Among the numerous decisions making headlines by the U.S. Supreme Court in recent weeks was a lesser noted decision impacting the Medicare reimbursement to healthcare facilities across the country. In a rare unanimous decision, the Court held that the federal government improperly lowered drug reimbursement payments to hospitals and clinics that serve low-income communities.

Under the Medicare statute, the U.S. Department of Health and Human Services (HHS) must reimburse hospitals for certain outpatient prescription drugs that the hospitals provide to Medicare patients. The total reimbursement to hospitals for these prescription drugs amounts to tens of billions of dollars every year. Under the law, HHS may set the reimbursement rate one of two ways: (1) if HHS has conducted a survey of hospitals’ acquisition costs for prescription drugs, then reimbursement may be set at the average of the hospitals’ acquisition costs, or (2) if HHS has not conducted a survey, then it may set reimbursement rates at the average sales price charged by manufacturers for the drugs (with certain adjustments). In any event, HHS may not vary the reimbursement rates for different groups of hospitals. However, in 2018 and 2019, despite not having conducted a survey, HHS substantially reduced the reimbursement rates for Section 340B hospitals, placing at issue about $1.6 billion annually. In its opinion, the Court addressed whether HHS had sufficient discretion to vary the reimbursement despite having not conducted a survey.

The government argued that 340B hospitals, because of their special status serving low-income communities, are able to buy drugs at a deep discount. Thus, HHS believed that by reimbursing 340B hospitals the same as all other hospitals, it created an incentive for the 340B hospitals to overprescribe the drugs or prescribe more expensive drugs. HHS also argued that by lowering the reimbursement it would save Medicare beneficiaries on their co-payments since they are linked to reimbursement rates. However, the Court was not persuaded by these or the other arguments raised by the government. Instead, the Court held that the government failed to abide by the express requirements of the Medicare statute. It therefore remanded the case back for further proceedings consistent with its opinion.

The decision serves as a significant win for providers of low-income care and is likely to result in significant additional reimbursement for these harmed facilities. Additionally, the Court’s decision should serve as a stern message to HHS that it must act consistent with the Medicare statute if it wishes to cut reimbursement rates, and cannot simply act based on its own perceived good intentions. Providers participating in the 340B drug pricing program should assess their individual reimbursement shortfall, if any, as the outcome of this litigation may result in an opportunity to seek additional reimbursement.

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Photo of John W. Kaveney John W. Kaveney

Partner, Healthcare and Litigation

John provides legal guidance to healthcare sector clients on a broad variety of topics, including Medicare/Medicaid reimbursement issues, corporate compliance, data privacy and cybersecurity concerns, healthcare provider licensure and medical staffing concerns, involuntary commitment laws, and general healthcare regulatory…

Partner, Healthcare and Litigation

John provides legal guidance to healthcare sector clients on a broad variety of topics, including Medicare/Medicaid reimbursement issues, corporate compliance, data privacy and cybersecurity concerns, healthcare provider licensure and medical staffing concerns, involuntary commitment laws, and general healthcare regulatory support. He represents a diverse roster of healthcare entities, including for-profit and nonprofit hospitals and health systems, academic medical centers, individual physicians and physician groups, ambulatory surgery centers, ancillary service providers, medical billing companies, skilled nursing and rehabilitation facilities, behavioral health centers and pharmacies.

John advises on Medicaid reimbursement matters before the New Jersey Division of Medical Assistance and Health Services (DMAHS), which administers the state’s Medicaid programs, and handles Medicare reimbursement disputes, both in New Jersey and in numerous other states, before the federal Provider Reimbursement Review Board (PRRB).

In the area of corporate compliance, John supports clients on matters including the implementation of new, and the assessment and improvement of existing, compliance programs. He assists healthcare clients in navigating compliance audits, internal investigations, and governmental investigations related to compliance issues, including potential violations of the federal Stark Law, Anti-Kickback Statute (AKS), and Civil Monetary Penalties law (CMP). He further provides general guidance concerning compliance and regulatory matters under state and federal healthcare laws.

On issues related to information privacy and cybersecurity at the intersection of healthcare law, John assists providers with issues arising under the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health Act (HITECH). This includes the implementation and assessment of privacy and security policies and procedures to ensure the proper protection and utilization of protected health information (PHI) both by healthcare providers and the business associates with which they contract. In addition, he represents healthcare clients in investigating, reporting, and remediating information breaches and the liability such breaches create under various information privacy and security laws.

John also counsels healthcare providers with professional licensure issues and advises hospitals and health systems regarding their medical staff bylaws and corresponding policies and procedures, as well as assisting with internal investigations of medical staff members and the corresponding disciplinary process. He further provides legal guidance related to New Jersey’s involuntary commitment laws, and provides representation in civil litigation.

John serves as Editor-In-Chief of Healthcare Perspectives, Greenbaum’s blog covering issues of interest to the healthcare industry.

Results may vary depending on your particular facts and legal circumstances.

Contact information:

jkaveney@greenbaumlaw.com | 973.577.1796 | vCard | LinkedIn

For more information visit the Greenbaum, Rowe, Smith & Davis LLP website.