Warder v. Shalala

The Secretary of Health and Human Services, Donna Shalala (plaintiff), was authorized to implement the Medicare Act by issuing substantive regulations and interpretive rules. The secretary delegated her authority to the Health Care Financing Administration (HCFA) for classifying medical equipment that qualified for reimbursement under Medicare Part B. OrthoConcepts made and sold a seating system for patients with musculoskeletal failures, consisting of a set of connected braces attached to a wheeled base and allowing patients to sit or recline depending on their conditions. In September 1989, OrthoConcepts informed HCFA that it planned to start marketing its medical devices nationwide and requested that the administration assign an orthotics code for the device as a brace. Four months later, HCFA responded, refusing to provide the requested code because it classified OrthoConcepts’s device as durable medical equipment (DME). DME was only covered by Medicare Part B if used in a patient’s home or in a facility treated as the patient’s home, but not in a hospital or skilled nursing facility. HCFA also informed insurance carriers that OrthoConcepts’s devices should be classified as DME for Medicare Part B reimbursement purposes. Despite warning, OrthoConcepts continued to bill devices that it supplied to skilled nursing homes as orthotics. Three regional carriers denied reimbursement. OrthoConcepts appealed the denials, and in all three cases, administrative adjudicators found that OrthoConcepts’s devices were braces and not wheelchairs, thus orthotics and not DME. With no administrative remedy, the secretary promulgated HCFAR 96-1 to provide clarity and guidance for classifying orthotics and DME. Particularly, the ruling made clear that OrthoConcepts’s devices were DME. Two Medicare beneficiaries who were in skilled nursing homes using OrthoConcepts’s device and three of the device’s suppliers (defendants) challenged the ruling in federal court. A United States district court held that the ruling was invalid because the administration had failed to follow required notice-and-comment procedures. The secretary appealed.