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Medicare drug-pricing case puts deference standard in high court’s crosshairs

Nearly 40-year precedent is under fire as the court’s justices debate a case concerning billions of dollars in drug payments.  

WASHINGTON (CN) — The high court’s justices toyed with overturning the cornerstone doctrine on agency deference Tuesday in oral arguments over a government reimbursement scheme alleged to underfund safety-net hospitals. 

Justice Clarence Thomas opened the argument session by asking directly if the court should overrule the 1984 case Chevron USA Inc. v. Natural Resources Defense Council Inc., which holds that a court may not substitute its own opinion in the place of a reasonable interpretation made by an administrative agency.

“Are you arguing that we should overrule Chevron to get to the statutory approach that you're taking,” the Bush appointee asked. 

Justice Samuel Alito came back to this question later on in the arguments. 

“If the only way we can reverse the D.C. Circuit is to overrule Chevron, do you want us to overrule Chevron,” the Bush appointee pressed.  

Donald Verrilli Jr. — an attorney for Munger, Tolles & Olson representing the American Hospital Association — said yes. 

Justice Neil Gorsuch pondered what could replace Chevron if the court did decide to do away with the precedent. The Trump appointee then suggested that the government was using the precedent to its advantage to avoid oversight, referencing Monday arguments in a separate case about Medicare. 

“If the government can't tell us how much ambiguity is enough 40 years almost after Chevron," Gorsuch said, "and these cases … tend to arise in circumstances just like this, where the government is seeking deference for a rule that advantages it — we saw one yesterday, here’s another one — advantages the federal fisc at the expense of hospitals that serve low-income patients and who are relatively politically powerless and cannot capture agencies or lobby them as effectively as others.” 

The case that could overturn the almost 40-year precedent concerns how the Department of Health and Human Services reimburses hospitals that serve low-income and underserved communities through a provision of Medicare Part B. These hospitals — categorized as 340B hospitals — are reimbursed for prescription drugs at a different rate than other hospitals to subsidize the critical services they offer to safety-net hospitals. In 2018, HHS changed its policy to eliminate the gap between Medicare reimbursement rates and 340B hospitals’ drug costs, resulting in a $1.6 billion cut in annual funding to safety-net hospitals.  

The hospital group filed a federal complaint, alleging HHS had violated the directive by changing rates for one hospital group but not the others. Though the district court agreed, ruling that the policy change was a “patent violation of agency authority," the D.C. Circuit reversed this ruling using Chevron

While some of the justices seemed intrigued by the idea of doing away with Chevron, Justice Stephen Breyer came out strongly against overruling the precedent. Breyer said his natural instinct would be for him to look to Chevron deference to decide the case but he doesn’t actually think it should be used in this case. 

“Ah, but Chevron's controversial, etc., and, actually, when you think about it, Chevron's the wrong case because whatever Congress wanted done here, it didn't want to give the agency to choose, they did something definite.” 

The justices seemed more accepting of the hospital group’s argument which said that Congress specifically defined how these rates should be calculated and HHS did not follow their instructions. 

“This was — I mean, micromanaging may be putting it a little too strongly — but Congress legislated with respect to this category of drugs in minute detail,” Verrilli said. “It said, you're going to either do it this way, acquisition costs with a cost study that’s statistically significant, or you're going to do it that way, you're going to set the average price for the drug for the year using the statutory formula.”  

Christopher Michel, assistant to the U.S. solicitor general, said Congress made Medicare “knowingly and dramatically overpay” 340B hospitals for drug reimbursements and warned about destabilizing the Medicare system. 

​​”Those rates are bound together by the statutory budget neutrality requirement and invalidating them years after payments have gone out the door would badly destabilize the Medicare system,” Michel said. 

Justice Brett Kavanaugh took issue with Michel’s characterization of the payments. 

“The word overpayment with respect to 340B hospitals is questionable,” the Trump appointee said. 

Justice Elena Kagan sparred with Michel over a survey that the agency was supposed to conduct to make rate changes. 

“The basic statutory structure here is you can charge acquisition cost when you've done a survey, and when you haven't done a survey — which the agency has refused to do for years — well, then you don't get to do this, you have to do something else,” the Obama appointee said. 

Breyer said the government’s interpretation of the statute gave them too much power. 

“I don't really see how a reasonable person in Congress would have wanted to give the agency the power to first interpret it the one way then interpret it the other way,” the Clinton appointee said. 

Verrilli underscored what the court’s ruling could mean for safety-net hospitals as well as other Medicare beneficiaries who he said could pay more for services as a result of the judgment. 

“I think it's important to understand the full picture that you take this $1.6 billion away from these hospitals, you are reducing the care that they provide to underserved populations by that amount,” Verrilli said. “At the same time, other Medicare beneficiaries are going to pay more because this statute is budget neutral — that's true — but what that means is that there's an extra billion six a year that raises the reimbursement rates for other services, which in turn raise the co-pays for those other services. So other people are going to be paying more as a result of this judgment.” 

The Department of Justice declined to comment further on the case following oral arguments, and the hospital group did not respond to requests for comment. 

The Supreme Court took up the appeal by the hospitals in its last order list before summer break.

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