News & Insights


June 21, 2022

Health Headlines – June 21, 2022

Supreme Court Overturns Medicare Outpatient Drug Rate Cut for 340B Hospitals

On June 15, 2022, the Supreme Court issued a unanimous ruling in American Hospital Assn. v. Becerra declaring that CMS’s 2018 and 2019 reimbursement outpatient drug rate cut to 340B hospitals was “contrary to the statute and unlawful.” In the 2018 OPPS Final Rule, CMS dramatically cut the Medicare reimbursement rate for outpatient drugs provided by 340B hospitals. Until then, Medicare reimbursed outpatient drugs for all hospitals at the drug’s average sales price (ASP) plus six percent as required by statute. Beginning with the 2018 OPPS rule, CMS dropped the reimbursement rate for drugs purchased under the 340B program to ASP minus 22.5 percent, citing the lower acquisition costs for these drugs. In a stern rebuke to CMS’s reading of the Medicare statute, the Court, in an opinion authored by Justice Kavanaugh, held that CMS may not vary the reimbursement rates for 340B hospitals from the statutorily prescribed amount unless it conducts its own survey of hospitals’ drug acquisition costs, which it did not do. The ruling reverses a 2020 decision by the U.S. Court of Appeals and remands the case for further proceedings consistent with the Supreme Court’s opinion. 

By way of background, the 340B Drug Discount Program allows covered entities—including certain qualifying hospitals—to purchase drugs for outpatients at steeply discounted rates.  Congress established the 340B program to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. Rep. No. 102-384(II), at 12 (1992); see also 82 Fed. Reg. 52362, 52493 & n. 18 (Nov. 13, 2017) (quoting House Report and noting that “[t]he statutory intent of the 340B Program is to maximize scarce Federal resources as much as possible, reaching more eligible patients”). Many of these same drugs are covered by Medicare as “separately payable drugs” under the outpatient prospective payment system. By statute, CMS is directed to set payment rates for all such drugs using one of two options, either the “survey” option or the “average sales price” option. The statutory language states:

  1. the Secretary may set the payment rate at the average hospital acquisition cost using “hospital acquisition cost survey data.” Using this data, the Secretary may also adjust rates by groupings of hospitals.  42 U.S.C. § 1395l(t)(14)(A)(iii)(I); or
  2. if “hospital acquisition cost data are not available,” the Secretary may use the average sales price for the drug established by 42 U.S.C. § 1395w-3a and “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II).

Prior to 2018, the Secretary paid all acute care providers for separately payable outpatient drugs using the second option above and established the payment rate for those drugs at ASP plus 6 percent as required by statute. 42 U.S.C. § 1395w-3a(b)(1)(A)-(B); see also 77 Fed. Reg. 68210, 68387-89 (Nov. 15, 2012) (acknowledging that hospital acquisition data is not available and adding the 6 percent to account for overhead and administrative costs).

Effective in 2018, however, CMS implemented its 340B rate cut policy to cut the rates for separately payable drugs purchased under the 340B program to ASP minus 22.5 percent. CMS justified the rate cut as an attempt to “better align” payment rates to hospitals’ true acquisition costs for 340B drugs. 82 Fed. Reg. at 52501. At least one commenter noted that the statute only gave CMS the authority to rely upon acquisition costs if such costs were determined based upon a survey conducted by the Secretary pursuant to standards set forth in the statute. Because CMS acknowledged that such survey data was not available, the statute required the Secretary to set rates based upon ASP. The Secretary adopted the proposed rate cut in the final rule. 

A group of plaintiffs, consisting of 340B hospitals and hospital associations, challenged the Secretary’s 340B rate cut in federal court. Plaintiffs were initially successful in district court, which concluded that the Secretary violated the plain language of the statute. The district court’s decision was reversed by the D.C. Circuit, as discussed here. The Supreme Court took review of the case to determine whether the 340B rate cuts were lawful under the statute.

CMS had argued that the statute’s ASP rate setting option gives the agency the authority to make appropriate “adjustments,” and adjusting ASP to align with a 340B hospital’s true acquisition cost was appropriate for purposes of establishing rates for separately payable drugs. The Supreme Court’s decision squarely rejected this interpretation. In a strong rebuke to CMS’s reading of the statute, Justice Kavanaugh parsed through the statutory text and concluded that it only authorizes the Secretary to vary rates by hospital group (i.e. 340B hospitals versus non-340B hospitals) if CMS has conducted a hospital acquisition cost survey. Otherwise, where, as here, CMS did not conduct such a survey, the reimbursement rates cannot vary among hospital groups and must follow the statutory formula. In short, as Justice Kavanaugh explained, “[b]ecause HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals.”

