OPINION ANALYSIS

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

This article was updated on June 15 at 8:50 p.m.

In American Hospital Association v. Becerra, the Supreme Court had a chance to upend the administrative state.

Though the dispute involved a technical Medicare reimbursement formula, business groups and conservative legal organizations had urged the justices to use the case as a vehicle to overhaul — or even overturn — the 38-year-old doctrine known as Chevron deference. That doctrine generally calls for courts to honor federal agencies’ interpretations of ambiguous laws. Supporters say the doctrine gives agencies breathing room to make policy judgments that carry out their missions. Critics say it hands too much power to unaccountable bureaucrats.

In a narrow and unanimous opinion on Wednesday, the court did not overturn the Chevron doctrine. Instead, it just ignored it. And in doing so, the court may have portended the future of Chevron, which already has been narrowed considerably over the years. Rather than a single, decisive blow or a continued death by a thousand cuts, the court might simply snuff out Chevron with the silent treatment.

More immediately, though, Wednesday’s ruling is a victory for safety-net hospitals trying to recoup $1.6 billion in annual Medicare payments after the Department of Health and Human Services cut reimbursements in 2018.

The cut applied to certain prescription drugs that hospitals provide in outpatient settings, and it applied only to hospitals that are eligible for a federal program known as the 340B Drug Pricing Program. Those hospitals generally serve a high proportion of low-income payments, and under federal law, they have the right to purchase drugs from pharmaceutical companies at reduced prices. So federal health care regulators reasoned that Medicare’s reimbursements for those drugs should reflect the hospitals’ lower costs. Otherwise, 340B hospitals can reap large profits on the drugs they prescribe to Medicare patients.

The hospital industry challenged the cut, arguing that the relevant provision of the Medicare statute — which surely is one of the most complex and technical statutes in the entire U.S. code — 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. Under the agency’s interpretation, that adjustment authority 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 agency’s targeted reimbursement cut for 340B hospitals. A separate provision of the statute would allow the agency to vary the rates it pays for outpatient drugs, but only if the agency 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 contain even a single citation to Chevron v. Natural Resources Defense Council, even though hundreds of pages of briefing and a large chunk of the oral argument focused on the continued vitality of the landmark 1984 case and the doctrine it created. Several of the court’s conservative justices, including Kavanaugh himself, have previously questioned the wisdom of the doctrine, suggesting that judicial deference to agencies’ legal interpretations may violate the separation of powers. With that groundwork laid, conservative interest groups of various stripes had urged the court to formally reconsider Chevron in American Hospital Association.

In a term when the court is under tremendous scrutiny for its apparent willingness to overturn precedent in other areas, the justices declined the invitation to do so here. Rather than reiterating his doubts about Chevron, Kavanaugh simply rejected the agency’s interpretation of the Medicare statute using ordinary principles of statutory analysis.

It’s telling that Kavanaugh’s analysis — appealing repeatedly to text and structure — actually resembles the traditional first stage of the Chevron framework, under which courts are supposed to assess whether a statute is ambiguous. Kavanaugh and the other eight justices apparently believe the arcane payment provision at issue is not ambiguous at all — it’s a “straightforward” case, he writes, involving statutory language that can be read only as the hospitals preferred. (The statute was apparently not so straightforward, though, for the U.S. Court of Appeals for the District of Columbia Circuit, Kavanaugh’s old court. A divided panel of that court found the agency’s contrary interpretation to be perfectly valid.)

What if Kavanaugh had found the statute genuinely ambiguous? That’s when Chevron deference would typically kick in, but Kavanaugh’s cold-shoulder approach suggests that, in his view, courts should adopt whichever interpretation they feel is best. Deference doctrines need not apply. In other words, there might not be five votes to scrap Chevron officially, but the court could tacitly stop deploying it. If so, a doctrine that has fallen into disfavor on the current court may fade all the way into oblivion.