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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 5, 2009 Decided December 22, 2009 

No. 08-5508 

ILENE HAYS, 

APPELLEE

v. 

KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES 

DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL., 

APPELLANTS

Appeal from the United States District Court 

for the District of Columbia 

(No. 1:08-cv-01032-HHK) 

Samantha L. Chaifetz, Attorney, U.S. Department of 

Justice, argued the cause for appellants. On the briefs were 

Mark B. Stern and Christopher C. Fonzone, Attorneys. 

Stuart M. Gerson argued the cause for appellee. With 

him on the brief was Robert E. Wanerman. 

Peter D. Keisler and Patrick Morrisey were on the brief 

for amicus curiae Sepracor Inc. in support of appellee. 

Before: TATEL and KAVANAUGH, Circuit Judges, and 

RANDOLPH, Senior Circuit Judge. 

USCA Case #08-5508 Document #1221815 Filed: 12/22/2009 Page 1 of 10
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Opinion for the Court filed by Circuit Judge TATEL. 

Concurring opinion filed by Senior Circuit Judge

RANDOLPH. 

TATEL, Circuit Judge: Appellee, a Medicare Part B 

beneficiary, challenges a decision by a regional Medicare 

contractor to reimburse for a particular drug only up to the 

price of its least costly alternative. The district court held that 

the Medicare Act unambiguously forecloses that 

determination and requires instead that Medicare pay for 

covered items or services at a statutorily prescribed rate. 

Agreeing with the district court, we affirm. 

I. 

Medicare Part B is a public health insurance program that 

provides the disabled and elderly with outpatient items and 

services, including durable medical equipment and certain 

prescription medications. The threshold for Medicare Part B 

coverage appears in 42 U.S.C. § 1395y(a)(1)(A), which states 

that “no payment may be made . . . for any expenses incurred 

for items or services which . . . are not reasonable and 

necessary for the diagnosis or treatment of illness or injury or 

to improve the functioning of a malformed body member.” 

The Secretary of Health and Human Services administers 

the Medicare Act and may delegate certain functions to 

contractors, including the development of local coverage 

determinations. 42 U.S.C. § 1395kk-1(a)(4). The Medicare 

Act defines local coverage determinations as decisions 

“whether or not a particular item or service is covered” in the 

contractor’s geographic area “in accordance with section 

1395y(a)(1)(A).” 42 U.S.C. § 1395ff(f)(2)(B). The Secretary 

has instructed contractors that when determining whether a 

treatment is “reasonable and necessary” under section 

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1395y(a)(1)(A), they may apply the so-called least costly 

alternative policy. Ctrs. for Medicare and Medicaid Servs., 

Medicare Program Integrity Manual § 13.4.A (Rev. 71, Apr. 

9, 2004). Under that policy, Medicare provides 

reimbursement for treatments only up to the price of their 

“reasonably feasible and medically appropriate” least costly 

alternatives. Ctrs. for Medicare and Medicaid Servs., 

Medicare Benefit Policy Manual § 110.1.C.3 (Rev. 93, July 

25, 2008). Application of the policy is discretionary with 

regard to prescription drugs—the subject of this case—but 

mandatory with regard to durable medical equipment. See

Medicare Program Integrity Manual § 13.4.A. 

This case arose when Medicare contractors applied the 

least costly alternative policy to DuoNeb, an inhalation drug 

used to treat Chronic Obstructive Pulmonary Disease. 

DuoNeb provides a combination of albuterol sulfate and 

ipratropium bromide in one dose and can be slightly more 

expensive than separate doses of the two component drugs. 

Appellee Ilene Hays is a Medicare Part B beneficiary 

suffering from Chronic Obstructive Pulmonary Disease who 

has used DuoNeb for approximately four years. During that 

time, Medicare, pursuant to a statutory formula, provided 

reimbursement for DuoNeb at 106% of the drug’s average 

sales price. 42 U.S.C. §§ 1395w-3a(b)(1), 1395u(o)(1)(G)(ii). 

In 2008, four Medicare contractors announced that the 

medical necessity of administering the two drugs in a 

combined dose, as compared to separate doses, had not been 

established. See NHIC (Region A), LCD for Nebulizers, 

L11499 (Apr. 10, 2008). Thus, pursuant to the least costly 

alternative policy, payment for the combination drug “[would] 

be based on the allowance for the least costly medically 

appropriate alternative,” the two component drugs as 

administered separately. Id. Hays challenged this decision in 

USCA Case #08-5508 Document #1221815 Filed: 12/22/2009 Page 3 of 10
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the United States District Court for the District of Columbia 

pursuant to a provision of the statute that allows beneficiaries 

to proceed without exhausting administrative remedies where 

“there are no material issues of fact in dispute, and the only 

issue of law is . . . that a regulation, determination, or ruling 

by the Secretary is invalid.” 42 U.S.C. § 1395ff(f)(3). Hays 

argued that section 1395y(a)’s “reasonable and necessary” 

standard modifies “items and services.” Accordingly, she 

contended, the Secretary may determine only whether 

DuoNeb is reasonable and necessary; if it is, Medicare must 

reimburse based on the 106% statutory formula. See 42 

U.S.C. § 1395w-3a. The district court agreed with Hays and 

granted her motion for summary judgment. Hays v. Leavitt, 

583 F. Supp. 2d 62, 69, 72 (D.D.C. 2008). The Secretary 

appeals, and our review is de novo. See, e.g., Transitional 

Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019, 1023 

(D.C. Cir. 2000) (reviewing de novo district court’s grant of 

summary judgment to plaintiffs challenging validity of 

Medicare regulations). 

