Hays v. Sebelius

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 5, 2009 Decided December 22, 2009

No. 08-5508

ILENE HAYS,

APPELLEE

v.

KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL.,

APPELLANTS

Appeal from the United States District Court

for the District of Columbia

(No. 1:08-cv-01032-HHK)

Samantha L. Chaifetz, Attorney, U.S. Department of

Justice, argued the cause for appellants. On the briefs were

Mark B. Stern and Christopher C. Fonzone, Attorneys.

Stuart M. Gerson argued the cause for appellee. With

him on the brief was Robert E. Wanerman.

Peter D. Keisler and Patrick Morrisey were on the brief

for amicus curiae Sepracor Inc. in support of appellee.

Before: TATEL and KAVANAUGH, Circuit Judges, and

RANDOLPH, Senior Circuit Judge.

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Opinion for the Court filed by Circuit Judge TATEL.

Concurring opinion filed by Senior Circuit Judge

RANDOLPH.

TATEL, Circuit Judge: Appellee, a Medicare Part B

beneficiary, challenges a decision by a regional Medicare

contractor to reimburse for a particular drug only up to the

price of its least costly alternative. The district court held that

the Medicare Act unambiguously forecloses that

determination and requires instead that Medicare pay for

covered items or services at a statutorily prescribed rate.

Agreeing with the district court, we affirm.

I.

Medicare Part B is a public health insurance program that

provides the disabled and elderly with outpatient items and

services, including durable medical equipment and certain

prescription medications. The threshold for Medicare Part B

coverage appears in 42 U.S.C. § 1395y(a)(1)(A), which states

that “no payment may be made . . . for any expenses incurred

for items or services which . . . are not reasonable and

necessary for the diagnosis or treatment of illness or injury or

to improve the functioning of a malformed body member.”

The Secretary of Health and Human Services administers

the Medicare Act and may delegate certain functions to

contractors, including the development of local coverage

determinations. 42 U.S.C. § 1395kk-1(a)(4). The Medicare

Act defines local coverage determinations as decisions

“whether or not a particular item or service is covered” in the

contractor’s geographic area “in accordance with section

1395y(a)(1)(A).” 42 U.S.C. § 1395ff(f)(2)(B). The Secretary

has instructed contractors that when determining whether a

treatment is “reasonable and necessary” under section

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1395y(a)(1)(A), they may apply the so-called least costly

alternative policy. Ctrs. for Medicare and Medicaid Servs.,

Medicare Program Integrity Manual § 13.4.A (Rev. 71, Apr.

9, 2004). Under that policy, Medicare provides

reimbursement for treatments only up to the price of their

“reasonably feasible and medically appropriate” least costly

alternatives. Ctrs. for Medicare and Medicaid Servs.,

Medicare Benefit Policy Manual § 110.1.C.3 (Rev. 93, July

25, 2008). Application of the policy is discretionary with

regard to prescription drugs—the subject of this case—but

mandatory with regard to durable medical equipment. See

Medicare Program Integrity Manual § 13.4.A.

This case arose when Medicare contractors applied the

least costly alternative policy to DuoNeb, an inhalation drug

used to treat Chronic Obstructive Pulmonary Disease.

DuoNeb provides a combination of albuterol sulfate and

ipratropium bromide in one dose and can be slightly more

expensive than separate doses of the two component drugs.

Appellee Ilene Hays is a Medicare Part B beneficiary

suffering from Chronic Obstructive Pulmonary Disease who

has used DuoNeb for approximately four years. During that

time, Medicare, pursuant to a statutory formula, provided

reimbursement for DuoNeb at 106% of the drug’s average

sales price. 42 U.S.C. §§ 1395w-3a(b)(1), 1395u(o)(1)(G)(ii).

In 2008, four Medicare contractors announced that the

medical necessity of administering the two drugs in a

combined dose, as compared to separate doses, had not been

established. See NHIC (Region A), LCD for Nebulizers,

L11499 (Apr. 10, 2008). Thus, pursuant to the least costly

alternative policy, payment for the combination drug “[would]

be based on the allowance for the least costly medically

appropriate alternative,” the two component drugs as

administered separately. Id. Hays challenged this decision in

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the United States District Court for the District of Columbia

pursuant to a provision of the statute that allows beneficiaries

to proceed without exhausting administrative remedies where

“there are no material issues of fact in dispute, and the only

issue of law is . . . that a regulation, determination, or ruling

by the Secretary is invalid.” 42 U.S.C. § 1395ff(f)(3). Hays

argued that section 1395y(a)’s “reasonable and necessary”

standard modifies “items and services.” Accordingly, she

contended, the Secretary may determine only whether

DuoNeb is reasonable and necessary; if it is, Medicare must

reimburse based on the 106% statutory formula. See 42

U.S.C. § 1395w-3a. The district court agreed with Hays and

granted her motion for summary judgment. Hays v. Leavitt,

583 F. Supp. 2d 62, 69, 72 (D.D.C. 2008). The Secretary

appeals, and our review is de novo. See, e.g., Transitional

Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019, 1023

(D.C. Cir. 2000) (reviewing de novo district court’s grant of

summary judgment to plaintiffs challenging validity of

Medicare regulations).

