By: Stuart Silverman
In a unanimous decision, the Supreme Court on June 15, 2022, in American Hospital Association, et al. v. Xavier Becerra, et al., ruled that the Secretary of the Department of Health and Human Services (“the Secretary” or “HHS”) exceeded statutory authority to establish payment rates for hospital outpatient drugs for 340B hospitals under Part B of the Medicare program. In so ruling, the Court, as a threshold matter, ruled that the Medicare statute does not preclude judicial review of the Secretary’s rate setting for the hospital outpatient drugs at issue in the case. The Supreme Court’s ruling in AHA v. Becerra reverses the decision rendered by a divided panel of the D.C. Circuit on the underlying merits of rate setting for the two years at issue, 2018 and 2019.
This Article will address the nature of the reimbursement dispute in the case, the decision by the court of appeals, and the Supreme Court’s ruling and analysis that favored the Petitioners, and rejecting Chevron deference, thereby declining to apply the Secretary’s reading of the statute. The article also concludes with observations on how the Court’s decision is an attempt to assume its traditional judicial role of engaging in statutory interpretation rather than abdication of that role in favor of agency deference to legislative enactments.
Pursuant to statutory authority, the Secretary, through rulemaking, established an Outpatient Prospective Payment System (“OPPS”) for the payment of certain drugs under Medicare Part B for hospital outpatient services. Those drugs are known as “specified covered outpatient drugs”(“SCODs”). Under the OPPS, the Secretary sets payment rates annually. The rates for hospital outpatient drugs at issue here, subject to legal challenge, were set for years 2018 and 2019, and applicable for hospitals that received discounts under the 340B Program. The lawsuit challenging the rates for SCODs was brought by hospitals and hospital associations whose members participate in Medicare and the 340B drug discount program under the Public Health Services Act.
The operative statutory language for payment rates for SCODs is codified at 42 U.S.C. § 395l(t)(14)(A)(iii)(I) and (II). As pertinent here, the statute reads that such rates shall be equal to:
(I) the average acquisition cost for the drug for that year (which, at the option of the Secretary, may vary by hospital group…), as determined by the Secretary taking into account the hospital acquisition cost survey data under subparagraph (D) (“Subclause (I)”); or
(II) if hospital acquisition cost data are not available, the average price for the drug in the year established under… (42 U.S.C. § 1395w3a)…as calculated and adjusted by the Secretary as necessary for the purpose of this paragraph (“Subclause (II)”).
The payment rates derived under Subclauses (I) and (II) are subject to adjustments to account for “overhead and related expenses” under Section 1395l(t)(14)(E)(i). The statutory text for the two methodologies identified above for SCODs was the subject of competing interpretations in AHA v. Becerra.
Subclause (I) commands the Secretary to set reimbursement rates for SCODs in a given year based on average acquisition cost for a drug. To do this, it was contemplated by Congress that the Secretary would consider a hospital’s acquisition cost survey data for SCODs, as specified under subparagraph D of 42 U.S.C. § 1395l(t)(14). Subparagraph D specifies that in years 2004 and 2005, survey data would be acquired and furnished to the Secretary for setting rates for 2006, in addition to a recommendation on methodology and frequency for subsequent surveys by the Secretary. The Secretary was directed to undertake for subsequent years surveys to determine the hospital acquisition cost (“shall conduct periodic…surveys”) in setting payment rates for SCODs. Since 2006, though, HHS has not had the hospital acquisition cost survey data, contemplated under Subclause (I). Thus, for the setting of annual rates for SCODs, HHS used, as mandated under Subclause (II), the “average price” of a drug. HHS has viewed average sales price data reported by drug manufacturers as representing a more reliable estimate, and a proxy for, average acquisition costs. By way of a statutory reference, a drug’s “average price” has always equated to a figure that is 104 percent to 106 percent of “average sales price.” Thus, in the absence of hospital acquisition cost data, from 2013 to 2017, the payment rate for SCODs was 106 percent of average sales price, or ASP+6 %, for all hospitals.
For context, as has been noted, the controversy in AHA v. Becerra arose from the Secretary’s rate setting for SCODs purchased by hospitals which participate in the “340B Program.” Under that program, safety-net hospitals providing care to low-income underserved communities receive substantial discounts from drug manufacturers in the purchase of drugs.
