The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge
Ilene Hays ("Hays"), a Medicare beneficiary, and Dey, L.P. ("Dey"), a drug manufacturer (collectively, "plaintiffs"), bring this action against Michael O. Leavitt, Secretary of the United States Department of Health and Human Services (the "Secretary"), Kerry Weems, the Acting Administrator for the Centers for Medicare and Medicaid Services, each in their official capacity, and four Medicare administrative contractors, National Heritage Insurance Company, National Government Services, CIGNA Government Services, and Noridian Administrative Services (collectively, "defendants"). Plaintiffs allege that defendants unlawfully limited the reimbursement rate under the Medicare Act (the "Act") for the inhalation drug DuoNeb.
Before the court are the parties' cross-motions for summary judgment [##16, 17]. Upon consideration of the motions, the oppositions thereto, and the record of this case, the court concludes that plaintiffs' motion [#16] must be granted and defendants' motion [#17] must be denied.
Hays is eligible for benefits under Part B of the Medicare Program on the basis of her disability. She suffers from Chronic Obstructive Pulmonary Disease for which her doctor has prescribed DuoNeb, an inhalation drug manufactured by Dey that is taken through a nebulizer. DuoNeb provides a combination of albuterol and ipratropium bromide in one dose.
The Secretary administers Part B of the Medicare program through Medicare contractors, who may issue local coverage determinations specifying whether a particular drug will be covered in their geographic area under the Medicare program. In this case, the four Medicare contractors named as defendants issued local coverage determinations for DuoNeb declaring that reimbursement for DuoNeb would be based not on the cost of DuoNeb, as it had in the past, but on the payment allowance for the least costly medically appropriate alternative, separate doses of albuterol and ipratropium bromide. Plaintiffs challenge these determinations.
A. The Medicare Act and the Department of Health and Human Services Regulations
The Act, codified at 42 U.S.C. § 1395, et seq., furnishes health benefits, including hospital services, medical devices and equipment and drugs, for the elderly and disabled. Medicare Part B authorizes payment for non-institutional services and items such as durable medical equipment, including nebulizers and the inhalation drugs used with nebulizers. Id. § 1395u(o)(1)(G)(ii); 1395x(n). The Act bars payment for items or services that are not "reasonable and necessary": "no payment may be made . . . for 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).
The Secretary may delegate her responsibilities under section 1395y(a) to Medicare contractors. 42 U.S.C. § 1395h. Medicare contractors may make determinations of what payments are barred under the "reasonable and necessary" standard in local coverage determinations. Local coverage determinations are defined as "determination[s] by a fiscal intermediary or a carrier under part A or part B of this subchapter, as applicable, respecting whether or not a particular item or service is covered . . . in accordance with section 1395y(a)(1)(A)." Id. § 1395ff(f)(2)(B). In other words, Medicare contractors may apply the "reasonable and necessary" standard to specific payments by Medicare contractors through local coverage determinations.
The Act further provides that if a beneficiary requests payment for an inhalation drug for which payment may be made (i.e. that is covered), the amount payable will be equal to the amount provided under section 1395w-3a of the Act. Id. § 1395u(o)(1)(G)(ii). Section 1395w-3a, in turn, states that subject to two exceptions, the amount of payment is 106 percent of an amount calculated based on the average sales prices of the inhalation drug. Id. § 1395w-3a(b)(1)(A).
The Secretary has provided direction to Medicare contractors through regulations. By regulation, the Secretary has stated, "An LCD [local coverage determination] may provide that a service is not reasonable and necessary for certain diagnoses and/or for certain diagnostic codes. An LCD does not include a determination of which procedure code, if any, is assigned to a service or a determination with respect to the amount of payment to be made for the service." 42 C.F.R. § 400.202.
B. The Least Costly Alternative Policy and the Local Coverage Determination for DuoNeb
The least costly alternative policy at issue in this case is found in the Secretary's interpretive manuals. The Medicare Benefit Policy Manual states that for durable medical equipment "where there exists a reasonably feasible and medically appropriate alternative pattern of care which is less costly than the equipment furnished, the amount payable is based on the rate for the equipment or alternative treatment which meets the patient's medical needs." Def.'s Ex. 2 at 13-14. The reimbursement is thus based on the payment amount for the least costly alternative. The Medicare Program Integrity Manual extends this concept to non-durable medical equipment, mandating that contractors "shall implement the new Least Costly Alternative (LCA) determinations through an LCD. 'Least Costly Alternative' is a national policy provision that shall be applied by contractors when determining payment for all durable medical equipment (DME). Contractors have the discretion to apply this principle to payment for non-DME services as well." Pl.'s Tab 2 at 13.
Until recently, the inhalation drug DuoNeb was covered under the Act according to the payment formula set out in section 1395w-3a of the Act based on the average sales price of DuoNeb. A.R. 97, 151. In 2006, three Program Safeguard Contractors*fn1 published draft local coverage determinations proposing revisions to the existing local coverage determinations for nebulizers. See id. at 100-21, 126-53, 158-79. Relevant to this case, the draft local coverage determinations stated that the medical necessity of administering albuterol and ipratropium bromide in a combined unit dose had not been established and proposed applying the "least costly alternative" policy to DuoNeb. See id. at 106, 131-32, 163. The Program Safeguard Contractors then initiated a public comment and response period.
In April 2008, the four Medicare contractors in this case issued new local coverage determinations for nebulizers. These determinations stated:
The medical necessity for administering an FDA-approved unit dose combination of albuterol and ipratropium (J7620) compared to the separate unit dose vials of albuterol and ipratropium has not been established. Therefore, effective for claims with dates of service on or after November 1, 2008, when one unit of service of code J7620 is billed, if coverage criteria are met, payment will be based on the allowance for the least costly medically appropriate alternative -- 2.5 units of J7613 [albuterol] and 0.5 units of J7644 [ipratropium bromide].
Id. at 488, 514, 540, 566. Therefore, effective November 1, 2008, if a claim is filed for the reimbursement code assigned to DuoNeb, reimbursement will be based on the least costly alternative -- the sum of the reimbursement ...