Petition for Writ of Certiorari — Bowen v. Georgetown Univ. Hospital

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OCTOBER TERM, 1987.

OTis R. BOWEN, SECRETARY OF HEALTH

AND HUMAN SERVICES, PETITIONER

GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

DONALD B. AYER

Acting Solicitor General

RICHARD K. WILLARD

Assistant Attorney General

THOMAS W. MERRILL

Deputy Solicitor General

ANDREW J. PINCUS

Assistant to the Solicitor General

JOHN F. CORDES

MARK W. PENNAK

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTIONS PRESENTED

1. Whether Section 1861(v)(1)(A)(ii) of the Medicare

Act, 42 U.S.C. (Supp. IID) 1395x(v)(1)(A)(ii), which allows

the Secretary of Health and Human Services to promul-

gate “regulations * * * for the making of suitable retro-

active corrective adjustments where, for a provider of

services for any fiscal period, the aggregate reimbursement

produced by the methods of determining costs proves to

be either inadequate or excessive,” authorizes the Secre-

tary to promulgate a retroactive regulation establishing a

ceiling on reimbursement for hospitals’ wage costs, and to

apply that regulation in reimbursement proceedings not

final at the time that the regulation was promulgated.

2. Whether the Administrative Procedure Act (APA),

5 U.S.C. (& Supp. IV) 551 ef seqg., prohibits an agency

from promulgating retroactive regulations even if the deci-

sion to apply a regulation retroactively is not arbitrary,

capricious, an abuse of discretion, or otherwise contrary

to law.

PARTIES TO THE PROCEEDING

In addition to the parties named in the caption, Howard

University as Howard University Hospital, Tuscon

Hospital Liquidating Corp. (formerly Tuscon General

Hospital), Greater Southeast Community Hospital,

Tuscon Medical Center, St. Cloud Hospital, and Com-

munity Hospital of Battle Creek were plaintiffs in actions

in the district court. These parties also were appellees in

the court of appeals.

TABLE OF CONTENTS

Page

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Reasons for granting the petition ......................... 11

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TABLE OF AUTHORITIES

Cases:

Action on Smoking & Health vy. CAB, 713 F.2d 795 (D.C.

Ne sce ccececececece 20, 21

Adams Nursing Home of Williamstown, Inc. v. Mathews,

Eg 15

Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 607

Ne cs ct cece coecccccceccces 20

Baylor University Medical Center vy. Heckler, 758 F.2d

Nee. as ces ecccccccceses 16

Burlington Northern, Inc. v. United States, 459 U.S. 13}

Ne esc ccc secccccececcecececs 20

Citizens to Save Spencer County v. EPA, 600 F.2d 844

ES MUU «vc cccccacces: Rs 6s 050 6000.0 19, 22

City of Austiny . Heckler, 753 F.2d 1307 (Sth Cir. 1985) .. 16

Colyer v. Harris, 519 F. Supp. 692 (S.D. Ohio 1981) ..... 19

Daughters of Miriam Center for the Aged v. Mathews,

Lg 15, 19

Fairfax Nursing Center, Inc. v. Califano, 590 F.2d 1297

Cee ss ces cccccwcevcecs 14

General Telephone Co. v. United States, 449 F.2d 846

EE 19

Cases — Continued: Page

Hazelwood Chronic & Convalescent Hospital, Inc. v.

Weinberger, 543 F.2d 703 (9h Cir. 1976), vacated, 430

ER EE TET Ter RT TTT CTT Te 14

Heckler v. Community Health Service of Crawford

Cocmty, Gor., 467 UD. Fb (TGB® «0. cc cccccccccccess 23

Illinois v. Bowen, 786 F.2d 288 (7th Cir. 1986) .......... 19

Kingsbrook Jewish Medical Center v. Richardson, 486

Ps CED 05.6 6h. ctebcaddoesecenssccces 14

Mason General Hospital v. Secretary of Health & Human

Services, 809 F.2d 1220 (6th Cir. 1987) .............. 14

Massachusetts Trustees vy. United States, 377 U.S. 235

EE ca nGn0o606 50 Nese Rkees UUEMeAKeenee bens os 16

Maxcell Telecom Plus, Inc. v. FCC, 815 F.2d 1551 (D.C.

Ck SN nu dathcecc cecanesccaseséawaeeee6oeaneass 19

Motor Vehicle Manufacturers Ass’n v. State Farm Mutual

Automobile Insurance Co., 463 U.S. 29 (1983) ....... 20

NLRB vy. Wyman-Gordon Co., 394 U.S. 759 (1969) ..... 16

National Ass’n of Independent Television Producers &

Distributors v. FCC, 502 F.2d 249 (2d Cir. 1974) ...... 19

Pension Benefit Guaranty Corp. v. R.A. Gray & Co.,

Fs Ce EE oc ccuidendheees cewetvesecessces 22

People of Illinois v. ICC, 722 F.2d 1341 (7th Cir. 1983) .. 16

Regents of the University of California v. Heckler,

771 F.2d 1182 (9th Cir. 1985) ............. Porerr re 14

Retail, Wholesale & Dep’t Store Union v. NLRB, 466

fF | tl re . 8, 22

SEC v. Chenery Corp., 332 U.S. 194 (1947) ............ 21, 22

Springdale Convalescent Center v. Mathews, 545 F.2d

ES ME ccc ccac ci besuseeyeennenenanes 13

St. Paul-Ramsey Medical Center v. Bowen, 816 F.2d 417

SE SE ek cnc deecccosectduasseeeneseseutnees 14

Tallahassee Memorial Regional Medical Center v. Bowen,

815 F.2d 1435 (11th Cir. 1987), petition for a writ of

oust. pantie, FOR. BITE oo cc cccccccccsvcccsccsees 14, 15

Texaco, Inc. v. Department of Energy, 795 F.2d 1021

(Temp. Emer. Ct. App. 1986), cert. dismissed, No.

CS Ge By, GD hn v.onnns cdc savcecdeaveuass 18-19, 22

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976) .. 22

Vermont Yankee Nuclear Power Corp. v. Natural Re-

sources Defense Council, Inc., 435 U.S. 519 (1978) .... 21

Cases — Continued: Page

Whitecliff, Inc. v. United States, 536 F.2d 347 (Ct. Cl.

1976), cert. denied, 430 U.S. 969 (1977) .............. 14

William v. Washington Metropolitan Area Transit

Comm'n, 415 F.2d 922 (D.C. Cir. 1968), cert. denied,

i IEE SE LES TNT Tere ee ee 20

Statutes and regulations:

Administrative Procedure Act, 5 U.S.C. (& Supp. IV)

Rees Bae hia edd bees de aeoe esas 5

ie a on oni oes ecu Uarade wan cules 2, 9, 19

ee Eo whiche$o04 UA bb bdnbbinscenens 21

Consolidated Omnibus Budget Reconciliation Act of

1985, Pub. L. No. 99-272, § 9102, 100 Stat. 155....... 3

Medicare Act, Tit. XVIII, 42 U.S.C. (& Supp. III) 1395

et seq.:

42 U.S.C. (& Supp. III) 1395f(b) . 2.2... 3, 23

42 U.S.C. (& Supp. III) 1395f(b)(1) .. 2. 3

42 U.S.C. (Supp. III) 1395x(u) ................... 3

42 U.S.C. (& Supp. III) 1395x(v) (§ 1861(v)) ....... 16

42 U.S.C. (Supp. II]) 1395x(v)(1)(A)

ee ee 2, 3, 18

42 U.S.C. (Supp. II]) 1395x(v)(1)(A)(ii)

SAE CS DE ee eee 10, 11,

13, 14, 15, 16, 17, 18

er ate ds occ i ccceckeccans 18

42 U.S.C. (& Supp. III) 139S00(f) ... 2.0.00 0002... 13

42 U.S.C. (Supp. IID) 139S00(f)(1) .. eee. 8, 23

42 U.S.C. (Supp. IID) 1395ww(a)(4) .. 2... 24

42 U.S.C. (Supp. III) 1395ww(d) .... 2.0.00, 3

Social Security Amendments of 1983, Tit. VI, Pub. L.

No. 98-21, §§ 601-607, 97 Stat. 149-172 ............. 3

Ne ee i rece Cenubdducweees 24

42 C.F.R.:

oe a uebecceeeeeeance 17

a es 24

EE RE Se 23

SE edie cee a re ete 24

Miscellaneous: Page

Attorney General's Manual on the Administrative Pro-

2 ree er 20

44 Fed. Reg. (1979):

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pp. BIBOT-SIGOS 2... ccc cee cece er eee neenes 4

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45 Fed. Reg. (1980):

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46 Fed. Reg. (198i):

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DP. 33638-33639 . 0.1... ccc cece cece cee eeennes 5

OE aed beahsssesendocvcvedeseresecergenss 5

ED cab ccccccnctinecsccccnesenssensseaces 5

49 Fed. Reg. (1984):

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TS SUP SPeTTT TT e Tere eT Tt TT ett ie 6, 7

MED oc Gch cccvescccdecceunessseseccecevassss 16

“_ reer rrerr rT rtt tert Terie 8

MED so cccnverredcccccececessseseneceseeass 8

ME cose ccccedieeevscdvesesscosvesesdseeess 16

51 Fed. Reg. 11188 (1986) ...........- 6c cece eee eens 18

H.R. Rep. 98-25, 98th Cong., Ist Sess. Pt. 1 (1983) ...... 3

H.R. Rep. 1980, 79th Cong., 2d Sess. (1946), reprinted in

Legislative History of the Administrative Procedure

EE oo o.oo b2Gu hel base cena anes te e0se seen 20

Jn the Supreme Court of the Gnited States

OCTOBER TERM, 1987

No.

OTIS R. BOWEN, SECRETARY OF HEALTH

AND HUMAN SERVICES, PETITIONER

GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

The Solicitor General, on behalf of the Secretary of

Health and Human Services, petitions for a writ of cer-

tiorari to review the judgment of the United States Court

of Appeals for the District of Columbia Circuit in this

case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra,

la-19a) is reported at 821 F.2d 750. The opinion and order

of the district court (App., infra, 20a-42a) are unreported.

JURISDICTION

The judgment of the court of appeals (App., infra,

43a-44a) was entered on June 26, 1987, and a petition for

rehearing was denied on September i, 1987 (App., infra,

45a-46a). On November 23, 1987, the Chief Justice en-

tered an order extending the time for filing a petition for

(1)

a writ of certiorari to and including December 30, 1987.

The jurisdiction of this Court rests upon 28 U.S.C.

1254(1).

STATUTES INVOLVED

5 U.S.C. 551(4) provides in pertinent part:

For the purpose of this subchapter —

* * * * *

(4) “rule” means the whole or a part of an agency

statement of general or particular applicability and

future effect designed to implement, interpret, or

prescribe law or policy or describing the organization,

procedure, or practice requirements of an agency

** *

42 U.S.C. (Supp. II]. 1395x(v)(1)(A) provides in perti-

nent part:

The reasonable cost of any services shall be the cost

actually incurred, excluding therefrom any part of in-

curred cost found to be unnecessary in the efficient

delivery of needed health services, and shall be deter-

mined in accordance with regulations establishing the

method or methods to be used, and the items to be in-

cluded, in determining such costs for various types or

classes of institutions, agencies, and services; * * *.

Such regulations shall * * * (ii) provide for the mak-

ing of suitable retroactive corrective adjustments

where, for a provider of services for any fiscal period,

the aggregate reimbursement produced by the

methods of determining costs proves to be either in-

acequate or excessive.

STATEMENT

1. At the time of the events at issue in this case, all

“providers” of health care services to Medicare bene-

ficiaries were reimbursed by the Secretary of Health and

Human Services on an annual basis for the “reasonable

cost” of those health care services. 42 U.S.C. (& Supp. III)

1395f(b), 1395x(u) and (v)(1)(A).' Congress expressly

authorized the Secretary to promulgate regulations

“establishing the method or methods to be used, and the

items to be included, in determining” reasonable costs (42

U.S.C. (Supp. II1) 1395x(v)(1)(A)). Alarmed by dramatic

increases in the cost of hospital care, Congress in 1972

authorized the Secretary to “establish{ ] * * * limits on

the * * * costs * * * to be recognized as reasonable” (42

U.S.C. (Supp. II]) 1395x(v)(1)(A)). Thus, “based on esti-

mates of the costs necessary in the efficient delivery of

needed health services,” the Secretary may by regulation

limit both the types and amounts of costs that are reim-

bursable under the Medicare program (42 U.S.C. (Supp.

III) 139Sx(v)(1)(A)).

' A provider was reimbursed for its “customary charges” if those

charges were less than the reasonable cost. 42 U.S.C. 1395f(b)(1).

Most hospitals are no longer reimbursed for inpatient services to

Medicare beneficiaries solely on the basis of the “reasonable cost” in-

curred in providing services to Medicare patients. In Title VI of the

Social Security Amendments of 1983, Pub. L. No. 98-21, §§ 601-607,

97 Stat. 149-172, Congress adopted the prospective payment system

(PPS). Under PPS (which has been implemented over a four-year

transition period beginning on October 1, 1983), hospitals are paid

predetermined rates for specific services, which rates are not tied to

specific costs incurred by the hospital in providing those services. See

42 U.S.C. (Supp. III) 1395ww(d), as amended by the Consolidated

Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272,

§ 9102, 100 Stat. 155. Congress adopted PPS primarily “to reform the

financial incentives hospitals face, promoting efficiency in the provi-

sion of services by rewarding cost/eftective hospital practices” (H.R.

Rep. 98-25, 98th Cong., Ist Sess. Pt. 1, at 132 (1983)). Many Medicare

providers are not covered by the prospective payment system, how-

ever, and continue to obtain reimbursement for their “reasonable”

costs. See pages 23-24, infra.

In 1979, the Secretary exercised his authority to

establish cost limits by promulgating a regulation that

prescribed ceilings upon Medicare reimbursement for

hospitals’ inpatient general routine operating costs. See 44

Fed. Reg. 31806 (1979). The regulation divided these costs

into two categories: wage costs and all other costs. It fixed

maximum reimbursable non-wage costs on a nationwide

basis for various categories of hospitals; the rule also set

nationwide wage cost ceilings, but made those cost limits

subject to adjustment on a hospital-by-hospital basis to

account for variations in wage rates over different geo-

graphic areas. The adjustment was made by applying to

the nationwide wage cost ceilings an index derived from

Bureau of Labor Statistics data for hospital wages in the

particular geographic area. A particular hospital’s wage

cost ceiling was thus dependent upon the index number for

that hospital’s geographic area. Jd. at 31807-31808.’ The

wage indices for each geographic area for hospital cost

reporting periods beginning on or after July 1, 1979, were

set forth in the regulation (id. at 31812-31813);> the 1980

indices were published one year later (45 Fed. Reg. 41868,

41875-41876 (1980)).

In 1981, the Secretary adjusted the formula used to

calculate the wage indices by excluding data concerning

2 As the court of appeals explained, “[{t}he wage index for an in-

dividual hospital was to be calculated by dividing the ‘local’ average

hospital wage by the ‘national’ average hospital wage”; “[i]f the

hospital was located within a Standard Metropolitan Statistical Area

(‘SMSA’), the appropriate ‘local’ figure would be the average hospital

wage within that SMSA, and the appropriate ‘national’ figure would

be the average hospital wage among all SMSAs. If the hospital was

located outside of a SMSA, the appropriate ‘local’ and ‘national’

figures would be calculated using non-SMSA wage data” (App., in-

fra, 8a & n.9).

} The Secretary subsequently revised the cost limits for this period

(see 44 Fed. Reg. 46949 (1979)).

the wages paid by hospitals owned by the federal govern-

ment. See 46 Fed. Reg. 33638-33639 (1981). The Secretary

explained that “[b]ecause these hospitals typically use na-

tional pay scales, the amounts they pay their employees do

not necessarily reflect area wage levels. We believe ex-

cluding data from these hospitals will help improve the ac-

curacy of the wage index adjustment” (id. at 33639).4

The Secretary viewed this refinement in the index

methodology as a “minor technical change[ ]” (46 Fed.

Reg. 33638 (1981)). He accordingly did not provide notice

Or an Opportunity to comment before placing the revised

index formula into effect. The Secretary further found

that the public interest required that the new wage indices

be placed into effect immediately: “the current [1980]

limits would [otherwise] remain in effect without adjust-

ment for cost reporting periods beginning after June 30,

[1981] since there is no provision in the current schedule

for adjusting the limits for cost reporting periods that

begin after the date” (id. at 33640).

Several hospitals sought judicial review of the

Secretary’s action in the United States District Court for

the District of Columbia, claiming that the Secretary had

violated the Administrative Procedure Act, 5 U.S.C. (&

Supp. IV) 551 ef seq., by failing to provide notice and an

opportunity to comment before altering the wage index

methodology. The court concluded that “the Secretary’s

decision to exempt the [decision to alter the index metho-

dology] from notice and comment must be declared un-

lawful” (App., infra, 60a). Citing the provisions of the

Medicare Act limiting the availability of judical review,

* The Secretary also used approximate, rather than actual index

values for 26 geographic areas because the Bureau of Labor Statistics

could not supply actual data for those areas (46 Fed. Reg.

33638-33639 (1981)).

the district court declined to issue an injunction barring

the application of the 1981 wage indices to the plaintiffs’

reimbursement claims. It instead issued an order declaring

that the revised wage indices were “invalid” (App., infra,

66a).

In February 1984, the Secretary issued a notice of pro-

posed rulemaking proposing the reissuance of the 1981

wage indices. See 49 Fed. Reg. 6175 (1984). The notice

stated that the indices set forth in the proposed rule would

apply to cost reporting periods beginning on or after July

1, 1981 and ending after September 30, 1981, but would

not apply to reporting periods beginning on or after Oc-

tober 1, 1982 (ibid.).5 Thus, “the rule was to apply to cost

accounting periods that would have been covered prospec-

tively by the Secretary’s 1981 rule had that rule been pro-

mulgated in accordance with the procedural requirements

of the APA” (App., infra, 9a).

