On June 15, 2022, the Supreme Court decided American Hospital Association v. Becerra, a dispute over hospital reimbursements for certain prescription drugs under Medicare. Although this case involved the Department of Health & Human Services’ (HHS) interpretation of the Medicare statute, which would typically be analyzed under the Chevron framework — providing the increasingly skeptical Court occasion to reexamine Chevron — the Court did not go the Chevron route. Instead, it examined the Medicare statute’s text and structure, and concluded that HHS impermissibly cut drug reimbursement rates for certain hospitals.
What’s At Issue
As discussed in an earlier preview, federal law gives HHS two options for calculating Medicare Part B drug reimbursement rates. Option one permits HHS to rely on the average acquisition cost (AAC) for the drug for that year and vary the AAC by hospital group. But HHS must consider survey data on hospitals’ acquisition costs for each covered drug. If that data is unavailable, HHS can use option two by basing reimbursement on the average sales price (ASP) of drugs.
Until 2017, HHS used option two and reimbursed hospitals at 104% to 106% of the ASP. This rate applied equally to all hospitals, including “340B hospitals,” which serve marginalized populations. 340B hospitals can purchase eligible outpatient drugs from manufacturers at a discount, meaning Medicare reimburses these hospitals for more than they originally pay the manufacturer. Citing this surplus, HHS issued a new rule in 2018 that maintained the same ASP reimbursement rate for most hospitals but cut reimbursement rates for 340B hospitals by 28.5%. This translates to cuts of an estimated $1.6 billion in annual Medicare funding for 340B hospitals.
The American Hospital Association (AHA) challenged HHS’ interpretation of the statute for determining the reimbursement rates. The district court sided with AHA. But this decision was overturned by a divided panel of the D.C. Circuit Court, which held that HHS reasonably interpreted the statute and was thus entitled to Chevron deference. Under Chevron, courts defer to federal agencies’ reasonable interpretations of ambiguous federal statutes. The D.C. Circuit court found that, at a minimum, HHS was not precluded from adjusting reimbursement rates to address concerns about reimbursement for certain hospitals.
Supreme Court Sides With American Hospital Association
The Supreme Court disagreed and reversed the D.C. Circuit’s opinion. In a unanimous decision, the Court sided with AHA, but Justice Kavanaugh did not invoke Chevron. Instead, he stated that the case was “straightforward” given the “meticulous” text and structure of the Medicare statute. HHS’ authority to vary the reimbursement rate for different hospital groups depends on whether it collects AAC survey data. Without a survey of hospitals’ costs, HHS may not vary the reimbursement rates for 340B hospitals.
The Court rejected HHS’ argument that option two under the statute permitted HHS to vary reimbursement rates by hospital group because the statute allowed the Secretary to “adjust” average prices. HHS’ power to adjust the price of one drug for all hospitals, Justice Kavanaugh wrote, is distinct from its power to set rates for different groups of hospitals.
What It Means
The Court’s decision invalidating the methodology used by HHS in 2018 and 2019 means 340B hospitals will undoubtedly benefit from increased funding (although the process for making each hospital whole is not immediately clear and could require additional federal guidance). AHA and its amici had argued that the 28.5% cut in reimbursement threatened the quality of care and services provided by 340B hospitals (which use these funds to offset the costs of providing care to the uninsured and underinsured). Justice Kavanaugh suggested that this could have been by congressional design, noting that Congress was aware of the discrepancy in pricing for 340B hospitals when it passed the statute in 2003.
Going forward, HHS is not prevented from varying reimbursement rates for different hospital groups. But federal officials must conduct a price acquisition survey first. HHS may be on a path to do so already: HHS attempted to conduct such a survey in 2020, after litigation in this case had commenced. But it is not clear that the survey will be ready to influence rates for 2023.
Despite much debate over whether the Supreme Court would use this challenge to overrule or limit Chevron, the Court did not weigh in on this issue at all — at least not explicitly. During oral argument, Justices Thomas, Gorsuch, and Alito signaled their receptiveness to reevaluating Chevron. AHA urged the Court to overrule Chevron if necessary but asserted that the statute was clear and unambiguous enough without the need to evaluate the merits of overturning Chevron. Interestingly, Justice Kavanaugh did not even mention Chevron or whether HHS’s interpretation was entitled to deference. It will be critical to monitor the Court’s evolving position on the scope of Chevron deference. If federal agencies are constrained in their ability to interpret federal law, the health care system could be severely disrupted.
Erin Coughlin is a fellow at the O’Neill Institute.