Amicus Curiae Brief — Chaves County Home Health Services, Inc. v. Sullivan

4) [ OFFCe OF THE CLERK

No. 91-674

IN THE

Supreme Court Of Che United States

OCTOBER TERM, 1991

Chaves County Home Health Service, Inc., Albuquerque

Visiting Nurse Service, Inc., and Bayonne Visiting Nurse

Association, Inc.,

Petitioners,

Vv.

Louis W. Sullivan, M.D.,

Secretary of Health and Human Services,

Respondent. ©

BRIEF OF AMICI CURIAE IN SUPPORT OF PETITION FOR A

WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

AMICI CURIAE: George G. Olsen, Esq.*

National Association of

Rehabilitation Agencies WILLIAMS & JENSEN, P.C.

American Physical 1101 Connecticut Avenue, N.W.

Therapy Association Suite 500

American Occupational Washington, D.C. 20036

Therapy Association (202) 659-8201

American Medical Association

American Speech-Language *Counsel of Record

Hearing Association

Private Practice Section of the

American Physical

Therapy Association

Balmar Legal Publishing Division, Washington, D.C. 20005 (202) 059-3610

IT.

IV.

TABLE OF CONTENTS

INTEREST OF AMICI CURIAE ........

SUMMARY OF ARGUMENT .........

RPRpeeren Ge BRU Ge ww we ee

A. Part Bof the Medicare Program .......

B. Part B Claims Review and Adjudication

C. The Secretary’s Use of Sample

SS ose

D. The Decisions Below ............

REASONS FOR GRANTING THE WRIT .. .

A. Statistical Sampling Abrogates Rights

Granted to Providers By Statute and

ARS A

B. The Decision of the Court of Appeals

Contravenes Long-Standing Holdings by

| Oe a eae ea ee

C. Statistical Sampling is Invalid Because It Has

Never Been Subject to Notice and Comment

Provisions of the Administrative Procedures

Rote ke ek ae eee eee

12

16

17

20

TABLE OF AUTHORITIES

CASES Page

Batterson v. Marshall, 648 F.2d 694

(DS... Ce, Te 6. See hae 5 19

Bowen v. Yuckert, 482 U.S. 137 (1987) ...... 16

Buschmann v. Schweiker, 676 F.2d 352

(Oils ie. SR ee ie te es es 19

Chaves County Home Health Service,

Inc. v. Sullivan, 931 F.2d 914

(D.C. Cie. SOR +. a eee 11, 12, 14,17

Chrysler Corp. v. Brown, 441 U.S. 281 (1979). . 17, 19

First State Bank of Hudson County v. United States,

599 F.2d 558 (3rd Cir. 1979), cert. denied 444

U.S. 1033 (20) se ee eas 17

Heckler v. Campbell, 461 U.S. 458 (1983) ..... 16

Highland District Hospital v. Secretary of HHS,

676 F.2d 230 (Gth Cir. 1962). ce ee 15

In re Home Health Care, Inc. v. Bowen, 639 F. Supp.

1124 (DSR, FR ke ee ees 19

Linoz v. Heckler, 800 F.2d 871 (9th Cir. 1986) .. 19

Mile High Physical Therapy Centers, Inc. v. Bowen,

735 F. Supp. 984 (D. Colo. 1988) ....... 4,10, 19

Morton v. Ruiz, 415 U.S. 199, 94 S. Ct. 1055

(1978) 0. i es See eee 17

National Motor Freight Traffic Ass'n v. United

States, 268 F. Supp. 90 (D.D.C. 1967), aff'd,

393 U.S. 19 CG eee 18

Powderly v. Schweiker, 704 F.2d 1092

(Gals Cin. 39RD) 5. ee 19

Richardson v. Perales, 402 U.S. 389 (1971) .... 16

ill

Sullivan v. Zebley, 493 U.S. 521, 110 S. Ct. 885

ea a aah al oral ye os ys 4s 16

CONSTITUTIONAL PROVISIONS,

STATUTES AND REGULATIONS Page

Pub. L. No. 89-97, § 102, 79 Stat. 286 (1965) . . . 8

Pub. L. No. 92-603, § 213(a), 89 Stat. 1329

Ne ey os eo ws 8

Pub. L. No. 99-509, § 9341(a)(1)(A-D), 100 Stat.

ES hat as ohn ha 8

Deemer eeemee . we ole nk 12, 17

42 U.S.C. § 405(a),(b),(g) ..........-.. 8

8 ee ee 6

8k Ow gk RS 7

42 U.S.C. §§ 1395k-1395x(nn) ........... 7

ee 7

Re 7

OR) re 2

i Se 8, 9, 10

SUS. 9 tssoma)........ Dn Ree rR 8

Re 8

Oo We, BESTS ZMD) 2. ww ew tt ee 10

ME I gs ks te 8 we ee 8

ee | | a ar 8

TRA oo eer eee

CUE RG hy eed er

a a re ree

ee ea ae ae

CUR CMT) 2... i ee.

