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The Supreme Court recently heard oral arguments in American Hospital Association et al. v. Becerra, a case addressing whether the Medicare program acted lawfully in significantly reducing its payments to 340B hospitals for outpatient drugs. The outcome of the case could also have significant implications on the discretion courts provide to agency action.

The Medicare program has historically paid all hospitals the same amount for drugs, such as chemotherapy and other expensive oncology drugs, dispensed in hospital outpatient departments. Starting in 2018, Medicare reduced the payments for these drugs to hospitals that participate in the 340B Drug Pricing Program for disadvantaged and underserved populations. Under the Program, manufacturers are required to sell these drugs to eligible 340B hospitals at steep discounts in order for the drugs to be covered by Medicaid. Congress created the program, in language quoted by the appellate court, to “enable the providers to ‘stretch Federal resources as far as possible.’”

The AHA, two other hospital groups, and three hospitals challenged the rule, arguing that CMS did not have the authority under the Medicare Prescription Drug Improvement and Modernization Act of 2003 to reduce the payments. Under this Act, CMS can either pay hospitals for their average acquisition costs of acquiring the drugs based on survey data, or it can pay them the “average price” for the drugs “as calculated and adjusted by the Secretary [of Health and Human Services.]” Lacking the survey data, Medicare had been paying hospitals under the second option at 106% of the drugs’ sale price, which is the statutorily set “average price.” As a result, Medicare was paying eligible 340B hospitals 106% of the sales price for drugs that the hospitals were purchasing at a discount under the 340B Program. The challenged rule reduced payments to 340B hospitals for these outpatient drugs to the average sales price minus 22.5%, or 77.5% of the average sales price.

The AHA argued that because CMS did not have the statutorily required survey data to set reimbursement based on acquisition costs, it was required by law to pay all hospitals the average sales price. The D.C. Circuit Court of Appeals ruled in favor of the Medicare program, citing to the Supreme Court’s seminal decision of Chevron U.S.A. Inc. v. Natural Resources Defense Council. That case held that courts should generally defer to agencies’ reasonable interpretations of ambiguous statutes. Applying this standard, the Court of Appeals found that Medicare reasonably read its authority under the law to “adjust” payment amounts to align payment for the drugs with the hospitals’ acquisition costs.

Court observers have carefully watched AHA v. Becerra to see if the Court would use it to overturn or narrow the ruling in Chevron because some of the conservative justices on the Court have criticized Chevron. In its Petition for Certiorari, the AHA asked the Court to review whether Medicare should receive Chevron deference, noting that “[i]t is no secret that members of this Court have raised concerns about whether Chevron deference, particularly when applied as indiscriminately as it was in this case, violates the separation of powers.” In its briefs, it argued that the statute “could not be clearer” and, therefore, there was not the necessary ambiguity in the law to trigger Chevron deference. It also argued that CMS did not “adjust” the formula, but rather substituted a different one.

At the oral argument, Justice Thomas asked the AHA’s lawyer whether the Court should overrule Chevron. He replied that the Court did not have to overrule Chevron because “this is a situation in which the statue is clear and unambiguous at the first stage of Chevron, and therefore one doesn’t get to the question of Chevron being overruled.” In response to a question from Justice Alito, he stated that the Court should overturn Chevron if necessary to rule in favor of the hospitals. Other justices asked whether a different or weaker deference standard should apply to agency actions. Justice Gorsuch, who has been critical of Chevron in the past, expressed his opinion that “these cases often tend to arise in circumstances just like this where the government is seeking deference for a rule that advantages it.”

The Supreme Court is expected to rule next year. The attorneys at Whatley Kallas, LLP will continue to follow this case and will report on the Court’s opinion when issued.