The Secretary stated (49 Fed. Reg. 6177 (1984)) that

the exclusion of Federal government hospital data

would improve the accuracy of the wage index

because most Federal hospitals characteristically

employ physicians and other high salaried profes-

sionals whose salaries are based on national rather

than local wage scales. This factor tends to overstate

the average hospital wage in areas with Federal in-

stitutions as compared to areas without such Federal

facilities. Since the purpose of the wage index is to

reflect area-by-area differences in the labor-related

component of hospital costs, the exclusion of Federal

hospital data better enables the wage index to ac-

curately reflect area-by-area labor-related costs.

The Secretary observed that where non-federal hospitals

pay wages similar to those paid by the federal government,

> Reimbursement of routine inpatient costs for those later cost

periods is governed by different rules. See 49 Fed. Reg. 6175 (1984).

the data from non-federal hospitals would reflect those

wages, and “the exclusion of Federal wages would have lit-

tle effect on the wage index” (ibid.). If, on the other hand,

“wages paid to Federal hospital employees are higher than

most area hospital wage levels, then the inclusion of

Federal data results in most hospitals receiving a higher

Medicare cost limit than is warranted based on their ex-

pected costs. Such a result defeats the purpose of the cost

limits, which is to limit a provider’s reimbursement to only

those costs necessary in the efficient delivery of needed

health services” (ibid.).

The Secretary stated that the reissuance of the 1981

wage indices, which had been calculated without wage

data from federally-owned hospitals, “avoids placing an

unwarranted hardship and burden on intermediaries and

many hospitals, while it would impose only a minimal

burden on a few hospitals” (49 Fed. Reg. 6177 (1984)).

Because “[t}he inclusion of Federal data in the wage index

at this point in time would result in overpayments to many

hospitals,” intermediaries might be forced to review

already-settled cost reports and hospitals that had received

excess reimbursement would be required to repay these

sums to the government (ibid.). “In contrast, those few

hospitals that would receive less reimbursement if Federal

hospital data are excluded from the wage index would not

be unduly harmed or burdened by the reissuance of the

wage index,” because those hospitals could only have

relied on the wage indices published in 1981 (ibid.). “Since

these limits are prospectively established and published in

advance, all hospitals knew before the beginning of their

respective cost reporting periods what their cost limit

would be. * * * This proposed notice would simply put

the previously set cost limits back into effect” (ibid.).

After considering comments submitted by interested

parties, the Secretary reaffirmed the propriety of the

change in index methodology and reissued the 1981 wage

indices in final form (49 Fed. Reg. 46495 (1984)). She re-

jected the contention that the application of the 1984 rule

to 1981 cost years constituted an impermissible retroactive

rule, observing that “as a practical matter hospitals could

only have relied on the [1981] rule in determining their

respective cost limits” for the cost periods that would be

covered by the 1984 rule (id. at 46497). Because “[eJach

hospital [therefore] knew in advance of its cost reporting

period what its cost limit would be for this period,” the

Secretary concluded that the 1984 rule could properly be

applied to 1981 cost reporting periods (ibid.).

2. Respondents are health care providers that operate

hospitals. Respondents’ fiscal intermediaries applied the

1984 wage indices to recoup funds previously reimbursed

to respondents under wage indices that included federal

hospital wage data. Respondents obtained the necessary

certification from the Provider Reimbursement Review

Board and commenced several actions in the United States

District Court for the District of Columbia challenging the

Secretary’s decision to apply the revised index calculation

methodology to their 1981 cost periods (see 42 U.S.C.

(Supp. III) 139500(f)(1)). The district court consolidated

the actions and entered judgment in favor of respondents.

The court declined to address respondents’ claims that the

Secretary lacked the statutory authority to issue retro-

active rules. Instead, the court held that the decision to ap-

ply the 1981 wage indices retroactively was invalid on the

facts of this case. See App., infra, 20a-42a.

In so ruling, the district court applied the five-factor

balancing test set forth in Retail, Wholesale & Dep't Store

Union v. NLRB, 466 F.2d 380, 388 (D.C. Cir. 1972), to

determine whether the rule could properly be given retro-

active effect. The court concluded (App., infra, 38a) that

“the balancing of factors in this case compels the conclu-

sion that Medicare statute interests are only minimally

served, if at all, by the Secretary’s retroactive application

of his reissued wage index to recoup funds from these

plaintiffs. In contrast, the ill effects of the Secretary’s ac-

tions are substantial for these plaintiffs and for the general

integrity of the administrative rule-making process. Ac-

cordingly, retroactive application against these plaintiffs

must be denied.”

3. The court of appeals affirmed, but rested its deci-

sion upon grounds different from those adopted by the

district court (App., infra, la-19a). The court acknowl-

edged that adjudicatory orders issued by administrative

agencies may be given retroactive effect. But, citing the

Administrative Procedure Act’s definition of a “rule” as

“an agency statement of general or particular applicability

and future effect” (5S U.S.C. 551(4) (emphasis added)), the

court concluded that “the APA requires that legislative

rules be given future effect only. Because of this clear

statutory command, equitable considerations are irrele-

vant to the determination of whether the Secretary’s rule

may be applied retroactively; such retroactive application

is foreclosed by the express terms of the APA” (App., in-

fra, \la-12a, 13a).

The court stated that when the district court invalidated

the 1981 rule, “it necessarily reinstated the Secretary’s 1979

rule, which required the Secretary to reimburse providers

using a formula that included federal-hospital data”

(App., infra, 13a (emphasis in original)). “The Secretary’s

1984 rule obviously can have no application to cost ac-

counting periods that were, by virtue of the District

Court’s ruling, governed by the Secretary’s 1979 rule”

(:bid.). In the Court’s view, “agencies would be free to

violate the rulemaking requirements of the APA with im-

punity if, upon invalidation of a rule, they were free to

reissue that rule on a retroactive basis” (id. at 14a). The

court acknowledged that if an agency rule is invalidated on

procedural grounds, “the agency must, of course, be given

an Opportunity to correct the procedural defect and prom-

BEST AVAILABLE COPY

ulgate a new rule”; but “the corrected rule, like all other

legislative rules, [must] be prospective in effect only”

(ibid.).°®

The court of appeals stated that Congress may “override

the general terms of the APA by explicitly authorizing

retroactive regulations in an agency’s organic statute”

(App., infra, 14a). Petitioner contended that the retroac-

tive 1984 regulation was specifically authorized by Section

1861(v)(1)(A)(ii) of the Medicare Act, 42 U.S.C. (Supp.

III) 1395x(v)(1)(A)(ii), which empowers the Secretary of

Health and Human Services to issue “regulations” that

“provide for the making of suitable retroactive corrective

adjustments where * * * the aggregate reimbursement

produced by the methods of determining costs proves to

be either inadequate or excessive.” The court of appeals re-

jected that argument, however, holding that “Congress did

not intend to empower the Secretary to promulgate

retroactive cost-limit rules” (App., infra, 15a (emphasis in

Original)). As an initial matter, the court stated that “[iJt

was not until the litigation in the district court that the

Secretary sought to invoke the retroactive adjustments

provision as authority for the rule” (App., infra, 16a).

Because the provision was not explicitly cited when the

1984 rule was promulgated, the court thought that it could

not be invoked to justify that rule.

With respect to the merits of this argument, the court of

appeals discerned “a critical distinction between the power

to promulgate retroactive rules of general application and

the power to make retroactive corrective adjustments in

* In its order denying the petition for rehearing, the court of appeals

stated that “[a]s a general rule, the APA requires that legislative rules

be given future effect only. Whatever exceptions might exist to this

general rule were not implicated in the case before us. Our opinion

therefore does not purport to address circumstances in which there

may be an exception to the rule against retroactive rulemaking” (App.,

infra, 4Sa).

the reimbursements of particular providers whose ag-

gregate reimbursement is shown to be either ‘inadequate or

excessive’ ” in case-by-case evidentiary proceedings (App..,

infra, 17a). It concluded that Section 1861(v)(1)(A)(ii)

confers only the latter power upon the Secretary, authoriz-

ing him to make retroactive adjustments to individual

reimbursement determinations where he is able to “prove

that inadequate or excessive reimbursements to a provider

have resulted from his ‘methods of determining costs’ ”

(App., infra, 18a (citation omitted)). In the absence of in-

dividualized proof that the reimbursement awarded

respondents exceeded their reasonable costs, the court

held that the Secretary had no authority to adjust those

reimbursement awards retroactively (/d. at 18a-19a).

REASONS FOR GRANTING THE PETITION

This case concerns an issue of considerable importance

to the administration of the Medicare program — whether

the Secretary of Health and Human Services may give

retroactive effect to regulations setting the amount of

reimbursement that may be paid to providers of health

services to Medicare beneficiaries. It is important to note

at the outset that, while the rule at issue in this case does

operate retroactively in the technical sense that it governs

reimbursement for costs incurred by respondents prior to

the date upon which the rule was promulgated, that retro-

active effect has none of the qualities that have led the

courts to take a cautious view of the retroactive applica-

tion of legal standards. The wage indices at issue here were

initially promulgated as an entirely prospective regulation

issued in 1981. When that regulation was invalidated by

the district court on procedural grounds in 1983, the Secre-

tary decided not to appeal that determination; instead —

after subjecting the regulation to prior notice and com-

ment—she reissued the regulation in 1984 and gave the

revalidated regulation the same 1981 effective date as the

Original regulation. Because the identical substantive

standard had been adopted in 1981, all hospitals affected

by the 1984 rule—including respondents — were plainly on

notice before they incurred the costs subject to the 1984

rule that the reasonableness of those costs would be meas-

ured against the standard contained in that rule.

Despite the fact that respondents can therefore demon-

Strate no prejudice of any kind from the Secretary’s deci-

sion to give retroactive effect to the reissued rule, the court

of appeals held that both the Medicare Act and the Ad-

ministrative Procedure Act barred the Secretary from ap-.

plying the rule on a retroactive basis. In reaching that

result, the court of appeals adopted constructions of these

Statutes that squarely conflict with the decisions of

numerous other courts of appeals. With respect to the

Medicare Act, the court’s determination cannot be recon-

ciled with the express statutory language authorizing retro-

active administrative action. And the court’s unprece-

dented interpretation of the Administrative Procedure

Act, precluding federal administrative agencies from

engaging in virtually any retroactive rulemaking, is

similarly at odds with that statute’s language and

legislative history.

The scope of the Secretary’s authority to give retroactive

effect to rules governing Medicare cost reimbursement is a

matter of considerable practical importance. In carrying

out his statutory mandate to ensure that reimbursement

neither exceeds nor falls short of a provider’s reasonable

costs, the Secretary may learn that a prior cost reimburse-

ment methodology was flawed—either in favor of pro-

viders or to their detriment — and conclude that retroactive

adjustment of reimbursement awards is therefore ap-

propriate. By prohibiting the Secretary from making such

adjustments through rules of general application, and re-

quiring the Secretary to engage in a separate adjudi-

cation for each individual provider (in which it would be

necessary to prove both the flaws in the old reimbursement

methodology and the propriety of the new standard) the

dec: »nof the court below would effectively eliminate the

only realistic method available to the Secretary to make

retroactive corrections to reimbursement decisions. More-

over, the effect of the court’s erroneous construction of

the Administrative Procedure Act is not confined to the

Medicare context; it dramatically reduces the rulemaking

authority of all federal agencies, barring retroactive rule-

making in essentially all circumstances regardless of the

balance between the public interest and any prejudice to

the affected parties. For all of these reasons, review by this

Court is plainly warranted.’

1. a. Section 1861(v)(1)(A)(ii) of the Medicare Act, 42

U.S.C. (Supp. II]) 1395x(v)(1)(A)(ii), empowers the Secre-

tary of Health and Human Services to issue regulations

that “provide for the making of suitable retroactive correc-

tive adjustments where * * * the aggregate reimburse-

ment produced by the methods of determining costs

proves to be either inadequate or excessive.” There is a

considerable disagreement among the courts of appeals re-

garding the scope of the Secretary’s authority under this

provision. Some court of appeals have concluded that

“{ujpon determining that one of his cost reimbursement

regulations produces inadequate or excessive payments to

providers, the Secretary has a statutory duty [under Sec-

tion 1861(v)(1)(A)(ii)] to make suitable retroactive correc-

tive adjustments” through the issuance of regulations

(Springdale Convalescent Center v. Mathews, 545 F.2d

943, 954 (Sth Cir. 1977)). These courts have held that the

’ This case does not raise the jurisdictional problem presented in

Bowen v. Commonwealth of Massachusetts, petition for cert. pend-

ing, No. 87-712, because the applicable waiver of sovereign immunity

is contained in 42 U.S.C. (& Supp. III) 139500(f), not the Ad-

ministrative Procedure Act or the Tucker Act.

Secretary may—and in some circumstances must — apply

revised cost reimbursement regulations retroactively where

the prior rule resulted in an improper level of reimburse-

ment. [bid.; see also Regents of the University of Califor-

nia v. Heckler, 771 F.2d 1182, 1188-1189 (9th Cir. 1985);

Fairfax Nursing Center, Inc. v. Califano, 590 F.2d 1297,

1300 (4th Cir. 1979); Hazelwood Chronic & Convalescent

Hospital, Inc. v. Weinberger, 543 F.2d 703, 707-708 (9th

Cir. 1976), vacated on other grounds, 430 U.S. 952 (1977);

Whitecliff, Inc. v. United States, 536 F.2d 347, 352 (Ct.

Cl. 1976), cert. denied, 430 U.S. 969 (1977); Kingsbrook

Jewish Medical Center v. Richardson, 486 F.2d 663,

669-670 (2d Cir. 1973); cf. Tallahassee Memorial Regional

Medical Center v. Bowen, 815 F.2d 1435, 1453-1454 &

n.36 (11lth Cir. 1987), petition for cert. pending, No.

87-380 (applying balancing test to determine whether rule

may be applied retroactively); Mason General Hospital v.

Secretary of Health & Human Services, 809 F.2d 1220,

1225-1226 (6th Cir. 1987) (same).

The court below took a narrower view of Section

1861(v)(1)(A)(ii), holding that the provision does not em-

power the Secretary to issue retroactive rules, but only

authorizes retroactive adjustment of reimbursement

awards on a case-by-case basis upon proof that a particu-

lar reimbursement award was either inadequate or ex-

cessive. App., infra, 16a-19a; see also St. Paul-Ramsey

Medical Center v. Bowen, 816 F.2d 417, 419-420 (8th Cir.

1987) (holding that the Secretary has a duty to make retro-

active adjustments without stating whether such ad-

justments may be made by regulation). A third group of

courts has stated that the provision does not permit any

retroactive reassessment of reimbursement decisions, but

only directs the Secretary “to promulgate regulations that

mandate retroactive adjustments in the payments received

by providers, so as to bring the amounts paid to them on

the basis of their monthly estimates in line with the

amount actually due them under the annual audit.”

Daughters of Miriam Center for the Aged v. Mathews, 590

F.2d 1250, 1258 n.23 (3d Cir. 1978) (emphasis in original);

see also Adams Nursing Home of Williamstown, Inc. v.

Mathews, 548 F.2d 1077, 1082 (1st Cir. 1977). On this

view of Section 1861(v)(1)(A)(ii), the provision simply re-

quires the Secretary to establish a mechanism for reconcil-

ing the Secretary’s advance estimated payments with the

amount finally determined to be due the provider follow-

ing review of the provider’s annual cost report.®

b. Section 1861(v)(1)(A)(ii) expressly authorizes the

Secretary to issue regulations that “provide for the mak-

ing of suitable retroactive corrective adjustments” in reim-

bursement awards. Where, as here, the Secretary con-

cludes that application of a cost reimbursement regulation

has resulted in either an excessive or inadequate

reimbursement award, the statute by its plain language

permits the Secretary to issue a retroactive regulation to

adjust the erroneous reimbursement determination as long

as that course of action is reasonable. Nothing in the

language of the statute supports the court of appeals’ con-

clusion that the Secretary may retroactively reexamine

reimbursement decisions on a case-by-case basis, but may

not issue retroactive rules of general application; the

statute expressly authorizes the issuance of regulations

providing for retroactive readjustments in reimbursement

determinations.’

* Indeed, the courts of appeals have themselves recognized the ex-

istence of a conflict regarding the proper interpretation of Section

1861(v) 1M Ai). Tallahassee Memorial Regional Medical Center v.

Bowen, 815 F.2d at 1454 n.36; Daughters of Miriam Center for the

Aged v. Mathews, 590 F.2d at 1258-1259 n.23; App., infra, 16a (fooi-

note omitted) (court below observed that its “sister circuits have

struggled to define the precise contours of the retroactive corrective

adjustments provision”); see also id. at 34a (district court opinion).

% The court of appeals stated that the Secretary could not rely

upon Section 1861(v)(1)(A)(ii) because “[i]t was not until the litigation

Not only is the court of appeals’ interpretation at odds

with the language of the statute, it is wholly unrealistic. It

would permit retroactive adjustments to reimbursement

determinations identical to that achieved by the 1984 rule,

but only if the Secretary makes those adjustments in

separate, individualized proceedings for each provider. In

view of the vast scope of the Medicare program, that ap-

proach is simply unworkable. See City of Austin v.

Heckler, 753 F.2d 1307, 1317 (Sth Cir. 1985) (“regulation

[of Medicare reimbursement] cannot be accomplished ona

hospital-by-hospital basis”). If, as the court appears to

agree, retroactive adjustments are permissible, then the

Secretary must have the authority to make those adjust-

ments in an administratively practicable manner. Because

the Secretary can utilize regulations to set cost limits as an

initial manner, it makes no sense to bar the Secretary from

using regulations to adjust reimbursement awards retro-

actively.

