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December 26, 2002


The opinion of the court was delivered by: Emmet G. Sullivan, United States District Judge.


I. Introduction

Plaintiff, Amgen Inc., a company that develops, manufactures and markets biological products, commenced this action against Thomas Scully, the Administrator of the Centers for Medicare and Medicaid Services ("CMS" or "the agency"), and Tommy Thompson, Secretary of the Department of Health and Human Services ("HHS"). On November 15, 2002, plaintiff filed a motion for preliminary injunction seeking to enjoin defendants from implementing one subsection of a final rule promulgated on November 1, 2002 and scheduled to go into effect on January 1, 2003. On December 7, 2002, Ortho Biotech Products, LP ("Ortho"), a pharmaceutical company which manufactures Procrit, the only product on the market which competes with Amgen's Aranesp, filed a motion to intervene on behalf of federal defendants. The Court granted the unopposed motion to intervene*fn1 with respect to standing issues only on December 23, 2002.

Without objection from the parties, the Court consolidated plaintiff's request for injunctive relief with the proceedings on the merits pursuant to Fed.R.Civ.P. 65(a)(2). Pending before the Court is defendants' motion to dismiss or, in the alternative, for summary judgment. Upon consideration of the parties' motions, oppositions, replies and oral arguments, as well as the statutory and case law governing the issues, and for the following reasons, the Court concludes that defendants' motion to dismiss plaintiff's complaint is GRANTED.

II. Overview

Plaintiff challenges the "illegal agency action" that resulted in the promulgation of a final rule affecting Medicare's hospital Outpatient Prospective Payment System ("OPPS"). OPPS is the mechanism under which Medicare reimburses hospitals for the outpatient services that they furnish to Medicare beneficiaries. Plaintiff alleges that, in its final rule, CMS, the agency responsible for implementing the Medicare program, unlawfully singled out Aranesp, Amgen's new product, and eliminated its statutorily mandated reimbursement status. Plaintiff alleges that the agency's action was in direct conflict with the "pass-through" statute, 42 U.S.C. § 13951 (t)(6)(C), which permits reductions in "pass-through" payments only where necessary to maintain total "pass-through" expenditures within a cap. According to plaintiff, the statute does not authorize CMS to pick and choose among pass-through products, imposing cuts on one and not on others.

III. Statutory Scheme:

A. Medicare Outpatient Prospective Payment System

Title XVIII of the Social Security Act of 1935, commonly known as the "Medicare Act," provides health insurance for individuals 65 years of age and older, some individuals with disabilities under 65, and individuals with end-stage renal disease. The program's primary objective is to ensure that its beneficiaries have access to health care services. Part B of Medicare is a voluntary program that provides supplemental coverage for other kinds of care, including treatment through hospital outpatient departments.

In 1997, Congress enacted the Balanced Budget Act of 1997 ("BBA"), Pub. L. No. 105-33, 111 Stat. 251 (1997), which required the Secretary of HHS to develop a prospective payment system for hospital outpatient services ("OPD services"), 42 U.S.C. § 13951 (t). For covered OPD services, the Secretary is required to develop a classification system for individual services or groups of related services. 42 U.S.C. § 13951 (t)(2)(A)-(B). In implementing this system, the Secretary groups outpatient services into classifications called Ambulatory Payment Classifications ("APCs"). 42 U.S.C. § 419.31. Each APC is a "package" of related medical services that CMS has determined should be grouped together and paid as a whole.*fn2 For each such service or group of services, the Secretary must establish relative payment weights based on historical data of the median cost of the service(s) within the APC. 42 U.S.C. § 13951 (t)(2)(C). The amount of the OPPS payment to a hospital for a particular service is established in part by multiplying the "conversion factor," the base amount used to determine payments for all services under OPPS, by the APC relative weight. 42 U.S.C. § 13951 (t)(3)(C)-(D). A percentage of this figure is paid by the beneficiary as a copayment and the remainder is the fee schedule amount for the APC. 42 U.S.C. § 13951 (t)(8).

