Yale-New Haven Hosp. v. Leavitt

• Decision Date: 16 November 2006
• Docket Number: Docket No. 05-1434-CV-XAP.,Docket No. 05-1224-CV-LEAD.
• Citation: 470 F.3d 71
• Parties: YALE-NEW HAVEN HOSPITAL, Giovanni Avallone, Fardi Balk, Louis Bonaventura, Joseph Bottone, Charles Bradbury, Mary Caccone, Sally Cassidy, John Christie, Mary Coons, Stanley Cornell, Charles Deluca, Theodore Demmerte, Ralph Derubertis, Richard Flaig, Karl Fritz, Edward Grosso, Alfred Hamann, William Horodeck, Warren Ivey, Marion Johnson, Alvin Karchere, Andrew Mancuso, Charles Mattia, Vincent McCarthy, James Miller, John Nurczyk, Romano Orlando, Bert Scott, Joseph Telesco, Stanley Gingolaski, Edith Howard, Raymond Hovino, Edward Jurczak, John King, Sherman Platt, Philip Kishel, Louise Kocak, Stephanie Lebell, Thomas Prall, Solon Robbins, Harry Sands, Felix Snopkoski, David Sprague, Joseph Vanek, Jack Warren, James Waters, Plaintiffs-Appellees, Cross-Appellants, v. Michael O. LEAVITT, U.S. Department of Health Human Services, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 71

470 F.3d 71

YALE-NEW HAVEN HOSPITAL, Giovanni Avallone, Fardi Balk, Louis Bonaventura, Joseph Bottone, Charles Bradbury, Mary Caccone, Sally Cassidy, John Christie, Mary Coons, Stanley Cornell, Charles Deluca, Theodore Demmerte, Ralph Derubertis, Richard Flaig, Karl Fritz, Edward Grosso, Alfred Hamann, William Horodeck, Warren Ivey, Marion Johnson, Alvin Karchere, Andrew Mancuso, Charles Mattia, Vincent McCarthy, James Miller, John Nurczyk, Romano Orlando, Bert Scott, Joseph Telesco, Stanley Gingolaski, Edith Howard, Raymond Hovino, Edward Jurczak, John King, Sherman Platt, Philip Kishel, Louise Kocak, Stephanie Lebell, Thomas Prall, Solon Robbins, Harry Sands, Felix Snopkoski, David Sprague, Joseph Vanek, Jack Warren, James Waters, Plaintiffs-Appellees, Cross-Appellants, v. Michael O. LEAVITT, U.S. Department of Health Human Services, Defendant-Appellant, Cross-Appellee.

Docket No. 05-1224-CV-LEAD.

Docket No. 05-1434-CV-XAP.

United States Court of Appeals, Second Circuit.

Argued: February 6, 2006.

Decided: November 16, 2006.

Jeffrey Clair, Barbara C. Biddle, Attorneys, Appellate Staff Civil Division, Department of Justice, Washington, DC (Peter D. Keisler, Assistant Attorney General, Kevin J. O'Connor, United States Attorney, on the brief), for Defendant-Appellant, Cross-Appellee.

Leonard C. Homer (Ray M. Shepard, on the brief), Ober, Kaler, Grimes & Shriver, Baltimore, MD, for Plaintiffs-Appellees, Cross-Appellants.

Before JACOBS, Chief Judge, POOLER, and GIBSON,^* Circuit Judges.

JACOBS, Chief Judge.

Michael O. Leavitt, the Secretary of the United States Department of Health and Human Services (the "Secretary" of "HHS"), appeals from the decision of the United States District Court for the District of Connecticut (Dorsey, J.), which reversed on motion for summary judgment a final decision of the Secretary denying to Yale-New Haven Hospital ("Yale") Medicare coverage for treatment involving investigational cardiac devices provided to 48 patients. The Secretary denied reimbursement on the ground that the devices had not received premarket approval from the FDA; in the district court, Yale successfully argued that the denial of the claims on the categorical ground of FDA classification was predicated on a rule altering the previous Medicare practice of conducting device-by-device review of safety and efficacy, and that the rule change was improperly adopted. We agree with the district court that the new rule is unenforceable because the Secretary did not satisfactorily explain his reasons for its promulgation. Nevertheless, we vacate the judgment of the district court (which reversed) and remand the case to the district court with instructions to remand to the Secretary for proceedings consistent with this opinion.

I

A. Medicare Reimbursement Procedures

Medicare, which at the time of the events at issue was administered by the Health Care Financing Administration ("HCFA")¹ on behalf of the Secretary, see Cedars-Sinai Med. Ctr. v. Shalala, 939 F.Supp. 1457, 1460 (C.D.Cal.1996), is the federally subsidized health insurance program for the elderly and disabled established by Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. ("Medicare Act"). Part A of the Medicare program, 42 U.S.C. §§ 1395c et seq., provides basic insurance protection "against the costs of hospital, related post-hospital, home health services, and hospice care," see also Huntington Hosp. v. Thompson, 319 F.3d 74, 76 (2d Cir.2003). Under Part A, service providers such as hospitals, see 42 U.S.C. § 1395x(u), are paid the lesser of the "reasonable cost" of covered services provided to program beneficiaries or "the customary charges with respect to such services," 42 U.S.C. § 1395f(b)(1), and agree not to charge beneficiaries for these services, see 42 U.S.C. § 1395cc(a)(1)(A).² Medicare reimbursement to service providers is generally made through "fiscal intermediaries": private entities, often insurance companies, that process, review, and pay claims submitted by providers. See 42 U.S.C. § 1395h. Fiscal intermediaries must only pay claims for services that are covered by Medicare, see 42 C.F.R. § 421.100(a); this responsibility includes the contractual obligation (to Medicare) to make coverage determinations in accordance with (i) the Medicare statutes, (ii) formal agency regulations and rulings, and (iii) less-formal agency instructions such as instructional manuals and intermediary letters. See Adventist Living Centers, Inc. v. Bowen, 881 F.2d 1417, 1419 (7th Cir.1989); Yale-New Haven Hosp., Inc. v. Thompson, 162 F.Supp.2d 54, 57-58 (D.Conn.2001).

