United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2019 Decided July 31, 2020

No. 19-5048

AMERICAN HOSPITAL ASSOCIATION, ET AL.,

APPELLEES

v.

ALEX MICHAEL AZAR, II, IN HIS OFFICIAL CAPACITY AS THE 

SECRETARY OF HEALTH AND HUMAN SERVICES AND UNITED 

STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLANTS

Consolidated with 19-5198

Appeals from the United States District Court

for the District of Columbia

(No. 1:18-cv-02084)

Alisa B. Klein, Attorney, U.S. Department of Justice, 

argued the cause for appellants. With her on the briefs were 

Mark B. Stern and Laura E. Myron, Attorneys, Robert P. 

Charrow, General Counsel, U.S. Department of Health & 

Human Services, Janice L. Hoffman, Associate General 

Counsel, Susan Maxson Lyons, Deputy Associate General 

Counsel for Litigation, and Robert W. Balderston, Attorney.
2

Thomas R. Barker and Andrew M. London were on the 

brief for amicus curiae Federation of American Hospitals in 

support of defendants-appellants.

William B. Schultz argued the cause for plaintiffsappellees. With him on the brief was Margaret M. Dotzel.

Before: SRINIVASAN, Chief Judge, and MILLETT and 

PILLARD, Circuit Judges.

Opinion for the Court filed by Chief Judge SRINIVASAN.

Opinion dissenting in part filed by Circuit Judge PILLARD.

SRINIVASAN, Chief Judge: When hospitals provide 

outpatient care to patients insured by Medicare Part B, the 

federal government reimburses the hospitals for the care. Until 

recently, the government reimbursed all hospitals at a uniform

rate for providing covered drugs. In 2018, though, the 

Department of Health and Human Services reduced the 

reimbursement rate for covered drugs by 28.5% for certain 

hospitals known as “340B hospitals” by virtue of their 

participation in the federal 340B Drug Pricing Program for 

underserved populations. HHS cut the reimbursement rate for 

340B hospitals because they can obtain drugs far more cheaply 

than other hospitals. As HHS saw it, Medicare should not 

reimburse hospitals more than they paid to acquire the drugs.

Several hospitals and hospital associations challenge 

HHS’s decision, claiming that it rests on an impermissible 

construction of the governing statute. The district court agreed 

with the plaintiffs that HHS had exceeded its statutory 

authority by reducing drug reimbursement rates for 340B 

hospitals. We disagree. We hold that HHS’s decision to lower
3

drug reimbursement rates for 340B hospitals rests on a 

reasonable interpretation of the Medicare statute.

I.

A.

The Medicare program provides health insurance to the 

elderly and disabled. Medicare Part A provides coverage for 

inpatient care, i.e., care provided while a patient is admitted to 

a hospital or skilled nursing facility. Medicare Part B covers 

various other services including outpatient (or same-day)

hospital care. Part B thus pays for certain drugs, such as 

immunosuppressants or chemotherapy drugs, administered in a 

hospital setting on an outpatient basis. Part B beneficiaries 

generally pay 20% of their bill out of pocket as coinsurance.

The Department of Health and Human Services (HHS) 

annually establishes Part B reimbursement rates through 

notice-and-comment rulemaking. In setting the rates, HHS 

uses the “Outpatient Prospective Payment System,” or OPPS. 

See 42 U.S.C. § 1395l(t). See generally Am. Hosp. Ass’n v. 

Azar, No. 19-5352, slip op. at 3–6 (D.C. Cir. July 17, 2020). 

The OPPS requires HHS to fix the amounts it will pay 

providers for certain services before the year begins (rather 

than after the care has been provided). Congress moved to that 

prospective system to enhance HHS’s ability to control Part B 

costs. See Medicare Program; Prospective Payment System for 

Hospital Outpatient Services, 65 Fed. Reg. 18,434, 18,436–37 

(Apr. 7, 2000); Paladin Cmty. Mental Health Ctr. v. Sebelius, 

684 F.3d 527, 528–29 (5th Cir. 2012).

For most types of covered care, the Medicare statute 

instructs HHS to set annual OPPS reimbursement rates through 

a complex formula that gives the agency significant discretion. 
4

See 42 U.S.C. § 1395l(t)(2). For certain kinds of services, 

however, the OPPS limits that discretion and sets out a specific 

methodology for calculating payment rates. That is the case 

for certain drugs covered by Part B, known as “specified 

covered outpatient drugs” or SCODs. 

The statute requires HHS to calculate the reimbursement 

rate for SCODs in one of two ways. First, under 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(I), which we will refer to as subclause 

(I), HHS may use “the average acquisition cost for the drug . . . 

as determined by the Secretary taking into account . . . hospital 

acquisition cost survey data.” Second, under 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(II), which we call subclause (II), “if 

hospital acquisition cost data are not available,” HHS must use 

“the average price for the drug” as established by a separate,

cross-referenced statute. In the event HHS uses average price 

under subclause (II), that price metric may be “adjusted by 

[HHS] as necessary for purposes of this paragraph.” Id. 

Since 2006, when those two statutory pricing alternatives 

took effect, HHS has not had the “hospital acquisition cost 

survey data” contemplated by subclause (I). As a result, HHS 

has had to use the average price metric. See Medicare and 

Medicaid Programs: Hospital Outpatient Prospective Payment 

and Ambulatory Surgical Center Payment Systems and Quality 

Reporting Programs, 77 Fed. Reg. 68,210, 68,385–86 (Nov. 15, 

2012). The parties here agree that, by virtue of a statutory

cross-reference, a drug’s default “average price” equals 106% 

of its “average sales price,” or ASP. See 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(II) (citing 42 U.S.C. § 1395w-3a(c)). 

HHS calculates ASP every quarter using sales data 

confidentially provided by drug manufacturers. 

HHS’s average price “methodology . . . has always 

yielded a finalized payment rate [for SCODs] in the range of 
5

ASP+4 percent to ASP+6 percent,” or 104% to 106% of ASP. 

77 Fed. Reg. at 68,386. As a result, all hospitals have been paid 

the same rate—104% to 106% of ASP—for SCODs. Medicare 

Program: Hospital Outpatient Prospective Payment and 

Ambulatory Surgical Center Payment Systems and Quality 

Reporting Programs, 82 Fed. Reg. 52,356, 52,494–95 (Nov. 13, 

2017). From 2013 to 2017, that rate was 106% of ASP, 

unadjusted from the statutory default average price.

B.

That changed in late 2017, when HHS announced SCOD 

payment rates for the upcoming 2018 OPPS year. Invoking its 

subclause (II) authority to “adjust” the average price metric, 

HHS for the first time established two separate rates: one rate 

for hospitals participating in a drug discount program known 

as the “340B program,” and another rate for all other hospitals. 

The rate for non-340B hospitals remained at ASP+6%, or 

106% of ASP. The rate for 340B hospitals was “adjusted” 

down to ASP minus 22.5%, or 77.5% of ASP. 

To understand HHS’s reasons for reducing SCOD 

reimbursement rates for 340B hospitals, it is helpful to review 

the background of the 340B program. The program takes its 

name from the section of the Public Health Service Act that 

authorizes it. See Pub. L. No. 102-585, § 602, 106 Stat. 4943, 

4967–71 (1992). The program allows covered entities

(including eligible hospitals) to purchase drugs from 

manufacturers at heavily discounted rates. See 42 U.S.C. 

§ 256b(a)(4). The covered entities generally care for 

underserved populations, and the discounted rates enable the 

providers to “stretch scarce Federal resources as far as 

possible.” H.R. Rep. No. 102-384 (II), at 12 (1992). 
6

The program requires manufacturers, as a condition of 

having their drugs covered by Medicaid, to sell each covered 

drug to 340B entities at a “ceiling price” (set by statutory 

formula). 42 U.S.C. § 256b(a). The program covers at least 

3,500 drugs, 82 Fed. Reg. at 52,494, and the government 

estimates that 340B sales make up approximately 2.8% of the 

total U.S. drug market. Health Resources and Services 

Administration, Justification of Estimates for Appropriations 

Committees Fiscal Year 2018, at 244, https://www.hrsa.gov/

sites/default/files/hrsa/about/budget/budget-justification2018.pdf.

Over the past several years, observers have raised concerns

about the intersection of the 340B program with Medicare Part 

B. Government reports found that 340B hospitals typically pay 

between 20% and 50% below ASP for covered drugs. When 

hospitals provide 340B drugs that qualify as SCODs to 

patients, the hospitals then seek reimbursement from Medicare 

Part B. Until 2018, the reimbursement rate was 106% of ASP. 

There was thus a large gap between the amount a 340B hospital 

would spend to acquire a SCOD and the higher amount 

Medicare would reimburse that hospital. The gap ranged from 

25% to 55% of the cost of the drug. See, e.g., U.S. Government 

Accountability Off., GAO-15-442, Medicare Part B Drugs: 

Action Needed to Reduce Financial Incentives to Prescribe 

340B Drugs at Participating Hospitals (June 2015), 

https://www.gao.gov/assets/680/670676.pdf.