The statute authorizes the Secretary to make certain adjustments in determining OPPS payments. 42 U.S.C. § 13951 (t)(2). These include wage adjustments to reflect differences in the cost of labor, adjustments for cases with unusually high costs, transitional pass-through payments for certain innovative drugs, biologicals and devices, and "other adjustments as determined to be necessary to ensure equitable payments." 42 U.S.C. § 13951 (t)(2)(D), (E). The Secretary updates the groups, relative payment weights, and wage and other adjustments annually in order to take into account changes in medical practice, changes in technology, the addition of new services, new cost data, and "other relevant information and factors." 42 U.S.C. § 13951 (t)(2), (9).

The OPPS must be budget neutral by law. In accordance with 42 U.S.C. § 13951 (t)(9)(B), any adjustments made by the Secretary "may not cause the estimated amounts of expenditures under this part for the year to increase or decrease from the estimated amount of expenditures under this part that would have been made if the adjustments had not been made." See also 42 U.S.C. § 13951 (t)(2)(E).

B. Transitional Pass-Through Payments

In 1999, Congress passed the Balanced Budget Refinement Act of 1999 ("BBRA"), Pub. L. No. 106-113, 113 Stat. 1501 (1999), which provides for additional "transitional pass-through" payments to hospitals that use certain innovative drugs, biologicals, and devices for outpatient services. 42 U.S.C. § 13951 (t)(6). The BBRA required CMS to make pass-through payments for each qualifying product for at least two, and not more than three, years during which time CMS would collect claims and charge data for each pass-through item. 42 U.S.C. § 13951 (t)(6)(C). Generally, once an item no longer qualifies for pass-through payments, CMS incorporates the cost for that item into the APC for the procedure with which it is associated.

Under 42 U.S.C. § 13951 (t)(2)(E) and 13951(t)(6)(E), the Secretary is to provide for transitional pass-through payments in a budget neutral manner. Thus, if the agency projects that transitional pass-through payments in the upcoming year will be 2.0 percent of total payments, then the agency makes a prospective adjustment to the conversion factor for OPPS payments, a reduction of 2.0 percent, so that the system is budget neutral. 42 U.S.C. § 13951 (t)(6)(E) places a limit on aggregate projected pass-through payments as a percentage of total OPPS payments. For calendar year 2003, the total amount of pass-through payments cannot be projected to exceed 2.5 percent of total OPPS payments. If the Secretary estimates before the beginning of the calendar year that total pass-through payments will exceed the 2.5 percent cap, then the Secretary shall reduce pro rata the amount of each of the pass-through payments to ensure that the 2.5 percent limit is not exceeded. The reduction applies only to the additional transitional pass-through payments that hospitals receive for using these items, not to the APC fee schedule amount with which the pass-through item is associated.

Under 42 U.S.C. § 1395 (t)(6)(D)(i), the additional pass-through payment to hospitals for qualified drugs and biologicals equals the difference between (1) 95 percent of Average Wholesale Price ("AWP") and (2) the amount of the APC payment rate that would be associated with the product if it did not have pass-through status, that is, "the otherwise applicable Medicare OPD fee schedule (payment) that the Secretary determines is associated with the drug or biological," (referred to herein as "the fee schedule payment"). Thus, a hospital using a drug designated for pass-through status under the OPPS would receive 95 percent of AWP, a portion of which is understood as the fee schedule payment and the remainder of which can be understood as the "pass through payment." The co-payment, paid by the beneficiary, is based only on the non-pass-through portion.

V. Facts

A. Aranesp

In September, 2001, plaintiff sought pass-through status for Aranesp. A.R. 3735-80. CMS found that pass-through status was warranted for Aranesp on February 5, 2002, stating that it had "carefully reviewed" Amgen's submission based on the provisions established in the hospital OPPS rules published in the Federal Register on April 7, 2000, and November 13, 2000. A.R. 3781. Aranesp was assigned to APC 734, with an APC payment rate of $4.74, which was 95 percent of the product's AWP. See 67 Fed. Reg. 9556, 9562 (Mar. 1, 2002). The first date on which Aranesp was eligible for pass-through payments was April 1, 2002. A.R. 3781.