Se | a ees 9,10

oOo OO O

fey SS? 8 Bs a ae 8

ie =; 5 RE Sa tee ermnnrE Aare 8

eR ec RE 6c ee te we 8

Coe 0S ar rare 9

fae eS ee ae 9

og SE aa 9

bak 8 OR eer 9

Fe SO SS a ae 9

a SS a ra 9

ee 8 eee ee ee eee 9

CE. kc 0 ee he sp we we 9

I gg ce es ce ek be ae 7

ere ea ea

oe ee eee eae a eer

LEGISLATIVE HISTORY Page

S. Rep. No. 1230, 92d Cong., 2d Sess. 294

ST in te ln Gy rg) ag he pi wok Aa Oe 15

OTHER AUTHORITIES Page

1 K. Davis, Administrative Law Treatise § 6.29

eg Se a ee ee ee 18

No. 91-674

IN THE

Supreme Court Of Che United States

OCTOBER TERM, 1991

Chaves County Home Health Service, Inc., Albuquerque

Visiting Nurse Service, Inc., and Bayonne Visiting Nurse

Association, Inc.,

Petitioners,

Vv.

Louis W. Sullivan, M.D.,

Secretary of Health and Human Services,

Respondent.

BRIEF OF AMICI CURIAE IN SUPPORT OF PETITION FORA

WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

This brief amici curiae in support of the Petition for Writ

of Certiorari to the United States Court of Appeals for the

District of Columbia Circuit is submitted by the National

Association of Rehabilitation Agencies (“NARA”), American

Physical Therapy Association (“APTA”), American Occupa-

tional Therapy Association (“AOTA”), American Medical As-

sociation (“AMA”), American Speech-Language Hearing

Association (““ASHA”), and the Private Practice Section of the

American Physical Therapy Association (“PPS”)(hereinafter

collectively “Amici”’). For the reasons set out herein, in the

Petition for Writ of Certiorari, as well as in the Brief of Amici

Curiae submitted by the American Hospital Association,

American Association of Homes for the Aging, American

Federation of Home Health Agencies, and the Home Health

Services and Staffing Association, these Amici respectfully

2

request this Court to grant the petition for a writ of certiorari so

that the lawfulness of the Secretary of Health and Human

Services’ (“Secretary”) sample adjudication scheme may be

reviewed.

I. INTEREST OF AMICI CURIAE

The Amici are six national professional associations repre-

senting tens of thousands of health care providers which furnish

medical services to millions of Medicare beneficiaries.! Mem-

bers of these organizations are “providers” or “suppliers” of

services under the Medicare program (42 U.S.C. § 1395x(u))

whose services are paid for principally under Part B of Medicare,

although members of these associations render some services

which may be covered by Part A. The Amici are convinced that

the Secretary’s use of sample adjudication will cause serious

harm to Part B providers, beneficiaries of Part B care, and the

Medicare program itself.

NARA, a not-for-profit corporation organized under the

laws of the State of Wisconsin, represents approximately 200

Medicare-certified rehabilitation agencies nationwide.

Rehabilitation agencies provide their patients with integrated

multi-disciplinary rehabilitative services including physical

therapy, speech-language pathology, occupational therapy, and

social or vocational adjustment services. Many of the services

furnished by rehabilitation agencies are rendered to Medicare

beneficiaries for which payment is made by the Medicare pro-

gram.

APTA, an Illinois corporation, is a non-profit association

composed of licensed physical therapists, physical therapist

assistants, and students of physical therapy. APTA has over

51,000 members and represents approximately 60% of all

licensed physical therapists in the United States. As such,

APTA is the largest organization of these health professionals

]

The consents of all the parties to the filing of this brief have been filed

with the Court.

3

in the country and is the recognized spokesman for their inter-

ests. Medicare beneficiaries are frequent users of services fur-

nished by members of APTA and Medicare covers the costs of

such care.

ASHA is a Kansas non-profit corporation which represents

approximately 75% of the speech-language pathologists and

audiologists in the country. With over 65,000 members, ASHA

is the nationally-recognized advocate for the interests of these

professionals. Speech-language pathology and audiology ser-

vices furnished to Medicare beneficiaries are covered and paid

for by Medicare.

AOTA is a District of Columbia non-profit corporation

which represents the professional interests of over 44,000 oc-

cupational therapists, occupational therapist assistants, and stu-

dents of occupational therapy. Occupational therapy services

are covered under the Medicare program and AOTA members

provide services to program beneficiaries in a variety of delivery

settings.

