Has Chevron Step One Stepped to Center Stage?

COMMENTARY Courts

Has Chevron Step One Stepped to Center Stage?

Jul 5th, 2022 8 min read
COMMENTARY BY
Jack Fitzhenry

Senior Legal Policy Analyst, Edwin Meese III Center

Jack is a senior legal policy analyst at The Heritage Foundation.
Xavier Becerra, Secretary of Health and Human Services speaks during a press conference in Washington, D.C. on June 28, 2022. NICHOLAS KAMM / AFP / Getty Images

Key Takeaways

Even under Chevron, courts owe no deference to agencies when courts first assess the meaning of a statute or frame the question presented by a particular case.

From the outset, Srinivasan said that HHS’s interpretation deserved Chevron deference. So where was the statutory ambiguity which HHS was entitled to interpret?

AHA v. Becerra is not the only recent decision in which the Court called for lower courts to take a hard look at the statute before giving deference to agencies.

Unanimous Supreme Court rulings are always less likely to generate headlines. So, in a term like this, which is set to put all prior “blockbuster” terms to shame, last Wednesday’s 9-0 ruling in American Hospital Association v. Becerra isn’t likely to garner much press.

But this is a case that split the D.C. Circuit, considered by many to be the second highest court in the land. And when that court is reversed by the whole Supreme Court, a little digging is in order to discern what’s behind that resounding reversal.

As one commentator noted, in “American Hospital Association v. Becerra, the Supreme Court had a chance to upend the administrative state” by cutting back the doctrine of Chevron deference to agencies’ interpretations of ambiguities in the statutes they administer. But that didn’t come to pass, and to those who’ve taken a few minutes to read Justice Brett Kavanaugh’s opinion, that concern now sounds overwrought. Could a case so straightforward that it commanded the agreement of all nine justices, with their disparate views of the administrative state, really have posed any serious danger to the centerpiece of the Court’s administrative law jurisprudence? And if not, then what significance, if any, can we assign to this decision?

Perhaps it’s a reminder to lower courts that Chevron deference would generate less controversy if it were applied more carefully; that is, ambiguity cannot be judge-made. Even under Chevron, courts owe no deference to agencies when courts first assess the meaning of a statute or frame the question presented by a particular case. This is the essence of Chevron Step One, which directs courts to examine the statute in question and give the statute’s plain terms controlling effect when they are clear.

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Apart from the fact that agency action was being reviewed, AHA v. Becerra lacked an obvious partisan significance. The case concerned a Department of Health and Human Services decision to cut Medicare reimbursements on prescription drugs to certain hospitals—not an issue classically associated with either political party. All three D.C. Circuit panel members were Obama appointees, not known as allies of the Trump administration, under whose watch HHS took the action in question.

Yet the D.C. Circuit’s opinion had a distinctly purpose-driven tone. Chief Judge Sri Srinivasan, joined by Judge Patricia Millett, took pains to emphasize how sensible HHS’s action was. The agency was merely correcting a case of chronic overpayment to so-called “340B hospitals,” which serve rural and poorer communities. In general, the reasonableness of an agency ceasing to overpay public funds scarcely needs a defense. Even fiscal conservatives might give half a cheer for an agency redirecting tax dollars toward better uses. So great was the practical appeal of HHS’s purpose that it seemed to dictate Srinivasan’s framing of the questions before the court:

Was HHS obligated to continue reimbursing 340B hospitals for [outpatient prescription drugs] 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?

Who could reply “yes” to this question? Courts can’t mandate fiscal irresponsibility, right? But this general framing obscured the actual dispute. The Medicare statute was clear that HHS had the power to avoid future overpayments to 340B Hospitals for prescription drugs. The question was whether HHS had taken the necessary steps to treat 340B hospitals differently from other hospitals. It was Judge Nina Pillard’s dissent that honed in on this disputed point.

From the outset, Srinivasan said that HHS’s interpretation deserved Chevron deference. So where was the statutory ambiguity which HHS was entitled to interpret? It had to lie in the word “adjust.” HHS explained that its action was valid under its statutory authority to “calculate and adjust” drug payments and that it interpreted the adjustment power to authorize its reduction in reimbursements to 340B hospitals to accord with their actual costs. The agency paired this explanation with the de rigueur assertion that Congress had delegated to “the Secretary broad discretion to adjust payments for drugs.” Really, it might be impudent even to question HHS’s discretion, given its evident vastness.

Srinivasan reasoned that there was “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).” He explained that “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).” Later, he pointed out that “it is undisputed . . . that the proposed adjustment accurately and reliably approximates procurement costs.” Again, the weight of his analysis rests heavily on how sensible the agency action appears, not on the particulars of Congress’s statutory framework.

