Erringer v. Thompson

• Decision Date: 10 June 2004
• Docket Number: No. 03-16408.,03-16408.
• Citation: 371 F.3d 625
• Parties: Christopher T. ERRINGER; Lawrence Corcoran; Ethel W. Vestal, by her husband and next friend, William A. Vestal; Valerie Lavaque, James Robertson, and Lillian Legier, on behalf of themselves and a class of persons similarly situated, Plaintiffs-Appellants, v. Tommy THOMPSON, Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

371 F.3d 625

Christopher T. ERRINGER; Lawrence Corcoran; Ethel W. Vestal, by her husband and next friend, William A. Vestal; Valerie Lavaque, James Robertson, and Lillian Legier, on behalf of themselves and a class of persons similarly situated, Plaintiffs-Appellants, v. Tommy THOMPSON, Secretary of Health and Human Services, Defendant-Appellee.

No. 03-16408.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 10, 2004.

Filed June 10, 2004.

COPYRIGHT MATERIAL OMITTED

Sally Hart, Arizona Center for Disability Law, Tucson, AZ, for the plaintiffs-appellants.

Ori Lev, Civil Division, Department of Justice, Washington, DC, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona, Bernardo P. Velasco, Magistrate Judge, Presiding.^* D.C. No. CV-01-00112-BPV.

Before: O'SCANNLAIN, SILER,^** and HAWKINS, Circuit Judges.

MICHAEL DALY HAWKINS, Circuit Judge.

A class of Medicare beneficiaries ("the Beneficiaries"), whose claims for coverage of their health care services were denied based on Local Coverage Determinations ("LCDs"),¹ challenge rules issued by the Secretary of Health and Human Services (the "Secretary") which give criteria to contractors for adopting LCDs. The Beneficiaries contend that the criteria governing the LCDs are substantive rules required to be promulgated under either the notice and comment requirements of the Administrative Procedures Act ("APA"), 5 U.S.C. § 553(b) and (c), or the promulgation requirements of the Medicare Act, 42 U.S.C. § 1395hh. The district court held that the unpublished criteria are not subject to the formal rulemaking requirements of the APA and the Medicare Act because they are interpretive rules. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I. Factual and Procedural Background

A. The Medicare Act and LCDs

The Medicare Act creates a health insurance program providing benefits to eligible elderly and disabled individuals. Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395hhh. Parts A and B provide coverage for various items and services, but exclude payment for items and services that "are not reasonable and necessary for the diagnosis or treatment of illness or injury...." 42 U.S.C. § 1395y(a)(1)(A) (emphasis added).

Medicare is administered nationally by the Center for Medicare and Medicaid Services ("CMS"). CMS contracts with private insurance companies, who together with local peer review organizations (collectively "contractors" or "Medicare contractors") process claims for Medicare beneficiaries. Essentially, a Medicare claim submitted for payment is approved or denied by a Medicare contractor.² In making coverage decisions, Medicare contractors rely on National Coverage Determinations ("NCDs") and Local Coverage Determinations ("LCDs"). The Secretary adopts NCDs to exclude certain items and services from coverage on a national level that are not "reasonable and necessary" under the agency's interpretation of the Medicare statute. See 42 U.S.C. § 1395ff(f)(1)(B). These determinations are binding on all Medicare contractors nationwide. When no NCD applies to a claim, Medicare contractors must still apply the "reasonable and necessary" limitation of the Medicare statute in determining whether to pay a claim and at what amount. The Secretary requires Medicare contractors to use LCDs to aid in this determination — specifically, when the contractor identifies an item or service that is never covered in certain circumstances and wishes to establish automated review or when widespread, significant risk to Medicare funds dictates. Program Integrity Manual ("PIM") Ch.13 § 4.B. LCDs are used only on a contractor-wide basis and may differ between contractors in different regions of the country. 42 U.S.C. § 1395ff(f)(2)(B). The Secretary has issued guidelines for contractors to follow in creating LCDs. It is these guidelines, giving criteria for the creation of LCDs, that are at issue in this appeal.

The guidelines are currently contained in the Secretary's Program Integrity Manual ("PIM").³ The POM is a compilation of guidelines which CMS issues to instruct Medicare contractors on how to conduct medical review of Medicare claims submitted by Medicare providers and suppliers for payment. Neither the PIM, nor the individual guidelines in question, are published in accordance with formal APA rulemaking procedures.

