Texas Alliance For Home Care v. Kathleen Sebelius , 681 F.3d 402 ( 2012 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 18, 2012 Decided June 1, 2012
No. 11-5265
TEXAS ALLIANCE FOR HOME CARE SERVICES AND DALLAS
OXYGEN CORPORATION,
APPELLANTS
v.
KATHLEEN SEBELIUS, IN HER OFFICIAL CAPACITY AS
SECRETARY, UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES, AND MARILYN TAVENNER, IN HER
OFFICIAL CAPACITY AS ACTING ADMINISTRATOR, CENTERS
FOR MEDICARE AND MEDICAID SERVICES,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:10-cv-00747)
William G. Kelly Jr. argued the cause for the appellants.
Brendan J. Klaproth was on brief.
Sharon Swingle, Attorney, United States Department of
Justice, argued the cause for the appellees. Tony West, Assistant
Attorney General, Ronald C. Machen, Jr., United States
Attorney, and Michael S. Raab, Attorney, were on brief. R.
Craig Lawrence, Assistant United States Attorney, entered an
appearance.
2
Before: HENDERSON, TATEL and KAVANAUGH, Circuit
Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: The Texas
Alliance for Home Care Services, a trade association
representing suppliers of durable medical equipment,1
prosthetics, orthotics and supplies (DMEPOS), and the Dallas
Oxygen Corporation, an individual DMEPOS supplier,
(collectively, Suppliers) appeal the district court’s dismissal of
their action against the Secretary of the United States
Department of Health and Human Services (Secretary) and the
Administrator of the Centers for Medicare and Medicaid
Services (CMS).2 The Suppliers challenge a regulation
addressing the “applicable financial standards” that a DMEPOS
supplier must meet to be eligible for a Medicare contract under
the competitive bidding process established in 42 U.S.C.
§ 1395w-3 (DMEPOS Statute). The district court dismissed the
complaint on three grounds: (1) it is precluded by subsection
(b)(11) of the DMEPOS Statute, 42 U.S.C. § 1395w-3(b)(11);
(2) the Suppliers lack constitutional standing and (3) the
regulation is authorized and otherwise valid. Texas Alliance for
Home Care Servs. v. Sebelius, 811 F. Supp. 2d 76 (D.D.C.
2011). Because we agree that subsection (b)(11) expressly
1
“The term ‘durable medical equipment’ includes iron lungs,
oxygen tents, hospital beds, and wheelchairs . . . and includes
blood-testing strips and blood glucose monitors for individuals with
diabetes.” 42 U.S.C. § 1395x(n).
2
CMS administers the Medicare program on behalf of the
Secretary. St. Luke’s Hosp. v. Sebelius, 611 F.3d 900, 901 (D.C. Cir.
2010).
3
precludes judicial review of the challenged regulation, we affirm
the district court’s dismissal on this ground.3
I.
In 1965, the Congress enacted the Medicare Act as Title
XVIII of the Social Security Act, 42 U.S.C. §§ 1395 et seq., to
establish a federally funded health insurance program for the
elderly and disabled. Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 506 (1994). The Medicare Act authorizes the
Secretary to issue regulations “defining reimbursable costs and
otherwise giving content to the broad outlines of the Medicare
statute.” Id. at 506-07 (citing 42 U.S.C. § 1395x(v)(1)(A)).
Before 2003, Medicare reimbursed the cost of DMEPOS
pursuant to a fixed fee schedule for each class of covered items.
In 1997, the Congress authorized the Secretary to conduct up to
five demonstration projects to test competitive bidding (in lieu
of the fixed schedules) to price and award contracts for
Medicare Part B services, including the provision of DMEPOS.4
Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4319, 111
Stat. 251, 392 (codified at 42 U.S.C. § 1395w-3 (1998)). The
subsequent demonstration projects, conducted in Polk County,
Florida and San Antonio, Texas, proved successful; competitive
bidding significantly reduced DMEPOS costs, while
maintaining quality standards and beneficiary satisfaction. See
H.R. Rep. No. 108-178(II), at 192 (July 15, 2003). Accordingly,
in 2003, the Congress instituted a competitive bidding process
3
Accordingly, we do not reach the Suppliers’ standing vel non or
the regulation’s validity.