AMA is a private, voluntary, non-profit organization of

physicians. The AMA was founded in 1846 to promote the

science and the art of medicine and improve the public health.

Its 280,000 members — over half of all physicians currently

licensed to practice medicine — practice in all fields of medical

specialization.

PPS, organized in 1956, represents over 5,000 physical

therapists who pursue their profession in private practice instead

of in hospitals, rehabilitation centers, nursing homes, or similar

institutional settings. The PPS also represents physical therapy

students, educators, researchers, physical therapist assistants,

and administrative assistants. PPS represents private practice

physical therapists before governmental agencies, professional

and voluntary associations, and numerous public forums.

4

The Amici vigorously support the petition for a writ of

certiorari because the Secretary’s use of statistical sampling

methodologies to adjudicate Medicare claims will carry the

following dire consequences:

First, sampling will likely cause severe financial hardship

to, and perhaps the insolvency of, any provider against whom

the technique is used. The pernicious consequences of statistical

sampling are evident from the undisputed facts in the case before

the Court. On the basis of extremely small samples of claims,

the Secretary demanded repayment of $138,113.38 from Albu-

querque Visiting Nurse Service, Inc., $46,913.19 from Chaves

County Home Health Service, Inc., and $1,506,639.00 from

Bayonne Visiting Nurse Association, Inc. The Secretary’s

repayment demands forced Albuquerque VNS into bankruptcy

and nearly led to the insolvency of Bayonne VNA as well. In

another case, a Medicare-certified rehabilitation agency was

forced to close its doors as a result of the Secretary’s use of

Statistical sampling. See Mile High Physical Therapy Centers,

Inc. v. Bowen, 735 F. Supp. 984 (D. Colo. 1988).

The Amici respectfully submit that if the use of statistical

sampling is upheld, the financial demise of numerous Medicare

Part B (and Part A) providers and suppliers will be ordained.

Second, at a time when the aged population is expanding

rapidly and the demand for Medicare services is growing at an

unprecedented rate, statistical sampling will deter providers

from participating in the Medicare program and impair the

ability of existing providers to furnish services to Medicare

beneficiaries. Statistical sampling significantly increases the

business risk associated with entering into a provider participa-

tion agreement with the Secretary because even small, good

faith errors on claims submitted for payment can result in huge

repayment demands. The risk, of course, is heightened as

Medicare carriers and intermediaries become more scrupulous

5

in their claims review in the face of mounting budget deficit

pressures to reduce Medicare program costs.

Third, as explained more fully below, statistical sampling

deprives providers and beneficiaries of their rights to individual-

ized claims review. See infra at 13-15. The absence of in-

dividual determinations harms providers because they have no

opportunity to defend themselves through the use of medical

records and expert testimony on claims not included in the

sample. In addition, individual claims determinations furnish

providers with a constant source of information about subtle, yet

important, shifts in the types of claims which intermediaries and

carriers will pay as well as the documentation they require to

support payment of a claim. Statistical sampling subverts this

dialogue and makes it far more difficult for providers to respond

in a timely fashion to changes ina carrier or fiscal intermediary’s

coverage interpretations or documentation requirements.

Fourth, faced with the prospect of an enormous repayment

demand resulting from statistical sampling, providers will

refrain from providing care or entering into a course of treatment

with a patient where there is even the slightest question whether

Medicare will cover it. Sampling, therefore, forces providers to

alter their methods of practice and treatment patterns even for

services which are legitimate and needed by the beneficiary. As

a result, Medicare beneficiaries will have significantly reduced

access to health care services which they require.

Fifth, sampling prevents providers from collecting pay-

ments due from beneficiaries for services not covered by

Medicare. See infra at 15. Under the law, providers have the

right to collect payment from beneficiaries where Medicare has

declined to pay for the service. Fundamental to a provider’s

ability to collect such payment is the identification of the

beneficiary whose claim was denied as well as the reasons for

the denial. Because, by definition, sampling does not identify

the beneficiary or the reasons for the denial for any claim not

6

included in the sample — i.e., the majority of denied claims —

the provider has no way of exercising its right of recourse against

the beneficiary. Sampling, therefore, is a “double-whammy”

for providers. On one hand, it inevitably results in huge repay-

ment demands. On the other, it precludes providers from offset-

ting those losses by collecting funds lawfully due them from

beneficiaries.

Il. SUMMARY OF ARGUMENT

The Amici urge this Court to grant the petition for writ of

certiorari and ultimately hold that the use of statistical sampling

to readjudicate Medicare coverage determinations is unlawful.

Sample adjudication causes grievous financial injury to

Medicare providers, detcrs them from providing needed care to

Medicare beneficiaries, and precludes providers from collecting

payments due from beneficiaries for services which Medicare

has determined that it will not cover.

