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High court backs safety-net hospitals in challenge to Medicare drug-pricing scheme

The ruling is unanimous: A federal reimbursement policy that cut $1.6 billion in annual funding to safety-net hospitals was unlawful. 

WASHINGTON (CN) — Safety-net hospitals that claimed a government reimbursement scheme left them underfunded prevailed at the Supreme Court on Wednesday.

The unanimous ruling in the complex Medicare funding case does not go as far as American Hospital Association had demanded during oral arguments last year. Back in November, the association urged the justices to overrule a cornerstone doctrine that says a court can not substitute its own opinion in the place of a reasonable interpretation made by an agency.

It was an argument that found a receptive audience in Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, who appeared willing to overturn the agency-deference doctrine from the 1984 case Chevron USA Inc. v. Natural Resources Defense Council Inc.

In the court’s ruling on Wednesday, however, the justices choose to not make a sweeping ruling disregarding Chevron. Instead, finding that the agency’s interpretation was just wrong. 

The Department of Health and Human Services uses a provision of Medicare Part B to reimburse hospitals that serve low-income and underserved communities — categorized as 340B hospitals. Because of the critical services that safety-net hospitals offer, they are reimbursed for prescription drugs at a different rate than other hospitals get. This creates a gap between drug costs at 340B hospitals and Medicare reimbursement rates. In 2018, the government attempted to eliminate that gap with a new policy creating a $1.6 billion cut in annual funding to safety-net hospitals. 

American Hospital Association shot back with a federal complaint, claiming HHS was changing rates for one hospital group and not the others. A federal judge agreed, but the D.C. Circuit reversed, citing Chevron in its decision for the agency. 

Wednesday's ruling reverses that D.C. Circuit’s decision. 

“After employing the traditional tools of statutory interpretation, we do not agree with HHS’s interpretation of the statute,” Justice Brett Kavanaugh wrote for the court. "We conclude that, absent a survey of hospitals’ acquisition costs, HHS may not vary the reimbursement rates for 340B hospitals. HHS’s 2018 and 2019 reimbursement rates for 340B hospitals were therefore contrary to the statute and unlawful.” 

While HHS said the Medicare statute prevents judicial review of its 2018 and 2019 reimbursement rates, the justices disagreed. 

“No provision in the Medicare statute precludes judicial review of the 2018 and 2019 reimbursement rates,” Kavanaugh wrote. “Moreover, the detailed statutory formula for the reimbursement rates undermines HHS’s suggestion that Congress implicitly granted the agency judicially unreviewable discretion to set the reimbursement rates.” 

Kavanaugh wrote that HHS can not vary reimbursement rates for outpatient prescription drugs by hospital groups unless it conducts a survey of the hospitals’ acquisition costs. The reasoning here rests on the 2003 Medicare Act, which sets reimbursement rates for drugs and specifies how HHS sets reimbursement rates. 

“The statute therefore reflects a careful congressional focus not only on the goal of proper reimbursement rates, but also on the appropriate means to that end,” the Trump-appointed Kavanaugh wrote. 

Kavanaugh said HHS’ interpretation makes little sense, given the text and structure of the statute. Kavanaugh described two paths available to the agency but said it chose to do neither. 

“Under the text and structure of the statute, this case is therefore straightforward: Because HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals,” Kavanaugh wrote. 

Donald Verrilli Jr., an attorney at Munger, Tolles & Olson representing the American Hospital Association, did not respond to request for comment following the ruling, nor did the Department of Justice. 

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