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Texas Alliance For Home Care Services, et al v. Kathleen Sebelius

September 9, 2011

TEXAS ALLIANCE FOR HOME CARE SERVICES, ET AL., PLAINTIFFS,
v.
KATHLEEN SEBELIUS, SECRETARY,
DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Royce C. Lamberth, Chief Judge

MEMORANDUM OPINION

I. INTRODUCTION

In 2003, as part of the Medicare Prescription Drug, Improvement, and Modernization Act, Pub. L. No. 108-173, 117 Stat. 2066 (2003) or "MMA," Congress directed the Department of Health and Human Services ("HHS") and the Center for Medicaid and Medicare Services ("CMS") to transition payment for Durable Medical Equipment ("DME")*fn1 under Medicare Part B from a fee schedule to a competitive bidding process by 2009. As part of this new law, Congress declared that CMS could not issue contracts to DME suppliers unless those entities met financial standards specified by the Secretary of HHS. The Secretary, along with an advisory group created by the MMA, held several public meetings on this new program-which included discussions on appropriate financial standards-and published a proposed rule in the Federal Register that, inter alia, described the purposes for collecting a supplier's financial information and gave examples of financial metrics that CMS would consider. In 2007, the Secretary published a final rule outlining the competitive process (the "DME Bidding Program"). The final rule stated that bidders would need to submit certain financial documentation, and directed interested parties to a website for the Program describing ten financial metrics CMS would use to evaluate potential DME suppliers. Before the initial implementation of the DME Bidding Program, Congress amended the statute via the Medicare Improvements for Patients and Providers Act. Pub. L. No. 110-275, 122 Stat. 2494 (2008) ("MIPPA"). These changes pushed back the target dates for implementation, and the Secretary subsequently promulgated an interim final rule incorporating the statutory changes and proceeded with the revised DME Bidding Program. But before the results of the revised Program could be announced, plaintiffs-a DME supplier and an industry group*fn2 -filed suit challenging the Secretary's financial standards. The gravamen of plaintiffs' complaint is that the standards lack the specificity required by statute, leaving potential DME suppliers in the dark when bidding for contracts. The DME Bidding Program has not yet been implemented, however, and so plaintiffs' suit focuses on the procedures used by the Secretary in designing the Program. Specifically, plaintiffs allege that the generality with which the Secretary's rulemaking process discussed financial standards renders the notice-and-comment process required by both the MMA and the Administrative Procedure Act ("APA") insufficient, that the absence of any published formula for financial viability violates the Freedom of Information Act ("FOIA"), and that the lack of a defined method for determining a supplier's soundness implies that CMS is acting arbitrarily, and the defendants are acting ultra vires. Defendants now move to dismiss plaintiffs' complaint, arguing that judicial review of these questions are precluded by the plain text of the MMA, that plaintiffs lack standing, and that the complaint fails to state a claim upon which relief may be granted.

Plaintiffs oppose defendants' request, and have sought several times to amend their original complaint. For the reasons set forth below, the Court finds that it lacks subject-matter jurisdiction over this matter and that, in any event, the Secretary's rulemaking process was legally sufficient. The Court will therefore dismiss this action in its entirety.

II. BACKGROUND

A. Statutory and Regulatory Background

Medicare is an "insurance program" that "provides basic protection against the costs of hospital, related post-hospital, home health services, and hospice care." 42 U.S.C. § 1395c. Those eligible for the program include individuals over the age of 65, qualified individuals who have less than two years until they reach age-based eligibility, and certain other individuals afflicted with particular medical conditions. Id. Most drugs, medical equipment, and medical services are covered by Medicare, which pays for a significant proportion of the cost in accordance with fee schedules that are published and revised by HHS and CMS-a process that has traditionally applied to the purchase of DME for Medicare beneficiaries.

In the late 1990s Congress-in the wake of "[n]umerous studies conducted by the HHS Office and the Inspector General as well as GAO hav[ing] found the government-determined fee schedule for durable medical equipment (DME) too high for certain items," H.R. Rep. No. 108-178(II), at 192 (2003)-authorized the Secretary to undertake several demonstration projects implementing a competitive bidding process for setting DME prices. The basic structure of the process is straightforward: Rather than have the Secretary set prices directly, CMS invites all suppliers in a geographical area to submit bid prices at which they would be willing to furnish particular DME products. After receiving bids and removing those entities ineligible under accreditation, financial or other standards, CMS adds up the proposed market shares-starting with the lowest bidder-until the entire market is covered, and awards exclusive contracts to those selected bidders at the median proposed price among the winners. A 1997 law "authorized the Secretary to conduct up to five demonstration projects to test competitive bidding as a way for Medicare to price and pay for" DME. H.R. Rep. No. 108-391, at 572 (2003).

