Supreme Court Shies Away From Attacking Regulatory State In Medicare Case

The Supreme Court rejected a prescription drug reimbursement rule instituted by the Department of Health and Human Services in 2018 in a narrow decision unlikely to have broader implications for the regulatory state.

Justice Brett Kavanaugh wrote the unanimous decision in American Hospital Association v. Becerra. While the case decreases the amount of discretion courts will give to agencies implementing new regulations, the case threatened to fully upend the federal regulatory state, as the justices were asked to overturn a nearly 40-year-old precedent providing that discretion.

The court, however, did not take up the suggestion to overturn its precedents governing the regulatory state. Instead, it ruled that HHS simply did not have the authority under existing laws to change reimbursement rates for a specific type of hospital.

The case originated from a decision by HHS in 2018 to update the prescription drug reimbursement payment total for certain hospitals after discovering that those hospitals were receiving reimbursements far in excess of the amounts they originally paid for drugs.

In 2003, Congress passed legislation adding a prescription drug benefit to Medicare that provided two options for how to reimburse hospitals for their purchases of drugs for Medicare patients. One option allowed Medicare to survey hospitals for their prescription drug acquisition costs and then reimburse hospitals for “average acquisition costs,” with different payments allowed for different hospitals. The other option said Medicare could reimburse the “average price” for each drug with the “average price” set at 106% of a drug’s sale price.

Medicare chose the second option due to the difficulty in surveying hospitals. But the second option increased costs by incentivizing hospitals to purchase more expensive drugs even when less expensive generics were available.

“Because 6% of a large number is bigger than 6% of a small number, hospitals have an incentive to dispense more expensive drugs, even when there are cheaper and equally effective therapies,” Nicholas Bagley, professor at the University of Michigan Law School, wrote at SCOTUSblog ahead of court arguments.

This payment structure created an even greater incentive for certain hospitals serving disadvantaged communities. Those hospitals receive substantial prescription drug discounts between 20% and 50% under Medicare’s 340B program. But the reimbursement program still pays these hospitals 106%, meaning these hospitals receive somewhere between a 26% and 56% subsidy on drug purchases.

In 2018, Medicare sought to fix this unexpected subsidy for 340B hospitals by lowering its drug reimbursement percentage to them from 106% to 77.5%. These hospitals and a collection of hospital trade associations, including the American Hospital Association, challenged this rule change in court by arguing that Congress had not provided the agency with the specific authority to alter its drug reimbursement program.

This is where the challenge ran into the 1984 precedent in Chevron v. Natural Resources Defense Council giving agencies broad deference to interpret statutes passed by Congress when setting rules and regulations. The Chevron deference has come under fire from conservative jurists in recent years as they seek to restrain federal regulatory authority.

Lower courts found that Medicare should be provided deference under the Chevron precedent to set prescription drug reimbursement rates, but the Supreme Court did not address the Chevron claim. It instead simply ruled that the existing Medicare prescription drug law did not allow the change “absent a survey of hospitals’ acquisition costs.”

“The text and structure of the statute make this a straightforward case,” Kavanaugh wrote. “Because HHS did not conduct a survey of hospitals’ acquisition costs, HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals.”

While the ruling here did not disrupt existing precedent on regulatory matters, the court is still set to rule on the issue again in June in the West Virginia v. Environmental Protection Agency case.

Conservative justices have increasingly questioned the precedent in recent years with Justice Neil Gorsuch taking the lead since he joined the bench in 2017.

But Gorsuch, and other opponents of agency regulatory deference, may have found another way to gut the federal regulatory state with their expansion of the so-called major questions doctrine. That doctrine supposedly states that any agency action of “vast economic and political significance” will not receive deference from the courts unless explicitly authorized by Congress in legislation. The court may expand its major questions doctrine when it rules in the West Virginia v. Environmental Protection Agency case over not-yet-written carbon emission regulations.