When it came time to set 2018 OPPS rates, HHS decided 

to address the 340B-Part B payment gap. HHS believed that 

the gap “allow[ed] [340B] providers to generate significant 

profits when they administer[ed] Part B drugs.” 82 Fed. Reg. 

at 52,494. Seeking to shrink those revenues, HHS imposed a 

28.5% cut, from 106% of ASP to 77.5% of ASP, to the rates at 

which it would reimburse 340B hospitals for SCODs. See id.
7

at 52,496. The new rate was based on a “conservative” 

estimate, presented by the Medicare Payment Advisory 

Committee, that 22.5% below ASP equaled the “average 

minimum discount that a 340B participating hospital 

receive[d]” when purchasing SCODs. Id. HHS estimated that 

its 28.5% cut to SCOD reimbursement rates for Part B hospitals 

would save Medicare $1.6 billion in 2018. Id. at 52,509. As 

called for by the OPPS statute, HHS did not pocket the savings, 

but instead redistributed them to all hospitals in a budgetneutral manner by raising other Part B reimbursement rates. Id.

at 52,623; see 42 U.S.C. § 1395l(t)(14)(H).

By addressing the 340B-Part B payment gap, HHS hoped 

to mitigate “unnecessary utilization and potential 

overutilization of [Part B] drugs.” Medicare Program: Hospital 

Outpatient Prospective Payment and Ambulatory Surgical 

Center Payment Systems and Quality Reporting Programs, 82 

Fed. Reg. 33,558, 33,633 (July 20, 2017). HHS cited a GAO 

study which found that 340B hospitals prescribed more drugs 

than other hospitals, a disparity unexplained by salient 

distinctions between the hospitals or their patient populations. 

Id. at 52,494. HHS also sought to reduce the disproportionate 

coinsurance payments borne by Medicare Part B beneficiaries 

(mostly elderly patients) for 340B SCODs: because the 

amount of a patient’s coinsurance payment is a fixed 

percentage of the medical bill as measured by the OPPS 

payment level, and because the latter amount for SCODs 

exceeded 340B hospitals’ actual costs to obtain the drugs, 

patients’ out-of-pocket coinsurance payments for SCODs 

became inflated, sometimes even exceeding a hospital’s costs 

to acquire the drugs. See id.

Ultimately, HHS found it “inappropriate for Medicare to 

subsidize other activities” by 340B hospitals—as laudable as 

those activities may be—“through Medicare payments for [Part 
8

B] drugs.” Id. at 52,495. In order to “better and more 

appropriately reflect the resources and acquisition costs that 

[340B] hospitals incur,” HHS acted to close the Part B-340B 

gap. Id. (formatting modified). HHS relied on its authority to 

“adjust” the average price metric under subclause (II) of the 

statute:

We believe our authority under section 

[1395l](t)(14)(A)(iii)(II) of the Act to “calculate 

and adjust” drug payments “as necessary for 

purposes of this paragraph” gives the Secretary 

broad discretion to adjust payments for drugs, 

which we believe includes an ability to adjust 

Medicare payment rates according to whether 

or not certain drugs are acquired at a significant 

discount. 

Id. at 52,499. 

C.

The plaintiffs here are three hospitals and three hospital 

associations, to whom we will refer collectively as the 

Hospitals. On November 13, 2017, the day HHS published the 

rule reducing 340B reimbursement rates for SCODs, the 

Hospitals brought a challenge to HHS’s action. See Am. Hosp. 

Ass’n v. Hargan, 289 F. Supp. 3d 45, 50 (D.D.C. 2017). The 

district court dismissed the suit on the ground that the Hospitals 

had yet to present a concrete claim for payment to HHS, as 

required by statute. See id. at 47. We affirmed. Am. Hosp. 

Ass’n v. Azar, 895 F.3d 822, 828 (D.C. Cir. 2018). 

The Hospitals quickly submitted payment claims as 

required. HHS rejected them, claiming that the Medicare 

statute precludes administrative review of adjustments to OPPS 
9

payment rates, including SCOD reimbursement rates. The 

Hospitals then filed this action. Before the district court ruled, 

HHS promulgated OPPS rates for fiscal year 2019, which 

retained the 28.5% SCOD reimbursement cut for 340B 

hospitals that the Hospitals had initially challenged. 53 Fed. 

Reg. 83,818 (Nov. 21, 2018). After submitting additional 

payment claims, the Hospitals filed a supplemental complaint 

challenging the 2019 Rule as well. See Suppl. Compl. ¶¶ 73–

75 (Dkt. 39).

This time, the district court reached the merits. After 

concluding that the Medicare statute did not preclude its review 

of the reductions in SCOD reimbursement, the court held that 

the rate cut exceeded HHS’s statutory authority to “adjust” 

SCOD rates. Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62, 79 

(D.D.C. 2018). The court remanded to the agency to come up 

with a remedy in the first instance. The court then entered final 

judgment, paving the way for this appeal.

II.

We must first address a threshold challenge to our 

jurisdiction. The government asserts that paragraph 

1395l(t)(12) of the OPPS statute, 42 U.S.C. § 1395l(t)(12), 

precludes judicial review of HHS’s adjustments to SCOD rates. 

The district court disagreed, and so do we. Unable to find 

“clear and convincing evidence that Congress intended” that 

result, as would be required to overcome the “strong 

presumption that Congress intends judicial review of 

administrative action,” we conclude that the challenged rate 

adjustment is subject to judicial review. Amgen, Inc. v. Smith, 

357 F.3d 103, 111 (D.C. Cir. 2004) (quoting Bowen v. Mich. 

Acad. of Family Physicians, 476 U.S. 667, 670 (1986)).
10

Paragraph 1395l(t)(12) states that “[t]here shall be no 

administrative or judicial review” of certain enumerated 

actions undertaken by HHS in administering the OPPS. The 

question is whether changes to SCOD reimbursement rates are 

among the listed, nonreviewable actions. The government says 

yes, contending that changes to SCOD reimbursement rates fall 

within two provisions of paragraph (12): subparagraphs

(12)(A) and (12)(C). 

The first provision, subparagraph (12)(A), bars review of 

the “development of the classification system under paragraph 

(2), including the establishment of groups and relative payment 

weights for covered OPD [outpatient department] services, of 

wage adjustment factors, other adjustments, and methods 

described in paragraph (2)(F).” 42 U.S.C. § 1395l(t)(12)(A); 

see also Am. Hosp. Ass’n, No. 19-5352, slip op. at 11. The 

second provision, subparagraph (12)(C), bars review of 

“periodic adjustments made under paragraph ([9]).” Id.

§ 1395l(t)(12)(C). (While the provision in fact refers to 

“paragraph (6),” all agree that the reference contains a 

scrivener’s error and that Congress in fact intended to refer to 

paragraph (9).) The reach of subparagraphs (12)(A) and 

(12)(C) turns on the scope of the provisions they crossreference: paragraphs (2) and (9), respectively.

Begin with paragraph (2), which sets out the general 

methodology HHS must use to set standard OPPS payments. 

Under paragraph (2), HHS “develop[s] a classification 

system.” Id. § 1395l(t)(2)(A). In doing so, HHS groups certain 

medical services together that are “comparable clinically and 

with respect to the use of resources.” Id. § 1395l(t)(2)(B). The 

resulting groups are known as ambulatory payment 

classifications, or APCs. Next, HHS establishes “relative 

payment weights” for the grouped services in an APC based on 

hospital costs. Id. § 1395l(t)(2)(C). HHS then sets default 
11

payment amounts for the services in each APC corresponding 

to the weights.

Paragraph (9), meanwhile, requires HHS to annually 

review and adjust the standard OPPS payment rates initially set 

under paragraph (2). Specifically, HHS must reassess its 

grouping and weighting decisions, as well as the other separate 

payment adjustments it makes under paragraph (2) (such as 

labor-cost adjustments), to “take into account changes in 

medical practice, changes in technology, the addition of new 

services, new cost data, and other relevant information and 

factors.” Id. § 1395l(t)(9)(A). 

HHS determines most annual OPPS payment levels 

through the exercise of paragraph (2) and (9) authority. Recall, 

however, that the Medicare statute does not allow HHS to use 

that discretion-laden authority to establish payment rates for all

Part B services. Reimbursement rates for specified covered 

outpatient drugs—the rates at issue here—instead must be 

keyed to one of two statutory formulas set out in paragraph 

1395l(t)(14): average acquisition cost (if hospital cost data are 

available) under subclause (I), or average price under subclause 

(II). SCOD payments “shall be equal” to one of those two 

options. Id. § 1395l(t)(14)(A)(iii).

Returning to our original question of whether HHS’s 

adjustment to SCOD reimbursement rates fall within the bars 

on judicial review set out in subparagraphs (12)(A) or (12)(C), 

the answer is no as a textual matter. Neither (12)(A) nor 

(12)(C) addresses—and thus neither purports to preclude—any 

action taken by HHS under paragraph (14) of the statute. And 

none of the actions described in subparagraphs (12)(A) or 

(12)(C) plausibly, let alone clearly, comprises SCOD 

reimbursement adjustments. 
12

In particular, subparagraph (12)(A) precludes review of 

“the development of the [APC] classification system,” “the 

establishment of groups and relative payment weights,” “wage 

adjustment factors,” and “other adjustments.” Id. 

