Key Med. Supply, Inc. v. Burwell

• Decision Date: 25 August 2014
• Docket Number: No. 13–2084.,13–2084.
• Citation: 764 F.3d 955
• Parties: KEY MEDICAL SUPPLY, INC., a Minnesota corporation, Plaintiff–Appellant v. Sylvia Matthews BURWELL, Secretary of the United States Department of Health and Human Services, in her official capacity; Marilyn Tavenner, Acting Administrator of the Centers for Medicare and Medicaid Services, in her official capacity, Defendants–Appellees. Midwest Association of Medical Equipment Suppliers, Inc., Amicus on Behalf of Appellant(s).
• Court: U.S. Court of Appeals — Eighth Circuit

764 F.3d 955

KEY MEDICAL SUPPLY, INC., a Minnesota corporation, Plaintiff–Appellant

v.Sylvia Matthews BURWELL,¹ Secretary of the United States Department of Health and Human Services, in her official capacity; Marilyn Tavenner,² Acting Administrator of the Centers for Medicare and Medicaid Services, in her official capacity, Defendants–Appellees.

Midwest Association of Medical Equipment Suppliers, Inc., Amicus on Behalf of Appellant(s).

No. 13–2084.

United States Court of Appeals,

Eighth Circuit.

Submitted: May 14, 2014.

Filed: Aug. 25, 2014.

Samuel Orbovich, argued (Lousene M. Hoppe, on the brief), Minneapolis, MN, for appellant.

Benjamin M. Shultz, argued (Dana Kaersvang, on the brief), Washington, DC, for appellee.

Natalie Ingraham Wyatt–Brown, Ryan W. Wahlund, Jonathan W. Lips, Minneapolis, MN, on the brief, for amicus.

Before WOLLMAN, MELLOY, and BENTON, Circuit Judges.

MELLOY, Circuit Judge.

Key Medical Supply, Inc. (“Key Medical”), a medical equipment provider in the Minneapolis–St. Paul area, alleges that the Department of Health and Human Services' Centers for Medicare and Medicaid Services (“CMS” or “the Agency”) exceeded its statutory authority when implementinga competitive-bidding system for Medicare's pricing of medical equipment and supplies. Key Medical acknowledges that the governing statute contains a strongly worded ban on administrative and judicial review. Key Medical argues, however, that review should be available because the Agency acted in an ultra vires manner by: (1) imposing arbitrary and non-competitively-derived maximum bid caps for certain products; (2) grouping inexpensive commodity products with more expensive custom-fit products for bidding purposes; and (3) applying the competitive bidding program in a manner that interferes with the separate state/federal Medicaid system. Key Medical also argues that review should be available for constitutional claims asserting that the Agency's actions deprived Key Medical of due process and effected an unconstitutional taking of Key Medical's “business.” The district court ³ rejected Key Medical's arguments and determined that the statutory bar on review precluded jurisdiction. We affirm.

I. Background

A. General Background: 42 U.S.C. § 1395w–3 Medicare Competitive Bidding System for Certain Items and Services

In 2003, Congress amended Medicare to control costs for durable medical equipment, prosthetics, orthotics, and supplies, based in part on a conclusion that Medicare and beneficiaries were overpaying substantially for such items. H.R.Rep. No. 108–178, pt. II, at 144 (2003) (“The Office of Inspector General has documented that taxpayers and Medicare beneficiaries are paying millions more for durable medical equipment than other programs, such as the Federal Employees Health Benefit Program (FEHBP).”). The amendments required the Agency to phase in a competitive bidding system to replace an existing government-defined price schedule. Medicare Prescription Drug, Improvement, and Modernization Act, Pub.L. No. 108–173, title III, § 302(b)(1) (2003) (codified in part at 42 U.S.C. § 1395w–3). This change followed successful pilot studies in two cities and began with a first round of competitive bidding in ten large metropolitan areas. Balanced Budget Act of 1997, Pub.L. No. 105–33, § 4319 (authorizing pilot studies); 42 U.S.C. § 1395w–3(a)(1)(B)(i)(I) (requiring a limited area, first-round program in 2007). Congress then received feedback, issued further amendments, and provided by statute that the first round contracts were to be re-bid in a second round. Medicare Improvements for Patients and Providers Act of 2008, Pub.L. No. 110–275; see generally Texas Alliance for Home Care Servs. v. Sebelius, 681 F.3d 402, 405–06 (D.C.Cir.2012) (discussing the genesis and evolution of the durable medical equipment competitive pricing program). Later, the second round took place and included many additional geographic bidding areas. The Minneapolis–St. Paul area is a second-round bidding area.

