The concept of “administrative deference” is a key component to the modern regulatory state. An important aspect of administrative deference is the “Chevron doctrine,” i.e. the concept that the courts should defer to relevant agencies’ interpretations of ambiguous statutes they are tasked to administer.

The Chevron doctrine is rooted in the US Supreme Court’s 1984 decision in Chevron v. National Resources Defense Council, which evaluated two competing interpretations of the federal Clean Air Act. Some practitioners have observed that the Supreme Court has grown increasingly suspicious of the power of the executive branch and speculate that precedent establishing the “Chevron doctrine” may be overturned or limited in keeping with other recent decisions focused on regulatory – not statutory – deference.

The Court’s recent, unanimous decision in American Hospital Association v. Becerra could appear to be consistent with that speculation in that it reflects a “Chevron”-style analysis without mentioning the doctrine (even though the case was discussed at length at argument and in various Supreme Court briefing). The decision provides two main takeaways for the regulated community:

1. The Court appears to have applied a higher bar for ambiguity: With Becerra, the Court appears to signal that a significant level of ambiguity is necessary before accepting an agency’s interpretation. Under traditional Chevron analysis, the Court would first look at the text of the relevant statutes and assess whether or not statutory ambiguity is present. A divided panel of the DC Circuit noted a contradiction between the intentions of the reimbursement-rate provisions (to align the reimbursement rates more closely to the actual costs to hospitals) and the plain text limiting the US Department of Health and Human Services (HHS) and current US Secretary of Health and Human Services Xavier Becerra’s ability to adjust rates, and found that created enough ambiguity to warrant deference to the agency under Chevron.

The Supreme Court disagreed and held that the statutory provisions at issue were “straightforward.” That there was a divergence in opinion between the DC Circuit and Supreme Court – probably the two courts which most frequently encounter federal statutes – indicates that the presence of statutory ambiguity may sometimes be in the eye of its beholder.

2. No Mention of “Chevron” Deference: Chevron has been a guiding precedent for nearly 40 years and was a central focus of the parties’ briefings and oral arguments. Although much of the decision parallels a Chevron analysis, the 14-page opinion never mentions Chevron, reasonably perceived to be a key precedent in this area. Perhaps given that Chevron is left unmentioned, the decision does not overturn Chevron – even though numerous amici briefs asked for Chevron to be overturned -- it illustrates a path future courts could follow to reject the statutory interpretations of federal agencies under the guise of reviewing statutory plain meaning.

Statutory vs. Regulatory Deference

Deference-related Supreme Court decisions have appeared with regularity in recent years as groups challenge the concentration of power in federal agencies. The past decade has seen all three branches weigh in on the role each branch has vis-à-vis one another.  Examples include the Trump Administration expressing a desire to “deconstruct the administrative state,” in part through limiting the ability of agencies to back-fill “gaps” in statutes; with conservatives in Congress pushing legislation to have courts review statutory language “de novo” – i.e. with no deference whatsoever granted to agencies; and with courts themselves expressing a desire to reassert a primary role in statutory interpretation. And indeed, the Supreme Court itself has recently wrestled with deference issues in cases, including Kisor v. O’Rourke, which held that courts will not defer to agencies’ interpretations of their own regulations outside of specified parameters. (See our detailed discussion of Kisor here.)

Case Background

This case involves “Section 340B” hospitals, which generally serve low-income or rural communities. Section 340B originates from a section of the 1992 Public Health Service Act This section established the “340B Program,” which required drug manufacturers to sign contracts with the HHS to set a price ceiling on what drug manufacturers could charge Section 340B hospitals in order to qualify their drugs for coverage under Medicaid.

Then, the 2003 Medicare Modernization Act required HHS to reimburse all hospitals for certain outpatient prescription drugs that hospitals provide to Medicare patients. Under this expansion, HHS is required to issue annual rules adjusting the Medicare reimbursement rates for certain outpatient prescription drugs so that the reimbursement rates for these drugs more closely track the actual cost to hospitals.

HHS is allowed to set the reimbursement rates using one of two measures: HHS may conduct a survey of the actual cost that groups of hospitals spend to acquire a drug; or HHS may use the average price charged by manufacturers for a drug. From 2003 until 2018, HHS never conducted a survey and relied only on average sales-price-data provided by manufacturers to set reimbursement rates.

During its rulemaking in 2018, HHS proposed a change to reimbursement rates for Section 340B hospitals, but not other hospitals. Because Section 340B hospitals are charged below-average prices for certain drugs, HHS reasoned that reimbursement rates based on average sales prices were effectively overpayments that allowed Section 340B hospitals to generate significant profits at a large cost to the Medicare program and Medicare patients.

Section 340B hospitals and related industry groups challenged the rulemaking on the grounds that the provisions of the 2003 Medicare statute precluded HHS from adjusting rates differently for different kinds of hospitals without first conducting a survey. Section 340B hospitals further pointed out that the reimbursement payments for prescription drugs helped them offset the significant costs associated with providing healthcare to un- or underinsured rural and low income communities.

Petitioners succeeded at the district court in challenging these yearly adjustments as outside HHS’s statutory authority. The DC Circuit Court of Appeals reversed, holding that HHS was entitled to Chevron deference for its interpretation of the Medicare statute. Petitioners then sought Supreme Court review.