A Federal Court Determines that CMS’s “Least Costly Alternative” Policy is Contrary to Law

By Carrie S. Martin –

On October 16, 2008, the U.S. District Court of the District of Columbia issued an opinion in Hays v. Leavitt holding that the “least costly alternative” policy implemented by the Centers for Medicare and Medicaid Services (“CMS”) was contrary to the Medicare Act, 42 U.S.C. § 1395, et seq. (the “Act”).  The court granted summary judgment for Plaintiff Ilene Hays, a Medicare beneficiary, finding that Defendants unlawfully limited the reimbursement rate of DuoNeb (albuterol sulfate; ipratropium bromide), an inhalation drug, to the “least costly alternative,” contrary to Congressional intent.  Another plaintiff, Dey, L.P., the manufacturer of DuoNeb, was dismissed as lacking standing to sue.

In April 2008, the defendants, four Medicare contractors, issued a local coverage determination (“LCD”) for DuoNeb, changing the drug’s reimbursement from the average sales price to the “least costly alternative,” in this case, separate doses of DuoNeb’s active ingredients, albuterol and ipratropium.  Plaintiffs sued, arguing that the policy was contrary to § 1395y(a) of the Act, which prohibits the reimbursement of any expenses for “items and services” that are not “reasonable and necessary.”  Although the Act allows Medicare contractors, in certain circumstances, to determine what payments are barred under the “reasonable and necessary” standard through LCDs, Plaintiffs argued that application of that policy to DuoNeb was contrary to law.  Plaintiffs pointed to the explicit payment scheme for inhalation drugs set forth in the Act (42 U.S.C. §§ 1395u(o)(1)(G)(ii), 1395w-3a.).  Defendants, however, argued that the term “reasonable and necessary” was ambiguous and could be read to modify “expenses” rather than “items” or “services.”  Such a reading justified the LCD issued for DuoNeb. 

The court, analyzing the arguments under the familiar Chevron standard, concluded that the “most natural reading” of the law is that the term “reasonable and necessary” modifies “items and services.”  Furthermore, the court found that – contrary contrary to Defendants’ arguments – the explicit language of § 1394w-3a indicated that Congress did not intend the “reasonable and necessary” requirement to be construed broadly to allow LCDs for drugs like DuoNeb, which have pre-existing statutory payment schemes.  Hence, the court held that “Congressional intent is clear and section 1395y(a) does not authorize the Secretary [of the U.S. Department of Health and Human Services] to set a payment rate for an item or service that differs from the statutory formulary in section 1395w-3a.”