The opinion
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
PACIFIC EDGE DIAGNOSTICS, : CIVIL ACTION NO. 1:25-CV-291
USA, LTD., :
: (Judge Neary)
Plaintiff :
:
v. :
:
ROBERT F. KENNEDY, in his :
official capacity as Secretary of Health :
and Human Services, and NOVITAS :
SOLUTIONS, INC., :
:
Defendants :
MEMORANDUM
Plaintiff Pacific Edge Diagnostics, USA, Ltd. initiated this action to challenge
a Medicare coverage determination made by defendant Novitas Solutions, Inc.
Novitas, pursuant to authority granted to it by the Secretary of Health and Human
Services, determined a test manufactured by Pacific Edge and used by physicians
to rule out bladder cancer would no longer be covered by Medicare. Pacific Edge
challenges this determination as arbitrary and capricious under the Administrative
Procedure Act, 5 U.S.C. § 706(2)(A). The Secretary and Novitas (collectively
“Defendants”) have asked this court to dismiss Pacific Edge’s challenge for a lack of
jurisdiction. Because Pacific Edge will have an administrative remedy available to it
if a claim is denied, the statutory scheme Defendants’ motion to dismiss will be
granted.
I. Factual Background & Procedural History
A. The Medicare Act
Medicare is a public health program providing health benefits to all persons
aged sixty-five and older who are eligible for Social Security benefits or eligible for
retirement benefits under the railroad retirement system. 42 U.S.C. §§ 1395 et seq.
Among Medicare’s provisions is Medicare Part B, which covers certain physicians’
services, outpatient hospital care, and other medical items and services. California
Clinical Lab’y Ass’n v. Sec’y of Health & Hum. Servs., 104 F. Supp. 3d 66, 70 (D.D.C.
2015).
The Secretary administers Medicare through the Centers for Medicare and
Medicaid services (“CMS”). Additionally, the Secretary can enter into contracts
with private entities, known as Medicare Administrative Contractors (“MAC’s”),
who are then empowered to make certain coverage determinations. 42 U.S.C. §
1395kk-1(a)(1), (4); 42 U.S.C. 1395u(a). Specifically, a MAC can issue a local coverage
determination (“LCD”) establishing “whether or not a particular item or service is
covered” within the geographic region assigned to the MAC. 42 U.S.C. §
1395ff(f)(2)(B). In this way, an LCD serves as a first-step screen of what is and is not
covered by Medicare.
A MAC’s discretion in issuing an LCD is not limitless. An LCD may only
cover expenses that are “reasonable and necessary” for healthcare. 42 U.S.C. §
1395y(a)(1)(A). Also, an LCD must first go through a notice and comment period
seeking feedback from the public and stakeholders. Medicare Program Integrity
Manual (“PIM”), § 13.2.4. LCD’s for clinical diagnostic laboratory services must be
made with the same process for making other local coverage determinations. 42
U.S.C. § 1395m-1(g)(1)(A).
Individual beneficiaries, healthcare providers, and suppliers of covered items
may challenge a coverage determination through an administrative process after a
MAC denies a claim. See 42 U.S.C. §§ 1395ff(b)–(d); 42 C.F.R. § 405.900 et seq. First, a
dissatisfied person or entity can seek a redetermination. 42 U.S.C. § 1395ff(a)(3); 42
C.F.R. § 405.940. The next step is to seek review by a qualified independent
contractor,1 42 U.S.C. § 1395ff(c); 42 C.F.R. § 405.960, who is not bound by the LCD,
42 U.S.C. § 1395ff(c)(3)(B)(ii)(II). After that, a challenger may seek review before an
administrative law judge (“ALJ”). 42 U.S.C. §§ 1395ff(d)(1); 42 C.F.R. § 405.1000. The
final administrative stop is an appeal to the Medicare Appeals Council, a division of
the Departmental Appeals Board of the Department of Health and Human Services
(“DAB”). 42 U.S.C. §§ 1395ff(d)(2); 42 C.F.R. § 405.1100.