II. 

 The Secretary argues that section 1395y(a) is ambiguous 

and that we should defer to her reasonable interpretation of 

the statute. See Chevron U.S.A. Inc. v. Natural Res. Def. 

Council, Inc., 467 U.S. 837 (1984). Several features of the 

Medicare statute, however, convince us that it unambiguously 

forecloses the Secretary’s interpretation. 

In relevant part, section 1395y provides: 

(a) Items or services specifically excluded. 

Notwithstanding any other provision of this 

subchapter, no payment may be made . . . for any 

expenses incurred for items or services-- 

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(1)(A) which, except for items and services 

described in a succeeding subparagraph or additional 

preventive services . . . , are not reasonable and 

necessary for the diagnosis or treatment of illness or 

injury or to improve the functioning of a malformed 

body member[.] 

The dispute in this case centers on whether “reasonable and 

necessary” modifies “expenses” (as the Secretary argues), or 

“items and services” (as Hays contends). If the Secretary is 

correct, then Medicare may, as it has here, partially cover an 

item or service, declining to reimburse expenses associated 

with the marginal difference in price between a prescribed 

item or service and its least costly and medically appropriate 

alternative. If Hays and the district court are correct, then the 

Secretary may make only a binary coverage decision, namely 

to reimburse at the full statutory rate or not at all. 

We agree with Hays and the district court. As they point 

out, only a dependent clause separates “reasonable and 

necessary” from the phrase “items or services.” See 

§ 1395y(a)(1) (“for any expenses incurred for items or 

services—which, . . . , are not reasonable and necessary . . .”). 

“Expenses,” by contrast, appears earlier in the sentence. 

“Ordinarily, qualifying phrases are to be applied to the words 

or phrase immediately preceding and are not to be construed 

as extending to others more remote.” United States v. 

Pritchett, 470 F.2d 455, 459 (D.C. Cir. 1972). To be sure, 

this “Rule of the Last Antecedent” “is not an absolute and can 

assuredly be overcome by other indicia of meaning.” 

Barnhart v. Thomas, 540 U.S. 20, 26 (2003); see also United 

States v. Villanueva-Sotelo, 515 F.3d 1234, 1238 (D.C. Cir. 

2008). Here, however, section 1395y contains no indication 

that the rule is inapplicable. Quite to the contrary, not only is 

the phrase “items or services” much nearer to the phrase 

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“reasonable and necessary,” but subsection (1)(A), which 

introduces the “reasonable and necessary” standard, is set off 

from the introductory language and nowhere mentions 

“expenses.” 

Several other characteristics of section 1395y(a) reinforce 

this conclusion. First, subsection (1)(A) prohibits payment 

for expenses incurred for items or services “which, except for 

items and services described in a succeeding subparagraph 

 . . . , are not reasonable and necessary . . . .” 42 U.S.C. 

§ 1395y(a)(1)(A). By defining the scope of the word 

“which,” this language provides powerful evidence that 

“reasonable and necessary” applies to “items and services.” 

Moreover, the “succeeding subparagraph[s]” to which 

subsection (1)(A) refers discuss coverage of specific items 

and services including “hospice care,” § 1395y(a)(1)(C), 

“screening mammography,” § 1395y(a)(1)(F), “home health 

services,” § 1395y(a)(1)(I), and “ultrasound screening,” 

§ 1395y(a)(1)(N). 

 

 Second, to be covered something—either expenses or 

items and services—must be “reasonable and necessary for 

the diagnosis or treatment of illness or injury or to improve 

the functioning of a malformed body member.” 42 U.S.C. 

§ 1395y(a)(1)(A). Items and services diagnose, treat, and 

improve; expenses do not. 

Finally, section 1395y(a) is entitled “Items or services 

specifically excluded.” 42 U.S.C. §1395y(a). Although “the 

title of a statute and the heading of a section cannot limit the 

plain meaning of the text,” they remain “tools available for 

the resolution of a doubt” about statutory meaning. Bhd. of 

R.R. Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519, 

528–29 (1947). Here, the title, which says nothing about 

expenses, confirms the obvious: that items or services, not 

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expenses, must be reasonable and necessary to qualify for 

Medicare coverage. 

