American Hospital Association v. Alex Azar, II ( 2020 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 8, 2019 Decided July 31, 2020
No. 19-5048
AMERICAN HOSPITAL ASSOCIATION , ET AL.,
APPELLEES
v.
ALEX MICHAEL AZAR, II, IN HIS OFFICIAL CAPACITY AS THE
SECRETARY OF HEALTH AND HUMAN SERVICES AND UNITED
STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLANTS
Consolidated with 19-5198
Appeals from the United States District Court
for the District of Columbia
(No. 1:18-cv-02084)
Alisa B. Klein, Attorney, U.S. Department of Justice,
argued the cause for appellants. With her on the briefs were
Mark B. Stern and Laura E. Myron, Attorneys, Robert P.
Charrow, General Counsel, U.S. Department of Health &
Human Services, Janice L. Hoffman, Associate General
Counsel, Susan Maxson Lyons, Deputy Associate General
Counsel for Litigation, and Robert W. Balderston, Attorney.
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Thomas R. Barker and Andrew M. London were on the
brief for amicus curiae Federation of American Hospitals in
support of defendants-appellants.
William B. Schultz argued the cause for plaintiffs-
appellees. With him on the brief was Margaret M. Dotzel.
Before: SRINIVASAN, Chief Judge, and MILLETT and
PILLARD , Circuit Judges.
Opinion for the Court filed by Chief Judge SRINIVASAN .
Opinion dissenting in part filed by Circuit Judge PILLARD.
SRINIVASAN, Chief Judge: When hospitals provide
outpatient care to patients insured by Medicare Part B, the
federal government reimburses the hospitals for the care. Until
recently, the government reimbursed all hospitals at a uniform
rate for providing covered drugs. In 2018, though, the
Department of Health and Human Services reduced the
reimbursement rate for covered drugs by 28.5% for certain
hospitals known as “340B hospitals” by virtue of their
participation in the federal 340B Drug Pricing Program for
underserved populations. HHS cut the reimbursement rate for
340B hospitals because they can obtain drugs far more cheaply
than other hospitals. As HHS saw it, Medicare should not
reimburse hospitals more than they paid to acquire the drugs.
Several hospitals and hospital associations challenge
HHS’s decision, claiming that it rests on an impermissible
construction of the governing statute. The district court agreed
with the plaintiffs that HHS had exceeded its statutory
authority by reducing drug reimbursement rates for 340B
hospitals. We disagree. We hold that HHS’s decision to lower
3
drug reimbursement rates for 340B hospitals rests on a
reasonable interpretation of the Medicare statute.
I.
A.
The Medicare program provides health insurance to the
elderly and disabled. Medicare Part A provides coverage for
inpatient care, i.e., care provided while a patient is admitted to
a hospital or skilled nursing facility. Medicare Part B covers
various other services including outpatient (or same-day)
hospital care. Part B thus pays for certain drugs, such as
immunosuppressants or chemotherapy drugs, administered in a
hospital setting on an outpatient basis. Part B beneficiaries
generally pay 20% of their bill out of pocket as coinsurance.
The Department of Health and Human Services (HHS)
annually establishes Part B reimbursement rates through
notice-and-comment rulemaking. In setting the rates, HHS
uses the “Outpatient Prospective Payment System,” or OPPS.
See 42 U.S.C. § 1395l(t). See generally Am. Hosp. Ass’n v.
Azar, No. 19-5352, slip op. at 3–6 (D.C. Cir. July 17, 2020).
The OPPS requires HHS to fix the amounts it will pay
providers for certain services before the year begins (rather
than after the care has been provided). Congress moved to that
prospective system to enhance HHS’s ability to control Part B
costs. See Medicare Program; Prospective Payment System for
Hospital Outpatient Services, 65 Fed. Reg. 18,434, 18,436–37
(Apr. 7, 2000); Paladin Cmty. Mental Health Ctr. v. Sebelius,
684 F.3d 527, 528–29 (5th Cir. 2012).
For most types of covered care, the Medicare statute
instructs HHS to set annual OPPS reimbursement rates through
a complex formula that gives the agency significant discretion.
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See 42 U.S.C. § 1395l(t)(2). For certain kinds of services,
however, the OPPS limits that discretion and sets out a specific
methodology for calculating payment rates. That is the case
for certain drugs covered by Part B, known as “specified
covered outpatient drugs” or SCODs.
The statute requires HHS to calculate the reimbursement
rate for SCODs in one of two ways. First, under 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(I), which we will refer to as subclause
(I), HHS may use “the average acquisition cost for the drug . . .
as determined by the Secretary taking into account . . . hospital
acquisition cost survey data.” Second, under 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(II), which we call subclause (II), “if
hospital acquisition cost data are not available,” HHS must use
“the average price for the drug” as established by a separate,
cross-referenced statute. In the event HHS uses average price
under subclause (II), that price metric may be “adjusted by
[HHS] as necessary for purposes of this paragraph.” Id.
Since 2006, when those two statutory pricing alternatives
took effect, HHS has not had the “hospital acquisition cost
survey data” contemplated by subclause (I). As a result, HHS
has had to use the average price metric. See Medicare and
Medicaid Programs: Hospital Outpatient Prospective Payment
and Ambulatory Surgical Center Payment Systems and Quality
Reporting Programs, 77 Fed. Reg. 68,210, 68,385–86 (Nov. 15,
2012). The parties here agree that, by virtue of a statutory
cross-reference, a drug’s default “average price” equals 106%
of its “average sales price,” or ASP. See 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(II) (citing 42 U.S.C. § 1395w-3a(c)).
HHS calculates ASP every quarter using sales data
confidentially provided by drug manufacturers.
HHS’s average price “methodology . . . has always
yielded a finalized payment rate [for SCODs] in the range of
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ASP+4 percent to ASP+6 percent,” or 104% to 106% of ASP.
77 Fed. Reg. at 68,386. As a result, all hospitals have been paid
the same rate—104% to 106% of ASP—for SCODs. Medicare
Program: Hospital Outpatient Prospective Payment and
Ambulatory Surgical Center Payment Systems and Quality
Reporting Programs, 82 Fed. Reg. 52,356, 52,494–95 (Nov. 13,
2017). From 2013 to 2017, that rate was 106% of ASP,
unadjusted from the statutory default average price.
B.
That changed in late 2017, when HHS announced SCOD
payment rates for the upcoming 2018 OPPS year. Invoking its
subclause (II) authority to “adjust” the average price metric,
HHS for the first time established two separate rates: one rate
for hospitals participating in a drug discount program known
as the “340B program,” and another rate for all other hospitals.
The rate for non-340B hospitals remained at ASP+6%, or
106% of ASP. The rate for 340B hospitals was “adjusted”
down to ASP minus 22.5%, or 77.5% of ASP.
To understand HHS’s reasons for reducing SCOD
reimbursement rates for 340B hospitals, it is helpful to review
the background of the 340B program. The program takes its
name from the section of the Public Health Service Act that
authorizes it. See Pub. L. No. 102-585, § 602, 106 Stat. 4943,
4967–71 (1992). The program allows covered entities
(including eligible hospitals) to purchase drugs from
manufacturers at heavily discounted rates. See 42 U.S.C.
§ 256b(a)(4). The covered entities generally care for
underserved populations, and the discounted rates enable the
providers to “stretch scarce Federal resources as far as
possible.” H.R. Rep. No. 102-384 (II), at 12 (1992).
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The program requires manufacturers, as a condition of
having their drugs covered by Medicaid, to sell each covered
drug to 340B entities at a “ceiling price” (set by statutory
formula). 42 U.S.C. § 256b(a). The program covers at least
3,500 drugs, 82 Fed. Reg. at 52,494, and the government
estimates that 340B sales make up approximately 2.8% of the
total U.S. drug market. Health Resources and Services
Administration, Justification of Estimates for Appropriations
Committees Fiscal Year 2018, at 244, https://www.hrsa.gov/
sites/default/files/hrsa/about/budget/budget-justification-
2018.pdf.
Over the past several years, observers have raised concerns
about the intersection of the 340B program with Medicare Part
B. Government reports found that 340B hospitals typically pay
between 20% and 50% below ASP for covered drugs. When
hospitals provide 340B drugs that qualify as SCODs to
patients, the hospitals then seek reimbursement from Medicare
Part B. Until 2018, the reimbursement rate was 106% of ASP.
There was thus a large gap between the amount a 340B hospital
would spend to acquire a SCOD and the higher amount
Medicare would reimburse that hospital. The gap ranged from
25% to 55% of the cost of the drug. See, e.g., U.S. Government
Accountability Off., GAO-15-442, Medicare Part B Drugs:
Action Needed to Reduce Financial Incentives to Prescribe
340B Drugs at Participating Hospitals (June 2015),
https://www.gao.gov/assets/680/670676.pdf.
