Hospitals, HHS each scored a win and a loss in recent Supreme Court cases

Photo by Geoff Livingston via Flickr.

Amid issuing some of the most significant rulings this century, the U.S. Supreme Court (SCOTUS) also decided on two cases where certain hospitals challenged federal decisions that cost them money. 

Hospitals scored one win and one loss in these cases. Both cases involved Department of Health and Humans Services (HHS) policies created under Republican presidents that the Biden administration sought to defend. 

In Health and Human Services Secretary (HHS) Becerra v. Empire Health Foundation, the Supreme Court split 5-4 in a June 24 decision about a calculation used to decide which hospitals qualify for extra pay for serving many people with low incomes. The Supreme Court found in favor of HHS in this case, disappointing hospital groups.

On June 15 in the American Hospital Association (AHA) v. Becerra case, the Court said in a unanimous decision that HHS erred in the administrative procedures in cutting reimbursement on certain drugs. In this case, the Biden administration had defended a Trump administration bid to compel hospitals to share certain savings they get on medicines with Medicare and people enrolled in the program.

Becerra v. Empire Health

The Empire Health case addressed a policy devised by the George W. Bush administration about calculations for extra pay intended for hospitals that serve many patients living in or near poverty. 

The extra pay “reflects that low-income individuals are often more expensive to treat than higher-income ones, even for the same medical conditions,” wrote Justice Elena Kagan in the majority opinion in this case.

To decide which institutions get disproportionate share hospital (DSH) payments, HHS uses Medicaid and Medicare fractions. Kagan described these in broad terms as attempts to measure the hospital’s “low-income senior-citizen population” and its “low-income non-senior population.”

In 2004, the Centers for Medicare and Medicaid Services (CMS) changed a part of the calculation to include patients entitled to Medicare even when the program is not paying for the care provided on a given day. Under this change, Medicare would continue to count for the calculation even if a patient had exhausted a 90-day limit on the coverage for an illness or if a private insurer were paying for the hospital stay.

In Nov. 29 arguments about this case before the Supreme Court, Jonathan Bond of the Justice Department defended this Bush-era policy. 

“Medicare Part A is hospital insurance coverage, and it is perfectly natural to say that a person is entitled to that coverage even though their insurer won’t pay for particular units of care, including because a third party was responsible for the injury, and so the third-party insurance must pay for it,” Bond told the court.

Kagan wrote that this approach preserves the intent of the DSH program, which was “not to pay hospitals the most money possible; it is to compensate them for serving a disproportionate share of low-income patients.” 

She offered the example of a “wealthy 70-year-old patient” who has private insurance. The CMS policy “excludes him from the Medicare fraction’s numerator (because he is wealthy) but keeps him in the denominator (because he is over 65)” and thus eligible for the program.

“By contrast, Empire’s view would exclude him from both the numerator and the denominator — the latter because he is not actually receiving Medicare payments,” Kagan wrote.

“That move increases payments to hospitals — but only because it fails to capture high-income Medicare patients, not because it better captures low-income ones,” Kagan wrote. “Or said otherwise, it increases payments because it distorts what the Medicare fraction is designed to measure — the share of low-income Medicare patients relative to the total.”

Joining her in the opinion were Justices Clarence Thomas, Stephen Breyer, Sonia Sotomayor and Amy Coney Barrett.

Justice Brett Kavanaugh wrote a dissenting opinion in which Chief Justice John Roberts and Justices Samuel Alito and Neil Gorsuch joined. 

Kavanaugh said in 2004, HHS changed its approach to calculating DSH payment in an attempt to contain costs. He called this a “misreading” of federal statute that has “significant real-world effects.”

“It financially harms hospitals that serve low-income patients, thereby hamstringing those hospitals’ ability to provide needed care to low-income communities,” Kavanaugh wrote.

During November arguments about the case, Kavanaugh asked attorney Daniel J. Hettich, who represented Empire, about the “practical impact” of the 2004 policy decision on hospitals. Hettich replied that it had a “very significant” toll on the finances of “safety-net hospitals.”

“Safety-net hospitals have much thinner margins than hospitals in general,” Hettich told Kavanaugh, adding that even seemingly relatively small losses “can be the difference between keeping their doors open or closed.”