Three demonstrations were ultimately conducted-two in Polk County, Florida and one in the fine city of San Antonio, Texas. Id. The consensus following these pilot programs was, and remains, that the introduction of competitive bidding into the DME market was a resounding success. As Congress would later observe: "The DME competitive bidding demonstration has been a success. The taxpayers and beneficiaries saved significantly and quality standards were higher under the demonstration." H.R. Rep. No. 108-178(II), at 192. And HHS concurred: "The demonstration led to lower Medicare fees for almost every item in almost every product category in each round of bidding. . . . resulting in a nearly 20 percent overall savings at each site." 71 F.R. 25654, 25657 (2006); see also Hearing on Medicare's DMEPOS Competitive Bidding Program: Hearing before the Subcomm. On Health of the H. Comm. On Ways and Means, 110th Cong. 82 (2008), at 33 (statement of Mr. Hoerger) ("2008 Hearing Tr.") (expert testimony that demonstrations "produced lower prices" while having "relatively little effect on beneficiary access, quality and product selection").

Satisfied with the demonstration results, Congress included in the MMA instructions for the Secretary to implement the DME Bidding Program nationwide. Codified at 42 U.S.C. § 1395w-3, the relevant statutory provision directs the Secretary to establish the DME Bidding Program, id. § 1395w-3(a), describes the conditions that must be met by suppliers before any contracts may be awarded, id. § 1395w-3(b)(2), establishes the terms that must be included in any contract, id. § 1395w-3(b)(3), and sets forth the process for payment. Id. § 1395w-3(b)(5).

Congress envisioned implementation of the DME Bidding Program over several phases, with "10 of the largest metropolitan statistical areas in 2007; 80 . . . in 2009; and remaining areas after 2009." H.R. Rep. No. 108-391, at 575.

The MMA sets forth conditions to be satisfied before CMS may award a contract under the DME Bidding Program, including that the supplier "meets applicable financial standards specified by the Secretary." 42 U.S.C. § 1395w-3(b)(2)(A)(1)(ii); see also H.R. Rep. No. 108-391, at 576 (explaining that CMS may not award contracts unless "entities meet financial standards specified by the Secretary, taking into account the needs of small providers"). To determine the appropriate financial standards, the MMA created a Program Advisory and Oversight Committee ("PAOC"), 42 U.S.C. § 1395w-3(c), to "provide advice to the Secretary regarding the implementation of the program, data collection requirements, proposals for efficient interaction among manufacturers and distributors of the items and services providers and beneficiaries, the establishment of quality standards, and other functions specified by the Secretary." H.R. Rep. No. 108-391, at 577; see also 42 U.S.C. § 1395w-3(c)(3)(A)(ii).

In 2004, the Secretary published notice in the Federal Register of public meetings hosted by PAOC on replacement of "the current DME payment methodology for certain items with a competitive acquisition process to improve the effectiveness of Medicare's methodology for setting DME payment amounts." 69 F.R. 52723, 52723 (2004). That notice explained that PAOC's role involved, inter alia, advising the Secretary on "financial standards for suppliers under the program." Id. The notice requested any written comments or questions, and announced that a summary of the meeting would be made publicly available. Id. After this and other public discussions were held, which included discussion on the "[f]inancial capabilities of bidding suppliers," the Secretary published a proposed rule in May 2006. 71 F.R. at 25658.

