## Facts

- Ilene Hays, a Medicare Part B beneficiary with chronic obstructive pulmonary disease, received the inhalation drug DuoNeb.
- A Medicare contractor issued a local coverage determination applying the “least costly alternative” (LCA) policy to DuoNeb.
- Under the LCA policy, the contractor treated DuoNeb as covered but limited reimbursement to the amount payable for a cheaper, medically appropriate alternative therapy.
- The reimbursement cap could leave the beneficiary responsible for any difference between DuoNeb’s price and the capped Medicare payment.
- Hays challenged the cap as inconsistent with the Medicare Act’s “reasonable and necessary” coverage provision and the statutory payment methodology for Part B drugs.

## Issues

1. Whether 42 U.S.C. § 1395y(a)(1)(A)’s “reasonable and necessary” limitation allows the Secretary to deem a drug medically appropriate yet cap payment at the cost of a cheaper therapeutic alternative.
2. Whether the Medicare Act’s Part B drug payment provisions require payment for a covered drug at a congressionally prescribed rate, preventing an LCA-based payment ceiling.
3. Whether a contractor’s local coverage determination authority extends beyond coverage decisions to setting payment limits for otherwise covered Part B drugs.

## Decision

- The D.C. Circuit affirmed the district court’s judgment for Hays.
- The court held that the Medicare Act does not authorize applying the LCA policy to reduce payment for a covered Part B drug below the statutory payment rate based on cheaper alternatives.
- The court concluded the statute is unambiguous on this point and therefore did not defer to the agency under Chevron.
- A concurrence agreed in the judgment that the LCA-based cap was unlawful.

## Legal Principles

- The “reasonable and necessary” standard in § 1395y(a)(1)(A) functions as a coverage limitation on items or services, not as a general authorization to calibrate payment amounts by comparative cost once coverage exists.
- When Congress prescribes a specific payment methodology for covered Part B drugs, the agency may not override that rate by capping reimbursement at the cost of a different therapy.
- A local coverage determination is a decision “whether or not” an item or service is covered in a contractor’s area; it does not authorize setting alternative payment ceilings for items otherwise subject to statutory payment formulas.
- An agency policy that treats an item as covered but pays as if a different item were provided impermissibly conflates coverage determinations with payment determinations where the payment rate is fixed by statute.

## Conclusion

The court rejected Medicare’s use of the least costly alternative policy to cap reimbursement for a covered Part B drug at a cheaper substitute’s cost, holding that once a drug is covered as “reasonable and necessary,” Medicare must pay according to the statute’s prescribed drug payment methodology rather than an administratively imposed cost ceiling.


Hays v. Sebelius, 589 F.3d 1279 (D.C. Cir. 2009)