Organogenesis Inc. v. Sebelius

• Decision Date: 06 May 2014
• Docket Number: Civil Action No.: 13–cv–2033 RC
• Court: U.S. District Court — District of Columbia
• Parties: Organogenesis Inc., Plaintiff, v. Kathleen Sebelius, Defendant.

41 F.Supp.3d 14

Organogenesis Inc., Plaintiff

v.Kathleen Sebelius, Defendant.

Civil Action No.: 13–cv–2033 RC

United States District Court, District of Columbia.

Signed May 6, 2014

Catherine E. Stetson, Jonathan Lynwood Abram, Hogan Lovells, US LLP, Washington, DC, for Plaintiff.

Carl Ezekiel Ross, U.S. Attorney's Office, Washington, DC, for Defendant.

Re Document No.: 3, 12

MEMORANDUM OPINION

Granting Defendant's Motion To Dismiss And Denying Plaintiff's Motion For A Preliminary Injunction As Moot

RUDOLPH CONTRERAS, United States District Judge

I. INTRODUCTION

Plaintiff, Organogenesis, has filed suit against Defendant Kathleen Sebelius, in her official capacity as Secretary of Health and Human Services (“HHS”), challenging under the Administrative Procedures Act (“APA”) the Centers for Medicare & Medicaid Services's (“CMS”) 2014 final rule packaging the drug Apligraf into payment for the service in which it is applied. Presently before the Court is Plaintiff's motion for preliminary injunction and Defendant's motion to dismiss. Upon consideration of the pleadings and the relevant legal authorities, the Court finds that it lacks jurisdiction to resolve the merits of the Plaintiff's claims. Accordingly, the Court grants Defendant's motion to dismiss and denies Plaintiff's motion for a preliminary injunction as moot. The Court shall not address Plaintiff's motion for a preliminary injunction in its Memorandum Opinion, but only the Defendant's motion to dismiss.

II. FACTUAL BACKGROUND

Title XVIII of the Social Security Act of 1935, 42 U.S.C. § 1395 et seq., establishes the Medicare program, which provides federally funded medical insurance to the elderly and disabled. Part A of the Medicare program provides insurance coverage for inpatient hospital care, home health care, and hospice services. Id. § 1395c. Part B of Medicare is a voluntary program that provides supplemental coverage for other types of care, including outpatient hospital care. Id. §§ 1395j, 1395k. Under this program, physicians, hospitals, and other health care providers may obtain payment from Medicare when they provide covered services to persons enrolled in Medicare Part B. The Medicare program is subject to both fiscal limits and restrictions on administrative and judicial review.

A component of the Medicare Part B program is the Outpatient Prospective Payment System (“OPPS”), which pays hospitals directly to provide outpatient services to beneficiaries. Under OPPS, hospitals are paid prospectively for their services in each upcoming year, thus requiring payments for outpatient hospital care to be made based on predetermined rates. See Balanced Budget Act of 1997, Pub.L. No. 105–33, 111 Stat. 251 (1997). Under OPPS, payment is based on the Ambulatory Payment Classification (“APC”) to which an item or service is assigned. Pursuant to 42 U.S.C. § 1395l (t), payments are calculated through a formula, setting payment weights for the provision of certain services, or groups of clinically similar services, as determined by the agency. Id. at § 1395l (t)(2)(C). These APC calculations are based on the mean or median cost of providing such services in past years, with adjustments for regional cost variations. Id. at § 1395l (t)(2)(C)–(D). Hospitals facing actual costs significantly above their prospective payment amounts receive outlier adjustments from the Secretary of the Department of Health and Human Services. Id. § 1395l (t)(2)(E). Hospitals can also receive supplemental payments, called “pass-through” payments, to help cover the cost of providing certain treatments, including new drugs, biologicals, and medical devices. Id. § 1395l (t)(6).

The Balanced Budget Refinement Act of 1999 required CMS to annually update payment weights, relative payment rates, wage adjustments, outlier payments, and APC groups. It also required CMS to establish payments in a “budget-neutral” manner—that is, CMS must maintain a balanced budget and cannot provide payments exceeding a set budget. Id. § 1395l (t)(2)(E). Thus, whenever the Secretary makes any type of payment adjustment, the additional projected expenses must be offset by a reduction in all prospective payment rates. Id.

Apart from reimbursement authority for general outpatient services, CMS must separately pay for a category of drugs and biologicals known as “specified covered outpatient drugs” (“SCODs”). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) Pub.L. No. 108–173, § 621(a), 117 Stat.2066, 2307 (2003). Congress has specified the methodology for determining the payment rates of SCODs in a separate provision. See 42 U.S.C. § 1395l (t)(14). This provision defines a SCOD as follows:

In this paragraph, the term “specified covered outpatient drug” means, subject to clause (ii), a covered outpatient drug (as defined in section 1396r–8(k)(2) of this title) for which a separate ambulatory classification group (APC) has been established and that is—

(I) a radiopharmaceutical; or

(II) a drug or biological for which payment was made under paragraph (6) (relating to pass-through payments) on or before December 31, 2002.

