The AHA Lawsuit Against HHS and Its Implications on the 340B Program

August 29, 2022

By Bert Orlov and Danielle Faup

In 2022, the U.S. Supreme Court ruled in favor of hospitals suing the Department of Health and Human Services (“HHS”) concerning nonprofit hospitals' ability to purchase high-cost pharmaceuticals through the 340B Drug Pricing Program. This program requires drug manufacturers to provide significant discounts on high-cost pharmaceuticals to safety-net hospitals—those serving a high level of under-insured patients, particularly Medicaid patients.

The American Hospital Association (“AHA”) brought a lawsuit against HHS Secretary Xavier Becerra for reducing reimbursement rates under the 340B Program. In 2018, HHS reduced Medicare reimbursement subsidies for participating hospitals by nearly 30% ($1.6 billion) for that year. The court rejected those price cuts for critical, but high-cost, drugs such as chemotherapeutics. This decision has significant implications for safety-net providers managing their 340B Programs and emphasizes the ongoing imperative for optimizing performance under 340B.

Case Detail

According to Supreme Court Justice Kavanaugh, who issued the opinion, the court sided with the AHA and other provider groups. “Regardless of the scope of HHS’s authority to ‘adjust’ the average price up or down under the statute, the statute does not grant HHS authority to vary the reimbursement rates by hospital group, unless HHS has conducted the required survey of hospitals’ acquisition costs. Therefore, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals,” the ruling stated. HHS has two options to be eligible for increasing Medicaid drug prices. It can either conduct the survey mentioned above, which will allow it to vary reimbursement rates by hospital, or it can base rates on the average amount charged by the drug manufacturers, which would be uniform for all health care providers covered under the 340B Program.

For broader context, all the high-cost pharmaceutical purchases by hospitals under the 340B Program have grown from “about $4 billion per year from 2007-09 to $38 billion in 2020, almost 7% of the total U.S. pharmaceutical market. This amount reflects the array of drugs covered by the 340B Program, not the amount of government subsidy. The 340B Program has helped hospitals that serve vulnerable communities achieve a savings of 25% to 50%, according to the Health Resources and Services Administration. In the decision, Justice Kavanaugh wrote that: "Congress, when enacting the statute, was well aware that 340B hospitals paid less for covered prescription drugs. It may be that the reimbursement payments were intended to offset the considerable costs of providing health care to the uninsured and underinsured in low-income and rural communities.” Therefore, HHS, Congress, and the Supreme Court have demonstrated varying levels of control over the nonprofit health care industry.

The implications of this unanimous Supreme Court decision are two-fold. On a micro scale, it denies HHS the ability to arbitrarily change how 340B is implemented within hospitals. If price adjustments are to be made, they will be based on hospital and drug valuation criteria. More broadly, this case reinforces the reality that the government drives health care delivery, especially to underserved populations. As such, providers must continually monitor what is happening within relevant programs.

Implications

Overall, the government should be recognized as a critical agent in the delivery of care to underserved populations, and health care providers should stay updated on changes to federal programs, such as 340B. More specifically, 340B providers should optimize their financial performance to achieve savings of between 5% and 10% of their net patient revenue in pharmacy contract revenue, when fully optimized. However, many hospitals underperform, resulting in millions of dollars of lost savings. Key initiatives to improve performance include:

  • Select optimal contract pharmacies.
  • Optimize qualified eligible locations.
  • Identify/maximize third-party administrator claims.
  • Ensure that data mapping is complete.
  • Conduct ongoing program monitoring rigorously.

Many nonprofit hospitals can achieve millions of dollars in savings thorough an organized and comprehensive assessment of current performance and a coordinated action plan of these initiatives.

About Bert Orlov

Mr. Orlov is a Managing Director in the Health Care Consulting Group with experience as a management consultant specializing in strategy, transactions, operations and project management for physician groups, hospital systems, and not-for-profits.