B. August 9, 2002 Proposed Rule

On July 2, 2002, Ortho, the manufacturer of the older drug Procrit, suggested to CMS a policy similar to that which CMS would eventually adopt in the final rule. Ortho suggested that CMS change its reimbursement policy so as to reimburse Aranesp and Procrit at the same rate pursuant to CMS' "other adjustment" authority. A.R. 1918-22. In the alternative, Ortho suggested that CMS eliminate Aranesp's pass-through status altogether, based on what Ortho characterized as "revised criteria" for determining "continued eligibility" for pass-through treatment in 2003 and beyond. A.R. 1922.

Approximately a month later, on August 9, 2002, CMS published a proposed rule addressing 2003 OPPS payment rates and other policy changes. 67 Fed. Req. 52,092 (Aug. 9, 2002). The proposed rule addressed calendar year 2003 Medicare payment rates and policies under the OPPS. Id. It observed that the outpatient pass-through provisions had been "exceptionally difficult to implement" and indicated that CMS was "actively seeking comment on all aspects" of the pass-through rates. Id. at 52,093. CMS concluded that it was "open to making changes, perhaps significant, in the final rule based on comments." Id. The proposed rule did not specify that "revised criteria" might be used to determine eligibility for pass-through status, as Ortho had suggested weeks before. Nor did CMS intimate that it might use its "other adjustment" authority to equate Aranesp's reimbursement level with Procrit's. CMS proposed to use mechanisms other than imputed acquisition cost ratios to compute pass-through amounts for a limited number of drugs and biologicals. For drugs that are new and are substitutes for a single drug whose cost is recognized in a unique APC, the pass-through amount would equal the difference between 95 percent of the AWP for the pass-through drug and the payment rate for the comparable dose of the associated drug. The payment rate for the comparable dose of the associated drug also would be used to determine the copayment amount for the pass-through drug. Id. at 52,118. In the proposed rule, CMS indicated that darbepoetin alfa, that is, Aranesp, "is a new substitute of epoetin (Procrit)." Id. at 52,118. Thus, CMS proposed that the pass-through payment for Aranesp be calculated as the difference between 95 percent of the AWP for Aranesp and the fee schedule payment rate for the "comparable dose" of Procrit, whose pass-through status was scheduled to expire in 2003. See Id.

Interested individuals and entities were given until October 7, 2002, to submit their comments on the proposed rule. 67 Fed. Req. 53,644 (Aug. 16, 2002).

C. Comments on the Proposed Rule

During the public comment period, plaintiff submitted a September 6, 2002 e-mail resubmitting an April 17, 2002 letter from plaintiff to CMS addressing whether Aranesp and Procrit were sufficiently similar to be paid at the same rate. A.R. at 2342-49. The April 17, 2002 letter from plaintiff was a response to a March 29, 2002 Ortho Biotech letter to CMS, submitted by Ortho at a public CMS Town Hall Meeting on 2003 OPPS rates on April 5, 2002. A.R. 2243-49. The announcement of the meeting in the Federal Register invited "(p)roviders, physicians, hospitals, coding specialists, and other interested parties . . . to present their views" on payment methodology for the 2003 OPPS rule. 67 Fed. Reg. 11,969-70. The administrative record includes several other e-mail comments sent to CMS in September 2002, some of which attached references, studies, and previous correspondence for CMS's review. A.R. at 2317-29, 2350, 2351-2357, 2360, 2361-63.

Plaintiff also submitted comments and materials dated September 12, 2002 suggesting that Aranesp and Procrit were not substitutes, and that it would be difficult to develop a comparable dosing ...

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