When it came time to set 2018 OPPS rates, HHS decided
to address the 340B-Part B payment gap. HHS believed that
the gap “allow[ed] [340B] providers to generate significant
profits when they administer[ed] Part B drugs.” 82 Fed. Reg.
at 52,494. Seeking to shrink those revenues, HHS imposed a
28.5% cut, from 106% of ASP to 77.5% of ASP, to the rates at
which it would reimburse 340B hospitals for SCODs. See id.
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at 52,496. The new rate was based on a “conservative”
estimate, presented by the Medicare Payment Advisory
Committee, that 22.5% below ASP equaled the “average
minimum discount that a 340B participating hospital
receive[d]” when purchasing SCODs. Id. HHS estimated that
its 28.5% cut to SCOD reimbursement rates for Part B hospitals
would save Medicare $1.6 billion in 2018. Id. at 52,509. As
called for by the OPPS statute, HHS did not pocket the savings,
but instead redistributed them to all hospitals in a budget-
neutral manner by raising other Part B reimbursement rates. Id.
at 52,623; see 42 U.S.C. § 1395l(t)(14)(H).
By addressing the 340B-Part B payment gap, HHS hoped
to mitigate “unnecessary utilization and potential
overutilization of [Part B] drugs.” Medicare Program: Hospital
Outpatient Prospective Payment and Ambulatory Surgical
Center Payment Systems and Quality Reporting Programs, 82
Fed. Reg. 33,558, 33,633 (July 20, 2017). HHS cited a GAO
study which found that 340B hospitals prescribed more drugs
than other hospitals, a disparity unexplained by salient
distinctions between the hospitals or their patient populations.
Id. at 52,494. HHS also sought to reduce the disproportionate
coinsurance payments borne by Medicare Part B beneficiaries
(mostly elderly patients) for 340B SCODs: because the
amount of a patient’s coinsurance payment is a fixed
percentage of the medical bill as measured by the OPPS
payment level, and because the latter amount for SCODs
exceeded 340B hospitals’ actual costs to obtain the drugs,
patients’ out-of-pocket coinsurance payments for SCODs
became inflated, sometimes even exceeding a hospital’s costs
to acquire the drugs. See id.Ultimately, HHS found it “inappropriate for Medicare to
subsidize other activities” by 340B hospitals—as laudable as
those activities may be—“through Medicare payments for [Part
8
B] drugs.” Id. at 52,495. In order to “better and more
appropriately reflect the resources and acquisition costs that
[340B] hospitals incur,” HHS acted to close the Part B-340B
gap. Id. (formatting modified). HHS relied on its authority to
“adjust” the average price metric under subclause (II) of the
statute:
We believe our authority under section
[1395l](t)(14)(A)(iii)(II) of the Act to “calculate
and adjust” drug payments “as necessary for
purposes of this paragraph” gives the Secretary
broad discretion to adjust payments for drugs,
which we believe includes an ability to adjust
Medicare payment rates according to whether
or not certain drugs are acquired at a significant
discount.
Id. at 52,499.
C.
The plaintiffs here are three hospitals and three hospital
associations, to whom we will refer collectively as the
Hospitals. On November 13, 2017, the day HHS published the
rule reducing 340B reimbursement rates for SCODs, the
Hospitals brought a challenge to HHS’s action. See Am. Hosp.
Ass’n v. Hargan, 289 F. Supp. 3d 45, 50 (D.D.C. 2017). The
district court dismissed the suit on the ground that the Hospitals
had yet to present a concrete claim for payment to HHS, as
required by statute. See id. at 47. We affirmed. Am. Hosp.
Ass’n v. Azar, 895 F.3d 822, 828 (D.C. Cir. 2018).
The Hospitals quickly submitted payment claims as
required. HHS rejected them, claiming that the Medicare
statute precludes administrative review of adjustments to OPPS
9
payment rates, including SCOD reimbursement rates. The
Hospitals then filed this action. Before the district court ruled,
HHS promulgated OPPS rates for fiscal year 2019, which
retained the 28.5% SCOD reimbursement cut for 340B
hospitals that the Hospitals had initially challenged. 53 Fed.
Reg. 83,818 (Nov. 21, 2018). After submitting additional
payment claims, the Hospitals filed a supplemental complaint
challenging the 2019 Rule as well. See Suppl. Compl. ¶¶ 73–
75 (Dkt. 39).
This time, the district court reached the merits. After
concluding that the Medicare statute did not preclude its review
of the reductions in SCOD reimbursement, the court held that
the rate cut exceeded HHS’s statutory authority to “adjust”
SCOD rates. Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62, 79
(D.D.C. 2018). The court remanded to the agency to come up
with a remedy in the first instance. The court then entered final
judgment, paving the way for this appeal.
II.
We must first address a threshold challenge to our
jurisdiction. The government asserts that paragraph
1395l(t)(12) of the OPPS statute, 42 U.S.C. § 1395l(t)(12),
precludes judicial review of HHS’s adjustments to SCOD rates.
The district court disagreed, and so do we. Unable to find
“clear and convincing evidence that Congress intended” that
result, as would be required to overcome the “strong
presumption that Congress intends judicial review of
administrative action,” we conclude that the challenged rate
adjustment is subject to judicial review. Amgen, Inc. v. Smith,
357 F.3d 103, 111 (D.C. Cir. 2004) (quoting Bowen v. Mich.
Acad. of Family Physicians, 476 U.S. 667, 670 (1986)).
10
Paragraph 1395l(t)(12) states that “[t]here shall be no
administrative or judicial review” of certain enumerated
actions undertaken by HHS in administering the OPPS. The
question is whether changes to SCOD reimbursement rates are
among the listed, nonreviewable actions. The government says
yes, contending that changes to SCOD reimbursement rates fall
within two provisions of paragraph (12): subparagraphs
(12)(A) and (12)(C).
The first provision, subparagraph (12)(A), bars review of
the “development of the classification system under paragraph
(2), including the establishment of groups and relative payment
weights for covered OPD [outpatient department] services, of
wage adjustment factors, other adjustments, and methods
described in paragraph (2)(F).” 42 U.S.C. § 1395l(t)(12)(A);
see also Am. Hosp. Ass’n, No. 19-5352, slip op. at 11. The
second provision, subparagraph (12)(C), bars review of
“periodic adjustments made under paragraph ([9]).” Id.
§ 1395l(t)(12)(C). (While the provision in fact refers to
“paragraph (6),” all agree that the reference contains a
scrivener’s error and that Congress in fact intended to refer to
paragraph (9).) The reach of subparagraphs (12)(A) and
(12)(C) turns on the scope of the provisions they cross-
reference: paragraphs (2) and (9), respectively.
Begin with paragraph (2), which sets out the general
methodology HHS must use to set standard OPPS payments.
Under paragraph (2), HHS “develop[s] a classification
system.” Id. § 1395l(t)(2)(A). In doing so, HHS groups certain
medical services together that are “comparable clinically and
with respect to the use of resources.” Id. § 1395l(t)(2)(B). The
resulting groups are known as ambulatory payment
classifications, or APCs. Next, HHS establishes “relative
payment weights” for the grouped services in an APC based on
hospital costs. Id. § 1395l(t)(2)(C). HHS then sets default
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payment amounts for the services in each APC corresponding
to the weights.
Paragraph (9), meanwhile, requires HHS to annually
review and adjust the standard OPPS payment rates initially set
under paragraph (2). Specifically, HHS must reassess its
grouping and weighting decisions, as well as the other separate
payment adjustments it makes under paragraph (2) (such as
labor-cost adjustments), to “take into account changes in
medical practice, changes in technology, the addition of new
services, new cost data, and other relevant information and
factors.” Id. § 1395l(t)(9)(A).
HHS determines most annual OPPS payment levels
through the exercise of paragraph (2) and (9) authority. Recall,
however, that the Medicare statute does not allow HHS to use
that discretion-laden authority to establish payment rates for all
Part B services. Reimbursement rates for specified covered
outpatient drugs—the rates at issue here—instead must be
keyed to one of two statutory formulas set out in paragraph
1395l(t)(14): average acquisition cost (if hospital cost data are
available) under subclause (I), or average price under subclause
(II). SCOD payments “shall be equal” to one of those two
options. Id. § 1395l(t)(14)(A)(iii).
Returning to our original question of whether HHS’s
adjustment to SCOD reimbursement rates fall within the bars
on judicial review set out in subparagraphs (12)(A) or (12)(C),
the answer is no as a textual matter. Neither (12)(A) nor
(12)(C) addresses—and thus neither purports to preclude—any
action taken by HHS under paragraph (14) of the statute. And
none of the actions described in subparagraphs (12)(A) or
(12)(C) plausibly, let alone clearly, comprises SCOD
reimbursement adjustments.
12
In particular, subparagraph (12)(A) precludes review of
“the development of the [APC] classification system,” “the
establishment of groups and relative payment weights,” “wage
adjustment factors,” and “other adjustments.” Id.