For years 2018 and 2019, for the first time, HHS set payment rates for SCODs separately for non-340B hospitals and for 340B hospitals. Specifically, the agency deemed it more fiscally prudent to account for the discounts 340B hospitals received in the calculation of average sales price under Subclause (II). In this way, considering those discounts, substantial savings would be realized by Medicare under Part B, and beneficiaries would pay lower copays for drugs. To do this, HHS imposed its own interpretive gloss under Section 1395l(t)(14) (“par. 14”), resulting in reduced rates set for SCODs payable to 340B hospitals in 2018 and 2019 to account for the discounts 340B hospitals received under the 340B Program. Those discounts were not identified in the calculation provided in the statutory cross-reference under Subclause (II) to derive average sale price. Thus, in the two years at issue, for non-340B hospitals, the rate paid for SCODs was set at ASP+6 % for SCODs. For 340B hospitals, the rate was ASP-22.5% for SCODs. AHA brought the legal challenge contending that the downward adjustment in rates of ASP-22.5% for 340B hospitals exceeded the Secretary’s authority. According to Petitioners, the government’s rulemaking for 340B hospitals resulted in a nearly 30% cut in Medicare reimbursement, with more than $1.5 billion loss in revenue each year.
In the litigation, the parties had dueling views of par.14. Specifically, the government insisted that its construction of that paragraph is the more natural reading. The government’s overarching view of par.14 emphasized that Congress meant to set rates for SCODs that equate to the average acquisition costs of drugs. Thus, in the absence of cost survey data contemplated under Subclause (I), which was the case for 2018 and 2019, the Secretary was authorized to derive payment rates under Subclause (II), through statutory cross-reference, as a proxy for average acquisition costs for SCODs. HHS argued that it had consistently viewed Subclause (II) generally as a means to establish a proxy for “average acquisition cost” that is specified in Subclause (I). In the agency’s view, setting rates that reflect hospital acquisition costs is among the “purposes of” par.14. HHS thus employed the text in Subclause (II) allowing rates to be adjusted “as necessary for the purpose of this paragraph” to make downward adjustments to rates paid to 340B hospitals, which would account for discounts on drugs received by those hospitals.
AHA had a contrary view, insisting that par. 14 is clear on its face. Paragraph 14 provides for two distinctly different methodologies for setting payment rates. In the absence of cost survey data, mandated under Subclause (I) to calculate average acquisition cost, Congress expressly intended HHS to calculate rates based on average price, and not as a proxy for average acquisition cost under Subclause (II). Further, AHA rejected outright HHS’s reliance on the text of that subclause to make downward adjustments to payment rates for the group of 340B hospitals in rates paid for SCODs. In AHA’s view, allowance for adjustments under Subclause (II) is to be read narrowly and refers to “overhead and related expenses” provided under Section 1395l(t)(14)(E)(i), and other more modest changes to ensure accuracy in average price calculations. Simply put, Subclause (II) left no room for major reduction in rates to account for discounts received by 340B hospitals. Thus, AHA argued that par.14, when read literally, is absent ambiguity in the text that would necessitate Chevron deference afforded to the Secretary in implementing rate setting for SCODs.
In its decision upholding the Secretary’s interpretation of par. 14, the D.C. Circuit applied the two-step analysis under Chevron and framed the inquiry for Chevron deference. “[W]e first ask whether ‘Congress has directly spoken to the precise question at issue’.” The Court of Appeals wrote the “precise question…is whether HHS’s adjustment authority in subclause (II)” allows for “a reduction in SCOD…rates” to align payments to 340B hospitals “with actual costs to acquire the drugs.” The Court further explained that “[i]f the statute does not directly foreclose HHS’s understanding, we defer to the agency’s reasonable interpretation.” Applying Chevron deference, the D.C. Circuit concluded that HHS’s interpretation of Subclause (II) “is not directly foreclosed” and the agency’s reading of the statute “is reasonable.”
In its briefing papers before the Supreme Court on writ of certiorari, AHA, the Petitioner, rejected outright HHS’s reading of par. 14. Most fundamentally, without cost survey data acquired as contemplated under Subclause (I) of acquisition costs for drugs, AHA argued that the statute precludes HHS from setting rates by hospital group. Thus, HHS exceeded statutory authority to single out 340B hospitals as a separate group. AHA raised further doubt on HHS’s reading of par. 14. The agency relied on an authorization under Subclause (II) to adjust average price (“the average price of the drug…as calculated and adjusted…”) to derive rates for 2018 and 2019. AHA contended that exercising the authority to adjust rates, by accounting for discounts received by 340B hospitals, ascribes a meaning to the word “adjust” under Subclause (II) in such a “consequential” manner that ignores Congress’s intent. In passing the 340B program, Congress meant to provide financial relief, additional resources, to assist safety-net hospitals in treating underserved communities. “[T]he agency’s purported ‘adjustment’ seriously harms the ability of 340 hospitals to…provide essential services.”