Like the qualified independent contractors, neither the ALJs nor the DAB
“are not bound by LCDs” when hearing appeals from initial coverage
determinations. 42 C.F.R. § 405.1062(a). This is to say, notwithstanding the LCD, an
ALJ or the DAB can still find a test to be reasonable and necessary—and covered
by Medicare. At the same time, neither ALJs nor the DAB can invalidate an LCD
1 A qualified independent contractor is an entity or organization that is
independent of any MAC that additionally possesses “sufficient medical, legal, and
other expertise” to evaluate whether a test or service is reasonable and necessary
under Medicare. 42 U.S.C. § 1395ff(c)(2), (c)(2)(3)(A).
wholesale on behalf of a supplier.2 Id. § 405.1062(c). Once an adverse DAB decision
becomes final, then and only then, can an appellant seek judicial relief. See 42
U.S.C. § 405(g), (h);3 42 C.F.R. § 405.1136(a)(1).
B. The Dispute
Pacific Edge is a biotechnology supplier that makes the Cxbladder line of
tests to help rule out or monitor urothelial bladder cancer in patients with
hematuria. (Doc. 1 ¶¶ 1, 6). Since 2020, Novitas4 has regularly approved claims for
Cxbladder tests. (Id. ¶ 48). In 2022, Novitas began the process for updating its LCD.
(Id. ¶ 49). The first draft, published and open to comment on June 9, 2022, stated
that only tests approved by certain non-profits, National Comprehensive Cancer
Network (“NCCN”) Biomarkers Compendium, Memorial Sloan Kettering Cancer
Center Oncology Knowledge Base (“OncoKB”), or Clinical Genome Resource
(“ClinGen”), would be covered. (Id. ¶ 50). Cxbladder was not approved by any of
these organizations. (Id. ¶ 55).
After a series of meetings, Novitas was preparing to finalize a new LCD,
L39365, in mid-2023. (Id. ¶¶ 55, 57). This LCD stood by the requirement that tests be
2 Individuals, however, can utilize a special avenue to challenge an entire
LCD. See 42 U.S.C. § 1395ff(f)(2)(A), (f)(5).
3 Section 405, by its own terms, applies to the Social Security Administration.
Subsection (h) incorporated by reference to apply to Medicare by 42 U.S.C. § 1395ii
and subsection (g) is incorporated by reference by 42 U.S.C. 1395ff(b)(1)(A).
4 Novitas is the MAC for Arkansas, Colorado, Delaware, Louisiana, Maryland,
Mississippi, New Jersey, New Mexico, Oklahoma, Pennsylvania, and the District of
Columbia. (Doc. 31 ¶ 8).
approved by the independent non-profits. (Id. ¶ 55). Further, L39365 included an
evidence review laying out why Cxbladder tests would no longer be covered. (Id.).
Rather than finalizing L39365, Novitas reissued it as a draft—with the same
provisions—and held more meetings with stakeholders, including Pacific Edge. (Id.
¶¶ 59-60). On January 3, 2025, Novitas repromulgated L39365 with an effective date
of February 23, 2025. (Id. ¶ 72). This latest LCD dropped the explicit requirement
tests be approved by the independent non-profits, however, it explicitly would not
cover Cxbladder tests. (Id.). On January 27, 2025, Novitas announced the effective
date for the final LCD is April 24, 2025. (Id. ¶ 74). While typically LCD’s are only
binding in the geographic region covered by a MAC, 42 U.S.C. § 1395ff(f)(2)(B),
Pacific Edge asserts that because its labs are within Novitas’ assigned geographic
area, L39365 would have the effect of being a national non-coverage of the
Cxbladder tests, (Doc. 38 at 18 n.2).
C. Procedural History
On February 18, 2025, Pacific Edge commenced this action by filing suit
against Defendants, alleging violations of the Administrative Procedure Act, 5
U.S.C. § 706(2)(A) (“APA”) based on Novitas’s non-coverage decision of Cxbladder.
(See generally Doc. 1). The next day, Pacific Edge filed a motion for a preliminary
injunction (Doc. 3).5 This court held a telephone conference on February 26, 2025,
and set a briefing schedule for the preliminary injunction, Defendants’ anticipated
5 That motion also requested the court enter summary judgment along with
the preliminary injunction.
motion to dismiss, and motion for summary judgment.6 (Docs. 14, 15). On March 19,
2025, Defendants filed a motion to dismiss this case, raising a factual challenge to
the court’s jurisdiction over this matter. (Doc. 29). The court heard oral argument
on the motion for a preliminary injunction, as well as Defendants’ motion to
dismiss, on April 16, 2025.