§ 1395(t)(12)(A). As just discussed, SCOD rates are not set
using the paragraph (2) grouping and weighting process, so a
change to SCOD rates does not come under the first two of
those descriptions. Such a change is also not a “wage
adjustment[].” Nor is it covered by the term “other
adjustments,” which we have read to reach only the
“adjustments . . . necessary to ensure equitable payments”
under subparagraph (2)(E) (i.e., “equitable adjustments”), see
Amgen, 357 F.3d at 113.
Subparagraph (12)(C), similarly, does not by its plain
terms appear to cover SCOD payment reductions. It covers
“periodic adjustments made under paragraph [9].” 42 U.S.C.
§ 1395l(t)(12)(C). By the terms of paragraph (9), that annual
adjustment power extends only to actions initially taken under
paragraph (2). And as just discussed, none of those actions
textually corresponds to a decision to reduce SCOD rates.
Our analysis of the text draws support from Congress’s
history of amendments to the OPPS statute. When adding new
provisions to subsection 1395l(t), Congress has tended to say
expressly when it wishes to preclude judicial review of
decisions made under an added provision. In 1999, Congress
added paragraphs (5), (6), and (7) to subsection (t). In the same
legislation, Congress also added clause (E) to paragraph (12),
which provided that certain “determination[s]” made under
paragraphs (5) and (6), but not any decisions under paragraph
(7), would not be judicially reviewable. See Pub. L. No. 106-
113, § 201(d), 113 Stat. 1501 (1999). In 2015, Congress
included a preclusion-of-judicial-review provision directly
within the newly added paragraph (21), rather than amending
13
paragraph (12). See Pub. L. No. 114-74, § 603, 129 Stat. 584,
598 (2015). By contrast, when Congress added paragraph (14)
in 2003, it did so without any indication of an intention to
preclude judicial review of SCOD rate-setting decisions.
According to the government, though, Congress had no
need to expressly preclude judicial review of actions taken
under paragraph (14) because those actions are inherently ones
under paragraphs (2) and (9) (and thus necessarily fall within
the judicial-review bars in subparagraphs (12)(A) and (12)(C)).
The nub of the government’s argument is that paragraph (14)
does not in fact set up a “standalone payment regime” outside
the general paragraph (2) system. Appellant’s Reply Br. 15.
Rather, the government contends, paragraph (14) merely
“provides instructions to HHS about how to exercise its
paragraph 2 and 9 authority when setting and revising
payments” for SCODs. Id. On that view, even though HHS
must follow paragraph (14)’s specific commands when setting
the SCOD reimbursement rate, when HHS does so, it exercises
authority located not in (14) but in paragraphs (2) and (9).
Ultimately, it is the government’s burden to support that
theory by “clear and convincing evidence,” Amgen, 357 F.3d
at 111, especially given the absence of statutory text
unambiguously precluding judicial review. Applying that
standard, we are insufficiently persuaded of the proposition
that HHS’s authority to annually set SCOD rates is located in
paragraphs (2) and (9) rather than paragraph (14).
First, Congress on several occasions has specifically
noted, directly in the statutory text, that certain OPPS-related
decisions fall under paragraph (2). When Congress authorized
HHS to make “outlier adjustments” and “pass-through
payments,” it fleshed out how those actions would work in
paragraphs (5) and (6) respectively, but lodged the authority to
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make the adjustments in the newly added subparagraph (2)(E).
See 42 U.S.C. § 1395l(t)(2)(E). When Congress added
paragraphs (13) and (18), which address adjustments for rural
and cancer hospitals, respectively, it similarly provided that
those adjustments would fall under subparagraph (2)(E). 42
U.S.C. § 1395l(t)(13)(B) (“the Secretary shall provide for an
appropriate adjustment under paragraph (2)(E)”); id.
§ 1395l(t)(18)(B) (“the Secretary shall . . . provide for an
appropriate adjustment under paragraph (2)(E)”). But when
Congress added the SCOD reimbursement provisions of
paragraph (14) in 2003, it included no such language
referencing paragraph (2).
Second, both the statute’s text and HHS’s longstanding
practice strongly suggest that paragraph (2) and (9)’s
“adjustment” authorities do not encompass paragraph (14). If
setting SCOD rates were an exercise of paragraph (2) authority,
HHS would be authorized to use its subparagraph (2)(E)
equitable-adjustment authority to change the rates. But it does
not appear HHS may make such adjustments to SCOD rates.
As a matter of statutory text, paragraph (14) provides its
own authorizations for HHS to adjust SCOD rates. Subclause
(I) of paragraph (14), which sets out the average-acquisition-
cost formula, says that the Secretary “may vary [the calculated
reimbursement rate] by hospital group.” 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(I). Subclause (II), which requires SCOD
reimbursement to reflect a drug’s average price, allows the
Secretary to “calculate[] and adjust[] [the average price metric]
as necessary for purposes of this paragraph.” Id.
§ 1395l(t)(14)(A)(iii)(II). And both the average-acquisition-
cost and average-price formulas are “subject to subparagraph
(E),” which authorizes the Secretary to “adjust” SCOD
payments to account for “overhead and related expenses, such
as pharmacy services and handling costs.” Id.
15
§ 1395l(t)(14)(E). It would be odd for Congress in paragraph
(14) to provide HHS with those specific authorities to “adjust”
SCOD rates if HHS nonetheless has the general authority to
adjust those rates as it sees fit under paragraph (2) or (9).
HHS’s longstanding practice, and the 2018 and 2019 Rules
at issue here, corroborate that understanding. HHS has never
purported to use its paragraph (2) or (9) authorities either to set
SCOD rates or to deviate from the default “average price” rate
set out in subclause (II). And it did not do so here. Instead, in
the 2018 Rule, HHS grounded its action in in the “calculate and
adjust” provision of paragraph (14), subclause (II). 82 Fed.
Reg. at 52,499–500. The government claims that HHS invoked
its paragraph (9) authority in the 2018 Rule’s preamble. But
the preamble stated only that the Rule would “describe [that]
and various other statutory authorities in the relevant sections
of this final rule.” Id. at 52,362. And in the section of the Rule
explaining HHS’s statutory authority to make the 340B-related
reduction to SCOD rates, there is no reference to paragraph (9).
See id. at 52,496, 52,499–502.
Of particular note, HHS made no claim that the rate cut at
issue here was an exercise of its subparagraph (2)(E) equitable-
adjustment authority, even though the change might be seen to
serve equitable goals. HHS relied solely on its paragraph (14),
subclause (II) adjustment authority, even as it invoked its
subparagraph (2)(E) equitable-adjustment power in connection
with at least two other rate changes in the 2018 OPPS Rule.
See id. at 52,364–65 (explaining that HHS makes an additional
payment for radioisotopes used in diagnostic imaging “based
on the authority set forth at section [1395l](t)(2)(E)”); id. at
52,421 (“we are using our equitable adjustment authority” to
change reimbursement for retinal procedure).
16
Third, paragraph (14) operates as a standalone payment
regime for all practical purposes. The statute contemplates that
HHS will set SCOD payment rates in a vacuum, without taking
into account other OPPS rate-setting decisions. SCOD rates
are not set through relative weighting with rates for other
reimbursable care. And if HHS changes the payment weights
for other APCs, SCOD prices need not change because SCOD
rates are unaffected by the statute’s budget-neutrality
requirement. Recall that SCOD rates must equal either average
acquisition cost or average price. Although subparagraph
(14)(H) requires that “[a]dditional expenditures resulting from
this paragraph” be “taken into account” for overall budget
neutrality for the OPPS, that language recognizes that the
expenditures “resulting” from the application of paragraph (14)
will be calculated first, irrespective of other adjustments made
to other OPPS payments. 42 U.S.C. § 1395l(t)(14)(H). Only
then are those set-in-stone numbers put into the budget-
neutrality calculator.
On this score, HHS again has consistently read the statute
the way we do. See, e.g., 77 Fed. Reg. at 68,262 (“Payments
for [SCODs] are included in the budget neutrality
adjustments . . . but the budget neutral weight scaler is not
applied to their payments because they are developed through
a separate methodology, outside the relative payment weight
based process.”). That understanding of the statute’s structure
sits uncomfortably, to say the least, with HHS’s position in this
case that paragraph (14) does no more than instruct HHS how
to exercise its paragraph (2) and (9) authorities.
The government lastly relies on subparagraph (14)(H),
reading that provision to indicate that setting of SCOD rates is
an exercise of paragraph (9)’s annual-adjustment authority.
Subparagraph (14)(H), enacted along with the rest of paragraph
(14) in 2003, requires that SCOD payments be counted for
17
budget-neutrality purposes in years after 2005, but specifies
that the payments “shall not be taken into account” for budget-
neutrality purposes in 2004 and 2005. 42 U.S.C.
§ 1395l(t)(14)(H) (emphasis added); see also id.
