In a rule issued in the waning days of the last administration, the Centers for Medicare & Medicaid Services sought to codify for the first time a definition of “reasonable and necessary” for purposes of determining whether an item or service is eligible for Medicare reimbursement.
That codification, embedded in the Medicare Coverage of Innovative Technology rule, appears required by the logic of the Supreme Court’s decision in Azar v. Allina Health Services (PDF). However, CMS recently prevented this regulation from going into effect, leaving the definition of “reasonable and necessary” to continue residing solely in sub-regulatory guidance.
The failure to codify a definition, in violation of the Medicare Act as interpreted by Allina, gives new ammunition to defendants in healthcare enforcement actions, including False Claims Act matters, that rely on the sub-regulatory definition of “reasonable and necessary.”
On March 12, 2021, CMS delayed the MCIT rule—which would expand Medicare coverage for new, innovative medical devices designated as breakthrough devices by the Food and Drug Administration—until May 15, 2021. CMS recently extended that delay until December 15, 2021.
Setting aside the legal questions attendant to extending the effective date without first using notice and comment, the delay generates broader concerns over HHS’ noncompliance with its notice-and-comment obligations. Caught up in the policy debate over MCIT is a companion provision in the same rule that for the first time codified a definition of “reasonable and necessary."
Medicare cannot make payment for items and services that “are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member,” with certain enumerated exceptions. Congress did not define the term “reasonable and necessary,” but CMS has long defined the term in a sub-regulatory guidance document known as the Medicare Program Integrity Manual.
The Program Integrity Manual states that an item or service will be considered reasonable and necessary where it is:
- “Safe and effective;
- Not experimental or investigational….; and
- Appropriate, including the duration and frequency that is considered appropriate for the item or service, in terms of whether it is:
- Furnished in accordance with accepted standards of medical practice for the diagnosis or treatment of the patient's condition or to improve the function of a malformed body member;
- Furnished in a setting appropriate to the patient's medical needs and condition;
- Ordered and furnished by qualified personnel;
- One that meets, but does not exceed, the patient's medical need; and
- At least as beneficial as an existing and available medically appropriate alternative.”
In healthcare enforcement actions, courts often treat this manual as providing a determinative definition of the statutory phrase.
As CMS noted in the MCIT final rule’s preamble, some commenters encouraged CMS to retain a definition “only in sub-regulatory guidance [to] allow for greater flexibility.”
But whatever the merits of giving CMS this flexibility, Congress decided to mandate a different approach when it drafted the Medicare Act to require notice-and-comment rulemaking whenever CMS issues a “rule, regulation, or other statement of policy” that “establishes or changes a substantive legal standard governing the scope of benefits [or] the payment for services…” under Medicare.
Three years ago in Allina, the Supreme Court concluded that this notice-and-comment obligation is broader than what the Administrative Procedure Act (APA) requires. The Allina Court declined to define the term “substantive legal standard,” and thus did not define the metes and bounds of where Medicare Act notice-and-comment obligations extend past their APA counterparts for the issuance of “substantive rules.”
But the Court did observe that when CMS “establishes or changes an avowedly ‘gap’-filling policy,” it generally needs to do so through notice-and-comment rulemaking. The underlying appellate opinion on review, which was written by then-Judge Brett Kavanaugh, provides a definition that still stands for the D.C. Circuit: “A ‘substantive legal standard’ at a minimum includes a standard that ‘creates, defines, and regulates the rights, duties, and powers of parties.’”
RELATED: Insurers slam CMS proposal to hasten Medicare coverage of breakthrough medical devices
Under these articulations, CMS’s sub-regulatory definition of “reasonable and necessary” seems clearly to be a “substantive legal standard”: it fills a gap in how to administer the Medicare program by defining a term critical to the scope of covered items and services, and it presents a standard that defines the rights of parties to receive coverage or reimbursement for items and services from the Medicare program.
Furthermore, this sub-regulatory definition satisfies the other requirements to trigger a rulemaking obligation under Allina, because it is at least a “statement of policy” that “establishes” the substantive legal standard and governs the scope of Medicare benefits or payment for services. Indeed, as CMS explained in the MCIT rule’s preamble, the agency decided against continued reliance on the sub-regulatory definition of “reasonable and necessary” because, among other reasons, issuing a regulatory definition “is consistent with the Supreme Court’s decision” in Allina..
At least one court has concluded that where Allina’s holding requires a sub-regulatory guidance document to have been issued through notice-and-comment rulemaking, but it was not, that guidance cannot be used to create the applicable standard for falsity for purposes of False Claims Act liability.
The question of how Allina intersects with the False Claims Act has not yet been extensively litigated. But that may soon change, as CMS’s continued delay in promulgating a regulatory definition of “reasonable and necessary” gives healthcare entities new defensive arguments in enforcement actions.
Brenna Jenny is a partner in the Healthcare group at Sidley Austin LLP. She was previously Principal Deputy General Counsel at HHS and Chief Legal Officer at CMS until January 2021.