The court of appeals rested its construction of the

statute in part upon the legislative history of the 1972

in the District Court that the Secretary sought to invoke the retro-

active corrective adjustments provision as authority for the rule”

(App., infra, 16a). But the Secretary did expressly invoke Section

186l(v), 42 U.S.C. (& Supp. III) 1395x(v)—of which Section

1861(v)(1)(A)(ii) is a subsection —as authority for the issuance of the

1984 rule. See 49 Fed. Reg. 6180 (1984); id. at 46501. Surely the

Secretary is not required to separately list every subsection upon which

he specifically relies in promulgating a rule. In any event, this Court

has stated that an agency’s failure to invoke the proper statutory

authority for administrative action does not invalidate that action

where the “mistake of the administrative body is one that clearly had

no bearing on the procedure used or the substance of the decision

reached.” Massachusetts Trustees v. United States, 377 U.S. 235,

247-248 (1964); see also NLRB v. Wyman-Gordon, Co., 394 U.S. 759,

767 n.6 (1969); People of Illinois v. ICC, 722 F.2d 1341, 1348-1349

(7th Cir. 1983); cf. Baylor University Medical Center v. Heckler, 758

F.2d 1052, 1060 n.14 (Sth Cir. 1985). That principle plainly applies

here.

amendment to the Medicare statute that authorized the

Secretary to promulgate cost limits such as the regulation

at issue here (see page 3, supra), citing a statement in the

congressional committee reports to the effect that this

authority “ ‘would be exercised on a prospective, rather

than retrospective, basis, so that the provider would know

in advance the limits to Government recognition of in-

curred costs and have the opportunity to act to avoid hav-

ing costs that are not reimbursable’ ” (App., infra, 15a

(citations omitted)).

As a threshold matter, we are not certain that this

legislative history is relevant in interpreting Section

1861(v)(1)(A)(ii), which was included in the original

Medicare statute enacted in 1965, and thus was not

enacted as part of the 1972 amendments. Even if the

legislative history is relevant, however, it does not change

the result here because respondents had ample notice of

the very cost limits adopted in 1984 before those limits

were placed into effect. As we have discussed (see pages

11-12, supra), the substantive standard contained in the

1984 regulation was first issued as a prospective rule in

1981. Indeed, that 1981 rule remained undisturbed for the

entire time period affected by the retroactive rule—the

cost periods beginning after July 1981 and before October

1982 — because the rule was not invalidated by the district

court until 1983. Thus, respondents obviously were on

notice that the reasonableness of their costs would be

assessed against the standard set forth in the 1984 rule.'®

'© The court of appeals suggested (App., infra, 12a n.11) that the

Secretary’s interpretation of the statute is flawed because it would

allow the Secretary to make his regulations retroactive for an

unlimited period of time. But Section 1861(v)(1)(A)(ii) does not over-

ride other provisions of the Medicare Act. Thus, when a reimburse-

ment award is fina! and no longer subject to reopening (see 42 C.F.R.

405.1885), that award cannot be reconsidered pursuant to a rule issued

2. Even if the Secretary’s express authority to alter

reimbursement decisions retroactively does not empower

the Secretary to issue retroactive rules of the type at issue

here, the Secretary’s action should be upheld as an exercise

of his general rulemaking authority under the Medicare

Act (see 42 U.S.C. (& Supp. IID) 1395x(v)(1)(A), 139S5hh)

and the Administrative Procedure Act. The court of ap-

peals’ contrary determination—which rests on the novel

conclusion that the APA prohibits virtually all retroactive

rulemaking — should be reviewed by this Court.!!

a. The decision of the court of appeals regarding the

authority of a federal administrative agency to accord

retroactive effect to one of its rules conflicts with the deci-

sions of other courts of appeals with respect to that ques-

tion. The court below stands alone in holding that, as a

general matter, a rule promulgated pursuant to the Ad-

ministrative Procedure Act may not be given retroactive

effect (see App., infra, 13a). The other courts of appeals

to address the question have stated that an agency’s deci-

sion to give a rule retroactive effect may be upheld if that

decision is found to be reasonable after assessment of the

public and private interests affected by the decision to ap-

ply the rule retroactively. See, e.g., Texacu, Inc. v. De-

under Section 1861(v)(1)A)(ii). See 51 Fed. Reg. 11188 (1986) (stating

that retroactive application of medical malpractice cost standard is

limited to cost reports not yet closed and costs reports still subject to

reopening).

'' The court of appeals initially stated that all retroactive rule-

making was prohibited by the APA (see App., infra, 13a). In its order

denying the petition for rehearing, the court indicated that there might

be some exceptions to this “general rule,” but declined to state what

those exceptions might be (id. at 45a). That vague order does little to

alleviate the impact of the court’s decision and it does nothing to

eliminate the fundamental error in the court’s legal analysis —the con-

clusion that the APA contains an independent limitation upon retro-

active rulemaking.

partment of Energy, 795 F.2d 1021, 1025-1027 (Temp.

Emer. Ct. App. 1986), cert. dismissed, No. 86-187 (Aug.

19, 1986); National Ass’n of Independent Television Pro-

ducers & Distributors v. FCC, 502 F.2d 249, 255 nn. 10, 11

(2d Cir. 1974); Daughters of Miriam Center for the Aged

v. Mathews, 590 F.2d at 1259-1260 (interpretive rule);

General Telephone Co. v. United States, 449 F .2d 846, 863

(Sth Cir. 1971); cf. Illinois v. Bowen, 786 F.2d 288, 292

(7th Cir. 1986) (upholding retroactive application of agen-

cy’s new interpretation of existing rule). Prior decisions of

the District of Columbia Circuit were to the same effect.

Citizens To Save Spencer County v. EPA, 600 F.2d 844,

879-881 (D.C. Cir. 1979); see also Maxcell Telecom Plus,

Inc. v. FCC, 815 F.2d 1551, 1554-1556 (D.C. Cir. 1987).

b. The court of appeals’ interpretation of the Ad-

ministrative Procedure Act is clearly wrong. The court of

appeals relied (App., infra, 1la-12a) upon the statutory

definition of a “rule,” which states that a rule is “the whole

or any part of any agency statement of general or par-

ticular applicability and future effect” designed to imple-

ment law or policy or describe the agency’s organization

and procedure (5 U.S.C. 551(4)). Seizing upon the phrase

“future effect,” the court concluded that a rule may not be

given retroactive effect. But the legislative history of Sec-

tion 551(4) makes plain that Congress did not intend to

impose any such general restriction upon rulemaking

authority. The reference to “future effect” was designed to

distinguish rulemaking from adjudication, not to prohibit

retroactive application of rules as a matter of course (see

Colyer v. Harris, 519 F. Supp. 692, 694 (S.D. Ohio 1981)).

Thus, under the APA, a “rule” is a statement of law or

policy which is not applied or enforced in the same pro-

ceeding in which it is announced; any application or en-

forcement will occur only in the future, i.e., in an ad-

judication.

BEST AVAILABLE COPY

This understanding is confirmed by the report of the

Horse—rdtetary—-Commnnittee, which-addedthe-phrase_of —

‘the House Judiciary Committee, which added the phrase

“future effect” to the statutory definition of “rule.” The

committee’s report explains that “(t]he phrase ‘future ef-

fect’ does not preclude agencies from considering and, so

far as legally authorized, dealing with past transactions in

prescribing rules for the future.” H.R. Rep. 1980, 79th

Cong., 2d Sess. App. A, n.1 (1946), reprinted in,

Legislative History of the Administrative Procedure Act,

1944-46, at 283 n.1; see also Alfftorney General’s Manual

on the Administrative Procedure Act 37 (1947) (“[nJothing

in the Act precludes the issuance of retroactive rules when

otherwise legal and accompanied by” a finding of good

cause).

The court of appeals also justified its interpretation of

the APA by stating that retroactive rulemaking to correct

an agency’s procedural misstep is “completely at odds

with basic tenets of administrative law” because “the ef-

fect of invalidating an agency rule is to ‘reinstat/e] the

rules previously in force.’ ” App., infra, 13a (quoting Ac-

tion on Smoking & Health v. CAB, 713 F.2d 795, 797

(D.C. Cir. 1983) (emphasis in the original)). But the

court’s premise is incorrect; invalidation of a rule does not

generally reinstate the rules previously in force. Rather,

the agency is free to reconsider the entire matter, with its

decision subject to further judicial review. See Burlington

Northern, Inc. v. United States, 459 U.S. 131, 142-144

(1982); Motor Vehicle Manufacturers Ass’n vy. State Farm

Mutual Automobile Insurance Co., 463 U.S. 29, 57 & n.21

(1983); Addison v. Holly Hill Fruit Products, Inc., 322

U.S. 607, 619-620 (1944); Williams v. Washington Metro-

politan Area Transit Comm’n, 415 F.2d 922, 939-940

(D.C. Cir. 1968) (en banc), cert. denied, 393 U.S. 1081

(1969). Accordingly, the administrative agency is free to

decide in the first instance whether to apply prior law to a

case covered by the invalidated regulation or give retro-

active effect to a subsequently-promulgated regulation. By

completely eliminating administrative discretion to deter-

mine whether to accord retroactive effect to a rule, it is the

court of appeals that has ignored basic principles of ad-

ministrative law.!?

The fact that retroactive rulemaking is permissible

under the APA does not, of course, mean that an agency’s

decision to give a rule retroactive effect must be upheld in

every case. The decision to apply the rule retroactively

must be set aside if it is “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law” (5

U.S.C. 706(2)(A)). The threshold inquiry is whether the

substantive statute granting rulemaking authority imposes

any restriction upon the agency’s authority to apply rules

retroactively. If no such limitation exists, a court must

consider whether the agency’s decision is arbitrary and

capricious. The touchstone for that inquiry is this Court’s

decision in SEC v. Chenery Corp., 332 U.S. 194 (1947),

which upheld the retroactive application of a new principle

of law in the context of an adjudication. The Court there

stated that “such retroactivity must be balanced against

the mischief of producing a result which is contrary to a

statutory design or to legal or equitable principles. If that

'2 Contrary to the court of appeals’ apparent belief, Action on

Smoking & Health v. CAB, supra, did not purport to establish a

general principle that invalidation of a rule automatically reinstates

the pre-existing rule. Rather, the reinstatement of the prior rule in that

case was ordered only because an agency had engaged in “repeated

technical noncompliance” with the APA (713 F.2d at 802). The court’s

general principle is also plainly unworkable. It would reimpose a prior

regulation that the agency had already found to be unsatisfactory and

that might be contrary to intervening statutory provisions. The agency

must exercise its expertise to determine in the first instance the suitable

course of action following a remand. Cf. Vermont Yankee Nuclear

Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S.

519 (1978) (holding that a court may not impose additional procedural

requirements On an agency).

mischief is greater than the ill effect of the retroactive ap-

plication of a new standard, it is not the type of retro-

activity which is condemned by law” (332 U.S. at 203).

Other courts have elaborated upon the application of this

balancing test in the rulemaking context. See, e.g., Tex-

aco, Inc. v. Department of Energy, 795 F.2d at 1025-1027;

Citizens to Save Spencer County v. EPA, 600 F.2d at

879-881. .

In addition, the retroactive application of the rule must

be consistent with the Constitution. The Court has con-

cluded that “[t}he retroactive aspects of legislation, as well

as the prospective aspects, must meet the test of due proc-

ess, and the justifications for the latter may not suffice for

the former” (Usery v. Turner Elkhorn Mining Co., 428

U.S. 1, 16-17 (1976)). That due process standard requires a

“showing that the retroactive application of the [regula-

tion] is itself justified by a rational * * * purpose” (Pen-

sion Benefit Guaranty Corp. v. R.A. Gray & Co., 467

U.S. 717, 730 (1984)).

These tests are satisfied here. As we have discussed (see

pages 11-12, supra), prior to incurring any of-the costs that

are subject to the 1984 rule, sespondents had ample notice

that the reasonableness of those costs would be assessed

against the standard contained in that rule. Thus, respond-

ents can have no reliance interest because the governing

standard at the time they incurred the relevant costs was

the standard that is contained in the current rule. In addi-

tion, the public interest weighs strongly in favor of apply-

ing the rule retroactively. Otherwise, respondents would

gain a windfall—approximately $2 million in excess re-

imbursement. '3 :

') The district court reached a contrary conclusion in applying the

balancing test set forth in Retail, Wholesale & Dep’t Store Union v.

NLRB, supra (see App., infra, 3Sa-39a). Its analysis was flawed by its

failure to recognize that respondents’ reliance interest must be assessed

3. The issues presented in this case are of considerable

practical significance. The Secretary is obligated to ad-

minister the Medicare program in a manner that ensures

that providers will be reimbursed for reasonable costs, as

defined by the Secretary, and no more. See 42 U.S.C. (&

Supp. III) 1395f(b). Because the decision of the court of

appeals effectively deprives the Secretary of any realistic

ability to adjust flawed reimbursement methodologies on

a retroactive basis, even in the face of practical experience

or audit data establishing the flaws in those methods, it

will greatly hamper the Secretary’s ability to perform his

statutory duty. If defective cost reimbursement rules allow

providers such as respondents to reap a windfall — or force

them to suffer a shortfall —the Secretary simply will not be

able to adjust those awards.'*

Although the reasonable cost system of reimbursement

for Medicare services has been replaced to some extent by

the prospective payment system (see note 1, supra), many

Medicare providers continue to obtain reimbursement for

their “reasonable” costs by filing cost reports. See 42

C.F.R. 412.20-412.32 (rehabilitation hospitals, psychiatric

as of the time they engaged in the underlying conduct. The court

erroneously concluded that respondents had a cognizable reliance in-

terest in retaining the windfall they obtained by virtue of the applica-

tion of the flawed reimbursement standard. Cf. Heckler v. Communi-

ty Health Service of Crawford County, Inc., 467 U.S. 51 (1984). The

court also erred in finding that the public interest weighed against the

application of the revised methodology for calculation of the indices

without first finding that that methodology was substantively invalid.

If the methodology is valid, it is, by definition, the proper approach

for calculating “reasonable” cost. Any award in excess of that amount

violates the statute and therefore cannot be supported by the public in-

terest.

'4 The District of Columbia Circuit’s limited view of the Secretary’s

authority is especially significant because the Medicare statute permits

any provider to seek judicial review of a reimbursement determination

in that Circuit (see 42 U.S.C. (Supp. III) 139500(f)(1)).

hospitals, children’s hospitals, and hospitals with average

length of stay greater than 25 days are not covered by

PPS), 42 C.F.R. 413.1 (reasonable cost payment system

applies to skilled nursing facilities, home health agencies,

and other facilities providing services other than in-

hospital care). Moreover, all providers are reimbursed for

some categories of costs on a reasonable cost basis. See,

e.g., 42 U.S.C. (Supp. II]) 1395ww(a)(4) (anesthesia serv-

ices provided by nurse); 42 C.F.R. 412.2(d) (capital costs,

direct medical education costs, cost for direct medical and

surgical services provided by certain physicians in teaching

hospitals). The questions presented here regarding the

Secretary’s authority to adjust reimbursement awards on a

retroactive basis therefore have continuing importance for

the administration of the Medicare program. '‘

The implications of the court of appeals’ construction of

the Administrative Procedure Act range far beyond the

Medicare context. The court’s decision seriously limits the

regulatory authority of virtually every federal administra-

tive agency.'® By precluding retroactive rulemaking to

correct procedural or technical missteps, the decision

below permits plaintiffs, such as respondents here, to

bootstrap procedural errors into substantive limitations

upon the exercise of agency authority. That result will

adversely affect an agency’s ability to carry out its con-

gressional mandate. The decision will also affect the gov-

'S In addition, many disputes concerning hospitals’ claims for reim-

bursement under the reasonable cost system are now pending on ad-

ministrative and judicial review. The Department of Health and

Human Services informs us that many of these cases involve .

challenges to the Secretary’s authority to promulgate retroactive cost

limit regulations.

'¢ And, because almost all government agencies are subject to suit

under the APA in the District of Columbia Circuit (see 28 U.S.C.

1391(e)), the court’s decision will have nationwide impact.

ernment s litigating posture and the caseload of the federal

appellate courts. If an agency cannot retroactively correct

even an insignificant procedural error, the government

will be forced to seek review of many more adverse lower

court decisions in order to protect the agency’s regulatory

authority. The decision below thus threatens to burden the

courts with issues that otherwise would have been resolved

in the administrative process. For all of these reasons,

review by this Court is plainly warranted.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

DONALD B. AYER*

Acting Solicitor General

RICHARD K. WILLARD

Assistant Attorney General

THOMAS W. MERRILL

Deputy Solicitor General

ANDREW J. PINCUS

Assistant to the Solicitor General

JOHN F. CORDES

MARK W. PENNAK

Altorneys

DECEMBER 1987

* The Solicitor General is disqualified in this case. .

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 86-5381

GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

Otis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

No. 86-5382

HOWARD UNIVERSITY

AS HOWARD UNIVERSITY HOSPITAL, ET AL.

Otis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

No. 86-5383

TUSCON GENERAL HOSPITAL

Vv.

OTis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

Appeals from the United States District Court

for the District of Columbia

(Civil Action Nos. 85-1845, 85-2545 and 85-2862)

Argued March 30, 1987

Decided June 26, 1987

(la)

Before: EDWARDS and STARR, Circuit Judges, and

SwYGERT,* Senior Circuit Judge, United States Court of

Appeals for the Seventh Circuit.

Opinion for the Court filed by Circuit Judge EDwarps.

EDWARDS, Circuit Judge: In 1979, the Secretary of the

Department of Health, Education and Welfare,' acting

pursuant to section 223(b) of the Social Security Amend-

ments of 1972,? promulgated a number of “cost limit”

rules applicable to providers of routine inpatient hospital

Medicare services. See 44 Fed. Reg. 31,806 (1979). The

rules established limits on the amount of money that pro-

viders would be able to claim from the federal government

as reimbursement for the costs incurred in the provision of

Medicare services. Among the rules promulgated by the

Secretary was a “wage index” formula, which would be

used to calculate the cap on reimbursable wage costs. By

its terms, the wage-index rule was to apply prospectively to

cost accounting periods beginning on or after July 1, 1979.

Id. at 31,806.

Two years later, in 1981, the Secretary modified the

wage-index formula to exclude certain data that, in his

view, reduced the accuracy of the index. See 46 Fed. Reg.

