Issue 26 

The U.S. Supreme Court's recent decision that overturned the so-called Chevron deference holds significant potential impact to the highly regulated U.S. health care industry, given its complexity, size, and dynamic nature.

Courts frequently rely upon agencies such as the Centers for Medicare and Medicaid, Food and Drug Administration (FDA), and Centers for Disease Control and Prevention to interpret and implement regulatory laws when facing ambiguity. With the 1984 decision in Chevron v. Natural Resources Defense Council now overturned, courts may still seek guidance from these agencies but not expressly defer to them for interpretations. They can instead use their independent judgment in deciding whether an agency is appropriately acting within a law's meaning.

Partially sidelining these agencies and concentrating power in the courts without the same industry expertise in determining the application of statutes will likely increase time and unpredictability in outcomes of challenges, legal challenges to regulations, and time for regulations and/or changes to pass.

More Regulatory Challenges, Longer Decision Times, Increased Unpredictability

The ruling has positive and negative potential impacts to the health care industry, depending on the company and specific legislation. However, we believe a more unpredictable, time-consuming, less stable rule-making environment is a long-term negative development for the industry. Courts can still solicit the expertise of agencies before making decisions and ultimately side with their recommendations.

But a given court may or may not elect to rely on an agency, could have varying interpretations, and at the very least may take more time to decide challenges.

The ruling could encourage more legal challenges, which at the very least can delay implementation of laws. And while it is not meant to reopen prior decisions that relied upon the Chevron deference, it could increase challenges to established rules, depending on how companies view their chances. This could further crowd court schedules and likely stretch agency resources, extending decision times.

We think a more litigious environment in general is a negative for the health care industry. Companies are generally reluctant to sue agencies with which they are partners. Chevron has for 40 years established precedents and enabled agencies and industries to work closely together in such aspects as expediting drug approvals, the FDA priority review process, and orphan drug status. While such cooperation will likely remain, the added prism of the judicial branch adds complexity.

Also, depending on which court hears a case, it will also increase unpredictability. Agencies will likely be more cautious, given their now lessened flexibility to interpret statutes. This may or may not benefit health care companies, depending on the action in question, such as companies looking for policy changes.

Chart 1

Laws and regulations will take longer to pass

The role of Congress in passing laws has not changed, and neither has the process. However, the Chevron deference had allowed executive agencies to interpret ambiguities in laws that they view necessary to effectively execute and enforce. No new regulatory laws are all-encompassing such that they do not need interpretation or increased specificity, especially for an industry as complex as health care.

Congress may look for more specificity in laws to reduce future legal challenges, resulting in more time needed to agree to the specifics of laws before passing them.

Inflation Reduction Act And No Surprises Act Get Scrutiny

We are most focused on the Inflation Reduction Act (IRA), which includes a provision for Medicare negotiation on drug pricing, and No Surprises Act. Under the IRA, Medicare can negotiate directly on pricing for prescription drugs used in the program. The measure goes into effect 2026 on an initial group of 10 drugs, expanding gradually over time. Several drug companies are already challenging the legality of IRA. Delayed implementation or a limiting of its application would be a credit benefit for drug companies with affected products.

Meanwhile, the No Surprises Act, passed in 2020 and implemented in 2022, required insurers and providers to negotiate out-of-network payment disputes to protect patients from "surprise billings". The act's implementation has been problematic and has faced several legal challenges on the arbitration process from providers, which are at a disadvantage against larger insurance providers. Delayed changes to the regulation would be a credit negative for providers that have gone through an extended and expensive arbitration process that has protracted collections.

Table 1

Plenty More To Come

We will monitor how much of a difference overturning the Chevron deference has on rule-making. But our initial read is that the decision holds mixed implications for companies from a credit perspective, depending on the legislation and company involved. We recognize that slowing the implementation of new laws and regulations, if not overturning them, could be a credit positive for firms facing legislation that could constrain financial performance. The ruling is also a positive development in that it increases opportunities to challenge regulatory laws.

However, it could be a credit negative because it potentially creates a less stable regulatory environment slower to respond with new rules. It will also be detrimental for firms looking for quick responses to legislation that can benefit them.

The health care industry, especially in the services subsector, remains relatively fragmented. Smaller firms that make up most companies that we rate could also be disadvantaged in their ability to litigate, weakening their competitive position versus much larger health insurers.