The Court should review the Court of Appeals’ decision

because it directly contravenes specific statutory and regulatory

mandates under Part B and Part A of Medicare for individualized

claims review, notice of the reasons for coverage denials, the

right to appeal adverse determinations, payment under waiver

of liability, and recourse against beneficiaries for unpaid claims.

Furthermore, the decision below flies in the face of long-stand-

ing decisions by this Court which mandate specific procedural

protections for Medicare providers. The Court of Appeals’

decision also conflicts with the rulemaking requirements of the

Administrative Procedure Act as articulated by this Court.

If. STATEMENT OF THE CASE

A. Part B of the Medicare Program

Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et

seq., commonly known as “Medicare”, consists of two parts.

Part A provides insurance protection against the costs of in-

patient hospital and related post-hospital services, home health

7

care, and hospice care for individuals who are 65 or over or who

are otherwise entitled to Medicare benefits. 42 U.S.C. §§ 1395c

- 1395i-4. Part B of the Medicare program is entitled “Supple-

mentary Medical Insurance Benefits for the Aged and Dis-

abled.” It furnishes insurance coverage for a broad spectrum of

health and medical services including, inter alia: certain

physicians services and supplies and services incident to physi-

cians’ services; physical therapy, speech pathology, and occupa-

tional therapy services; outpatient hospital services; rural and

community health clinic services; ambulatory surgery; care

provided by comprehensive outpatient rehabilitation facilities;

and x-ray, laboratory, and other diagnostic tests. 42 U.S.C. §§

1395k - 1395x(nn).

Medicare Part B is a substantial federal program. Approxi-

mately 32.6 million individuals currently participate in the

Medicare supplementary insurance program and in excess of

$42 billion in Part B benefits are paid out annually. Physical

therapists, speech pathologists, occupational therapists,

physicians and other health professionals represented by the

Amici herein submit millions of Part B claims annually.

Part B is administered by the Secretary who is authorized

by statute to contract with private insurance carriers to review

and pay, on the Secretary’s behalf, all Part B claims.” 42 U.S.C.

§ 1395u. These carriers act as the Secretary’s agents for this

purpose (42 C.F.R. § 421.5) and the Secretary pays the carriers’

costs of administering the Part B claims process. 42 U.S.C. §

1395u(c).

B. Part B Claims Review and Adjudication

Medicare carriers review, adjudicate, and pay Part Bclaims

pursuant to procedures precisely specified in the Medicare

statute and the Secretary’s regulations. The procedures, which

guarantee providers the right to individualized factual deter-

Under certain circumstances, some Part B providers have their claims

reviewed and paid by fiscal intermediaries rather than carriers.

8

minations, notice, and appeal, find their genesis in the claims

adjudication process formulated over 45 years ago for Title II

of the Social Security Act. See 42 U.S.C. § 405(a),(b),(g) as

incorporated by 42 U.S.C. §§ 1395ff, 159511. These procedures

were adopted for Medicare beneficiaries for Part A coverage

determinations in 1965. Pub. L. No. 89-97, § 102, 79 Stat. 286

(1965), (codified at 42 U.S.C. § 1395ff(b)). See also 42 C.F.R.

§ 405.701. They were put in place for providers of services

under Part A in 1972. Pub. L. No. 92-603, § 213(a)(1972)

(codified at 42 U.S.C. § 1395pp(d)). While Part B providers

had access to the initial determination, notice, and fair hearing

procedures prior to 1986, the opportunity for administrative law

judge hearings and judicial review of Part B claims was not

extended until 1986. Pub. L. No. 99-509, § 9341(a) (1)(A-D),

100 Stat. 1874 (1986) (codified at 42 U.S.C. § 1395ff(a),(b).

The statutory basis for Part B provider rights to individual

factual determinations and administrative and judicial review

resides in 42 U.S.C. § 1395ff which states in pertinent part:

“The determination of whether an individual is entitled to

benefits under Part A or Part B..., and the determination of the

amount of benefits under Part A or Part B..., shall be made by

the Secretary in accordance with regulations prescribed by him.”

When a beneficiary or provider of services submits a claim

for payment, the carrier makes an initial determination whether

it should be paid. 42 C.F.R. § 405.803. The initial determina-

tion involves deciding whether the services were covered by

Medicare; whether the services were medically necessary;

whether the charges for services were reasonable; and whether

the beneficiary or provider “knew or could reasonably have been

expected to know that such items or services were excluded from

coverage.” 42 C.F.R. § 405.803(b). The very nature of these

determinations demand a highly individualized analysis of the

facts concerning the beneficiary and the claim.

9

A party dissatisfied with the initial decision may request

the carrier to review the determination. 42 C.F.R. § 405.807.