II. Legal Standard
Federal Rule of Civil Procedure 12(b)(1) provides that a court may dismiss a
claim for lack of subject matter jurisdiction. See FED. R. CIV. P. 12(b)(1). Such
jurisdictional challenges take one of two forms: (1) parties may levy a “factual”
attack, arguing that one or more of the pleading’s factual allegations are untrue,
removing the action from the court’s jurisdictional ken; or (2) they may assert a
“facial” challenge, which assumes the veracity of the complaint’s allegations but
nonetheless argues that a claim is not within the court’s jurisdiction. Lincoln
Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 105 (3d Cir. 2015). “A factual
challenge allows ‘a court [to] weigh and consider evidence outside the pleadings.’”
Davis v. Wells Fargo, 824 F.3d 333, 345 (3d Cir. 2016) (citing Constitution Party of
Pa. v. Aichele, 757 F.3d 347, 358 (3d Cir. 2014)). “‘[T]he plaintiff will have the burden
of proof that jurisdiction does in fact exist,’ and the court ‘is free to weigh the
evidence and satisfy itself as to the existence of its power to hear the case.’” Id.
6 On March 12, 2025, the court amended the briefing schedule at the request
of Defendants and ordered that neither they nor any amicus need address Pacific
Edge’s alternative motion for summary judgment. (Doc. 20).
(quoting Mortenson v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir.
1977)).
“Federal courts are courts of limited jurisdiction. They possess only that
power authorized by Constitution and statute. . . . It is to be presumed that a cause
lies outside this limited jurisdiction and the burden of establishing the contrary
rests upon the party asserting jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 377 (1994) (internal citations omitted).
III. Discussion
Pacific Edge argues in favor of subject matter jurisdiction by framing the
dispute under the APA and arising under this court’s general jurisdiction over
federal laws pursuant to 28 U.S.C. § 1331. Defendants counter that Pacific Edge
must channel its claims through Medicare’s administrative process first, before it
can bring a claim in federal court. The court agrees that it lacks subject matter
jurisdiction to hear this claim based on the facts as they are now.
Unquestionably, the Medicare Act is a federal statute, and APA claims are
typically judiciable by federal courts. Yet, several exceptions to this general rule
exist. Congress can provide for other, exclusive methods for judicial review as part
of its power to set the jurisdiction of federal courts. See Shalala v. Illinois Council
on Long Term Care, Inc., 529 U.S. 1, 10 (2000). The question presently before the
court is whether the exclusive track set forth in the Medicare Act applies to this
case.
Section 405(h) places sharp restrictions on a party’s ability to sue the
government for claims involving Medicare. See Illinois Council, 529 U.S. at 10. That
section “channels most, if not all, Medicare claims through [Medicare’s] special
review system.” Id. at 8. As our court of appeals has noted, the channeling provision
“operates as [a] near-absolute bar to federal-question jurisdiction for claims arising
under the Medicare Act that have not been challenged administratively.” Temple
Univ. Hosp. v. Sec’y United States Dep’t Health and Human Servs., 2 F.4th 121, 128
(3d Cir. 2021). It is undisputed Pacific Edge’s claim arises under the Medicare Act,
(Doc. 38 at 9), and that Pacific Edge has not yet pursued any administrative review
of its claims.7
However, there is an exception to the exception that allows a party to bypass
§ 405(h)’s jurisdictional limit. To find § 405(h) inapplicable, a party must show
“application of § 405(h) would not simply channel review through the agency, but
would mean no review at all.” Illinois Council, 529 U.S. at 19.
Pacific Edge fails to make this showing. It is undisputed that once L39365
goes into effect, Pacific Edge, as a supplier, would have standing to challenge an
initial determination that non-covers a Cxbladder test. 42 C.F.R. § 405.940; 42 U.S.C.
§ 1395ff(a)(3). Such a challenge begins the administrative process which culminates
in a final agency decision by the DAB. 42 U.S.C. §§ 1395ff(b)(1)(A), (d)(2); 42 C.F.R. §
405.1100. The decision of the DAB is subject to judicial review. 42 U.S.C. §§ 405(g),
1395ff(b)(1)(A); 42 C.F.R. 405.1136(a). Further, Pacific Edge may assist an aggrieved
7 Indeed, Pacific Edge could not have availed itself of any administrative
process because the first step is to first receive an adverse “initial determination”
which will not occur until L39365 takes effect on April 24th, 2025. 42 U.S.C. §
1395ff(b)(1)(A).
party in bringing a challenge to a coverage determination before an ALJ and the
DAB, and decisions of the DAB are again subject to review in federal courts.
