U.S. Supreme Court Faults Medicare Cuts To Hospitals For Outpatient Drugs

The U.S. Department of Health and Human Services (HHS) exceeded its authority when it cut billions of dollars in annual Medicare reimbursements to a group of nonprofit hospitals that cater to poor and uninsured people, the Supreme Court ruled on Wednesday.

The justices, in a 9-0 decision authored by Justice Brett Kavanaugh, sided with the hospitals, which sued after HHS starting in 2018 reduced by $1.6 billion the government's yearly Medicare payments for outpatient drugs that had helped subsidize the operations of these hospitals.

The American Hospital Association said after the ruling that it intends to seek reimbursement for hospitals that receive discounts on medications through a federal program called "340B" and were "affected by these unlawful cuts."

The justices overturned a lower court's 2020 decision that HHS had the authority to reduce the reimbursements. They found that the U.S. Court of Appeals for the District of Columbia Circuit wrongly let HHS close a gap between the reimbursement rates paid to these hospitals and the discounts they receive through the 340B program.

The rate adjustment, the justices found, was an impermissible interpretation of the federal law governing Medicare, the vast government program that provides health insurance for the elderly and disabled.

"The question is whether the statute affords HHS discretion to vary the reimbursement rates for that one group of hospitals when, as here, HHS has not conducted the required survey of hospitals' acquisition costs. The answer is no," Kavanaugh wrote in the ruling.

"This decision is a decisive victory for vulnerable communities and the hospitals on which so many patients depend," the American Hospital Association, which filed suit along with several nonprofit health care systems and other plaintiffs, said in a statement.

The Supreme Court's current conservative majority, which has displayed an assertiveness on a range of issues, has shown skepticism toward the power of federal agencies in recent years.

But the justices opted not to use the case to impose further limits on a landmark 1984 Supreme Court ruling in a case called Chevron v. Natural Resources Defense Council that directed judges to defer to federal agencies' interpretation of U.S. laws that may be ambiguous. This doctrine is called "Chevron deference."

Starting in 2018, HHS under then-President Donald Trump cut payments for outpatient drugs by 28.5% to hospitals receiving money under 340B. The department found that reimbursements were too high because these hospitals obtain the drugs from manufacturers at a deep discount, an issue that also resulted in excessive patient co-payments.

The resulting annual funding cut dealt "a crushing blow to providers that were already operating on razor-thin or negative margins and to the vulnerable populations they serve," the hospitals told the justices in a court filing.

The D.C. Circuit ruled that the HHS actions were entitled to Chevron deference because the law was ambiguous enough to permit the reimbursement rate adjustment.