Last week, the Supreme Court heard back-to-back challenges over how the U.S. Department of Health and Human Services (HHS) calculates Medicare reimbursement for hospital stays and prescription drugs. In Becerra v. Empire Health Foundation and American Hospital Association v. Becerra, the high court is considering whether HHS’s interpretations conflict with the Medicare statute and, if the statute’s requirements are unclear, whether the court should defer to HHS’s interpretations of federal law (and whether those interpretations are reasonable).
The outcome of both cases will affect billions of dollars in Medicare funding. But they could have an even greater impact if the court erodes longstanding doctrines of judicial deference to federal agency rulemaking. If so, HHS could face new limitations in its ability to regulate the health care industry and manage federal health programs.
Becerra v. Empire Health Foundation
On November 29, the Supreme Court heard a challenge to a 2004 HHS rule governing Medicare’s “disproportionate share hospital adjustments” (DSH payments) to hospitals serving disproportionately high numbers of low-income patients. The Medicare statute includes a formula to calculate a hospital’s DSH payment. The formula is the sum of the “Medicare fraction” and the “Medicaid fraction” — proxy measures for the proportion of indigent patients served. The Medicare fraction divides the number of patient days for those “entitled to” both Medicare Part A benefits and Supplemental Security Income benefits by the number of patient days for those entitled to Medicare Part A benefits.
There is a long history of legal challenges to HHS’s changing interpretations of these fractions. The question in Empire Health Foundation is whether the 2004 rule’s interpretation of the Medicare fraction is consistent with the statutory formula — or, if the statute is unclear, whether the court should defer to HHS. In its rule, HHS interpreted the phrase “entitled to benefits” to include all days for patients who are eligible for Medicare Part A benefits — regardless of whether Medicare is actually responsible for paying for those days. (Medicare might not pay if the patient has exhausted their benefits for inpatient days or another insurer is responsible for payment.)
HHS argues that a straightforward reading of the statute requires it to include all Part A patients in the Medicare fraction or, at least, that its approach is reasonable and entitled to deference. Empire disagrees, arguing that the phrase “entitled to benefits under part A” refers to a patient’s entitlement to payment of benefits by Medicare for specific hospital days, not general entitlement to Part A benefits. Empire argues that HHS impermissibly rewrote the statute to effectively replace “entitled to” with “eligible for” in the Medicare fraction.
The Ninth Circuit agreed with Empire in 2020, holding that HHS’ broad interpretation of “entitled to” was incompatible with the “unambiguous” statutory language. In 2013, in contrast, two other federal appeals courts reached the opposite conclusion, holding that the statute is ambiguous and deferring to HHS’ interpretation as reasonable.
What Could It Mean?
HHS’ approach results in DSH underpayments to some hospitals — with billions at stake if the approach is changed. If the 2004 rule is upheld, those hospitals would continue to receive lower DSH payments than they otherwise would have under the methodology Empire argues is correct. But this case could go beyond an arcane dispute over the technicalities of a statutory formula and more broadly impact HHS and other federal agencies’ ability to interpret federal statutes. Though not the focus of the questions raised at oral argument, the court could use this case to limit how much deference it gives to federal agencies when interpreting ambiguous federal statutes.
American Hospital Association v. Becerra
Obscure Medicare rules were again before the Supreme Court on November 30. In American Hospital Association v. Becerra, the court is considering HHS’ Medicare Part B reimbursement rates for certain prescription drugs under the so-called 340B drug pricing program. Under this program, pharmaceutical companies must sell outpatient drugs to safety-net hospitals at significant discounts.
Federal law requires HHS to set Medicare rates for certain outpatient drugs based on “the average price for the drug…as calculated and adjusted by the Secretary as necessary for purposes” of the statute. Until 2018, HHS used this average-price approach to set uniform reimbursement rates for all hospitals. Beginning in 2018, however, HHS set one reimbursement rate for most hospitals and cut reimbursement rates to only 340B hospitals by nearly one-third. In making this change, HHS cited the 340B hospitals’ discounted rates and called it “inappropriate” for Medicare to “subsidize” 340B hospitals.
The American Hospital Association (AHA), among others, challenged this Trump-era modification, asserting that it drastically shortchanged safety-net hospitals and improperly considered drug acquisition costs. The rule, they argue, violates the plain text of the statute since HHS can only set reimbursement rates based on drug acquisition costs if it has first collected data from hospitals to see what drugs cost. In response, HHS contends that the statutory language permitting HHS to “adjust” rates permits it to set a lower rate for 340B hospitals.
The question before the Supreme Court is whether HHS’ decision is entitled to Chevron deference, a doctrine announced in the court’s landmark 1984 decision in Chevron v. Natural Resources Defense Council that courts should generally defer to agencies’ reasonable interpretations of ambiguous statutes that they administer. The D.C. Circuit, in a split decision, held that the word “adjusted” was ambiguous and accorded Chevron deference to HHS’ interpretation. AHA argues that because the statute is unambiguous, HHS’ interpretation is entitled to no deference under Chevron. Nevertheless, AHA also encouraged the court to impose new limits on Chevron if necessary, a position that garnered support from conservative groups that have long opposed the broad regulatory powers accorded to federal agencies.
What Could It Mean?
HHS’ current policy has cost 340B hospitals an estimated $1.6 billion in Medicare funding annually. If AHA prevails, there is no question that 340B hospitals will benefit from increased funding. But this benefit could come potentially at the expense of HHS’ ability to interpret complex and often ambiguous statutory requirements under Medicare, Medicaid, the Affordable Care Act, and other federal laws.
Katie Keith is a scholar and director of the Health Policy and the Law Initiative at the O’Neill Institute.
Joseph Wardenski, founder of the civil rights law firm Wardenski P.C., is a legal consultant to the Health Policy and the Law Initiative at the O’Neill Institute.