§ 1395(t)(12)(A). As just discussed, SCOD rates are not set 

using the paragraph (2) grouping and weighting process, so a 

change to SCOD rates does not come under the first two of 

those descriptions. Such a change is also not a “wage 

adjustment[].” Nor is it covered by the term “other 

adjustments,” which we have read to reach only the 

“adjustments . . . necessary to ensure equitable payments” 

under subparagraph (2)(E) (i.e., “equitable adjustments”), see 

Amgen, 357 F.3d at 113. 

Subparagraph (12)(C), similarly, does not by its plain 

terms appear to cover SCOD payment reductions. It covers 

“periodic adjustments made under paragraph [9].” 42 U.S.C. 

§ 1395l(t)(12)(C). By the terms of paragraph (9), that annual

adjustment power extends only to actions initially taken under 

paragraph (2). And as just discussed, none of those actions 

textually corresponds to a decision to reduce SCOD rates.

Our analysis of the text draws support from Congress’s 

history of amendments to the OPPS statute. When adding new 

provisions to subsection 1395l(t), Congress has tended to say 

expressly when it wishes to preclude judicial review of 

decisions made under an added provision. In 1999, Congress 

added paragraphs (5), (6), and (7) to subsection (t). In the same 

legislation, Congress also added clause (E) to paragraph (12), 

which provided that certain “determination[s]” made under 

paragraphs (5) and (6), but not any decisions under paragraph 

(7), would not be judicially reviewable. See Pub. L. No. 106-

113, § 201(d), 113 Stat. 1501 (1999). In 2015, Congress 

included a preclusion-of-judicial-review provision directly 

within the newly added paragraph (21), rather than amending
13

paragraph (12). See Pub. L. No. 114-74, § 603, 129 Stat. 584, 

598 (2015). By contrast, when Congress added paragraph (14) 

in 2003, it did so without any indication of an intention to 

preclude judicial review of SCOD rate-setting decisions.

According to the government, though, Congress had no 

need to expressly preclude judicial review of actions taken 

under paragraph (14) because those actions are inherently ones 

under paragraphs (2) and (9) (and thus necessarily fall within 

the judicial-review bars in subparagraphs (12)(A) and (12)(C)). 

The nub of the government’s argument is that paragraph (14) 

does not in fact set up a “standalone payment regime” outside 

the general paragraph (2) system. Appellant’s Reply Br. 15. 

Rather, the government contends, paragraph (14) merely 

“provides instructions to HHS about how to exercise its 

paragraph 2 and 9 authority when setting and revising 

payments” for SCODs. Id. On that view, even though HHS 

must follow paragraph (14)’s specific commands when setting

the SCOD reimbursement rate, when HHS does so, it exercises

authority located not in (14) but in paragraphs (2) and (9). 

Ultimately, it is the government’s burden to support that

theory by “clear and convincing evidence,” Amgen, 357 F.3d 

at 111, especially given the absence of statutory text 

unambiguously precluding judicial review. Applying that 

standard, we are insufficiently persuaded of the proposition 

that HHS’s authority to annually set SCOD rates is located in 

paragraphs (2) and (9) rather than paragraph (14).

First, Congress on several occasions has specifically 

noted, directly in the statutory text, that certain OPPS-related 

decisions fall under paragraph (2). When Congress authorized 

HHS to make “outlier adjustments” and “pass-through 

payments,” it fleshed out how those actions would work in 

paragraphs (5) and (6) respectively, but lodged the authority to 
14

make the adjustments in the newly added subparagraph (2)(E). 

See 42 U.S.C. § 1395l(t)(2)(E). When Congress added 

paragraphs (13) and (18), which address adjustments for rural 

and cancer hospitals, respectively, it similarly provided that 

those adjustments would fall under subparagraph (2)(E). 42 

U.S.C. § 1395l(t)(13)(B) (“the Secretary shall provide for an 

appropriate adjustment under paragraph (2)(E)”); id.

§ 1395l(t)(18)(B) (“the Secretary shall . . . provide for an 

appropriate adjustment under paragraph (2)(E)”). But when 

Congress added the SCOD reimbursement provisions of 

paragraph (14) in 2003, it included no such language 

referencing paragraph (2).

Second, both the statute’s text and HHS’s longstanding 

practice strongly suggest that paragraph (2) and (9)’s 

“adjustment” authorities do not encompass paragraph (14). If 

setting SCOD rates were an exercise of paragraph (2) authority, 

HHS would be authorized to use its subparagraph (2)(E) 

equitable-adjustment authority to change the rates. But it does 

not appear HHS may make such adjustments to SCOD rates.

As a matter of statutory text, paragraph (14) provides its 

own authorizations for HHS to adjust SCOD rates. Subclause 

(I) of paragraph (14), which sets out the average-acquisitioncost formula, says that the Secretary “may vary [the calculated 

reimbursement rate] by hospital group.” 42 U.S.C.

§ 1395l(t)(14)(A)(iii)(I). Subclause (II), which requires SCOD 

reimbursement to reflect a drug’s average price, allows the 

Secretary to “calculate[] and adjust[] [the average price metric] 

as necessary for purposes of this paragraph.” Id.

§ 1395l(t)(14)(A)(iii)(II). And both the average-acquisitioncost and average-price formulas are “subject to subparagraph 

(E),” which authorizes the Secretary to “adjust” SCOD 

payments to account for “overhead and related expenses, such 

as pharmacy services and handling costs.” Id.
15

§ 1395l(t)(14)(E). It would be odd for Congress in paragraph 

(14) to provide HHS with those specific authorities to “adjust” 

SCOD rates if HHS nonetheless has the general authority to 

adjust those rates as it sees fit under paragraph (2) or (9).

HHS’s longstanding practice, and the 2018 and 2019 Rules 

at issue here, corroborate that understanding. HHS has never 

purported to use its paragraph (2) or (9) authorities either to set 

SCOD rates or to deviate from the default “average price” rate 

set out in subclause (II). And it did not do so here. Instead, in 

the 2018 Rule, HHS grounded its action in in the “calculate and 

adjust” provision of paragraph (14), subclause (II). 82 Fed. 

Reg. at 52,499–500. The government claims that HHS invoked 

its paragraph (9) authority in the 2018 Rule’s preamble. But 

the preamble stated only that the Rule would “describe [that] 

and various other statutory authorities in the relevant sections 

of this final rule.” Id. at 52,362. And in the section of the Rule 

explaining HHS’s statutory authority to make the 340B-related 

reduction to SCOD rates, there is no reference to paragraph (9). 

See id. at 52,496, 52,499–502.

Of particular note, HHS made no claim that the rate cut at 

issue here was an exercise of its subparagraph (2)(E) equitableadjustment authority, even though the change might be seen to 

serve equitable goals. HHS relied solely on its paragraph (14), 

subclause (II) adjustment authority, even as it invoked its 

subparagraph (2)(E) equitable-adjustment power in connection 

with at least two other rate changes in the 2018 OPPS Rule. 

See id. at 52,364–65 (explaining that HHS makes an additional 

payment for radioisotopes used in diagnostic imaging “based 

on the authority set forth at section [1395l](t)(2)(E)”); id. at 

52,421 (“we are using our equitable adjustment authority” to 

change reimbursement for retinal procedure).
16

Third, paragraph (14) operates as a standalone payment 

regime for all practical purposes. The statute contemplates that 

HHS will set SCOD payment rates in a vacuum, without taking 

into account other OPPS rate-setting decisions. SCOD rates 

are not set through relative weighting with rates for other 

reimbursable care. And if HHS changes the payment weights 

for other APCs, SCOD prices need not change because SCOD 

rates are unaffected by the statute’s budget-neutrality 

requirement. Recall that SCOD rates must equal either average 

acquisition cost or average price. Although subparagraph 

(14)(H) requires that “[a]dditional expenditures resulting from 

this paragraph” be “taken into account” for overall budget 

neutrality for the OPPS, that language recognizes that the 

expenditures “resulting” from the application of paragraph (14) 

will be calculated first, irrespective of other adjustments made 

to other OPPS payments. 42 U.S.C. § 1395l(t)(14)(H). Only 

then are those set-in-stone numbers put into the budgetneutrality calculator.

On this score, HHS again has consistently read the statute 

the way we do. See, e.g., 77 Fed. Reg. at 68,262 (“Payments 

for [SCODs] are included in the budget neutrality 

adjustments . . . but the budget neutral weight scaler is not 

applied to their payments because they are developed through 

a separate methodology, outside the relative payment weight 

based process.”). That understanding of the statute’s structure 

sits uncomfortably, to say the least, with HHS’s position in this 

case that paragraph (14) does no more than instruct HHS how 

to exercise its paragraph (2) and (9) authorities. 

The government lastly relies on subparagraph (14)(H), 

reading that provision to indicate that setting of SCOD rates is 

an exercise of paragraph (9)’s annual-adjustment authority. 

Subparagraph (14)(H), enacted along with the rest of paragraph 

(14) in 2003, requires that SCOD payments be counted for 
17

budget-neutrality purposes in years after 2005, but specifies

that the payments “shall not be taken into account” for budgetneutrality purposes in 2004 and 2005. 42 U.S.C. 