HHS, in its brief filed before the Supreme Court, directly challenged AHA’s held view that Subclause (II) dictated that the Secretary overpay 340B hospitals for drugs even though more accurate data existed that would support downward adjustments in rates. When weighed against the text of Subclause (II), providing for rates “adjusted by the Secretary…for the purpose” of par. 14, the agency considered AHA’s view as “counterintuitive.” HHS argued that the purpose of par. 14 is to set rates that equate with acquisition costs of drugs for 340B hospitals. That reading is directly at odds with AHA’s view of the purpose of par. 14. The government concluded that even if par. 14 was ambiguous, which it did not concede, deference was owed to the Secretary in the decision to make downward adjustments to rates for SCODs to account for discounts received by 340B hospitals.
Finally, AHA, in its briefing papers, addressed Chevron deference that the D.C. Circuit panel majority applied in the case. In AHA’s view, a court needs to rigorously employ, and exhaust all efforts by applying, traditional tools of statutory construction. Only then may it deem the text of a law to be “genuinely ambiguous” and thus subject to principles of agency deference under notions of congressional delegation to the agency to implement the statute. While not conceding that par. 14 is ambiguous, AHA was particularly critical of the D.C. Circuit’s conclusion that Chevron allowed for agency deference in support of HHS since par. 14 “does not expressly forbid” the agency’s own interpretation of the statute. AHA suggested that application of Chevron, to resolve statutory ambiguities, in the manner employed by HHS, and affirmed by the D.C. Circuit, in this case brings into question the very viability of Chevron principles as controlling law.
The Supreme Court’s Decision
In concluding, as a matter of law, that the Secretary exceeded statutory authority in setting rates applicable to 340B hospitals, the Supreme Court applied the plain meaning rule in construing the Medicare statute. The Court looked to the text and structure of the statute, and found no ambiguity in the statutory provisions under par. 14.
Specifically, the Supreme Court wrote that under Subclause (I), the Secretary is required to conduct a survey to acquire data that would enable rates to be set at average acquisition cost for a drug, and allows the Secretary to vary rates by hospital group. Importantly, in the absence of survey data for a given year, Subclause II directs that payment rates for drugs be set at the average price of the drug. The Court made clear that since no survey data was acquired for 2018 and 2019, then the statute did not authorize the Secretary to vary payment rates by hospital group. It thus rejected outright attempts by the Secretary to vary payment rates for drugs based on hospital groups (340B hospitals and non-340B hospitals) for the two years at issue. The Supreme Court took note that the Secretary relied on the language in Subclause (II) that allows for the average price for a drug to be calculated “and adjusted…as necessary for the purpose of this paragraph,” thus allowing for rates to be set by hospital group. The Court similarly viewed this reading as unpersuasive. The Court explained that any reference to rates that vary based by hospital group was solely authorized under Subclause (I), where the Secretary had survey data as contemplated under that particular provision to establish the acquisition costs of a drug. That was the clear reading of the statute. Since no survey data was available for 2018 and 2019, the Secretary exceeded statutory authority to single out 340B hospitals under Subclause (II). In the Court’s view, the text of the statute that allows rates to be adjusted under Subclause (II) serves an entirely different purpose. Subclause (II) requires the average price of a particular drug to be set in a given year, and thus any adjustment contemplated under Subclause (II) refers to the average price on a drug-by-drug basis, and not on a basis of hospital groups. The government seemed to suggest that it would never need to conduct a survey of cost data as required under Subclause (I) to afford it authority to set rates based by hospital group since it could simply rely on the adjustment language in Subclause (II) to set rates by hospital groups. The Court deemed the government’s view to largely rewrite the text of significant portions of the statute that is clear on its face.
The Supreme Court also rejected the government’s contention that the prospect of overpaying 340B hospitals in setting payment rates under par. 14 could not have been what Congress had intended. The Court emphasized that when the legislature enacted the payment program for outpatient drugs under Part B in 2003, surely Congress knew about drug discounts received by 340B hospitals, a program that dates back to 1992. Congress however did not express its concern about overpayment of drugs to 340B hospitals. It is thus reasonable to assume that additional funds received by that group of hospitals for drugs would be expended on other health services to low-income underserved communities.
It is clear that the Supreme Court based its decision on a reading of par. 14 that it found lacked any ambiguity. In doing so, it implicitly disregarded any application of Chevron deference. The government pressed the point that absent adjustments to rates paid to 340B hospitals to account for drug discounts received by those hospitals, 340B hospitals would be the recipients of windfalls in reimbursements from Medicare. The Court, though, was not persuaded by this argument. It viewed the government’s position on this as one solely based on policy considerations.
The history of the 340B program exemplifies congressional intent to afford additional financial resources to hospitals in the treatment of low-income underserved populations. Further, Congress has never raised a concern about discounts received by 340B hospitals as somehow affording such hospitals a windfall. Thus, policy concerns about that were ones that needed to be raised before the legislative branch in the first instance, rather than through any agency efforts via rulemaking to correct a perceived inequity of how 340B hospitals are reimbursed.
