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Sharp Healthcare v. Leavitt

April 8, 2008


The opinion of the court was delivered by: Hon. Thomas J. Whelan United States District Judge


Plaintiffs Sharp Healthcare, Scripps Health, and Internist Laboratory have filed a motion for a preliminary injunction. Plaintiffs seek to enjoin Defendant Michael Leavitt, Secretary of Health and Human Services (the "Secretary"), from selecting winners in the Medicare demonstration project for clinical laboratory tests. For the following reasons, the Court GRANTS Plaintiffs' motion (Doc. No. 15).


A. Factual Background

This litigation involves Part B of the Medicare program. Medicare Part B is a voluntary insurance program that covers a portion of the costs for, among other things, clinical diagnostic laboratory services for Medicare beneficiaries. Typically, Medicare pays for clinical laboratory services on a fee-for-service basis according to the Medicare Part B Clinical Laboratory Fee Schedule established in 1984. See 42 U.S.C. § 13951(h). In 2003, Congress passed the Medicare Prescription Drug Improvement and Modernization Act of 2003, 42 U.S.C. § 1395w-3. The statute requires the Secretary, through the Center for Medicare and Medicaid Services ("CMS"), to 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. 42 U.S.C. § 1395w-3(e). Pap smear and colorectal cancer screening tests are excluded from the demonstration project, as well as tests performed by entities that have a "face-to-face encounter with the individual" being tested. 42 U.S.C. § 1395w-3(e)(1)(A)-(B). The statute also requires the Secretary to designate competitive acquisition areas where the project will be implemented. 42 U.S.C. § 1395w-3(a)(1)(A).

On October 17, 2007, the Secretary announced the San Diego-Carlsbad-San Marcos area as the first competitive acquisition demonstration site. See 72 Fed.Reg. 58856-01. Under the bidding process, laboratories must submit bids for 303 laboratory tests, and for the collection and handling of laboratory specimens. Laboratories are required to bid for each of the 303 tests, even if the laboratory does not provide the specific test. Bids will be evaluated based on CMS's determination of the "best value for the Medicare program," using price and non-price criteria. The deadline for submitting bids was February 15, 2008. The winning bidders will be announced on April 11, 2008.

In November 2007, CMS issued a list of Frequently Asked Questions ("FAQ") as part of the final Bidders' Package. In the FAQ, CMS stated that the Secretary had interpreted the face-to-face exception in 42 U.S.C. § 1395w-3(e)(1)(B) as excluding only "testing performed by physician office laboratories or by hospital laboratories for their own patients."

B. Procedural Background

On January 29, 2008, Plaintiffs filed this lawsuit seeking to enjoin the Secretary from implementing the demonstration project. The Complaint includes four counts. Count I alleges the Secretary violated notice and comment requirements of the Administrative Procedure Act ("APA"), 5 U.S.C. § 553(b), in developing certain demonstration project rules. In Count II, Plaintiffs allege that three of the Secretary's rules (including the limitation on the face-to-face exception) violate sections 701--706 of the APA because the rules are arbitrary, capricious, an abuse of discretion or not otherwise in accordance with the law. Count III alleges that the Secretary's rules will cause a taking in violation of the Fifth Amendment to the United States Constitution. In Count IV, Plaintiffs contend that the Secretary violated 42 U.S.C. § 1395w-3(e) by increasing the scope of the demonstration project to include collecting and handling laboratory specimens.

On February 4, 2008, Plaintiffs filed a motion for a TRO to enjoin the demonstration project before the February 15, 2008 application deadline. On February 14, 2008, the Court denied the motion because the Secretary had raised serious issues regarding the Court's jurisdiction--thereby preventing a finding that Plaintiffs had a likelihood of success on the merits-- and because Plaintiffs had failed to establish that they would suffer irreparable harm by having to comply with the application deadline. In light of the serious jurisdictional issues raised by the Secretary, the Court also issued an order to show cause ("OSC") requiring the parties to provide briefing regarding whether jurisdiction exists, and whether Plaintiffs have standing.

On March 10, 2008, Plaintiffs filed the preliminary injunction motion seeking to enjoin the demonstration project before April 11, 2008, the date the Secretary will announce winning bidders. After Plaintiffs' motion was filed, the parties filed their briefs on the OSC. On April 4, 2008, the Court issued an Order Finding The Court Has Jurisdiction And Plaintiffs' Claims Are Ripe For Review ("OSC Order"). (Doc. No. 23.) The Court now decides Plaintiffs' preliminary injunction motion.


