Georgetown University Hosp. v. Bowen

Citation261 U.S.App.D.C. 262,821 F.2d 750
Decision Date01 September 1987
Docket NumberNos. 86-5381,s. 86-5381
Parties, 56 USLW 2035, 18 Soc.Sec.Rep.Ser. 136, Medicare&Medicaid Gu 36,365 GEORGETOWN UNIVERSITY HOSPITAL, et al. v. Otis R. BOWEN, Secretary of Health and Human Services, Appellant. HOWARD UNIVERSITY, as Howard University Hospital, et al. v. Otis R. BOWEN, Secretary of Health and Human Services, Appellant. TUCSON GENERAL HOSPITAL v. Otis R. BOWEN, Secretary of Health and Human Services, Appellant. to 86-5383.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

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

Ronald N. Sutter, Washington, D.C., for appellees.

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 EDWARDS.

HARRY T. EDWARDS, Circuit Judge:

In 1979, the Secretary of the Department of Health, Education and Welfare, 1 acting pursuant to section 223(b) of the Social Security Amendments of 1972, 2 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 providers 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 appellees--seven non-profit hospitals that provide routine inpatient Medicare services--challenged the Secretary's action 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. Sec. 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), reprinted in J.A. 65-66. No appeal was taken from this ruling, and the Secretary, acting through fiscal intermediaries, 3 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 comment 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 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 reissued 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 concluded that the retroactive application of the rule was barred by the equitable principles enumerated by this circuit in Retail, Wholesale & Department Store Union v. 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 announced in the course of an administrative adjudication and applied retroactively to the participants in that adjudication. It does not apply in those situations where a "legislative" rule is promulgated in accordance with the rulemaking procedures set forth in the APA. In these latter 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 clearly 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 Congress 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 generally 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. Sec. 1395f(b)(1) (1982 & Supp. III 1985). The instant case concerns only the "reasonable cost" provisions of 42 U.S.C. Sec. 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 unnecessary 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 empowered to estimate the reasonable cost of providers by issuing regulations of general applicability. These regulations--denominated by statute as the "methods to be used ... in determining ... costs"--are presumed to measure 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 provide 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 excessive." 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 somewhat 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. 6 However, the Secretary was not authorized to promulgate regulations determining--on a prospective basis--what level of Medicare-related costs would be considered "reasonable," and hence reimbursable. 7

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 establishing "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, Sec. 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 CONG. & ADMIN.NEWS at 4989, 5070. Thus, by virtue of this amendment, the Secretary's statutory authority to establish "methods of determining costs" extends 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.").

B. Factual Background

The cost-limit rule at issue in this case was first promulgated 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, 8 established a wage-index formula to be used to calculate the cap on reimbursable wage costs. The wage index for an individual hospital was to be calculated by...

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