American Hosp. Ass'n v. Bowen, 86-5579

Citation834 F.2d 1037
Decision Date04 December 1987
Docket NumberNo. 86-5579,86-5579
Parties, 56 USLW 2328, 20 Soc.Sec.Rep.Ser. 34, Medicare&Medicaid Gu 36,747 AMERICAN HOSPITAL ASSOCIATION v. Otis R. BOWEN, Secretary, H.H.S., et al., Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Appeal from the United States District Court for the District of Columbia (Civil Action No. 85-00311).

John F. Daly, Atty., Dept. of Justice, with whom Richard K. Willard, Asst. Atty. Gen., Dept. of Justice, Joseph E. diGenova, U.S. Atty. and John F. Cordes, Atty., Dept. of Justice, Washington, D.C., were on the brief, for appellants.

F. Joseph Nealon, Washington, D.C., for appellee.

Before WALD, Chief Judge, MIKVA and SILBERMAN, Circuit Judges.

Opinion for the Court filed by Chief Judge WALD.

Opinion concurring in part and dissenting in part filed by Circuit Judge MIKVA.

WALD, Chief Judge:

We face here the issue of whether the Department of Health and Human Services ("HHS"), in implementing the system of "peer review" of Medicare outlays called for by Congress in its 1982 amendments to the Medicare Act, erred in not first undertaking the notice and comment rulemaking generally prescribed by the Administrative Procedure Act ("APA"), 5 U.S.C. Sec. 553. Because we conclude that the directives issued and contracts entered into by HHS constitute mere procedural rules or general statements of policy that do not substantially alter the rights or interests of regulated hospitals, we hold that HHS has satisfied the requirements of Sec. 553 of the APA, and therefore reverse the judgment of the district court.

I. THE FACTUAL SETTING OF THIS CASE

Since 1965, the Medicare program has provided for the reimbursement by the federal government of those medical expenses incurred by persons over 65 and of persons suffering from certain disabilities. Typically, this reimbursement has been paid directly to the hospitals and doctors who provide health care to Medicare recipients.

In 1982, Congress amended the Medicare Act to provide for a new method of reviewing the quality and appropriateness of the health care provided by these medical providers to Medicare beneficiaries. It did so by passing the Peer Review Improvement Act of 1982, Pub.L. No. 97-248, Sec. 143, 96 Stat. 382 (1982), 42 U.S.C. Secs. 1320c et seq., which called for HHS to contract with "peer review organizations," or PROs, private organizations of doctors that would monitor "some or all of the professional activities" of the provider of Medicare services in their areas. 42 U.S.C. Sec. 1320c-3(a)(1). A primary goal of Congress was to put into place a review system that would crack down on excessive reimbursements to hospitals for treatments of Medicare patients. 1

In passing the 1982 amendments, Congress painted with a broad brush, leaving HHS to fill in many important details of the workings of peer review. The amendments require HHS to designate geographic areas generally corresponding to each state, to be served by individual peer review organizations. 42 U.S.C. Sec. 1320c-2(a). HHS must then enter into an agreement, initially for a two-year term, with a PRO in each area. 42 U.S.C. Sec. 1320c-2(b)(1) and (c)(3). Entities seeking to qualify as PROs must contain a sufficient number of physicians practicing in the PRO area to carry out the requisite review functions. 42 U.S.C. Sec. 1320c-1.

The agency has broad discretion in negotiating each of these contracts. As the district court observed, HHS may negotiate different agreements with each PRO, and it may make agreements without regard to any federal law regarding contracts which it determines to be inconsistent with the PRO program. 42 U.S.C. Sec. 1320c-2(e). See American Hospital Association v. Bowen, 640 F.Supp. 453, 457 (D.D.C.1986). A typical provision on which PRO contracts differ is the type of activities that an individual PRO is expected to review. On this contractual term, as on others, the goal of HHS' flexibility is to encourage PROs to be responsive to distinctive community needs and practices, apparently a shortcoming in the system of review preceding the PRO system. See note 1, supra. The PRO contract must, however, specify the types of cases it will review, 42 U.S.C. Sec. 1320c-3(a)(4), and it must include negotiated objectives against which the PRO will be judged. 42 U.S.C. Sec. 1320c-2(c)(7). Typically, PROs have been compensated according to fixed-price contracts, under which they receive a pre-determined amount of money for all services performed under the two-year contract.