In the proposed rule, the Secretary explained that the purpose of evaluating financial standards is to assist CMS "in assessing the expected quality of suppliers, estimating the total potential capacity of selected suppliers, and ensuring that selected suppliers are able to continue to serve market demand for the duration of their contracts." Id. at 25675. The preamble further noted that CMS learned from the demonstrations that "general financial conditions, adequate financial ratios, positive credit history, adequate insurance documentation, adequate business capacity, and line of credit, net worth, and solvency, were important considerations for evaluating financial stability." Id. Thus, the Secretary indicated that the requests for bids "will identify the specific information" required of suppliers, and suggested that such information might include "a supplier's bank reference . . . credit history, insurance documentation, business capacity and line of credit." Id. In addition to the specific rules, the Secretary announced the creation of a public website, which would provide "access to all PAOC presentations, minutes, and updates for the" DME Bidding Program. Id. at 25658. The Secretary also set forth the role of financial standards in the Program, explaining that CMS would (1) look to all bidders to calculate the competitive bid range, then (2) eliminate those bidders that did not meet applicable financial standards, and finally (3) award contracts to the remaining bidders in sufficient number to provide for the entire market. Id. at 25677--78. Having set forth the purposes of the financial standards and the documentation involved, the Secretary "welcome[d] comments on the financial standards" and "the most appropriate documents that will support these standards." Id. at 25675.

After nearly a year passed, the Secretary promulgated a final rule establishing the DME Bidding Program. 72 F.R. 17992 (2007). In the preamble to that rule, the Secretary responded to a number of comments concerning financial standards and documentation. See generally id. at 18037--39. For example, in response to concerns about onerous documentation requirements, the Secretary announced that CMS would require only submission of "certain schedules from . . . tax returns, a copy of the 10K filing report from the immediate 3 years prior . . . certain specified financial statement reports, such as cash flow statements, and a copy of [a] current credit report," id. at 18037, and explained that such information would allow CMS "to determine financial ratios, such as a supplier's debt-to-equity ratio, and credit worthiness, which will allow [it] to assess a supplier's financial viability." Id. Some commenters also focused on particular financial indicators that they believed should be included in the Program, such as the debt-to-equity ratio, the EBITDA-to-equity ratio, the quick ratio and a Dunn and Bradstreet accounts payable rating. Id. at 18037--38. In response to these comments, the Secretary stated that CMS "will use appropriate financial ratios," and listed examples such as "a supplier's debt-to-equity ratio and a financial credit worthiness score from a reputable financial services company." Id. at 18038. At the same time, the Secretary cautioned that CMS "will be reviewing all financial information in the aggregate and will not be basing [its] decision on one ratio but rather overall financial soundness." Id. A subsequent announcement on the DME Bidding Program website explained that CMS would use ten particular financial ratios to evaluate a supplier's viability. See Center for Medicaid and Medicare Services, CMS Announces Financial Measures for the Medicare Durable Medical Equipment, Prosthetics, Orthotics, and Supplies Competitive Bidding Program, June 1, 2007, available at www.medicarenhic.com/dme/articles/060107_comp_bid.pdf (last visited Sep. 5, 2011) ("CMS Financial Measures").*fn3

As to the specific regulation, the Secretary promulgated a rule requiring any bidding supplier to "submit along with its bid the applicable covered documents" to ensure that the candidate meets required financial standards. 42 C.F.R. § 414.414(d)(1). Covered documents were defined elsewhere as any "financial, tax, or other document required to be submitted by a bidder as part of an original bid submission under a competitive acquisition program in order to meet the required financial standards." Id. § 414.402. Together, these regulations establish that "[i]n order to be considered for a contract award, each DMEPOS supplier is required to meet applicable quality and financial standards." All Fla. Network Corp. v. United States, 82 Fed. Cl. 468, 470 (Ct. Cl. 2008).

CMS proceeded with Round 1 of the DME Bidding Program in the first 10 geographical areas, but in 2008-just before the results were announced-the House Committee on Ways and Means held a hearing "to review the development and execution of the 'Durable Medical Equipment Competitive Bidding Program' mandated in [the] MMA." 2008 Hearting Tr. at 6 (statement of Rep. Stark). The hearing was called "because of the concern from [members of Congress] who [were] hearing from the suppliers in their communities," prompting the need for, as one member put it, "oversight." Id. Though recognizing that the initial demonstrations had successfully reduced prices, id. (noting estimated savings of 26%), and combated fraud, id. (applauding "the accreditation process" as method to combat "excessive fraud and abuse"), the Committee reviewed a number of complaints from industry and beneficiary advocates, and several members expressed their desire to alter or eliminate the DME Bidding Program. See generally id. at 6--9. During the 2008 Hearing, a colloquy between Kerry Weems, then director of CMS, and several representatives concerning the transparency of the Program and the disqualification of a large number of suppliers in Round 1 for lack of proper financial documentation took place. See, e.g., id. at 16 (statement of Mr. Weems) (acknowledging "that there is a problem with the fact that certain financial documentation was not supplied"); id. at 17 (statement of Mr. Weems) (discussing use of "certain financial rations [sic] that . . . tell [CMS] the financial strength of" particular bidders); id. at 24 (statement of Mr. Weems) (admitting that CMS "ha[s] not disclosed as a matter of the bid process . . . exactly how [CMS] use[s] the financial rations [sic] in judging the financial viability of each bidder").

