Court rebuffed HHS’s argument that nearby statutory provisions precluding judicial review implicitly deprived the courts of review, and responded that “the detailed statutory formula for the reimbursement rates undermines HHS’s suggestion.” Moreover, the Court read the provisions on which HHS relied to affect a different payment methodology than the one at issue here. The Court also rejected HHS’s argument that allowing judicial review is impractical because the agency must operate the program on a budget-neutral basis, and a ruling could require offsets elsewhere in the program. The Court simply replied that HHS’s argument “cannot override the text of the statute and the traditional presumption in favor of judicial review of administrative action.”

On the merits, the Court held steadfast to the survey requirement in Option 2: “The statute . . . protects all hospitals by imposing an important procedural prerequisite—namely, a survey of hospitals’ acquisition costs for prescription drugs—before HHS may target particular groups of hospitals for lower reimbursement rates.” The Court regarded the survey prerequisite as helpful in determining whether there is significant variation in costs, and whether and how much HHS should vary rates among hospital groups. “[A]bsent that survey data, as Congress determined, HHS may not make ‘billion-dollar decisions differentiating among particular hospital groups.’” (Citation omitted.) The Court also denied HHS’s argument that Option 2’s statutory language permitting HHS to “adjus[t]” the average price authorized rate variations: “[V]arying a rate by hospital group is not a lesser-included power of adjusting price.” Stated differently, “The text . . . requires the reimbursement rate to be set drug by drug, not hospital by hospital or hospital group by hospital group. The only item that the agency is allowed to adjust is the ‘average price for the drug in the year.’ Such an adjustment can consist of moving the average-price number up or down, but it cannot consist of giving a single drug two different average prices for two different groups of hospitals.” (Citation omitted.) HHS’s reading of the statute, in the Court’s view, would eliminate the need to conduct a survey of acquisition costs. That, said the Court, “makes little sense given the statute’s overall structure,” which is “elaborate” and “premised on HHS’s surveys of hospitals’ acquisition costs, including specifying when HHS could vary reimbursement rates by hospital group.”

Finally, the Court considered the policy arguments. In response to HHS’s claim that Congress could not have intended overpayment to 340B hospitals, the Court sided with the hospitals, noting that Congress was “well aware that 340B hospitals paid less for covered prescription drugs” and allowed uniform reimbursement rates under Option 2 without distinguishing among hospital groups. The Court continued that HHS can still vary rates so long as it conducts a survey first, and, alternatively, “HHS can ask Congress to change the law.”