The economic impact of this case is significant—it stands at around $1.6 billion annually for 340B hospitals. Importantly, CMS also extended its 340B rate cut policy to subsequent calendar years (i.e., 2020, 2021, etc.), which were not expressly included in the Supreme Court’s decision. It would be reasonable to expect, however, that the high court’s rejection of CMS’s policy for 2018 and 2019 would effectively vacate CMS’s policy for subsequent calendar years.

The decision is also significant for another reason. While the D.C. Circuit had deferred to the Secretary’s reading of the Medicare statute and permitted him to adopt an “adjustment” based upon non-survey acquisition data as he deemed appropriate, the Supreme Court’s unanimous decision corrected the D.C. Circuit’s error. Before reaching the question as to whether the Secretary was appropriately using his “adjustment” authority, the Secretary must follow the plain meaning of the statute which can only be determined by a rigorous exploration of the text of statute itself. 

The Supreme Court’s Decision in American Hospital Assn. v. Becerra is available here.  

Reporter, Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

California Court of Appeal Finds Hospitals Do Not Have a Duty to Disclose ER Level Fees

On June 17, 2022, the First Appellate District of the California Court of Appeal issued a decision in Saini v. Sutter Health, Case No. A162081, affirming the decision of the Superior Court in Alameda County to dismiss class action claims against Sutter Health with prejudice. This case mirrors several cases throughout California and the country where plaintiffs’ attorneys are attempting to use class action cases to impose a new duty on hospitals to disclose to emergency room patients—before providing emergency care—the existence, amount, and intent to charge certain emergency room charges, specifically the five emergency room level fees (ER Level Fees). The California Courts of Appeal have recently issued prior two decisions on this issue, one unequivocally finding that this alleged duty to disclose does not exist and one finding that the duty may exist in certain circumstances. This new case, Saini v. Sutter Health, affirmatively came down on the side that the duty to disclose ER Level Fees does not exist as a matter of law. Although unpublished, the Saini decision is nonetheless an important development of California law in this area as hospitals continue to try to defeat these class actions throughout the state. King & Spalding represented Sutter Health in this matter. 

The ER Level Fees, also known as “evaluation and management fees,” are assessed for emergency room care in levels 1 through 5 depending on the intensity of hospital resources used to treat the patient. The plaintiffs in these cases allege that, under the California Consumer Legal Remedies Act (CLRA) and/or the Unfair Competition Law (UCL), a duty to disclose these fees exist for two separate reasons: (1) because they are “exclusively known” to the hospital and not “reasonably accessible” to patients, or alternatively, (2) because the hospital “actively conceals” these fees. In this case, King & Spalding argued on behalf of Sutter Health that no such disclosure duty exists because under both state and federal law, hospitals are required to make all of their charges publicly available—including posting them online—and there is no allegation that the hospital does not comply with existing state and federal price transparency and disclosure requirements. The plaintiffs’ attorneys contend that existing disclosure requirements are inadequate—that hospitals must also post signage in their emergency room about these five charges (but not any other charges a patient may incur) and must verbally disclose these five charges to patients before providing emergency care (even though the hospital will not know which of the five levels will apply to that particular patient and that a patient’s financial responsibility for the fees will depend on their insurance status).

The California Court of Appeal has recently issued two published decisions, Gray v. Dignity Health (2021) 70 Cal.App.5th 225, in the First Appellate District, and Torres v. Adventist Health (2022) 77 Cal.App.5th 500, in the Fifth Appellate District, which appear to be in conflict with each other on whether this duty to disclose these ER level fees exists. The Gray decision is better reasoned because it addresses the fact that the federal government and California state statutes and regulations already extensively regulate hospital disclosure requirements regarding their charges and expressly do not require hospitals to make the additional disclosure sought by the plaintiffs in these cases—a disclosure which could have disastrous consequences if it causes a delay in the provision of emergency medical care to patients who need it. Torres found a duty to disclose ER level fees existed as to the particular hospital at issue because the plaintiff in that case alleged that the online charges were not “reasonably accessible” to her because the chargemaster did not list CPT codes associated with the fees and because the description of the fees in the chargemaster were “highly abbreviated” and therefore “meaningless” to consumers. However, the Torres court also found that even though the duty to disclose may exist, the ER level fees were not “material” to that particular plaintiff because she was assessed a level 5 fee—indicating a highly severe injury or illness with a significant threat to her life.  The result of Torres would suggest that a hospital’s duty to disclose ER level fees is dependent upon the severity of a particular patient’s condition, which is not a workable result for hospitals, as they would be forced into the impossible position of trying to assess the severity of a patient’s condition before providing care in order to determine whether a further notice of ER Level Fees is required.

