Court invalidates HCFA's orthotic management ruling - Health Care Financing Administration

Healthcare Financial Management, Sept, 1997 by Ronald N. Sutter

Many of HCFA's Medicare policies have been struck down because the agency ignored the mandatory notice-and-comment rulemaking procedures established under the Administrative Procedure Act (APA) and the Medicare statute. Procedural irregularities once again have proven to be the agency's undoing, this time in the recent decision of the U.S. District Court for the District of Massachusetts in Warder v. Shalala.

Warder struck down HCFA Ruling 96-1, which precluded Medicare coverage of "orthotic management" for nursing home patients. The invalidation is based on HCFA's failure to follow notice-and-comment procedures in establishing its policy.

Case Context

At issue in the Warder case was whether nursing home patients are covered under Medicare for custom-fitted braces made by the OrthoConcepts company. The braces may potentially relieve pain, improve functioning, and prevent complications associated with musculoskeletal failure elderly patients sometimes suffer. Such failure can result in multisited contractures, which the court graphically described as frequently being "so debilitating that the patient's body literally folds into itself."

The Medicare statute and regulations provide coverage for "medical and other health services," including orthotics and durable medical equipment (DME). DME coverage, however, is limited to home use, making nursing home patients ineligible for such coverage. Thus, whether the costs of OrthoConcepts products for nursing home patients are reimbursed under Medicare depends on whether the products are properly characterized as orthotics (which are covered) or DME (which are not).

The OrthoConcepts braces first became available in the late 1980s. The products were covered consistently by Medicare for several years, although a few HCFA officials questioned the propriety of such coverage.

By December 1994, Medicare carriers began denying coverage to nursing home patients for the OrthoConcepts products. Patients denied coverage appealed to an administrative law judge, who upheld the patients' claims and ruled that the OrthoConcepts braces were properly classified as orthotics, not DME. HCFA responded by issuing HCFA Ruling 96-1, which established a per se rule stating that the OrthoConcepts products were DME and, therefore, not covered by Medicare for nursing home patients.

The Court's Ruling

Rulemaking provisions of the APA and the Medicare statute generally require agencies to issue a proposed rule and invite and evaluate public comments before issuing a substantive final rule. HCFA bypassed these procedures when it issued Ruling 96-1, arguing that the ruling qualified for the exemption applicable to interpretative rules.

The court, however, rejected HCFA's characterization of Ruling 96-1 as an interpretative rule. The court found that the ruling was substantive for three reasons. First, it set a policy that departed from the agency's prior practice, therefore constituting a "substantive change." Second, the ruling was binding on all HCFA agents, divesting them of any discretion in allowing coverage of these products for nursing home patients. Third, it had a substantial impact because, without the OrthoConcepts braces, thousands of nursing home patients might suffer painful and possibly life-threatening complications.

The court declared HCFA Ruling 96-1 invalid because it failed to meet the procedural requirements of the APA and the Medicare statute. Further, it specifically found that the OrthoConcepts braces are covered under Medicare as orthotics.

Implications

The Warder case proves once again that courts will not hesitate to strike down HCFA policies when the agency adopts rules without proper notice and public participation. The risk is particularly great when HCFA issues a per se rule that may be perceived as harsh and heartless, as was the case in Warder.

Ronald N. Sutter, JD, is a principal, Powers, Pyles, Sutter and Verville PC, Washington, D.C., and a member of HFMA's Washington Metropolitan Chapter.