Is the Department of Health and Human Services entitled to deference in its interpretation of a statute that enabled it to reduce drug reimbursement rates for hospitals; alternatively, is the Department of Health and Human Services’ action unreviewable because of 42 U.S.C. § 1395l(t)(12)?
This case asks the Supreme Court to determine the scope of authority granted to the Department of Health and Human Services (“HHS”) in setting hospital Medicare reimbursement rates for outpatient drugs. The Medicare Modernization Act (“MMA”) prescribes two alternative reimbursement rate methodologies for outpatient drugs—hospital acquisition cost or average drug price—and conditions HHS’s choice on whether HHS collects hospital drug cost-acquisition data. American Hospital Association et al. argue that MMA prevents HHS from tailoring rates to hospital acquisition costs and varying rates by group unless HHS has the requisite data. Xavier Becerra responds that MMA gives HHS the authority to “adjust” reimbursement rates as necessary, and therefore deference under Chevron permits HHS discretion to set reasonable rates. The outcome of this case has significant implications for the financial health of 340B hospitals, and the Medicare system more broadly, as well as the scope of the administrative state and judicial deference under Chevron.
Questions as Framed for the Court by the Parties
(1) Whether deference under Chevron U.S.A. v. Natural Resources Defense Council permits the Department of Health and Human Services to set reimbursement rates based on acquisition cost and very such rates by hospital group if it has not collected adequate hospital acquisition cost survey data; and (2) whether petitioners’ suit challenging HHS’s adjustments is precluded by 42 U.S.C. § 1395l(t)(12).
The Medicare program consists of Part A and Part B. Am. Hosp. Ass’n v. Azar at 820. Under Medicare Part B, which provides coverage for certain hospital-administered drugs, the Department of Health and Human Services (“HHS”) sets hospital reimbursement rates. Id. The “Outpatient Prospective Payment System” (“OPPS”) regulates the establishment of these rates. Id. The OPPS requires HHS to follow a strict approach, pursuant to 42 U.S.C. § 1395l(t)(14)(A)(iii)(I) and (II), in determining reimbursement rates for drugs known as “specified covered outpatient drugs” (“SCODs”), which Medicare Part B covers. Id. at 821. Under this approach, HHS may determine reimbursement rates by looking to the “average acquisition cost for the drug . . . taking into account . . . hospital acquisition cost survey data,” but if this data is unavailable, HHS must rely on “the average price for the drug.” Id. HHS has always relied on the average drug price measurement because of a lack of “hospital acquisition cost survey data.” Id.
From 2006 to 2017, HHS employed a consistent method in calculating reimbursement rates based on a drug’s average price. Id. This method resulted in hospitals receiving a reimbursement equal to 104% to 106% of the average sales price (“ASP”) of SCODs. Id. However, in 2017, HHS altered its method in response to hospitals that participated in the “340B program,” a federal program that allows certain hospitals to purchase drugs from manufacturers at significant discounts (between 20% and 50% lower than the ASP). Id. at 821–22. After purchasing the discounted SCODs, 340B hospitals then seek reimbursement from Medicare Part B. Id. at 822. Before HHS’s adjustment, 340B hospitals received a reimbursement equal to 106% of the drugs’ ASP. Id. Recognizing this gap between what 340B hospitals paid and their reimbursement, HHS reduced the reimbursement rate for 2018 from 106% to 77.5% of the ASP. Id. HHS also worried that 340B hospitals were overprescribing Part B drugs and enjoying an unwarranted profit. Id. 822–23. In making the adjustment, HHS relied on what it argued was its authority to “calculate and adjust” drug payments under § 1395l(t)(14)(A)(iii)(II). Id. at 823.
The American Hospital Association (“AHA”) sued HHS and its Secretary, Xavier Becerra, arguing that HHS exceeded its statutory authority when it adjusted the reimbursement rate for 340B hospitals. Id. The district court agreed with AHA, and HHS appealed. Id. Reviewing the claim de novo, the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) first noted that it had jurisdiction to decide the case, rejecting HHS’s argument that 42 U.S.C. § 1395l(t)(12) bars the court from reviewing its action. Id. at 823–24. In making this determination, the D.C. Circuit relied on a lack of evidence that Congress intended to prohibit judicial review of SCOD reimbursement rate adjustments. Id. at 824–28. Next, the D.C. Circuit addressed the merits, and determined that HHS possesses the statutory authority to enact a cut to the SCOD reimbursement rate. Id. at 828. The D.C. Circuit found that Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc. entitles HHS to deference. Id. Chevron deference requires courts to defer to an agency’s interpretation of a statute, so long as Congress has not addressed the precise question and the agency’s interpretation is reasonable. Id. The D.C. Circuit ultimately held that Congress did not, in § 1395l(t)(14)(A)(iii)(II), preclude HHS from setting reimbursement rates in accordance with the cost of acquiring the SCODs and that HHS reasonably interpreted the statute to permit its action. Id. at 828–34.