§ 1395l(t)(9)(B). According to the government, the
specification that SCOD payments would not be subject to
budget neutrality in 2004 and 2005 suggests that budget
neutrality otherwise applies, which would be the case if SCOD
rate-setting were an exercise of paragraph (9) authority (given
that all paragraph (9) adjustments must be budget neutral, see
id. § 1395l(t)(9)(B)).
We disagree with the premise that SCOD rates can factor
into OPPS budget neutrality only if the setting of SCOD rates
is an exercise of paragraph (9) authority. It is at least possible,
if not probable, that Congress conceived of the SCOD rate-
setting program as entirely distinct from the general paragraph
(2) and (9) program, yet still wanted the output of the SCOD
program to matter for overall budget neutrality. Recall that
Congress required HHS to move to the prospective OPPS
system, constrained by a budget-neutrality requirement, in
order to control Medicare Part B spending and promote more
predictable annual growth. In view of those goals, Congress,
when creating a standalone payment regime for SCODs, might
still have wanted to achieve budget neutrality for Part B
payments as a whole. Thus, Congress’s choice to make that
desire explicit for years after 2005 (and to carve out the two
prior years) does not necessarily imply that HHS exercises
paragraph (9) authority whenever it adjusts SCOD rates.
To sum up: subparagraphs (12)(A) and (12)(C) do not, by
their terms, clearly cover HHS’s decision to cut SCOD
reimbursement to 340B hospitals. While the government
argues that SCOD rate-setting is merely a species of general
OPPS rate-setting under paragraphs (2) and (9), and that
18
Congress thus intended SCOD payment decisions to be
similarly insulated from review, that account, at a minimum, is
not clearly correct. As a result, the government has failed to
“overcom[e] the strong presumption that Congress did not
mean to prohibit” our review. Bowen, 476 U.S. at 672.
III.
Proceeding to the merits, the sole question before us is
whether HHS had statutory authority to impose its 28.5% cut
to SCOD reimbursement rates for 340B hospitals. HHS
located its authority in subclause (II) of paragraph (14) of the
OPPS statute. Under that provision, when HHS sets SCOD
payment amounts tethered to average drug prices, HHS has
express authority to “adjust[]” the amounts “as necessary for
purposes of this paragraph.” 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(II). In our view, HHS reasonably
interpreted subclause (II)’s adjustment authority to enable
reducing SCOD payments to 340B hospitals, so as to avoid
reimbursing those hospitals at much higher levels than their
actual costs to acquire the drugs.
On that issue of statutory interpretation, HHS is entitled to
Chevron deference, which it has invoked here (although it did
not do so expressly until a post-argument letter submitted to the
Court). See Chevron U.S.A., Inc. v. Nat. Res. Def. Council,
Inc., 467 U.S. 837, 842 (1984). When an agency “interpret[s]
a statute it is charged with administering in a manner (and
through a process) evincing an exercise of its lawmaking
authority,” that interpretation is entitled to Chevron treatment,
and the agency cannot forfeit Chevron’s applicability.
SoundExchange, Inc. v. Copyright Royalty Board, 904 F.3d 41,
54–55 (D.C. Cir. 2018). HHS established SCOD
reimbursement rates for 340B hospitals through notice-and-
comment rulemaking and explained why it “believe[d] that [its]
19
proposal [was] within [its] statutory authority to promulgate.”
82 Fed. Reg. at 52,499. HHS’s understanding of its statutory
authority thus is entitled to Chevron deference. See Am. Hosp.
Ass’n, No. 19-5352, slip op. at 14; Tenet HealthSystems
HealthCorp. v. Thompson, 254 F.3d 238, 248 (D.C. Cir. 2001);
see also Barnhart v. Walton, 535 U.S. 212, 222 (2002).
Under Chevron, we first ask whether “Congress has
directly spoken to the precise question at issue.” Chevron, 467
U.S. at 842. Here, the “precise question at issue” is whether
HHS’s adjustment authority in subclause (II) encompasses a
reduction to SCOD reimbursement rates aimed at bringing
reimbursements to 340B hospitals into line with their actual
costs to acquire the drugs. If the statute does not directly
foreclose HHS’s understanding, we defer to the agency’s
reasonable interpretation. See id. at 844. We conclude that
HHS’s interpretation of subclause (II) is not directly foreclosed
and is reasonable.
By way of brief review, paragraph (14), as its title
confirms, addresses “[d]rug . . . payment rates”—specifically,
the rates at which hospitals are reimbursed for SCODs
furnished to beneficiaries in supplying covered care. 42 U.S.C.
§ 1395l(t)(14). Under subclause (I) of the paragraph, the
“amount of payment,” as a default matter, “shall be equal” to
hospitals’ “average acquisition cost for the drug.” Id.
§ 1395l(t)(14)(A)(iii)(I). But if pertinent “hospital acquisition
cost data are not available,” then payment levels are determined
under subclause (II). Under that provision, the amount of
payment equals “the average price for the drug”—which, by
statutory cross-reference, is the drug’s average sales price
(ASP) charged by manufacturers—but subject to
“adjust[ment] . . . as necessary for purposes of this paragraph.”
Id. § 1395l(t)(14)(A)(iii)(II).
20
Much is undisputed about HHS’s application of subclause
(II)’s adjustment authority to reduce SCOD payment rates to
340B hospitals. First, HHS properly found that the “hospital
acquisition cost data” contemplated by subclause (I) was
unavailable, such that HHS needed to determine payment rates
in accordance with subclause (II)’s fallback reliance on average
drug prices. Second, 340B hospitals obtain SCODs at
substantially lower cost than other providers, such that
reimbursing those hospitals at the same rate as other providers
would give sizable revenues to the hospitals. Third, HHS’s
28.5% SCOD rate reduction for 340B hospitals is a fair, or even
conservative, measure of the reduction needed to bring
payments to those hospitals into parity with their costs to obtain
the drugs. See 82 Fed. Reg. at 52,500. Fourth, absent the
reduction, at least some Medicare beneficiaries served by 340B
hospitals (generally underserved populations) would pay out-
of-pocket copayments for the drugs that substantially exceed
the normal copay share of providers’ cost to obtain the drugs—
with beneficiaries’ copayments sometimes exceeding 340B
hospitals’ full cost to purchase the drugs. And fifth, the roughly
$1.6 billion in savings from reducing SCOD reimbursement
payments to 340B hospitals is not kept by the agency but is
redistributed to all providers as additional reimbursement
payments for other services. See generally pp. 6–8, supra.
That is the backdrop against which we consider whether
HHS permissibly understood its subclause (II) adjustment
authority to encompass its reduction to reimbursement
payments to 340B hospitals for SCODs. Was HHS obligated
to continue reimbursing 340B hospitals for SCODs in amounts
substantially exceeding their costs to obtain the drugs, with the
resulting effects that concerned the agency on out-of-pocket
copayments owed by Medicare beneficiaries? We think the
agency was not compelled to continue doing so.
21
The central question is whether HHS permissibly
conceived of the “purposes of this paragraph,” i.e., paragraph
(14), in exercising its subclause (II) authority to “adjust[]”
payment rates “as necessary for the purposes of this
paragraph,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II). According to
the agency, a “manifest purpose of paragraph 14 is to
compensate providers for the average acquisition cost” of
SCODs. Appellant’s Br. 30. In accordance with that
understanding, HHS explained in the 2018 Rule that “a
payment amount of ASP minus 22.5 percent for drugs acquired
under the 340B Program is better aligned to hospitals’
acquisition costs and thus this adjustment . . . is necessary for
Medicare OPPS payment policy.” 82 Fed. Reg. at 52,501.
Paragraph (14)’s structure supports HHS’s understanding
that the provision’s core purposes include reimbursing
hospitals for their costs to acquire SCODs. Paragraph (14)’s
primary (and default) instruction for determining SCOD
payment amounts, set out in subclause (I), is to equate them to
“average acquisition cost.” 42 U.S.C. § 1395l(t)(14)(A)(iii)(I).
That alone indicates that Congress’s primary goal is to
reimburse providers for their acquisition costs. And if direct
acquisition-cost data of a kind contemplated by subclause (I) is
unavailable, HHS must then, as a fallback matter under
subclause (II), equate payment amounts to “average price,”
subject to adjustment. 42 U.S.C. § 1395l(t)(14)(A)(iii)(II). By
prescribing the use of ASP as a backup when the requisite
acquisition-cost data is unavailable, Congress signaled that
average price functions as a stand-in for costs.
HHS has long understood average price under subclause
(II) to serve as a “proxy for average acquisition cost.” 77 Fed.
Reg. at 68,386. HHS has used ASP since 2006, stating then
and all along that its “intent” in using ASP was “to pay for
drugs and biologicals based on their hospital acquisition costs.”