B. The Class Action

Beneficiaries are a nationwide class whose claims either have been denied or will be denied based on LCDs.⁴ They brought suit in district court in 2001 challenging two particular provisions of the PIM concerning LCDs. Section 5.1, "Coverage Provisions in [LCDs]," gives guidelines for when a service may be covered by a contractor.⁵ PIM Ch. 13 § 5.1. Section 5.4, "Least Costly Alternative," requires contractors to only partially pay for an item or service that substantially exceeds the cost of what is required for treatment. PIM Ch.13 § 5.4. Contractors must apply this principle when determining payment for durable medical equipment ("DME") and may apply it to non-DME services, as well. Id.

The Medicare beneficiaries allege the Secretary violated the APA, 5 U.S.C. § 553(b) and (c), and the Medicare Act, 42 U.S.C. § 1395hh, by failing to provide notice and comment prior to promulgating the PIM provisions governing LCDs. The Beneficiaries and the Secretary filed cross-motions for summary judgment. The district court⁶ granted the Secretary's motion and denied the Beneficiaries' motion, holding that Section 5.1 is both a procedural and interpretive rule, and Section 5.4 is interpretive and not binding with the force and effect of law.⁷ Therefore, neither section was subject to the notice and comment rulemaking requirements of the APA or of the Medicare statute.

II. Discussion

We review de novo the determination that an agency's rule is interpretive and not legislative as a matter of law.⁸ See Hemp Indus. Ass'n v. DEA ["Hemp Industries"], 333 F.3d 1082, 1086 (9th Cir.2003); Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir.2004).

The APA requires agencies to advise the public through a notice in the Federal Register of the terms or substance of a proposed substantive rule, allowing the public a period to comment. See 5 U.S.C. § 553(b) and (c). This is termed the "notice and comment" requirement of the APA. "Th[e] requirement is designed to give interested persons, through written submissions and oral presentations, an opportunity to participate in the rulemaking process." Chief Prob. Officers of California v. Shalala ["Probation Officers"], 118 F.3d 1327, 1329 (9th Cir.1997). Generally, "[t]he procedural safeguards of the APA help ensure that government agencies are accountable and their decisions are reasoned." Sequoia Orange Co. v. Yeutter, 973 F.2d 752, 758 (9th Cir.1992).

The notice and comment requirement, however, does not apply to "interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice." 5 U.S.C. § 553(b)(3)(A). The singular question we are asked to address is whether the Secretary's PIM provisions constitute substantive rules subject to formal rulemaking requirements or whether the manual provisions are interpretive and thus exempt.

A. Interpretive Rules Under the APA Do Not Have the Force of Law

In Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 88, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995), the Supreme Court described an interpretive rule as one "issued by an agency to advise the public of the agency's construction of the statutes and rules which it administers." The Ninth Circuit has put it this way: "In general terms, interpretive rules merely explain, but do not add to, the substantive law that already exists in the form of a statute or legislative rule. Legislative rules, on the other hand, create rights, impose obligations, or effect a change in existing law pursuant to authority delegated by Congress." Hemp Industries, 333 F.3d at 1087 (9th Cir.2003) (internal citations omitted).⁹

Hemp Industries cites with approval the D.C. Circuit's framework for distinguishing between interpretive and legislative rules set out in American Mining Congress v. Mine Safety & Health Admin. ["American Mining"], 995 F.2d 1106, 1109 (D.C.Cir.1993). Hemp Industries, 333 F.3d at 1087. Specifically, the Ninth Circuit agreed that legislative rules have the "force of law," while interpretive rules do not, and adopted a three-part test for determining whether a rule has the "force of law":

(1) when, in the absence of the rule, there would not be an adequate legislative basis for enforcement action;

(2) when the agency has explicitly invoked its general legislative authority; or

(3) when the rule effectively amends a prior legislative rule.

Id. at 1088.

1. Adequate Legislative Basis

Hemp Industries says "if there is no legislative basis for enforcement action on third parties without the rule, then the rule necessarily creates new rights and imposes new obligations. This makes it legislative." 333 F.3d at 1088. As an example, American Mining pointed to § 14 of the Securities Exchange Act. That provision, governing proxy authority, proscribes no specific conduct — only that "in contravention of such rules and regulations as the Commission may prescribe." American Mining, 995 F.2d at 1109 (quoting 15 U.S.C. § 78n(b)). Absent the SEC's promulgation of proxy rules, therefore, the statute would be an empty letter — it would provide no legislative basis for the enforcement of anything at all. The American Mining case itself provides another example where there was an inadequate legislative basis for enforcement without the rule in question. The statute in that case required an operator to maintain "such records ... as the Secretary ... may reasonably require...." Id.

In contrast, the Medicare statute does contain a standard for approval of claims apart from the PIM provisions and the LCDs. If the PIM...