AHA appealed, and on July 2, 2021, the United States Supreme Court granted certiorari to hear the case.
JUDICIAL REVIEW OF AGENCY ACTION UNDER MEDICARE’S OUTPATIENT PROSPECTIVE PAYMENT SYSTEM
Petitioners American Hospital Association et al. (“AHA”) contend that 42 U.S.C. § 1395l(t)(12) does not preclude judicial review of their suit challenging the Department of Health and Human Services (“HHS”) setting of Medicare reimbursement rates for outpatient drugs under the Medicare Modernization Act’s (“MMA”) Outpatient Prospective Payment System (“OPPS”). Brief for Petitioners, American Hospital Association et al. at 16. First, AHA argues that HHS cannot meet its burden of proving by clear and convincing evidence that Congress intended to preclude judicial review. Id. at 16–17. AHA asserts that Congress singled out specific subsections of § 1395l as precluded from judicial review. Id. at 17. Because AHA’s suit challenges HHS action taken pursuant to a section not singled out for preclusion, AHA maintains that Congress meant for the action to be reviewable. Id. Second, AHA articulates that by setting out a detailed methodology for outpatient drug reimbursement rates, Congress intended for that rate setting action by HHS to be reviewable. Id. at 18. Third, AHA claims that HHS’s action is judicially reviewable because the MMA allows for agencies to issue corrections for previous underpayments to hospitals. Id. at 29. Lastly, AHA posits that HHS’s departure from rate setting mandates in the MMA means that the action does not constitute an “adjustment” within the meaning of the statute. Id. at 30. Therefore, AHA argues that none of the MMA’s judicial review preclusions apply because the action falls outside of the MMA entirely. Id.
Respondents Xavier Becerra et al. (“Becerra”) counter that in enacting the MMA, Congress precluded judicial review of specific HHS actions, including the setting of reimbursement rates for outpatient services and drugs under the OPPS. Brief for Respondents, Becerra et al. at 21. Becerra claims that, unless judicial review of HHS’s generally applicable rate setting action was precluded, excessive challenges to HHS’s actions would threaten the entire regulatory scheme. Id. at 21–22. Becerra notes that judicial review takes over a year to complete. Id. at 22. Moreover, Becerra contends that invalidating the rate for outpatient drugs would force HHS to offset costs elsewhere to comply with OPPS’s budget-neutrality mandate. Id. at 22. In addition to these practical considerations, Becerra also responds that the clear text of § 1395l overrides any presumption favoring judicial review. Id. at 23. Becerra articulates that § 1395l(12)(A) expressly forbids judicial review of HHS’s “development of the classification system” for outpatient drug reimbursement. Id. at 23–24. Finally, Becerra rejects AHA’s suggestion that Congress could have enacted a flat ban on judicial review for all OPPS actions, instead asserting that Congress needed to preserve review of individual reimbursement decisions. Id. at 27.
STATUTORY CONSTRUCTION AND INTERPRETATION
AHA alleges that the text of § 1395l(t)(14) clearly prohibits HHS’s changing of Medicare reimbursement rates based on acquisition cost for different hospital groups without the requisite data. Brief for Petitioners at 31. AHA contends that Congress provided two reimbursement rate methodologies and made the choice of methodology contingent upon the availability of hospital acquisition cost survey data by using the word “if.” Id. AHA argues that if the hospital acquisition cost data is not available, HHS must set the reimbursement rate for outpatient drugs equal to the average price of the drug for the year. Id. at 32. AHA maintains that Congress created the methodology contingency requirement to protect hospitals and prevent HHS from varying the reimbursement among hospital groups without sufficient price comparison data. Id. at 34. AHA also asserts that HHS cannot rely on the statute’s grant of power to “adjust” price-based rates to effectively transform the reimbursement rate into a cost-acquisition rate. Id. at 35. AHA states that reading “adjusts” to give HHS the power to align reimbursement rates to hospital acquisition costs even without the cost survey data makes the first section of paragraph (14) superfluous. Id.
