Recently, my colleague Regina DeSantis told you about the ongoing saga involving disputes between 340B contract pharmacies and pharmaceutical manufacturers. We often write about the 340B program on our blog because of the link between that program and the Medicaid prescription drug rebate program.

Well, we’re doing it again: this time, because the U.S. Supreme Court just announced that it’s going to hear a dispute between some hospitals (340B covered entities) and CMS in the Court’s next term that starts in October. And not only that: the Court also announced that it would hear several other health care cases in the next term, three of which – including this 340B case – touch (at least tangentially) on the Medicaid program, so we thought that we would mention them all in our post today.

340B Outpatient Payment Cut Case

We’ve told you before about the simmering dispute between hospitals and CMS over the agency’s revised reimbursement policy involving drugs that hospital covered entities acquire under the 340B program and then dispense to Medicare patients whose care is paid for under Medicare’s outpatient prospective payment system, or OPPS. To recap: Medicare generally pays hospitals for outpatient drugs at the average sales price of the drug, plus 6%. But, in 2018, CMS announced that if the hospital acquired an outpatient drug under the 340B program, it would reimburse the hospital at the average sales price of the drug minus 22.5%. CMS’s theory is that, because the 340B program allows the hospital to acquire the drug at a significant discount, it should not be able to profit from the difference between the purchase price and the sales price of the drug (economists call this practice arbitrage, and CMS is trying to limit – although not eliminate – the arbitrage). Of course, 340B hospitals disagree, and note that the whole purpose of the 340B program is to help hospitals that serve a disproportionate share of low-income individuals and that price differential was an intended result of the program.

As you might expect, when CMS adopted this policy, 340B hospitals objected, and sued CMS in federal court. They won at the trial court level. However, CMS appealed and, in a decision handed down last summer called American Hospital Association v. Azar, 967 F.3d 818 (D.C. Cir. 2020), the United States Court of Appeals for the D.C. Circuit held that the OPPS policy was a valid exercise of CMS’s rulemaking authority. (The court also held, by the way, that, despite the government’s arguments, the case was not shielded from judicial review overall).

Here at the Medicaid and the Law blog, we were a bit surprised that the Supreme Court agreed to review this case. After all, there is no conflict between the appellate courts over the CMS policy and the policy does not interfere with the nationwide administration of the Medicare program. Typically, the courts give broad deference to an agency’s interpretation of the law (a legal concept called “Chevron deference”) and we thought that the Supreme Court would sit this one out. Obviously, we were wrong, so we wondered what’s going on.

We think that the Supreme Court’s decision to hear the case (the legal term is that they granted a writ of certiorari filed by the American Hospital Association) might involve two much larger legal questions, so we’re anxiously awaiting the Court’s decision next term. The first possibility is that the Court is questioning the scope of Chevron deference across the board. If so, that has broad implications government-wide that would reach far beyond the Medicare and Medicaid programs. The second possibility is that the Supreme Court thinks that the D.C. Circuit’s analysis of the preclusion of judicial review was incorrect and they may want to correct it. We think this is a possibility because in their grant of certiorari, the Court asked both parties to brief that question, even though neither party raised it in their briefs on the request for review. This, too, is potentially significant because Congress frequently includes language in the Medicare and Medicaid statutes (and in other federal programs as well) blocking judicial review of policy choices that Congress makes. If the Court wants to spell out how lower courts should apply these preclusions of review, that also has implications across the government.

DSH Formula Case

We also want to mention two other health care cases on the docket for next term. The first is another case that involves a Medicare payment policy but one that has implications for hospitals that treat a large number of Medicaid patients. This case, Empire Health Foundation v. Becerra, 958 F.3d 873 (9th Cir. 2020) involves the mathematical formula used to determine a hospital’s Medicare disproportionate share adjustment. That formula depends on the sum of two fractions: a Medicare fraction and a Medicaid fraction. The numerator of the Medicare fraction is the total of all patient days in a year for low income patients entitled to Medicare (those who receive Supplemental Security Income benefits) and the denominator is the total of all patient days attributable to those individuals entitled to Medicare. The numerator of the Medicaid fraction is the total of all patient days in a year for patients eligible for Medicaid and the denominator is total patient days.

Did you notice the tweak in wording that Congress used that we quoted up above? “Entitled” to Medicare but “eligible” for Medicaid? Do you think it makes a difference?

Well, the U.S. Court of Appeals for the 9th Circuit does. In a case decided in 1996 called Legacy Emanuel Hospital and Health Center v. Shalala, 97 F.3d 1261 (9th Cir. 1996), the 9th Circuit held that “eligible” for Medicaid meant simply that a patient met the basic statutory requirements to receive the benefit. By contrast, they defined “entitled” to mean that the patient had an absolute right to payment. And so the issue in the Empire case is: how should CMS count patient days in both the numerator and denominator of the Medicare fraction in the case of Medicare beneficiaries who have exhausted their Medicare benefits and are, therefore, no longer “entitled” to Medicare? That could happen, for example, if a patient reaches the 90-day limit on Medicare benefits per spell of illness.

CMS issued a rule in 2005 that held that a Medicare patient has to be counted in the numerator and denominator of the Medicare fraction regardless of whether Medicare is paying for the patient’s care. In the Empire Health decision, the 9th Circuit invalidated that rule, holding that it had “unambiguous[ly]” interpreted the phrase “entitled to” in the Emanuel Hospital decision and that CMS’s 2005 rule violated that unambiguous interpretation. The Supreme Court will review that decision next Term and here again may decide to assess the scope of Chevron deference.

Medicaid Recovery Case

Finally, the Supreme Court also announced that it would review a Medicaid case called Gallardo v. Martsiller, 963 F.3d 1167 (11th Cir. 2020). The Gallardo case addresses the tragic situation of a young girl, Gianinna Gallardo, who was severely injured and remains in a persistent vegetative state after she was struck by a car exiting her school bus in Florida in 2008. The young girl’s parents received an $800,000 settlement that apportioned $35,000 to account for past medical expenses. The issue in this case is whether the state is entitled to recover a larger portion of the settlement.

Section 1902(a)(25)(A) of the Social Security Act requires that a state Medicaid plan “take all reasonable measures to ascertain the legal liability of third parties” to pay for care and services provided under the state Medicaid plan, and subparagraph (H) of that section requires that, where the state has already made payment when a third party is liable for payment, the state is deemed to have acquired the Medicaid beneficiary’s right to payment. In other words, in the Gallardo case, does the Florida Medicaid program have a right to a share of the $800,000 settlement, and if so, how much?

In the civil litigation that arose from the accident, the parties agreed (without the involvement of Florida Medicaid) that a little more than $35,000 would be set aside for Gianinna’s health care expenses. The state of Florida has incurred over $800,000 in medical expenses. Simply stated, the issue before the 11th Circuit is: is the state limited to recovering the $35,000, or are they entitled to a larger amount? The district court limited the state’s recovery to the $35,000 that the parties had agreed to, but the U.S. Court of Appeals for the 11th Circuit overturned that decision. Because the 11th Circuit decision is in conflict with an earlier decision of the Florida Supreme Court – and because the Florida Supreme Court’s decision conflicts with other state Supreme Court decisions – the U.S. Supreme Court has agreed to settle the dispute.

All in all, it will be a busy health care term at the Supreme Court next year, and three of those cases that we discussed above at least touch on the Medicaid program. We’ll be monitoring them closely at our blog.

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