The federal government will pay eligible hospitals in the 340B program $9 billion to offset payment cuts the Supreme Court ruled unlawful last year.

In 2018, the Department of Health and Human Services (HHS) cut prescription drug payments for 340B-covered entity hospitals by nearly 30%. The American Hospital Association (AHA) and other hospital groups sued to halt the cuts, and an appellate court sided with HHS that it has the power to make the cuts.

In June 2022, the Supreme Court unanimously rejected the massive payment cuts to hospitals under the contentious 340B drug discount program and ruled the pay cuts to be unlawful.

The top court ruled that the differential payment rates for 340B-acquired drugs were unlawful because HHS didn't follow the proper procedure. Prior to implementing the rates, HHS failed to conduct a survey of hospitals’ acquisition costs under the relevant statute, the Supreme Court ruled.

HHS argued the cuts were needed to reimburse those hospitals for the actual acquisition costs of the drugs. The 340B drug discount program requires drugmakers to offer discounts to safety net providers in exchange for participation in Medicare and Medicaid.

In its ruling, the Supreme Court returned the case to lower courts to address potential remedies. In January, U.S. District Judge Rudolph Contreras remanded the issue of repayment back to HHS.

The Centers for Medicare & Medicaid Services (CMS) issued a proposed rule (PDF) Friday outlining the proposed remedy for the 340B-acquired drug payment policy for calendar years 2018-22. The agency is proposing a one-time lump-sum payment to the roughly 1,600 340B-covered entity hospitals that were paid less due to the now-invalidated policy.

CMS estimates that for calendar year 2018 through the approximate third quarter of 2022, certain 340B providers received $10.5 billion less in 340B drug payments than they would have without the 340B policy. However, many calendar year 2022 340B drug claims have been processed, or reprocessed through standard claims processing, at the higher default payment rate since the 340B payment policy was vacated on Sept. 27, 2022.

"As a result, affected 340B providers have already received from Medicare and beneficiaries $1.5 billion of the $10.5 billion that would otherwise have had to be remedied through these reprocessed claims," the agency said in a fact sheet about the proposed rule.

The proposed rule contains the calculations of the amounts owed to affected 340B-covered entity hospitals.

But, at the same time, HHS also proposed to recoup funds from those hospitals that received increased rates for non-drug services from 2018 to 2022. CMS estimates that hospitals were paid $7.8 billion more for non-drug items and services during this time period than they would have been paid in the absence of the 340B payment policy. 

The agency plans to recoup these funds by slashing hospital payments for other non-drug items and services by 0.5% for the next 16 years.

The proposed rule will have a 60-day comment period, which will end Sept. 5. CMS anticipates issuing the final rule before the 2024 Outpatient Prospective Payment System/Ambulatory Surgery Center final rule is published this fall.

The agency plans to disperse the lump-sum payment by the end of 2023 or early 2024.

Hospital groups overall seemed relieved with HHS' plan to issue a lump-sum payment to hospitals.

“After more than five years of litigation and a unanimous Supreme Court victory, the AHA is extremely pleased that 340B hospitals will finally be paid back what they deserve so they can continue providing care to their patients and communities," AHA President and CEO Rick Pollack said in a statement issued Friday.

"We are especially gratified that HHS agreed with the AHA’s position that these hospitals must be promptly repaid in full with a single lump-sum. At the same time, the AHA is disappointed that HHS has chosen to recoup funds from other hospitals that cannot afford additional Medicare payment cuts, including rural sole community, cancer and children’s hospitals that were initially exempted from HHS’ illegal policy. We will continue to review the proposal closely and look forward to providing comments."

The Federation of American Hospitals (FAH) also praised the proposed rule to remedy years of cuts to Medicare outpatient drug payments.

"The Administration showed important leadership in acting to preserve patient care. The proposed remedy takes into account the multiple pressures that hospitals face today, from excessive inflation to workforce shortages," FAH President and CEO Chip Kahn said in a statement.

"Notwithstanding their efforts to protect hospitals through a lengthy transition, we remain concerned that the proposal to claw back 5 years of payments sets a dangerous precedent. It runs counter to the law and violates the finality and predictability principles that are foundational to the Medicare outpatient prospective payment system," Kahn said.

But the budget neutrality aspect of the proposed rule is an issue with providers and other groups.

"We are disappointed the remedy payments would include no interest and be budget neutral. The administration’s plan to cut non-drug payments to hospitals to achieve budget neutrality unnecessarily blunts the impact of the remedy by ensuring years of future underpayments," said Bruce Siegel, M.D., president and CEO of America's Essential Hospitals.

"The proposed remedy is a positive step to compensate hospitals for the difference between the cuts and what they would have received otherwise. We urge CMS to reconsider its proposed budget neutrality policy and make the remedy payments as soon as possible," Siegel said.

Soumi Saha, senior vice president of government affairs at Premier, described the proposed rule as "one step forward and two steps back."

"While Premier appreciates CMS proposing a one-time lump sum payment to affected providers for 340B-acquired drugs for calendar years 2018-2022, doing so in a budget-neutral manner over 16 years is a clawback in disguise," Saha said in a statement.

"Premier looks forward to commenting on and fleshing out ambiguity that exists in statutory language regarding whether retrospective remedies pursuant to a Supreme Court case are required to be implemented in a budget-neutral manner. Expeditiously arriving at a remedy to transparently address past reimbursement shortfalls—while holding hospitals harmless from policy deemed unlawful—is essential to support hospital and patient access to high-quality pharmaceuticals," he said.

More legal battles around the 340B program are ongoing. The Biden administration has fined multiple pharmaceutical companies for restricting contract pharmacies' access to 340B drugs, which has prompted a slew of lawsuits from drugmakers.

Back in late January, the pharma industry was handed a win on the contentious issue by a federal appeals court. The U.S. Court of Appeals for the Third Circuit ruled that the Biden administration can’t require drugmakers to provide 340B-discounted products to “an unlimited number” of contract pharmacies.

Drugmakers participating in the 340B program give substantial discounts on products to safety net providers in exchange for participation in Medicare and Medicaid.

The issue is still far from undecided, however, as two other federal appeals courts are weighing similar cases in other jurisdictions. Lower courts have previously gone both ways on the matter.

Just days after the appellate court decision, Bayer and EMD Serono became the 20th and 21st drugmakers to implement policies limiting discounted product sales to contract pharmacies.