Since its announcement by the Supreme Court in 1984, the doctrine of Chevron deference, a judge-made rule, has been recognized as a bedrock of administrative law. Through the years though, it has been criticized as responsible for the encroachment of the “administrative state” in agency determinations about the meaning of statutes, and threatening the separation of powers between the three branches of government, the legislative branch, the executive branch and the judiciary. A central focus in the discourse on the meaning of Chevron has been, in some circles, the abdication of the respective roles of the legislative and judicial branches, with agencies assuming an ever-greater role in ascribing meaning to legislation enacted by Congress, on the grounds that a statute is ambiguous. The state of dominance of Chevron deference has been characterized as a lack of adherence to uniform application of that doctrine by the courts, including favoring other standards of review of agency action. Chevron deference has been justified by the delegation by Congress to an agency, through rulemaking, to exercise an interpretative function of legislation, predicated on agency expertise, an expertise that courts do not have, particularly involving complex regulatory regimes. To resolve the shifting roles between the legislative function and judicial function in the interpretation of statutes, the analysis has adhered to the traditional two-step process under Chevron to determine whether deference to an agency’s interpretation of a statute is appropriate. The courts have faced significant criticism in that the judiciary has been accused of rushing to conclude that an ambiguity in a statute exists, and thus courts simply defer to an agency’s interpretation, thereby abdicating the court’s role of interpreting congressional enactments.
Moreover, some courts have embraced a variant of the two-step model under Chevron that raises an initial inquiry, focusing on whether Congress, in the first instance, intended a delegation of authority to the agency to interpret a statute. This approach, known as “Chevron step zero,” is meant to provide boundaries to an all too often inclination to hastily conclude that a statute is ambiguous, thus leading to reliance on an agency’s reading on the justification of an implied congressional delegation of authority to an agency to construe a statute.
There was some speculation that the controversy in AHA v. Becerra could result in the Supreme Court overruling Chevron in view of the simmering criticism of Chevron. That did not happen. No concerted effort was made by the parties in AHA v. Becerra to overrule Chevron. Rather, the heart of the dispute centered on application of Chevron principles to the statute at issue. Each litigant claimed significant financial ramifications adverse to its interests should its reading of the statute not prevail. The Supreme Court’s ruling in AHA v. Becerra evidences the Court’s attempt to redress past criticism of the application of the Chevron doctrine by the judiciary. The Court declined to explicitly find ambiguity in the statutory text. Thus, employing its traditional role of interpreting a statute, it rigorously relied upon tools of statutory construction to derive the intent of Congress. In so doing, it avoided past criticism that courts have abdicated their judicial role of interpreting statutes, and too hastily deferred, under Chevron, to an agency’s interpretation of a statute.
 2022 U.S. LEXIS 2943 (June 15, 2022).
 42 U.S.C. § 1395l(t)(14).
 American Hospital Association, et al. v. Alex Michael Azar II, et al., 967 F.3d 818 (D.C. Cir. 2020).
 42 U.S.C. § 1395l(t).
 42 U.S.C. § 1395l(t)(14)(B) (“specified covered outpatient drugs” defined).
 See 42 U.S.C. § 256b(a)(4).
 42 U.S.C. § 256b. For simplicity, reference to those entities challenging the rates for SCODs will be denoted as “AHA” or “Petitioners.”
 42 U.S.C. § 1395l (t)(14)(D).
 42 U.S.C. §§ 1395l(t)(14)(A)(iii)(I), (II). Subclause (II) cross-references 42 U.S.C. § 1395w-3a which identifies a method for calculating drug reimbursement rates for drugs under Medicare Part B.
 42 U.S.C. § 1395l(t)(14)(E)(i).
 42 U.S.C. § 1395l(t)(14)(D)(ii).
 70 Fed. Reg. 68, 516, 68, 639-42 (Nov. 10, 2005).
 See 77 Fed. Reg. 68, 210, 68, 385-87 (Nov. 15, 2012); see also 82 Fed. Reg. 52, 356, 52, 494-95 (Nov. 13, 2017).
 See 82 Fed. Reg. 52, 356 (Nov. 13, 2017); 83 Fed. Reg. 58, 818 (Nov. 21, 2018).
 Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).
 American Hospital Association, 967 F.3d at 828 (internal quotation marks omitted).
 Brief for Petitioners at 14, 33 & 35, American Hospital Association, et al. v. Alex Michael Azar II, et al., 967 F.3d 818 (D.C. Cir. 2020) (No. 20-1114).
Id. at 40.
 Brief for Respondents at 36, American Hospital Association, et al. v. Alex Michael Azar II, et al., 967 F.3d 818 (D.C. Cir. 2020) (No. 20-1114).
 Id. at 36-37.
 Id. at 48.
 Id. 46-50.