Medicare Program: Review of National Coverage Determinations and Local
Coverage Determinations, 68 FED. REG. 63692, 63695 (Nov. 7, 2003); 42 U.S.C. §
1395ff(f)(2), (f)(2)(A)(iv). Thus, Pacific Edge has both a direct and an indirect avenue
to court to challenge the non-coverage of its tests and so it must take that road, no
matter how long, winding, or uncertain it may be. See Illinois Council, 529 U.S. at
12-13. (noting that the channeling requirement “comes at a price, namely,
occasional individual, delay-related hardship.”). Nothing in the record or legal
precedent permits this Court to reach a different conclusion.
Pacific Edge, perhaps understandably, wishes to avoid taking the above
avenues because the administrative process would not be able to invalidate the
LCD, in addition to the delays in waiting for the administrative process to play out.
(See Doc. 38 at 9-11). While an individual with aligned interests could carry its
claims through the administrative process, Pacific Edge dubs this possibility “rank
speculation.” (Id. 11). Yet, even ignoring this route, Pacific Edge could still
challenge, on an individual basis, the initial determinations denying Cxbladder
tests. 42 C.F.R. § 405.940; 42 U.S.C. § 1395ff(a)(3). Pacific Edge argues that is futile
because “[it] cannot challenge the validity of the LCD—meaning, the
reasonableness of the LCD—in the claim appeal. Pacific Edge cannot ask the ALJ
or the Council to set aside or invalidate the LCD.” (Doc. 38 at 15).
Unfortunately for Pacific Edge, the Supreme Court has made clear “[t]he fact
that the agency might not provide a hearing for that particular contention, or may
lack the power to provide one, . . . is beside the point because it is the ‘action’
arising under the Medicare Act that must be channeled through the agency.”
Illinois Council, 529 U.S. at 23 (emphasis in original) (citations omitted). “[A]ll
inextricably intertwined claims must first be raised in an administrative process. In
that process, the agency, with the benefit of its experience and expertise, can
resolve whatever issues it can, limiting the number of issues before judicial
review. . . .” Nichole Med. Equip. & Supply, Inc. v. TriCenturion, Inc., 694 F.3d
340, 350 (3d Cir. 2012) (quoting Kaiser v. Blue Cross of Cal., 347 F.3d 1107, 1116 n.4
(9th Cir. 2003)).
Pacific Edge protests, saying that since “the validity of the LCD is irrelevant
to the claim denial that is the subject of the ALJ hearing, Pacific Edge cannot obtain
the administrative record for the LCD through discovery in the claim appeal
process.” (Doc. 38 at 15). It also states that “judicial review [would be] limited to the
agency’s application of the LCD to the claim.” (Id. at 16). Not so. Once Pacific
Edge’s claim has been properly channeled, “a court reviewing [the final agency
action] has adequate authority to resolve any statutory or constitutional contention
that the agency does not, or cannot, decide, including, where necessary, the
authority to develop an evidentiary record.” Illinois Council, 529 U.S. at 23-24
(emphasis added). The ultimate question for the court would be whether Cxbladder
tests are “reasonable and necessary” for medical treatment. 42 U.S.C. §
1395y(a)(1)(A). If L39365 refuses to cover tests that could be “reasonable and
necessary” for some patients, of course a court could find the LCD arbitrary and
capricious under the APA.8 See 5 U.S.C. § 706(2)(A).
Additionally, Pacific Edge points out that Congress created a shortcut to
challenge an LCD for individuals, not suppliers. See 42 U.S.C. 1395ff(f)(2). Because
that provision outlines a clear process for challenging an LCD, Pacific Edge argues
it is the only way to challenge an LCD. (4/16/25 Hr’g Tr. 7:11-19). If anything, this
provision hurts Pacific Edge. Subsection (f) was added to the Medicare Act by the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000.