4
Medicare Part B covers “outpatient items and services, including
durable medical equipment and certain prescription medications.”
Hays v. Sebelius, 589 F.3d 1279, 1280 (D.C. Cir. 2009).
4
for DMEPOS purchases by enacting the DMEPOS Statute as
part of the Medicare Prescription Drug, Improvement, and
Modernization Act, Pub. L. No. 108-173, title III, § 302(b)(1),
117 Stat. 2224 (2003) (codified in relevant part at 42 U.S.C.
§ 1395w-3, as amended). The DMEPOS Statute directed the
Secretary to “establish and implement programs under which
competitive acquisition areas are established throughout the
United States for contract award purposes for the furnishing . . .
of competitively priced items and services.” 42 U.S.C.
§ 1395w-3(a)(1)(A) (2004). The Secretary was to implement
the programs in three phases, beginning in 2007 with the 10
largest metropolitan areas in the United States. Id. § 1395w-
3(a)(1)(B)(i)(I).5
Under the DMEPOS Statute, no payment may be made for
a covered item unless the contractor submits a bid “to furnish an
item or service for a particular price and time period that
includes, where appropriate, any services that are attendant to
the furnishing of the item or service” and the Secretary awards
a contract to the supplier for such item or service. Id. § 1395w-
3(b)(6)(A)-(B). In addition, the Secretary “may not award a
contract to any entity under the competition conducted in a
competitive acquisition area . . . to furnish such items or services
unless the Secretary finds,” inter alia, that “[t]he entity meets
applicable financial standards specified by the Secretary, taking
into account the needs of small providers.” Id. § 1395w-
3(b)(2)(A)(ii).6 The Secretary is further directed to form a
5
The second and third phases extended the program, respectively,
to 80 of the largest metropolitan statistical areas in 2009 and to
“additional areas” after 2009. 42 U.S.C. § 1395w-3(a)(1)(B)(i)(II)-
(III) (2004).
6
The Secretary must also find that (1) the entity “meets applicable
quality standards specified by the Secretary,” (2) total payments to
area contractors will decrease and (3) beneficiaries will retain access
5
“Program Advisory and Oversight Committee” (PAOC) to
“provide advice” on several enumerated functions, including the
“establishment of financial standards for purposes of subsection
(b)(2)(A)(ii).” Id. § 1395w-3(c)(A)(i)-(iii).
In August 2004, the Secretary published in the Federal
Register a notice of a public meeting of PAOC on October 6,
2004 “to consider issues related to competitive bidding for
DMEPOS items and to furnish advice to the Secretary regarding
these issues.” Medicare Program; Public Meeting of the
Program Advisory and Oversight Committee (PAOC) for
Quality Standards and Competitive Acquisition of Certain
[DMEPOS], 69 Fed. Reg. 52,723, 52,723 (Aug. 27, 2004). The
notice solicited written comments “addressing topics discussed
at the meeting” to be submitted no later than October 13, 2004.
Id. During the October 6, 2004 meeting and two subsequent
ones, CMS presented to the public and to PAOC material on
topics that included the “[f]inancial capabilities of bidding
suppliers” before publishing a proposed DMEPOS rule in May
2006. Medicare Program; Competitive Acquisition for Certain
[DMEPOS] and Other Issues, 71 Fed. Reg. 25,654, 25,658 (May
1, 2006).
The proposed DMEPOS rule included the following
provision regarding financial standards:
(d) Financial standards. All suppliers must meet
the applicable financial standards specified in the
request for bids.
71 Fed. Reg. at 25,700 (emphasis added). The proposed rule’s
preamble elaborated:
[A]s part of the bid selection process, the [Request
for Bids] will identify the specific information we will
to multiple suppliers. Id. § 1395w-3(b)(2)(A)(i), (iii)-(iv).