Rule 65 of the Federal Rules of Civil Procedure authorizes a district court to issue a preliminary injunction in the exercise of its equitable powers. Fed. R. Civ. P. 65. "The standard for granting a preliminary injunction balances the plaintiff's likelihood of success against the relative hardship to the parties." Clear Channel Outdoor, Inc. v. City of Los Angeles, 340 F.3d 810, 813 (9th Cir. 2003). The Ninth Circuit recognizes two tests for granting preliminary injunctive relief. Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120 (9th Cir. 2005).

To obtain a preliminary injunction under the "traditional" test, a plaintiff must show "'(1) a strong likelihood of success on the merits, (2) the possibility of irreparable injury to plaintiff if preliminary relief is not granted, (3) a balance of hardships favoring the plaintiff, and (4) advancement of the public interest (in certain cases).'" Save Our Sonoran, 408 F.3d at 1120 (quoting Johnson v. Cal. State Bd. of Accountancy, 72 F.3d 1427, 1430 (9th Cir. 1995)).

To obtain a preliminary injunction under the "alternative" test, a plaintiff must demonstrate either (1)a combination of probable success on the merits and the possibility of irreparable injury or (2) that serious questions are raised and the balance of hardships tips sharply in his favor. Save Our Sonoran, 408 F.3d at 1120 (citing Johnson, 72 F.3d 1430); Immigrant Assistance Project of the L.A. County of Fed'n of Labor v. INS, 306 F.3d 842, 873 (9th Cir. 2002). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases. They are not separate tests but rather outer reaches of a single continuum." Baby Tam & Co. v. City of Las Vegas, 154 F.3d 1097, 1100 (9th Cir. 1998). Thus, "the greater the relative hardship to the moving party, the less probability of success must be shown." Immigrant Assistant Project, 306 F.3d at 873 (citations). "Conversely, it has been held that a preliminary injunction may be granted even though the harm factor favors defendant if plaintiff demonstrates a substantial likelihood that he will ultimately prevail." Id. (citations).

"In cases where the public interest is involved, the district court must also examine whether the public interest favors the plaintiff." Fund for Animals, Inc. v. Lujan, 962 F.2d 1391, 1400 (9th Cir. 1992); see also Caribbean Marine Services Co., Inc. v. Baldrige, 844 F.2d 668, 674 (9th Cir. 1988) ("Under either test, however, the district court must consider the public interest as a factor in balancing the hardships when the public interest may be affected.").


There are numerous issues raised by the parties related to the irreparable-harm element: (1) can an award of damages compensate Plaintiffs; (2) are injuries to third parties, such as patients relevant; (3) are the damages alleged too speculative; and (4) have Plaintiffs provided sufficient evidence to support their damage claims.

Plaintiffs allege that the demonstration project, as currently being implemented, will result in substantial economic harm. Sharp operates clinical laboratories for the benefit of hospital inpatients and outpatients, and for non-hospital patients and non-hospital ambulatory clinic patients. (Thompson Decl.*fn1 ,¶5.) The laboratories also provide phlebotomy, or blood drawing services, to non-hospital and hospital patients directly. (Id., ¶6.) In total, Sharp operates 13 laboratories that provide "outreach" services throughout San Diego,*fn2 and service thousands of patients and employ hundreds of people. (Id.) Sharp contends that a significant portion of the patients to whom its laboratories furnish services are Medicare beneficiaries (Id.), but it does not provide an estimate regarding that portion. If it does not win, Sharp alleges that it will "certainly close some drawing sites and, in fact, likely will shut down a significant segment of its outreach laboratory." (Id., ¶17.) Other significant operational changes will be required, including costly changes to Sharp's medical record-keeping system and shifting staff from revenue generating laboratory functions to non-revenue generating administrative functions. (Id., ¶18.) Sharp contends that the economic impact will be significant.

In addition to the direct economic injury, Sharp alleges that patient care will be adversely effected. Sharp's integrated patient care network would be disrupted, thereby delaying the receipt of laboratory test results (including for "stat" or emergency tests), compromising the consistency in laboratory testing that currently exists, and increasing the probability of medical errors and miscommunications. (Thompson Decl., ¶19.) And because the changes would effect Sharp's integrated network, the impact would not only be felt by Medicare beneficiaries, but would adversely effect the overall level of care within the Sharp system. (Id., ¶20.)