Pub. L. No. 106-554, § 1(a)(6), Title V, § 522(a). Significantly, prior versions of the bill
considered by Congress would have given suppliers, like Pacific Edge, the ability to
administratively challenge an LCD. See H.R. 4680, 106th Cong. § 221(a) (2000)
(allowing “[p]ersons or classes of persons, who make, manufacture, offer, supply,
make available, or provide [covered] items and services” to challenge an LCD). The
purpose of this provision was to “ensure that all beneficiaries maintain a legitimate
right to challenge in a timely manner, before an independent decisionmaker, any
adverse coverage or claims decisions that may impact their ability to obtain quality
health care.” H.R. Rep. No. 106-703(I), at 71 (2000). When Congress made the clear
choice to only allow individuals to challenge an LCD through the administrative
process, it did not implicitly grant suppliers the ability to cut straight to federal
court and seek relief under the APA. Rather, § 1395ff(f)(2) gives individuals a
8 The Secretary has conceded that once Pacific Edge has gone through the
administrative process for an individual claim appeal, it could then make its APA
claim in federal court. (4/16/25 Hr’g Tr. 31:10-12, 21-24).
streamlined way to challenge an LCD, whereas institutional players must go
through the individual claims process under § 1395ff(b)-(d).
Pacific Edge further objects that judicial review at that point would be
deferential to the agency’s decision; in other words, review would be deferential to
the LCD. (See Doc. 38 at 15-16). But deference does not preordain defeat (or confer
jurisdiction where none exists). See In Touch Home Health Agency, Inc. v. Azar,
414 F. Supp. 3d 1177, 1194 (N.D. Ill. 2019) (“Moreover, despite federal courts’
deferential review [of] agency decisions, obtaining relief in federal court remains
possible.”). Second, Pacific Edge’s basis for asserting a “district court does not
review whether the LCD is valid,” (Doc. 38 at 16), is a single, unreported decision
from the Southern District of Texas—Clinic Resources Management v. Burwell, No.
CIV.A. H-14-578, 2015 WL 3932657 (S.D. Tex. June 26, 2015). Among the issues with
relying solely on Clinic Resources, is that the plaintiff in that case was not
challenging the LCD wholesale but the application of the LCD. See Clinic
Resources, 2015 WL 3932657 *5-6. Nowhere was there a claim in that case that the
LCD violated the APA. As such, the court is not persuaded Clinic Resources stands
for the proposition that an LCD’s validity cannot be challenged under the APA once
properly in federal court.
Finally, in a last-ditch effort to avoid the Illinois Council analysis, Pacific
Edge asserts Weinberger v. Salfi, 422 U.S. 749 (1975) provides an alternative path to
jurisdiction in this case. (See Doc. 38 at 22). Salfi held that § 405 allows the
Secretary to “specify such requirements for exhaustion as he deems serve his own
interests in effective and efficient administration.” Salfi, 422 U.S. at 766. Thus, the
Secretary can waive whether a challenger must first proceed through the
administrative process before going to court. In Salfi, the Secretary “d[id] not raise
any challenge to the sufficiency of the allegations of exhaustion in appellees'
complaint.” Id. at 767. This is plainly not the case here, (See Doc. 30 at 18-22), and so
Salfi is inapplicable.
The court is cognizant of the dire consequences the non-coverage of
Cxbladder tests will have on Pacific Edge. The company has also marshalled
incredibly compelling facts for why its test is a medical marvel. Yet the law is clear:
a party may only avoid Medicare’s challenging requirement when it would
otherwise have “no review at all.” Illinois Council, 529 U.S. at 19. Pacific Edge will
have access to review through the individual claims reconsideration process once
L39365 take effect. While this undoubtably will cause Pacific Edge (and perhaps
individuals) “delay related hardship,” it is the price to be paid for stability in the
Medicare system, and it is a price Congress has decided is worth paying. See id. at
13. This court’s hands remain tied.
IV. Conclusion
The Illinois Council exception to Medicare’s channeling requirement does
not apply in this case. As such, this court does not have jurisdiction over Pacific
Edge’s present claim. Accordingly, Defendants’ motion to dismiss will be granted
and Pacific Edge’s motion for a preliminary injunction or summary judgment will
be denied as moot. An appropriate order shall issue.
/S/ KELI M. NEARY
Keli M. Neary
United States District Judge
Middle District of Pennsylvania
Dated: April 23rd, 2025