by David Slovick

To surprisingly little fanfare, on June 15 the U.S. Supreme Court issued a decision that took square aim at the federal administrative state, fulfilling in part the promise of a newly conservatized supreme bench and realizing in part one of the federal bureaucracy’s perennial fears. The facts of the case, American Hospital Association v. Becerra, weren’t sufficiently sensational to attract much attention; the underlying dispute involved routine payments made to hospitals by the federal government as part of its Medicare reimbursement program. But the knock-on effect the decision will have in other areas of administrative law, and its long-range political implications, should have made government watchers sit up and take note.

Becerra involved an obscure Supreme Court doctrine known as “Chevron deference,” which requires U.S. federal courts to allow U.S. federal administrative agencies to decide for themselves how to interpret some of the authority granted to the agencies by Congress. The doctrine takes its name from a 1984 Supreme Court case, Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., that dealt with a U.S. Environmental Protection Agency (EPA) regulation intended to implement provisions of the Clean Air Act of 1977. The Court was asked to decide whether the regulation reasonably construed a term in the Clean Air Act that, in turn, determined the scope of certain of the Act’s other requirements. The analysis the Court used in 1984 to answer this question about the limits of an agency’s rulemaking authority, which is the core of Chevron deference, had two parts.     

“First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”

Although it has been around for nearly 40 years, the principle of deference established by Chevron has always attracted gadflies. One school of dissent takes exception to the supposed extraordinary competence of federal agencies that underpins the doctrine. Interpreting complex statutes and the policy goals underlying them is what federal judges do every day as part of their regular duties, and in other contexts that do not involve federal agencies we expect them to do so competently. According to the Chevron paradigm, though, once an administrative agency is inserted into a legal problem judges can no longer be trusted to resolve complex disputes on their own

A related concern involves allowing self-interested administrative agencies to define the scope of their own authority. Executive branch agencies, this argument goes, are inherently political organizations because their leaders are appointed by the president. Critics of Chevron argue that, just like any other political program, administrative rulemakings and other agency decisions ought to be subject to de novo review by federal courts to ensure that they comport with the statutes that govern them.

Still other observers find problematic the separation-of-powers implications of requiring the judicial branch of the federal government to defer to decisions made by the executive branch. Article III of the U.S. Constitution vests the judicial power of the United States in the Supreme Court and lower federal courts, not the executive branch. By taking away federal courts’ authority to decide, in the last instance, whether agency decisions comply with U.S. law, Chevron deference transfers the judiciary’s prerogative of deciding cases to agencies of the executive branch in violation of the Constitution.  

None of these esoteric considerations surfaced, however, in American Hospital Association v. Azar, the 2020 U.S. Court of Appeals for the D.C. Circuit decision that set the stage for the Supreme Court’s recent review of the Chevron doctrine. Azar instead concerned the workaday issue of how much money the U.S. Department of Health and Human Services (HHS) would reimburse hospitals for drugs provided to patients participating in the federal government’s Medicare Part B program. In 2018, HHS reduced the amount it reimbursed some hospitals (known as “340B hospitals”) because they were able to obtain drugs more cheaply than other hospitals. To close the reimbursement gap between 340B hospitals and hospitals that couldn’t obtain discount drugs, HHS invoked its rulemaking authority under the Medicare statute to adjust the amount of reimbursement the two types of hospitals received.

In support of its reading of the Medicare statute, HHS invoked Chevron deference—and the appellate court assumed, with only brief discussion, that the doctrine governed the parties’ dispute. Even the lone dissenter in the case, Judge Cornelia Pillard, assumed that Chevron supplied the proper frame of reference for the issue on appeal, although she believed that HHS’s reading of the Medicare statue was “foreclosed at Chevron step one” because “HHS’s actions cannot be squared with the text” of the Medicare statute. The majority ultimately decided that HHS “permissibly read the [Medicare] statute to allow it to implement the 340B payment reduction,” and that “the agency’s decision rests on a permissible understanding of its statutory authority.”

Given what we already knew about the political leanings of the Supreme Court’s three newest members (Justices Neil Gorsuch, Brett Kavanaugh and Amy Coney Barrett), the Court’s handling of the Chevron doctrine this month was, perhaps, an anticlimax. In a short opinion authored by Justice Kavanaugh, the Court reversed the judgment of the D.C. Circuit and held that HHS misinterpreted its discretion under the Medicare statute because the agency adjusted the amounts it reimbursed 340B hospitals for drugs in a way not contemplated by the grant of authority from Congress.

“The text . . . requires the reimbursement rate to be set drug by drug, not hospital by hospital or hospital group by hospital group. The only item that the agency is allowed to adjust is the “average price for the drug in the year.” . . . Such an adjustment can consist of moving the average-price number up or down, but it cannot consist of giving a single drug two different average prices for two different groups of hospitals.”

In reaching this decision, though, the Court did not invoke the Chevron doctrine, even though Justice Kavanaugh’s reasoning is indistinguishable from Judge Pillard’s reasoning in Azar—i.e., HHS’s position was “foreclosed at Chevron step one” because it was incompatible with the text of the Medicare statute. In fact, the word “deference” does not appear anywhere in the Becerra opinion, nor did the Court so much as mention its earlier decision in Chevron.

It is nonetheless difficult to escape the conclusion that the result in Becerra boiled down to a disagreement between the Court and HHS about what the phrase “as necessary for the purposes of” means in the context of the Medicare statute. That is, it seems that, contrary to the rule of Chevron, the Court substituted its own reading of the Medicare statute for HHS’s. Without expressly contesting the viability of the Chevron doctrine, Becerra establishes precedent that will allow courts to forego deference to administrative decisions through the simple expedient of more broadly classifying those decisions as contrary to the text of a Congressional mandate.

Practically minded defenders of the Chevron deference doctrine argue that it is too late to dismantle the legal scaffolding the Supreme Court has erected around the administrative state over the past 80-odd years. To burden federal courts with even part of the decision-making responsibility currently assumed by the agencies would impose an impossible obligation on an already overextended judiciary. They also point out that, even though Chevron may blur the line between the roles of the judicial and executive branches, it affords agency experts needed leeway to revise past assumptions in light of changing circumstances without having to go back to the Congressional well, or waiting years for mundane rulemakings to wend their way through the courts.

But these pragmatic arguments, whatever their merit, will likely sink beneath the wake left behind by the Supreme Court’s new tack. In the decades before Becerra, courts’ authority to override agency decision-makers was circumscribed by the deference doctrine. After Becerra, courts are at liberty to assume greater discretion to decide “whether Congress has directly spoken to the precise question at issue” and, therefore, whether the Chevron framework applies to federal court cases in the first place. This means that the Supreme Court will have the final say on a larger number of agency rulemakings, including agency interpretations of legislation establishing the boundaries of an agency’s jurisdiction.

And that final authority will necessarily extend beyond payments for pills. Although Becerra had nothing to do with, say, the U.S. Securities and Exchange Commission or the EPA, the decision will directly affect those agencies’ authority to regulate the nation’s securities markets and rural wetlands. For this reason, the decision may well signal the beginning of the end of the decades long growth of America’s administrative state, and represent one of the most far-reaching and permanent accomplishments of the Court’s new conservative majority.