6
require to evaluate suppliers, which may include: a
supplier’s bank reference that reports general financial
condition, credit history, insurance documentation,
business capacity and line of credit to successfully
fulfill the contract, net worth, and solvency. We
welcome comments on the financial standards, in
particular the most appropriate documents that will
support these standards.
We found that in the demonstration, general
financial condition, 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.
As we develop our methodology for financial
standards, we will further consider which individual
measures should be required so that we can obtain as
much information as possible while minimizing the
burden on bidding suppliers and the bid evaluation
process.
Id. at 25,675. In addition, the preamble announced that CMS
had created a website “specifically for the public to have access
to all PAOC presentations, minutes, and updates for the
Medicare DMEPOS Competitive Bidding Program.” Id. at
25,658.
The Secretary published the final rule in April 2007.
Medicare Program; Competitive Acquisition for Certain
[DMEPOS] and Other Issues, 72 Fed. Reg. 17,992 (Apr. 10,
2007). Its financial standards provision stated:
(d) Financial standards. Each supplier must
submit along with its bid the applicable financial
documentation specified in the request for bids.
7
Id. at 18,088 (42 C.F.R. § 414.414(d) (2008)). The final rule’s
preamble, responding to comments, clarified the proposed rule
in two respects. First, it explained that “in order to obtain a
sufficient amount of information about each supplier while
minimizing the burden on both bidding suppliers and the bid
evaluation process,” CMS intended to require for the initial
round of competition that suppliers submit only “certain
schedules from their tax returns, a copy of the 10K filing report
from the immediate 3 years . . . [,] certain specified financial
statement reports, such as cash flow statements, and a copy of
their current credit report.” Id. at 18,037. These documents, the
preamble explained, would enable CMS to “determine financial
ratios, such as a supplier’s debt-to-equity ratio, and credit
worthiness” and, from those determinations, “to assess a
supplier’s financial viability.” Id. Second, the preamble
explained that CMS planned to “review[] all financial
information in the aggregate and [] not [] bas[e its] decision on
one ratio but rather overall financial soundness.” Id. at 18,038.
On March 22, 2007, CMS posted on the DMEPOS website the
ten financial ratios it intended to use, along with a supplier’s
credit history, in evaluating the supplier’s financial health.7
After evaluating the bids, CMS awarded over 329 contracts to
implement the program beginning July 1, 2008.
Meanwhile, the Ways and Means Committee of the United
States House of Representatives convened a hearing on the
bidding process culminating in the Medicare Improvements for
7
Initially, the ten ratios were: (1) current ratio, (2) collection
period, (3) accounts payable to sales, (4) quick ratio, (5) current
liabilities to net worth, (6) return on sales, (7) sales to inventory, (8)
working capital, (9) quality of earnings and (10) operating cash flow
to sales. Tex. Alliance for Home Care Servs., 811 F. Supp. 2d at 83;
see CMS Announces Financial Measures for the [DMEPOS]
Competitive Bidding Program, June 1, 2007 (available at http://www.
medicarenhic.com/dme/articles/060107_comp_bid.pdf).
8
Patients and Providers Act of 2008, Pub. L. No. 110-275, 122
Stat. 2494 (2008) (MIPPA). MIPPA amended the DMEPOS
Statute, inter alia, to terminate all contracts awarded pursuant to
the 2007 bid and mandate they be rebid in 2009 (postponing the
second bidding round to 2011), thereby effectively reinstating
the previous Medicare fee schedule for DMEPOS. 42 U.S.C.
§ 1395w–3(a)(1)(D).
In January 2009, in order to implement MIPPA, the
Secretary published a new “interim final rule,” which amended
42 C.F.R. § 414.414(d) to read in relevant part:
(1) General rule. Each supplier must submit along
with its bid the applicable covered documents (as
defined in § 414.402) specified in the request for bids.
Medicare Program; Changes to the Competitive Acquisition of
Certain [DMEPOS] by Certain Provisions of [MIPPA], 74 Fed.
Reg. 2873, 2880 (Jan. 16, 2009). Section 414.402 defines
“covered documents” broadly as “a 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.” 42 C.F.R.
