In Yale-New Haven Hospital, et al. v. Michael O. Leavitt, U.S. Department of Health and Human Services, ___ F.3d___, 2006 WL 3317691 (2nd Cir. 2006), Yale-New Haven Hospital and 48 implantees of cardiovascular-defibrillator devices ("ICDs"), sued to recover H.H.S.’s set-off recoupment of $1,500,000.00 in payments for the ICDs implanted in 1994 and 1995. The case turned on the validity of an "interpretive" rule promulgated by HHS in the 1986 Medical Reimbursement Manual. The provision directed all fiscal intermediaries to reject any and all claims for medical devices that had not received pre-approval by the FDA.
The Secretary of HHS is responsible under the Medicare statute to specify those services that are "reasonable and necessary" and therefore reimbursable under the Medicare program. See Heckler v. Ringer, 466 U.S. 602, 617 (1984). The FDA is authorized to regulate medical devices by the Medical Devices Amendments Act of 1976, 21 U.S.C. § 360 et seq. Some medical devices require FDA "pre-market approval" before they may be commercially distributed to the general public. In the 1980s, the FDA adopted regulations establishing an investigational devices exemption ("IDE") authorizing lawful sale to hospitals and physicians of devices that had not obtained pre-market approval.
In 1977, Medicare fiscal intermediaries were instructed that their basic consideration for reimbursement is whether the device has come to be generally accepted by the professional medical community as an effective and proven treatment for the condition for which it is used. On the other hand if the treatment is one that is not generally accepted, is rarely used, novel or relatively unknown, then authoritative evidence was required to establish that it was safe and effective before payment could be authorized. HSS gave no public explanation for its policy change. the 1986 manual provision reversed this policy without explanation.
In 1995, the 1986 exclusion was supplanted by published final guidelines regarding IDE devices. As long as other requirements were met, the 1995 regulations extended coverage to IDEs classified by the FDA as Category B (non-experimental/non-investigational representing 90% of IDEs.)
Yale appealed the HHS "recoupment" for the 1994 and 1995 implanted devices to an administrative law judge who determined that the 1986 Medicare provision was invalid and that Yale presented sufficient evidence to demonstrate the IDEs were "reasonable and necessary" to each beneficiary’s treatment. The Medicare Appeals Council reviewed the decision on its own motion and reversed it. The Appeals Council ruled the 1986 Manual Provision was valid and entitled to deference by the ALJ and that evidence didn’t support the conclusion that the devices were "safe and effective" or "generally accepted."
Yale sought judicial review per 42 U.S.C. § 405(g), the sole vehicle for review of administrative action in federal courts. The federal district court in Connecticut reversed the Appeals Council on summary judgment and the case proceeded to the Second Circuit Court of Appeals.
The Second Circuit, relying on 5 U.S.C. § 706(2)(A) of the federal Administrative Procedure Act and Motor Vehicles Mfr’s Ass’n of the United States, Inc. v. State Farm Mutual Auto Ins. Co., 463 U.S. 29 (1983), concluded the 1986 Manual Provision was adopted in a manner that was arbitrary and capricious. Under State Farm, an agency must examine relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.
Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.
The court held that a change in direction requires an adequate explanation finding that a significant "flip flop" in agency policy must be accompanied by a reasoned explanation why the new rule effectuates the statute as well as or better than the old rule. The Secretary failed to explain to the Court’s satisfaction how the adoption of a per se coverage standard comported with Congressional purposes in enacting the Medicare Act. To the contrary, the legislative history of the Medicare Act suggests that Congress wanted Medicare patients to have access to the medical care most suited to their individual needs. The Court directed the remand of the case to the Secretary for proceedings consistent with its opinion – a victory over arbitrary administrative action.
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