U.S. District Court Stops Clinical Laboratory Competitive Bidding Demonstration

On April 8, 2008, the U.S. District Court for the Southern District of California enjoined the Secretary of the Department of Health and Human Services (Secretary) from implementing the Medicare clinical laboratory services competitive bidding demonstration project (Demonstration Project) at this time in the San Diego-Carlsbad-San Marcos, California metropolitan area. 

Specifically, in Sharp Healthcare v. Leavitt, Case No. 08-CV-0170 W (S.D. Cal. April 8, 2008), the U.S. District Court for the Southern District of California granted the plaintiffs' (Sharp Healthcare, Scripps Health and Internist Laboratory) motion for a preliminary injunction enjoining the Secretary from:

• announcing the winners in the Demonstration Project's bidding for the San Diego-Carlsbad-San Marcos metropolitan area;
• otherwise implementing and carrying out the Demonstration Project for the San Diego-Carlsbad-San Marcos metropolitan area; and
• disclosing any information included in the bid applications submitted in connection with the Demonstration Project for the San Diego-Carlsbad-San Marcos metropolitan area.

Furthermore, in granting the plaintiffs' motion, the U.S. District Court found that the plaintiffs established the possibility of irreparable injury and that the balance of the hardships was sharply in the plaintiffs' favor.  The U.S. District Court also found that the plaintiffs established a likelihood of success on their claims that:

• the Secretary violated the Administrative Procedure Act's (APA) notice and comment rule making requirements in developing the Demonstration Project rules;
• the Secretary's interpretation of the "face-to-face exception" violates the APA because it is arbitrary, capricious, an abuse of discretion, and/or not otherwise in accordance with the law; and
• the Demonstration Project rules violate the controlling statute by increasing the scope of the Demonstration Project to include collecting and handling laboratory specimens.

In 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) requiring that the Secretary, through the Centers for Medicare & Medicaid Services (CMS), conduct a demonstration project on the application of competitive acquisition for payment of clinical diagnostic laboratory tests that would otherwise be covered by the Medicare Part B fee schedule.  The MMA also required that the Secretary exclude entities that have a "face-to-face encounter" with patients, and pap smears and colorectal cancer screening tests, from the Demonstration Project.

On October 17, 2007, CMS announced that the first site for the Demonstration Project would be the San Diego-Carlsbad-San Marcos, California metropolitan area.  Under the Demonstration Project, the deadline for submitting bids was February 15, 2008. Prior to the U.S. District Court enjoining the Secretary, CMS was expected to announce the winning bidders on or around April 11, 2008.