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.