22
Medicare Program; Changes to the Hospital Outpatient
Prospective Payment System and Calendar Year 2006 Payment
Rates, 70 Fed. Reg. 68,516, 68,642 (Nov. 10, 2005). For non-
340B hospitals, ASP is an accurate approximation of
acquisition costs: HHS’s Inspector General has found that, for
non-340B hospitals, ASP comes within roughly 1% of
acquisition costs. HHS Office of Inspector General,
Memorandum Report: Payment for Drugs Under the Hospital
Outpatient Prospective Payment System 1, 9 (Oct. 22, 2010).
But for 340B hospitals, ASP substantially exceeded SCOD
acquisition costs by the time of the 2018 Rule—hence the need
for an adjustment under subclause (II) to bring payments to
340B hospitals into line with their costs.
The OPPS statute exhibits in other ways Congress’s
evident purpose of aligning SCOD reimbursement with
hospital costs. Paragraph (14) itself expressly authorizes a
separate adjustment to SCOD payment rates to account for
“overhead costs” and “related expenses” (“such as pharmacy
services and handling costs”). Id. § 1395l(t)(14)(E). And more
broadly, many other OPPS provisions reflect the goal of
aligning payments to hospitals with their costs. See id.
§ 1395l(t)(2)(C) (grouping and weighting under paragraph (2)
must be “based on median . . . hospital costs”); id.
§ 1395l(t)(2)(D) (“wage adjustment factor” must account for
“relative differences in labor and labor-related costs”); id.
§ 1395l(t)(5)(B) (“outlier adjustments” must “approximate the
marginal cost of care”); id. § 1395l(t)(9)(A) (“periodic . . .
adjustments” must be based on “new cost data”); id.
§ 1395l(t)(13)(A) (authorizing adjustments if “costs incurred
by hospitals located in rural areas . . . exceed those costs
incurred by hospitals located in urban areas”); id.
§ 1395l(t)(18)(B) (same for cancer hospitals).
23
All of that supports HHS’s understanding that the
“purposes” of paragraph 14 for which the agency can “adjust[]”
SCOD payments under subclause (II) include aligning
payments to hospitals with their drug acquisition costs. Id.
§ 1395l(t)(14)(A)(iii)(II). That is precisely what HHS did
when it imposed its 28.5% reduction in payments to 340B
hospitals for SCODs.
In arguing that HHS lacked authority under subclause (II)
to undertake that measure, the Hospitals focus on subclause
(I)’s requirement that, if payment amounts are keyed to
“average acquisition cost” under that provision—as opposed to
average price under subclause (II)—then the agency must take
“into account the hospital acquisition cost survey data under
subparagraph (D).” Id. § 1395l(t)(14)(A)(iii)(I). And
subparagraph (D) imposes stringent data-quality requirements,
mandating that the cost surveys “shall have a large sample of
hospitals that is sufficient to generate a statistically significant
estimate of the average hospital acquisition cost for each
[SCOD].” Id. § 1395l(t)(14)(D)(iii).
Because Congress required HHS to “tak[e] into account”
robust study data when setting SCOD rates at average
acquisition cost under subclause (I), the Hospitals argue, HHS
cannot use its subclause (II) authority to adjust ASP in order to
approximate acquisition cost. As the Hospitals see it, if HHS
wants to set SCOD rates based on the cost to hospitals to
acquire the drugs, the agency must get the data contemplated
by subclause (I). If it were otherwise, the Hospitals contend,
subclause (I)’s requirement to take into account the data
collected under subparagraph (D) would be meaningless: HHS
could simply forgo the study required by subclause (I) and
instead use subclause (II) to approximate drug acquisition
costs. Our dissenting colleague, too, stresses the same point.
Dissenting Op. 5.
24
That argument, on which the district court relied, see Azar,
348 F. Supp. 3d at 82–83, is not without force. We, though,
are ultimately unpersuaded. For the Hospitals’ argument to
carry the day under Chevron, we would need to conclude that
Congress unambiguously barred HHS from seeking to align
reimbursements with acquisition costs under subclause (II), or
that HHS’s belief that it could do was unreasonable. And HHS
would be barred from doing so even if, as here, it is undisputed
both that payment amounts otherwise would substantially
exceed hospitals’ costs and that the proposed adjustment
accurately and reliably approximates procurement costs.
Given that the survey data contemplated by subclause (I)
aims to assure the reliability of cost-acquisition data, we do not
read the statute to foreclose an adjustment to ASP under
subclause (II) that is based on reliable cost measures of the kind
undisputedly at issue here. That is particularly so because,
whereas the Hospitals question whether HHS’s interpretation
could enable sidestepping subclause (I)’s data-reliability
requirements altogether, the Hospitals’ own reading raises a
similar interpretive dilemma. Subclause (II), as explained,
expressly empowers HHS to “adjust” payments based on ASP
“as necessary for purposes of” paragraph (14). And under the
Hospitals’ reading, those “purposes” cannot include the goal of
approximating hospital acquisition costs. But the Hospitals
point to no other “purpose” that could permissibly support an
adjustment. The Hospitals’ argument thus renders subclause
(II)’s adjustment authority superfluous.
The Hospitals submit that “[t]he purpose of paragraph (14)
is to establish the rate for separately payable drugs.”
Appellees’ Br. 42–43. That may be true at a high level of
generality—indeed, the title of paragraph (14) is “Drug APC
payment rates”—but it is unhelpful to the Hospitals for our
25
purposes. After all, HHS’s rate reduction for payments to 340B
hospitals does “establish the rate for separately payable drugs.”
The Hospitals also suggest that subclause (II)’s adjustment
authority enables adjustments to account for overhead costs.
Appellees’ Br. 49. But that reading would leave subclause
(II)’s adjustment authority duplicative of authority already
conferred by subparagraph (14)(E). That subparagraph, as
noted, authorizes HHS to make adjustments to account for
“overhead and related expenses, such as pharmacy services and
handling costs.” 42 U.S.C. § 1395l(t)(14)(E)(i). If subclause
(II)’s adjustment authority were merely meant to reinforce
subparagraph (14)(E)’s authority to account for overhead costs,
then why would subclause (II) not simply say so, in comparable
language? Instead, subclause (II) frames its grant of authority
in notably broader terms addressed to the overall purposes of
paragraph (14), not just the specific, “overhead and related
expenses” focus of subparagraph (14)(E).
The Hospitals’ reading of subclause (II)’s adjustment
authority as addressed to overhead costs, it bears noting, would
necessarily mean that the purpose of granting that authority is
to enable bringing ASP closer to drug acquisition costs—
precisely what the Hospitals otherwise say the agency cannot
aim to do when exercising its subclause (II) authority. But
under the Hospitals’ evident understanding, the agency can try
to get ASP closer to actual costs only to the extent of taking
into account overhead costs, without going further to bring
ASP all the way into alignment with acquisition costs. That
half-measure understanding of subclause (II)’s adjustment
authority is incompatible with its broad terms, which speak
generally to the “purposes” of paragraph (14), including, in
particular, approximating drug acquisition costs.
26
Our dissenting colleague nonetheless endorses the
Hospitals’ suggestion that subclause (II)’s adjustment
authority, while framed generally, should be read as focused on
overhead costs. Dissenting Op. 5–8. Our colleague briefly
suggests that there may be no redundancy between subclause
(II) and subparagraph (14)(E) under that reading because, she
posits, the two provisions both allow for adjustments to account
for overhead costs, but at different times, with (14)(E) in the
nature of a time-limited, naturally-expiring allowance and
subparagraph (II) an ensuing, ongoing one. Id. at 5–6. Again,
though, if the provisions were designed to cover the same
terrain (even if at different times), one would expect them to
use similar language in defining the territory, which they
conspicuously do not. And at any rate, the statutory text
confirms that the provisions are designed to work side-by-side
contemporaneously, not at different times: Congress rendered
subclause (II)’s provisions expressly “subject to paragraph
(E),” such that the agency, when acting under subclause (II),
could make adjustments to ASP both under that provision’s
own, broadly-framed adjustment authority and under
subparagraph (14)(E)’s more specific authority addressed to
overhead costs. 42 U.S.C. § 1395l(t)(14)(A).
Our dissenting colleague ultimately allows that the
Hospitals’ overhead-costs interpretation of subclause (II)’s
adjustment authority means that the provision may reiterate—
i.e., make “double sure”—subparagraph (14)(E)’s express
authority to account for overhead costs. Dissenting Op. 6. But
our colleague still believes that the Hospitals’ reading of the
statute is unambiguously compelled at Chevron step one. Id.
at 1. In her evident view, any superfluity occasioned by that
reading is less substantial than the superfluity occasioned by
the agency’s reading. Id. at 8–9. But even assuming there is a
reliable metric for comparing degrees of superfluity across
readings in that fashion, that kind of comparison is not the stuff
27
of a Chevron step one resolution. Rather, when competing
readings of a statute would each occasion their own notable
superfluity, that manifests the kind of statutory ambiguity that
Chevron permits the agency to weigh and resolve. See
National Ass’n of Home Builders v. Defenders of Wildlife, 551
U.S. 644, 666 (2007); Peter Pan Bus Lines, Inc. v. Fed. Motor
Carrier Safety Admin., 471 F.3d 1350, 1354 (D.C. Cir. 2006)
(“[S]ection 13902 contains surplusage under either reading
and, as a result, we cannot say that either proffered construction
reflects the Congress’s unambiguously expressed intent.”).