§ 1395l(t)(14)(H) (emphasis added); see also id.

§ 1395l(t)(9)(B). According to the government, the 

specification that SCOD payments would not be subject to 

budget neutrality in 2004 and 2005 suggests that budget 

neutrality otherwise applies, which would be the case if SCOD 

rate-setting were an exercise of paragraph (9) authority (given 

that all paragraph (9) adjustments must be budget neutral, see 

id. § 1395l(t)(9)(B)).

We disagree with the premise that SCOD rates can factor 

into OPPS budget neutrality only if the setting of SCOD rates 

is an exercise of paragraph (9) authority. It is at least possible, 

if not probable, that Congress conceived of the SCOD ratesetting program as entirely distinct from the general paragraph 

(2) and (9) program, yet still wanted the output of the SCOD 

program to matter for overall budget neutrality. Recall that 

Congress required HHS to move to the prospective OPPS 

system, constrained by a budget-neutrality requirement, in 

order to control Medicare Part B spending and promote more 

predictable annual growth. In view of those goals, Congress, 

when creating a standalone payment regime for SCODs, might 

still have wanted to achieve budget neutrality for Part B 

payments as a whole. Thus, Congress’s choice to make that 

desire explicit for years after 2005 (and to carve out the two 

prior years) does not necessarily imply that HHS exercises 

paragraph (9) authority whenever it adjusts SCOD rates.

To sum up: subparagraphs (12)(A) and (12)(C) do not, by 

their terms, clearly cover HHS’s decision to cut SCOD 

reimbursement to 340B hospitals. While the government 

argues that SCOD rate-setting is merely a species of general 

OPPS rate-setting under paragraphs (2) and (9), and that 
18

Congress thus intended SCOD payment decisions to be 

similarly insulated from review, that account, at a minimum, is 

not clearly correct. As a result, the government has failed to 

“overcom[e] the strong presumption that Congress did not 

mean to prohibit” our review. Bowen, 476 U.S. at 672.

III.

Proceeding to the merits, the sole question before us is 

whether HHS had statutory authority to impose its 28.5% cut 

to SCOD reimbursement rates for 340B hospitals. HHS 

located its authority in subclause (II) of paragraph (14) of the 

OPPS statute. Under that provision, when HHS sets SCOD 

payment amounts tethered to average drug prices, HHS has 

express authority to “adjust[]” the amounts “as necessary for 

purposes of this paragraph.” 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(II). In our view, HHS reasonably 

interpreted subclause (II)’s adjustment authority to enable

reducing SCOD payments to 340B hospitals, so as to avoid 

reimbursing those hospitals at much higher levels than their 

actual costs to acquire the drugs.

On that issue of statutory interpretation, HHS is entitled to 

Chevron deference, which it has invoked here (although it did 

not do so expressly until a post-argument letter submitted to the 

Court). See Chevron U.S.A., Inc. v. Nat. Res. Def. Council, 

Inc., 467 U.S. 837, 842 (1984). When an agency “interpret[s] 

a statute it is charged with administering in a manner (and 

through a process) evincing an exercise of its lawmaking 

authority,” that interpretation is entitled to Chevron treatment,

and the agency cannot forfeit Chevron’s applicability. 

SoundExchange, Inc. v. Copyright Royalty Board, 904 F.3d 41, 

54–55 (D.C. Cir. 2018). HHS established SCOD 

reimbursement rates for 340B hospitals through notice-andcomment rulemaking and explained why it “believe[d] that [its] 
19

proposal [was] within [its] statutory authority to promulgate.” 

82 Fed. Reg. at 52,499. HHS’s understanding of its statutory 

authority thus is entitled to Chevron deference. See Am. Hosp. 

Ass’n, No. 19-5352, slip op. at 14; Tenet HealthSystems 

HealthCorp. v. Thompson, 254 F.3d 238, 248 (D.C. Cir. 2001); 

see also Barnhart v. Walton, 535 U.S. 212, 222 (2002).

Under Chevron, we first ask whether “Congress has 

directly spoken to the precise question at issue.” Chevron, 467 

U.S. at 842. Here, the “precise question at issue” is whether 

HHS’s adjustment authority in subclause (II) encompasses a

reduction to SCOD reimbursement rates aimed at bringing

reimbursements to 340B hospitals into line with their actual 

costs to acquire the drugs. If the statute does not directly 

foreclose HHS’s understanding, we defer to the agency’s 

reasonable interpretation. See id. at 844. We conclude that 

HHS’s interpretation of subclause (II) is not directly foreclosed

and is reasonable.

By way of brief review, paragraph (14), as its title 

confirms, addresses “[d]rug . . . payment rates”—specifically, 

the rates at which hospitals are reimbursed for SCODs 

furnished to beneficiaries in supplying covered care. 42 U.S.C. 

§ 1395l(t)(14). Under subclause (I) of the paragraph, the 

“amount of payment,” as a default matter, “shall be equal” to

hospitals’ “average acquisition cost for the drug.” Id.

§ 1395l(t)(14)(A)(iii)(I). But if pertinent “hospital acquisition 

cost data are not available,” then payment levels are determined 

under subclause (II). Under that provision, the amount of 

payment equals “the average price for the drug”—which, by 

statutory cross-reference, is the drug’s average sales price 

(ASP) charged by manufacturers—but subject to 

“adjust[ment] . . . as necessary for purposes of this paragraph.” 

Id. § 1395l(t)(14)(A)(iii)(II).
20

Much is undisputed about HHS’s application of subclause 

(II)’s adjustment authority to reduce SCOD payment rates to 

340B hospitals. First, HHS properly found that the “hospital 

acquisition cost data” contemplated by subclause (I) was 

unavailable, such that HHS needed to determine payment rates 

in accordance with subclause (II)’s fallback reliance on average 

drug prices. Second, 340B hospitals obtain SCODs at 

substantially lower cost than other providers, such that 

reimbursing those hospitals at the same rate as other providers 

would give sizable revenues to the hospitals. Third, HHS’s 

28.5% SCOD rate reduction for 340B hospitals is a fair, or even

conservative, measure of the reduction needed to bring 

payments to those hospitalsinto parity with their costs to obtain 

the drugs. See 82 Fed. Reg. at 52,500. Fourth, absent the 

reduction, at least some Medicare beneficiaries served by 340B 

hospitals (generally underserved populations) would pay outof-pocket copayments for the drugs that substantially exceed 

the normal copay share of providers’ cost to obtain the drugs—

with beneficiaries’ copayments sometimes exceeding 340B

hospitals’ full cost to purchase the drugs. And fifth, the roughly 

$1.6 billion in savings from reducing SCOD reimbursement 

payments to 340B hospitals is not kept by the agency but is 

redistributed to all providers as additional reimbursement 

payments for other services. See generally pp. 6–8, supra. 

That is the backdrop against which we consider whether 

HHS permissibly understood its subclause (II) adjustment 

authority to encompass its reduction to reimbursement 

payments to 340B hospitals for SCODs. Was HHS obligated 

to continue reimbursing 340B hospitals for SCODs 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? We think the 

agency was not compelled to continue doing so.
21

The central question is whether HHS permissibly 

conceived of the “purposes of this paragraph,” i.e., paragraph 

(14), in exercising its subclause (II) authority to “adjust[]” 

payment rates “as necessary for the purposes of this 

paragraph,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II). According to 

the agency, a “manifest purpose of paragraph 14 is to 

compensate providers for the average acquisition cost” of 

SCODs. Appellant’s Br. 30. In accordance with that 

understanding, HHS explained in the 2018 Rule that “a 

payment amount of ASP minus 22.5 percent for drugs acquired 

under the 340B Program is better aligned to hospitals’ 

acquisition costs and thus this adjustment . . . is necessary for 

Medicare OPPS payment policy.” 82 Fed. Reg. at 52,501.

Paragraph (14)’s structure supports HHS’s understanding 

that the provision’s core purposes include reimbursing 

hospitals for their costs to acquire SCODs. Paragraph (14)’s 

primary (and default) instruction for determining SCOD 

payment amounts, set out in subclause (I), is to equate them to 

“average acquisition cost.” 42 U.S.C. § 1395l(t)(14)(A)(iii)(I). 

That alone indicates that Congress’s primary goal is to 

reimburse providers for their acquisition costs. And if direct 

acquisition-cost data of a kind contemplated by subclause (I) is

unavailable, HHS must then, as a fallback matter under 

subclause (II), equate payment amounts to “average price,” 

subject to adjustment. 42 U.S.C. § 1395l(t)(14)(A)(iii)(II). By 

prescribing the use of ASP as a backup when the requisite 

acquisition-cost data is unavailable, Congress signaled that 

average price functions as a stand-in for costs.

HHS has long understood average price under subclause 

(II) to serve as a “proxy for average acquisition cost.” 77 Fed. 