Becerra disagrees with AHA that the statutory language of § 1395l(t)(14) prohibits HHS from aligning reimbursement rates with acquisition costs if HHS lacks the relevant hospital cost data. Brief for Respondents at 33. Rather, Becerra responds that HHS followed the exact procedures outlined by Congress. Id. Without the statutorily required hospital acquisition cost data, Becerra maintains that HHS calculated the reimbursement rate based on average drug price, and then “adjusted” the rate to serve one of the “purposes” of paragraph (14). Id. at 33–34. Specifically, Becerra argues that one of the primary purposes of paragraph (14) is to reimburse outpatient drugs at a rate reflective of actual hospital acquisition cost. Id. at 34. Becerra notes that the section of the text where Congress directs HHS to use average drug prices also cross-references another provision that sets drug prices at a well-known proxy rate for acquisition costs. Id. Moreover, Becerra asserts that in general, Congress designed Medicare reimbursements to be reasonable. Id. at 35. Consequently, Becerra counters that AHA’s reading of the statute would force HHS to overpay for reimbursements—because average price does not accurately reflect the cost to hospitals—and frustrate Congress’s intent to reasonably reimburse outpatient drug costs. Id. at 36.
Becerra also responds that allowing HHS to align with acquisition costs even without the survey data does not make the first component of the statute superfluous because HHS must still adhere to Congress’s strict mandates when the agency has collected that data. Id. at 40. Finally, Becerra posits that even though section two of paragraph (14) does not explicitly give HHS the ability to vary rates by hospital group, Congress implicitly granted that power through the broader “purposes” of the paragraph. Id. at 43–44.
APPLICABILITY AND IMPACT OF CHEVRON DEFERENCE
AHA maintains that even if the Court applies Chevron deference to HHS’s interpretation of its rate-setting authority, HHS’s reading does not constitute a reasonable interpretation of § 1395l(t)(14)’s delegation of authority. Brief for Petitioners at 46–47. Citing Kisor v. Wilkie, AHA urges that Chevron deference may only be granted once the Court has exhausted its interpretive “legal toolkit” and found no single correct answer to the underlying analytical question. Id. at 47. However, in exhausting this toolkit with respect to § 1395l(t)(14), AHA argues that the Court does not need to find every action Congress permitted HHS to take. Id. at 48. Rather, AHA alleges that because Chevron requires an implicit delegation of authority, it is enough that Congress did not delegate HHS the authority to disregard the conditional methodology selection in paragraph (14). Id. AHA also analogizes the present case to MCI Telecommunications Corp. v. AT&T, where the Court declined to give deference to the Federal Communication Commission’s (“FCC”) interpretation that the term “modify” allowed the FCC to exempt carriers from tariffs that were mandated by the same statute. Id. at 49. AHA concludes that Congress could not have intended “adjustment” to mean that HHS could effectively legislate around the OPPS reimbursement structure, thereby invalidating the action at issue. Id. at 49–50.
Becerra responds that HHS’s rate-setting action derives from “the best and most natural reading” of the statute and therefore must survive under Chevron deference. Brief for Respondents at 47. Becerra rejects AHA’s conclusion that the Court must engage in the “fiction” of implicit Congressional delegation under Chevron. Id. at 48. Rather, Becerra argues that Congress explicitly gave HHS the authority to “adjust” reimbursement rates as needed to meet underlying statutory purposes. Id. Moreover, Becerra claims that HHS’s decision to adjust and reduce reimbursement rates for certain hospitals differs greatly from the FCC’s decision to remove a statutory requirement and exempt select carriers from tariffs in MCI Telecommunications Corp. v. AT&T. Id. at 47. Finally, Becerra disputes AHA’s claim that Congress did not intend to give HHS so much discretion over the massive Medicare drug reimbursement system. Id. at 49. Becerra concludes that Congress has repeatedly granted HHS authority over other components of Medicare reimbursement, and therefore intended its explicit delegation to HHS over outpatient drug reimbursements. Id.
FINANCIAL HARM TO HOSPITALS
The Yale New Haven Health System and five other academic medical centers (collectively the “AMCs”), in support of AHA, argue that HHS’s reimbursement rate cut threatens the ability of amici and other 340B hospital to continue their provision of care to underserved populations. Brief of Amici Curiae Yale New Haven Health System, et al., in Support of Petitioners at 25. The AMCs assert that the 340B program in conjunction with Medicare reimbursements allow them to function effectively in a period when, due to the COVID-19 pandemic, hospitals across the country are struggling financially. Id. at 25–26. The AMCs contend that HHS’s cut in the reimbursement rate for 340B hospitals will lead to a loss in $1.6 billion annually—funds that 340B hospitals desperately need to provide high-quality care to underserved communities. Id. at 26. The AMCs warn that this loss in funding may result in a further reduction in services offered, as they have already had to make difficult cost-saving decisions. Id. at 26–27.
