American Hospital Assn. v. Becerra
The Supreme Court unanimously struck down Medicare payment cuts targeting hospitals that serve low-income and rural patients, ruling that federal health officials skipped a required step before singling out those hospitals for lower drug reimbursements.
The decision restores about $1.6 billion a year in Medicare payments to these safety-net hospitals and reinforces that federal agencies must follow the specific procedural steps Congress requires — they cannot use broad 'adjustment' language to shortcut a more demanding process the law explicitly lays out.
How it got here: A federal district court ruled for the hospitals; the D.C. Circuit reversed and upheld HHS's reduced rates; the Supreme Court agreed to hear the hospitals' appeal.
The Case in Depth
What happened
Hospitals in the federal 340B program serve low-income, uninsured, and rural communities and are required by law to buy prescription drugs at discounted prices. Beginning in 2018, the Department of Health and Human Services cut Medicare reimbursements for those hospitals' drug costs by roughly 22.5 percent — about $1.6 billion per year — without first conducting a survey of what hospitals actually pay to acquire the drugs, a step the Medicare statute requires before the agency may set different rates for different hospital groups.
The question before the Court
Did federal health officials have the power to cut Medicare drug reimbursements for hospitals serving low-income and rural patients without first completing a legally required survey of how much those hospitals actually pay for the drugs?
The Court's answer
No — the Court unanimously ruled that the Department of Health and Human Services acted unlawfully when it cut drug reimbursement rates for 340B hospitals without first conducting a survey of what hospitals actually pay to acquire the drugs. The Medicare statute lays out two options for setting reimbursement rates: Option 1 requires a survey and then allows HHS to set different rates for different hospital groups; Option 2 skips the survey but requires the same uniform rate for all hospitals. HHS used the no-survey option and then applied different rates to different hospital groups anyway — precisely what the statute does not permit.
HHS argued that its general power to "adjust" prices under Option 2 implicitly covered setting different rates for different groups of hospitals. The Court rejected this, reasoning that moving a price up or down is a fundamentally different power from setting separate prices for separate groups. Accepting HHS's reading would have made the survey requirement entirely pointless, since the agency could skip the survey and still do everything the survey option allows.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Hospitals in the federal 340B program — which serve low-income, uninsured, and rural patients — can seek recovery of the roughly $1.6 billion per year in Medicare drug payments the government had been withholding since 2018. The ruling also signals that agencies cannot use generic adjustment authority to do things Congress reserved for a more demanding, data-driven process.
What changes now
The case is sent back to the D.C. Circuit to determine the appropriate remedy — meaning the 340B hospitals could seek back-payments for the roughly $1.6 billion per year they were underpaid since 2018. HHS must either conduct the required survey of hospital drug acquisition costs before imposing differentiated rates again, or seek a statutory change from Congress. The Court left the precise remedy question open, including how the program's budget-neutrality requirement would interact with any back-pay award.
What this does not decide
The Court did not decide how much HHS can raise or lower overall drug reimbursement rates using Option 2's general "adjust" authority — only that this authority does not extend to setting different rates for different hospital groups without a survey. The exact remedy for the unlawful 2018 and 2019 rates was also left open.
How the Court got there
The legal reasoning, step by step
- The Court first addressed whether courts can review HHS's reimbursement-rate decisions at all. It applied the long-standing rule that courts are strongly presumed to have the power to review final agency decisions unless the text or structure of a statute clearly blocks such review.
- HHS pointed to two nearby provisions of the Medicare statute that bar courts from reviewing certain other payment methodologies for general outpatient services. The Court rejected this argument: those provisions govern a different payment system, not the separate formula Congress wrote specifically for outpatient prescription drugs, so no statute blocked review of the drug-reimbursement formula.
- Turning to the merits, the Court read the statute's two-option structure as a conditional framework. Option 1 — which allows HHS to set different rates for different groups of hospitals — is only available if HHS has first conducted a survey of hospitals' drug acquisition costs. Option 2 — used when no survey is done — requires a uniform rate for all hospitals based on manufacturers' average sales price, with no authority to differentiate among hospital groups.
- HHS argued that Option 2's language allowing the agency to 'adjust' the average price 'as necessary' implicitly covered setting different rates for different hospital groups. The Court rejected this, explaining that adjusting a price (moving a single number up or down) is a fundamentally different power from setting separate prices for separate groups. Option 2's text requires setting a rate 'drug by drug,' not 'hospital group by hospital group.'
- The Court also rejected HHS's reading on structural grounds: if the agency could skip the survey and still vary rates by hospital group under Option 2, the survey requirement would become meaningless. Congress carefully detailed the requirements for conducting surveys — including statistical standards and data-quality rules — and that careful drafting would be pointless if agencies could simply bypass the survey and achieve the same result.
- Finally, the Court declined HHS's policy argument that Congress could not have intended to 'overpay' 340B hospitals. Congress enacted this statute in 2003 knowing that 340B hospitals already paid below-market prices for drugs, yet still wrote a uniform reimbursement rule under Option 2. The Court noted that if HHS believes the system overpays these hospitals, it may conduct the required survey or ask Congress to change the law — but courts are not the forum for that policy debate.