33,637, 33,639 (1981). The Secretary did so, however,

without allowing for a notice and comment period. The

* Sitting by designation pursuant to 28 U.S.C. § 294(d) (1982).

' Now the Department of Health and Human Services or “HHS.”

? Codified at 42 U.S.C. § 1395x(v)(1)(A) (1982).

appellees — seven non-profit hospitals that provide routine

inpatient Medicare services — challenged the Secretary’s ac-

tion in the District Court on the ground that notice and an

opportunity for comment were required by section 553 of

the Administrative Procedure Act (“APA”), 5 U.S.C.

§ 553 (1982). The trial court agreed with the appellees’

contention and struck down the rule as violative of the

APA. See District of Columbia Hosp. Ass’n v. Heckler,

No. 82-2520, slip op. (D.D.C. Apr. 29, 1983), reprinted in

Joint Appendix (“J.A.”) 44-64; Saint Cloud Hosp. v.

Heckler, No. 83-0223, slip op. (D.D.C. May 2, 1983), re-

printed in J.A. 65-66. No appeal was taken from this rul-

ing, and the Secretary, acting through fiscal intermedi-

aries,’ settled the appellees’ accounts using the 1979 wage-

index rule.

Three years later, the Secretary “reissued” the 1981

wage-index rule, this time adhering to the notice and com-

ment procedures mandated by the APA. See 49 Fed. Reg.

46,495 (1984). Like the 1979 and 1981 cost-limit rules, the

1984 rule was promulgated under the authority of section

223(b). See Proposed Notice, 49 Fed. Reg. 6175, 6176

(1984). Unlike the 1979 and 1981 rules, however, the 1984

rule was given retroactive effect. Specifically, the rule was

to cover cost accounting periods beginning on or after July

1, 1981—precisely those cost accounting periods that

would have been covered prospectively by the Secretary’s

1981 rule had that rule been promulgated in conformity

with the procedural requirements of the APA. Pursuant to

the retroactive rule, the fiscal intermediaries recalculated

> 42 U.S.C. § 1395g(a) (1982) requires the Secretary to reimburse

providers periodically during the fiscal year based on estimated costs

for the year. At the end of the fiscal year, the Secretary is to make any

“necessary adjustments on account of previously made overpayments

or underpayments.” The Secretary has contracted out these statutory

responsibilities to insurance companies known as “fiscal inter-

mediaries.”

the amount owing to the appellees and recouped an

amount in excess of two million dollars.

The appellees again filed suit in the District Court,

challenging both the rule’s retroactive application and its

substantive validity. The District Court held that the re-

issued wage index was invalid insofar as it was applied to

recoup monies from the appellees, and ordered the

Secretary to reimburse the appellees with interest. See

Georgetown Univ. Hosp. v. Bowen, No. 85-1845, slip op.

at 24(D.D.C. Apr. 11, 1986), reprinted in J.A. 94, 117. In

reaching this result, the District Court principally con-

cluded that the retroactive application of the rule was

barred by the equitable principles enumerated by this cir-

cuit in Retail, Wholesale & Department Store Union vy.

NLRB (“Retail Union”), 466 F.2d 380 (D.C. Cir. 1972).4

We agree with the District Court that the Secretary’s

retroactive application of the 1984 cost-limit rule cannot

stand, but we base our conclusion solely on the applicable

provisions of the APA and the Medicare Act, and not on

the equitable balancing test adopted by this circuit in

Retail Union. The principles enunciated in Retail Union

govern only those situations where a new policy is an-

nounced in the course of an administrative adjudication

and applied retroactively to the participants in that ad-

judication. It does not apply in those situations where a

* The District Court was ambivalent about whether the Secretary

had the statutory authority to promulgate a retroactive cost-limit rule.

On the one hand, the court found that the APA and the Medicare Act

seemed to preclude the issuance of such a retroactive rule. Slip op. at

15-16, reprinted in J.A. 108-09. On the other hand, the court observed

that 42 U.S.C. § 1395x(v)(1)(A)(ii) (1982), which authorizes the Secre-

tary to provide in his regulations for the “making of suitable retroac-

live corrective adjustments where, for a provider of services for any

fiscal period, the aggregate reimbursement produced by the methods

of determining costs proves to be either inadequate or excessive,”

arguably contemplated some degree of retroactive rulemaking

authority. /d. at 16-17, reprinted in J.A. 109-10.

“legislative” rule is promulgated in accordance with the

rulemaking procedures set forth in the APA. In these lat-

ter situations, a reviewing court must look both to the

APA and to the agency’s organic statute to discern the

scope of the agency’s rulemaking authority. When we do

so in the instant case, we find that the Secretary’s actions

were cleariy precluded both by the APA and the Medicare

Act. Accordingly, we affirm the judgment of the District

Court.

I. BACKGROUND

A. Statutory Background

The Medicare program, which subsidizes the medical

care of the elderly and the infirm, was enacted by Con-

gress in 1965 as Title XVIII of the Social Security Act. See

Social Security Amendments of 1965, Pub. L. No. 89-97,

79 Stat. 286. Under the program, providers of covered

services, such as hospitals and nursing homes, are general-

ly reimbursed for “the lesser of (A) the reasonable cost of

such services, as determined under section 1395x(v). . . or

(B) the customary charges with respect to such services.”

42 U.S.C. § 1395f(b)(1) (1982 & Supp. III 1985). The in-

stant case concerns only the “reasonable cost” provisions

of 42 U.S.C. § 1395x(v).

As amended in 1972, section 1395x(v)(1)(A) defines

“reasonable cost” as the “cost actually incurred, excluding

therefrom any part of incurred cost found to be unneces-

sary in the efficient delivery of needed health services.”

The statute, however, does not require the Secretary to

calculate the reasonable cost of Medicare services on a

provider-by-provider basis. Rather, the Secretary is em-

powered to estimate the reasonable cost of providers by is-

suing regulations of general applicability. These regula-

tions — denominated by statute as the “methods to be used

. in determining . . . costs” —are presumed to measure

accurately that proportion of a provider’s total costs that

are attributable to the efficient treatment of Medicare

beneficiaries. However, the Secretary is empowered by

section 1395x(v)(1)(A)(ii) to provite in his regulations “for

the making of suitable retroactive corrective adjustments

where, for a provider of services for any fiscal period, the

aggregate reimbursement produced by the methods of

determining costs proves to be either inadequate or ex-

cessive.” 5

Prior to the 1972 amendments to section 1395x(v)(1)(A),

the Secretary’s ability to determine accurately the

reasonable cost incurred by Medicare providers was some-

what limited. As the statute was originally drafted, the

Secretary was empowered to establish cost accounting

“methods” that would separate a provider’s Medicare-

related costs from its non-Medicare related costs.* How-

ever, the Secretary was not authorized to promulgate

regulations determining—on a prospective basis— what

level of Medicare-related costs would be considered “reas-

onable,” and hence reimbursable.’

> Section 1395x(v)(1)(A)(ii) will be referred to throughout the re-

mainder of this opinion as the “retroactive corrective adjustments pro-

vision.”

* See S. Rep. No. 404, 89th Cong., Ist Sess. 36, reprinted in 1965

U.S. CODE CONG. & ADMIN. NEWS 1943, 1976:

Although [reimbursement] may be made on various bases the ob-

jective, whatever method of computation is used, will be to ap-

proximate as closely as practicable the actual cost (both direct

and indirect) of services rendered to the beneficiaries of the pro-

gram so that under any method of determining costs, the costs of

services of individuals covered by the program will not be borne

by individuals not covered, and the costs of services of in-

dividuals not covered will not be borne by the program.

’ As the statute was originally drafted, the Secretary did have the

authority to reduce reimbursements for those “items or services which

are in excess of or more than” what would be considered “reasonable”

To remedy this perceived deficiency in the statutory

scheme, Congress amended section 1395x(v)(1)(A) in 1972

to authorize the Secretary to promulgate regulations estab-

lishing “limits on the direct or indirect overall incurred

costs or incurred costs of specific items or services or

groups of items or services to be recognized as reasonable

based on estimates of the costs necessary in the efficient

delivery of needed health services.” See Social Security

Amendments of 1972, Pub. L. No. 92-603, § 223(b), 86

Stat. 1329, 1393. In amending the statute, both Houses of

Congress made clear their intent that this new authority

was to be exercised on a prospective basis only: “[The

authority] to set limits on costs . . . would be exercised on

a prospective, rather than retrospective, basis so that the

provider would know in advance the limits to Government

recognition of incurred costs and have the opportunity to

act to avoid having costs that are not reimbursable.”

Senate Report at 188; House Report at 83, reprinted in

1972 U.S. CoDE Conc. & ADMIN. News at 5070. Thus, by

virtue of this amendment, the Secretary’s statutory

authority to establish “methods of determining costs” ex-

tends to the promulgation of prospective “cost limit” rules.

See Regents of the Univ. of Cal. v. Heckler, 771 F.2d

1182, 1189 (9th Cir. 1985) (“The 1972 amendments, in

authorizing the Secretary to adopt cost limits, merely

added another method of cost calculation to those already

recognized as legitimate by the statute.”).

under the Medicare Act. Pub. L. No. 89-97, § 1861(v)(2)(B), 79 Stat.

286, 323 (1965). However, this power was rarely exercised, both

because of the difficulty of proving on a case-by-case basis that a par-

ticular item or service was excessively priced, and the “financial uncer-

tainty” to providers caused by the retroactive disallowance of incurred

costs. See S. Rep. No. 1230, 92d Cong., 2d Sess. 188 (1972) (“Senate

Report’); H.R. Rep. No. 231, 92d Cong., Ist Sess. 83, reprinted in

1972 U.S. CODE CONG. & ADMIN. NEWS 4989, 5069-70 (“House

Report’).

B. Factual Background

The cost-limit rule at issue in this case was first promul-

gated by the Secretary in 1979, explicitly pursuant to his

statutory authority “to set prospective limits on the costs

that are reimbursed under Medicare.” 44 Fed. Reg.

31,806, 31,806 (1979). The rule, which governed only the

provision of routine inpatient hospital services,* estab-

lished a wage-index formula to be used to calculate the cap

on reimbursable wage costs. The wage index for an in-

dividual hospital was to be calculated by dividing the

“local” average hospital wage by the “national” average

hospital wage.’ Bureau of Labor Statistics (“BLS”) data

was to be used in calculating the applicable indexes. See id.

at 31,807-08.

In 1981, the Secretary made an adjustment to the for-

mula used to calculate the wage indexes. Specifically, the

Secretary decided to exclude data on the wages paid by

federally-owned hospitals. See 46 Fed. Reg. 33,637,

33,639 (1981). The Secretary reasoned that the wage-index

formula— which was designed to measure variations in

local wage rates — would be more accurate without the in-

clusion of this wage data, because federally-owned

hospitals typically paid their employees according to

* In 1983, Congress enacted a new “prospective payment system” to

be used by the Secretary in determining the appropriate level of reim-

bursement for inpatient hospital services. See 42 U.S.C. § 1395ww(d)

(Supp. IIl 1985). Under that new system, providers of inpatient

hospital services are reimbursed on the basis of predetermined rates.

This change does not affect the instant appeal, which concerns only

reimbursements for costs incurred prior to 1983.

* If the hospital was located within a Standard Metropolitan

Statistical Area (“SMSA”), the appropriate “local” figure would be the

average hospital wage within that SMSA, and the appropriate “na-

tional” figure would be the average hospital wage among ali SMSAs.

If the hospital was located outside of a SMSA, the appropriate “local”

and “national” figures would be calculated using non-SMSA wage

data.

national rather than local wage rates. /d. at 33,639. The

Secretary made this revision in his cost-limit rule without

allowing for a notice and comment period.

The appellees filed two separate actions in the District

Court seeking to overturn the rule on the ground that the

Secretary had failed to comply with the procedural

requirements of section 553 of the APA, 5 U.S.C. § 553

(1982). The trial court found in favor of the appellees and

invalidated the rule. See District of Columbia Hosp. Ass’n

v. Heckler, No. 82-2520, slip op. (D.D.C. Apr. 29, 1983),

reprinted in J.A. 44-64; Saint Cloud Hosp. v. Heckler,

No. 83-0223, slip op. (D.D.C. May 2, 1983), reprinted in

J.A. 65-66. The Secretary filed an appeal from the trial

court’s ruling, but voluntarily dismissed the appeal on

September 1, 1983. Pursuant to the trial court’s decision,

the fiscal intermediaries settled the appellees’ accounts us-

ing the Secretary’s original wage-index formula, /.e., the

wage-index formula that included federal-hospital data.

In February of 1984, the Secretary published a Notice of

Proposed Rulemaking in which he proposed to “re-issue”

the 1981 wage-index rule. 49 Fed. Reg. 6175 (1984).

Although the notice explicitly stated that the Secretary was

authorized by statute to establish “prospective” cost-limit

rules, the “reissued” rule was to apply retroactively to cost

accounting periods dating back to July of 1981. /d. In

other words, the rule was to apply to cost accounting

periods that would have been covered prospectively by the

Secretary’s 1981 rule had that rule been promulgated in ac-

cordance with the procedural requirements of the APA.

After a comment period, the Secretary published a final

notice announcing his decision to “reissue” the 1981 wage-

index rule. 49 Fed. Reg. 46,495 (1984). In rejecting the

contention of one commenter that he was without authori-

ty to promulgate a retroactive rule, the Secretary opined

that the rule was not truly “retroactive” in nature, because

hospitals were on notice in 1981 that he intended to ex-

—_

10a

clude federal-hospital data from the wage index. /d. at

46,497. Under the circumstances, the Secretary viewed the

“retroactive” Tule as a legitimate attempt to correct the

procedural defect that had prompted the District Court to

invalidate the rule in the first instance. /d.

Pursuant to the rule, the Secretary instructed the fiscal

intermediaries to reopen earlier cost accounting periods and

recalculate the amount owing to the appellees using a wage-

index formula that excluded federal-hospital data. The

fiscal intermediaries did so, recouping an amount in excess

of two million dollars from the seven appellee hospitals.

The appellees again filed suit in the District Court, which

invalidated the Secretary’s action on the ground that

retroactive application of the 1984 rule violated the

equitable principles enunciated by this court in Retail

Union. See Georgetown Univ. Hosp. v. Bowen, No.

85-1845, slip op. at 17-22 (D.D.C. Apr. 11, 1986), reprinted

in J.A. 94, 110-15. The Secretary filed this appeal.

Il. ANALYSIS

A. The Secretary’s Retroactive Rule Was Barred by the

APA

In its Opinion, the District Court found that both the

APA and the Medicare Act appeared to preclude the

Secretary from promulgating a retroactive cost-limit rule.

However, the court declined to rest its judgment on that

ground. Perceiving conflicting signals from Congress on

the question of the Secretary’s statutory authority, see

note 4 supra, the trial court turned to this circuit’s decision

in Retail Union, where we articulated certain equitable

considerations relevant to the question whether an agency

may give retroactive effect to new policies adopted in the

course Of adjudication.'® Based on the considerations

'© Those equitable considerations include: (1) whether the issue

raised in the adjudication is one of first impression; (2) whether the

—_

lla

enumerated in Retail Union, the trial court held that the

Secretary’s rule was invalid insofar as it was applied to

recoup monies from the appellees.

We uphold the judgment of the District Court, but for

reasons distinct from those identified in Retail Union. In

Retail Union, the court was careful to distinguish between

new policies adopted in the course of adjudication, and

rules adopted pursuant to rulemaking procedures under

the APA. Policies adopted in the course of adjudication,

the court held, may be applied retroactively, unless the in-

equities produced by retroactive application are not

counterbalanced by sufficiently significant statutory in-

terests. See 466 F.2d at 390; cf. Yakima Valley Cable-

vision, Inc. v. FCC, 794 F.2d 737, 745-46 (D.C. Cir. 1986)

(noting the “troubling nature” of retroactive policy-

making, and observing that this court, beginning with

Retail Union, “has developed factors to guide our deter-

mination of whether an agency may give retroactive effect

to a new policy developed in adjudication”). The court in

Retail Union went on to observe, however, that Congress

had devised an “alternative procedure,” i.e., rulemaking

under the APA, by which the inequities of retroactive

policymaking could be avoided altogether. 466 F.2d at 388

(emphasis added). The court made clear that a balancing

of the equities is unnecessary in those situations where this

“alternative procedure” is utilized, because rules adopted

pursuant to rulemaking procedures under the APA are to

be “prospective in application only.” /d. (citing the defini-

tional section of the APA, 5 U.S.C. § 551 (1982), which

distinguishes a “rule” from an “adjudication,” and defines

new policy is an abrupt departure from well-established agency prac-

tice; (3) the extent to which the parties to the adjudication relied on the

old policy; and (4) the burden imposed on the parties by retroactive

application of the new policy. These considerations must be balanced

against the statutory interest in applying the new policy retroactively.

See 466 F.2d at 390.

12a

the former as “an agency statement of general or par-

ticular applicability and future effect” (emphasis added));

cf. SEC. v. Chenery Corp., 332 (U.S. 194, 202 (1947)

(distinguishing between the “quasi-legislative promulga-

tion of [general] rules to be applied in the future,” and ad-

judicatory orders that may in appropriate circumstances,

be given retroactive effect); Wisconsin Gas Co. v. FERC,

770 F.2d 1144, 1166 (D.C. Cir. 1985) (distinguishing be-

tween trial-type procedures and “notice and comment rule-

making, [which is] particularly appropriate for determina-

tion of legislative facts and policy of general, prospective

applicability”), cert. denied, 106 S. Ct. 1968 (1986);

Telocator Network of America v. FCC, 691 F.2d 525, 551

(D.C. Cir. 1982) (same); PBW Stock Exchange, Inc. v.

SEC, 485 F.2d 718, 732 (3d Cir. 1973) (“[R]ules ordinarily

look to the future and are applied prospectively only.

...), cert. denied, 416 U.S. 969 (1974).!!