The carrier reviews the claim on the basis of the evidence in the

record and issues a separate determination affirming, reversing,

or revising the initial determination. 42 C.F.R. § 405.810.

A party has the right to a hearing before a carrier hearing

officer if the carrier's decision on review is not favorable and

the amount in controversy is at least $100.00. 42 C.F.R. §

405.820. The hearing is on the record (42 C.F.R. § 405.833)

and the provider of services or the beneficiary may appear at the

hearing and present testimony and other evidence. 42 C.F.R. §

405.830. The hearing officer must make a written decision

based upon the evidence in the hearing record. 42 C.F.R. §

405.834. The decision is final and binding on all parties (42

C.F.R. § 405.840) unless it is reopened and revised pursuant to

42 C.F.R. § 405.841.

A claim dispute may be appealed to an administrative law

judge (“ALJ”) provided that the amount in controversy exceeds

$500. 42 U.S.C. § 1395ff. At an ALJ hearing, a party is

entitled to present its case through documentary evidence and

witnesses. 20 C.F.R. § 404.950. A transcript of the testimony

and exhibits, together with all other papers submitted in the case,

forms the exclusive record upon which the ALJ's decision must

be based. 20 C.F.R. § 404.951.

An adverse decision by an ALJ may be appealed to the

Appeals Council (20 C.F.R. § 404.967) or, alternatively, the

Appeals Council itself may decide to review the decision. 20

C.F.R. § 404.969. Appeals Council review is predicated on the

record before the ALJ as well as any new evidence accepted by

the Council. 20 C.F.R. § 404.976(b). The Appeals Council has

the authority to render a final decision on behalf of the Secretary

which is then subject to judicial review. 20 C.F.R. § 404.981.

If the Appeals Council declines to take review, the ALJ decision

10

becomes the final decision of the Secretary and is subject to

judicial review. 20 C.F.R. § 404.981.

42 U.S.C. § 1395ff provides for judicial review of

Medicare Part B claims where the amount in controversy is at

least $1,000. 42 U.S C. § 1395ff(b)(2)(B).

C. The Secretary’s Use of Sample Adjudication

In this case, the Secretary abrogated the rights of three

home health agencies to individualized factual determinations,

notice and appeal under Part A by utilizing a sampling procedure

to readjudicate and deny thousands of claims that had previously

been determined to be covered pursuant to the Secretary’s

claims review procedures. The Secretary’s sampling procedure

operated as follows: he conducted a post-payment review of a

small sample of each provider’s claims and then extrapolated

the percentage of newly denied claims to the remaining universe

of unreviewed claims. This methodology resulted in the read-

judication of the claims not included in the sample without

affording the providers the procedural rights to which they were

entitled. The Secretary did not even identify the specific claims

in the universe which were disallowed.

Although this case involves only Part A of Medicare, its

disposition will have an identical impact on Part B providers

such as those represented by the Amici. Indeed, the Secretary

has in the past employed statistical sampling against Part B

providers. See Mile High Therapy Centers, Inc. v. Bowen, 735

F. Supp. 984 (D. Colo. 1988). The Court of Appeals below

recognized that the decision in Chaves would govern Part B

providers:

Although Part B is somewhat different from Part A,

there is no essential difference in their recoupment

powers for coverage overpayments. Furthermore,

amendments added in 1986 extended Part A claims

adjudication procedures to Part B claims as well.

1]

(Consequently, a contrary holding on the statutory

question in this case could imperil sample adjudica-

tion under Part B).

Chaves County Home Health Service v. Sullivan, 931 F.2d 914,

918-19 (D.C. Cir. 1991).

D. The Decisions Below

The Court of Appeals rendered its decision in this case on

April 26, 1991. The court held that: (1) sampling procedures

for recoupment of overpayments to home health care providers

do not violate the Medicare statute; (2) sample adjudication does

not violate procedural due process; and (3) the sample audit

procedures were not impermissibly retroactive and were not in

violation of Administratiye Procedure Act requirements.

Chaves, 931 F.2d at 914.

The court’s opinion observed that the question whether

sample adjudication is an unreasonable interpretation of the

Medicare statute is “close.” Chaves, 931 F.2d at 923. The Court

of Appeals also agreed with the following contentions advanced

by the providers: (1) the language and overall structure of the

Medicare statute and regulations require individualized factual

determinations (Chaves, 931 F.2d at 917, 919-20 and 922-23);

(2) Medicare providers have the same right to individualized

factual determinations as beneficiaries (Chaves, 931 F.2d at 917,

919 and 921): and (3) there is no authority in the statute, its

legislative history, or in the Secretary’s regulations to support

the use of sample adjudication. Chaves, 931 F.2d at 916 and

922.

Having recognized these principles, however, the court

misapplied them. First, the court found that although the statute

provides for individualized factual determinations, it does so

only for “pre-payment review” and not “post-payment review.”

