AHA Opening Brief in Case Urging U.S. Supreme Court to Reverse Cut to 340B Program

Under federal law, the reimbursement rate paid by Medicare for specified covered outpatient drugs is set based on one of two alternative payment methodologies. If the Department of Health and Human Services (HHS) has collected certain required “hospital acquisition cost survey data,” HHS sets the reimbursement rate equal to the “average acquisition cost for the drug,” and “may vary” that rate “by hospital group.” 42 U.S.C. 1395l(t)(14)(A)(iii)(I). If HHS has not collected the required “hospital acquisition cost data,” it must set a reimbursement rate equal to the “average price for the drug,” which is “calculated and adjusted by [HHS] as necessary for purposes of this paragraph”—i.e., paragraph (14) of subsection (t) of Section 1395l. 42 U.S.C. 1395l(t)(14)(A)(iii)(II).

The questions presented are:

1. Whether petitioners’ suit challenging HHS’s “adjustments” is precluded by 42 U.S.C. 1395l(t)(12).
2. Whether Chevron deference permits HHS to set reimbursement rates based on acquisition cost and vary such rates by hospital group if HHS has not collected required hospital acquisition cost survey data.

Petitioners are the American Hospital Association, the Association of American Medical Colleges, America’s Essential Hospitals, Northern Light Health, Henry Ford Health System, and Fletcher Hospital, Inc., d/b/a AdventHealth Hendersonville. Petitioners were appellees in the court of appeals.

Respondents are Xavier Becerra, in his official capacity as Secretary of Health and Human Services, and the Department of Health and Human Services. Appellants in the court of appeals were Alex M. Azar II, in his official capacity as then-Secretary of Health and Human Services, and the Department of Health and Human Services.

The corporate disclosure statement included in the petition for a writ of certiorari remains accurate.

The opinion of the court of appeals (Pet.App.1a-43a) is published at 967 F.3d 818. The order denying rehearing en banc (Pet.App.118a) is unpublished. The district court’s opinions granting petitioners relief (Pet.App.44a-112a) are published at 348 F. Supp. 3d 62 and 385 F. Supp. 3d 1. The district court’s order requiring entry of judgment (Pet.App.113a-117a) is available at 2019 WL 3037306.

The judgment of the court of appeals was entered on July 31, 2020. A timely petition for rehearing en banc was denied on October 16, 2020. The petition for a writ of certiorari was granted on July 2, 2021. The jurisdiction of this Court rests on 28 U.S.C. 1254(1).

Relevant portions of 42 U.S.C. 1395l are reproduced in the appendix to this brief at 1a-29a. Section 1395l is reproduced in full in the joint appendix (JA) at JA212-354.

In the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066, Congress included comprehensive coverage of outpatient prescription drugs under the Medicare program. As part of that massive expansion of Medicare, Congress provided for the first time that hospitals would be separately reimbursed for certain outpatient drugs. Congress also set forth a methodology for deciding the amount of that reimbursement—a methodology that would govern billions of dollars of annual payments.

Although Congress has historically delegated considerable discretion to the Department of Health and Human Services (HHS or the agency) to develop reimbursement methodologies for other services covered by Medicare, in 42 U.S.C. 1395l(t)(14) Congress took a distinctly different approach to the reimbursements that hospitals would be paid for providing outpatient drugs. That provision sets forth in meticulous detail the methodology for outpatient drug reimbursement rates. The agency is given authority to set rates based on drug acquisition cost (and to vary rates among hospital groups) only if the agency first conducts cost surveys that meet the statute’s rigorous requirements. If the agency has not conducted the analysis that the statute requires, it must set rates based on the drug’s average price and may not differentiate among hospital groups.

Notwithstanding those unambiguous statutory directives, HHS decided starting in 2018 that it would single out one particular group of hospitals—Section 340B hospitals, whose mission is to provide care to impoverished and underserved communities—and set acquisition-cost-based reimbursement rates for most hospitals in that group without meeting the statutory requirements for such rates. That change cut reimbursement to those hospitals by 28.5% and imposed upon them a devastating $1.6 billion annual revenue loss, imperiling their vital mission.

The agency purported to justify that draconian cut by citing statutory language giving it the authority to “adjust[]” price-based rates (i.e., the rates the agency must set when it has not done the statutorily required cost analysis). 42 U.S.C. 1395l(t)(14)(A)(iii)(II). What the agency did was make assumptions about drug acquisition cost for Section 340B hospitals, compare that figure to the price-based rate, and then provide that the price-based rate should be reduced by the percentage necessary to produce a number equivalent to the agency’s estimate of a cost-based rate. As a result, Section 340B hospitals—and only Section 340B hospitals—are now reimbursed based on cost-based rates that were set without meeting any of the requirements that Congress mandated for establishing such rates.

The agency’s action in this case was nothing less than an audacious administrative repeal of the express limitations Congress imposed on its authority. Congress took particular care to constrain the agency’s power to set rates for outpatient drugs, and the agency simply decided that it would prefer not to respect those limitations. This is not merely a situation in which the agency has departed from the best meaning of the text of the statute it is charged with implementing. Here the agency has violated unambiguous statutory commands. That action cannot be defended under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), or on any other ground. It is an affront to the separation of powers, and it should be reversed.

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