Reg. at 68,386. HHS has used ASP since 2006, stating then 

and all along that its “intent” in using ASP was “to pay for 

drugs and biologicals based on their hospital acquisition costs.” 
22

Medicare Program; Changes to the Hospital Outpatient 

Prospective Payment System and Calendar Year 2006 Payment 

Rates, 70 Fed. Reg. 68,516, 68,642 (Nov. 10, 2005). For non340B hospitals, ASP is an accurate approximation of

acquisition costs: HHS’s Inspector General has found that, for 

non-340B hospitals, ASP comes within roughly 1% of

acquisition costs. HHS Office of Inspector General, 

Memorandum Report: Payment for Drugs Under the Hospital 

Outpatient Prospective Payment System 1, 9 (Oct. 22, 2010). 

But for 340B hospitals, ASP substantially exceeded SCOD 

acquisition costs by the time of the 2018 Rule—hence the need 

for an adjustment under subclause (II) to bring payments to 

340B hospitals into line with their costs.

The OPPS statute exhibits in other ways Congress’s 

evident purpose of aligning SCOD reimbursement with 

hospital costs. Paragraph (14) itself expressly authorizes a

separate adjustment to SCOD payment rates to account for 

“overhead costs” and “related expenses” (“such as pharmacy 

services and handling costs”). Id. § 1395l(t)(14)(E). And more 

broadly, many other OPPS provisions reflect the goal of 

aligning payments to hospitals with their costs. See id.

§ 1395l(t)(2)(C) (grouping and weighting under paragraph (2) 

must be “based on median . . . hospital costs”); id.

§ 1395l(t)(2)(D) (“wage adjustment factor” must account for 

“relative differences in labor and labor-related costs”); id. 

§ 1395l(t)(5)(B) (“outlier adjustments” must “approximate the 

marginal cost of care”); id. § 1395l(t)(9)(A) (“periodic . . . 

adjustments” must be based on “new cost data”); id.

§ 1395l(t)(13)(A) (authorizing adjustments if “costs incurred 

by hospitals located in rural areas . . . exceed those costs 

incurred by hospitals located in urban areas”); id.

§ 1395l(t)(18)(B) (same for cancer hospitals).
23

All of that supports HHS’s understanding that the 

“purposes” of paragraph 14 for which the agency can “adjust[]” 

SCOD payments under subclause (II) include aligning 

payments to hospitals with their drug acquisition costs. Id.

§ 1395l(t)(14)(A)(iii)(II). That is precisely what HHS did 

when it imposed its 28.5% reduction in payments to 340B 

hospitals for SCODs.

In arguing that HHS lacked authority under subclause (II) 

to undertake that measure, the Hospitals focus on subclause 

(I)’s requirement that, if payment amounts are keyed to 

“average acquisition cost” under that provision—as opposed to 

average price under subclause (II)—then the agency must take 

“into account the hospital acquisition cost survey data under 

subparagraph (D).” Id. § 1395l(t)(14)(A)(iii)(I). And 

subparagraph (D) imposes stringent data-quality requirements, 

mandating that the cost surveys “shall have a large sample of 

hospitals that is sufficient to generate a statistically significant 

estimate of the average hospital acquisition cost for each 

[SCOD].” Id. § 1395l(t)(14)(D)(iii). 

Because Congress required HHS to “tak[e] into account”

robust study data when setting SCOD rates at average 

acquisition cost under subclause (I), the Hospitals argue, HHS 

cannot use its subclause (II) authority to adjust ASP in order to 

approximate acquisition cost. As the Hospitals see it, if HHS 

wants to set SCOD rates based on the cost to hospitals to 

acquire the drugs, the agency must get the data contemplated

by subclause (I). If it were otherwise, the Hospitals contend, 

subclause (I)’s requirement to take into account the data 

collected under subparagraph (D) would be meaningless: HHS

could simply forgo the study required by subclause (I) and 

instead use subclause (II) to approximate drug acquisition

costs. Our dissenting colleague, too, stresses the same point. 

Dissenting Op. 5.
24

That argument, on which the district court relied, see Azar, 

348 F. Supp. 3d at 82–83, is not without force. We, though,

are ultimately unpersuaded. For the Hospitals’ argument to 

carry the day under Chevron, we would need to conclude that 

Congress unambiguously barred HHS from seeking to align

reimbursements with acquisition costs under subclause (II), or 

that HHS’s belief that it could do was unreasonable. And HHS 

would be barred from doing so even if, as here, it is undisputed 

both that payment amounts otherwise would substantially 

exceed hospitals’ costs and that the proposed adjustment 

accurately and reliably approximates procurement costs. 

Given that the survey data contemplated by subclause (I) 

aims to assure the reliability of cost-acquisition data, we do not 

read the statute to foreclose an adjustment to ASP under 

subclause (II) that is based on reliable cost measures of the kind 

undisputedly at issue here. That is particularly so because, 

whereas the Hospitals question whether HHS’s interpretation 

could enable sidestepping subclause (I)’s data-reliability

requirements altogether, the Hospitals’ own reading raises a 

similar interpretive dilemma. Subclause (II), as explained,

expressly empowers HHS to “adjust” payments based on ASP

“as necessary for purposes of” paragraph (14). And under the 

Hospitals’ reading, those “purposes” cannot include the goal of 

approximating hospital acquisition costs. But the Hospitals 

point to no other “purpose” that could permissibly support an 

adjustment. The Hospitals’ argument thus renders subclause 

(II)’s adjustment authority superfluous.

The Hospitals submit that “[t]he purpose of paragraph (14) 

is to establish the rate for separately payable drugs.” 

Appellees’ Br. 42–43. That may be true at a high level of 

generality—indeed, the title of paragraph (14) is “Drug APC 

payment rates”—but it is unhelpful to the Hospitals for our 
25

purposes. After all, HHS’s rate reduction for payments to 340B 

hospitals does “establish the rate for separately payable drugs.”

The Hospitals also suggest that subclause (II)’s adjustment 

authority enables adjustments to account for overhead costs. 

Appellees’ Br. 49. But that reading would leave subclause

(II)’s adjustment authority duplicative of authority already 

conferred by subparagraph (14)(E). That subparagraph, as 

noted, authorizes HHS to make adjustments to account for 

“overhead and related expenses, such as pharmacy services and 

handling costs.” 42 U.S.C. § 1395l(t)(14)(E)(i). If subclause 

(II)’s adjustment authority were merely meant to reinforce 

subparagraph (14)(E)’s authority to account for overhead costs, 

then why would subclause (II) not simply say so, in comparable 

language? Instead, subclause (II) frames its grant of authority 

in notably broader terms addressed to the overall purposes of 

paragraph (14), not just the specific, “overhead and related 

expenses” focus of subparagraph (14)(E).

The Hospitals’ reading of subclause (II)’s adjustment 

authority as addressed to overhead costs, it bears noting, would 

necessarily mean that the purpose of granting that authority is 

to enable bringing ASP closer to drug acquisition costs—

precisely what the Hospitals otherwise say the agency cannot 

aim to do when exercising its subclause (II) authority. But 

under the Hospitals’ evident understanding, the agency can try 

to get ASP closer to actual costs only to the extent of taking 

into account overhead costs, without going further to bring 

ASP all the way into alignment with acquisition costs. That 

half-measure understanding of subclause (II)’s adjustment 

authority is incompatible with its broad terms, which speak 

generally to the “purposes” of paragraph (14), including, in 

particular, approximating drug acquisition costs.
26

Our dissenting colleague nonetheless endorses the 

Hospitals’ suggestion that subclause (II)’s adjustment 

authority, while framed generally, should be read as focused on

overhead costs. Dissenting Op. 5–8. Our colleague briefly 

suggests that there may be no redundancy between subclause 

(II) and subparagraph (14)(E) under that reading because, she 

posits, the two provisions both allow for adjustments to account 

for overhead costs, but at different times, with (14)(E) in the 

nature of a time-limited, naturally-expiring allowance and 

subparagraph (II) an ensuing, ongoing one. Id. at 5–6. Again, 

though, if the provisions were designed to cover the same 

terrain (even if at different times), one would expect them to 

use similar language in defining the territory, which they 

conspicuously do not. And at any rate, the statutory text 

confirms that the provisions are designed to work side-by-side

contemporaneously, not at different times: Congress rendered 

subclause (II)’s provisions expressly “subject to paragraph 

(E),” such that the agency, when acting under subclause (II), 

could make adjustments to ASP both under that provision’s 

own, broadly-framed adjustment authority and under 

subparagraph (14)(E)’s more specific authority addressed to 

overhead costs. 42 U.S.C. § 1395l(t)(14)(A).

Our dissenting colleague ultimately allows that the 

Hospitals’ overhead-costs interpretation of subclause (II)’s 

adjustment authority means that the provision may reiterate—

i.e., make “double sure”—subparagraph (14)(E)’s express 

authority to account for overhead costs. Dissenting Op. 6. But 

our colleague still believes that the Hospitals’ reading of the 

statute is unambiguously compelled at Chevron step one. Id.

at 1. In her evident view, any superfluity occasioned by that 

reading is less substantial than the superfluity occasioned by 

the agency’s reading. Id. at 8–9. But even assuming there is a 

reliable metric for comparing degrees of superfluity across 

readings in that fashion, that kind of comparison is not the stuff 
27

of a Chevron step one resolution. Rather, when competing 

readings of a statute would each occasion their own notable

superfluity, that manifests the kind of statutory ambiguity that 

Chevron permits the agency to weigh and resolve. See 

National Ass’n of Home Builders v. Defenders of Wildlife, 551 

U.S. 644, 666 (2007); Peter Pan Bus Lines, Inc. v. Fed. Motor 

Carrier Safety Admin., 471 F.3d 1350, 1354 (D.C. Cir. 2006) 

(“[S]ection 13902 contains surplusage under either reading 

and, as a result, we cannot say that either proffered construction 

reflects the Congress’s unambiguously expressed intent.”).

