How much should we pay for drugs? That’s the question at the center of American Hospital Association v. Becerra, a sleeper of a case involving billions of dollars in federal spending and a chance to reshape two doctrines at the heart of administrative law.
Drugs, money, and the law: Sounds sexy, right? Still, you could be forgiven for never having heard of the case, which will be argued on Tuesday. It arises out of a technical dispute over how Medicare, the federal program that insures 63 million elderly and disabled people, pays for some of the drugs that hospitals dispense to patients in outpatient departments — in particular, chemotherapy drugs and other expensive anti-cancer medications.
The case centers on part of a 2003 law that gives Medicare two options for how to pay for those drugs. Under the first option, Medicare would survey hospitals about what it cost them to acquire the drugs. Medicare would then draw on the survey data and reimburse hospitals for their “average acquisition costs,” subject to variations for different types of hospitals. It’s a rough-cut way to make hospitals whole without requiring them to submit receipts for every drug purchase.
But Medicare immediately encountered a problem: It just wasn’t practical to survey hospitals about their acquisition costs. Fortunately, the law anticipated that possibility and gave Medicare a second option. In the absence of survey data, Medicare could pay the “average price” for the drug, “as calculated and adjusted by the Secretary [of Health and Human Services] as necessary for purposes of this [option].”
This approach turned out to be costly. A drug’s “average price” is fixed elsewhere in the Medicare statute, typically at 106% of the drug’s sale price. As a policy matter, this “average sales price plus 6%” approach is hard to defend. 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.
Other developments soon made the payment policy look even more dubious. Back in 1992, Congress created something called the 340B program to support health-care providers that serve poor and disadvantaged communities. Eligible providers get steep discounts on the drugs that they purchase — anywhere between 20% and 50% of the normal price.
Initially, few hospitals qualified for the 340B program. Today, more than two-thirds of nonprofit hospitals participate. (For-profits are excluded from the program.) For years, Medicare kept paying those 340B hospitals 106% of the average sales price of their outpatient drugs. The upshot was that hospitals were buying highly discounted drugs and then charging the federal government full price. That heightened the incentive to prescribe very expensive medications — which is partly why Medicare spending on outpatient drugs has ballooned, growing an average of 8.1% per year from 2006 through 2017.
Federal regulators were troubled by the gap between hospital costs and Medicare payments. In their view, the point of the 2003 statute was to cover hospitals’ costs, not to subsidize 340B hospitals. That jibes with the Medicare statute more generally: Its “overriding purpose” is to provide “reasonable (not excessive or unwarranted) cost-based reimbursement.”
So Medicare adopted a rule that, starting in 2018, slashed the reimbursement rate for 340B hospitals’ outpatient drugs (or, more precisely, a subset of them) to 22.5% less than the average sales price. That was still generous, since on average the 340B discount is about one-third of a drug’s price. But it was much less generous than before, and Medicare estimated that the change would save taxpayers $1.6 billion every year.
The American Hospital Association, together with two hospital trade groups and three hospitals, filed suit. Had Medicare chosen option one, the plaintiffs argued, it could have focused on acquisition costs and even distinguished among hospital groups in setting payment rates. Instead, it chose option two, which says that Medicare must pay a drug’s “average price” — not its acquisition price — and doesn’t provide for discriminating between hospitals. While the plaintiffs acknowledged that Medicare could “adjust” the average price, they argued that a cut from 106% to 77.5% of the average sales price was not really an adjustment. It was a wholesale revision of the statutory scheme.
The plaintiffs encountered an obstacle right out of the gate. To prevent courts from second-guessing Medicare’s choices about how much to pay for outpatient care, the Medicare statute says that “[t]here shall be no administrative or judicial review” of those choices. In the government’s telling, Congress precluded review because Medicare has a fixed annual budget for outpatient care. Increasing payments for one type of care thus requires cutting payments for other types of care.
That linkage means that, if the plaintiffs win, it’s not just that they should have been paid more for certain drugs. It’s that all hospitals should have been paid less for other services. (That helps explains why coalitions representing rural and for-profit hospitals have filed amicus briefs in support of Medicare.) Unwinding that decision would be an administrative nightmare — which is why Congress precluded review in the first place.
As the plaintiffs see it, however, the government simply misreads the scope of the preclusion language. Though it generally precludes review of reimbursement decisions relating to outpatient care, it doesn’t cross-reference the subsection relating to outpatient drugs. Both the district court and the U.S. Court of Appeals for the District of Columbia Circuit agreed, invoking the strong presumption favoring judicial review of agency action.
On the merits, the plaintiffs fared less well. Though they won in the district court, the D.C. Circuit held that Medicare reasonably read the 2003 law to allow it to align hospital reimbursement with hospital acquisition costs. Medicare’s interpretation — and the scope of its authority to “adjust” payment rates — was thus owed deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council, a 1984 decision holding that courts generally should defer to agencies’ reasonable interpretations of ambiguous statutes. Judge Cornelia Pillard dissented, arguing that the statute unambiguously foreclosed Medicare’s interpretation.
The plaintiffs asked the Supreme Court to review a single question: whether Medicare should receive Chevron deference for interpreting the 2003 law in the manner that it did. Tantalizingly, the plaintiffs noted 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.”
The Supreme Court bit. In its order granting certiorari, however, the court instructed the parties to brief an additional question: whether the Medicare statute precludes the lawsuit. What that means is that — in addition to resolving whether hospitals are entitled to billions of taxpayer dollars — the court will have the chance to address two foundational doctrines of administrative law: the presumption of reviewability and Chevron deference.
Arguably, AHA v. Becerra offers an unusually vivid example of the costs of a strong presumption of reviewability. If the plaintiffs win, what’s the remedy? Is Medicare supposed to reopen every outpatient payment decision that it’s made since 2018, given that paying more for 340B drugs means it should have paid less for other services? The plaintiffs say no, arguing that Medicare wouldn’t be required to make any retroactive adjustments. But the government fears otherwise and the answer is not at all clear. Isn’t that the kind of mess that preclusion is meant to avoid?
I’ve called in my academic work for abandoning the presumption of reviewability precisely because it disrespects Congress’ reasonable desire to shield some administrative decisions from judicial review. In recent years, however, the Supreme Court has evinced no interest in doing so — the presumption of reviewability remains “strong.” We may soon find out just how strong it is.
But the big question about the case is whether the court will use it as a vehicle to reconsider Chevron deference. In the plaintiffs’ view, it is galling — “an affront to the separation of powers” — that the courts would defer when Medicare has exploited a purported ambiguity to sidestep Congress’ clear instructions about how much to pay hospitals. Several of the conservative justices, including in particular Justices Clarence Thomas and Neil Gorsuch, may be receptive to the argument. If so, the right wing of the court could use the case to narrow or even overturn Chevron, with potentially dramatic implications for the scope of executive-branch power.
Whether the court will do so is anyone’s guess. The justices could easily resolve the case on narrower grounds. Maybe the statute unambiguously forecloses Medicare’s interpretation of the law, as the plaintiffs argue. Or maybe, as the government claims, Medicare properly exercised its explicit authority to “adjust” prices for outpatient drugs.
Neither of those holdings would be the sexiest decision that the Supreme Court has ever issued. It would be technical, arcane — even boring. Given the financial stakes, however, it would be significant nonetheless.