April 4 Fed Court Ruling Opened Door to Injunction

Three San Diego labs had to first prevail on three legal issues for their case to proceed

CEO SUMMARY: Federal Judge Thomas J. Whelan’s ruling on three key legal points on Friday, April 4, was the first court victory needed by three San Diego-area labs in their lawsuit to prevent the Medicare Laboratory Competitive Bidding Demonstration in San Diego from proceeding. Judge Whelan ruled that the three plaintiff labs: 1) did not have to exhaust administrative remedies before turning to court; 2) a judicial review of these claims is not barred by law; and, 3) standards for ripeness and standing are met.

LAST TUESDAY’S DRAMATIC DEVELOPMENTS THAT STOPPED the Medicare Laboratory Competitive Bidding Demonstration Project from proceeding in San Diego would not have occurred without an earlier favorable decision by the federal judge hearing the case.

On Friday, April 4, U.S. District Court Judge Thomas J. Whelan ruled in favor of the three plaintiff laboratories on three key points. It was necessary for Sharp Healthcare, Scripps Health, and Internist Laboratory to prevail on these three points before Judge Whelan would then take up the primary issue in the case: the request by the three plaintiffs for a preliminary injunction to stop the Centers for Medicare & Medicaid Services (CMS) from moving forward with the Medicare Competitive Bidding Demonstration Project unfolding in the San Diego-Carlsbad-San Marcos metropolitan statistical area (MSA).

When requesting the preliminary injunction in January, Sharp Healthcare, Scripps Health, and Internist Laboratory challenged the procedural steps that U.S. Department of Health and Human Services (HHS) Secretary Michael Leavitt used to implement the bidding demonstration project. Because the judge initially ruled against the three laboratories on February 14, the Medicare lab competitive demonstration pilot went forward as announced. On February 15, CMS accepted bids from laboratories seeking to participate in the demonstration project.

Awaiting the Next Steps

As part of his February 14 decision, Judge Whelan requested that briefs and arguments be made on three points of jurisdiction:

1) Do Plaintiffs have to exhaust administrative remedies before pursuing their claims in federal court?

2) Is judicial review of Plaintiffs’ claims barred under 42 U.S.C. § 1395w- 3(10)?

3) Are ripeness and standing requirements met?

In its response to the plaintiff ’s lawsuit, attorneys for CMS said that the Medicare Act precludes such suits because it requires aggrieved parties to first file an administrative appeal. Second, CMS also argued that the labs have no standing to sue because federal law does not apply to such challenges. On the third issue, CMS claimed any harm to the labs is speculative because no winners had been named in the bidding process.

Judge Gave Labs A Big Win

It was Friday, April 4, when Judge Whelan made his ruling after reviewing legal briefs from both sides. Whelan ruled that: 1) the court has jurisdiction over the labs’ claims in the case; 2) the three plaintiff labs have standing in the case; and, 3) at least some of the claims are ripe for review, meaning the plaintiff labs could suffer damages.

Among the most significant statements in Whelan’s 8-page ruling were those involving his decisions concerning arguments U.S. Health and Human Services Secretary Michael Leavitt had made in legal briefs. THE DARK REPORT reported on March 3 that the government had misrepresented the facts in arguing its case against the labs.

For example, federal lawyers for Leavitt argued that, if the three plaintiff labs are not named winning bidders, they can use HHS’ administrative review procedures rather than pursue their case in court. Whelan found otherwise, writing in his ruling that “…contrary to the secretary’s contention, if plaintiffs lose, they cannot submit claims to Medicare and, therefore, will not be in a position to obtain administrative review.”

Whalen also said, “Furthermore, in a February 1, 2008, letter sent to [laboratory] providers, the secretary stated that non-winning laboratories cannot pursue administrative appeals… (‘non-winner laboratories… have no appeal rights when Medicare denies payment for the test…’) This statement contradicts the secretary’s representation to the court that administrative review is available to plaintiffs.”

Later in his order, Whelan said, “…plaintiffs contend that the secretary violated the Administrative Procedure Act (“APA”) by enacting a rule requiring some laboratories that have a face-to-face encounter with the patients, such as plain- tiffs, to participate in the competitive bidding process. Plaintiffs contend that this rule conflicts with the express language of [federal law], which excepts all entities that have a face-to-face encounter from the bidding requirement.”

Leavitt had also argued that CMS’ bidding structure explains which labs could submit bids. Whelan addressed this argument, writing, “But ‘bidding structure’ may reasonably be interpreted as encompassing only the secretary’s establishment of the procedures or process that bidders must follow. In short, the term is ambiguous, at best, regarding whether it provides the secretary with unchecked discretion to determine who must submit bids. In light of this ambiguity, the court finds that the secretary has not provided ‘clear and convincing evidence’ that Congress intended to preclude judicial review of his interpretation of the face-to-face exception.”

Labs’ Arguments Have Merit

“The judge resolved these issues in our favor fairly convincingly,” wrote attorney Patric Hooper of Hooper Lundy & Bookman in Los Angeles in an e-mail on April 4. Hooper represents the three labs.

“The easiest thing for the judge to have done in this case would have been to get rid of it on jurisdictional grounds,” Hooper explained. “Given the complexity of the jurisdictional issues, we think this order, in itself, is a significant victory.”

Had Judge Whelan not ruled in favor of the three plaintiff laboratories on these three points on Friday, April 4, then the court case would not have proceeded to the next step, which was the judge’s decision about granting the injunction to stop the Medicare Laboratory Competitive Bidding Demonstration project, as requested by the plaintiffs. Just four days later, Judge Whelan did grant the temporary injunction.


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