Under the 1982 amendments, hospitals, in turn, must enter into contracts with the HHS-designated PRO in their area in order to participate in the Medicare program and thus be eligible for reimbursements. The hospital must agree, as part of its contract with the PRO, to allow the PRO to review the validity of diagnostic information provided by the hospital, to review the completeness, adequacy and quality of care provided, to review the appropriateness of hospital admissions, and to review the appropriateness of care provided for which the hospital or health care provider seeks extra Medicare payments. 42 U.S.C. Sec. 1395cc(a)(1)(F). Congress required hospitals to enter into such agreements by November 15, 1984. Deficit Reduction Act of 1984, Pub.L. No. 98-369, Sec. 2347(b).

The principal function of a PRO, once having been designated by HHS and having entered into agreements with hospitals in its jurisdiction, is to review for conformance with the substantive standards of the Medicare Act the professional activities of physicians, hospitals, and other providers of health care. 42 U.S.C. Sec. 1320c-3(a)(1). The standard of review is whether the services and items provided by the doctor or hospital "are or were reasonable and medically necessary," id., and thus whether these activities satisfy the standards for federal government reimbursement under Medicare. 42 U.S.C. Sec. 1320c-3(a)(2). The PRO's determination on whether Medicare should pay for the services in question is generally conclusive. Id. When the PRO program first began, these reimbursements were retrospective ones, based upon the "reasonable cost" of providing medical services to Medicare beneficiaries, see 42 U.S.C. Secs. 1395b; 42 U.S.C. Sec. 1395x(v). Since 1983, when Congress further modified the Medicare system by passing the Social Security Amendments of 1983, Medicare expenses have been paid prospectively to providers according to a predetermined rate based on which "diagnosis related group," or DRG, a patient is deemed to fall into. 42 U.S.C. Sec. 1395ww. 2

Beyond those relatively skeletal requirements, Congress left much of the specifics of the hospital-PRO relationship to the inventiveness of HHS, empowering it to promulgate regulations governing PROs in order to implement the peer review program. 42 U.S.C. Sec. 1320c-3(a)(8). The legislative history of the peer review amendments suggests that this was no oversight: Congress apparently expected HHS to design and put into place the numerous procedures necessary to administer the PRO program.

The initial flurry of regulations promulgated by HHS filled in a variety of these details regarding PRO procedures. See 42 C.F.R. Secs. 412.42; 412.44; 412.46; 412.48; 412.82; 462.100 et seq. Many of these procedures were aimed at harmonizing the PRO concept with the new system of reimbursing Medicare providers prospectively. The procedures detailed in these regulations included basic PRO review functions, reporting hospitals' misrepresentations, DRG validation, review of hospital determinations of noncoverage, and payment for coverage exceeding the standard amount allotted for each diagnostic group.

The parties to this case agree that these regulations were promulgated in conformance with the Administrative Procedure Act, 5 U.S.C. Sec. 553, and thus they are not under challenge here.

In addition to these regulations, HHS issued a series of directives and transmittals governing the PRO program that are the subject of this lawsuit. These communications include PSRO Transmittals Nos. 107 and 108, Medicare Hospital Manual Transmittal No. 367 and Medicare Intermediary Transmittal No. 1079, Medicare Intermediary Transmittal No. 1102, and PRO Program Directive No. 2. These transmittals contain a wide variety of instructions, guidelines and procedures covering aspects of the PRO program. HHS also shaped the PRO program when it issued the Request for Proposals ("RFP"), a document soliciting proposed contracts from entities seeking to become PROs. The RFP, among other things, told would-be PROs what review procedures their proposals must address, and what provisions their bids must contain. The contracts entered into between HHS and the PROs contain the provisions required by the RFP.

HHS concedes that neither the transmittals, the RFP, nor the contracts ultimately entered into were issued pursuant to the notice and comment procedures generally required by Sec. 553 of the APA.

The plaintiff in this action is the American Hospital Association ("AHA"), an Illinois nonstock corporation that represents 6,000 member hospitals serving approximately 30 million patients a year, more than 9 million of them Medicare beneficiaries. The facts of its dispute with HHS leading to this lawsuit are essentially as recounted by the district court. See American Hospital Association, 640 F.Supp. at 458.

On October 10, 1984, complaining of what the district court termed "the small and incomplete selection of regulations" HHS had published implementing the PRO program and the large number of procedures set forth in documents not published as regulations, AHA filed with HHS a petition for rulemaking, pursuant to 5 U.S.C. Sec. 553(e). In it, AHA requested HHS to promulgate a complete set of regulations governing all aspects of the PRO program.

On December 14, 1984, the then-Secretary of HHS, Margaret Heckler...

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