B. Recourse for Dissatisfied Providers

Under certain circumstances, see 42 C.F.R. § 405.710(b), a provider may seek administrative and judicial review of a fiscal intermediary's initial coverage determination, see 42 U.S.C. § 1395ff; see also 42 C.F.R. §§ 405. 702, 405. 704(b), (c)(1); 421. 100(a), (b). The successive levels of administrative review available to a provider are [i] reconsideration by the fiscal intermediary, see 42 C.F.R. §§ 405.710, 405.711; [ii] review before an administrative law judge, see 42 C.F.R. §§ 405.720, 405.722; and [iii] review before the Medicare Appeals Council ("Appeals Council"), which may also review the ALJ's decision sua sponte, see 20 C.F.R. §§ 404.967-404.969. A provider that has exhausted its administrative remedies may seek judicial review of the Secretary's final decision under 42 U.S.C. § 1395ff(b) (incorporating 42 U.S.C. § 405(g)). See Weinberger v. Salfi, 422 U.S. 749, 762-65, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975).

C. Medicare Coverage Standards

With a few exceptions, the Medicare Act does not specify which devices are covered or excluded from coverage. Broad wording excludes from Medicare Part A coverage "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." 42 U.S.C. § 1395y(a)(1)(A); see also 42 C.F.R. § 411.15(k)(1). The Secretary is responsible for specifying those services that are covered under the "reasonable and necessary" standard, see 42 U.S.C. § 1395ff(a); he has wide discretion in selecting the means for doing so, see Heckler v. Ringer, 466 U.S. 602, 617, 104 S.Ct. 2013, 80 L.Ed.2d 622 (1984), and has traditionally acted through formal regulations and (informal) instructional manuals and letters.

The Medicare reimbursement manuals issued to fiscal intermediaries in July 1986, see Yale-New Haven Hosp., 162 F.Supp.2d at 59, announced that only medical devices that had received FDA premarket approval for commercial distribution were covered under Medicare. The FDA is authorized to regulate medical devices by the Medical Devices Amendments Act of 1976 ("MDA"), 21 U.S.C. § 360 et seq. See Medtronic, Inc. v. Lohr, 518 U.S. 470, 476-77, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996). Under the MDA, each medical device is classified according to the stringency of regulatory control necessary to ensure safety and effectiveness. See 21 U.S.C. § 360c(a). Certain devices, such as those at issue in this case, require FDA "premarket approval" before they may be commercially distributed to the general public. Such "Class III" devices are so designated if (i) the controls provided for under Classes I and II are insufficient to guarantee the device's safety and effectiveness and (ii) the device (a) is "purported or represented to be for a use in supporting or sustaining human life or . . . of substantial importance in preventing impairment of human health" or (b) "presents a potential unreasonable risk of illness or injury." 21 U.S.C. § 360c(a)(1)(C)(ii)(II). To obtain premarket approval, the manufacturer must furnish "detailed information about the device's testing, design, components, performance standards, manufacturing, packaging, and labeling" sufficient to reasonably assure the FDA that the device is safe and effective. Martello v. Ciba Vision Corp., 42 F.3d 1167, 1168 (8th Cir. 1994) (citing 21 U.S.C. § 360e(c)(1); 21 C.F.R. § 814.20 (1994)); 21 U.S.C. § 360c (a)(1)(C).

In 1980, the FDA promulgated regulations establishing an investigational device exemption ("IDE"), which authorizes the lawful sale—to hospitals and physicians, for use in clinical trials—of certain devices that have not obtained premarket approval. See 21 U.S.C. § 360j(g). The IDE exemption is intended "to encourage . . . the discovery and development of useful devices" by generating the data necessary to determine safety and effectiveness. Id.

The 1986 Manual Provision explained Medicare's policy with respect medical devices that had received IDEs but had not been accorded premarket approval. The provision, identified as a "New Policy," instructed intermediaries to adopt a per se rule against reimbursement for these devices:

Devices Not Approved by FDA.—Medical devices which have not been approved for marketing by the FDA are considered investigational by Medicare and are not reasonable and necessary for the diagnosis or treatment of illness or injury . . . . Program payment, therefore may not be made for medical procedures or services performed using devices which have not been approved for marketing by FDA.

Yale-New Haven, 162 F.Supp.2d at 59. Prior to the FDA's adoption of the IDE in 1980 (and promulgation of the per se rule against IDE reimbursement in the 1986 Manual Provision), Medicare had issued coverage guidelines for "investigational" (or "experimental") medical devices in a letter to fiscal intermediaries in 1977 ("1977 intermediary letter"). The letter instructed Medicare fiscal intermediaries to respond to coverage inquiries concerning investigational medical devices by explaining that:

a basic consideration [in making a coverage decision] is whether the service has come to be generally accepted by the professional medical community as an effective and proven treatment for the condition for which...