Accordingly, the court reasoned, sample adjudication does not

conflict with the statutory mandate for individualized claims

12

review. Chaves, 931 F.2d at 917, 921. Although it conceded

that neither the statute, its legislative history, nor the regulations

provide a basis for differentiating between the adjudication of

pre-payment and post-payment claims, the court insisted, absent

an explicit prohibition of sampling, that it must defer to the

Secretary’s general authority to recoup overpayments.

The court also ruled that the different standard of individu-

alized review for post-payment claims met the Medicare

Statute’s requirements for individualized adjudication of claims

because it gives claimants the opportunity to challenge the

denials of specific claims within the sample. Chaves, 931 F.2d

at 922-23.

The providers in Chaves had asserted that HCFA Ruling

86-1, the ruling which sets out HCFA’s procedures for ad-

ministering sample adjudication, was invalid because it was not

promulgated pursuant to the Administrative Procedure Act, 5

U.S.C. § 553 et seq. (“APA”) and was impermissibly retroac-

tive. The court rejected these arguments finding that the ruling

was merely an explanation of a “long-standing and well-estab-

lished” practice, not an announcement of a new scheme which

would require prospective application or compliance with the

APA notice and comment requirements. Chaves, 931 F.2d at

923.

IV. REASONS FOR GRANTING THE WRIT

A. Statistical Sampling Abrogates Rights

Granted to Providers By Statute and

Regulation

As explained in detail above, supra at 7-10, the Social

Security Act and the Secretary’s regulations thereunder guaran-

tee Part B providers the absolute right to a comprehensive

multi-step administrative process for the review and adjudica-

tion of Medicare claims: (1) an initial determination on each

beneficiary’s claim; (2) carrier review of an adverse initial

13

decision; (3) a carrier fair hearing in the event the review

decision is unfavorable on claims in excess of $100; (4) an

appeal to an ALJ if the amount in controversy exceeds $500;

and (5) review of the ALJ decision by the Appeals Council.

Judicial review of Part B cases is available if the amount in

controversy is at least $1,000. These procedural rights exist for

every Part B claim.

This procedural scheme is triggered by a single event —

the denial of a Medicare Part Bclaim. For this reason, each step

of the process necessarily entails an assessment of highly

individualized facts — e.g., whether the services in question

were medically necessary given the beneficiary’s medical con-

dition, the nature and number of treatments received, the

likelihood that the services will improve the patient’s condition,

pre-existing diseases or injuries, and the effectiveness of the

provider’s services, etc. Similarly, numerous facts specific to

the beneficiary and provider must be examined in determining

whether the cost of the service was reasonable.

Sample adjudication operates in fundamental conflict with

the principles of individualized review which are clearly articu-

lated in the statute and implementing regulations. As a practical

matter, statistical sampling completely circumvents the com-

prehensive Part B claims review process described above. See

supra at 6-10.

Except for the claims in the sample, there is no individual-

ized review of any other claim in the universe of claims which

will be used to calculate the Medicare overpayment amount. By

the very nature of statistical sampling, a Part B provider is

accorded all of its procedural rights in only a relatively small

portion of its cases. For example, if the Secretary took a sample

of 350 claims from 10,000 claims that the provider submitted in

a given year and then used the percentage denial rate for the

sample to calculate a recoupment amount for the entire universe,

the provider would have been deprived of its right to individual-

14

ized factual determinations, notice, and appeal for 9,650 of its

claims. Neither the Social Security Act nor the Secretary’s

regulations specify that these provider rights need only be

afforded in some of the provider’s claims cases.

The Court of Appeals attempted to rationalize the depriva-

tion of procedural rights inherent in sample adjudication by

asserting that there was a difference in the procedural rights

which attach to pre-payment claims review and those which

govern post-payment review.

HHS has not, in fact, suspended individualized

determinations and substituted sample adjudication

review of payment claims (a decision that would be

inconsistent with the statute); instead, the Department

has supplemented individualized pre-payment review

of claims with a sampling procedure on post-payment

review of providers suspected of overbilling.

Chaves, 931 F.2d at 917. Emphasis supplied.

The court’s argument is specious for several reasons. First,

neither the statute nor the Secretary’s regulations expressly or

implicitly differentiate between the Part B provider rights avail-

able on pre- and post-payment review. Quite to the contrary,

the statute and regulations clearly afford a provider the full

panoply of procedural protections regardless of when the review

occurs. Second, the court’s argument conveniently ignores the

practical effect of sample adjudication. When sampling is used

On post-payment review, all of the initial favorable determina-

tions for each of the claims in the universe made on pre-payment

review are voided. In a very real sense, therefore, sample

adjudication renders the pre-payment protections irrelevant and

sampling becomes the only mechanism by which denied claims

are adjudicated. Third, if the Court of Appeals is correct in its

finding that Part B providers enjoy little protection on post-pay-

ment review, the Secretary might well refrain from denying

claims on pre-payment review — when providers may exercise -

15

all of their procedural rights — and instead deny the claims on

post-payment review where the court below says providers have

far more limited rights.