II.

The Secretary argues that section 1395y(a) is ambiguous

and that we should defer to her reasonable interpretation of

the statute. See Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984). Several features of the

Medicare statute, however, convince us that it unambiguously

forecloses the Secretary’s interpretation.

In relevant part, section 1395y provides:

(a) Items or services specifically excluded.

Notwithstanding any other provision of this

subchapter, no payment may be made . . . for any

expenses incurred for items or services--

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(1)(A) which, except for items and services

described in a succeeding subparagraph or additional

preventive services . . . , are not reasonable and

necessary for the diagnosis or treatment of illness or

injury or to improve the functioning of a malformed

body member[.]

The dispute in this case centers on whether “reasonable and

necessary” modifies “expenses” (as the Secretary argues), or

“items and services” (as Hays contends). If the Secretary is

correct, then Medicare may, as it has here, partially cover an

item or service, declining to reimburse expenses associated

with the marginal difference in price between a prescribed

item or service and its least costly and medically appropriate

alternative. If Hays and the district court are correct, then the

Secretary may make only a binary coverage decision, namely

to reimburse at the full statutory rate or not at all.

We agree with Hays and the district court. As they point

out, only a dependent clause separates “reasonable and

necessary” from the phrase “items or services.” See

§ 1395y(a)(1) (“for any expenses incurred for items or

services—which, . . . , are not reasonable and necessary . . .”).

“Expenses,” by contrast, appears earlier in the sentence.

“Ordinarily, qualifying phrases are to be applied to the words

or phrase immediately preceding and are not to be construed

as extending to others more remote.” United States v.

Pritchett, 470 F.2d 455, 459 (D.C. Cir. 1972). To be sure,

this “Rule of the Last Antecedent” “is not an absolute and can

assuredly be overcome by other indicia of meaning.”

Barnhart v. Thomas, 540 U.S. 20, 26 (2003); see also United

States v. Villanueva-Sotelo, 515 F.3d 1234, 1238 (D.C. Cir.

2008). Here, however, section 1395y contains no indication

that the rule is inapplicable. Quite to the contrary, not only is

the phrase “items or services” much nearer to the phrase

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“reasonable and necessary,” but subsection (1)(A), which

introduces the “reasonable and necessary” standard, is set off

from the introductory language and nowhere mentions

“expenses.”

Several other characteristics of section 1395y(a) reinforce

this conclusion. First, subsection (1)(A) prohibits payment

for expenses incurred for items or services “which, except for

items and services described in a succeeding subparagraph

. . . , are not reasonable and necessary . . . .” 42 U.S.C.

§ 1395y(a)(1)(A). By defining the scope of the word

“which,” this language provides powerful evidence that

“reasonable and necessary” applies to “items and services.”

Moreover, the “succeeding subparagraph[s]” to which

subsection (1)(A) refers discuss coverage of specific items

and services including “hospice care,” § 1395y(a)(1)(C),

“screening mammography,” § 1395y(a)(1)(F), “home health

services,” § 1395y(a)(1)(I), and “ultrasound screening,”

§ 1395y(a)(1)(N).

Second, to be covered something—either expenses or

items and services—must be “reasonable and necessary for

the diagnosis or treatment of illness or injury or to improve

the functioning of a malformed body member.” 42 U.S.C.

§ 1395y(a)(1)(A). Items and services diagnose, treat, and

improve; expenses do not.

Finally, section 1395y(a) is entitled “Items or services

specifically excluded.” 42 U.S.C. §1395y(a). Although “the

title of a statute and the heading of a section cannot limit the

plain meaning of the text,” they remain “tools available for

the resolution of a doubt” about statutory meaning. Bhd. of

R.R. Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519,

528–29 (1947). Here, the title, which says nothing about

expenses, confirms the obvious: that items or services, not

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expenses, must be reasonable and necessary to qualify for

Medicare coverage.

Our conclusion finds support elsewhere in the Medicare

Act, specifically its mandatory reimbursement formulas.

Section 1395w-3a provides that for multiple source drugs like

DuoNeb “the amount of payment . . . is” 106% of the average

sales price, as determined under the statutory formula. 42

U.S.C. § 1395w-3a(b)(1) (emphasis added). The statutory

formula is in turn based on the volume-weighted average of

the average sales prices of drugs within the same Healthcare

Common Procedure Coding System (HCPCS) billing and

payment code. 42 U.S.C. § 1395w-3a(b)(6). DuoNeb’s

HCPCS code includes neither component drug.

The Secretary insists that the least costly alternative

policy comports with the Medicare Act’s mandatory

reimbursement formulas because payment under that policy is

based on the statutory rate as applied to an item or service’s

least costly alternative. But this argument would permit an

end-run around the statute. The statutory formula requires the

Secretary to reimburse a particular drug at 106% of the

average sales price for drugs within its billing and payment

code. 42 U.S.C. § 1395w-3a(b)(1). By reimbursing DuoNeb

at 106% of the average sales price of its two component

drugs—which have different billing and payment codes—the

Secretary would fundamentally alter the reimbursement

scheme. Like the district court, we think it quite unlikely that

“Congress, having minutely detailed the reimbursement rates

for covered items and services, intended that the Secretary

could ignore these formulas whenever she determined that the

expense of an item or service was not reasonable or

necessary.” Hays, 583 F. Supp. 2d at 71.

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To be sure, Congress could have written the Medicare

Act to authorize the least costly alternative policy. For

example, if the statute read, “no payment may be made . . . for

any expenses which are incurred for items and services and

which are not reasonable and necessary for the diagnosis or

treatment of illness or injury,” then the phrase “reasonable

and necessary” would indeed modify “expenses.” And if the

reimbursement formulas were either discretionary or based on

the cost of an item or service’s therapeutic equivalents, the

Secretary would have authority to refuse payment for the

difference in cost between a prescribed item or service and its

least costly alternative. But this is not the statute Congress

wrote. As written, the statute unambiguously authorizes the

Secretary to make only a binary choice: either an item or

service is reasonable and necessary, in which case it may be

covered at the statutory rate, or it is unreasonable or

unnecessary, in which case it may not be covered at all.

Nothing in the statute authorizes the least costly alternative

policy.

III.

Amicus Sepracor argues that the statute also prohibits the

Secretary from considering cost in making the initial coverage

determination. But we need not consider that issue. Even if

the Secretary may consider cost in determining whether an

item or service is “reasonable and necessary,” it does not

follow that she has authority to partially cover an item or

service based on the price of its least costly alternative.

For the foregoing reasons, we affirm.

So ordered.

RANDOLPH, Senior Circuit Judge, concurring: Although I

join the court’s opinion, one feature of this case, unusual in

administrative law, prompts me to add a few words. Invoking

Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), the

Secretary asked us to defer to the interpretation of the statute

embodied in the local coverage determination of a private

contractor. The court rightly declines on the ground that the

statute – 42 U.S.C. § 1395y(a)(1)(A) – clearly forecloses

application of the least costly alternative policy to DuoNeb. Slip

Op. at 4. If the statute had not been so clear, one may wonder

whether deference of the Chevron variety would have been due.

No decision of the Secretary applied the least costly alternative

policy to this product. That was the doing of four private

contractors the Secretary hired to administer the program.

While the Secretary issued guidance instructing the contractors

to employ the policy with respect to durable medical equipment,

the guidance gave the contractors “discretion to apply this

principle to payment for non-DME [durable medical equipment]

services as well.” Ctrs. for Medicare and Medicaid Servs.,

Medicare Program Integrity Manual § 13.4.A (Rev. 71, Apr. 9,

2004). DuoNeb is not durable medical equipment and so fell

within the scope of the contractors’ discretion. The Secretary at

one time considered issuing a nationwide opinion regarding the

status of DuoNeb but ultimately declined, leaving the issue to

the contractors. Ctrs. for Medicare and Medicaid Servs.,

Decision Memo for Nebulized Beta Adrenergic Agonist Therapy

for Lung Diseases, CAG-00354N (Sept. 10, 2007).

Given these circumstances, there is a substantial question

whether, in requesting deference, the Secretary was actually

asking us to defer to a private contractor’s determination of the

meaning of the statue as applied to DuoNeb. It is not apparent

why the rationale of Chevron would support the Secretary’s

request. See 467 U.S. at 844-45, 865-66. Still less is it clear

that Congress authorized the Secretary to delegate lawmaking

functions to private contractors, see 42 U.S.C. §§ 1395u(a),

1395kk-1, or could do so consistently with the Constitution. As

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I have said, the court’s disposition of the case renders

consideration of these issues unnecessary.