American Nursing Home Ass'n v. Cost of Living Council, DC-21

• Decision Date: 21 May 1974
• Docket Number: DC-22.,No. DC-21,DC-21
• Citation: 497 F.2d 909
• Parties: AMERICAN NURSING HOME ASSOCIATION, Plaintiff-Appellee, v. The COST OF LIVING COUNCIL et al., Defendants-Appellants.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

497 F.2d 909 (1974)

AMERICAN NURSING HOME ASSOCIATION, Plaintiff-Appellee, v. The COST OF LIVING COUNCIL et al., Defendants-Appellants.

Nos. DC-21, DC-22.

Temporary Emergency Court of Appeals.

April 29, 1974.

As Modified May 15, 1974.

Supplemental Order May 21, 1974.

John N. Hanson, Atty., Dept. of Justice, Washington, D.C., with whom Irving Jaffe, Acting Asst. Atty. Gen., William E. Nelson, Stanley D. Rose, Attys., Dept. of Justice, were on the brief for appellants.

Thomas C. Fox, Washington, D.C., with whom William A. Geoghegan and George R. Clark; Pierson, Ball & Dowd, Washington, D.C., were on the brief for appellee.

Before TAMM, Chief Judge, and ANDERSON and ESTES, Judges.

ROBERT P. ANDERSON, Judge:

The Cost of Living Council (CLC) and its members, defendants below, appeal, under § 211 of the Economic Stabilization Act of 1970, as amended ("the Act"), from a judgment entered by the District Court for the District of Columbia on February 7, 1974,¹ declaring CLC regulations, as applied to nursing homes, arbitrary and capricious and in conflict with the reimbursement provisions for Medicare and Medicaid under the Social Security Act, and permanently enjoining CLC from enforcing the regulations against nursing homes. We reverse.

In order to give context to the issues raised on this appeal, brief summaries of the history of the regulations in question and of the relevant portions of the Social Security Act are of assistance. On December 29, 1971, the CLC issued regulations covering institutional providers of health services, including nursing homes. 6 C.F.R. § 300.18 (Phase II). With various exemptions and refinements, these regulations generally limited price increases to those justified by increased costs, but only to the extent that such increases did not raise the provider's total annual revenues, adjusted for volume differences, by more than 6% above the level of the preceding year. Thereafter the regulations went through several recodifications, but without substantial change.² On January 21, 1974, new regulations were issued in implementation of Phase IV of the Act.³ In general they imposed a 6.5% ceiling on the annual increase in average revenues of establishments providing some kind of health care. While these new regulations eliminated the requirement of cost justification, they provided more flexible exceptions.

In 1965, Congress had added to the Social Security Act, Title XVIII ("Medicare", 42 U.S.C. § 1395 et seq.) and Title XIX ("Medicaid", 42 U.S.C. § 1396 et seq.). Medicare established a federal health insurance program under the supervision of the Secretary of the Department of Health, Education and Welfare (HEW) to provide medical care for the aged. Payments to nursing homes, and other health providers, for services covered by the program were based upon the reasonable cost of such services, as implemented by an agreement between the Secretary and the nursing home. Medicaid provided grants to the states to aid their programs designed to furnish medical assistance to those in need of it. The amount of payment to a participating nursing home, or other health provider, was to be determined by the state, though the Secretary first recommended, and then required by regulation, that payments under Medicaid could not exceed the reasonable cost reimbursement for comparable services under Medicare. Among amendments to the Social Security Act affecting reimbursements under these programs were those in 1972 which, inter alia, included a provision requiring states to use the Medicare reasonable cost reimbursement approach in Medicaid programs, effective July 1, 1976 (42 U.S.C. § 1396a(a)(13)(E)), and those of 1973, including a repeal of another section (§ 225) of the 1972 amendments, (42 U.S. C. § 1396b(j)), which had imposed a 5% anti-inflation limitation on increases in federal participation in payment for skilled and intermediate care facilities.

The CLC's appeals, docketed as DC-21 and DC-22 and consolidated by this court on February 10, 1974, raise issues applicable to all of the CLC regulations, promulgated and amended from time to time under Phases II, III and IV.

Before reaching the merits of the two reasons advanced by the district court for finding these regulations invalid as applied to nursing homes, it is necessary to dispose briefly of certain preliminary contentions of the CLC.

