758 F.2d 1052 (5th Cir. 1985), 83-1853, Baylor University Medical Center v. Heckler

Docket Nº:83-1853.
Citation:758 F.2d 1052
Party Name:BAYLOR UNIVERSITY MEDICAL CENTER, Plaintiff-Appellee, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant-Appellant.
Case Date:April 26, 1985
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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758 F.2d 1052 (5th Cir. 1985)



Margaret M. HECKLER, Secretary of Health and Human Services,


No. 83-1853.

United States Court of Appeals, Fifth Circuit

April 26, 1985

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[Copyrighted Material Omitted]

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James A. Rolfe, U.S. Atty., Dallas, Tex., Anthony J. Steinmeyer, Carlene V. McIntyre, Attys., Appellate Staff, Civil Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Burford & Ryburn, Catherine A. Gerhauser, Stephen N. Wakefield, R.B. Cook, Jr., Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before CLARK, Chief Judge, GOLDBERG and RUBIN, Circuit Judges.

GOLDBERG, Circuit Judge:

This appeal arose initially out of a determination by the Secretary of Health and Human Services ("Secretary" or "HHS") concerning the amount of reimbursement allowable to Baylor University Medical Center ("Baylor") under title XVIII of the Social Security Act ("Medicare Act"), 42 U.S.C. Secs. 1395-1395xx (1982). Dissatisfied with the agency's outcome, Baylor sought review of the Secretary's final decision in federal district court pursuant to Sec. 1395oo(f) of the Medicare Act. With the parties' cross-motions for summary judgment before it, the judge below concluded first that the Secretary had erroneously calculated

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the hospital's routine service costs, and second that the Secretary had invalidly disallowed the hospital's inclusion of a return on equity capital in its claimed reimbursable costs. The court accordingly entered judgment on behalf of Baylor.

Having decided the first issue in favor of Baylor in reviewing the hospital's reimbursement claim for a different fiscal year, we affirm as to the computation of routine service costs. Baylor University Medical Center v. Heckler, 730 F.2d 391 (5th Cir.1984) (per curiam). We reverse on the second ground, however, and hold under both the Administrative Procedure Act ("APA" or "Act"), 5 U.S.C. Secs. 551, 553 (1982), and the Medicare Act that the Secretary did not improperly deprive the hospital from a return on its equity capital.


In 1965, Congress amended the Social Security Act to establish federal health insurance for the aged and disabled, a program popularly known as Medicare. Pub.L. No. 89-97, 79 Stat. 286 (codified as amended at 42 U.S.C. Secs. 1395-1395xx (1982)). Part A of the Medicare Act, id. Secs. 1395c to 1395i-1, provides health insurance for hospital and related post-hospital costs to persons sixty-five or older. Under this program, "providers of services," such as appellee Baylor, do not charge beneficiaries directly but instead receive reimbursement from the Medicare trust fund for services provided. Id. Secs. 1395d, 1395x(e), (u), 1395cc(a), (e). While the statute directs that providers are entitled to reasonable costs actually incurred in connection with furnishing hospital services to beneficiaries of the Medicare program, id. Secs. 1395f(b), HHS is left the task of defining what is "reasonable," id. Sec. 1395x(v)(1)(A).

In June of 1966, one month prior to the effective date of the Medicare Act, the Secretary initiated rulemaking proceedings in accordance with the notice and comment requirements of the APA, 5 U.S.C. Sec. 553(b), (c). 1 Exercising its delegated role to define reasonable costs, the agency published in the Federal Register and invited public comment on a proposed regulation that allowed a two-percent reimbursement of costs allowable under other reimbursement principles (excluding interest expense). 31 Fed.Reg. 7864 (1966). This allowance was in lieu of an amalgam of factors not otherwise given specific recognition, including an "interest return on equity capital." 2 Id. at 7871. By the time the rule was published in final form, it provided for the two-percent allowance, except with regard to proprietary providers, who were limited to a one and one-half percent allowance. 3 In June of 1969, the Secretary, citing implementation of the President's review of the 1970 budget, repealed the non-proprietary providers' two-percent allowance without opportunity for public comment. 34 Fed.Reg. 9927 (1969). The Secretary failed to state any APA exemption as justification for not complying

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with informal rulemaking requirements in connection with this repeal. Apparently because Congress expressly sanctioned the allowance for a return on equity capital for proprietary providers, 42 U.S.C. Sec. 1395x(v)(1)(B), 4 the Secretary left intact the one and one-half percent allowance for the proprietary facilities.

