Supreme Court ruling on Chevron makes regulations in healthcare (and other industries) more vulnerable to legal challenges

The U.S. Supreme Court issued a decision Friday that has dramatic implications for the regulatory infrastructure in healthcare, among many other industries.

Since it was established in a 1984 case, Chevron deference has served as guidance to courts that regulatory authorities such as CMS and dozens of others across the federal government have license to use regulations to fill in gaps or ambiguities in legislation. Courts thus should give leeway to regulatory bodies in their rulings.

As court watchers had predicted, the Supreme Court overturned that precedent in its decision on a pair of cases brought by fisheries seeking to have commerce-related regulations invalidated.

“Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority,” Chief Justice John Roberts wrote in the 6-3 majority opinion. He added that courts are in a better position than agencies to resolve statutory ambiguities.

With the long-standing guidance eliminated, potential developments include lawsuits against many existing and future regulations issued by agencies like HHS, CMS, FDA, the IRS, the Environmental Protection Agency and others, resulting in a patchwork of regulatory applications if some courts rule against the lawfulness of a regulation while others rule for it. Ultimately, such discrepancies likely would be resolved at the Supreme Court, but it can take months or years for a case to get there.

“Courts, in particular this court, will now play a commanding role” in policymaking, Justice Elena Kagan wrote in a dissenting opinion, noting that whereas “agencies have expertise” in scientific and technical matters, “courts do not.”

There’s one way in which the impact appears likely to be limited: Roberts said prior judicial decisions that hinged on Chevron deference are not affected by Friday’s ruling.

Prospects for chaos

Some legal analysts see a scenario in which the finer points of Medicare policymaking, for instance, get thrown to the courts.

Citing two HHS agencies as examples, authors with Yale University wrote in March in JAMA that “[t]he FDA and CMS can only issue informed, authoritative and responsive regulations if their expert judgment is not subject to routine second-guessing through the courts. Overturning Chevron could invite legal challenges to any and all agency determinations of ambiguous statutes by any stakeholder, leaving individual courts with the impractical task of determining the ‘correct’ meaning of statutes without the benefit of requisite expertise, practical experience or public engagement. The spillover effects for medicine and public health, in turn, will be consequential.”

Stakeholders such as hospitals that disagree with CMS’s application of the market basket in annually determining Medicare payments would have a better chance at winning a lawsuit over that issue. For that matter, criteria that determine whether Medicare should cover an item or service could be up for dispute.

In a statement after the ruling, medical and public-health associations wrote of a “significant disruption to publicly funded health insurance programs, to the stability of this country’s healthcare and food and drug review systems, and to the health and well-being of the patients and consumers we serve.”

In an analysis published in January, attorneys with Morgan Lewis described the possibility of a muddled case docket. Among many other examples of vulnerable healthcare regulations is FDA’s broad authority to establish safety protocols for drugs and medical devices (along with food and cosmetics).

“There are thousands of pages of regulations and manuals containing agency interpretations of program requirements such as coding submissions for risk adjustment payments, the low-income patient percentage to qualify for disproportionate share hospital payments, supervision requirements for use of physician extenders and contracting requirements for managed care organizations,” they wrote.

“For decades, CMS has released annual fee schedules and payment adjustments that have formed the bases for many legal challenges against agency policy over the years and would furnish ample additional volume for the flood of litigation [some] justices fear should the gates of Chevron open. Will courts have to become experts on the nuances of claiming reimbursement on hospital cost reports or make decisions on what specific elements are necessary for a sufficient compliance program?”

Why the consequences may not be drastic

In a Bloomberg Law analysis published in May, attorneys with Ropes & Gray explained that the impact of a Chevron ruling could be restricted because decisions at the appellate level and Supreme Court have been deemphasizing the doctrine in recent years. Per that interpretation, the ultimate adjudication of cases would not change profoundly.

“A review of recent jurisprudence involving challenges to federal agencies’ statutory interpretations suggests the impact of such a ruling may be more limited than expected at first blush,” they wrote. “Following recent precedent of the Supreme Court, some appellate courts have already refrained from applying Chevron. A diminished Chevron would most affect district courts that have been continuing to follow Chevron and would potentially need to dust off traditional tools of statutory interpretation to determine the best statutory reading themselves.”

At the Supreme Court, two decisions issued in 2022 and pertaining to hospitals did not rely on Chevron, the analysis notes. One resulted in a $9 billion remedy for hospitals stemming from underpayments in the 340B Drug Pricing Program, while the other notably backed HHS’s interpretation of the formula for determining disproportionate share hospital payments.

If nothing else, the knowledge that Chevron deference does not apply figures to encourage more prospective plaintiffs to bring cases. If district courts become more likely to reject regulatory guidance, key questions in any given case would include whether a court is inclined to: 1) apply its ruling universally or only for the plaintiffs and 2) stay its ruling in the event of a potential appeal.

What should change

Legal experts say Congress will need to get more prescriptive in the statutes it authors to avoid having a raft of future regulations end up in the courts. That may be a tall order, however.

“Expecting the U.S. Congress to draft legislation with sufficient detail to account for all possible regulatory scenarios and unforeseen circumstances is not realistic,” the Yale authors wrote in JAMA.

A May analysis by Julius Hobson Jr., policy analyst with Polsinelli, notes a potential workaround: negotiated rulemaking, a process in which a committee of agency experts and affected parties collaborates on proposed regulations.

“Although negotiated rulemaking is not appropriate for all regulations, advocates have felt the approach can speed rule development, reduce litigation and generate more creative and effective regulatory solutions,” Hobson wrote. “Congress has sometimes mandated negotiated rulemaking and established specific procedures and time frames to follow.”

He added that stakeholders should “advocate to convince Congress to draft more detailed legislation. Then, they must step up participation in the regulatory rulemaking process. This means communicating with agencies prior to drafting proposed rules, as well as commenting once the proposed rules are published in the Federal Register.”