The Federation of American Hospitals (“FAH”), in support of Becerra, counters that HHS’s reduction in the 340B hospital reimbursement rate is financially equitable because it does not favor certain hospitals to the exclusion of others. Brief of Amicus Curiae The Federation of American Hospitals, in Support of Respondents at 21–22. Specifically, FAH asserts that the reimbursement rate reduction eliminates the unfair advantage that only 340B hospitals enjoyed in benefiting from both significantly discounted drugs and a high Medicare reimbursement rate. Id. at 22. Moreover, FAH notes that the savings attributable to the reduction in reimbursement rate are then distributed to all hospitals, 340B hospitals and non-340B hospitals alike. Id. The Rural Hospital Coalition (“RHC”), also in support of Becerra, contends that the reimbursement rate reduction allows hospitals in underserved communities that are not able to qualify for 340B status, such as privately-owned rural hospitals, to enjoy increased financial stability. Brief of Amicus Curiae Rural Hospital Coalition, in Support of Respondents at 4–8.
THE SCOPE OF THE ADMINISTRATIVE STATE
Pacific Legal Foundation (“PLF”), in support of AHA, argues that Chevron deference implicates serious separation of powers concerns because it unconstitutionally enlarges the scope of the administrative state. Brief of Amicus Curiae Pacific Legal Foundation, in Support of Petitioners at 7. Specifically, PLF contends that Chevron deference intrudes upon the power of both the legislative and judicial branches by placing undue power in the hands of executive agencies. Id. at 8. PLF asserts that deference to an executive agency’s interpretation effectively strips Congress of its unilateral authority to legislate and promotes the impermissible grant of lawmaking power to the executive branch. Id. at 9. PLF also posits that Chevron deference encourages legislators to pass ambiguous laws and shirk their own responsibilities by requiring unelected executive agencies to make complicated policy decisions. Id. at 10. Moreover, PLF argues that Chevron deference divests the judiciary of its power of judicial review. Id. at 11. PLF contends that deferring to an executive agency’s interpretation of a statute forecloses the ability of courts to engage in statutory interpretation, a fundamental duty of the judiciary. Id. at 12.
The State of Indiana and seven other states (collectively the “States”), in support of neither party, argue that Chevron deference, when properly applied, is consistent with separation of powers and does not lead to an expansion of the administrative state. Brief of Amici Curiae Indiana et al., in Support of Neither Party at 10. The States contend that Chevron deference requires courts to first ask whether Congress has directly addressed the statutory question at issue, and if Congressional intent is unequivocal on the question, then both courts and executive agencies must adhere to Congress’s intent and reading of the statute. Id. The States further assert that the second step of Chevron deference, determining whether an agency’s interpretation is reasonable, properly constrains the scope of authority Congress has delegated to the agency. Id. at 10–11. Thus, the States posit that Chevron deference is consonant with the judiciary’s duty of interpreting laws because it requires courts to discern Congressional intent and then only defer to an agency’s interpretation when Congress has indicated for this to occur. Id. at 17.
Becerra counters that this case is an improper vehicle for consideration of the broader policy questions regarding Chevron deference and its effect on separation of powers because Congress has expressly delegated authority to HHS in adjusting reimbursement rates under § 1395l(t)(14)(A)(iii)(II). Brief for Respondents, Becerra et al. at 48. Becerra contends that because HHS’s action was consistent with an express grant of Congressional authority, there is no reason to entertain questions related to the proper scope of the administrative state. Id. Accordingly, Becerra argues that AHA and its amici’s policy argument on this point is immaterial. Id.
- Robert King, Supreme Court Agrees to Hear Hospital Lawsuit Challenging HHS’ 340B Cuts, FierceHealthcare (July 2, 2021).
- Andrew D. Ruskin et al., 340B Update: Supreme Court Accepts Certiorari in 340B Payment Reduction Case, The National Law Review (July 8, 2021).
- Lydia Wheeler, Chevron Deference Scope Tested in Supreme Court Medicare Case, Bloomberg Law (May 21, 2021).
- Supreme Court to Review Application of Hospital Medicare Drug Reimbursement Statute, The Council of State Governments (July 7, 2021).