The Hospitals separately suggested in oral argument that

subclause (II)’s adjustment authority could pertain to 

improving the accuracy of the sales-price metric specifically 

for hospitals (as opposed to other providers). ASP reflects

sales prices to all manner of medical providers, including 

pharmacies, clinics, independent physician practices, and the 

like. See 42 U.S.C. § 1395w-3a(c). As the Hospitals see it, 

HHS can adjust ASP to arrive at a metric that better reflects the 

prices paid by hospitals alone. But nothing in subclause (II)’s 

general adjustment authority suggests that it is so narrowly 

focused. And in any event, to the extent HHS might adjust ASP 

to more accurately reflect prices paid by hospitals, it is unclear 

whether there would then remain any appreciable difference 

between such a hospital-specific ASP and hospital acquisition 

costs. Yet the Hospitals’ whole point is that HHS cannot rely 

on its subclause (II) adjustment authority to approximate 

acquisition costs.

Especially in view of the Hospitals’ inability to present an 

interpretation of HHS’s subclause (II) adjustment authority that 

would give it meaningful independent content, we cannot

conclude that the statute forecloses HHS from reducing SCOD 

reimbursement rates for 340B hospitals with the object of 

bringing payments into alignment with acquisition costs. 
28

Rather, in the specific circumstances of this case, HHS 

permissibly read the statute to allow it to implement the 340B

payment reduction. Although subclause (I) calls for the 

“average acquisition cost” payment metric to “tak[e] into 

account” subparagraph (D)’s survey data, here, HHS relied on 

data of undisputed reliability. Moreover, the agency acted on 

that data in a cautious way, adopting a “conservative, lowerbound estimate” of the 340B discount’s size. 82 Fed. Reg. at 

52,504 (quotation marks omitted). In those circumstances, 

HHS reasonably concluded that it need not continue 

subsidizing 340B providers with Part B (i.e. taxpayer) funds 

and Medicare beneficiaries’ copayments. We of course do not 

consider the wisdom of that decision as a policy matter in the 

first instance, but only whether the agency had statutory 

authority to reach it. See Chevron, 467 U.S. at 845. We 

conclude that the agency’s decision rests on a permissible 

understanding of its statutory authority.

Shifting tack, the Hospitals contend that even if HHS can 

seek to approximate acquisition costs in exercising its 

subclause (II) adjustment authority, HHS’s 28.5% rate cut is 

simply too large and sweeping to qualify as an “adjustment.” 

That argument falls short under a straightforward application 

of Chevron. The statutory term “adjust” is ambiguous as to 

size. The Hospitals offer various definitions of “adjust” that 

include qualifiers such as “slightly,” e.g., Adjust, Oxford

Dictionaries, https://www.lexico.com/definition/adjust (“alter 

or move (something) slightly in order to achieve the desired fit, 

appearance, or result”), but HHS responds with many 

definitions that lack such qualifiers, e.g., Adjust, MerriamWebster, https://www.merriam-webster.com/dictionary/adjust

(“to bring to a more satisfactory state”).

The Hospitals point to our decision in Amgen, which 

considered an “adjustment” under HHS’s subparagraph (2)(E)
29

authority to make equitable adjustments. In the course of 

upholding the challenged adjustment, we observed that 

“similar limits inhere in the term ‘adjustments’ to those the 

Supreme Court found in the word ‘modify’” in MCI 

Telecomms. Corp v. Am. Tel. & Tel. Co., 512 U.S. 218, 225 

(1994). Amgen, 357 F.3d at 117. And the MCI Court stated

that “modify” means “to change moderately or in minor 

fashion.” MCI, 512 U.S. at 225. But we do not read Amgen to 

prescribe that “adjust” in the OPPS statute refers only to minor

changes. To the contrary, Amgen explained that it “ha[d] no 

occasion to engage in line drawing to determine when 

‘adjustments’ cease being ‘adjustments.’” 357 F.3d at 117. 

Even if there are limits to what HHS could permissibly

consider an “adjustment,” that line has not been crossed here, 

where the agency acted on a conservative estimate drawn from 

data of undisputed reliability.

The Hospitals’ last argument is that HHS’s subclause (II) 

adjustment authority does not allow adjusting reimbursement 

rates for 340B hospitals alone. According to the Hospitals, the 

reimbursement rate set under subclause (II) must be uniform

across all hospitals. The Hospitals rely on subclause (I)’s 

statement that payment rates set under that provision must

equal “the average acquisition cost for the drug for that year 

(which, at the option of the Secretary, may vary by hospital 

group (as defined by the Secretary based on volume of covered 

OPD services or other relevant characteristics)).” 42 U.S.C.

§ 1395l(t)(14)(A)(iii)(I) (emphasis added). The Hospitals 

stress that subclause (II), by comparison, says nothing about 

authority to vary the average price metric by hospital group. 

That silence, to the Hospitals, means that when HHS sets 

SCOD reimbursement rates under subclause (II), it must apply 

the same rate to every recipient hospital.
30

Congress, however, was not silent about HHS’s 

adjustment power in subclause (II). Whereas subclause (I) 

does not grant HHS any general authority to adjust 

reimbursement rates, subclause (II) affirmatively grants HHS 

general adjustment authority for deployment “as necessary for 

purposes of” paragraph (14). And as explained, HHS 

reasonably believes that a central purpose of paragraph (14) is 

to accurately reimburse hospitals for their acquisition costs. 

There is 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). In particular, 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). At a minimum, the statute does 

not clearly preclude HHS from adjusting the SCOD rate in a 

focused manner to address problems with reimbursement rates 

applicable only to certain types of hospitals. That is enough to 

reject the Hospitals’ argument under Chevron.

* * * * *

For the foregoing reasons, we reverse the judgment of the 

district court.

So ordered.
PILLARD, Circuit Judge, dissenting in part: I agree with 

my colleagues that the Medicare Outpatient Prospective 

Payment System (OPPS) statute does not preclude judicial 

review of HHS’s 28.5% reduction in reimbursement rates to

340B hospitals that administer Specified Covered Outpatient 

Drugs (SCODs). On the merits, however, I disagree that 

subclause (II) authorized HHS to implement for 340B hospitals 

alone the challenged rate reductions in its 2018 and 2019 OPPS 

rules.

The statute sets forth two alternative bases for HHS’s 

calculation of the relevant reimbursement rates: It may set 

those rates under subclause (I) based on average acquisition 

cost (reflecting the average cost that hospitals actually incurred 

in purchasing the drug), or under subclause (II) based on 

average sales price (reflecting the average price, updated 

quarterly, at which manufacturers sold the drug to most 

purchasers, not limited to hospitals). See 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(I)-(II). When the two subclauses at issue 

here are read together, the conclusion is unavoidable that HHS 

may institute its large reductions, tailored for a distinct hospital 

group, only under subclause (I), which requires the agency to 

take into account specific data undisputedly absent here. 

The majority concludes that HHS may act on other data 

(not meeting Congress’ specifications) to make those 

reductions pursuant to subclause (II). That reading

impermissibly nullifies subclause (I) and the data requirements 

spelled out at length in subparagraph (D). See id. 

§ 1395l(t)(14)(D). I would therefore hold that the agency’s 

interpretation of subclause (II) is foreclosed at Chevron step 

one. Because HHS’s actions cannot be squared with the text of 

the OPPS statute, I respectfully dissent from part III of the 

majority opinion.

* * *
2

Reproduced in full, subclauses (I) and (II) provide that, for 

every year after 2005, the reimbursement rate “shall be equal, 

subject to subparagraph (E)”—

(I) to the average acquisition cost for the drug for 

that year (which, at the option of the Secretary, may 

vary by hospital group (as defined by the Secretary 

based on the volume of covered [outpatient 

department] services or other relevant 

characteristics)), as determined by the Secretary 

taking into account the hospital acquisition cost 

survey data under subparagraph (D); or

(II) if hospital acquisition cost data are not available, 

the average price for the drug in the year established 

under section 1395u(o) of this title, 

section 1395w-3a of this title, or section 1395w-3b 

of this title, as the case may be, as calculated and 

adjusted by the Secretary as necessary for purposes 

of this paragraph. 

42 U.S.C. § 1395l(t)(14)(A)(iii). Subparagraph (E) in turn 

authorizes the Secretary to make “adjustment[s] in payment 

rates for overhead costs,” for instance to account for “pharmacy 

services and handling costs,” based on the findings of a 2005 

Medicare Payment Advisory Commission (MedPAC) report.

Id. § 1395l(t)(14)(E).