The Secretary's 1969 repeal thus gave rise to a disparity. Currently, the regulations entitle only proprietary providers to a return on equity capital. Because Baylor is a nonproprietary provider, here lies the rub.

In September of 1980, Baylor's fiscal intermediary 5 issued a notice of program reimbursement for the fiscal year ending June 30, 1979. The notice objected to Baylor's claim of $2,584,259 as a return on equity capital. 6 At the ensuing hula hoop of agency review, see 42 U.S.C. Sec. 1395oo (a), the Provider Reimbursement Board ("PRRB" or "Board") affirmed the intermediary's determination of the return on equity capital issue, reasoning that the Medicare reimbursement regulations plainly distinguished between proprietary and nonproprietary providers. In light of the distinction, the Board held that Baylor was not entitled to a return on equity capital. This position was affirmed by the Deputy Administrator of the Health Care Financing Administration, whose decision represented the final order of the Secretary.

Baylor filed a complaint in federal district court seeking review of the Secretary's decision pursuant to 42 U.S.C. Sec. 1395oo (f)(1). In considering the parties' cross-motions for summary judgment, the court held that the Secretary's 1969 repeal had run afoul of the APA's notice and comment requirements. 571 F.Supp. 374, 380 (N.D.Tex.1983). The court reasoned first that the repeal merited close examination because notice and an opportunity for comment had been afforded incident to the rule's promulgation in 1966. Acknowledging that the APA exempts regulations dealing with "benefits," the court declined to apply that exemption to the Secretary's repeal because the agency had failed to articulate it as a basis for not complying with informal rulemaking procedures at the time of repeal. The court stated that "longstanding administrative law principles" prohibited the agency from successfully invoking this type of post hoc rationalization for having failed to comply with the APA.

Alternatively, the court concluded that even if the benefits exemption applied, the regulation's repeal had a substantial impact on the affected parties, thereby taking the regulation outside the benefits exemption and requiring notice and an opportunity for comment. Moreover, the court held that the stated reason for repealing the regulation--the need to comply with the President's budgetary constraints--did not constitute "good cause" for purposes of the good cause exemption from informal

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rulemaking under the APA. Finally, the court noted that because the Secretary's violation of the APA was so clear, "a delay in bringing the violation to the courts' attention should not prevent judicial enforcement of the APA's requirements." Although the court did not employ the referent "laches," its discussion went on to state that the delay had not proven unfair to the Secretary because the judgment would apply only prospectively. Because the court held the regulation's repeal to have been procedurally flawed and hence invalid, the court did not reach the substantive question whether the agency's repeal was consistent with the Medicare Act. APA noncompliance was sufficient to hold the repeal invalid and to award Baylor its two percent return on equity capital under the 1966 regulation.

We conclude that the agency's 1969 repeal fell within the benefits exemption from notice and comment rulemaking and that the agency was therefore justified in not complying with the procedural strictures of the APA. In addition, we hold that the repeal did not violate the substantive requirements of the Medicare Act. Before reaching the merits, however, we pause first to consider whether as an equitable matter Baylor's slumbering challenge to the agency's repeal remained vital some eleven years after the fact. 7


Under the doctrine of laches, 8 an otherwise meritorious suit must be dismissed where there has been an inexcusable delay in bringing the claim for relief and where the delay has unreasonably prejudiced the defendant. " 'The defendant must show: (1) a delay in asserting the right or claim; (2) that the delay was not excusable; and (3) that there was undue prejudice to the party against whom the claim is asserted.' " Environmental Defense Fund, Inc. v. Alexander, 614 F.2d

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474, 478 (5th Cir.) (quoting Save Our Wetlands, Inc. (SOWL) v. United States Army Corps of Engineers, 549 F.2d 1021, 1026 (5th Cir.), cert. denied, 434 U.S. 836, 98 S.Ct. 126, 54 L.Ed.2d 98 (1977)), cert. denied, 449 U.S. 919, 101 S.Ct. 316, 66 L.Ed.2d 146 (1980). Laches will bar stale claims challenging agency rulemaking. E.g., Independent Bankers Association v. Heimann, 627 F.2d 486 (D.C.Cir.1980) (per curiam).

Persuasive arguments exist that each of the first two criteria is satisfied. Baylor's delay is obvious, and the hospital--a Medicare participant in 1969--proffers no excuse for its having failed to contest the repeal sooner. If our analysis encompassed no more than the first two elements, our conclusion would reflect our intuition: that this plaintiff is equitably...

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