Warder v. Shalala

Facts

This is about the classification, for Medicare Part B reimbursement purposes, of medical equipment made for those suffering from severe musculoskeletal problems. The equipment at issue is produced by OrthoConcepts (P) and is used by Warder (P). The equipment consists of braces, fitted to the individual patient, on a wheeled base. D made an administrative ruling that classifies this equipment as 'durable medical equipment' rather than as 'braces.' The former classification limits Medicare reimbursement to devices used at home, precluding reimbursement for such devices when used in certain hospital and institutional settings. The court held that HCFAR 96-1 was a substantive, or legislative, rule requiring notice and comment. The court ruled it to be invalid because notice and comment procedures had not been followed prior to its issuance. The court also found that the equipment in dispute was not 'durable medical equipment,' and enjoined D from treating it as such. The Medicare Act establishes a national health insurance program for the elderly and the disabled. Congress authorized D to implement the Medicare statute by issuing both substantive regulations and interpretive rules. Part B benefits are administered by private insurance carriers under contract with D. D reimburses a carrier for the costs of administering claims, and the carriers act as D's agents. Medicare Part B expressly provides coverage for braces, including 'leg, arm, back, and neck braces.' Part B reimburses devices classified as 'durable medical equipment' (DME) only when provided at the patient's 'home' or other 'institution used as [the patient's] home,' and not in a hospital or skilled nursing facility (SNF). If a piece of medical equipment used in a hospital or SNF is a 'brace,' it is reimbursable -- but not if deemed to be DME. This device at issue includes a set of connected braces attached to a wheeled base. Provisions define braces and DME, but a device such as P's which is a brace-like device used as part of a wheeled item that might be classified as DME is not categorized. The statutory definition of DME 'includes iron lungs, oxygen tents, hospital beds, and wheelchairs.' Congress amended § 1395m(a)(4) to add a provision expressly providing that customized wheelchairs were DME. D addressed customized wheelchairs in a regulation that substantially tracked the language of the amendment, providing that a wheelchair is DME if 'uniquely constructed or substantially modified for a specific beneficiary' and 'so different from another item used for the same purpose that the two items cannot be grouped together for pricing purposes.' Congress, and D, treated as DME any wheelchair modified in light of an individual patient's disability, per a physician's instructions. The regulatory definition of DME focuses on qualitative criteria, including the equipment's durability: (1) Can withstand repeated use; (2) Is primarily and customarily used to serve a medical purpose; (3) Generally is not useful to an individual in the absence of an illness or injury; and (4) Is appropriate for use in the home, which is defined to exclude hospitals and SNFs. D's manual explains that DME includes 'supplies and accessories' that are 'necessary for the effective use of DME.' The statutory definition of 'brace' is ostensive, listing the sorts of braces that are covered. P designed what it has marketed as the 'OrthoConcepts Seating System.' The patient sits or reclines, on the Seating System, and the component braces maintain the patient in a position designed to reduce the weight borne by weaker extremities and to prevent contractures. D advised P that Part B covered the Seating System as DME, not as orthotics and that it would provide no L Code for billing the Seating System as an orthotic. Despite D's notice declaring the Seating System DME, P through its corporate affiliates continued to bill Seating Systems supplied to patients at SNFs as an orthotic. D suspended Medicare payments to P in December 1994. Following a meeting and an inspection of SNFs where the Seating System was in use, one of D's carriers concluded that the billed equipment was, in fact, DME, and notified P that it was obligated to refund the Part B payments. Soon thereafter, the Region B and Region C DMERCs denied P reimbursement. P appealed from denials of their Part B claims. The net result of these proceedings was that by early 1996, D's view of the Seating System as DME -- as expressed in its 1990 letter to OrthoConcepts and its 1994 notice to its carriers -- was at odds with the decisions of an ALJ and a hearing officer. D then issued HCFAR 96-1. Noting the decisions classifying the Seating System as an orthotic, the Ruling's stated purpose was 'to provide clarification and guidance regarding the scope and meaning of the statutory benefits for 'orthotics' and '[DME].' It stated that the definition of 'orthotics' 'is limited to leg, arm, back, and neck braces that are used independently of, rather than in conjunction with, or as components of, other kinds of medical equipment.' The Ruling provides several illustrations of DME, one of which unmistakably refers to the OrthoConcepts Seating System. Ps brought the present district court action challenging HCFAR 96-1 which having been adopted without compliance with the notice-and-comment procedures of the Administrative Procedure Act and the Medicare statute, was invalid. Ps also claimed that HCFAR 96-1 was arbitrary and capricious. The district court ruled that HCFAR 96-1 is a substantive rule and, therefore, invalid because D did not follow notice and comment procedures. D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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