'! The fact that the APA requires legislative rules to be given only

“future effect” is underscored by 5 U.S.C. § 553(d) (1982), which re-

quires that such rules be published not less than 30 days before their

effective date, except “as otherwise provided by the agency for good

cause found and published with the rule.” On one occasion, this cir-

cuit has suggested that, in unique circumstances, the “good cause” ex-

ception to the 30-day effective date requirement might justify

legislative rules of limited retroactive effect. See Citizens to Save

Spencer County v. EPA, 600 F.2d 844, 879-81 (D.C. Cir. 1979). The

decision in Spencer County is not only extremely limited, but the nar-

row exception that it purports to recognize has never been accepted by

any other panel of this court. This is hardly surprising, because

§ 553(d) appears only to contemplate a narrow exception to the 30-day

requirement for rules that, for good cause shown, must be given effect

either immediately upon promulgation, or in less than 30 days; neither

§ 553(d), nor any other provision of the APA, permits rules of retro-

spective effect.

In any event, we need not examine the precise meaning of § 553(d)

here, because the reasons advanced by the Secretary in his notice for

promulgating a retroactive rule plainly do not bring that rule within

any conceivable “good cause” exception.

l3a

The instant case does not in any way involve a new agen-

cy policy articulated in the course of adjudication. Rather,

it involves a /egislative rule adopted by the Secretary pur-

suant to the notice and comment procedures of the APA,

5 U.S.C. § 553 (1982). As recognized in Retail Union

itself, the APA requires that legislative rules be given

future effect only. Because of this clear statutory com-

mand, equitable considerations are irrelevant to the deter-

mination of whether the Secretary’s rule may be applied

retroactively; such retroactive application is foreclosed by

the express terms of the APA.

In his final rulemaking notice, the Secretary suggested

that a retroactive rule was warranted under the circum-

stances of this case to correct what was simply a “pro-

cedural defect” in his previous rule. See 49 Fed. Reg.

46,495, 46,497 (1984). It is clear, however, that this prof-

fered exception to the requirement that legislative rules be

prospective in effect only is completely at odds with basic

tenets of administrative law. This circuit has previously

held that the effect of invalidating an agency rule is to

“reinstat{e] the rules previously in force.” Action on

Smoking & Health v. CAB, 713 F.2d 795, 797 (D.C. Cir.

1983) (emphasis added); accord Menorah Medical Center

vy. Heckler, 768 F.2d 292, 297 (8th Cir. 1985); Abington

Memorial Hosp. v. Heckler, 750 F.2d 242, 244 (3d Cir.

1984), cert. denied, 106 S. Ct. 180 (1985). Accordingly,

when the District Court vacated the Secretary’s /98/ wage-

index rule, it necessarily reinstated the Secretary’s /979

rule, which required the Secretary to reimburse providers

using a formula that included federal-hospital data. Well

aware of the import of the District Court’s ruling, the Sec-

retary reimbursed the appellee hospitals using the 1979

wage-index formula. The Secretary’s 1984 rule obviously

can have no application to cost accounting periods that

were, by virtue of the District Court’s ruling, governed by

the Secretary’s 1979 rule. Cf. Greene v. United States, 376

l4a

U.S. 149, 160 (1964) (because 1955 regulation was in effect

when the petitioner’s claim to monetary compensation was

asserted, the government could not compel the petitioner

to establish his entitlement to compensation under a re-

vised 1960 regulation).

The Secretary’s suggestion that retroactive rulemaking is

permissible to remedy a procedural defect in a rule would,

if accepted, make a mockery of the provisions of the

APA. Obviously, agencies would be free to violate the

rulemaking requirements of the APA with impunity if,

upon invalidation of a rule, they were free to “reissue” that

rule on a retroactive basis. If an agency rule is invalidated

on procedural grounds, the agency must, of course, be

given an Opportunity to correct the procedural defect and

promulgate a new rule. See, e.g., Action on Smoking &

Health, 713 F.2d at 798. However, both the express terms

of the APA and the integrity of the rulemaking process de-

mand that the corrected rule, like all other legislative rules,

be prospective in effect only.

B. The Secretary’s Retroactive Rule is Also Inconsistent

With the Medicare Act

Although Congress has expressed a clear intention in the

APA not to authorize retroactive agency rulemaking,

Congress may—subject to any applicable constitutional

constraints'*— override the general terms of the APA by

explicitly authorizing retroactive regulations in an agency’s

Organic statute. However, just as substantive legislation

will not be given retroactive effect “unless such be ‘the un-

equivocal and inflexible import of the [statutory] terms,

'2 See generally Hochman, The Supreme Court and the Constitu-

tionality of Retroactive Legislation, 73 HARV. L. REV. 692 (1960);

Slawson, Constitutional and Legislative Considerations in Retroactive

Lawmaking, 48 CALIF. L. REV. 216 (1960).

——

lSa

and the manifest intention of the legislature,’” '> an

organic statute will not be read to authorize an agency to

engage in retroactive rulemaking unless it is clear from the

terms of the statute that Congress intended such an

unusual delegation of power. In the instant case, it is clear

from the terms and the legislative history of the Medicare

Act that Congress did not intend to empower the Secretary

to promulgate retroactive cost-limit rules. Thus, the Secre-

tary’s actions in this case are barred not only by the APA,

but by the Medicare Act as well.

As outlined earlier, Congress amended section

1395x(v)(1)(A) of the Medicare Act in 1972 to authorize

the Secretary to promulgate cost-limit regulations. In

amending the statute, both Houses of Congress made it

abundantly clear that this authority was to be exercised on

a prospective basis only: “[The authority] to set limits on

costs. . . would be exercised on a prospective, rather than

retrospective, basis so that the provider would know in ad-

vance the limits to Government recognition of incurred

costs and have the opportunity to act to avoid having costs

that are not reimbursable.” Senate Report at 188; House

Report at 83, reprinted in 1972 U.S. Cope CONG. & AD.

MIN. News at 5070. | ,

Since 1972, the Secretary has consistently interpreted

section 1395x(v)(1)(A) to authorize cost-limit rules that are

prospective in application only. See, e.g., 42 C.F.R.

§ 413.30 (1986); Beth Israel Hosp. v. Blue Cross Assoc.,

{1981-1982 Transfer Binder] Medicare & Medicaid Guide

(CCH) § 31,645, at 10,136-37 (Nov. 7, 1981). Indeed, on

each occasion that the Secretary has promulgated a wage-

index rule—including the rule challenged here on the

grounds of retroactivity—the Secretary has explicitly

noted that he is authorized by statute to establish prospec-

'3 Greene v. United States, 376 U.S. 149, 160 (1964) (quoting Union

Pac. R.R. v. Laramie Stock Yards Co., 231 U.S. 190, 199 (1913)).

l6a

tive cost-limit rules. In light of the clear congressional in-

tent, and the uninterrupted agency practice, we are aston-

ished that the Secretary now purports to have the authori-

ty to promulgate such rules on a retroactive basis.

At no point in this litigation, either in the District Court

or on appeal, has the Secretary disputed the fact that Con-

gress amended the Medicare Act in 1972 to authorize pros-

pective cost-limit rules. Nevertheless, the Secretary con-

tends that a retroactive cost-limit rule was authorized

under the present circumstances by section 1395x(v)(1)(A)

(ii), the retroactive corrective adjustments provision. We

cannot agree.

First, we note that the Secretary explicitly promulgated

the retroactive rule under section 223 of the Social Security

Amendments of 1972—the very provision that Congress

added to the Medicare Act to authorize prospective cost-

limit rules. It was not until the litigation in the District

Court that the Secretary sought to invoke the retroactive

corrective adjustments provision as authority for the rule.

In light of the APA’s requirement that notice of proposed

rules contain “reference to the legal authority under which

the rule is proposed,” 5 U.S.C. § 553(b)(2) (1982), and

that final rules be accompanied by “a concise general state- .

ment of their basis and purpose,” id. § 553(c) (emphasis

added), the Secretary’s belated attempt to justify the rule

under the retroactive corrective adjustments provision

must fail.

Second, even if we were to entertain the Secretary’s be-

lated invocation of section 1395x(v)(1)(A)(ii), we would

conclude that the Secretary’s actions here were not author-

ized by the statute. Although our sister circuits have

struggled to define the precise contours of the retroactive

corrective adjustments provision,'* that provision is

'* See, e.g., Tallahassee Memorial Regional Medical Center vy.

Bowen, 815 F.2d 1435 (llth Cir. 1987); Mason Gen. Hosp. vy.

Secretary of HHS, 809 F.2d 1220 (6th Cir. 1987); Regents of the Univ.

17a

plainly nmot—as the Secretary would have it—broad

authority for the promulgation of retroactive cost-limit

rules. Rather, the provision is narrowly drawn to allow the

Secretary to make “corrective adjustments where, for a

provider of services for any fiscal period, the aggregate

reimbursement produced by the [Secretary’s] methods of

determining costs proves to be either inadequate or ex-

cessive.” 42 U.S.C. § 1395x(v)(1)(A)(ii) (emphasis added).

As the highlighted language illustrates, there is a critical

distinction between the power to promulgate retroactive

rules of general application and the power to make retro-

active corrective adjustments in the reimbursements of

particular providers whose aggregate reimbursements are

shown to be either “inadequate or excessive.” The former

power —if it existed — would be exceedingly broad, for it

would permit the Secretary to issue a modified cost-limit

rule, and then automatically apply that rule across the

board to all providers who had been reimbursed under the

predecessor rule. The latter power, however, is far more

limited, for it only allows the Secretary to adjust the reim-

bursements of particular providers upon proof that his

“methods of determining costs” (including his cost-limit

rules) resulted in inadequate or excessive reimbursements

to those providers.

To emphasize the importance of this distinction, it is

necessary to focus in on the workings of the statutory

scheme. As outlined earlier, the Secretary’s “methods of

determining costs” are the means by which the Secretary

estimates the “reasonable cost” incurred by all providers of

Medicare services, defined by statute as the “cost actually

of Cal. v. Heckler, 771 F.2d 1182 (9th Cir. 1985); Fairfax Nursing

Center v. Califano, 590 F.2d 1297 (4th Cir. 1979); Daughters of

Miriam Center for the Aged v. Mathews, 590 F.2d 1250 (3d Cir.

1978); Adams Nursing Home v. Mathews, $48 F.2d 1077 (Ist Cir.

1977); Springdale Convalescent Center v. Mathews, 545 F.2d 943 (Sth

Cir. 1977); Kingsbrook Jewish Medical Center v. Richardson, 486

F.2d 663 (2d Cir. 1973).

18a

incurred, excluding therefrom any part of incurred cost

found to be unnecessary in the efficient delivery of needed

health services.” 42 U.S.C. § 1395x(v)(1)(A) (1982). Like

any measuring device, the Secretary’s regulations will be

subject to a certain degree of error, inevitably resulting in

“inadequate” or “excessive” reimbursements to some pro-

viders. Where the Secretary is able to prove that inade-

quate or excessive reimbursements to a provider have

resulted from his “methods of determining costs,” he may

make “suitable retroactive corrective adjustments.” /d.

§ 1395x(v)(1)(A)(ii). '°

The administrative record is devoid of any indication

that corrective adjustments in the appellees’ reimburse-

ments were warranted on the facts of this case.'® Absent

'S Although the Secretary is authorized by statute to make retroac-

live corrective adjustments, we reject out of hand the Secretary’s con-

tention that the exercise of such authority is subject to no time limita-

tion. The Secretary infers the absence of any temporal restriction on

his authority to make retroactive adjustments from the use of the

phrase “any fiscal period” in § 1395x(v)(1)(A)(ii) (emphasis added).

We agree with the Eleventh and Sixth Circuits, however, that the use

of the word “any” does not suggest that the Secretary has the awesome

power to reopen a provider’s account years or even decades after that

account has been settled. See Tallahassee Memorial Regional Medical

Center v. Bowen, 815 F.2d 1435, 1453-54 (11th Cir. 1987); Mason

Gen. Hosp. v. Secretary of HHS, 809 F.2d 1220, 1225-26 (6th Cir.

1987). Had Congress intended to delegate such boundless authority to

the Secretary, it would, we submit, have said so more directly and

unambiguously.

'© The fact that the appellees arguably are entitled to lower reim-

bursements under the Secretary’s new rule does nos establish that they

were reimbursed in excess of their reasonable costs under the prior

rule. It is equally plausible that the Secretary’s new rule understates

the reasonable costs incurred by the appellees in prior cost accounting

periods, as the appellees have maintained throughout this litigation.

The appellees argue—and the District Court specifically

found—that the Secretary’s new wage-index rule understates their

reasonable costs, principally because the index does not distinguish

19a

an evidentiary showing that the appellees received ex-

cessive reimbursements under the prior wage-index rule,

there was no basis for even a timely invocation of the

retroactive corrective adjustments provision. We therefore

hold that the Secretary acted in contravention of the APA

and the Medicare Act by recouping past reimbursements

from the appellees, and that those reimbursements must

be restored.

lil, CONCLUSION

For the reasons set forth above, the judgment of the

District Court is

Affirmed.

between those hospitals located within the urban “core” of a SMSA,

and those hospitals located within the suburban “ring” of a SMSA (the

purported distinction being that hospitals in urban cores are forced to

pay higher wages to entice talented personnel). See Brief of Plaintiffs/

Appellees at 39-45; Georgetown Univ. Hosp. v. Bowen, No. 85-1845,

s'ip op. at 19-20 (D.D.C. Apr. 11, 1986), reprinted in J.A. 94, 112-13;

see also Final Notice, 49 Fed. Reg. 46,495, 46,498 (1984) (conceding

that a wage index that differentiates urban “cores” from suburban

“rings” could “{i}Jn principle” provide a “more precise” wage index, but

finding that such an index is infeasible “due to certain limitations of

the BLS data used to construct the wage index”). Whether the ap-

pellees are indeed correct in this assertion, however, is irrelevant to the

proper disposition of this appeal. The Secretary’s actions here must

fail because he made no attempt to demonstrate that the appellees had

received excessive reimbursements under the prior rule, and therefore

laid no foundation for the application of the retroactive corrective ad-

justments provision. Only if the Secretary had attempted such an

evidentiary showing would we need to examine the appellees’ sub-

stantive claims.

20a

APPENDIX B

UNITED STATES DiSTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 85-1845

GEORGETOWN UNIVERSITY HOSPITAL, ET AL., PLAINTIFFS

Vv.

Otis R. BOWEN,* SECRETARY OF THE DEPARTMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

Civil Action No. 85-2545

HOWARD UNIVERSITY

AS HOWARD UNIVERSITY HOSPITAL, ET AL., PLAINTIFFS

Vv.

Otis R. BOWEN,* SECRETARY OF THE DEPARTMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

Civil Action No. 85-2862

TUSCON GENERAL HOSPITAL, PLAINTIFF

Vv.

OTis R. BOWEN,* SECRETARY OF THE DEPARTMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

[Filed Apr. 11, 1986]

* Otis R. Bowen is substituted for Margaret M. Heckler pursuant to

Fed. R. Civ. P. 25(d).

2la

MEMORANDUM

Plaintiff health care providers in these consolidated

cases challenge the retroactive wage index rule published

by the Secretary of Health and Human Services on

November 26, 1984. Fiscal intermediaries, applying this

retroactive wage index rule, have recouped monies

previously paid to plaintiffs. Plaintiffs seek a determina-

tion that the retroactive wage index rule is invalid, and

reimbursement of the monies recouped under that rule by

the fiscal intermediaries. Presently before the Court are

the parties’ cross motions for summary judgment. All

issues have been thoroughly briefed and orally argued.

This suit continues a controversy that commenced in

1981 when the Secretary published a schedule of Medicare

routine cost limits without having first published notice

and received comments. For each of the seven years before

1981 the Secretary had published an annual schedule of

limits on hospital costs reimbursable under the Medicare

Act only after publishing a notice of proposed rulemaking

and receiving comments solicited by that notice, pursuant

to the Administrative Procedure Act (“APA”), 5 U.S.C.

§ 553. On June 30, 1981, however, the Secretary published

a “Final Notice” of the 1981 “Schedule of Limits on

Hospital . . . Costs,” 46 Fed. Reg. 33637 (June 30, 1981),

without having first published notice and received com-

ments. Significantly, the 1981 schedule used a formula for

calculating the hospital wage index that excluded data

from federal hospitals in the Standard Metropolitan

Statistical Area (“SMSA”).

The preamble to the June 30 Notice stated

In developing the wage index used for the revised

limits, we have also excluded data from federal

government hospitals. Because these hospitals typi-

22a

cally use national pay scales, the amounts they pay

their employees do not necessarily reflect area wage

levels. We believe excluding data from these hospitals

will help improve the accuracy of the wage index ad-

justment.

46 Fed. Reg. at 33639.

The Secretary’s June 30, 1981 wage index rule was chal-

lenged in a suit filed in this Court on September 9, 1982,

by three District of Columbia hospitals and the District of

Columbia Hospital Association, which represented the in-

terests of fifteen similar hospitals in the District of Colum-

bia. Each of those hospitals would have been reimbursed

less under the Secretary’s 1981 wage index rule than they

would have been under the pre-existing wage index, which

included federal hospital data.

By Memorandum and Order of April 29, 1983, this

Court invalidated the Secretary’s June 30, 1981 wage index

rule because it was promulgated without notice and com-

ment. District of Columbia Hospital Association [DCHA]

v. Heckler, No. 82-2520, slip op. (D.D.C. April 29, 1983).

That Memorandum stated:

If the Secretary wishes to put in place a valid pros-

pective wage index, she should begin proper notice

and comment proceedings; any wage index currently

in place that has been promulgated without notice

and comment is invalid as was the 1981 schedule.

Id. at 19 (emphasis added) (footnote omitted). The April

29 decision became final on September 1, 1983, when the

Secretary voluntarily dismissed her appeal from that deci-

sion. After the DCHA opinion, the Medicare fiscal inter-

mediaries settled these plaintiffs’ cost reports for years

subject to the 1981 schedule, using a wage index that in-

cluded federal hospital data.