The Hospitals separately suggested in oral argument that
subclause (II)’s adjustment authority could pertain to
improving the accuracy of the sales-price metric specifically
for hospitals (as opposed to other providers). ASP reflects
sales prices to all manner of medical providers, including
pharmacies, clinics, independent physician practices, and the
like. See 42 U.S.C. § 1395w-3a(c). As the Hospitals see it,
HHS can adjust ASP to arrive at a metric that better reflects the
prices paid by hospitals alone. But nothing in subclause (II)’s
general adjustment authority suggests that it is so narrowly
focused. And in any event, to the extent HHS might adjust ASP
to more accurately reflect prices paid by hospitals, it is unclear
whether there would then remain any appreciable difference
between such a hospital-specific ASP and hospital acquisition
costs. Yet the Hospitals’ whole point is that HHS cannot rely
on its subclause (II) adjustment authority to approximate
acquisition costs.
Especially in view of the Hospitals’ inability to present an
interpretation of HHS’s subclause (II) adjustment authority that
would give it meaningful independent content, we cannot
conclude that the statute forecloses HHS from reducing SCOD
reimbursement rates for 340B hospitals with the object of
bringing payments into alignment with acquisition costs.
28
Rather, in the specific circumstances of this case, HHS
permissibly read the statute to allow it to implement the 340B
payment reduction. Although subclause (I) calls for the
“average acquisition cost” payment metric to “tak[e] into
account” subparagraph (D)’s survey data, here, HHS relied on
data of undisputed reliability. Moreover, the agency acted on
that data in a cautious way, adopting a “conservative, lower-
bound estimate” of the 340B discount’s size. 82 Fed. Reg. at
52,504 (quotation marks omitted). In those circumstances,
HHS reasonably concluded that it need not continue
subsidizing 340B providers with Part B (i.e. taxpayer) funds
and Medicare beneficiaries’ copayments. We of course do not
consider the wisdom of that decision as a policy matter in the
first instance, but only whether the agency had statutory
authority to reach it. See Chevron, 467 U.S. at 845. We
conclude that the agency’s decision rests on a permissible
understanding of its statutory authority.
Shifting tack, the Hospitals contend that even if HHS can
seek to approximate acquisition costs in exercising its
subclause (II) adjustment authority, HHS’s 28.5% rate cut is
simply too large and sweeping to qualify as an “adjustment.”
That argument falls short under a straightforward application
of Chevron. The statutory term “adjust” is ambiguous as to
size. The Hospitals offer various definitions of “adjust” that
include qualifiers such as “slightly,” e.g., Adjust, Oxford
Dictionaries, https://www.lexico.com/definition/adjust (“alter
or move (something) slightly in order to achieve the desired fit,
appearance, or result”), but HHS responds with many
definitions that lack such qualifiers, e.g., Adjust, Merriam-
Webster, https://www.merriam-webster.com/dictionary/adjust
(“to bring to a more satisfactory state”).
The Hospitals point to our decision in Amgen, which
considered an “adjustment” under HHS’s subparagraph (2)(E)
29
authority to make equitable adjustments. In the course of
upholding the challenged adjustment, we observed that
“similar limits inhere in the term ‘adjustments’ to those the
Supreme Court found in the word ‘modify’” in MCI
Telecomms. Corp v. Am. Tel. & Tel. Co., 512 U.S. 218, 225
(1994). Amgen, 357 F.3d at 117. And the MCI Court stated
that “modify” means “to change moderately or in minor
fashion.” MCI, 512 U.S. at 225. But we do not read Amgen to
prescribe that “adjust” in the OPPS statute refers only to minor
changes. To the contrary, Amgen explained that it “ha[d] no
occasion to engage in line drawing to determine when
‘adjustments’ cease being ‘adjustments.’” 357 F.3d at 117.
Even if there are limits to what HHS could permissibly
consider an “adjustment,” that line has not been crossed here,
where the agency acted on a conservative estimate drawn from
data of undisputed reliability.
The Hospitals’ last argument is that HHS’s subclause (II)
adjustment authority does not allow adjusting reimbursement
rates for 340B hospitals alone. According to the Hospitals, the
reimbursement rate set under subclause (II) must be uniform
across all hospitals. The Hospitals rely on subclause (I)’s
statement that payment rates set under that provision must
equal “the average acquisition cost for the drug for that year
(which, at the option of the Secretary, may vary by hospital
group (as defined by the Secretary based on volume of covered
OPD services or other relevant characteristics)).” 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(I) (emphasis added). The Hospitals
stress that subclause (II), by comparison, says nothing about
authority to vary the average price metric by hospital group.
That silence, to the Hospitals, means that when HHS sets
SCOD reimbursement rates under subclause (II), it must apply
the same rate to every recipient hospital.
30
Congress, however, was not silent about HHS’s
adjustment power in subclause (II). Whereas subclause (I)
does not grant HHS any general authority to adjust
reimbursement rates, subclause (II) affirmatively grants HHS
general adjustment authority for deployment “as necessary for
purposes of” paragraph (14). And as explained, HHS
reasonably believes that a central purpose of paragraph (14) is
to accurately reimburse hospitals for their acquisition costs.
There is no reason to think that HHS’s general adjustment
authority when acting under subclause (II) excludes the more
focused license to vary rates by hospital group when acting
under subclause (I). In particular, the Hospitals provide no
reason why, if HHS knows that a certain group of hospitals has
far lower (or far higher) costs than others, Congress would
want to preclude HHS from acting on that information in a
suitably tailored fashion when exercising its adjustment
authority under subclause (II). At a minimum, the statute does
not clearly preclude HHS from adjusting the SCOD rate in a
focused manner to address problems with reimbursement rates
applicable only to certain types of hospitals. That is enough to
reject the Hospitals’ argument under Chevron.
* * * * *
For the foregoing reasons, we reverse the judgment of the
district court.
So ordered.
PILLARD, Circuit Judge, dissenting in part: I agree with
my colleagues that the Medicare Outpatient Prospective
Payment System (OPPS) statute does not preclude judicial
review of HHS’s 28.5% reduction in reimbursement rates to
340B hospitals that administer Specified Covered Outpatient
Drugs (SCODs). On the merits, however, I disagree that
subclause (II) authorized HHS to implement for 340B hospitals
alone the challenged rate reductions in its 2018 and 2019 OPPS
rules.
The statute sets forth two alternative bases for HHS’s
calculation of the relevant reimbursement rates: It may set
those rates under subclause (I) based on average acquisition
cost (reflecting the average cost that hospitals actually incurred
in purchasing the drug), or under subclause (II) based on
average sales price (reflecting the average price, updated
quarterly, at which manufacturers sold the drug to most
purchasers, not limited to hospitals). See 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(I)-(II). When the two subclauses at issue
here are read together, the conclusion is unavoidable that HHS
may institute its large reductions, tailored for a distinct hospital
group, only under subclause (I), which requires the agency to
take into account specific data undisputedly absent here.
The majority concludes that HHS may act on other data
(not meeting Congress’ specifications) to make those
reductions pursuant to subclause (II). That reading
impermissibly nullifies subclause (I) and the data requirements
spelled out at length in subparagraph (D). See id.
§ 1395l(t)(14)(D). I would therefore hold that the agency’s
interpretation of subclause (II) is foreclosed at Chevron step
one. Because HHS’s actions cannot be squared with the text of
the OPPS statute, I respectfully dissent from part III of the
majority opinion.
* * *
2
Reproduced in full, subclauses (I) and (II) provide that, for
every year after 2005, the reimbursement rate “shall be equal,
subject to subparagraph (E)”—
(I) to the average acquisition cost for the drug for
that year (which, at the option of the Secretary, may
vary by hospital group (as defined by the Secretary
based on the volume of covered [outpatient
department] services or other relevant
characteristics)), as determined by the Secretary
taking into account the hospital acquisition cost
survey data under subparagraph (D); or
(II) if hospital acquisition cost data are not available,
the average price for the drug in the year established
under section 1395u(o) of this title,
section 1395w-3a of this title, or section 1395w-3b
of this title, as the case may be, as calculated and
adjusted by the Secretary as necessary for purposes
of this paragraph.
42 U.S.C. § 1395l(t)(14)(A)(iii). Subparagraph (E) in turn
authorizes the Secretary to make “adjustment[s] in payment
rates for overhead costs,” for instance to account for “pharmacy
services and handling costs,” based on the findings of a 2005
Medicare Payment Advisory Commission (MedPAC) report.