Covered outpatient drug is defined in 42 U.S.C. § 1396r–8(k)(2) as follows:

Subject to the exceptions in paragraph (3), the term “covered outpatient drug” means—

(A) of those drugs which are treated as prescribed drugs for purposes of section 1396d(a)(12) of this title, a drug which may be dispensed only upon prescription (except as provided in paragraph (5)), and—

(i) which is approved for safety and effectiveness as a prescription drug under section 505 or 507 of the Federal Food, Drug, and Cosmetic Act [21 U.S.C.A. § 355 or 357 ] or which is approved under section 505(j) of such Act [21 U.S.C.A. § 355(j) ];

(ii) (I) which was commercially used or sold in the United States before October 10, 1962, or which is identical, similar, or related (within the meaning of section 310.6(b)(1) of title 21 of the Code of Federal Regulations ) to such a drug; and (II) which has not been the subject of a final determination by the Secretary that it is a “new drug” (within the meaning of section 201(p) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C.A. § 321(p) ] ) or an action brought by the Secretary under section 301, 302(a), or 304(a) of such Act [21 U.S.C.A. § 331, 332(a), or 334(a) ] to enforce section 502(f) or 505(a) of such Act [21 U.S.C.A. § 352(f) or 355(a) ]; or

(iii) (I) which is described in section 107(c)(3) of the Drug Amendments of 1962 and for which the Secretary has determined there is a compelling justification for its medical need, or is identical, similar, or related (within the meaning of section 310.6(b)(1) of title 21 of the Code of Federal Regulations ) to such a drug, and (II) for which the Secretary has not issued a notice of an opportunity for a hearing under section 505(e) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C.A. § 355(e) ] on a proposed order of the Secretary to withdraw approval of an application for such drug under such section because the Secretary has determined that the drug is less than effective for some or all conditions of use prescribed, recommended, or suggested in its labeling; and

(B) a biological product, other than a vaccine which—

(i) may only be dispensed upon prescription,

(ii) is licensed under section 262 of this title, and

(iii) is produced at an establishment licensed under such section to produce such product; and

(C) insulin certified under section 506 of the Federal Food, Drug, and Cosmetic Act [21 U.S.C.A. § 356 ].

In 2004 and 2005, CMS was required to provide separate reimbursement for SCODs, as determined by Congress's payment methodology laid forth in the MMA. 42 U.S.C. § 1395l (t)(14)(A)(i)–(ii). During these years, CMS also provided separate reimbursement for other high-cost drugs and biologicals that were not SCODs, but based payment on a different methodology—the median cost methodology that CMS also applied to non-drug items and services. 69 Fed. Red. 65,682, 65,800 (Nov. 15, 2004). Starting in 2006, however, CMS began to use the SCOD methodology to calculate payments for non-SCOD, high-cost drugs and biologicals. CMS recognized that it was required by statute to pay for SCODs based on the specific payment methodology established in the MMA, but decided to extend that methodology to non-SCOD drugs and biologicals as a policy choice. 77 Fed.Reg. 68,210, 68,383 (Nov. 15, 2012).

Apligraf is a bioengineered product manufactured from living skin cells. It is made from living healthy cells that stimulate a wound

to heal. It is used in the treatment of chronic, hard-to-heal venous leg ulcers and diabetic foot ulcers. In 1998, the FDA approved Apligraf for marketing under its premarket approval (“PMA”) process for “use with standard therapeutic compression for the treatment of non-infected partial and full-thickness skin ulcers due to venous insufficiency of greater than adequately responded to conventional ulcer therapy.” FDA CDRH, Summary of Safety and Effectiveness Data: Apligraf, Available at: http:// www.accessdata.fda.gov/cdrh_docs/pdf/P950032b.pdf. In 2001, CMS granted Apligraf pass-through status as a biological pursuant to 42 U.S.C. § 1395l (t)(6). Although Apligraf was originally approved under a PMA, Organogenesis asserts that it has been informed by the Center for Biologics at the FDA that all new clinical indications for Apligraf will be approved through the Biologic License Application (“BLA”) pathway. See Pl.'s Mot. for Preliminary Injunction, 15, Dec. 20, 2013, ECF No. 3.

On July 19, 2013, by notice of proposed rulemaking in the Federal Register, CMS proposed to begin packaging together a category known as “skin substitutes,” which included Apligraf, with their associated surgical procedures. See 78 Fed.Reg. 43534, 43571. CMS issued the final rule on December 10, 2013. 78 Fed.Reg. 74826, 74930 (Dec. 10, 2013). The Final Rule further divides “skin substitute” products into high-cost and low-cost categories, and...