On February 17, 1984, the Secretary published a pro-

posed notice reissuing the wage index originally contained

in the 1981 schedule of cost limits. 49 Fed. Reg. 6175

23a

(February 17, 1984). On November 26, 1984, the Secre-

tary, “after consideration of comments,” issued a final

notice reaffirming the use of the wage index that was used

to calculate the June 30, 1981 schedule of cost limits. 49

Fed. Reg. 46495 (November 26, 1984). The November 26

Notice stated that it was “[e]ffective December 26, 1984”

and applied to “cost reporting periods ending after

September 30, 1981, as well as cost reporting periods be-

ginning on or after October 1, 1981, and before October |,

1982.” Jd. Fiscal intermediaries then applied this retro-

active wage index to recoup monies previously reimbursed

to plaintiffs for these cost reporting periods under the

wage index that included federal hospital data.

Pursuant to 42 U.S.C. § 139500(f)(1), plaintiffs sought

and obtained certification from the Provider Reimburse-

ment Review Board (“PRRB”) that it lacked authority to

resolve the providers’ challenges to the retroactive wage in-

dex rule. The parties do not dispute that the agency’s

determination thus constitutes a final decision properly

before this Court for judicial review under applicable pro-

visions of the APA, 5 U.S.C. § 701 et seq. See 42 U.S.C.

§ 139500(f).

il.

Plaintiffs contend that the Secretary’s retroactive wage

index rule is invalid: (1) under Medicare Act provisions

authorizing the establishment of Medicare cost limits; (2)

under APA provisions and case law interpreting those pro-

visions; (3) under the standards applied to determine

whether rules should be given retroactive effect; and (4)

for violation of the Secretary’s own regulations on cost

limits indicating that they are to be given prospective

effect.

24a

Plaintiffs first note that in 1972 Congress amended the

Medicare Act—specifically 42 U.S.C. § 1395(x)(v)(1)

(A)—to authorize the Secretary to establish Medicare cost

limits. See Pub. L. No. 92-603, § 223(b). According to

plaintiffs, an examination of the legislative history estab-

lishes that limits set under § 223 must be “exercised on a

prospective, rather than retrospective, basis so that the

provider would know in advance the limits to Government

recognition of incurred costs and have the opportunity to

act to avoid having costs that are not reimbursable.” H.R.

Rep. No. 92-231, 92d Cong., Ist Sess. 83 (1971); S. Rep.

No. 92-1230, 92d Cong., 2d Sess. 188 (1972). Thus, plain-

tiffs assert, the Secretary’s wage index rule is invalid be-

cause its retroactivity is contrary to the intent of Congress.

Plaintiffs’ second contention is that the Secretary’s ac-

tion violates applicable APA provisions and case law in-

terpreting the APA. Plaintiffs note that under the APA, a

“rule” is defined as “the whole or part of an agency state-

ment of general or particular applicability and future ef-

fect ....” 5 U.S.C. § 551(4) (emphasis added). Rules

adopted under the APA “are prospective in application

only.” Retail, Wholesale and Department Store Union,

AFL-CIO v. NLRB, 466 F.2d 380, 388 (D.C. Cir. 1972).

Plaintiffs distinguish adjudicative rulemaking, which may

under certain circumstances be given retroactive effect,

from notice and comment rulemaking, which, plaintiffs

assert, should not have retroactive application. Compare

Citizens to Save Spencer City v. USEPA, 600 F.2d 844,

880 (D.C. Cir. 1979) (Supporting “the general principle

that agency [notice and comment] rulemaking, whenever

possible, should be prospective only in effect,” but finding

in the particular circumstances good cause for retroactive

application).

Plaintiffs assert that even in the context of adjudicative

rulemaking, retroactivity is disfavored. Our Court of Ap-

peals has discussed the factors to be considered in deter-

25a

mining whether a rule should be given retroactive applica-

tion:

(1) Whether the particular case is one of first im-

pression,

(2) Whether the new rule represents an abrupt

departure from well established practice or merely at-

tempts to fill a void in an unsettled area of law,

(3) the extent to which the party against whom the

new rule is applied relied on the former rule,

(4) the degree of the burden which a retroactive

order imposes on a party, and

(5) the statutory interest in applying a new rule

despite the reliance of a party on the old standard.

Retail Union, supra, 466 F.2d at 390. Plaintiffs contend

that examination of these factors yields the conclusion

that the wage index rule should not be given retroactive ef-

fect.

Exploring the Retail Union factors, plaintiffs first quote

from that opinion:

Whether a case is of “first impression” is important

because “to deny the benefits of a change in the law to

the very parties whose efforts were largely responsible

for bringing it about might have adverse effects on

the incentive of litigants to advance new theories or to

challenge outworn doctrines.”

Plaintiffs’ Statement of Material Fact Not In Dispute at 14

(filed October 21, 1985) (quoting Retail Union, supra, 466

F.2d at 390). Similarly, plaintiffs contend, it trivializes

APA procedural requirements and significantly dis-

courages litigants like plaintiffs if the Secretary can, after

invalidation of a rule for procedural defects, simply

engage in pro forma procedural corrections and retro-

actively re-issue the rule against those who successfully

challenged it initially.

26a

Regarding the second Retail Union factor, plaintiffs

contend that the retroactive rule constitutes an abrupt

departure from the previous practice of including federal

hospital data in the wage index. Plaintiffs note that the

result of the Court’s action in DCHA in invalidating the

1981 schedule was to reinstate the previous index including

federai hospital data:

To “vacate,” as the parties should well know, means

“to annul; to cancel or rescind; to declare, to make, or

to render void; to defeat; to deprive of force; to make

of no authority or validity; to set aside.” [Citations

omitted.] Thus, by vacating or recinding the recis-

sions proposed by ER-1245, the judgment of this

court had the effect of reinstating the rules previously

in force....

Action on Smoking and Health v. CAB, 713 F.2d 795, 797

(D.C. Cir. 1983). Thus, plaintiffs assert, the DCHA deci-

sion invalidating the 1981 schedule reinstated the prior in-

dex including federal hospital data. That index continued

in force until the unexpected retroactive application in late

1984 of the reissued wage index rule, which thus consti-

tuted an “abrupt departure.”

Regarding other Retail Union factors, plaintiffs assert

that they relied on the prior rule and expected that the

Secretary would behave lawfully. They further assert that

retroactive application clearly imposes a_ substantia

burden on them, representing without contradiction that

$400,000 was recouped from four plaintiffs and

$1,000,000 from one plaintiff.

As to the final Retail Union factor, plaintiffs contend

that no statutory interest supports retroactive application

of the reissued wage index rule. Plaintiffs explore the

merits of the reissued wage index rule and argue, sup-

ported by Bureau of Labor Statistics (“BLS”) data, that

the Secretary is erroneous in her belief that the wage index

27a

rule excluding federal hospital data results in more ac-

curate cost reimbursement. Plaintiffs contend that the

Secretary has critically erred by failing to differentiate be-

tween hospitals in the urban “core” of an SMSA and those

in the suburban “ring.” Essentially, plaintiffs argue that

they, as urban core hospitals, must compete for employees

with federal hospitals in a manner that most suburban

“ring” non-federal hospitals do not. Accordingly, exclu-

sion of the federal data fails to account for market forces

with significant impact on plaintiffs’ costs and results in

under-reimbursement. In support of this contention,

plaintiffs recite BLS data that indicate that the wage index

for non-federal hospitals in the urban core of the D.C.

SMSA is 1.3286. The wage index for the entire SMSA, in-

cluding federal hospitals, is 1.1953; the wage index for the

entire SMSA excluding federal hospital data is 1.1547. See

Plaintiffs’ Statement of Material Facts, supra at 33. The

Secretary’s reissued rule applies the equivalent of the latter

index —thus forcing plaintiffs even farther away from the

index (the first) that accurately reflects market forces

operating on their costs.

Plaintiffs further contend that the retroactive applica-

tion of the wage index rule necessarily involves violation

of the APA’s requirement that published rules have a thir-

ty day delayed effective date. See 5 U.S.C. § 553(d). The

purpose of the thirty day delayed effective date rule is to

“afford persons affected a reasonable time to prepare for

the effective date of a rule or rules or to take any other ac-

tion which the issuance of rules may prompt.” S. Rep. No.

752, 79th Cong., Ist Sess. 15 (1946); H.R. Rep. No. 1980,

79th Cong. 2d Sess. 25 (1946). Retroactive application of

the revised rule, plaintiffs contend, denies them this op-

portunity. Plaintiffs also contend that the Secretary has

not provided an adequate basis and purpose statement

supporting the reissuance of the rule.

28a

Finally, plaintiffs contend that the Secretary’s action

violates his own regulations which require that cost limits

be given prospective effect. Plaintiffs note that initial ver-

sions Of 42 C.F.R. § 405.460(a), the cost limit regulations,

promulgated on June 6, 1974, expressly stated that

“[t}]hese limits will be imposed prospectively... .” 39 Fed.

Reg. 20165 (June 6, 1974) (emphasis added). The cost limit

regulations were revised June 1, 1979; as revised,

§ 405.460(b)(3) stated:

Prior to the beginning of a cost period to which limits

will be applied, the Secretary will publish a notice in

the Federal Register, establishing cost limits ard ex-

ploring the basis on which they were calculated.

44 Fed. Reg. 31802 (June 1, 1979) (emphasis added). The

preamble accompanying the amendments stated that the

Medicare Act authorizes the Secretary “to set prospective

limits on the costs that are reimbursed under Medicare.”

Id. (emphasis added). Thus, plaintiffs assert, the Secre-

tary’s action violates not only the Medicare Act and the

APA, but the principle of “prospectivity” required by the

Secretary’s own regulations.

Plaintiffs also point to the Secretary’s administrative

decisionmaking, in which “prospectivity” is emphasized:

When an event occurs during the cost year that both

changes a provider’s eligibility for a new classification

and significantly increases the provider’s costs, a re-

classification would not violate prospectivity. The

criteria for setting the limits and the limits themselves

would be established for all categories prior to the

cost reporting period. The criteria and the limits

would not change during that period. That is all that

prospectivity requires under the circumstances in this

case.

Beth Israel Hospital v. Blue Cross Association, CCH

Medicare and Medicaid Guide § 31,645 at 10,136-10,137

(Nov. 7, 1981) (emphasis added).

—

29a

In response, the Secretary generally seeks to character-

ize the November 26, 1984 action as a simple reissuance of

the 1981 schedule after correction of the procedural

defects that initially prevented effectuation. The Secretary

stresses that the Court’s decision in DCHA did not pre-

clude re-issuance of the wage index rule, and that retro-

active effect is accorded rules when it is reasonable and in

the public interest to do so. See SEC v. Chenery Corp.,

332 U.S. 194 (1947). The Secretary argues that the reissued

wage index rule wil! more accurately reflect actual costs,

and that to deny the reissued rule retroactive effect will

permit plaintiffs to retain an unjustified “windfall.”

The Secretary quotes this Court’s statement that “ ‘[i]t is

both logical and precedented that an agency can engage in

new rulemaking to correct a prior rule which a court his

found defective.’ ” Community Hospital of Battle Creek

v. Heckler, No. 84-0743, slip op. at 6 (D.D.C. Oct. 30,

1984), quoting NAACP vy. Donovan, 737 F.2d 67, 72

(D.C. Cir. 1984).

Defendant contends that even if the reissued rule is

perceived as a new rule, rather than a reissued “pro-

cedurally corrected” old rule, that retroactive application

is justified after scrutiny of the Retail Union factors. The

Secretary contends that the reissued rule does not con-

stitute an “abrupt departure” from established practice as

plaintiffs were forewarned by the issuance of the 1981

schedule that the Secretary intended to exclude federal

hospital data from the wage index.

For the same reason, the Secretary argues that plaintiffs

cannot reasonably claim to have relied to their detriment

on the previous wage index. The Secretary notes that the

1981 schedule, although later invalidated, was in place

before the cost reporting periods at issue and was not in-

validated until April 29, 1983. Thus, the Secretary asserts,

plaintiffs should have conducted their planning for the

30a

relevant cost periods under the assumption that federal

hospital data would be excluded.

Defendant contends that retroactive application will not

unduly burden plaintiffs, as the wage index excluding

federal hospital data more accurately reflects actual! costs.

Thus, the Secretary argues, rather than being unduly

burdened by the retroactive application, plaintiffs are

prevented from enjoying unjust enrichment.

As to the final Retail Union factor, defendant argues

that his action furthers the statutory interest in reimburs-

ing only those costs necessary in the efficient delivery of

health services. The Secretary notes that 42 U.S.C.

§ 1395(x)(v)(1 Ai) authorizes “suitable retroactive ad-

justments” when necessary to cure over- or under-reim-

bursement, and cites cases in which retroactive Medicare

adjustments have been upheld. See Fairfax Nursing

Center,-Inc. v. Califano, 590 F.2d 1297 (4th Cir. 1979);

Adams Nursing Home of Williamstown, Inc. v. Mathews,

§48 F.2d 1077 (ist Cir. 1977); Springdale Convalescent

Center v. Mathews, 545 F.2d 943 (Sth Cir. 1977);

Hazelwood Chronic & Conv. Hosp. v. Weinberger, 543

F.2d 703 (9th Cir. 1976).

On the merits of the reissued rule, the Secretary con-

tends that the rule is substantively, as well as procedurally,

valid. The Secretary quotes from the preamble to the 1981

notice:

We concluded that the exclusion of Federal govern-

ment hospital data would improve the accuracy of the

wage index because most Federal hospitals character-

istically employ physicians and other high salaried

professionals whose salaries are based on national

rather than local wage scales. This factor tends to

overstate the average hospital wage in areas with

Federal institutions as compared to areas without

such Federal facilities. Since the purpose of the wage

3la

index is to reflect area-by-area differences in the

labor-related component of hospital costs, the exclu-

sion of Federal hospital data better enables the wage

index to accurately reflect area-by-area labor-related

costs.

To the extent hospitals must pay employees wage

rates similar to those of Federal facilities to attract

qualified personnel, this competitive behavior is

reflected in the non-Federal BLS data used to

calculate the wage index. That is, if non-Federal

hospitals in an area pay wage rates relatively

equivalent with those of Federal hospitals, the exclu-

sion of Federal wages would have little effect on the

wage index. If wages paid to Federal hospital

employees are higher than most area hospital wage

levels, then the inclusion of Federal data results in

most hospitals receiving a higher Medicare tost limit

than is warranted based on their expected costs. Such

a result defeats the purpose of the cost limits, which is

to limit a provider’s reimbursement to only those

costs necessary in the efficient delivery of needed

health services. Therefore, reissuance of the wage in-

dex excluding Federal hospital data reflects Congres-

sional intent to limit hospital reimbursement to those

costs necessary in the efficient delivery of services.

49 Fed. Reg. 6175, 6177 (February 17, 1984). While the

Secretary does not dispute plaintiffs’ claim that urban

“core”/suburban “ring” differentiation might yield an

even more accurate wage index, he contends that positive

change may be accomplished piecemeal, and that core-ring

differentiation requires more study before implementa-

tion.

The Secretary contends that many providers were bene-

fitted by the wage index excluding federal hospital data,

and that many comments received after the February 17,

32a

1984 proposed notice favored implementation of the

change. These providers, defendant asserts, would be

substantially harmed by invalidation, as the fiscal in-

termediaries would be forced to open up past cost-report-

ing years and recoup funds reimbursed under the wage in-

dex excluding federal data. .

Finally, the Secretary contends that plaintiffs could

have applied for an exception under 42 C.F.R. § 405.460

(f)(8) from application of the wage index of which they

complain. Section 405.460(f)(8) grants an exception to an

individual hospital that can demonstrate that its percent-

age of labor costs varies by more than ten percent f rom the

percentage used to calculate its area’s limits. As plaintiffs

did not apply for such exception, the Secretary suggests

that they should not be heard to complain of application

of the reissued wage index.

Plaintiffs’ motion for summary judgment is well taken.

Under the circumstances of this case, the Secretary’s re-

issued wage index is invalid insofar as it was retroactively

applied to recoup monies paid to these plaintiffs under the

wage index previously in force.

The fact that the November 26, 1984 wage index rule

was retroactive cannot reasonably be denied. As plaintiffs

correctly note, the effect of this Court’s decision in DCHA

was to render the 1981 schedule void ab initio, and to

reinstate the previous wage index which included federal

hospital data. The fiscal intermediaries recognized this

when they settled plaintiffs’ reimbursement for the cost

years at issue using the wage index that included federal

hospital data. The issues that are thus joined are (1)

whether the Secretary was authorized to promulgate a rule

with intended retroactive applications and (2) if so,

whether retroactive—application was justified in the

circumstances of this case.

33a

Addressing the first issue, it is not entirely clear that the

Secretary is even authorized to apply a notice and com-

ment cost-limit rule retroactively as was done in this case.

Plaintiffs correctly note that the legislative history of

§ 223 of Pub. L. No. 96-603 indicates that limits set under

§ 223 are to be “exercised on a prospective, rather than

retrospective, basis so that the provider would know in ad-

vance the limits to Government recognition of incurred

costs and have the opportunity to act to avoid having costs

that are not reimbursable.” H.R. Rep. No. 92-231, supra,

at 83; S. Rep. No. 92-1230, supra, at 188. Moreover, a

“rule” under the APA is defined as “the whole or part of

an agency statement of general or particular applicability

and future effect,” 5 U.S.C. § 551(4) (emphasis added),

and our Court of Appeals has stated that rules adopted

under APA notice and comment procedures “are pros-

pective in application only.” Retail Union, supra, 466 F.2d

at 388. See also Citizens, supra, 600 F.2d at 880 (Support-

ing “the general principle that agency [notice and com-

ment} rulemaking, whenever possible, should be prospec-

tive only in effect”). In addition, the Secretary’s action

does appear to violate 5 U.S.C. § 553(d)’s requirement

that rules must have a thirty day delayed effective date.

