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U.S. Supreme Court Strikes Down HHS and EPA Actions, Signaling Renewed Oversight Over Agency Action

For nearly 40 years, federal courts have routinely upheld agency action under the principle of judicial deference established in the seminal case of Chevron U.S.A. v. Natural Resources Defense Council, Inc., which requires courts to uphold an agency’s interpretation of the statute it administers if the statutory language is ambiguous, and the agency’s interpretation is reasonable. Critics have argued that federal judges have been too quick to find an ambiguity in the face of complex and often dense statutory language and rush to defer to an agency’s interpretation, secure in the knowledge that Chevron deference will provide cover for their rulings.

However, this past June the U.S. Supreme Court issued two decisions addressing the outer limits of agency power in American Hospital Association v. Becerra and West Virginia v. Environmental Protection Agency, signaling renewed judicial oversight over agency action.

In AHA v. Becerra, the Court admonished the Department of Health and Human Services (HHS) for improperly lowering drug reimbursement payments to hospitals that serve low-income communities under a program called “340B,” finding that the Medicare statute explicitly and solely permits HHS to set the reimbursement rate for hospitals for certain outpatient prescription drugs that the hospitals provide to Medicare patients using only one of two methods:

  • If HHS conducted a survey of hospitals’ acquisition costs for prescription drugs, then HHS may set the reimbursement at the average of the hospitals’ acquisition costs.
  • If HHS did not conduct a survey, then HHS is required to set reimbursement rates at the average sales price charged by manufacturers for the drugs, i.e., 106% of the drug’s average sales price, and is prohibited from varying reimbursement rates for different groups of hospitals.

Without conducting a survey, in 2018 and 2019, HHS established two separate reimbursement rates, substantially reducing the reimbursement rates for 340B hospitals to 77.5 % of the average sales price for each drug while at the same time maintaining the historical rate of 106% of the average sales price for non-340B hospitals. This resulted in a reduction in the reimbursement rates for 340B hospitals of about $1.6 billion annually. However, the Court held in AHA v. Becerra that because HHS did not conduct a survey of hospitals’ acquisition costs (as required by the express language of the Medicare statute), it acted unlawfully by reducing the reimbursement rates for 340B hospitals.

Further, in West Virginia v. EPA, the Court determined that a Congressional statute, authorizing the EPA to establish emissions caps at a level reflecting “the application of the best system of emission reduction . . . adequately demonstrated,” did not empower EPA to devise carbon emissions caps based on a generation-shifting approach, i.e., by restructuring the nation’s overall mix of electricity generation, to transition from 38% to 27% coal by 2030. By taking this generation-shifting approach, EPA broke from its 50-year history of setting performance standards under the Clean Air Act based on measures that would reduce pollution by causing plants to operate more cleanly.

Applying what is known as the “major questions doctrine,” the Court held that EPA did not have the authority under the language of the Clean Air Act to promulgate regulations that would essentially reconfigure electric energy production nationwide from coal-generated power plants to solar, wind and gas powered plants. Rather, the Court noted, such a dramatic shift in policy is a matter for Congress.

Both decisions are notable particularly because they ignore Chevron and find instead that agency authority is limited by the language and scope of the agency enabling statutes. In AHA v. Becerra, the agency’s power was clearly defined in the Medicare statute and in West Virginia v. EPA, the scope of the extraordinary power claimed by EPA for itself was not granted by Congress in any textual provision of the Clean Air Act. The upshot of these decisions is that federal agencies must be circumspect about relying on innocuous statutory language or general “catch all” provisions to justify their actions where such language or provisions do not (and were never intended to) authorize agency action.

Hospitals should vigilantly monitor HHS’s regulatory actions which adversely affect Medicare reimbursement to ensure that such actions are supported by clear Congressional authority rather than simply by an exploitive interpretation which aggrandizes HHS’s own power.

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