In an amicus brief filed in this case, the Federation of American Hospitals (FAH) argued that the CMS approach to counting Medicare-eligible people even when their benefits had been exhausted ran counter to the aim of the DSH payments.

“These are precisely the costly, low-income patient days that disproportionately burden DSH hospitals and drove Congress to require Medicare DSH payments,” said FAH, whose members include hospital organizations that pay taxes and are publicly-traded companies such as HCA Healthcare and Tenet.

Writing in the SCOTUS blog, John Alyosius Cogan Jr. explained that the DSH “cuts will likely increase financial pressures on some safety-net hospitals, which have closed at an accelerating rate over the last decade.” Cogan is an associate professor of law at the University of Connecticut School of Law.

Cogan cited a 2020 report from the Chartis Group, a consulting firm, “The Rural Health Safety Net Under Pressure: Rural Hospital Vulnerability.” In it, Chartis consultants noted that by the beginning of 2020, approximately 120 rural hospitals had closed. “Although the number of rural hospital closures slowed somewhat in 2016 (12) and 2017 (10), there have been 34 closure announcements in the last 24 months,” the report added.

At Modern Healthcare, Maya Goldman explained the ruling will not result in hospitals losing money, but they will not gain extra funds as they said they should, she explained. 

AHA v. Becerra

Citing administrative missteps, the Supreme Court ruled against a policy that both the Trump and Biden administrations supported to lower certain drug costs for the Medicare program and the people enrolled in it. This case involved the 340B federal drug discount program.

Federal law required HHS to do a survey of hospitals’ acquisition costs before making such a change. HHS did not do this survey before putting in place the price cut on 340B drugs, making this a “straightforward case,” Kavanaugh wrote in the Court’s unanimous opinion.

Medicare’s standard approach to paying for certain medicines administered in outpatient clinics, and thus covered by its Part B program, is to pay a 6% premium to the reported average sales prices (ASP) of medicine, or 106%.

The 340B program allows certain hospitals and clinics to buy medicines for discounts, often cited in the 20% to 50% range, and then charge higher prices for them. 

There is no federal restriction on the use of the resulting windfall. Hospitals in the 340B program can apply the savings as they choose, with many saying they use the money gained for community services and expanding access to care. The trade association 340B Health, for example, has created a “Faces of 340B” website with video interviews of patients and medical professionals who discuss the uses of program savings. The hospitals sometimes offer patients free and reduced-cost medicines but are not required to do so.

But in response to concerns about rising drug costs, CMS during the Trump administration sought to compel hospitals to share some of the savings with patients enrolled in Medicare and with taxpayers who pay for the giant federal program.

CMS reduced payment for drugs purchased through the 340B program. Instead of paying 106% of the costs of drugs purchased for a discount, Medicare would pay about 77.5%. The Biden administration defended this policy in a routine update last year of a hospital payment rule. CMS said the 340B program was not intended for “subsidization from Medicare in the form of payments far exceeding hospitals’ acquisition costs.”

Kavanaugh noted that the policy change reduced Medicare spending on these medicines by about $1.6 billion a year. 

“If HHS believes that this Medicare reimbursement program overpays 340B hospitals, it may conduct a survey of hospitals’ acquisition costs to determine whether and how much the data justify varying the reimbursement rates by hospital group — for example, reducing reimbursement rates paid to 340B hospitals as compared to other hospitals,” Kavanaugh wrote in the opinion.

“Or if the statute’s requirement of an acquisition cost survey is bad policy or is working in unintended ways, HHS can ask Congress to change the law,” he added.

In the opinion, though, Kavanaugh suggests HHS might have a challenging time persuading federal lawmakers to allow Medicare to cut payments for drugs purchased with the 340B discount.

Kavanaugh said the money hospitals gained through the 340B model may “offset the considerable costs of providing health care to the uninsured and underinsured in low-income and rural communities.”

“HHS’s new rates eliminate the federal subsidy that has helped keep 340B hospitals afloat,” Kavanaugh wrote in the opinion. “All of which is to say that the 340B story may be more complicated than HHS portrays it. In all events, this Court is not the forum to resolve that policy debate.”

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