Kavanaugh, and Pillard before him, pointed out why this was not a plausible reading of the statute in question. The two subclauses Srinivasan referenced represent separate alternatives which HHS could choose between. But by assuming that HHS could reach the same result via either section, the D.C. circuit ran afoul of the interpretive rule that “where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”

Congress located HHS’s power to vary reimbursement rates among hospitals in a separate subclause from the adjustment power. In that separate clause Congress expressly conditioned HHS’s power to vary reimbursement rates on the performance of a drug-acquisition-cost survey, which HHS concededly had not done. HHS’s ability to reference any particular hospital’s actual acquisition costs is connected to this survey and not referenced in connection with the general power to adjust drug prices. If the power to “adjust” subsumed the power to “vary,” the first subclause would be a redundant route to the same end, one which HHS would never take willingly because the required survey was a complex undertaking.

The D.C. Circuit tried to avoid these wrinkles by asking “whether HHS permissibly conceived of the ‘purposes of th[e] paragraph’” in question, i.e., the adjustment subclause. The majority found that HHS would satisfy this purpose-based inquiry so long as Congress had not “unambiguously barred HHS from seeking to align reimbursements with acquisition costs under subclause (II), or that HHS’s belief that it could do [so] was [not] unreasonable.”

These criteria come from Chevron’s focus on whether Congress has spoken to the “precise question at issue.” But the D.C. Circuit’s approach precluded the possibility that the structure Congress gave to its statutory framework could clearly preclude the agency’s proposed interpretation, as it did here. Instead, the D.C. Circuit looked for language expressly depriving HHS of the ability to vary reimbursements between hospital groups under the guise of an adjustment. Such an approach would require Congress not only to be clear in what it commands, but also unusually prescient in anticipating all possible misinterpretations an agency might give those commands. In short, two of the three judges on the D.C. Circuit were too anxious to show deference by taking the view that any powers not explicitly denied to the agency were reserved to the agency.

Kavanaugh identified where the D.C. Circuit went astray. But in answering one question, his opinion raised another: why was Chevron completely omitted? Though the Court supposedly granted certiorari to determine “[w]hether Chevron deference permits HHS to set reimbursement rates based on acquisition cost and vary such rates by hospital group,” his opinion has not a single citation to Chevron. Did Chevron play any role in the decision?

Several commentators have observed that Kavanaugh’s attention to the statutory text and structure reads like a classic application of “step one” in Chevron’s familiar two-step analysis. But they drew different conclusions from that fact.

One suggested that this cold-shoulder approach is the Court’s effort to usher Chevron quietly out the side exit without the trouble and embarrassment of an outright overruling. But assuming the Court is not inclined to apply the decision, how likely is it that Justices think “ghosting” Chevron is a viable long-term approach? Like a troublesome relative, Chevron will keep reappearing. No matter which party occupies the White House, agencies will continue to assert an entitlement to deference so long as there remains some possibility of receiving it. And cases will arise where the agency’s claim to that entitlement will present a closer question. Given the sheer breadth of high-profile executive priorities funneled through administrative agencies, it would be nigh impossible for the Court to avoid granting certiorari in all cases implicating Chevron deference. One way or another, Chevron will be invited back to the high court.

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Another saw the Kavanaugh decision as rigorously faithful to Chevron Step One and an admonition to lower courts to be more attentive to this phase of the inquiry before rushing to the favored exercise of assessing the agency’s reasonableness and then graciously deferring. In other words, the problem is not that the Supreme Court is ignoring Chevron, it’s that the lower courts are ignoring Chevron Step One. This seems like the more plausible view.

But while too much can be made of the omission, Kavanaugh’s failure to cite Chevron could hardly be accidental. The justices may have determined that this was only peripherally a case about administrative law. The fact that an agency was a party turned out to be incidental to the case’s merits. There was no question about whether HHS’s rule went through notice and comment, no question about whether HHS had ignored relevant public input, and ultimately no real question about deference under Chevron, Skidmore, Auer, or any other admin law doctrine. When the Court resolves the case by resorting to “the traditional tools of statutory interpretation,” the holding applies to a host of parties other than agencies. But agencies and courts alike should take note, because whether AHA v. Becerra was, strictly speaking, an admin law case or not, the message that courts should tighten up the statutory inquiry affects many agency cases.

Will lower courts heed the message? There’s reason for doubt. Chevron is just one specific outgrowth of the legal profession’s inclination to defer to expertise in policy making, expertise embodied in agency personnel. It stems from a philosophy of government as much as from any specific legal doctrine. At its most benign, it is a desire by judges to avoid gumming up the works of government with overly technical, “gotcha!” rulings that just send administrators back to redo their homework. This accounts, at least partially, for the tendency among courts to look slantwise at statutory text and structure and discern what Justice Antonin Scalia memorably termed “agency-liberating ambiguity.” But courts must be wary about “liberating” entities whose authority to govern is entirely borrowed from other constitutionally vested actors. This concern, though, provides only an inconsistent check on the lure of expertise, and as others have noted, AHA v. Becerra is not the only recent decision in which the Court called for lower courts to take a hard look at the statute before giving deference to agencies. Thus, even as the Court directs Chevron Step One back to center stage, it remains to be seen how or if the audience will respond.

This piece originally appeared in The Federalist Society

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