Finally, plaintiffs correctly note that the Secretary’s own

regulations, see 42 C.F.R. § 405.460(b)(3), and ad-

ministrative decisionmaking stress the principle of pros-

pectivity in cost limit pronouncement and application. See

Beth Israel Hospital, supra, CCH Medicare and Medicaid

Guide 4 31,645.

42 U.S.C. § 1395(x)(v)(1)(A)(ii), however, does author-

ize the Secretary to

provide for the making of suitable retroactive correc-

tive adjustments where, for a provider of services for

any fiscal period, the aggregate reimbursement pro-

duced by the methods of determining costs proves to

be either inadequate or excessive.

34a

Defendant correctly notes that this provision has been in-

terpreted to authorize retroactive application of rules and

recoupment based on cost years prior to the single cost

year that preceded the promulgation of the rule. See Fair-

fax Nursing Center, supra; Adams Nursing Home of

Williamstown, supra; Springdale Convalescent Center

supra; Hazelwood Chronic & Conv. Hosp., supra. The

scope of section 1395(x)(v)(1)(A)(ii) is far from settled,

however; the Court of Appeals for the 9th Circuit has

examined the legislative history and concluded that Sec-

tion 1395(x)(v)(1)(A)(ii) did not contemplate that reim-

bursement principles could be changed and recoupment

conducted after a cost reporting year has been completed

and the provider’s claims settled. See Daughters of Miriam

Center for the Aged v. Mathews, 590 F.2d 1250, 1258-59

n.23 (3d Cir. 1978), quoting Hearings before the Senate

Committee on Finance, 89th Cong., 2d Sess. 119 (1966).

It is unnecessary, however, to rest summary judgment

for plaintiffs on the ground that the Secretary was not em-

powered to apply the reissued wage index rule retro-

actively to the cost years in question. Our Court of Ap-

peals has stated with regard to the balancing of factors in

evaluation of retroactive rulemaking:

Which side of the balance preponderates is in each

case a question of law, resolvable by reviewing courts

with no overriding obligation of deference to the

agency decision. [Citation omitted. ]

Retail Union, supra, 466 F.2d at 390.

The Retail Union factors have been applied to deter-

mine the validity of retroactively applied “notice and com-

ment” rules. See Citizens, supra, 600 F.2d at 881 n.185.

Examination of those factors in this case compels the con-

clusion that the re-issued wage index must be invalidated

insofar as it was applied retroactively to recoup monies

reimbursed to these plaintiffs under the wage index that

included federal hospital data.

35a

The first Retail Union factor to be considered is whether

a case is of “first impression.” This is important because:

to deny the benefits of a change in the law to the very

parties whose efforts were largely responsible for

bringing it about might have adverse effects on the in-

centive of litigants to advance new theories or to

challenge outworn doctrines.

Retail Union, supra, 466 F.2d at 390. This general policy

weighs strongly against permitting the Secretary to take

the course upon which he has embarked in this case. It

would stand the APA on its head and dramatically dis-

courage litigants from contesting procedural deficiencies if

the Secretary could, after invalidation of a rule, simply

engage in pro forma procedural corrections and retro-

actively reissue the rule against those who challenged it

initially. ,

The second Retail Union factor relates to whether the

new rule is an abrupt Geparture from the pre-existing ones.

The November 26, 1984 notice and its retroactive applica-

tion dramatically departed from prior practice. This

Court’s decision in DCHA reinstated the wage index that

included federal hospital data, and as late as July 10, 1984,

the Secretary indicated in open Court that the Secretary

had no present intention of recouping the monies reim-

bursed to plaintiffs under the pre-existing wage index, and

future recoupment strategies were uncertain. See Ad-

ministrative Record at 177. Under these circumstances, the

retroactive application of the rule issued November 26,

1984 may fairly be described as an “abrupt departure.”

The third Retail Union factor relates to whether the par-

ty against whom the new rule is applied relied on the old

rule. While plaintiffs had perhaps been forewarned by the

1981 schedule of the Secretary’s views on inclusion in the

wage index of federal hospital data, this Court’s DCHA

opinion and the Secretary’s representations on July 10,

36a

1984 were sufficient that plaintiffs justifiably expected to

retain the funds reimbursed to them after DCHA by fiscal

intermediaries applying the wage index rule that included

federal data.

The fourth Retail Union factor concerns the degree of

the burden which a retroactive order imposes on a party. It

cannot be disputed that the retroactive application

substantia’ly burdens plaintiffs. The Secretary does not

contest plaintiffs’ claims that over $1,400,000 has been re-

couped from them by fiscal intermediaries applying the

retroactive rule. |

Most significant, however, is the final Retail Union fac-

tor: whether any statutory interest supports retroactive ap-

plication of the new rule so as to justify recoupment from

these plaintiffs. The Secretary has not traversed plaintif fs

demonstration, employing BLS data, that the failure to

differentiate between “core” and “ring” hospitals —

coupled with the exclusion of federal hospital data —re-

sulted in a wage index that /ess accurately reflected their

costs than did the wage index which included federal

hospital data. Accordingly, application of the reissued

wage index rule to these plaintiffs would have resulted in

under-reimbursement of legitimate costs—which would

contravene the purposes of the Medicare statutes. The

Secretary’s argument that recoupment is necessary to pre-

vent “unjust enrichment” is without foundation; plaintiffs

represent without contradiction that they are not-for-

profit hospitals and that their reimbursements were re-

stricted to the lesser of actual costs or cost limits. Under

————such circumstances, plaintiffs can hardly be said to be “un-

justly enriched” by invalidation of the Secretary’s retro-

active recoupment measures. | .

The Secretary’s passing reference! to section 2316 of the

| See Memorandum of Points and Authorities in Support of De-

fendant’s Motion for Summary Judgment at 18 n.15 (filed October 21,

1985). The Secretary actually referenced § 2311; it is assumed that he

intended to refer to § 2316.

37a

Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98

Stat. 1081 (1984), is not persuasive that a different result is

required. Section 2316, enacted in the middle of the cost

year beginning October 1, 1983, contemplated formula-

tion of an improved wage index applicable io health care

providers under the prospective payment plan. The section

further contemplated that upon formulation of the im-

proved wage index, adjustments would be made to pay-

ment amounts to providers for the cost year during which

the required revised index was prepared. Such adjustments

were to be made by decreasing or increasing payments in

the succeeding cost period. Consequently, section 2316

does n~. strongly support the Secretary’s action in 1984 in

opening up for recoupment 1981 and 1982 cost years that

have already been settled and expired several years before

the retroactive wage index rule was promulgated. The fact

that the Secretary first noticed in 1981 his intention to ex-

clude federal hospital data from the wage index does not

renuer the adjustment principles of section 2316 applicable

in this case. The Secretary’s 1981 schedule was rendered

void ab initio and without effect by this Court’s DCHA

opinion. Thus, the 1984 retroactive wage index, unlike the

revised prospective payment plan wage index con-

templated by section 2316, reached back to cost years that

expired several years prior to its issuance. Even more

significantly, § 2316 by its terms justifies such payment

adjustments by reference to the very problem which the

Secretary has in this case failed to confront with sufficient

particularity: the effect of area differentials and relevant

labor markets on average hospital wage levels. These

critical underlying principles render inapposite the Secre-

tary’s citation of section 2316 in support of his action in

this case.

The Secretary’s actions after DHCA suggest, as plain-

tiffs intimate, that the Secretary has trivialized the APA.

Plaintiffs represent without contradiction that no com-

38a

ments expressed favor for retroactive recoupment from

those providers who had used the wage index including

federal hospital data. Indeed, the February 1984 notice in-

cluded no clear indication that the Secretary intended to

apply the measure retroactively so as to effect such a re-

coupment. Such action in the face of comments opposed

to it suggests thai the notice and comment “procedural

correction” was in critical respects simply pro forma. Such

is the stuff of which arbitrary and capricious decisions are

made.

The Supreme Court has clarified the general principles

to be applied in determining whether new pronouncements

should be given retroactive application:

{R]etroactivity must be balanced against the mischief

of producing a result which is contrary to a statutory

design or to legal and equitable principles. If that mis-

chief is greater than the ill effect of the retroactive ap-

plication of a new standard, it is not the type of retro-

activity which is condemned by law.

SEC v. Chenery Corp., supra, at 203. Conversely, if the ill

effect of retroactive application exceeds any “mischief” to

the statutory design that would result from denying retro-

active application, there should be no retroactive applica-

tion. As has been demonstrated, see supra pp. 18-21, the

balancing of factors in this case compels the conclusion

that Medicare statute interests are only minimally served,

if at all, by the Secretary’s retroactive application of his

reissued wage index to recoup funds from these plaintiffs.

In contrast, the ill effects of the Secretary’s action are

substantial for these plaintiffs and for the general integrity

of the administrative rule-making process. Accordingly,

retroactive application against these plaintiffs must be

denied.

This ruling does not overlook defendant’s expressed

concern that th. ruling requires the Secretary to open up

39a

and recoup funds reimbursed to providers who used the

wage index that excluded federal hospital data. This con-

cern is unwarranted. It may well be that the wage index ex-

cluding federal hospital data operates to the advantage of

and better reflects costs for non-federal hospitals in subur-

ban portions of SMSA’s. Regulations and case law provide

ample precedent for the Secretary to determine that a rule

would not serve the statutory interests if applied in certain

circumstances. For example, 42 C.F.R. § 405.460(f)(8),

while not—as defendant contends — precluding plaintiffs

from presenting osher chailenges,? does support the princi-

ple that the Secretary need not treat all individual hospitals

under the same wage index rule when it would contravene

Statutory purposes to do so. See also Regents of the

University of California v. Heckler, 756 F.2d 1387, 1397

(9th Cir. 1985):

the Secretary must afford claimants the opportunity

to demonstrate that the application of a particular

rule to the facts of their case would produce a result

that is contrary to the statutory mandate.

Moreover, “[w]here any administrative rule, although con-

sidered generally to be in the public interest, is not in the

public interest as applied .o particular facts, an agency

should waive application of the rule.” P&R Temmer y.

FCC, 743 F.2d 918, 929 (D.C. Cir. 1984); accord

American Farm Lines v. Black Ball Freight Service, 397

U.S. 532, 539 (1970). Thus, there is nothing in this ruling

hich requires the Secretary to recoup from those who

have used a wage index which excluded federal hospital

data.

? Defendant does not persuasively traverse plaintiffs’ demonstra-

tion that § 405.406(f)(8) would not have been available to them and

that any relief accorded under that section would have been de

minimis,

40a

For all of the above reasons, the accompanying order

will grant plaintiffs’ motion for summary judgment, deny

defendant’s motion for summary judgment and declare

the reissued wage index rule invalid insofar as it was

applied to recoup monies from these plaintif fs. Defendant

will be required to reimburse plaintiffs with interest for

those funds recouped under retroactive application of the

November 26, 1984 wage index.

/s/ Louis F. OBERDORFER

United States District Judge

Date: April 11, 1986

4la

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 85-1845

GEORGETOWN UNIVERSITY HOSPITAL, ET AL., PLAINTIFFS

Otis R. BOWEN,* SECRETARY OF THE DEPAR TMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

Civil Action No. 85-2545

HOWARD UNIVERSITY

AS HOWARD UNiveERSITY HOSPITAL. ET AL., PLAINTIFFS

Vv.

Otis R. BOWEN,* SECRETARY OF THE DEPARTMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

Civil Action No. 85-2862

TUSCON GENERAL HOSPITAL. PLAINTIFF

Otis R. BOWEN,* SECRETARY OF THE DEPARTMENT OF

HEALTH AND HUMAN SERVICES, DEFENDANT

{Filed Apr. 1i, 1986]

* Ous R. Bowen is substituted for Margaret M. Heckler pursuant to

Fed. R. Civ. P. 25(d).

42a

ORDER

For the reasons stated in an accompanying Memoran-

dum, it is this 11th day of April, 1986, hereby

ORDERED: that plaintiffs’ motion for summary judg-

ment should be, and it hereby is, GRANTED; and it is

further

ORDERED: that defendant’s motion for summary

judgment should be, and it hereby is, DENIED; and it is

further

DECLARED: that the retroactive wage index rule pub-

lished at 49 Fed. Reg. 46495 ef seq. (November 26, 1984),

was and is invalid insofar as it was applied to recoup funds

previously reimbursed to plaintiffs; and it is further

ORDERED: that, on or before April 25, 1986, defend-

ant pay to the plaintiffs all amounts previously recouped

from the plaintiffs based on defendant’s retroactive wage

index rule (including any interest charged by defendant

during !"e recoupment process), plus interest (computed

to ihe cate of payment) in accordance with 42 U.S.C.

§ 429% 4 f)Q2).

/s/ Louis F. OBERDORFER

United States District Judge

43a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 86-5381

Civil Action No. 85-1845

GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

Vv.

Otis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

No. 86-5382

Civil Action No. 85-2545

HOWARD UNIVERSITY

AS HOWARD UNIVERSITY HOSPITAL. ET AL.

Vv.

OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

No. 86-5383

Civil Action No. 85-2862

TUSCON GENERAL Hospital

OTis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

Appeals trom the United States District Court

for the District of Columbia

[Filed June 26, 1987]

44a

JUDGMENT

Before: Epwarps and STARR, Circuit Judges, and

Swycert, *Senior Circuit Judge, United States Court

of Appeals for the Seventh Circuit.

These causes came on to be heard on the records on ap-

peal from the United States District Court for the District

of Columbia, and were argued by counsel. On considera-

tion thereof, it is

ORDERED and ADJUDGED, by this Court, that the

judgment of the District Court appealed from in these

causes is hereby affirmed, in accordance with the Opinion

for the Court filed herein this date.

Date: June 26, 1987 |

Opinion for the Court filed by Circuit Judge Edwards.

* Sitting by designation pursuant to 28 U.S.C. § 294(d)(1982).

45a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 86-5381

GEORGETOWN UNIVERSITY HOSPITAL. ET AL.

Otis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

[Filed Sept. 1, 1987] ,

ORDER

Before: EDWARDS and Starr, Circuit Judges, and

SwyGERT,* Senior Circuit Judge, United States Court of

Appeals for the Seventh Circuit.

We have considered appellant’s petition for rehearing in

the above-captioned case. Appellant characterizes our

opinion as holding that the Administrative Procedure Act

imposes a “per se” ban on retroactive rulemaking. As a

general rule, the APA requires that legislative rules be

given future effect only. Whatever exceptions might exist

to this general rule were not implicated in the case before

us. Our opinion therefore does not purport to address cir-

cumstances in which there may be an exception to the rule

against retroactive rulemaking.

It is therefore ORDERED, by the Court, that the peti-

tion for rehearing is denied.

* Sitting by designation pursuant to 28 U.S.C. Section 294(d).

46a 47a

Per Curiam APPENDIX E

FOR THE COURT:

GEORGE A. FISHER, Clerk UNITED STATES COURT OF APPEALS

/s/ ROBERT A. BONNER FOR THE DISTRICT OF COLUMBIA CIRCUIT

By: Robert A. Bonner

Deputy Clerk No. 86-5381

GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

Vv.

OTis R. BOWEN, SECRETARY OF HEALTH AND HUMAN

SERVICES, APPELLANT

[Filed Sept. 1, 1987}

ORDER

Before: WALD, Chief Judge, and ROBINSON, MIKVA,

EDWARDS, RUTH B. GINSBURG, BORK, STARR, SILBERMAN,

BUCKLEY, WILLIAMS, and D.H. GinssBurG, Circuit Judges,

and SwyGerT,* Senior Circuit Judge, United States Court

of Appeals for the Seventh Circuit.

Appellant’s suggestion for rehearing en banc has been

circulated to the full Court. No member of the Court re-

quested the taking of a vote thereon. Upon consideration

of the foregoing, it is

ORDERED, by the Court en banc, that the suggestion is

denied.

* Sitting by designation pursuant to 28 U.S.C. Section 294(d).

48a 49a

Per Curiam APPENDIX fF

FOR THE COURT:

GEORGE A. FISHER, Clerk UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

/s/ ROBERT A. BONNER __-

By: Robert A. Bonner 7 ,

Deputy Clerk Civil Action No. 82-2520

DISTRICT OF COLUMBIA

HosPITAL ASSOCIATION, ET AL., PLAINTIFFS

Vv.

MARGARET HECKLER, ET AL., DEFENDANTS

{Filed Apr. 29, 1983]

MEMORANDUM

For each of the even years before 1981, defendants have

published an annual schedule of limits on hospital costs

reimbursable under the Medicare Act only after publishing

a notice of proposed rulemaking and receiving comments

solicited by that notice, pursuant to the Administrative

Procedure Act (“APA”), 5 U.S.C. § 553. On June 30,

1981, however, defendants published a “Final Notice” of

the 1981 “Schedule of Limits on Hospital . . . Costs,” 46

Fed. Reg. 33637 (June 30, 1981), without first publishing a

proposed rule and receiving comments, despite the fact

that the new 1981 schedule for the first time excluded the

wages paid by “federal government hospitals” in each

market area from the formula used to calculate reim-

bursable wage costs for that area. See id. at 33639.

In the 1981 Final Notice, defendants noted that because

of this exclusion of federal wage data, the wage index for

the 1981 cost limit schedule “differs . . . from the wage

50a

index used in developing the 1980 hospital cost limits.” /d. .

at 33638. The defendants explained their decision to ex-

clude the data as follows:

“Because these [federal government] hospitals typical-

ly use national pay scales, the amounts they pay their

employees do not necessarily reflect area wage levels.

We believe excluding data from these hospitals will

help improve the accuracy of the wage index adjust-

ment.”

Id. at 33639. Defendants stated that this was a “minor

technical change[ ].” /d. at 33638. They also stated, in

justification of foregoing notice and comment, that it

“would be contrary to the public interest to permit” 1980

cost limits to remain in effect any longer, id. at 33640,

presumably, although the notice did not so indicate,

because the 1980_limits led to higher hospital reimburse-

ments and greater expense to the Medicare program.