The statute creating the DME Bidding Program was largely unaffected following this hearing, 74 F.R. 2873, 2875 (2009)-likely because of the Program's expected savings. See 2008 Hearing Tr. at 34--35 (statement of Rep. Stark) ("[T]o the extent we're going to change [the DME Bidding Program], the Congressional Budget Office, who is a fiddler to whom we have to dance here, has said that a one-year delay in round one would lose $3.5 billion in projected savings, . . . Over five years, the current program is north of $6 billion over the next five years. . . . [I]f we are going to solve this legislatively, and we may not, we're going to have [to] come up with 6 billion bucks over five years."). But the MIPPA did amend the statute in two ways that are collaterally relevant: first, Congress directed the Secretary to delay implementation of the program, such that a Round 1 rebid would be conducted in 2009 and Round 2 would be delayed until 2011, 74 F.R. at 2875; and second, Congress created a mechanism for supplier feedback that requires the Secretary to provide notice of any missing financial documents and an opportunity to supplement the bid. 42 U.S.C. § 1395w-3(a)(1)(F).

Following passage of the MIPPA, the Secretary promulgated an interim final rule to integrate changes to various laws-including the DME Bidding Program-affected by that Act.

74 F.R. 2873. As the Secretary explained, the MIPPA made "certain limited changes" to the DME Bidding Program. Id. at 2875. Noting that these changes "are largely self-implementing," the Secretary re-adopted the same methodologies (including the consideration of financial standards) that she had previously articulated. Id. at 2875--76; see also id. at 2876 ("The [requests for bid] issued for the Round 1 rebid will require suppliers to submit the same categories of financial documents as we requested for the previous Round 1 competition.").*fn4 In light of the MIPPA's "new paragraph . . . set[ting] forth a process for supplier feedback on missing financial documents," id. at 2875, however, the Secretary amended the applicable regulations to provide a method for suppliers to obtain feedback concerning incomplete submissions. 42 C.F.R. § 414.414(d)(2). CMS then proceeded with the Round 1 rebid.

B. Factual and Procedural History

Before the results of the Round 1 rebid could be announced, plaintiffs filed suit in this Court. Complaint, May 10, 2010 [1]. The stated purposes of this action are to compel HHS and CMS "(1) [to] comply with the Medicare provisions . . . by specifying financial standards that [DME] suppliers must meet, taking into consideration the needs of small providers, (2) to comply with the APA and the Medicare provisions of the Social Security Act by providing proper notice and opportunity for public comment in proposing and specifying such financial standards, and (3) to publish in the Federal Register, or otherwise provide to Plaintiffs, the 'financial standards' [they are] applying to qualify such DME suppliers, if in fact they exist." Id. at ¶ 1. The Complaint centers around a host of alleged deficiencies in the processes used by the Secretary and the Director of CMS in developing the DME Bidding Program, including that "[t]he [2006] proposed rule did not contain any further information on the substance of the proposed financial standards," id. at ¶ 14, the preamble to the final rule "did not specify the 'appropriate financial ratios' to be used" by defendants, id. at ¶ 15, the substantive adopted regulation "did not specify financial standards that would be applied," id. at ¶ 16, "[n]owhere in the [2009] interim final rule did Defendants specify the financial standards to be used," id. at ¶ 18, and that-despite numerous requests-defendants have not allowed DME suppliers to "comment on proposed financial standards" following the interim final rule. Id. at ¶ 23. In light of these purported shortcomings, plaintiffs allege that DME suppliers participating in the Round 1 rebid "do not know whether or not they have been determined by Defendants to be qualified bidders under whatever financial standards or judgments are, or have been, applied." Id. at ¶ 20. Plaintiffs further allege, "[o]n information and belief," that HHS and CMS are "evaluating the financial soundness of . . . bidders without having specified financial standards, . . . as required by statute, and are evaluating 'covered documents' for the financial soundness of providers on an ad hoc basis, without application of specified financial standards and without any specific means for considering the financial needs of small providers." Id. at ¶ 24. Based on these allegations, plaintiffs assert that HHS and CMS have violated § 553 of the APA and § 1395hh of the Medicare Act by failing to make the financial standards publicly available and provide a meaningful opportunity for comment, id. at ¶¶ 25--34 (Counts I & II), violated § 552(a)(1)(C) of FOIA by failing to publish the applicable financial standards in the Federal Register, id. at ¶¶ 35--39 (Count III), and violated § 706(2) of the APA by failing to rely upon specified financial standards and thus acting ultra vires. Id. at ¶¶ 40--41.

Defendants subsequently moved to dismiss plaintiffs' complaint. Motion to Dismiss, July 23, 2010 [9] ("MTD"). Defendants' motion sets forth three general bases for dismissal: first, that the MMA precludes judicial review of the Secretary's choice of financial standards, and thus this Court lacks subject-matter jurisdiction, id. at 18--24; second, that the Court lacks jurisdiction because the Complaint does not sufficiently allege the elements necessary to establish plaintiffs' standing, id. at 25--29; and finally, that the Complaint fails to state any claim upon which relief may be granted and therefore must be dismissed under Federal Rule of Civil Procedure 12(b)(6). Id. at 29--37.

Several months after defendants' motion was fully briefed, plaintiffs moved to amend their Complaint following completion of the Round 1 rebid. Motion for Leave to File First Amended Complaint, Jan. 10, 2011 [15]. Defendants opposed plaintiffs' motion on the grounds that plaintiffs failed to comply with Local Rule 7(m) requiring the parties to meet and confer, and that the new allegations did not alter the three bases for dismissal-rendering amendment futile. Opposition to Motion for Leave, Jan. 12, 2011 [16]. Three months later, plaintiffs moved a second time to amend the Complaint, asserting a need to incorporate allegations concerning Round 2 bidding under the DME Program, Motion for Leave to File Second Amended Complaint, Apr. 12, 2011 [18], and defendants opposed this request on the same grounds. And just last week, plaintiffs again moved to amend-and defendants again opposed-this time because (1) areas of Texas covered by Texas Alliance's members are part of Round 2 of the DME Bidding Program and (2) plaintiffs wish to add a Medicare beneficiary as a plaintiff. Motion for Leave to File Third Amended Complaint, Aug. 29, 2011 [23].

Having reviewed the full record, as well as the applicable law, the Court,*fn5 for the reasons set forth below, will dismiss plaintiffs' suit for want of jurisdiction and for failure to state a claim, and will deny plaintiffs' requests to amend the Complaint as futile.

III. STANDARD

A. 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction

Federal district courts are courts of limited jurisdiction, Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994), and a Rule 12(b)(1) motion for dismissal presents a threshold challenge to a court's jurisdiction. Haase v. Sessions, 835 F.2d 902, 906 (D.C. Cir. 1987). In evaluating such a motion, the Court must "accept as true all of the factual allegations contained in the complaint," Wilson v. District of Columbia, 269 F.R.D. 8, 11 (D.D.C. 2010) (citing Leatherman v. Tarrant Cty. Narcotics Intel. & Coordination Unit, 507 U.S. 163, 164 (1993)), and should review the complaint liberally while accepting all inferences favorable to the plaintiff. Barr v. Clinton, 370 F.3d 1196, 1199 (D.C. Cir. 2004). At the same time, the Court may consider relevant materials outside the pleadings, Settles v. U.S. Parole Comm'n, 429 F.3d 1098, 1107 (D.C. Cir. 2005), and must remain cognizant that "the plaintiff's factual allegations in the complaint will bear closer scrutiny in resolving a 12(b)(1) motion than in resolving a 12(b)(6) motion for failure to state a claim." Wilson, 269 F.R.D. at 11 (quotations omitted). In defending against a Rule 12(b)(1) motion, the plaintiff bears the burden of demonstrating that jurisdiction exists. Khadr v. United States, 529 F.3d 1112, 1115 (D.C. Cir. 2008).

B. 12(b)(6) Motion to Dismiss for Failure to State a Claim

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a complaint. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). To satisfy this test, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[W]hen ruling on a defendant's motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint," Atherton v. District of Columbia, 567 F.3d 672, 681 (D.C. Cir. 2009), and grant a plaintiff "the benefit of all inferences that can be derived from the facts alleged." Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994). At the same time, a court may not "accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). In other words, "only a complaint that states ...


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