The defendants first assert that American Nursing Home Ass'n (ANHA) had no standing to bring its suit because it failed to allege injury to itself and because it was not a "person suffering legal wrong" within the meaning of § 210(a) of the Act. But the Association made specific allegations of injury to its members, 7,000 nursing homes deriving approximately 75% of their revenues from Medicare and Medicaid reimbursements and suffering adverse effects from defendants' regulations on the level of permissible reimbursements. Under these circumstances, standing is present. Sierra Club v. Morton, 405 U.S. 727, 737, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1971); United States v. Scrap, 412 U.S. 669, 685, 687, 93 S.Ct. 2405, 37 L.Ed.2d 254 (1972). The words "person suffering legal wrong" do not in themselves impose a more stringent test of standing, but rather are used in the context of requiring that any suit brought under the Act, must be for redress of a legal wrong that is the result of an act or practice arising under the Act, or an order or regulation issued pursuant thereto.

CLC also contends that the complaint does not present a justiciable controversy, because the 7,000 members embody an "infinite variety of dissimilarities." But this constituted no bar to prevent the district court from addressing issues not dependent on the individual circumstances of each nursing home, such as the two it was asked to, and did, decide, i.e. the claimed conflict of the regulations with the intent and purpose underlying the congressional enactments, and their alleged arbitrary and capricious nature.

Finally, CLC objects that ANHA did not exhaust its administrative remedies. There is some confusion in the factual premise for this contention, between individual exceptions and industry-wide exemptions, and whether the latter were properly requested.⁴ Nevertheless, all are agreed that no final CLC decision was reached before the plaintiff brought its district court suit, and the question thus posed is whether that circumstance should have prevented the district court from hearing the case.

The reasoning of the district court in concluding that it should hear and decide the two issues is stated as follows:

"The Court can interpret and rule on this conflict between regulation and statute as cogently as the agency and therefore the Court does not feel constrained to dismiss the complaint for failure to exhaust administrative remedies. If this were a matter where agency expertise was required or the plaintiff was trying to short-circuit the administrative process and an administrative record would be of benefit, the Court would hold differently."

While this is a correct statement of the rule to be applied in passing upon the exhaustion requirement, the district court used it correctly only for the statutory construction issue and not for the question of whether the regulations were arbitrary and capricious.

The exhaustion doctrine is a practical one designed to increase both judicial and administrative efficiency. The most important factor in its application is, therefore, the one stated by the district court, whether "an administrative record would be of benefit" to proper resolution of the issues in controversy. This court, when considering the exhaustion requirement, has consistently stressed the importance of distinguishing between factual issues, upon which administrative expertise is best brought to bear, and legal issues, which courts are equally well equipped to handle. In City of New York v. New York Telephone Co., 468 F.2d 1401 (TECA 1972), we upheld dismissal of a complaint for failure to exhaust administrative relief, emphasizing that "judicial review is surely hindered by the failure of the litigant to give the agency an opportunity to make a factual record, exercise its discretion or apply its expertise," id., at 1403. We there relied on McKart v. United States, 395 U.S. 185, 89 S.Ct. 1657, 23 L.Ed.2d 194 (1969), which had stressed the desirability of letting "the agency develop the necessary factual background upon which decisions should be based," id., at 194, and explicitly distinguished cases "solely of statutory interpretation" from those involving "expertise or the exercise of discretion," id., at 197-198. Similarly in Anderson v. Dunlop, 485 F.2d 666 (TECA 1973), we insisted upon exhaustion where the gist of plaintiffs' complaint was that the application of certain regulations to them was "arbitrary and capricious," id., at 667. Finally, in Consumers Union v. Cost of Living Council, 491 F.2d 1396 (TECA 1974), we gave recognition to the exhaustion requirement but distinguished the case because there were no factual issues in dispute, and only a legal question remained concerning the interpretation of the validity of certain regulations in the light of the Economic Stabilization Act.

In this case, the district court in its final decision of February 7, 1974, 372 F.Supp. 517, did not express any adverse criticism of the record before it with regard to the statutory interpretation issue. Buton the arbitrary and capricious question, it recognized that "the determination of whether these regulations are arbitrary and capricious must rest upon a careful examination of the record as presented to this Court;" and it then pointed out the deficiencies of the record from the standpoint of its inadequacy in providing a "rational basis" for the regulations. The plaintiff-appellee takes the position that both issues are purely legal and that no factual issue remains in the case. The basis for the arbitrariness...