A federal judge in San Diego has ordered CMS to temporarily halt a demonstration project that would use bids to determine Medicare payments for clinical laboratory tests.

The agency was to announce winners on April 11 in the first round of bidding under the project in the San Diego-Carlsbad-San Marcos metro area, but the preliminary injunction handed down April 8 by Southern District of California Judge Thomas J. Whelan prevented CMS from doing so and from taking any other implementation steps in the region for the time being.

The injunction stems from a lawsuit filed in January by three San Diego laboratories seeking to permanently stop the project. Sharp Healthcare, Internist Laboratory and Scripps Health allege that CMS did not follow proper rulemaking protocol and reached beyond its authority in developing the project.

The labs also say competitive bidding could put them out of business and block testing services for thousands of Medicare beneficiaries.

The plaintiffs had attempted to stop the program just before lab bids were due to CMS Feb. 15 by requesting a temporary restraining order, but Judge Whelan rejected the request, questioning if the court had appropriate jurisdiction.

Further arguments by the labs' lawyers convinced the judge on the jurisdiction issue earlier this month. Now he has agreed to grant the preliminary injunction - which will "remain in place until further order of the court." The first payments under the project were scheduled to begin July 1.

Whelan said the demonstration project has the potential to cause "irreparable injury" to the labs and that the labs have a reasonable likelihood of succeeding with several of their legal claims.

The court also agreed the bidding program could harm Medicare patients in the San Diego area if their test results are delayed due to some labs being forced out of business by not being named winners under the bidding.

Agency Says It Tried To Address Concerns

A CMS spokesman said the agency was disappointed by the injunction because the agency believed it was following Congress' direction in implementing the demonstration project, and was careful to design it to ensure the quality of clinical lab services for beneficiaries.

CMS "has communicated with and sought input from the laboratory industry" to address issues of concern in putting together the project, the spokesman added.

Alan Mertz, president of the American Clinical Laboratory Association (ACLA), which opposes the demo project, says his group "applauds the court for recognizing the harm this project will cause and for highlighting the fatal flaws of the project."

More importantly for the laboratory community, the ruling "should bolster the case for congressional repeal of the project," Mertz said. ACLA is supporting legislation, which has been introduced in the House and Senate, to repeal the program.

The three-year demo project was mandated by the Medicare Modernization Act of 2003, and designed to assess the cost-saving potential of replacing Medicare's clinical laboratory fee schedule with payments based on the lowest bids from labs ("¹ Also see "Competitive Bidding Demo For Clinical Labs To Begin In Spring 2008" - Medtech Insight, 23 July, 2007. p. 11).

Lab groups have fought the program, which they say is unfair to small business and rewards cost-cutting above clinical superiority. The diagnostics manufacturing industry has expressed similar concerns, but has been less public in its opposition.

San Diego is the first of what are supposed to be two metro areas in which labs, with some exceptions, are required to participate in the demo project. CMS has yet to name the second region.

- Sue Darcey (s.darcey@elsevier.com)

Federal Judge Halts Medicare Clinical Lab Bidding Project In San Diego

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