# Petition for Writ of Certiorari — Bowen v. Georgetown Univ. Hospital > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0627%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1988 - **Citation:** 488 U.S. 204 ## Text 87 10970 Errers Ne. | D&e 30 war OCTOBER TERM, 1987. OTis R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, PETITIONER v. 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 EEL LSE l EE l EEE LS 2 Ne ne. ccucccsccccceecees 2 Reasons for granting the petition ......................... 11 Ne cece cceenececcecces 25 EE Oe la Ne eg ac ccccecceccees 20a Ne ee cc cc cee cccccereececccccs 43a Ne ee ccc ccveccceesccecces 4Sa ecco bendccceccccccscccosess 47a Ne ee meccvcccceece 49a Neen nner ewe ccccceevess 65a 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 IV 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 Vi Miscellaneous: Page Attorney General's Manual on the Administrative Pro- 2 ree er 20 44 Fed. Reg. (1979): SS —-_ FRPP PSPTSTIPT ETT EEL 4 pp. BIBOT-SIGOS 2... ccc cee cece er eee neenes 4 Me) |) Po) |) 5 ee 4 ich aGGbhes Cob audewecerosesctncesecees 4 45 Fed. Reg. (1980): cece a caedererseessoccversseevecessenss 4 wm. GIBTSBIGTG ... nw ccc ccrccecencrssccccens 4 46 Fed. Reg. (198i): ECs bed sadG¥Sccsedeseiccevecesoedenesets 5 DP. 33638-33639 . 0.1... ccc cece cece cee eeennes 5 OE aed beahsssesendocvcvedeseresecergenss 5 ED cab ccccccnctinecsccccnesenssensseaces 5 49 Fed. Reg. (1984): Acid pind vsadeenevesbaenduseenenesesuy es 6 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 v. 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) 2 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. 4 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)). 6 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). 7 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 8 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 9 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 10 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). i] 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- 12 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- 13 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. 14 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.” 15 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 16 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. 17 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 18 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. 19 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 20 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- 21 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). 22 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 23 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)). 24 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. an 25 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. V. Otis R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, APPELLANT No. 86-5382 HOWARD UNIVERSITY AS HOWARD UNIVERSITY HOSPITAL, ET AL. v. 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) 2a 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). 3a 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.” 4a 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. a Sa “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 6a 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” 7a 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’). 8a 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. 9a 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. A. 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 includ [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0627%3A02. Public record. Not legal advice.