§ 414.402.
The Secretary opened the round 1 rebidding on October, 21,
2009 and closed it on December 21, 2009. The resulting
contracts, announced in November 2010, went into effect on
January 1, 2011.8 Unsuccessful bidders were so notified by
letter, with a chart attached indicating by check marks the
reasons for their rejection—financial ineligibility, high bid, lack
of accreditation or licensure, etc. See, e.g., Letter from
Competitive Bidding Implementation Contractor Palmetto GBA
8
CMS issued a final rule in November 2011 which did not change
or even address 42 C.F.R. § 414.414(d), the regulation the Suppliers
now challenge. 76 Fed. Reg. 70,228 (Nov. 10, 2011).
9
to Bidder Dallas Oxygen Corp. (dated Nov. 3, 2010) (Dallas
Oxygen Corp. Rejection Letter).
Meanwhile, the plaintiffs filed this action on May 10, 2010,
alleging that the Secretary’s evaluation of bidders’ financial
eligibility without first “specify[ing]” by regulation the
“applicable financial standards” (1) violated the notice and
comment requirement of the Administrative Procedure Act
(APA), 5 U.S.C. § 553(b)-(c); the separate Medicare notice and
comment requirement, 42 U.S.C. § 1395hh(b), and the APA’s
Federal Register publication requirement, 5 U.S.C.
§ 552(a)(1)(D); and (2) should be set aside under the APA as
ultra vires, arbitrary and capricious, an abuse of discretion and
otherwise not in accordance with law, 5 U.S.C. § 706(2).
The Secretary and CMS moved to dismiss the complaint on
three alternative grounds: (1) subsection (b)(11) of the
DMEPOS Statute precludes judicial review; (2) the Suppliers
lacked constitutional standing to initiate the action; and (3) the
complaint fails to state a claim. The district court granted the
motion to dismiss on all three grounds and the Suppliers timely
appealed.
II.
We review the district court’s dismissal de novo. Kim v.
United States, 632 F.3d 713, 715 (D.C. Cir. 2011). The
Suppliers invoked the district court’s federal question
jurisdiction under 28 U.S.C. § 1331 and sought review under the
APA. The APA generally “establishes a cause of action for
those ‘suffering legal wrong because of agency action, or
adversely affected or aggrieved by agency action.’ ” Koretoff v.
Vilsack, 614 F.3d 532, 536 (D.C. Cir. 2010) (quoting 5 U.S.C.
§ 702). The APA does not apply, however, “to the extent that
. . . statutes preclude judicial review.” 5 U.S.C. § 701(a). The
district court concluded that subsection (b)(11) of the DMEPOS
Statute precludes judicial review of the Secretary’s regulation on
10
financial standards and therefore deprived the district court of
jurisdiction. See Amgen, Inc. v. Smith, 357 F.3d 103 (D.C. Cir.
2004) (court lacks jurisdiction over complaint precluded by 42
U.S.C. § 1395l(t)(12)(A)). We agree.
“In determining whether a statute precludes judicial review,
the court must heed the APA’s ‘basic presumption of judicial
review’ that ‘will not be cut off unless there is persuasive reason
to believe that such was the purpose of Congress.’ ” Banzhaf
v. Smith, 737 F.2d 1167, 1168-69 (D.C. Cir. 1984) (en banc)
(quoting Abbott Labs. v. Gardner, 387 U.S. 136, 140 (1967)).
“The presumption favoring judicial review of administrative
action,” however, “is just that—a presumption” and, “like all
presumptions used in interpreting statutes, may be overcome by
specific language or specific legislative history that is a reliable
indicator of congressional intent.” Block v. Cmty. Nutrition
Inst., 467 U.S. 340, 349 (1984). The presumption of
reviewability here is overcome by the specific and emphatic
statutory language prohibiting judicial review of the competitive
bidding procedure.
