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The Supreme Court’s ‘American Hospital’ case: A view of the DC swamp

The Supreme Court’s ‘American Hospital’ case: A view of the DC swamp

This essay first appeared in the June 20, 2022 Epoch Times.

Critics of federal administrative agencies won a small victory in the Supreme Court on Jun. 15 with the justices’ unanimous decision in American Hospital Association v. Becerra (pdf).

Justice Brett Kavanaugh’s opinion for the court offers, perhaps inadvertently, some revealing views of the D.C. Swamp: ridiculous legal complexities, absurdities in a major federal social program, and raw special interest politics.

The American Hospital case arose because (1) rural hospitals were trying to grab $1.6 billion annually in extra Medicare cash and (2) the U.S. Department of Health and Human Services (HHS) overreached while trying to stop them.

An Initial Glimpse of the Swamp: Medicare

Medicare is the second-largest government program. (Disclosure: I’m enrolled in Medicare because federal law requires it.) It illustrates how federal social problems almost always are counterproductive, how they drive up spending, and how—under the existing Swamp protocols—they almost always grow.

Medicare’s initial sponsors promoted it as a low-cost program covering hospitalization. Now it consumes about an eighth of the entire federal budget. Despite its humongous tax base, the program is about four years away from bankruptcy.

Medicare has played a major role in driving health care costs from reasonably affordable levels to stratospheric heights few can afford. This, in turn, results in tens of millions of Americans being desperately dependent on Medicare—stuck in the bureaucratic mire, so to speak.

In addition to hospitalization, Medicare now pays for hospitals to give away free prescription drugs to people who are not hospitalized. Why? Because in 2003, a supposedly “conservative” Republican Congress further expanded the already-gargantuan program, and a supposedly “conservative” Republican President, George W. Bush, signed it into law. (Yes, I know there were arguments for the expansion, but there were better arguments for free market alternatives.)

Next Glimpse of the Goo: The Medicare Statute

Examining Congress’s Medicare statute tells you more about the D.C. quagmire. The law is inconceivably complex. This ensures that almost no one outside the D.C. beltway (except a few special interests) has any idea what it means. One single section of the statute—the “payment of benefits” section—comprises over 32,000 words. That’s as long as a modest-sized book.

The “payment of benefits” section includes a dizzying array of subdivisions. Consider the following example: Traditional statutes are split into sections and subsections, so a typical reference might be “Section 2(a)” or perhaps “Section 2(a)(ii).” But the provision of law at issue in the American Hospital case was “United States Code, Title 42, Chapter 7, Subchapter XVIII, Section 1395l(t)(14)(A)(iii).” In other words, it is a subsection … of a subsection … of a subsection … of a subsection … of a section … of a subchapter … of a chapter . . . of Title 42.

You can add agency regulations on top of that.

Another Glimpse: Paying Marsh Critters

In the American Hospitals case, the Supreme Court had to interpret the legal rule defining how the feds reimburse hospitals for handing out free medications.

The law says that HHS has two options. The first option is to pay hospitals 106 percent of the drug’s average sales price. This is a really good deal for the hospitals: There’s no adjustment for any discount they may get for buying in volume, and they collect a 6 percent profit on top of that. This motivates them to hand out as many free drugs as possible. As you can see, the hospital and pharmaceutical lobbies reside in the Swamp.

The law’s second reimbursement option is for HHS to conduct a survey to find out what the hospitals actually are paying for the medicines. Then HHS can reimburse on that basis. This might save some money. But when the American Hospitals case arose in 2018, HHS had never yet conducted a survey.

Price Controls in the Bog

Maybe you think price controls are a thing of the past because they proved their futility during the Nixon and Carter administrations. If so, you don’t know the Swamp. Another portion of the Medicare law forces drug companies to sell their product at a fixed discount to favored hospitals—in Swamp jargon, “340B hospitals.” These (supposedly) are hospitals serving lower-income or rural communities.

Under the 106 percent reimbursement formula, 340B hospitals can feast like alligators: They get paid 106 percent of the normal price for drugs and pay only 77.5 percent. Of course, the lobbyists for the 340B hospitals have a heart-tugging justification for this indefensible situation. They always do. Here’s how the court described it:

“[T]he 340B hospitals asserted that reducing their reimbursement rates for prescription drugs would force those hospitals to eliminate or dramatically curtail other crucial programs that provide a wide range of medical services in low-income and rural communities—such as treatments for cancer, mental health issues, opioid addiction, and diabetes.”

This sounds appealing. But it overlooks the fact that almost all other hospitals also have to minister to patients with those ailments. It also overlooks the medical needs of citizens not on Medicare, most of whom have to pay their own health care costs and federal taxes as well.

More From the Mire: HHS Tries to Respond

HHS responded to this situation by cutting the prescription reimbursement rate to 340B hospitals to reflect the cost discount they were getting.

HHS’s response would have saved about $1.6 billion a year. It probably was the right thing to do. But if you think the “right thing” would save money for the taxpayers or reduce the deficit, guess again. The court’s opinion explains that any savings “by law would be re-allocated for other Medicare services.” In other words, it would allow HHS bureaucrats to divert the money to projects they prefer.

The legal problem with HHS’s maneuver was this: On its face, the law gives HHS power to differentiate among hospitals only if the agency first does a cost survey. And, as I said earlier, HHS had never done a cost survey.

The Court’s Decision

Finally, we come to the small victory against the administrative state: In 1984, the Supreme Court decided Chevron v. Natural Resources Defense Council (pdf). The Chevron ruling said that when a law isn’t clear about how much authority the agency has, the agency—not a court—determines the question. The agency’s decision must be “reasonable,” but as a practical matter, its decision is usually final.

Justice Kavanaugh is known to be a critic of Chevron. He doesn’t think a government office grasping for power should be the judge in its own case.

In American Hospital, HHS claimed that allowing it to reimburse hospitals at different rates was a reasonable interpretation of the statute.  But the court didn’t apply Chevron. The court simply said the HHS view was legally wrong. This could be a sign that the Chevron rule is on the way out.

It says a lot about the Swamp that the case clipping bureaucrats’ power was one in which they were probably trying to do the right thing.

Another Sign of the Slough? A Poorly Drafted Opinion

The reasons for the justices’ American Hospital decision likely could have been explained in three or four pages. Instead, the opinion consumes 14. It’s quite repetitive: For example, it describes HHS’s two reimbursement options (average sales price or cost survey) four separate times.

Another sign of sloppy drafting is how the opinion treats the word “data.” Properly speaking, “data” is the plural form of “datum.” So one should say, “This datum is” and “these data are.”

The Medicare statute correctly treats “data” as the plural form. But the court’s opinion shifts back and forth. On page 3, the opinion treats it as a singular (“that data” rather than “those data”). This happens again on page 9. But later on page 9 the word is treated as a plural (“data are”) and this remains so on page 10 (“data … help”) and page 13 (“data justify”).

Why the mess? We’ll never know. It looks like there was mauling by multiple paws at the draft stage. And someone who was supposed to proofread or edit the result didn’t do a very good job.

No matter: The Swamp is guilty of far worse.

Rob Natelson