On June 15, 2022, the U.S. Supreme Court decided American Hospital Association, et al. v. Becerra, Secretary of Health and Human Services, et al., No. 20-1114, holding that the Department of Health and Human Services (HHS) cannot alter reimbursement rates for hospitals that provide prescription drugs to Medicare patients without surveying acquisition costs for the drugs, as required by the Medicare statute.

HHS reimburses hospitals for the cost of prescription drugs they provide Medicare patients. Under the Medicare statute, 42 U.S.C. § 1395l(t)(14)(A)(iii), the reimbursement rate is determined in one of two ways. If HHS conducts surveys of the hospitals’ acquisition costs for prescription drugs, HHS is permitted to base the reimbursement rate on the average amount the hospitals pay to acquire the drug, and HHS has the discretion to vary the reimbursement rates among different groups of hospitals. Alternatively, if HHS does not survey the hospitals, the reimbursement rate is based on the average sales price charged by drug manufacturers, and HHS cannot vary the reimbursement rate between hospital groups.

This action arose in 2018 when HHS significantly reduced the reimbursement rate for Section 340B hospitals, which generally serve low-income or rural communities, even though it had not surveyed hospital acquisition costs for many years. The District Court agreed with the American Hospital Association that HHS acted outside its statutory authority in lowering the reimbursement rate for 340B hospitals, but the D.C. Circuit reversed, upholding the rate change.

The Supreme Court reversed, holding that HHS’s authority to “vary reimbursement rates by hospital group . . . depends on whether HHS has obtained acquisition cost survey data from hospitals.” To permit HHS to vary rates without surveying hospitals would contravene “an elaborate statute” that protects hospitals by requiring certain measures “before HHS may target particular groups of hospitals for lower reimbursement rates.”

The opinion did not address Chevron v. Natural Resources Defense Council, which requires judicial deference to an agency’s interpretation of an ambiguous statute, finding that “[u]nder the text and structure of the statute, this case is . . . straightforward.”

Justice Kavanaugh authored the opinion for a unanimous Court.

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