Id. § 1395l(t)(14)(E).
The two subclauses together provide that, if HHS sets
reimbursements rates based on hospitals’ actual average
acquisition costs, HHS must consider congressionally specified
acquisition-cost data. See id. § 1395l(t)(14)(D). And—crucial
for the challenged differential reimbursement rate for 340B
hospitals—HHS may only segment reimbursement rates by
hospital group if it has collected the specified data and set the
rates keyed to hospital acquisition costs in view of that data.
3
The two subclauses operate as alternatives:
Subclause (I) lays out what the agency may do when it has
collected and taken into account the “hospital acquisition cost
survey data under subparagraph (D),” whereas subclause (II)
lays out what the agency may do “if the hospital acquisition
cost data are not available.” Id. § 1395l(t)(14)(A)(iii). If the
agency has that data, it may set reimbursement rates based on
the “average acquisition cost for the drug for that year,” and
“vary by hospital group” any reimbursement rates. Id.
§ 1395l(t)(14)(A)(iii)(I). But “if hospital acquisition cost data
are not available,” id. § 1395l(t)(14)(A)(iii)(II), the agency
must set reimbursement amounts under subclause (II) by resort
to what it has previously called the “statutory default” rate for
a given drug in a given year, see, e.g., 2013 OPPS Rule, 77 Fed.
Reg. 68,210, 68,386 (Nov. 15, 2012). That statutory default
rate is the drug’s average sales price charged to hospitals,
clinics, pharmacies, and other providers, drawn from data that
drug manufacturers submit to HHS every quarter. See id.§§ 1395w-3a(c), 1396r-8(b)(3)(A)(iii). Subclause (II)
provides for the average sales price to be “adjusted . . . as
necessary for purposes of this paragraph” but, unlike
subclause (I), grants no authority to vary the reimbursement
rates by hospital group. Id. § 1395l(t)(14)(A)(iii)(II).
As everyone agrees, HHS has never collected the “hospital
acquisition cost data” that the statute contemplates, so must
proceed under its subclause (II) authority to set reimbursement
rates for the 2018 and 2019 OPPS rules. See, e.g., HHS Br. 9;
2018 Proposed OPPS Rule, 82 Fed. Reg. 33,558, 33,634
(proposed July 20, 2017). The question before us is whether
the agency may set and vary by hospital group SCOD
reimbursement rates in the manner that subclause (I)
authorizes, without collecting and considering the data that
subclause (I) specifies, by invoking its authority under
subclause (II) to adjust the average-sales-price-based
4
reimbursement rate and, in effect, simply deem that to be a rate
reflecting hospitals’ average acquisition cost. The majority
concludes that the agency’s circumvention of subclause (I) in
this manner is a permissible construction of the statute for
several reasons, none of which I find persuasive.
First, the majority argues, based primarily on the text of
subclause (I) and other provisions in the OPPS statute, that
Congress’ “primary goal is to reimburse providers for their
acquisition costs.” Maj. Op. at 21. But the statute’s
overarching goal is not its only goal, to be achieved however
the agency sees fit. When it comes to Medicare Part B
payments for SCODs, paragraph (14) specifically tells us when
and how Congress intended HHS to pursue acquisition-cost-
based reimbursement. Only subclause (I), not subclause (II),
authorizes HHS to set different reimbursement rates for distinct
hospital groups—rather than a uniform, drug-by-drug “average
price for the drug in the year,” 42 U.S.C.
§ 1395l(t)(14)(A)(iii)(II)—and to do so only by taking into
account the different acquisition costs identified in the robust,
hospital-specific data that Congress required the agency to
collect.
The majority finds it inconceivable that Congress would
require the same sales-price-based reimbursement rate for all
types of hospitals when hospitals’ acquisition costs vary
widely. See, e.g., Maj. Op. at 24. But in authorizing the
average-sales-price methodology, which takes account of most
discounts and rebates that purchasers receive, Congress was
attuned to the many factors rendering non-uniform the amounts
different hospitals actually pay for the same drugs. Given
Congress’ awareness that various hospitals—not only 340B
hospitals—pay more or less than others, I see nothing
inconceivable about Congress requiring disparities in
reimbursement rates to certain types of hospitals to be
5
identified and acted upon based only on the most complete and
accurate data.
If Congress wanted HHS, in the absence of subclause (I)’s
hospital-specific data regarding average acquisition costs, just
to do its best to approximate those costs and then vary them by
hospital groups according to its unchecked policy judgment, it
easily could have written the statute to say so. Instead,
subclause (II) mandates that the base reimbursement rate “shall
be equal” to the specified drug’s statutory default rate premised
on average sales price, subject to adjustments, and entirely
omits the authority granted in subclause (I) to “vary by hospital
group” the pricing data or resultant rate. 42 U.S.C.
§ 1395l(t)(14)(A)(iii). I cannot discern in the statute any
congressional intention that the adjustment authority be used to
set markedly different prices for different hospital groups. I
would instead affirm the district court’s conclusion that HHS
“cannot fundamentally rework the statutory scheme—by
applying a different methodology than the provision requires—
to achieve under sub[clause] (II) what [it] could not do under
sub[clause] (I) for lack of adequate data.” Am. Hosp. Ass’n v.
Azar, 348 F. Supp. 3d 62, 82 (D.D.C. 2018).
Second, the majority reasons that this data-sensitive
reading of the two subclauses cannot be correct because it
“renders subclause (II)’s adjustment authority superfluous.”
Maj. Op. at 24. But the Hospitals’ reading of the subclause (II)
adjustment authority as primarily cross-referencing
incremental modifications like the overhead-cost adjustment
described in subparagraph (E) does not make the former
altogether redundant. As the Hospitals explain,
subparagraph (E) authorized adjustments for overhead with
reference to a one-time, 2005 MedPAC report, whereas
subclause (II)’s authority to make “adjust[ments] . . . as
necessary for purposes of this paragraph,” 42 U.S.C.
6
§ 1395l(t)(14)(A)(iii)(II), encompasses “adjustments” for
overhead in the same manner on an ongoing basis. See
Hospitals Br. 5-6, 49.
In any event, reading section 1395l(t)(14) to contain
overlapping references to a limited adjustment authority—
making “double sure” the point is made—does not create the
kind of superfluity that renders a statute ambiguous. Mercy
Hosp., Inc. v. Azar, 891 F.3d 1062, 1068 (D.C. Cir. 2018)
(quoting Fla. Health Scis. Ctr., Inc. v. HHS, 830 F.3d 515, 520
(D.C. Cir. 2016)). As we have recognized with respect to the
Medicare statute, a “little overlap, either by accident or design,
is to be expected in any complex statutory scheme with
interdependent provisions” and does not alone create
ambiguity. Id. The fact that average price data lumps together
pharmaceutical sales to hospitals from sales to non-hospital
providers seems to explain Congress’ clear decision to omit
from subclause (II) the authority in subclause (I) to vary
reimbursement by hospital group. Without subclause (I)’s
hospital-specific cost data, billion-dollar decisions
differentiating among particular hospital groups could rest on
significantly less exact information.
Moreover, to the extent that past agency practice bears on
the question of statutory construction before us, it only
confirms the Hospitals’ reading that the agency’s
subclause (II) adjustment authority references overhead
adjustments like those contemplated by subparagraph (E). As
the agency described at length in 2012, during the preceding
six years HHS had made no adjustments to its estimate of
average sales prices other than occasional small tweaks to
account for overhead costs (and, in any case, purported to rely
only on its subclause (I) authority). See 2013 OPPS Rule, 77
Fed. Reg. at 68,383-86 (explaining the agency’s methodology
year by year over this period); see also 2016 OPPS Rule, 80
7
Fed. Reg. 70,298, 70,439 (Nov. 13, 2015) (providing a similar
summary of the agency’s past methodology); Hospitals Br. 49
(“[W]hen HHS previously made adjustments to the ASP-plus-
6% rate, it explained at the time that it was doing so to account
for estimates of overhead.”). Indeed, the focus of the agency
in those years was on collecting more accurate overhead-cost
data to better tailor its adjustments. See, e.g., 2013 OPPS Rule,
77 Fed. Reg. at 68,385. And, in the five years before the two
challenged rules at issue, the agency simply adopted the
statutory default rate of 106% of the average sales price under
subclause (II) without making any adjustments at all. See 2018
OPPS Rule, 82 Fed. Reg. 52,362, 52,490 (Nov. 13, 2017).
In sum, at no point in any of the materials that the majority
cites—and at no point of which I am aware—has HHS ever
previously used its subclause (II) adjustment authority to make
adjustments that are not modest changes to account for
overhead. HHS itself has not claimed otherwise in its briefing
before us. And HHS certainly has never used that adjustment
authority to implement variations by hospital group. See, e.g.,
HHS Br. 13 (“The final rule for 2018 established a new sub-
classification for drugs purchased by 340B providers . . . .”