Because Key Medical primarily advances an ultra vires argument, it is important to note the plain text and overall structure of the amendments which show the extent and nature of authority granted to the agency. Congress tasked the Agency with a broad and general mandate to “establish and implement programs under which competitive acquisition areas are established throughout the United States for ... the furnishing under this part of competitively priced items and services.” 42 U.S.C. § 1395w–3(a)(1)(A). In doing so, Congress granted relatively unconstrained authority to the Agency as to many issues, while narrowly defining and limiting authority as to other issues. This is evident in the statute's use of the terms “may” to identify factors for the Agency's discretionary consideration; “shall” to identify mandatory tasks; and “may not” or “shall not” to identify prohibited actions.

For example, 42 U.S.C. § 1395w–3 sub-parts (b)(4)(A) and (b)(4)(B), read together, show that the Secretary “may” limit the number of contractors awarded contracts for a bidding area, but “shall” grant contracts to multiple entities (i.e., the number of contractors may be reduced, but must be kept greater than one). Also, Congress gave the Agency discretion to choose products for inclusion in the competitive bidding system and expressly authorized—but did not require—the Agency to evaluate the relative medical efficacy of different items for inclusion, exclusion, or grouping purposes. See42 U.S.C. § 1395w–3(b)(7) (“The Secretary may consider the clinical efficiency and value of specific items within codes, including whether some items have a greater therapeutic advantage to individuals.”) (emphases added). Similarly, Congress granted the Agency the authority (“may establish”) but not the obligation to specify certain items for exemption from competitive bidding and also to leave the use and “mode of delivery” of such items to physician discretion. See id. § 1395w–3(a)(5)(A). As these last two citations illustrate, Congress empowered the Agency to exercise its judgment and discretion in choosing the items that would be subjected to competitive bidding (and what items, due to perceived medical necessity, would not). Further, Congress prohibited payments to vendors who had not submitted bids for items and services and who had not been awarded contracts by the Agency. Id.§ 1395w–3(b)(6)(A) (“payment shall not be made ...”).

Several sub-parts of the statute illustrate that Congress made timely implementation a priority. For example, Congress gave the Secretary discretion to waive more generally applicable acquisition regulations and provided that implementation was to move forward even if various quality-standard regulations were not complete. 42 U.S.C. § 1395w–3(a)(1)(C). Importantly for the present case, Congress also provided that seven broad types or categories of administrative actions in the process of creating and implementing these changes would be immune from judicial and administrative review:

(b)(11) There shall be no administrative or judicial review under section 1395ff of this title, section 1395oo of this title, or otherwise, of—

(A) the establishment of payment amounts under paragraph (5);

(B) the awarding of contracts under this section;

(C) the designation of competitive acquisition areas under subsection (a)(1)(A) of this section and the identification of areas under subsection (a)(1)(D)(iii) of this section;

(D) the phased-in implementation ... of this section ...;

(E) the selection of items and services for competitive acquisition under subsection (a)(2) of this section;

(F) the bidding structure and number of contractors selected under this section; or

(G) the implementation of the special rule [concerning diabetic supplies].42 U.S.C. § 1395w–3 (emphasis added). It is noteworthy that this ban on review is broad. Sub-part (b)(11) states that there “shall be no administrative or judicial review ... or otherwise.” And, the seven enumerated areas listed in the ban are categorical; the statute does not carve out reviewable and non-reviewable aspects of these seven categories. Sub-parts (b)(11)(A), (B), (E), and (F) are material to the present case—review is expressly barred as to “the establishment of payment amounts,” “the awarding of contracts,” “the selection of items ... for competitive acquisition,” and “the bidding structure[.]”

B. Implementation of the Competitive Bidding System and Its Impact on Key Medical

Because the district court dismissed this case pursuant to Federal Rule of Civil Procedure 12(b)(1), we present the facts as asserted in Key Medical's complaint and in the light most favorable to Key Medical. See Great Rivers Habitat Alliance v. F.E.M.A., 615 F.3d 985, 988 (8th Cir.2010). Enteral nutrition supplies, including low-profile, custom-fit feeding tubes are an important product for Key Medical's business.⁴ Key Medical provided such feeding tubes to many customers, including some customers with developmental disabilities who were “dually eligible” for assistance from Medicare and also from Minnesota's Medicaid system. Key Medical explains that the interplay between these two medical payment programs requires that providers be eligible to receive payment from Medicare before they are allowed to receive payment from Medicaid. For dually eligible patients, Medicaid is the payor of last resort and reimbursement requests must first be submitted to and denied by Medicare before Medicaid will reimburse providers.

Key Medical described differences and relationships between these two programs and explained how its own business coordinated with these programs prior to implementation of competitive bidding. First, Medicare would reimburse providers for low-profile tubes at a scheduled rate of approximately $40 per tube and would allow replacement of a patient's tube once every 3 months. Medicaid, on the other hand would reimburse providers at a rate...