In an opinion that shuns Chevron, the court rejects a Medicare cut for hospital drugs

OPINION ANALYSIS

Federal health care regulators exceeded their authority when they cut Medicare reimbursements to safety-net hospitals in an attempt to prevent those hospitals from reaping large profits on certain prescription drugs, the Supreme Court unanimously ruled on Wednesday.

The case, American Hospital Association v. Becerra, involved how Medicare pays for drugs that hospitals provide in outpatient settings. Beginning in 2018, the Department of Health and Human Services cut the government’s reimbursement rates for those drugs at so-called 340B hospitals, which generally serve a high proportion of low-income patients.

The agency’s rationale for the cut was that, under federal law, pharmaceutical companies are obligated to sell the drugs to 340B hospitals at reduced prices. Medicare’s reimbursement rates to the hospitals should reflect the hospitals’ lower costs, the government reasoned.

The hospital industry challenged the cut, arguing that the relevant provision of the Medicare statute does not authorize the government to pay lower rates to 340B hospitals while maintaining higher rates for other hospitals. The government responded that the statute authorizes HHS to “adjust” the “average price” of outpatient drugs when calculating reimbursement rates. That adjustment authority, the government argued, includes the ability to vary reimbursement rates among hospital groups.

In a 14-page opinion by Justice Brett Kavanaugh, the court sided with the hospitals. The text and structure of the statute, Kavanaugh wrote, do not permit the reimbursement cut in these circumstances. A separate provision of the statute would allow the government to vary the rates it pays for outpatient drugs, but only if the government first conducts a time-consuming survey of hospitals — which it did not do here.

“Regardless of the scope of HHS’s authority to ‘adjust’ the average price up or down under the statute, the statute does not grant HHS authority to vary the reimbursement rates by hospital group unless HHS has conducted the required survey of hospitals’ acquisition costs,” Kavanaugh wrote.

Notably, the opinion does not invoke Chevron deference, the 38-year-old doctrine under which courts generally defer to agencies’ statutory interpretations. Some business organizations and conservative groups had called on the court to use American Hospital Association to reconsider or even overturn Chevron.

The court declined that invitation. Instead, Kavanaugh’s opinion simply ignored Chevron. He did not cite the case even once, instead opting to reject the agency’s interpretation under ordinary principles of statutory analysis. For a court that is increasingly skeptical of the administrative state, Chevron’s absence speaks volumes. There may not be five votes to scrap Chevron altogether, but if the court simply stops applying it, the doctrine may be shunned into oblivion.