In our case for Sutter Health, the First Appellate District chose to follow Gray and distinguished Torres on its facts, on the grounds that the plaintiff’s complaint admitted that Sutter Health’s chargemaster listed the ER Level Fees and did not allege the same detriments in the hospital’s existing disclosures. The Court of Appeal rejected every argument plaintiff made that Gray was wrongly decided and agreed with Gray that “state and federal legislative bodies are in a superior position to balance” the goals of price transparency with requirements that all hospitals treat patients presenting to their emergency departments regardless of patients’ ability to pay for the care. 

This is a great win for our client and for hospitals across the country engaged in the ongoing fight against overreaching class action disputes attempting to impose new improper disclosure duties on hospitals through the courts. 

The California Court of Appeal’s June 17, 2022 opinion is here. The plaintiff may appeal this decision to the California Supreme Court.

Reporters, Amanda L. Hayes-Kibreab, Los Angeles, +1 213 443 4375,, and Ariana Fuller, Los Angeles, +1 213 443 4342,

HHS to End Telehealth HIPAA Flexibilities Upon PHE Expiration

On June 13, 2022, HHS OCR issued guidance on how covered health care providers and health plans can use remote communication technologies to provide audio-only telehealth services when conducted in a manner consistent with HIPAA requirements. This guidance also indicates OCR’s HIPAA enforcement discretion under its March 2020 Telehealth Notification will expire at the end of the Public Health Emergency (PHE).

In March 2020, OCR issued a Telehealth Notification informing the public that HHS would exercise discretion in how it applies the rules under HIPAA and that it would not impose penalties for noncompliance against covered providers in connection with the good faith provision of telehealth during the COVID-19 PHE. This flexibility in HIPAA enforcement was aimed at assisting the health care industry’s response to the PHE and quickly expanding the use of remote health care services. Under the flexibilities afforded by the Telehealth Notification, covered health care providers have been able to use any available non-public facing remote communication technologies for telehealth, even where those technologies, and the manner in which they are used, may not fully comply with the HIPAA Rules.

In the Telehealth Notification, OCR specifically stated that “covered health care providers may use popular applications that allow for video chats, including Apple FaceTime, Facebook Messenger video chat, Google Hangouts video, Zoom, or Skype, to provide telehealth without risk that OCR might seek to impose a penalty for noncompliance with the HIPAA Rules related to the good faith provision of telehealth during the COVID-19 nationwide public health emergency.” In contrast, OCR stated that “Facebook Live, Twitch, TikTok, and similar video communication applications are public facing, and should not be used in the provision of telehealth by covered health care providers.”

HHS’s most recent guidance is aimed at assisting covered entities in complying with the HIPAA rules when OCR’s Telehealth Notification is no longer in effect, which could be as early as July 15, 2022. The guidance addresses questions that HHS has received about whether, and in what circumstances, audio-only telehealth is permissible under the HIPAA rules. Under this guidance, HHS clarifies that HIPAA covered entities can use remote communication technologies to provide telehealth services including audio-only services; however, the services must be provided in private settings to the extent feasible, and the entity must verify the identity of the individual. Further, the guidance notes that while HIPAA does not apply to audio-only telehealth services provided by a traditional telephone landline, electronic communications and mobile technologies such as internet, cellular, and Wi-Fi are subject to the HIPAA rules. This could potentially expose providers to HIPAA enforcement risks when providing telehealth services through mobile devices or applications. As a result, in preparation for the conclusion of the PHE, providers should identify, assess, and address the potential risks and vulnerabilities to the confidentiality, integrity, and availability of PHI when using such technologies as part of its risk analysis and risk management process.

The HHS guidance can be found here.

Reporter, Jasmine Becerra, Atlanta, +1 404 572 3537,