Health-Related Litigation And The Supreme Court: The 2021 Term (Part 1)

Federal courts have long played a significant role in shaping health policy, and the Supreme Court’s current term is no exception. This is especially true given a shift in the Court’s makeup with an emboldened 6 to 3 conservative majority.  The stakes could not be greater—from women’s bodily autonomy to billions in Medicare funding to the scope of federal agencies’ authority—with consequences that will be felt for decades to come.

This article summarizes this term’s major health care decisions as of June 21, 2022 and highlights a few cases that are already on the Court’s docket (or could soon be) for the next term. Decisions to date focus on Medicare payment cuts to 340B hospitals, employers’ coverage of dialysis, disability discrimination by health care providers, state recoupment of settlement funds for Medicaid programs, and the public charge rule. A second article will summarize what are expected to be seismic decisions on abortion access, climate change, gun rights, and disproportionate share hospital payments. These opinions are expected in the next week or so.

Court Unanimously Rejects Trump-Era Cuts To 340B Hospitals

In American Hospital Association (AHA) v. Becerra, the Supreme Court sided with hospitals to invalidate federal Medicare reimbursement rules adopted by the Department of Health and Human Services (HHS). As a result, safety net and other hospitals that participate in the Section 340 program will receive billions of dollars more in Medicare funding for outpatient prescription drugs, and HHS will have to use different procedures if it wants to adopt a similar policy in the future.

Under the Medicare statute, HHS has two options to set reimbursement rates for certain outpatient prescription drugs. Federal officials can 1) conduct a survey of how much it costs hospitals to acquire each drug and then vary reimbursement rates by hospital group; or 2) set reimbursement rates based on the average price charged by drug manufacturers as calculated and adjusted by the Secretary.

For many years, HHS set the same rates for all hospitals under the second option. The agency continued to do so but issued rules for 2018 and 2019 that cut the reimbursement rates for only 340B hospitals. While other hospitals received the same rate as in prior years, HHS cut the rate for 340B hospitals by nearly 30 percent (or about $1.6 billion in annual Medicare funding). The cut was appropriate, HHS argued, because 340B hospitals receive a significant discount for these drugs from the manufacturer, meaning Medicare pays 340B hospitals more than the hospital pays for the drug. HHS adopted the cuts, asserting that Medicare should not continue to “subsidize” 340B hospitals.

The district court agreed with AHA that HHS exceeded its authority, but this decision was overturned by a divided panel of the D.C. Circuit. The majority there held that HHS’s interpretation of the Medicare statute was reasonable and thus entitled to deference under Chevron (a framework adopted by the Supreme Court in 1984 that directs courts to defer to an agency’s reasonable interpretation of an ambiguous statute).

The Decision

In a decision for a unanimous Court, Justice Kavanaugh reversed the D.C. Circuit’s decision. He did not address whether HHS’s interpretation of the Medicare statute was owed Chevron deference. Instead, he analyzed the text and structure of the law to conclude that HHS did not have the authority to make the cuts to only 340B hospitals in the manner that it did.

HHS’s authority to “adjust” the average price under the second drug-reimbursement option listed above does not extend to cutting reimbursement rates only for 340B hospitals. If HHS were allowed to do so, it would make the first option and the requirement to conduct a survey “largely irrelevant.” Further, the second option only allows HHS to “adjust” the average price of each drug (rather than the average price for each hospital group). The text and structure show that HHS could vary reimbursement rates for 340B hospitals in the future—but federal officials would have to first survey the hospitals about their costs (which it has attempted only once, in 2020).

Implications In Brief

All told, HHS can adjust reimbursement rates to 340B hospitals if it believes they are overpaid. But it cannot do so without first surveying hospitals about their acquisition costs. As discussed more here, 340B hospitals will benefit from increased funding which the hospitals had argued was needed to preserve care access and quality.

Notably, Justice Kavanaugh did not invoke Chevron deference—at least not by name—and instead referred to the case as “straightforward” given the text and structure of the statute. He sidestepped Chevron altogether even though AHA asked the Court directly to overrule Chevron deference to federal agencies. This will be an issue to continue to watch for those who care about health policy and administrative law, but the Court did not yet flip the table on Chevron.

We are waiting to see if hospitals will win in a separate case, Becerra v. Empire Health Foundation, that the Court should decide soon. Here too, there are billions of dollars in Medicare funding at stake, and it will be worth watching to see whether and how the Court invokes Chevron.