(emphasis added)).
The Hospitals’ limited reading of the adjustment authority
that subclause (II) confers is supported by our previous caution
that the term “adjustment” in this statute—like the term
“modify” at issue in MCI Telecommunications Corp. v. AT&T
Co., 512 U.S. 218, 225 (1994), which the Court held “means to
change moderately or in minor fashion”—cannot permit “basic
and fundamental changes in the scheme.” Amgen, Inc. v.
Smith, 357 F.3d 103, 117 (D.C. Cir. 2004) (quoting MCI,
512 U.S. at 225). The majority distinguishes Amgen by
quoting our observation there that we had “no occasion to
engage in line drawing to determine when ‘adjustments’ cease
8
being ‘adjustments.’” Id. But that observation made eminent
sense in a dispute “involving only the payment amount for a
single drug,” and we went on to warn that a “more substantial
departure from the default amounts would, at some point,
violate the Secretary’s obligation to make such payments and
cease to be an ‘adjustment.’” Id. (alteration omitted). Given
the scale and segmentation of the rate cut at issue—reducing
SCOD reimbursements by nearly a third, thereby eliminating
$1.6 billion annually in reimbursements to many of the most
financially vulnerable hospitals in the Medicare program—I
disagree that, “[e]ven if there are limits to what HHS could
permissibly consider an ‘adjustment,’ that line has not been
crossed here.” Maj. Op. at 29.
Not only is the majority wrong to reject the Hospitals’
reading as creating unexplained surplusage, see Maj. Op.
at 24-27, but the superfluity concerns cut decisively the other
way. As discussed above, the majority essentially reads
subclause (I) out of the statute by permitting the agency to do
under subclause (II) without the requisite data what
subclause (I) authorizes only with that data. The majority also
renders superfluous the entirety of subparagraph (D). See
42 U.S.C. § 1395l(t)(14)(D). That subparagraph, occupying
nearly a full column in the U.S. Code, specifies in detail how
the “[a]cquisition cost survey for hospital outpatient drugs” is
to be conducted, first by the Government Accountability Office
(GAO) and later by HHS, after that agency has “tak[en] into
account” the Comptroller General’s “recommendations” as to
the “frequency and methodology of subsequent surveys.” Id.
§ 1395l(t)(14)(D)(i)-(ii). Subparagraph (D) further includes a
provision dealing with “survey requirements,” mandating that
the GAO and HHS surveys “shall have a large sample of
hospitals that is sufficient to generate a statistically significant
estimate of the average hospital acquisition cost for each
specified covered outpatient drug.” Id. § 1395l(t)(14)(D)(iii).
9
And a later clause details how acquisition-cost variations by
hospital group are to be identified in GAO’s initial surveys if
they are to justify reimbursement-rate variations, noting that
the Comptroller General “shall determine and report to
Congress if there is (and the extent of any) variation in hospital
acquisition costs for drugs among hospitals based on the
volume of covered [outpatient department] services performed
by such hospitals or other relevant characteristics of such
hospitals (as defined by the Comptroller General).” Id.
§ 1395l(t)(14)(D)(iv).
The majority’s reading drains each of these provisions of
meaning. It allows the agency simply to purport to
approximate hospital acquisition costs, and to claim authority
to vary reimbursement rates by hospital group, based on
adjusted average price data that HHS recasts as acquisition cost
data, but that lacks the characteristics and process of collection
that Congress specified in subclause (I). The Hospitals’
reading does give distinct meaning to subclause (II)’s
allowance for adjustment; it is the majority’s reading that
occasions significant superfluity without regard to Congress’
structural decision to make subclauses (I) and (II) distinct
alternatives.
Finally, the majority repeatedly justifies its reading by
reference to the policy benefits of the agency’s rate reductions
and the reasonableness of the agency’s alternative data and
resulting estimates. See, e.g., Maj. Op. at 18, 20, 22, 24, 27-28.
The majority views it as relevant “backdrop,” for example, that
one result of the agency’s proposed cuts will be to lower
copayments for Medicare beneficiaries served by 340B
hospitals, and to avoid the prospect of any beneficiary possibly
paying more in a copayment than the hospital paid to buy the
prescribed drugs. Id. at 20; but see HHS Off. of Inspector Gen.,
OEI-12-14-00030, Part B Payments for 340B-Purchased
10
Drugs 9 n.26 (Nov. 2015) (OIG Report) (noting that 340B
hospitals “may waive all or part of the beneficiary’s
coinsurance”). And the majority notes HHS’s worries that
340B hospitals might overprescribe drugs that bring
reimbursement revenue. See Maj. Op. at 7; but see U.S. Gov’t
Accountability Off., GAO-15-442, Medicare Part B Drugs:
Action Needed to Reduce Financial Incentives to Prescribe
340B Drugs at Participating Hospitals 31 (June 2015) (noting
HHS’s view that “higher spending for Part B drugs at 340B
hospitals” might “lead to better clinical outcomes” for patients
served by those safety-net hospitals, who often are in
“meaningful[ly]” poorer health than other patients). The
majority also expresses confidence that the agency examined
“data of undisputed reliability,” Maj. Op. at 28, “acted on that
data in a cautious way,” id., and implemented a “fair, or even
conservative, measure of the reduction needed to bring
payments to those hospitals in parity with their costs to obtain
the drugs,” id. at 20. “In those circumstances,” the majority
declares, “HHS reasonably concluded that it need not continue
subsidizing 340B providers with Part B (i.e. taxpayer) funds
and Medicare beneficiaries’ copayments.” Id. at 28.
Those circumstances would perhaps be relevant were this
a challenge to the agency’s rules as arbitrary and capricious.
But concerns about the program’s effects, and confidence in
the agency’s care in using data other than those the statute
requires, cannot somehow authorize the agency to do what the
statute does not. As the Supreme Court has held, an “agency
has no power to ‘tailor’ legislation to bureaucratic policy goals
by rewriting unambiguous statutory terms.” Util. Air
Regulatory Grp v. EPA, 573 U.S. 302, 325 (2014). And,
unmoored from the statute’s express data-quality requirements,
the asserted reliability of the quite different data HHS gathered
here provides no assurance for its next rulemaking. Whether
HHS’s actions might have perceptible policy advantages does
11
not affect whether the statute authorizes what the agency has
done.
It bears noting that, even were they relevant, the claimed
policy benefits of the agency’s new rate reductions are far from
clear. The Section 340B drug discount program, enacted in
1992 as part of the Public Health Service Act, see 42 U.S.C.
§ 256b, permits 340B hospitals to “generate revenue” through
“insurance reimbursement[] that may exceed the 340B price
paid for the drugs.” U.S. Gov’t Accountability Off.,
GAO-11-836, Manufacturer Discounts in the 340B Program
Offer Benefits, But Federal Oversight Needs Improvement 2
(2011) (GAO Report). As HHS itself has recognized, Congress
anticipated that such above-cost reimbursement revenue would
help to fund the public and nonprofit safety-net hospitals that
qualify for 340B pricing: “Under the design of the 340B
Program and Part B payment rules, the difference between
what Medicare pays and what it costs to acquire the drugs is
fully retained by the participating covered entities, allowing
them to stretch scarce Federal dollars in service to their
communities.” OIG Report i (Executive Summary); see also
HHS Off. of Inspector Gen. Memorandum Report: Payment for
Drugs Under the Hospital Outpatient Prospective Payment
System 8 (Oct. 22, 2010) (describing above-cost SCOD
reimbursements to 340B hospitals as “an expected result given
the purpose of the 340B Program”).
The challenged rules took a major bite out of 340B
hospitals’ funding. Often operating at substantial losses, 340B
hospitals rely on the revenue that Medicare Part B provides in
the form of standard drug-reimbursement payments that exceed
those hospitals’ acquisition costs. 340B hospitals “have used
the additional resources to provide critical healthcare services
to communities with underserved populations that could not
otherwise afford these services.” Hospitals Br. 9 (citing GAO
12
Report at 17-18); see also Cares Cmty. Health v. HHS,
944 F.3d 950, 955 (D.C. Cir. 2019). Although stakeholders
have debated “whether statutory changes should be made to
enable Medicare and/or Medicaid to share in these savings,”
OIG Report 2, Congress has not made any such change. And,
as written, subparagraph (E) does not empower the Secretary
to “adjust” away from 340B hospitals substantial annual
revenue they garner under the separate, unchallenged 340B
statute to provide care to underserved communities.
The net effect of HHS’s 2018 and 2019 OPPS rules is to
redistribute funds from financially strapped, public and
nonprofit safety-net hospitals serving vulnerable populations—
including patients without any insurance at all—to facilities
and individuals who are relatively better off. If that is a result
that Congress intended to authorize, it remains free to say so.
But because the statute as it is written does not permit the
challenged rate reductions, I respectfully dissent.