Sample adjudication deprives Part B providers of another

crucial right — the right to receive payment for their services.

In the event that Medicare denies payment for a claim on the

ground that the service was not medically necessary, the

provider has the legal authority to seek payment from the patient

pursuant to state law. This right has long been recognized by

the Secretary? , Congress‘ , and the courts.5 Statistical sampling

renders these rights unenforceable, however, because the

provider has no way of identifying the individuals in the

universe of unsampled claims whose claims have been denied.

Statistical sampling also disregards the Secretary’s duty to

furnish detailed reasons for denial whenever a claim is not paid.

This information is provided so that the claimant can make a

reasonable decision as to whether to pursue administrative or

judicial review. Such information is non-existent where sam-

pling is used and so, therefore, is any record upon which an

appeal can be predicated. More importantly, this individualized

decision-making furnishes beneficiaries and providers with

guidance as to those services which will be paid and those which

Medicare will not cover. In this way, providers and

beneficiaries can avoid submitting claims for which payment is

unavailable from Medicare.

* HCFA Ruling 83-1 (1982).

S. Rep. No. 1230, 92d Cong., 2d Sess. 294 (1972).

Highland District Hospital v. Secretary of HHS, 676 F.2d 230, 238

(6th Cir. 1982).

4

16

B. The Decision of the Court of Appeals Con-

travenes Long-Standing Holdings By this

Court.

The formal Medicare claims adjudication process available

to Part B providers arises out of, and is substantially similar to,

the claims adjudication process extant in Title II of the Social

Security Act as early as 1947. See discussion supra at 6. This

Court, on numerous occasions, has ruled that Title II requires

individualized factual determinations, notice of those

determinations, and administrative and judicial review. See

e.g., Sullivan v. Zebley, 493 U.S. 521, 110 S. Ct. 885, 888 and

890 (1990); Heckler v. Campbell, 461 U.S. 458, 468 (1983);

Richardson v. Perales, 402 U.S. 389, 394-98 (1971); and Bowen

v. Yuckert, 482 U.S. 137 (1987). Zebley is particularly instruc-

tive in this regard because it states that the Social Security Act’s

claims adjudication process clearly contemplates individualized

functional assessments, because only such review can address

the:

infinite variety of medical conditions and combina-

tions thereof, the varying impact of such conditions

due to the claimant’s individual characteristics, and

the constant evolution of medical diagnostic techni-

ques.

Zebley, 110 S. Ct. at 896.

The progeny of the Title II claims adjudication process —

the Medicare Part A and Part B procedures — demand the same

review of individualized facts throughout the review process,

running from initial determination through judicial review. As

explained above, supra at 8-9, Medicare Part B claims adjudica-

tions necessarily entail highly unique and specific facts for each

beneficiary including, inter alia, the person’s medical condition,

medical history, course of treatment, prognosis, etc. Therefore,

the Court of Appeals, in ruling that the Secretary may circum-

vent the multi-step review process for Part B claims, renounced

17

over two decades of decisions by this Court holding that in-

dividualized factual determinations, notice, and administrative

and judicial review must be provided under Title II of the Social

Security Act.

C. The Decision of the Court of Appeals

Conflicts With the Rulemaking Require-

ments of the Administrative Procedure

Act as Articulated by this Court.

In its decision, the Court of Appeals found that sample

adjudication was a “long-standing practice” of the Secretary and

not “a brand new scheme ushered in by HCFA Ruling 86-1.”

Chaves, 931 F.2d at 923. For this reason, the court ruled that

HCFA Ruling 86-1 was an interpretive rule which did not have

to be promulgated pursuant to the requirements of the APA. This

decision is erroneous and squarely conflicts with the APA’s

requirements as recognized by this Court.

This Court has carefully delineated the standards which are

to be utilized to determine whether an agency rule is “substan-

tive” or “interpretive.” A substantive rule is one that is “binding”

or has the “force of law” and which “affects individual rights

and obligations.” Chrysler Corp. v. Brown, 441 U.S. 281, 99

S.Ct. 1705, 1717-1718 (1979). See also Morton v. Ruiz, 415 U.S.

199, 94 S. Ct. 1055, 1074 (1974). An interpretive rule, by

contrast, is not binding, has no future effect, and is merely a

statement of what the statute or regulation has always meant in

the opinion of the agency issuing the interpretation. First State

Bank of Hudson County v. United States, 599 F.2d 558 (3rd Cir.