Subsection (b)(11) of the DMEPOS Statute sweepingly
states:
There shall be no administrative or judicial review
under section 1395ff of this title, section 1395oo of this
title, or otherwise, of—
(A) the establishment of payment
amounts under paragraph (5);
(B) the awarding of contracts under this
section;
(C) the designation of competitive
acquisition areas under subsection (a)(1)(A)
and the identification of areas under
subsection (a)(1)(D)(iii);
11
(D) the phased-in implementation under
subsection (a)(1)(B) and implementation of
subsection (a)(1)(D);
(E) the selection of items and services for
competitive acquisition under subsection
(a)(2) of this section;
(F) the bidding structure and number of
contractors selected under this section; or
(G) the implementation of the special
rule described in paragraph (10).
42 U.S.C. § 1395w-3(b)(11). The mandate that there be “no
administrative or judicial review” under the two cited statutes
“or otherwise” unequivocally precludes review of the
Secretary’s actions addressing the seven aspects of the
competitive bidding program enumerated in subsections
(b)(11)(A)-(G) (emphases added). See Amgen, 357 F.3d at 111
(virtually identical preclusive language in 42 U.S.C.
§ 1395l(t)(12)(A) precluded review of Medicare payment
classification system adjustments); cf. Banzhaf, 737 F.2d at
1168-69 (statutory language “shall not be reviewable in any
court” effectively precluded review of Attorney General’s
decision not to investigate particular allegations or seek
appointment of independent counsel). This language, combined
with the broad range of subjects expressly immunized from
review, manifest the Congress’s intent to “proceed with these
initial administrative processes without risk of litigation
blocking the execution of the program.” Cardiosom, LLC v.
United States, 656 F.3d 1322, 1326 (Fed. Cir. 2011) (noting
“purpose of withholding judicial review in these instances is to
insulate these management decisions by the Medicare
Administration from the potential of inordinate delays that
would transpire if every such management decision were open
to an upfront challenge by some disappointed group”); see also
12
Carolina Med. Sales, Inc. v. Leavitt, 559 F. Supp. 2d 69 (D.D.C.
2008) (“The scope of the other areas of preclusion indicate a
scheme to insulate the entire program from review, as does the
broad, general language used.”). Moreover, as we explain
below, two of the enumerated subject areas encompass the
Secretary’s specification of “applicable financial standards”
pursuant to subsection (b)(2)(A)(ii) so as to insulate the
Secretary’s challenged regulation from any judicial review. See
Amgen, 357 F.3d at 113 (“If a no-review provision shields
particular types of administrative action, a court may not inquire
whether a challenged agency decision is arbitrary, capricious, or
procedurally defective, but it must determine whether the
challenged agency action is of the sort shielded from review.”)
First, the financial standards regulation is unreviewable
under subsection (b)(11)(B), which states that there is to be “no
administrative or judicial review . . . of . . . the awarding of
contracts under [section 1395w-3].” As the district court
observed, the DMEPOS Statute itself “ties the development and
application of appropriate financial standards to the Secretary’s
decision to grant or deny a contract” because the financial
standards requirement “is found in the section entitled
‘Conditions for awarding contracts,’ ” 42 U.S.C. § 1395w-3(b).
Texas Alliance, 811 F. Supp. 2d at 88. Indeed, under the
DMEPOS Statute, financial standards are indispensable to “the
awarding of contracts” as such standards determine whether or
not a contract may be awarded to a bidder based on the financial
documents submitted with its bid. If a bidder is found
financially ineligible, its bid is rejected in a notice advising that
CMS “is unable to offer [the bidder] a contract.” Dallas Oxygen
Corp. Rejection Letter at 1.
The Suppliers claim the statutory language was meant to
preclude only review of “individual contracts.” Appellants’ Br.
18. The statutory language, however, is not so narrow. By its
terms, subsection (b)(11)(B) applies not to the awarding of a
13
single contract but to “the awarding of contracts” generally,
which, under the DMEPOS Statute, requires the formulation and
application of financial standards. Nor does it make sense that
the Congress would intend to preclude a bidder deemed
financially ineligible from challenging the disqualifying
financial standards and yet allow a non-bidder to seek review of
the same standards. In either case, permitting review would
delay the costs savings the Congress sought to realize through
DMEPOS competitive bidding. Moreover, the United States
Supreme Court has rejected just the sort of distinction the
Suppliers seek to draw.
