Hospitals Win 340B Medicare Rate Cut Suit, But When, How, and How Much They Will Recoup Remains Unclear

June 24, 2022 Alerts and Newsletters

In a recent unanimous decision, the Supreme Court found that the Centers for Medicare and Medicaid Services (“CMS”), part of the federal Department of Health and Human Services (“HHS”), erred when it significantly reduced 2018 and 2019 Medicare Part B Outpatient Prospective Payment System (“OPPS”) payment rates to safety-net hospitals for outpatient drugs they acquired under the 340B discounted drug program. The reduced payment rates have continued through the current year. The Court concluded that the statute unambiguously prohibits CMS from reducing reimbursement rates only for 340B hospitals without conducting a survey of hospitals’ acquisition costs. While the Supreme Court addressed how the statute should be interpreted, it left a number of lingering questions as to what the decision means for the 340B hospitals, including how and when they might be reimbursed for the unlawful reductions.


In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act. Under this law, HHS must annually set Medicare reimbursement rates for outpatient prescription drugs provided by hospitals.[1] The statute requires HHS to establish reimbursement rates by either (1) conducting a survey to determine the average acquisition cost for the drug (“Option One”), or (2) using the average price of the drug charged by manufacturers in the year (“Option Two”). Proceeding under Option One allows HHS to vary reimbursement rates for different groups of hospitals in accordance with the results of the survey while Option Two does not permit some hospitals to be treated differently.

From 2006 until 2018 HHS did not conduct surveys of hospitals’ acquisition costs; instead, it consistently operated under Option Two and set uniform drug reimbursement rates for all hospitals equal to the Average Sales Price (“ASP”) plus 6%. In 2018, still without conducting a survey, HHS decided to set the payment rate for 340B hospitals at a significantly lower rate than that paid to other hospitals. The payment rate was established (without a survey) at ASP minus 22.5%. HHS justified the lowered drug rate paid to 340B hospitals because these hospitals obtain drugs from manufacturers at a discount. HHS continued this policy for 2019 and subsequent years through 2022. Various hospital groups challenged HHS’s 2018 and 2019 reimbursement policies, arguing that, per the statute, HHS could not set different rates for different hospital groups without first conducting an Option One survey analysis.

Court Ruling

The Supreme Court held that, absent a survey, HHS could not vary the reimbursement rates for different groups of hospitals. If HHS wishes to vary the reimbursement rates among hospital types, it must conduct an Option One survey. The Court concluded that, under the statute, HHS acted unlawfully. The Supreme Court remanded the case to lower courts for further proceedings subject to its ruling.

Lingering Questions

The Court’s ruling leaves a number of questions in its wake.

  • Remedies for 340B Hospitals. It is unclear what remedies 340B hospitals may be entitled to for the cuts in 2018 and 2019 as well as subsequent years. Not all hospitals affected by the reimbursement cuts filed claims appeals. (In fact, MACs notified hospitals not to file appeals because they would be dismissed as federal law prohibits appeals of OPPS rates). Whether all 340B hospitals are entitled to remedies, or just those who appealed, is currently unknown. Hospitals should continue to monitor lower court rulings on this case to better understand what their remedies will be. There should be a public notice-and-comment period on this question as part of the 2023 OPPS rate setting process to ensure widespread input from stakeholders. Moreover, some hospitals are considering filing claims without the “JG modifier” that identifies the claims as 340B drug purchases. Those hospitals also might file a notice of protest for their list of 340B claims. Is this burdensome process necessary? Time will tell.

  • Budget Neutrality. The relevant statute must be applied in a budget-neutral way. Budget neutrality provisions require the savings from the reduced reimbursement rate be redistributed for other outpatient services. If 340B hospitals are to be reimbursed for the unlawful reduced payments in 2018 and 2019, the funds for these corrected payments may come from recouping excess payments made to all hospitals (including the 340B hospitals) for all other OPPS services during those years. CMS could also reduce OPPS rates paid to all hospitals in future year(s) and use the savings to reimburse 340B hospitals. HHS also might convince Congress to provide them with additional funding.
  • The 2020 Survey. How HHS will reimburse for 340B drugs in future years is unclear. HHS conducted a survey in 2020 (after the litigation was filed) and initially proposed to further reduce the 2021 drug rates for 340B hospitals to 28.7% but it did not adopt the proposed further rate reduction. Questions remain as to how relevant the 2020 data is given the changes hospitals have faced throughout the COVID-19 pandemic and whether HHS may rely on this outdated information. We can expect legal challenges should CMS attempt to use this data.


The Supreme Court’s ruling, while favorable to 340B hospitals, raises many questions. When CMS releases the 2023 proposed OPPS rule stakeholders hopefully will have a better understanding of how CMS intends to respond to the Court’s decision. Hospitals should continue to monitor the proposed OPPS rule and the lower court’s handling of this case, particularly as it pertains to remedies, in order to get a better idea of the anticipated revenue. Although the 2023 proposed OPPS rule should be released soon, it likely will be months, if not years, and possibly more litigation, before the full impact of the decision is known. If you have questions regarding how the ruling impacts your hospital and any steps you may consider taking now, please reach out to a member of Verrill’s Health Care & Life Sciences Group.

[1] Medicare Prescription Drug, Improvement and Modernization Act of 2003, 117 Stat. 2066, 42 U.S.C. § 1395(l)(t)(14)