Dialysis Providers Can Be Cut Out Of Employer Insurance Networks

In Marietta Memorial Hospital Employee Health Benefit Plan v. DaVita—a 7 to 2 decision written by Justice Kavanaugh—the Court ruled that the Marietta Memorial Hospital Employee Health Benefit Plan did not violate the Medicare Secondary Payer statute even though it had no in-network dialysis providers. This meant that anyone in need of dialysis had to use an out-of-network provider which led to higher patient cost sharing. The plan also capped reimbursement for dialysis at 87.5 percent of the Medicare rate and imposed utilization management restrictions, such as claims audits and reviews.

In the 1980s, Congress enacted the Medicare Secondary Payer statute to ensure that Medicare is not responsible for paying for care covered by other sources of coverage when Medicare is not the patient’s primary insurance. Group health plans are the patient’s primary payer of dialysis costs for the first 30 months after a patient is diagnosed with end stage renal disease (ESRD). To prevent discrimination by plans against those with ESRD, Congress barred plans from taking into account whether an individual is eligible for Medicare because of ESRD and from differentiating in benefits provided to those with ESRD and others “on the basis of the existence of end stage renal disease, the need for renal dialysis, or in any other manner.”

DaVita argued that the inferior benefits offered by Marietta’s plan violated the Medicare Secondary Payer statute by limiting coverage and incentivizing individuals with ESRD to switch from the plan to Medicare. Marietta’s plan defended its restrictions by noting that each limit applied equally to all enrollees. Because the plan does not vary benefits or limitations only for those with ESRD, it does not differentiate between individuals with ESRD and others and thus does not violate the statute.

The district court agreed with Marietta, but a divided panel of the Sixth Circuit reversed. The majority on the Sixth Circuit held, among other things, that limited payments for dialysis treatment had a disparate impact on individuals with ESRD that violated the Medicare statute. The Ninth Circuit, in a separate appeal, held the opposite. The Supreme Court agreed to hear the case to resolve this split.

The Decision

In a highly formalistic opinion, Justice Kavanaugh reversed the Sixth Circuit’s decision, concluding that the group health plan did not violate the Medicare statute because it provided the same benefits to all plan participants, whether they had ESRD or were eligible for Medicare. The same terms apply uniformly to all individuals, even if those terms result in limited access for those with ESRD. Thus, there is no violation of the Medicare statute, and the plan design can remain.

Justice Kavanaugh rejected arguments that the statute authorizes a disparate impact theory because the text does not address the effects that plan terms might have on those with ESRD and because this standard would be “all but impossible” to implement. On this point, Justice Kavanaugh emphasized that the statute did not mandate a certain level or type of coverage for dialysis. Nor is this provision a traditional nondiscrimination statute; it merely requires equal benefits for individuals with and without ESRD.

In a dissent in part joined by Justice Sotomayor, Justice Kagan criticized the majority for barely grappling with the fact that limits on outpatient dialysis treatment are “an almost perfect proxy” for people with ESRD. While she agreed with the majority’s arguments regarding disparate impact, she emphasized that virtually everyone with ESRD needs outpatient dialysis. There is, she argued, no distinction between those who need outpatient dialysis and those with ESRD. Said another way, limits on access to this treatment penalize those with ESRD. She further argued that text of the statute is broad enough to cover this type of plan design. By including “on the basis of … the need for renal dialysis, or in any other manner,” Congress prohibited differentiation in services (not just as between individuals) to prevent private plans from asking federal taxpayers to pick up the bill for dialysis treatment.

As he did in AHA, Justice Kavanaugh noted that Congress could act if it wants to. It could have mandated group health plans to cover particular benefits or ensured parity between different kinds of benefits. But it did not do so here in what is merely a coordination of benefits standard for Medicare. Justice Kagan took a different view, noting that “now Congress will have to fix a statute this Court has broken.”

Implications In Brief

DaVita could have significant implications for employers, dialysis providers, and taxpayers. If more employers adopt the same restrictions, more people with ESRD would rely on Medicare before the end of the 30-month transition period. This would increase costs to the Medicare program (including Medicare Advantage plans) by billions of dollars while decreasing reimbursement to dialysis providers. Given this impact, dialysis providers such as DaVita may try to lobby Congress for statutory changes.

It is not clear whether DaVita will have an impact beyond dialysis. For instance, would the Court’s reasoning extend to a plan that excluded transition-related care but did not directly mention gender identity or transgender people? It is not clear. In rejecting the proxy theory, Justice Kavanaugh noted that this Medicare statute is “not a traditional antidiscrimination statute,” which suggests his analysis might be different for discrimination protections.

Parts of Justice Kavanaugh’s decision also echo concerns raised about compliance and enforcement of federal mental health parity requirements. He noted: “Absent some benchmark or comparator, courts would have great difficulty trying to make an apples-to-apples comparison of a plan’s coverage for outpatient dialy­sis against its coverage for other services.” The statutory scheme for mental health parity is different—and he notes that Congress does know how to require parity between different kinds of benefits—but there appear to be some parallels there.

It is also worth noting that the Health Insurance Portability and Accountability Act of 1996 (HIPAA) has long been read in a way that seems consistent with the Court’s decision in DaVita. HIPAA prohibits policies that discriminate against all employees: so long as benefits are uniformly available to all similarly situated individuals, coverage is not discriminatory. As an example, a plan could not adopt a lower lifetime dollar cap solely for an HIV-positive employee, but it could cap coverage of HIV-related expenses for all group members. (As discussed more here, many Republican proposals to maintain protections for people with preexisting conditions ahead of California v. Texas would have reenacted provisions similar to HIPAA that would have left significant gaps in coverage.)

Eroding Remedies For Victims Of Disability Discrimination In Health Care

On April 28, Chief Justice Roberts—in a 6 to 3 decision—limited the remedies for victims of disability discrimination in federally funded health care settings. The Chief Justice was joined by the five more conservative Justices; Justice Breyer dissented, joined by Justices Sotomayor and Kagan. Justice Kavanaugh, joined by Justice Gorsuch, filed a concurring opinion. On June 21, the Justices denied a request for a rehearing that was filed on May 23.

In Cummings v. Premier Rehab Keller, Jane Cummings—who is deaf and legally blind—sued Premier Rehab Keller after the Texas-based rehabilitation center refused to provide her with an American Sign Language interpreter to enable her to communicate with her physical therapist. She was forced to find another provider which delayed her ability to access treatment and care. She sued under Section 504 of the Rehabilitation Act and Section 1557 of the Affordable Care Act; these laws bar organizations that receive federal funds from discriminating against people with disabilities. Cummings asserted that Premier Rehab Keller—which receives federal funds through Medicare and Medicaid—illegally discriminated against her based on her disability in violation of these Spending Clause statutes.

Even though courts have long awarded damages for emotional distress in these types of cases, the district court dismissed Cummings’ case after finding that her only injuries were “humiliation, frustration, and emotional distress.” The Fifth Circuit agreed that damages for this type of harm were not recoverable. So too did the Supreme Court.

The Decision

Chief Justice Roberts analogized federal requirements imposed through the Spending Clause to a contract, which requires the parties to have clear notice of and then consent to these standards—and any penalties that might attach. He then asked whether a health care facility that accepts Medicare and Medicaid funds would be aware that it could be liable for emotional distress damages for discrimination. His conclusion? No, it would not be.

Though disputed by the dissent, Chief Justice Roberts concluded that emotional distress damages have not typically been recoverable in contract disputes. Therefore, recipients of federal funds like Premier Rehab Keller would not have notice that they could be liable for emotional distress damages when they agree to accept federal funds in exchange for a promise not to discriminate. (Justice Kavanaugh would have rejected the contract analogy altogether to conclude that emotional distress damages are not allowed because Section 504 and Section 1557 do not expressly authorize these remedies.)

In his dissent, Justice Breyer emphasized that Congress used the Spending Clause statutes to prohibit intentional invidious discrimination. He cited examples of a high school student being repeatedly sexually assaulted by her teacher, a person who uses a wheelchair being forced to crawl up two flights of stairs, and separate facilities and services for Black patrons under segregation. The major harm from these incidents is the indignity and humiliation of discrimination itself—and Justice Breyer thinks those who accept federal funds would almost certainly understand that intentional discrimination could cause emotional distress.

Implications In Brief

Victims of discrimination under Section 504 and Section 1557 can no longer receive compensation for emotional harm based on discrimination. Though not explicit, Cummings likely extends to other Spending Clause statutes too, including Title VI of the Civil Rights Act of 1964 and Title IX of the Education Amendments of 1972. Any fix to restore emotional distress damages for these statutes will have to come from Congress.

As has been written elsewhere, the decision “effectively closes the courthouse door to many individuals who experience unlawful discrimination by health providers and other federal funding recipients.” Victims can still sue—but only to recover direct monetary losses and injunctive relief from discrimination. Those who experience emotional suffering will be limited to filing a complaint with federal officials at the Office for Civil Rights at the U.S. Department of Health and Human Services.

Cummings does confirm that there is an implied private right of action under Section 1557, an issue that has been disputed in court and by different administrations. The Chief Justice called it “beyond dispute” that individuals can sue to enforce Spending Clause nondiscrimination statutes.

The Court had agreed to hear a separate case, CVS v. Doe, which could have gutted disparate impact claims for disability discrimination. But CVS ultimately withdrew its appeal following advocacy by disability rights organizations.

State Medicaid Programs Can Seek Patient Settlement Funds For Future Medical Care

In Gallardo v. Marstiller, Justice Thomas held that state Medicaid programs are not limited to recovering past medical expenses from a patient’s settlement; recovery can extend to future medical expenses as well. Here, the Court considered Florida’s efforts to recover parts of a settlement owed to the family of Gianinna Gallardo, a then-13-year-old girl who remains in a persistent vegetative state after being struck by a truck while stepping off her school bus in 2008. Florida’s Medicaid program paid nearly $863,000 to cover her initial medical expenses and continues to pay her medical expenses because of her permanent disability.

Gallardo’s family sued the truck’s owner and driver as well as the school district. The litigation was ultimately settled for $800,000, with about $35,000 expressly designated for compensation for past medical expenses. The settlement acknowledged that some portion of the remaining total “may represent compensation for future medical expenses” but no amount was specified.

Florida’s Medicaid Third-Party Liability Act includes a statutory formula that, once applied to Gallardo’s settlement, would have made the state presumptively entitled to over one-third—$300,000—of the total settlement. The state also believed it was entitled to reimbursement from her settlement payments for past and future medical expenses. Gallardo disputed this presumptive allocation through an administrative proceeding. Gallardo also sued in federal court, arguing that Florida’s attempt to recover funds from her settlement for future medical expenses violated the federal Medicaid Act. The district court agreed with Gallardo, but a divided Eleventh Circuit panel reversed after concluding that there is no conflict between federal and state law on this issue (so the Medicaid Act does not prohibit states from seeking reimbursement for future care).

The Decision

In a 7 to 2 decision, Justice Thomas affirmed the Eleventh Circuit’s decision and held that states can seek reimbursement from settlement payments for future care. This means Florida can take $300,000 from the settlement, not just the $35,000 expressly designated for past medical expenses.

Justice Thomas’ decision focused largely on the text and structure of various Medicaid statutes. Under Section 1396k of the federal Medicaid Act, states must make reasonable efforts to recoup medical costs from liable third parties. The law also includes an “anti-lien” provision in Section 1396p that prohibits states from recovering paid or unpaid medical payments from a Medicaid beneficiary’s property except under certain circumstances outlined in the statute.

Focusing primarily on Section 1396k (and dismissing arguments made by Gallardo, the Department of Justice, and the dissent), Justice Thomas rejected the argument that the anti-lien provision under Section 1396p preempts any state law that allows the state to recover settlement amounts beyond those paid by Medicaid for past medical care. Rather, Section 1396k qualifies as an exception under Section 1396p’s anti-lien provision and is not explicit on this point of whether recovery is limited to only past medical care. As such, Florida’s law is not preempted; the state can seek funds for past or future care paid for by the Medicaid program.

Justice Sotomayor, joined by Justice Breyer, dissented. The majority’s decision, she noted, is “inconsistent with the structure of the Medicaid program and will cause needless unfairness and disruption.” By focusing too narrowly on Section 1396k, the majority ignored the fact that the Medicaid Act’s anti-lien and anti-recovery provisions must be read together to ensure that being on Medicaid does not become treated, in Justice Sotomayor’s words, as “a loan.” When read together, the statute allows states to recover expenses paid but not expenses that it did not cover (and might never pay). The Court’s decision could also result in a lifetime assignment, Justice Sotomayor warned, allowing states to recover for not only the rights of an individual while a Medicaid beneficiary but any future rights when they are no longer a Medicaid beneficiary.

Implications In Brief And Future Cases To Watch

The decision—which allows states to obtain a larger portion of settlements from Medicaid beneficiaries—could discourage beneficiaries from suing those that caused harm in the first place. If Medicaid beneficiaries have less incentive to sue, states might recover even fewer amounts in past medical expenses.

At least one, but potentially more, Spending Clauses cases will be heard by the Court in its next term. As discussed at length here by Sara Rosenbaum and Tim Jost, the Court agreed to hear Health and Hospital Corp. v. Talevski, a Medicaid nursing home rights case that could be used to “strip Medicaid beneficiaries and the providers that serve them … of access to court to prevent state officials from unlawfully denying, reducing, or terminating benefits guaranteed under federal law.” If the Court does so, millions of Medicaid beneficiaries (and recipients of other federal benefits programs) would be stripped of their judicial protections.

We are also waiting to hear whether the Court will hear Kerr v. Planned Parenthood South Atlantic, which raises a question similar to that raised in Talevski. South Carolina first asks whether Medicaid beneficiaries and providers can sue to enforce the Medicaid Act and other Spending Clause statutes. If so, can South Carolina lawfully exclude Planned Parenthood from the state’s Medicaid program? Abortion providers such as Planned Parenthood have argued that states cannot exclude qualified providers under the Medicaid Act’s “freedom of choice” provision, which guarantees that Medicaid beneficiaries have the right to receive family planning services from any willing and qualified provider.

Republican Attorneys General Cannot Intervene To Defend Trump-Era Public Charge Rule

In a per curiam (unsigned) decision, the Court dismissed a case known as Arizona v. City and County of San Francisco as improvidently granted. This lawsuit is part of a long history of litigation over the Trump administration’s public charge rule from 2019. The Court agreed to hear appeals over the public charge rule in February 2021 but soon granted a joint stipulation to dismiss the appeal from the Biden administration and the plaintiffs in early March.

The Department of Justice then asked for dismissal of pending appeals in several appellate courts. Once the Seventh Circuit Court of Appeals dismissed its appeal, a nationwide vacatur of the rule from a district court in Illinois went into effect. Citing the Illinois district court decision (and other challenges), the Biden administration issued a final rule (without any notice and comment process) that revoked the underlying Trump-era public charge rule. In its place, the Department of Homeland Security announced it would resume using interim field guidance from 1999; this is the standard that was in place before the 2019 rule.

Federal officials subsequently issued an advance notice of proposed rulemaking in August 2021 and a full proposed rule in February 2022. But that did not stop Republican attorneys general—led by Arizona—from trying to keep the Trump-era litigation alive. On October 29, the Court agreed to consider whether Arizona could intervene to defend the prior public charge rule when the federal government ceases to do so. (Notably, Arizona asked the Court to decide on the validity of the underlying public charge rule itself, but the Court declined to do so by agreeing to hear only the issue of whether the states could intervene in the litigation.)

The Decision

The Court dismissed Arizona as improvidently granted, meaning there is no decision and the Court should not have agreed to hear the appeal in the first place. This preserves a decision from the Ninth Circuit that Arizona could not intervene in litigation to defend the old rule. Although the decision was per curiam, Chief Justice Roberts—joined by Justices Thomas, Alito, and Gorsuch—took time to file a concurrence that criticized the Biden administration’s actions in not defending and then withdrawing the 2019 rule without providing an opportunity for notice and comment. A new administration can change its position, the Chief Justice wrote, but he is clearly troubled by the “maneuvers” used by the administration to rely on a lower court decision in withdrawing the rule while circumventing notice and comment procedures.

These concerns notwithstanding, he wrote that there are many issues at play—such as standing, mootness, vacatur, the scope of relief under the Administrative Procedure Act, and nationwide injunctions—that “complicate” the Court’s resolution of this issue. Chief Justice Roberts also stressed that this decision should not be viewed as the Court weighing in on any substantive issues related to the 2019 public charge rule or its replacement.

Implications In Brief

The Court made an appropriate decision here in my view. The 2019 public charge has been rescinded and is in the process of being replaced by the Biden administration. Even if some Justices take issue with the process that was used, the idea of allowing states to intervene to defend the now-withdrawn rule would have made an already complicated process even more complex. It also could have opened the door to even more litigation and intervention by state attorneys general since one question in Arizona was whether states satisfied the standard for intervening in the litigation in the first place.