Government Narrowly Avoids Invalidation of All LCDs in the Ninth Circuit

A divided panel of the Ninth Circuit recently reversed a district court decision that held that local coverage determinations (“LCDs”) are valid only when issued through a 60-day notice-and-comment rulemaking process.  Agendia, Inc. v. Becerra, No. 19-56516 (9th Cir. July 16, 2021).  The impact of the district court’s ruling—and a spirited dissent from the Ninth Circuit majority opinion—would have been significant for healthcare enforcement actions, including under the False Claims Act.  LCDs have never gone through notice-and-comment rulemaking.  A decision that all LCDs are accordingly invalid would have undermined a number of False Claims Act cases premised on the use of LCDs to apply the “reasonable and necessary” standard for Medicare reimbursement.  The Ninth Circuit is the first court of appeals to weigh in on this issue, however, and others may yet reach a different conclusion.

By statute, the Medicare program is generally prohibited from offering reimbursement for items or services that are not “reasonable and necessary.”  LCDs are determinations issued by Medicare Administrative Contractors (“MACs”) that govern each MAC’s adjudication of whether a claim is reasonable and necessary.  MAC reimbursement decisions are subject to several layers of administrative review, and LCDs are not binding on entities outside of the MAC during this administrative appeal process, although they must be given “substantial deference.”

A MAC had denied reimbursement for certain of Agendia’s diagnostic tests, concluding that they did not meet the statutory “reasonable and necessary” standard for coverage.  These decisions were ultimately upheld during the multi-step administrative appeal process.  Agendia challenged these final decisions in court, arguing that the LCD relied upon to deny coverage was invalid, because it had not been issued through notice-and-comment rulemaking.

The Medicare Act has its own notice-and-comment requirement (separate and apart from the Administrative Procedure Act’s) that says, “No rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing” certain aspects of the Medicare program, including the “scope of benefits” and “payment for services,” can go into effect unless issued as a regulation promulgated through a minimum 60-day comment period.  42 U.S.C. § 1395hh(a)-(b).  In 2019, the Supreme Court held that this notice-and-comment requirement is broader than the Administrative Procedure Act’s, and thus some Medicare pronouncements that would not need to go through rulemaking under the Administrative Procedure Act must do so under the Medicare Act.  See Azar v. Allina Health Services, 139 S. Ct. 1804 (2019).  Both courts and the Department of Health and Human Services have interpreted this decision as imposing limitations on the use of Medicare sub-regulatory documents in healthcare enforcement actions.  Under this view, if a sub-regulatory document, such as an LCD, is invalidly issued under Allina, it cannot be relied upon in an enforcement action.

The district court agreed with Agendia that LCDs establish or change a substantive legal standard, and therefore under § 1395hh, LCDs are only valid if issued through a 60-day notice-and-comment process.  Accordingly, the district court remanded to an administrative appeal body to reevaluate the claims for reimbursement without relying on the LCD in question.  The Department of Health and Human Services appealed.

A majority of the Ninth Circuit panel agreed with the government and held that LCDs do not “establish” or “change” the relevant legal standard, namely the phrase “reasonable and necessary,” and therefore they can validly be relied upon by MACs and throughout administrative appeal process without going through notice and comment.  The majority explained that an LCD merely “guides the application of [the reasonable and necessary] legal standard in a particular claim adjudication,” by “reflect[ing] a MAC’s view of what qualifies as reasonable and necessary.”  However, because the final agency adjudicators are not bound by LCDs—but rather must simply consider them—the panel concluded that LCDs do not change the underlying legal standard.

Although the majority intoned that the “application of a statutory standard does not—and could not—make the relevant standard different in any way,” this begs the question of whether application of an LCD is truly just the application of the reasonable and necessary statutory standard.  The dissent concluded otherwise, describing how LCDs “bind initial claim adjudicators” and “‘narrowly limit[]’ subsequent reviewers’ discretion to weigh evidence and consider arguments,” thereby “establishing” the “standard at the initial stage of review” and “changing” the “standards applied on appellate review.”  Whereas the majority had focused on the dictionary definition of “change” to mean “replace,” the dissent looked more broadly at definitions that included the concept of making something “different in some particular.”  Under this view, “grafting presumptions and deference regimes onto statutory rules substantially alters the scope of the conduct those rules cover,” just as LCDs do, and thus effectuates a “change.”

The intersection between Allina and healthcare enforcement is one that will continue to develop, and we will continue to monitor.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.