In Shalala v. Illinois Council on Long Term Care, Inc., 529
U.S. 1 (2000), the Court considered the preclusive effect of a
statutory channeling scheme, which prohibits direct review of
Medicare claim determinations under 28 U.S.C. § 1331 and
requires instead that a challenge proceed initially through a
statutory “special Medicare review route, [] set forth in a
complex set of statutory provisions,” with judicial review
available only afterward under the Medicare Act. 529 U.S. at 7-
8; see 42 U.S.C. § 1395ii (incorporating 42 U.S.C. § 405(h)
(“The findings and decision of the Commissioner of Social
Security after a hearing shall be binding upon all individuals
who were parties to such hearing. . . . No action . . . shall be
brought under section 1331 . . . to recover on any claim arising
under [Medicare].”)). There, as here, a trade association
mounted a direct attack in the district court under 28 U.S.C.
§ 1331, challenging Medicare regulations governing “how to
impose remedies after inspectors find that a nursing home has
violated substantive standards.” 529 U.S. at 6. The Court
concluded that the section 1331 bar applies not only to review
of the denial of monetary benefits but also to review of “a
policy, regulation, or statute that might later bar recovery of that
benefit.” Id. at 10. The Court explained that it could not
“accept a distinction that limits the scope of [the statutory bar]
to claims for monetary benefits”:
14
Claims for money, claims for other benefits, claims of
program eligibility, and claims that contest a sanction
or remedy may all similarly rest upon individual
fact-related circumstances, may all similarly dispute
agency policy determinations, or may all similarly
involve the application, interpretation, or
constitutionality of interrelated regulations or statutory
provisions. There is no reason to distinguish among
them in terms of the language or in terms of the
purposes of [the bar].
Id. at 14. Likewise here, we do not distinguish between an up-
front attack on the financial standards by suppliers not yet
injured by them and a challenge brought after-the-fact by a
frustrated bidder who has been found to be financially
ineligible.9 Under Illinois Council, review is precluded in both
cases.
The Secretary’s financial standard is also immune from
review under subsection (b)(11)(F)’s ban on any challenge to
“the bidding structure and number of contractors selected.” The
financial standards, as eligibility criteria, are integral to the
9
The Suppliers argue that Illinois Council in fact supports
reviewability because the Court there acknowledged that in Bowen v.
Michigan Academy of Family Physicians, 476 U.S. 667 (1986), the
Court concluded the channeling provision did not apply because the
result would be no review at all—the same result that will occur, they
claim, if section 1395w-3(b)(11)(B) is applied to preclude their
challenge here. See Appellants’ Br. 20-21. In Michigan Academy,
however, the Court found “persuasive evidence of legislative intent”
to foreclose review only of “amount determinations” and therefore
concluded the presumption of reviewability had not been
“surmounted.” 476 U.S. at 680-81. As explained supra, here the
presumption is surmounted—by the broad and unequivocally
preclusive language of section § 1395w-3(b)(11), which manifests the
Congress’s intent to foreclose all review of the listed subjects.
15
bidding structure the Secretary has erected. The standards are
identified in each individual Request for Bids, which lists the
financial documentation to be submitted; the bidder submits the
financial documents to CMS along with its bid; and the bidder
learns if it fails the standards in the notice of rejection of the bid.
Financial eligibility under the applicable standards, then, is
inextricably intertwined with the bidding structure and review
thereof is therefore expressly precluded by subsection (b)(11)(F).
For the foregoing reasons, we conclude that subsection
(b)(11) of the DMEPOS Statute precludes judicial review of the
Secretary’s financial standards regulation and that the district
court therefore lacked subject matter jurisdiction. Accordingly,
we affirm the district court’s judgment of dismissal under
Federal Rule of Civil Procedure 12(b)(1).
So ordered.