The Biden administration's next challenge: Paying for discount drug mistakes

Four months after it lost a high-profile dispute at the Supreme Court, the Biden administration has yet to figure out how it will reimburse hospitals for as much as $10 billion in unlawful cuts to Medicare outpatient drug payments.

Why it matters: Congress may have to step in and authorize billions in new spending to make the facilities whole if the government decides to claw back already allocated funds

Flashback: The Centers for Medicare and Medicaid Services in 2018 began cutting payments to safety-net providers in the federal discount drug program by nearly 30% after research indicated some hospitals were profiting excessively from the program.

• CMS applied the $1.96 billion in savings from the reimbursement cut by raising Medicare payments to all hospitals for non-drug items and services. 
• But the Supreme Court ruled in June that the rate adjustments for 2018 and 2019 were illegal because HHS didn't first conduct a survey of hospitals' acquisition costs.

State of play: CMS this summer proposed policy changes and sought feedback on how to compensate the affected hospitals.

• Repaying them without tapping into new funds would result in lower Medicare payments to 80% of all hospitals next year, according to an Avalere study. 
• Further complicating matters, a lower court ruled last month that CMS had to stop discount drug program payment cuts for 2022.  

What we're hearing: Hospitals say that new federal spending should be used to rectify the improper cuts.

• "[A]ny remedy should not and may not either directly or indirectly seek to recoup non-drug payments," the Federation of American Hospitals wrote in a letter to CMS. 
• But CMS hasn't said whether it agrees with that argument. And it's unclear if Congress would approve such a payment fix while it sorts through a passel of other year-end health care funding requests.
• CMS under Medicare law is supposed to balance out reimbursements for outpatient drugs without raising government spending, experts say.
• "By letter of the law, yes, it should be budget-neutral," Barbara Straub Williams, an attorney at Powers Pyles Sutter & Verville. But she noted CMS retroactively pays hospitals for things like provider reimbursement appeals without adjusting the entire system.

What we're watching: CMS could finalize a solution in early November as part of its Medicare outpatient payment rule for 2023. Emily Cook, a partner at law firm McDermott Will & Emery, thinks CMS will move forward with a solution that requires some clawbacks of already authorized funds. 

• The $10 billion due for five years of outlawed cuts is "a huge amount of money to put back into the payment system outside of some additional form of congressional appropriation," Cook said.

• If CMS decides it doesn't have the authority to fix the situation without clawing back funds, the agency may ask Congress for help, said Raymond James analyst Chris Meekins. He estimates there's a 65% chance Congress weighs in on the 340B pay fix.

The catch: Health care providers are already asking Congress for relief from several other Medicare payment cuts, including a scheduled 4% Medicare payment cut due to take effect in 2023.

• But if Congress opts to delay that cut, Meekins thinks extra money for a payment fix could be among its next priorities. The House Ways and Means Committee and Senate Finance Committee, which oversee Medicare policy, did not respond to Axios' requests for comment. 

The bottom line: "Whether it comes from an additional congressional appropriation or another government fund, our focus is on ensuring that hospitals receive the funding that they are entitled to because HHS unlawfully withheld it for five years," an American Hospital Association spokesperson told Axios.