1979), cert. denied 444 U.S. 1013 (1980).

Under these standards, HCFA Ruling 86-1 is clearly a

substantive rule which should have been promulgated pursuant

to the APA. The ruling affects providers rights by depriving

them of the comprehensive multi-step administrative procedure

for Medicare claims review. It is also binding on the parties

because it is used to deny claims on post-payment review which

18

had been approved for payment on pre-payment review. Fur-

thermore, since the statute and regulations contain no authority

for the use of sampling, it stretches credulity to argue that HCFA

Ruling 86-1 only restates what the law already provides.

A substantive rule which must be promulgated pursuant to

the APA can also arise out of an agency’s change in administra-

tive adjudication procedures. In National Motor Freight Traffic

Ass’n v. United States, 268 F. Supp. 90 (D.D.C. 1967), aff'd,

393 U.S. 18 (1968), this Court affirmed a decision which held

that an agency rule establishing a scheme for administrative

adjudication constituted a substantive rule subject to the APA’s

notice and comment procedures. The district court had

reviewed a series of Interstate Commerce Commission rules

which established informal adjudication procedures for carrier

overcharge claims. Rejecting the argument that the rules merely

established procedures for implementing substantive statutory

rights, the court of appeals held that the agency’s decision to

establish procedures for administrative adjudication was the

type of ruling that the APA required to be open to public

participation. National Motor Freight, 268 F. Supp. at 95-96;

see also 1 K. Davis, Administrative Law Treatise § 6.29 (2d ed.

1978) (describing National Motor Freight as “the most

authoritative decision” on the scope of 5 U.S.C. 553(b)(A)).

National Motor Freight is particularly instructive in this

case because sample adjudication suspends or circumvents the

comprehensive individualized claims review procedures man-

dated by the Medicare statute and the Secretary’s regulations.

In so doing, statistical sampling, as provided for in HCFA

Ruling 86-1 radically alters the administrative adjudication pro-

cedures for Medicare claims. National Motor Freight teaches

that any such change must be published pursuant to the APA.

The Court of Appeals’ only rationale for labeling HCFA

Ruling 86-1 an interpretive rule was that sample adjudication

was a “long-standing practice” of the Secretary. This finding is

bi i

19

erroneous. Sample adjudication is neither a common nor long-

standing practice in Medicare claims cases. Prior to Chaves,

there is no reported instance of the Secretary's use of sampling

to suspend a provider’s procedural rights to individual factual

determinations, notice, and appeal in Part A cases. Furthermore,

the court could point to only one case, Mile High Therapy

Centers, in which sample adjudication supplanted Part B claims

review procedures. This case is inapposite, however, because it

involved a sampling methodology utilized by the Secretary prior

to the time when the ALJ and judicial review provisions for Part

A were extended to Part B providers. Simply put, there was no

evidence before the court below that sample adjudication is a

long-standing practice.

HCFA Ruling 86-1 is clearly not an interpretive rule.

“Interpretive rules are those which merely clarify or explain

existing law or regulations.” Powderly v. Schweiker, 704 F.2d

1092, 1098 (9th Cir. 1983). They are non-binding and do not

“foreclose alternative courses of action or conclusively affect

rights of private parties.” Batterton v. Marshall, 648 F.2d 694,

702 (D.C. Cir. 1980). The use of statistical sampling interferes

with and suspends the provider’s rights to initial determinations,

notice, appeal, and waiver of liability under the Medicare Act

and regulations. For this reason, HCFA Ruling 86-1 did not

merely explain existing law; it created new law which foreclosed

providers’ administrative procedure rights and in so doing con-

clusively affected their rights.

A substantive rule is invalid if it is not promulgated pur-

suant to the procedural requirements of the APA. Buschmann

v. Schweicker, 676 F.2d 352 (9th Cir. 1982). Chrysler Corp. v.

Brown, 441 U.S. 281 (1979); Linoz v. Heckler, 800 F.2d 871,

878 (9th Cir. 1986); Jn re Home Health Care, Inc. v. Bowen, 639

F. Supp. 1124 (D.D.C. 1986). Because the Secretary failed to

comply with the APA requirements in promulgating HCFA

Ruling 86-1, that ruling is invalid and cannot provide authority

20

for the use of sampling methodologies in Medicare overpayment

cases. The Court of Appeals’ finding to the contrary is in error.

V. CONCLUSION

For all of the reasons set out above, this Court should grant

the Petition for a Writ of Certiorari.

Respectfully submitted,

George G. Olsen*

WILLIAMS & JENSEN, P.C.

1101 Connecticut Avenue, N.W.

Ste 500

Washington, D.C. 20036

(202) 659-8201

*Attorney of Record for the

Amici Curiae

Date: