ARGUMENT ANALYSIS

Justices mull Chevron and voice skepticism of Medicare’s rate cut for hospital drugs

On Tuesday, in American Hospital Association v. Becerra, the Supreme Court appeared receptive to the claim that Medicare overstepped its authority when it cut the amount that it paid certain hospitals for drugs they dispensed in their outpatient departments. None of the justices voiced sympathy with the government’s argument that Congress had precluded judicial review of the question. And while oral argument mainly involved a technical discussion about statutory meaning, several of the conservative justices toyed with the possibility of abandoning Chevron deference — the principle that the courts will defer to an agency’s reasonable interpretation of the statute that it administers.

Don Verrilli, a former solicitor general of the United States, argued the case for the hospitals. Right out of the gate, Justice Clarence Thomas asked Verrilli if he was “arguing that we should overrule Chevron to get to the statutory approach that you’re taking.” Verrilli demurred, saying that “we think this is a situation in which the statute is clear, unambiguous … and, therefore, that one doesn’t get to the question of whether Chevron needs to be overruled.”

From there, questions turned to the relevant portion of the Medicare statute, which allows Medicare to “adjust” the amount that it reimburses hospitals for outpatient drugs when doing so is consistent with the “purposes of this paragraph.” Justice Stephen Breyer said he’d read the paragraph “two or three times” and he thought that “the point seems to be to pay the hospitals what they actually pay for the drugs, which sometimes you can figure out and sometimes you can’t. And when it says ‘adjust’ for purposes, [it] mean[s] adjust so that you get closer to what the hospitals are really paying for those drugs. And that’s what [Medicare] did.” Chief Justice John Roberts picked up on the theme. “It does seem to me you have to have some limiting principle for what ‘necessary for purposes of this paragraph’ means, or your case is pretty — well, I think it might be wrong, right? … So what does it mean?”

That’s about as rough as the questioning got. And Verrilli didn’t get much pushback on his main response, which was that “Congress doesn’t just legislative objectives, it legislates the means by which those objectives are to be accomplished.” In his view, the law was clear: Unless Medicare has done a study that looks at actual hospital acquisition costs, it must pay the average sales price, period. The purpose of the law, Verrilli argued, could be readily inferred from the text. By fixing payments to the average sales price, Congress sought to “avoid political favoritism and avoid powerful interests going in to the agency and jawboning the agency into giving them higher rates based on whatever formula they can come up with.”

Justice Samuel Alito returned the conversation to Chevron. “If the only way we can reverse the D.C. Circuit is to overrule Chevron,” asked Alito, “do you want us to overrule Chevron?” “Yes,” Verrilli shot back. “We want to win the case.” Justice Neil Gorsuch followed up by asking Verrilli what should replace Chevron if the court abandoned the doctrine. But Verrilli kept his answer focused on the statutory question: “There’s clearly a best reading of this statute, and it’s our reading.”

Justice Brett Kavanaugh didn’t join in the questions about overturning Chevron. He instead asked Verrilli if his argument was basically to “take footnote 9 of Chevron seriously” — a footnote that urges the courts to “emplo[y] traditional tools of statutory construction” in order to “ascertai[n] that Congress had an intention on the precise question at issue.” Verrilli confirmed that it was.

Arguing on behalf of the federal government, Assistant to the Solicitor General Christopher Michel faced a skeptical bench. Justice Elena Kagan may have summed up the mood most pithily: “The provision says, if you have survey data, you do one thing” — pay acquisition costs — “and if you don’t have survey data, you do a different thing” — pay the average sales price plus 6%. Other justices sounded similar themes. If Medicare could just “adjust” what it paid hospitals whenever it didn’t have survey data, Thomas asked, “why would you ever collect survey data?” Roberts said that “you seem to think [the authority to ‘adjust’] means everything.” Justice Sonia Sotomayor thought it was weird that Congress said in one part of the Medicare statute that 340B discounts weren’t to be taken into account when calculating the average sales price, but that Medicare went ahead and took them into account as an “adjustment.”

Michel had solid answers for all of these questions. “How could you be clearer about what the purposes of the paragraph are,” he said, “than to read [the opening] subclause of that paragraph which says that you can set the rate at average acquisition costs?” Medicare couldn’t just make adjustments willy-nilly: It had to support its adjustments with evidence and avoid distinguishing among hospitals based on factors that didn’t relate to what it cost them to buy drugs. Here, however, the evidence clearly showed that the only hospitals targeted by the rate cut — those that participated in the 340B program — were getting paid far above their costs. And the point of the Medicare statute has never been to subsidize 340B hospitals; instead, it “has a pervasive focus on cost-based reimbursement.”

Several of the justices, Kagan chief among them, remained skeptical. Returning to Chevron, Justice Amy Coney Barrett asked whether the ambiguity in the statute might raise “just an interpretive question, you know, the classic problem of statutory interpretation that a court should resolve, as opposed to one that reflects some sort of delegation to the agency.” Gorsuch chimed in with a similar point, noting that, in normal cases, “we go down and apply all the tools of statutory interpretation, as Chevron footnote 9 says, … and we come up with an answer. It may be 51/49. It may be really close. … So why shouldn’t that be true here?”

Gorsuch followed up with what may be the most vexing question in the case: “What’s ambiguous enough to trigger deference to the government?” Michel’s response was that “you could write a whole law review article on that,” to which Gorsuch replied, “Somebody has.” (He’s right.) But it was Verrilli who had the last word — and he may have captured the mood of the court. “The question with respect to Chevron deference is how much ambiguity is enough,” he said. “I think the answer is way more than you have here.”