Plaintiffs are three “not-for-profit” hospitals located in

the District of Columbia and an association representing

the interests of 15 similar hospitals in the District of Col-

umbia. Apparently, neither the individual hospital plain-

tiffs nor the 15 hospitals represented by the association are

“federal government hospitals.” ' There are, however, a

relatively large number of federal government hospitals in

the District of Columbia market area. Plaintiffs allege that

they have been substantively damaged in two ways by the

decision to exclude federal hospital wage data from the

wage index for the 1981 Medicare hospital cost limits

schedule. First, the new limit substantially reduces the

' All the plaintiff hospitals and “nearly all” of the association’s

member hospitals provide services under the Medicare and Medicaid

programs. Complaint, 44 7, 11. As defendants note, with exceptions

under One treatment program “[f]ederal government hospitals do not

participate in Medicare.” Defendants’ Post-Hearing Memorandum

(March 21, 1983) at 3, n.2.

Sia

income derived by plaintiffs from the Medicare program

on account of services provided to Medicare patients.? Se-

cond, this decrease in reimbursement payments also

allegedly reduces plaintiffs’ ability to compete in hiring

qualified personnel against the higher-paying federal

hospitals in the area.

Plaintiffs’ basis for suit, however, does not rest on their

alleged monetary injuries or the substance of defendants’

decision to exclude federal wage data from the 1981 wage

index. Their challenge is solely procedural. Plaintiffs

claim that defendants’ failure to carry out notice and com-

ment procedures before deciding to eliminate federal

hospital wage data from the 1981 schedule violated the

APA, 5 U.S.C. § 551 et seg. They therefore seek a

declaratory judgment to this effect. They seek as further

relief on this procedural claim an order vacating the 1981

cost limit schedule, enjoining defendants from excluding

the federal hospital wage data from the calculation of

reimbursements under the 1981 schedule, and requiring

that any subsequent schedule that may be validly adopted

after notice and comment be given prospective effect only.

This prayer for relief will be dealt with below, separately

from the procedural basis for the suit.

2 According to plaintiffs, Children’s Hospital Medical Center,

Georgetown University Hospital and Greater Southeast Community

Hospital “will incur” Medicare and Medicaid losses of $91,200,

$278,100 and $423,000 respectively, “[sJolely as a result of the exclu-

sion of the federal government hospital wage data from the wage in-

dex. .. .” Memorandum in Support of Plaintiffs’ Motion for Sum-

mary Judgment (Oct. 7, 1982) at 7. Defendants argue that plaintiff

hospitals can have no “expectation” or “reliance interest” in a par-

ticular level of reimbursement, so that these monetary allegations are

improper. This may be true, but it is beside the point. Defendants do

not contest the fact that, if federal wage data were included in the 1981

wage index, plaintiffs’ reimbursement levels would be higher to some

degree than if that data is excluded.

52a

Defendants have moved to dismiss or in the alternative

for summary judgment. They argue that this Court is

without jurisdiction to review the decision by the Secretary

of Health and Human Services to issue a final regulation

without notice and comment, citing 42 U.S.C. § 405(h)

(incorporated into the Medicare Act by 42 U.S.C.

§ 139S5ii) and 42 U.S.C. § 139500 (1976 & Supp. IV

1980).3 Defendants further argue that, in any event, the

Secretary had good cause to waive notice and comment for

the 1981 schedule because exclusion of federal wage data

was “a technical change” for which notice and comment

procedures would have been “unnecessary and contrary to

the public interest.” 4+ See Defendants’ Supplementary

Memorandum (Jan. 25, 1983) at 2-4.

> Section 205(h) of the Social Security Act, 42 U.S.C. § 405(h), pro-

vides that:

The findings and decisions of the Secretary after a hearing shall

be binding upon all individuals who were parties to such hearings.

No findings of fact or decision of the Secretary shali be reviewed

by any person, tribunal, or government agency except as herein

provided. No action against the United States, the Secretary, or

any officer or employee thereof shall be brought under sections

1331 or 1346 of title 28 to recover on any claim arising under this

subchapter.

42 U.S.C. § 139500, which will not be set forth here, sets up at

length an administrative review mechanism for Medicare claims that

may lead to judicial review once the mechanism has been exhausted.

Plaintiffs have not attempted to initiate administrative proceedings

under § 139500.

* Defendants do not argue that the annual cost limit schedule is not

a “rule” subject generally to APA notice and comment requirements.

Rather, they argue that this particular change (exclusion of federal

wage data) was exempt under § 553(b)(B), which permits waiver of the

rulemaking requirement for “good cause.” Thus it is unnecessary to

address plaintiffs’ argument, which defendants do not controvert, that

the 1981 change was otherwise subject to APA rulemaking pro-

cedures. It is conceded that such is the case. See Plaintiffs Memoran-

dum in Support (Oct. 7, 1982) at 7-13; see also Batterton v. Marshall,

648 F.2d 694 (D.C. Cir. 1980).

53a

/In support of the latter argument defendants cite 5

U.S.C. § 553(b)(B), which provides for an exemption to

the APA’s notice and comment requirements “when the

agency for good cause finds (and incorporates the finding

and a brief statement of reasons therefor in the rules

issued) that notice and public procedure thereon are im-

practicable, unnecessary, or contrary to the public in-

terest.” * According to defendants’ Final Notice, although

federal wage data was excluded for the first time in 1981,

the Secretary used the “same methodology” to compute

the 1981 wage index as had been used in earlier years. 46

Fed. Reg. 33638, 33640. Subsequently, defendants have

characterized the exclusion of federal government hospital

wage data as a “change in methodology,” but one that was

“minor and technical,” so that notice and comment were

“unnecessary” for purposes of the APA. Defendants’

Memorandum of Points and Authorities (Nov. 22, 198°

at 17 (hereinafter “Points and Authorities”). At the same

time, defendants urge that action without notice and com-

ment served the public interest by protecting the public

against payment of large “windfalls” to plaintiffs and

other Medicare providers totalling “hundreds of

thousands of dollars.” Defendants’ Supplementary

Memorandum, supra, at 10; see Defendants’ Points and

Authorities, supra, at 25.

Jurisdiction is the threshold question. Our Court of Ap-

peals has generally construed Section 205(h) of the Social

Security Act (see note 3, supra) to bar federal court

jurisdiction over claims seeking Medicare reimbursement.

’ Defendants do not argue that public participation was “imprac-

ticable” in this case. That obviously would be a difficult claim to sus-

tain when defendants have previously used the notice and comment

procedure in fixing these schedules for seven years.

S4a

Ass'n. of American Medical Colleges v. Califano, 569

F.2d 101 (D.C. Cir. 1977). Moreover, the detailed ad-

ministrative review process for Medicare claims set out in

42 U.S.C. § 139500 (see note 3, supra) generally must be

exhausted before a claimant may seek review in federal

court. /d., see also Humana of South Carolina, Inc. vy.

Califano, 590 F.2d 1070, 1080 (D.C. Cir. 1978). On the

other hand, exhaustion is not required under these provi-

sions and judicial review may lie ab initio (albeit with

deference) when a lawsuit is brought “simply to vindicate

an interest in procedural regularity.” Humana, supra, 590

F.2d at 1080; accord, National Ass’n. of Home Health

Agencies v. Schweiker, 690 F.2d 932, 936-37 (D.C. Cir.

1982), cert. den., 103 S. Ct. 1193 (1983) (hereinafter

“NAHHA”).

Each party here struggles to fit the circumstances and

precedents into categories advantageous to it. Plaintiffs

emphasize that they make no monetary claims; they wish

only to correct a violation of a fundamental requirement

of the APA and seek a declaratory judgment by the Court

on that theory. Defendants point to plaintiffs’ additional

prayers for injunctive relief barring defendants from ap-

plying to plaintiffs any wage schedule or wage schedule

methodology different from that in effect in 1980, or from

applying any new, procedurally valid, schedule retro-

actively. Defendants argue that this prayer for relief

demonstrates that plaintiffs’ only real interest is in the bot-

tom line—a larger reimbursement when and if plaintiffs

file their claims.

This is plainly not an “action brought to recover on any

claim” within the specific terms of § 405(h). There has

been no claim of which the Court is aware. Plaintiffs dis-

avow any substantive challenge to the Secretary’s wage in-

dex decision in this lawsuit, but rather claim the right

under the APA to present their views to the Secretary for

consideration in rulemaking. Plaintiffs’ Memorandum in

5Sa

Opposition (Dec. 20, 1982) at 2. Thus it is clear that this is

not a dispute “over the amount properly reimbursable,”

and therefore that relief under § 139500 is not available

nor is its pursuit required for jurisdiction here. See

NAHHA, supra, 690 F.2d at 938-39; Humana, supra, 590

F.2d at 1080-81.

Plaintiffs have, of course, criticized the substantive ra-

tionality of defendants’ decision to exclude federal

hospital wage data from the relevant formula. As a matter

of policy, they disagree with that decision. But as a matter

of law, they make this argument only to show how the

omission of notice and comment proceedings deprived

them of an opportunity to apprise the Secretary on the

rulemaking record of relevant facts and considerations

that might have led the defendants to a different result, or

at least subsequently permitted the plaintiffs to argue to a

reviewing court that the result the Secretary reached was

irrational. Thus the claim pressed here by plaintiffs is

essentially that of a party “aggrieved” by a rulemaking

consummated without notice and comment. It is a claim

made available under the APA to any person aggrieved by

administrative action. Hopes of increased reimbursement

may underlie plaintiffs’ pursuit of an opportunity to com-

ment to the Secretary about the change and may be, in that

sense, plaintiffs’ “motivation for bringing this lawsuit.”

NAHHA, supra, 690 F.2d at 938. But the point of law at

issue is vindication of their statutory rights to have notice

of and to comment on administrative decisions that affect

them. Those rights have values of their own, independent

of any claim for reimbursement: “increased fairness” to

affected parties, and provision to the Secretary of

“valuable information concerning the various issues in-

volved.” NAHHA, supra, 690 F.2d at 950; see also Small

Refiner Lead Phase-Down Task Force v. U.S. Environ-

mental Protection Agency, No. 82-2282, slip op. at 85

(April 22, 1982). Plaintiffs are entitled to judicial con-

S6a

sideration of their challenge to possible denial of these

values, irrespective of whether favorable resolution would

ultimately support a separate administrative claim for

reimbursement, or not.®

Defendants appear to suggest that whenever a monetary

interest can be traced to the plaintiffs in a Medicare case,

there can be no immediate federal jurisdiction. Defend-

ants’ Points and Authorities, supra, at 14-15. This is a

strained and unrealistic interpretation of the statutes and

relevant precedent. In both Humana and NAHHA, it was

clear that plaintiffs challenging particular decisions of the

Secretary on procedural grounds were doing so because of

the ultimate fiscal impact which those decisions might or

would have on them. Indeed, the sort of injury necessary

for standing in a federal court is unlikely to ever be entire-

ly separated from monetary interests in a Medicare case.

Congress’s intention to prevent judicial interference with

the Secretary’s substantive decisionmaking concerning

particular monetary claims in the Medicare program can

and must be reconciled with its intention in passing the

APA to permit those regulated by unelected federal agen-

cles to receive some procedural process prior to exercise of

the regulatory power. That end is accomplished by finding

immediate federal jurisdiction over procedural claims

while barring such jurisdiction over substantive monetary

challenges. Thus our Court of Appeals in NAHHA dis-

tinguished between a plaintiff's “ultimate goal” and his

“motivation,” and indicated that only claims “directly

® Although it is not the basis for the Court’s decision, defendants

themselves have, as already noted, characterized the change that

plaintiffs challenge as one in “methodology.” Our Court of Appeals

has suggested that substantive challenges to the “method” of determin-

ing claims, as opposed to the “amount” of such claims, may be heard

by courts in the first instance. NAHHA, supra, 690 F.2d at 938; see

Riverside General Hospital v. Schweiker, 548 F. Supp. 1137, 1141-42

(D.D.C. 1982).

57a

related to a claim for reimbursement” can and must be

reviewed under § 139500. 690 F.2d at 938 (emphasis

supplied). When such alternate forms of judicial review

are unavailable as in a procedural case like this one, the

law in this Circuit is that § 405(h) does not preclude

federal jurisdiction over federal claims. /d. at 940-41. The

legal rights normally provided under the APA cannot be

cut off by the language of § 405(a) or § 139500 unless ex-

pressly indicated by Congress, and the Court is aware of

no such express indication.

This conclusion is not altered by consideration of the

1980 amendment to § 139500 that specifically authorized

expedited judicial review of “a question of law and regula-

tions” where the Medicare administrative review board

“determines that it is without authority to decide the ques-

tion.” 1980 Omnibus Budget Reconciliation Act, Pub. L.

No. 96-499, § 955, 94 Stat. 2599, 2647 (1980). This argu-

ment was made by the Secretary and rejected by our Court

of Appeals in NAHHA, supra. The Court of Appeals

ruled there that the 1980 amendment was directed only at

claims “otherwise reviewable under the statute.” 690 F.2d

at 939. Here, as there, plaintiffs’ claim is a procedural one

not cognizable under the statute, and it “cannot be char-

acterized as a reimbursement dispute.” /d.’ Accordingly,

? Moreover, the Secretary has already made the decision to forego

notice and comment for the 1981 schedule; that decision has been con-

sidered, reaffirmed and defended in this proceeding. The Secretary’s

decision to forego notice and comment must be considered on the

grounds offered at the time of the decision, i.e., the grounds that ap-

pear at 46 Fed. Reg. 33637-44 (June 30, 1981). S.E.C. v. Chenery

Corp., 332 U.S. 194, 196 (1947); Portland Cement Association v.

Ruckelhaus, 486 F.2d 375, 395 (D.C. Cir. 1973) (Leventhal, J.), cert.

den., 417 U.S. 921 (1974); cf. Lanphear v. Prokop, No. 82-1388, slip

op. at 11 (D.C. Cir. April 1, 1983). Thus it would be an exercise in

futility to decline jurisdiction over the notice and comment issue now,

only to have to consider it again on these same grounds after it has

gone through the administrative mill.

58a

defendants’ motion to dismiss for lack of jurisdiction will

be denied.

There remains for consideration defendants’ contention

that the exclusion of federal hospital wages was a “minor

technical change” which was exempt from notice and com-

ment under the “good cause” exemption of the APA. §

U.S.C. § 553(b)(B). The “good cause” exemption relied

upon by defendants does not operate upon mere incanta-

tion, as defendants appear to suggest, see Supplementary

Memorandum, supra, at 2-3, and a court cannot accept an

agency’s finding of “unnecessary” on faith alone. The ex-

emption of § 553(b)(B) is to be “narrowly construed” and

reviewing courts should “examine closely proferred ra-

tionales justifying the elimination of public procedures.”

A.F.G.E. v. Block, 655 F.2d 1153, 1157 n.6 (D.C. Cir.

1981); see Council of Southern Mountains, Inc. v.

Donovan, 653 F.2d 573, 580 (D.C. Cir. 1981).

The argument that public participation was “un-

necessary” does not survive even deferential scrutiny.

When Congress enacted § 555(b)(B), it explained that

“‘fujmnecessary’ means unnecessary so far as the

public is concerned, as would be the case if a minor or

merely technical amendment in which the public is

not particularly interested were involved.”

S. Rep. No. 752, 79th Cong., Ist Sess., at 16 (1945),

reprinted in Administrative Procedure Act— Legislative

History 200 (U.S. Gov’t. Printing Office 1946) (emphasis

Supplied). “ ‘[PJublic interest’ supplements the terms ‘im-

practicable’ and ‘unnecessary,’ ” and only “lack of public

interest in rulemaking warrants an agency to dispense with

public procedure.” /d. Thus it is the public’s perception of

a rule change, and not the agency’s, that must govern. The

institution of this lawsuit, as well as the conceded fact that

59a

“hundreds of thousands of dollars” are at issue, indicate

that at least a portion of the public is very interested in

defendants’ decision, and would have taken advantage of

the opportunity to comment if it had been afforded.

Moreover, defendants are caught in contradiction when

they leap from a description of the wage index change as

“minor” to their argument that notice and comment would

have been “contrary to the public interest.” Defendants

argue that the change in the formula was so insignificant

that it produced only a “very limited . . . small impact.”

Points and Authorities, supra, at 21-22. Yet they also

argue that the public interest justified acting without

awaiting public participation because the new schedule

would save the public money and protect against “wind-

falls” totalling “hundreds of thousands of dollars.” This

contradictory rationale is the stuff of which arbitrary and

capricious decisions are made.

Defendants’ assertion that public participation in devel-

oping the 1981 wage index was “unnecessary” or “contrary

to the public interest” overlooks the fact that plaintiffs and

the public had no opportunity to provide information

about the potential impact of the exclusion. The decision

was clearly a controversial one, and plaintiffs have

demonstrated that the Secretary may have been unaware

or even mistaken about some facts central to the decision.*®

Defendants’ description of the possibility of increased pay-

ments to plaintiffs as “windfalls” thus begs the very ques-

tion that proper notice and comment procedures could

have addressed and resolved.

* For example, the defendants did not have a list before them of all

federal government hospitals when deciding to exclude their wage

data, thus making precise calculation of the fiscal impact difficult. See

Plaintiffs’ Second Supplemental Memorandum (March 1, 1983) at 2.

Defendants may have also erred in their assumption that federal

govenment hospitals “typically” set their wages according to “national

pay scales.” /d. at 2-3. See also Plaintiffs’ Memorandum in Support

(Oct. 7, 1982) at 16-20.

60a

Moreover, the administrative agencies that determine

provider reimbursement claims are now bound by the

Secretary’s decision to exclude federal wage data. The

decision thus made law, binding on the agency which ad-

ministered it, without even the limited process that notice

and comment would have afforded. See Batterton v. Mar-

Shall, 648 F.2d 694 (D.C. Cir. 1980); Joseph v. U.S. Civil

Service Commission, 554 F.2d 1140, 1157 (D.C. Cir.

1977).

On the basis of the foregoing and other badges of ar-

bitrariness and caprice identified by plaintiffs in their

memoranda, the Secretary’s decision to exempt the exclu-

sion decision from notice

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