The two subclauses together provide that, if HHS sets 

reimbursements rates based on hospitals’ actual average 

acquisition costs, HHS must consider congressionally specified 

acquisition-cost data. See id. § 1395l(t)(14)(D). And—crucial 

for the challenged differential reimbursement rate for 340B 

hospitals—HHS may only segment reimbursement rates by 

hospital group if it has collected the specified data and set the 

rates keyed to hospital acquisition costs in view of that data.
3

The two subclauses operate as alternatives: 

Subclause (I) lays out what the agency may do when it has 

collected and taken into account the “hospital acquisition cost 

survey data under subparagraph (D),” whereas subclause (II) 

lays out what the agency may do “if the hospital acquisition 

cost data are not available.” Id. § 1395l(t)(14)(A)(iii). If the 

agency has that data, it may set reimbursement rates based on 

the “average acquisition cost for the drug for that year,” and 

“vary by hospital group” any reimbursement rates. Id.

§ 1395l(t)(14)(A)(iii)(I). But “if hospital acquisition cost data 

are not available,” id. § 1395l(t)(14)(A)(iii)(II), the agency 

must set reimbursement amounts under subclause (II) by resort 

to what it has previously called the “statutory default” rate for 

a given drug in a given year, see, e.g., 2013 OPPS Rule, 77 Fed. 

Reg. 68,210, 68,386 (Nov. 15, 2012). That statutory default 

rate is the drug’s average sales price charged to hospitals, 

clinics, pharmacies, and other providers, drawn from data that 

drug manufacturers submit to HHS every quarter. See id.

§§ 1395w-3a(c), 1396r-8(b)(3)(A)(iii). Subclause (II) 

provides for the average sales price to be “adjusted . . . as 

necessary for purposes of this paragraph” but, unlike 

subclause (I), grants no authority to vary the reimbursement 

rates by hospital group. Id. § 1395l(t)(14)(A)(iii)(II).

As everyone agrees, HHS has never collected the “hospital 

acquisition cost data” that the statute contemplates, so must 

proceed under its subclause (II) authority to set reimbursement 

rates for the 2018 and 2019 OPPS rules. See, e.g., HHS Br. 9;

2018 Proposed OPPS Rule, 82 Fed. Reg. 33,558, 33,634 

(proposed July 20, 2017). The question before us is whether 

the agency may set and vary by hospital group SCOD 

reimbursement rates in the manner that subclause (I) 

authorizes, without collecting and considering the data that 

subclause (I) specifies, by invoking its authority under 

subclause (II) to adjust the average-sales-price-based 
4

reimbursement rate and, in effect, simply deem that to be a rate 

reflecting hospitals’ average acquisition cost. The majority

concludes that the agency’s circumvention of subclause (I) in 

this manner is a permissible construction of the statute for 

several reasons, none of which I find persuasive.

First, the majority argues, based primarily on the text of 

subclause (I) and other provisions in the OPPS statute, that 

Congress’ “primary goal is to reimburse providers for their 

acquisition costs.” Maj. Op. at 21. But the statute’s 

overarching goal is not its only goal, to be achieved however 

the agency sees fit. When it comes to Medicare Part B 

payments for SCODs, paragraph (14) specifically tells us when 

and how Congress intended HHS to pursue acquisition-costbased reimbursement. Only subclause (I), not subclause (II), 

authorizes HHS to set different reimbursement rates for distinct 

hospital groups—rather than a uniform, drug-by-drug “average 

price for the drug in the year,” 42 U.S.C. 

§ 1395l(t)(14)(A)(iii)(II)—and to do so only by taking into 

account the different acquisition costs identified in the robust, 

hospital-specific data that Congress required the agency to 

collect.

The majority finds it inconceivable that Congress would

require the same sales-price-based reimbursement rate for all 

types of hospitals when hospitals’ acquisition costs vary 

widely. See, e.g., Maj. Op. at 24. But in authorizing the 

average-sales-price methodology, which takes account of most 

discounts and rebates that purchasers receive, Congress was 

attuned to the many factors rendering non-uniform the amounts

different hospitals actually pay for the same drugs. Given 

Congress’ awareness that various hospitals—not only 340B 

hospitals—pay more or less than others, I see nothing 

inconceivable about Congress requiring disparities in 

reimbursement rates to certain types of hospitals to be
5

identified and acted upon based only on the most complete and 

accurate data.

If Congress wanted HHS, in the absence of subclause (I)’s

hospital-specific data regarding average acquisition costs, just 

to do its best to approximate those costs and then vary them by 

hospital groups according to its unchecked policy judgment, it 

easily could have written the statute to say so. Instead, 

subclause (II) mandates that the base reimbursement rate “shall 

be equal” to the specified drug’s statutory default rate premised 

on average sales price, subject to adjustments, and entirely 

omits the authority granted in subclause (I) to “vary by hospital 

group” the pricing data or resultant rate. 42 U.S.C. 

§ 1395l(t)(14)(A)(iii). I cannot discern in the statute any

congressional intention that the adjustment authority be used to 

set markedly different prices for different hospital groups. I 

would instead affirm the district court’s conclusion that HHS 

“cannot fundamentally rework the statutory scheme—by 

applying a different methodology than the provision requires—

to achieve under sub[clause] (II) what [it] could not do under 

sub[clause] (I) for lack of adequate data.” Am. Hosp. Ass’n v. 

Azar, 348 F. Supp. 3d 62, 82 (D.D.C. 2018).

Second, the majority reasons that this data-sensitive

reading of the two subclauses cannot be correct because it 

“renders subclause (II)’s adjustment authority superfluous.” 

Maj. Op. at 24. But the Hospitals’ reading of the subclause (II)

adjustment authority as primarily cross-referencing 

incremental modifications like the overhead-cost adjustment

described in subparagraph (E) does not make the former 

altogether redundant. As the Hospitals explain, 

subparagraph (E) authorized adjustments for overhead with 

reference to a one-time, 2005 MedPAC report, whereas

subclause (II)’s authority to make “adjust[ments] . . . as 

necessary for purposes of this paragraph,” 42 U.S.C. 
6

§ 1395l(t)(14)(A)(iii)(II), encompasses “adjustments” for 

overhead in the same manner on an ongoing basis. See 

Hospitals Br. 5-6, 49.

In any event, reading section 1395l(t)(14) to contain 

overlapping references to a limited adjustment authority—

making “double sure” the point is made—does not create the 

kind of superfluity that renders a statute ambiguous. Mercy 

Hosp., Inc. v. Azar, 891 F.3d 1062, 1068 (D.C. Cir. 2018)

(quoting Fla. Health Scis. Ctr., Inc. v. HHS, 830 F.3d 515, 520 

(D.C. Cir. 2016)). As we have recognized with respect to the 

Medicare statute, a “little overlap, either by accident or design, 

is to be expected in any complex statutory scheme with 

interdependent provisions” and does not alone create

ambiguity. Id. The fact that average price data lumps together 

pharmaceutical sales to hospitals from sales to non-hospital 

providers seems to explain Congress’ clear decision to omit 

from subclause (II) the authority in subclause (I) to vary 

reimbursement by hospital group. Without subclause (I)’s 

hospital-specific cost data, billion-dollar decisions

differentiating among particular hospital groups could rest on 

significantly less exact information.

Moreover, to the extent that past agency practice bears on 

the question of statutory construction before us, it only 

confirms the Hospitals’ reading that the agency’s 

subclause (II) adjustment authority references overhead

adjustments like those contemplated by subparagraph (E). As 

the agency described at length in 2012, during the preceding 

six years HHS had made no adjustments to its estimate of 

average sales prices other than occasional small tweaks to 

account for overhead costs (and, in any case, purported to rely 

only on its subclause (I) authority). See 2013 OPPS Rule, 77 

Fed. Reg. at 68,383-86 (explaining the agency’s methodology 

year by year over this period); see also 2016 OPPS Rule, 80 
7

Fed. Reg. 70,298, 70,439 (Nov. 13, 2015) (providing a similar 

summary of the agency’s past methodology); Hospitals Br. 49 

(“[W]hen HHS previously made adjustments to the ASP-plus6% rate, it explained at the time that it was doing so to account 

for estimates of overhead.”). Indeed, the focus of the agency 

in those years was on collecting more accurate overhead-cost 

data to better tailor its adjustments. See, e.g., 2013 OPPS Rule, 

77 Fed. Reg. at 68,385. And, in the five years before the two 

challenged rules at issue, the agency simply adopted the 

statutory default rate of 106% of the average sales price under 

subclause (II) without making any adjustments at all. See 2018 

OPPS Rule, 82 Fed. Reg. 52,362, 52,490 (Nov. 13, 2017).

In sum, at no point in any of the materials that the majority 

cites—and at no point of which I am aware—has HHS ever 

previously used its subclause (II) adjustment authority to make 

adjustments that are not modest changes to account for 

overhead. HHS itself has not claimed otherwise in its briefing 

before us. And HHS certainly has never used that adjustment 

authority to implement variations by hospital group. See, e.g.,

HHS Br. 13 (“The final rule for 2018 established a new subclassification for drugs purchased by 340B providers . . . .” 

(emphasis added)).

The Hospitals’ limited reading of the adjustment authority 

that subclause (II) confers is supported by our previous caution 

that the term “adjustment” in this statute—like the term 

“modify” at issue in MCI Telecommunications Corp. v. AT&T 

Co., 512 U.S. 218, 225 (1994), which the Court held “means to 

change moderately or in minor fashion”—cannot permit “basic 

and fundamental changes in the scheme.” Amgen, Inc. v. 

Smith, 357 F.3d 103, 117 (D.C. Cir. 2004) (quoting MCI, 

512 U.S. at 225). The majority distinguishes Amgen by 

quoting our observation there that we had “no occasion to 

engage in line drawing to determine when ‘adjustments’ cease 
8

being ‘adjustments.’” Id. But that observation made eminent 

sense in a dispute “involving only the payment amount for a 

single drug,” and we went on to warn that a “more substantial 

departure from the default amounts would, at some point, 

violate the Secretary’s obligation to make such payments and 

cease to be an ‘adjustment.’” Id. (alteration omitted). Given 

the scale and segmentation of the rate cut at issue—reducing 

SCOD reimbursements by nearly a third, thereby eliminating 

$1.6 billion annually in reimbursements to many of the most 

financially vulnerable hospitals in the Medicare program—I 

disagree that, “[e]ven if there are limits to what HHS could 

permissibly consider an ‘adjustment,’ that line has not been 

crossed here.” Maj. Op. at 29.

Not only is the majority wrong to reject the Hospitals’ 

reading as creating unexplained surplusage, see Maj. Op. 

at 24-27, but the superfluity concerns cut decisively the other 

way. As discussed above, the majority essentially reads

subclause (I) out of the statute by permitting the agency to do 

under subclause (II) without the requisite data what 

subclause (I) authorizes only with that data. The majority also 

renders superfluous the entirety of subparagraph (D). See 

42 U.S.C. § 1395l(t)(14)(D). That subparagraph, occupying 

nearly a full column in the U.S. Code, specifies in detail how 

the “[a]cquisition cost survey for hospital outpatient drugs” is 

to be conducted, first by the Government Accountability Office

(GAO) and later by HHS, after that agency has “tak[en] into 

account” the Comptroller General’s “recommendations” as to 

the “frequency and methodology of subsequent surveys.” Id.

§ 1395l(t)(14)(D)(i)-(ii). Subparagraph (D) further includes a 

provision dealing with “survey requirements,” mandating that

the GAO and HHS surveys “shall have a large sample of 

hospitals that is sufficient to generate a statistically significant 

estimate of the average hospital acquisition cost for each 

specified covered outpatient drug.” Id. § 1395l(t)(14)(D)(iii).
9

And a later clause details how acquisition-cost variations by 

hospital group are to be identified in GAO’s initial surveys if 

they are to justify reimbursement-rate variations, noting that 

the Comptroller General “shall determine and report to 

Congress if there is (and the extent of any) variation in hospital 

acquisition costs for drugs among hospitals based on the 

volume of covered [outpatient department] services performed 

by such hospitals or other relevant characteristics of such 

hospitals (as defined by the Comptroller General).” Id.

§ 1395l(t)(14)(D)(iv).

The majority’s reading drains each of these provisions of 

meaning. It allows the agency simply to purport to 

approximate hospital acquisition costs, and to claim authority 

to vary reimbursement rates by hospital group, based on

adjusted average price data that HHS recasts as acquisition cost 

data, but that lacks the characteristics and process of collection 

that Congress specified in subclause (I). The Hospitals’

reading does give distinct meaning to subclause (II)’s 

allowance for adjustment; it is the majority’s reading that 

occasions significant superfluity without regard to Congress’ 

structural decision to make subclauses (I) and (II) distinct 

alternatives.

Finally, the majority repeatedly justifies its reading by 

reference to the policy benefits of the agency’s rate reductions 

and the reasonableness of the agency’s alternative data and 

resulting estimates. See, e.g., Maj. Op. at 18, 20, 22, 24, 27-28. 

The majority views it as relevant “backdrop,” for example, that 

one result of the agency’s proposed cuts will be to lower 

copayments for Medicare beneficiaries served by 340B 

hospitals, and to avoid the prospect of any beneficiary possibly

paying more in a copayment than the hospital paid to buy the 

prescribed drugs. Id. at 20; but see HHS Off. of Inspector Gen., 

OEI-12-14-00030, Part B Payments for 340B-Purchased 
10

Drugs 9 n.26 (Nov. 2015) (OIG Report) (noting that 340B 

hospitals “may waive all or part of the beneficiary’s 

coinsurance”). And the majority notes HHS’s worries that 

340B hospitals might overprescribe drugs that bring 

reimbursement revenue. See Maj. Op. at 7; but see U.S. Gov’t 

Accountability Off., GAO-15-442, Medicare Part B Drugs: 

Action Needed to Reduce Financial Incentives to Prescribe 

340B Drugs at Participating Hospitals 31 (June 2015) (noting 

HHS’s view that “higher spending for Part B drugs at 340B 

hospitals” might “lead to better clinical outcomes” for patients 

served by those safety-net hospitals, who often are in 

“meaningful[ly]” poorer health than other patients). The 

majority also expresses confidence that the agency examined

“data of undisputed reliability,” Maj. Op. at 28, “acted on that 

data in a cautious way,” id., and implemented a “fair, or even 

conservative, measure of the reduction needed to bring 

payments to those hospitals in parity with their costs to obtain 

the drugs,” id. at 20. “In those circumstances,” the majority 

declares, “HHS reasonably concluded that it need not continue 

subsidizing 340B providers with Part B (i.e. taxpayer) funds

and Medicare beneficiaries’ copayments.” Id. at 28.

Those circumstances would perhaps be relevant were this 

a challenge to the agency’s rules as arbitrary and capricious. 

But concerns about the program’s effects, and confidence in 

the agency’s care in using data other than those the statute

requires, cannot somehow authorize the agency to do what the 

statute does not. As the Supreme Court has held, an “agency 

has no power to ‘tailor’ legislation to bureaucratic policy goals 

by rewriting unambiguous statutory terms.” Util. Air 

Regulatory Grp v. EPA, 573 U.S. 302, 325 (2014). And, 

unmoored from the statute’s express data-quality requirements, 

the asserted reliability of the quite different data HHS gathered 

here provides no assurance for its next rulemaking. Whether 

HHS’s actions might have perceptible policy advantages does
11

not affect whether the statute authorizes what the agency has 

done.

It bears noting that, even were they relevant, the claimed 

policy benefits of the agency’s new rate reductions are far from 

clear. The Section 340B drug discount program, enacted in 

1992 as part of the Public Health Service Act, see 42 U.S.C. 

§ 256b, permits 340B hospitals to “generate revenue” through 

“insurance reimbursement[] that may exceed the 340B price 

paid for the drugs.” U.S. Gov’t Accountability Off., 

GAO-11-836, Manufacturer Discounts in the 340B Program 

Offer Benefits, But Federal Oversight Needs Improvement 2 

(2011) (GAO Report). As HHS itself has recognized, Congress 

anticipated that such above-cost reimbursement revenue would 

help to fund the public and nonprofit safety-net hospitals that 

qualify for 340B pricing: “Under the design of the 340B 

Program and Part B payment rules, the difference between 

what Medicare pays and what it costs to acquire the drugs is 

fully retained by the participating covered entities, allowing 

them to stretch scarce Federal dollars in service to their 

communities.” OIG Report i (Executive Summary); see also

HHS Off. of Inspector Gen. Memorandum Report: Payment for 

Drugs Under the Hospital Outpatient Prospective Payment 

System 8 (Oct. 22, 2010) (describing above-cost SCOD

reimbursements to 340B hospitals as “an expected result given 

the purpose of the 340B Program”). 

The challenged rules took a major bite out of 340B 

hospitals’ funding. Often operating at substantial losses, 340B 

hospitals rely on the revenue that Medicare Part B provides in 

the form of standard drug-reimbursement payments that exceed 

those hospitals’ acquisition costs. 340B hospitals “have used 

the additional resources to provide critical healthcare services 

to communities with underserved populations that could not 

otherwise afford these services.” Hospitals Br. 9 (citing GAO 
12

Report at 17-18); see also Cares Cmty. Health v. HHS, 

944 F.3d 950, 955 (D.C. Cir. 2019). Although stakeholders 

have debated “whether statutory changes should be made to 

enable Medicare and/or Medicaid to share in these savings,” 

OIG Report 2, Congress has not made any such change. And,

as written, subparagraph (E) does not empower the Secretary 

to “adjust” away from 340B hospitals substantial annual

revenue they garner under the separate, unchallenged 340B 

statute to provide care to underserved communities. 

The net effect of HHS’s 2018 and 2019 OPPS rules is to 

redistribute funds from financially strapped, public and 

nonprofit safety-net hospitals serving vulnerable populations—

including patients without any insurance at all—to facilities 

and individuals who are relatively better off. If that is a result 

that Congress intended to authorize, it remains free to say so. 

But because the statute as it is written does not permit the 

challenged rate reductions, I respectfully dissent.