Scripps Clinic Medical Laboratories ("SCML") includes three testing laboratories and seven patient centers, located at or near different Scripps clinics throughout San Diego. (Wiesner Decl.,*fn3 ¶5.) The laboratories service thousands of clinic patients and employ hundreds of employees. (Id.) Similar to Sharp, Scripps is an integrated healthcare system. A significant portion of the patients that SCML services are Medicare beneficiaries. (Id., ¶7.) Scripps contends that its inability to continue to participate in the Medicare program will have wide-ranging, adverse consequences for the entire Scripps health system, and its patients. (Id., ¶11.) Scripps estimates that it will lose a minimum of $1.9 million in revenue, which would lead to a reduction in services and laying off numerous employees. (Id., ¶12.) Additionally, because Scripps would continue to treat Medicare patients, it would be required to set-up costly and time-consuming procedures to determine which patients' laboratory tests must be conducted by a different (winning) laboratory, and to deal with those tests . (Id., ¶¶16, 17.)

Scripps' patients would also be significantly impacted. Like Sharps, Scripps has an integrated medical network, which includes an integrated medical record system. The record system allows physicians a more complete, comprehensive view of a patient's condition. (Wiesner Decl., ¶15.) The system is particularly important in treating patients with certain diseases because the integrated network allows laboratory results to be consolidated with those of other disciplines, such as imaging and clinical studies. (Id.) Losing the ability to perform laboratory tests for Medicare patients would delay care and could lead to data input errors. (Id., ¶15.) Treatment for cancer patients who are Medicare Part B beneficiaries, particularly those undergoing chemotherapy where laboratory testing is essential to the treatment protocol, would also be adversely impacted. (Id., ¶18.) Additionally, Scripps asserts that disrupting its integrated medical network would mean a slower turn around for laboratory tests, including important blood tests for patients suspected of suffering from cardiac arrest, stroke, or gastrointestinal bleeding who are being treated at urgent care clinics. (Id., ¶¶12, 13.)

Internist is an 18-year old community-based clinical laboratory with ten employees. (Stevens Decl., ¶¶1,2.) Internist draws blood for certain patients, and performs all necessary tests on site. (Id., ¶3.) It is the only independent laboratory that can perform blood draws and testing in the Oceanside, San Marcos, Vista, Carlsbad area, and is regularly referred special need patients whose medical or physical conditions make blood drawing difficult. (Id., ¶5.)

Approximately 65% of Internist's laboratory services are for Medicare program beneficiaries, and thus Internist depends on Medicare to remain in business. (Stevens Decl., ¶7.) Because all of the Medicare patients that Internist services reside in the demonstration project area, Internist contends that it will lose 65% of its business and be forced out of business if it does not prevail in the bidding process. (Id., ¶15.)

The Secretary argues that these factual allegations are insufficient to establish irreparable injury for several reasons. The Secretary first argues that the alleged injury is too speculative because the possibility remains that Plaintiffs will win.

In Western State University v. American Bar Association, 301 F.Supp.2d 1129 (C.D. Cal. 2004), a law school sought a preliminary injunction to prevent the ABA from taking final steps to withdraw the school's accreditation. An ABA council had determined that the school's accreditation should be withdrawn, but the decision had to be approved by the ABA's House of Delegates. In opposing the preliminary injunction motion, the ABA argued that the law school's damage claims were too speculative because the "House may or may not vote to withdraw Western's accreditation. . . ." Id. at 1137. The court disagreed:

The harm if the accreditation is withdrawn is real and substantial. Western need not wait for the axe to fall before seeking an injunction. The Court finds sufficient possibility of irreparable harm if the preliminary injunction is not granted.

Id. at 1138.

The Secretary attempts to distinguish Western State on the ground that when the injunction was granted, the initial decision to withdraw the school's accreditation had already been made. This distinction is unavailing.

In Western State, the House of Delegates vote was the critical event because it marked the point at which the school might potentially lose its accreditation and thus suffer irreparable harm. In this sense, the council's vote was largely irrelevant. Similarly, here, the critical event is April 11, 2008, when Plaintiffs will--if not selected as winners--lose their ability to provide laboratory services to Medicare Part B patients and thus suffer irreparable harm.

Moreover, Western State's statement that a plaintiff need not wait for the axe to fall before seeking an injunction is consistent with the preliminary injunction standard, which requires "the possibility of irreparable injury to plaintiff. . . ." Save Our Sonoran, 408 F.3d at 1120 (emphasis added); see also Ohio Forestry Assoc., Inc. v. Sierra Club, 523 U.S. 726, 734 (1998) (recognizing plaintiff's right to seek injunctive relief ...

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