The case, just now being scutinized by Medicare officials and consumer advocates, involved drugs used to treat chronic obstructive pulmonary disease.
Judge Henry H. Kennedy Jr. of Federal District Court here said the policy of paying for only “the least costly alternative” was not permitted under the Medicare law.
The administration’s position would give the health and human services secretary “enormous discretion” to determine the amount paid for every item and service covered by Medicare, without reference to the detailed formulas set by Congress, Judge Kennedy said. “This flies in the face of the detailed statutory provisions,” he added.
Over the years, Medicare officials have often tried to adopt regulations that allow them to consider cost in deciding whether the program should cover various goods and services. Health care providers, manufacturers and some patients’ advocates have resisted these efforts, saying that coverage decisions should be made based on clinical effectiveness and not cost.
“We are disappointed with the ruling and continue to believe that our policy is supported by the statute,” Peter L. Ashkenaz, a spokesman for the federal Centers for Medicare and Medicaid Services, said Monday. “We are still considering our options and next steps.”
Federal health officials said the decision would make it more difficult to rein in Medicare costs.
Judge Kennedy found that Medicare and some of its contractors had unlawfully limited payments for DuoNeb, an inhalation drug taken through a nebulizer, which turns the medicine into a fine mist.
The drug, made by Dey, a unit of Mylan Inc., makes breathing easier by opening up the bronchial tubes. A single dose provides a combination of two commonly prescribed bronchodilators, albuterol and ipratropium.
Congress set forth the touchstone for Medicare coverage in a 1965 law that created the program. The law generally prohibits payment for items and services that are “not reasonable and necessary for the diagnosis or treatment of illness or injury, or to improve the functioning of a malformed body member.”
If an item is covered, the payment rate is specified in other parts of the law.
The Bush administration argued that Medicare officials had the right to decide whether the expense incurred for a given item, not just the item itself, was “reasonable and necessary.”
Judge Kennedy said this argument “does not make sense” because Congress went to great lengths to establish payment rates.
Similar disputes have come up over other treatments.
Another pharmaceutical company, Sepracor, has for years challenged the government’s authority to use the “least costly alternative” as a basis for setting reimbursement rates for Xopenex, prescribed for asthma and chronic obstructive pulmonary disease.
In a friend-of-the-court brief, Sepracor said that Congress had set the payment rate at 106 percent of the average sales price. “Congress consciously chose to entrust the amount of reimbursement to the market, not to a government agency or its contractors,” the company said in its brief.
Patrick Morrisey, a lawyer representing Sepracor, said, “If you extend the agency’s logic to its natural conclusion, Congress would never need to pass any payment laws and policies.”
Scott T. Williams, vice president of Men’s Health Network, an education and advocacy group, welcomed the court decision. Mr. Williams said the decision would be “a springboard to help ensure that prostate-cancer patients have access to drugs like Lupron and Zoladex, rather than being forced to use the least costly alternative products.”
Mr. Williams said that if Medicare paid for only the least costly drugs, low-income and minority patients might not have access to more expensive treatments deemed appropriate by their doctors.