 Our conclusion finds support elsewhere in the Medicare 

Act, specifically its mandatory reimbursement formulas. 

Section 1395w-3a provides that for multiple source drugs like 

DuoNeb “the amount of payment . . . is” 106% of the average 

sales price, as determined under the statutory formula. 42 

U.S.C. § 1395w-3a(b)(1) (emphasis added). The statutory 

formula is in turn based on the volume-weighted average of 

the average sales prices of drugs within the same Healthcare 

Common Procedure Coding System (HCPCS) billing and 

payment code. 42 U.S.C. § 1395w-3a(b)(6). DuoNeb’s 

HCPCS code includes neither component drug. 

 The Secretary insists that the least costly alternative 

policy comports with the Medicare Act’s mandatory 

reimbursement formulas because payment under that policy is 

based on the statutory rate as applied to an item or service’s 

least costly alternative. But this argument would permit an 

end-run around the statute. The statutory formula requires the 

Secretary to reimburse a particular drug at 106% of the 

average sales price for drugs within its billing and payment 

code. 42 U.S.C. § 1395w-3a(b)(1). By reimbursing DuoNeb 

at 106% of the average sales price of its two component 

drugs—which have different billing and payment codes—the 

Secretary would fundamentally alter the reimbursement 

scheme. Like the district court, we think it quite unlikely that 

“Congress, having minutely detailed the reimbursement rates 

for covered items and services, intended that the Secretary 

could ignore these formulas whenever she determined that the 

expense of an item or service was not reasonable or 

necessary.” Hays, 583 F. Supp. 2d at 71. 

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 To be sure, Congress could have written the Medicare 

Act to authorize the least costly alternative policy. For 

example, if the statute read, “no payment may be made . . . for 

any expenses which are incurred for items and services and

which are not reasonable and necessary for the diagnosis or 

treatment of illness or injury,” then the phrase “reasonable 

and necessary” would indeed modify “expenses.” And if the 

reimbursement formulas were either discretionary or based on 

the cost of an item or service’s therapeutic equivalents, the 

Secretary would have authority to refuse payment for the 

difference in cost between a prescribed item or service and its 

least costly alternative. But this is not the statute Congress 

wrote. As written, the statute unambiguously authorizes the 

Secretary to make only a binary choice: either an item or 

service is reasonable and necessary, in which case it may be 

covered at the statutory rate, or it is unreasonable or 

unnecessary, in which case it may not be covered at all. 

Nothing in the statute authorizes the least costly alternative 

policy. 

III. 

Amicus Sepracor argues that the statute also prohibits the 

Secretary from considering cost in making the initial coverage 

determination. But we need not consider that issue. Even if 

the Secretary may consider cost in determining whether an 

item or service is “reasonable and necessary,” it does not 

follow that she has authority to partially cover an item or 

service based on the price of its least costly alternative. 

For the foregoing reasons, we affirm. 

So ordered. 

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RANDOLPH, Senior Circuit Judge, concurring: Although I

join the court’s opinion, one feature of this case, unusual in

administrative law, prompts me to add a few words. Invoking

Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), the

Secretary asked us to defer to the interpretation of the statute

embodied in the local coverage determination of a private

contractor. The court rightly declines on the ground that the

statute – 42 U.S.C. § 1395y(a)(1)(A) – clearly forecloses

application of the least costly alternative policy to DuoNeb. Slip

Op. at 4. If the statute had not been so clear, one may wonder

whether deference of the Chevron variety would have been due.

No decision of the Secretary applied the least costly alternative

policy to this product. That was the doing of four private

contractors the Secretary hired to administer the program.

While the Secretary issued guidance instructing the contractors

to employ the policy with respect to durable medical equipment,

the guidance gave the contractors “discretion to apply this

principle to payment for non-DME [durable medical equipment]

services as well.” Ctrs. for Medicare and Medicaid Servs.,

Medicare Program Integrity Manual § 13.4.A (Rev. 71, Apr. 9,

2004). DuoNeb is not durable medical equipment and so fell

within the scope of the contractors’ discretion. The Secretary at

one time considered issuing a nationwide opinion regarding the

status of DuoNeb but ultimately declined, leaving the issue to

the contractors. Ctrs. for Medicare and Medicaid Servs.,

Decision Memo for Nebulized Beta Adrenergic Agonist Therapy

for Lung Diseases, CAG-00354N (Sept. 10, 2007).

Given these circumstances, there is a substantial question

whether, in requesting deference, the Secretary was actually

asking us to defer to a private contractor’s determination of the

meaning of the statue as applied to DuoNeb. It is not apparent

why the rationale of Chevron would support the Secretary’s

request. See 467 U.S. at 844-45, 865-66. Still less is it clear

that Congress authorized the Secretary to delegate lawmaking

functions to private contractors, see 42 U.S.C. §§ 1395u(a),

1395kk-1, or could do so consistently with the Constitution. As

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I have said, the court’s disposition of the case renders

consideration of these issues unnecessary. 

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