Marshall County Health Care Authority v. Shalala

Decision Date19 March 1993
Docket NumberNo. 92-5001,92-5001
Citation300 U.S. App. D.C. 263,988 F.2d 1221
Parties, 25 Fed.R.Serv.3d 244, 40 Soc.Sec.Rep.Ser. 442, Medicare & Medicaid Guide P 41,368 MARSHALL COUNTY HEALTH CARE AUTHORITY, et al., Appellants, v. Donna E. SHALALA, Secretary of the Department of Health and Human Services.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (91cv0208).

N. Kent Smith, with whom L. Richard Gohman, Indianapolis, IN, was on the brief, for appellants.

Edward T. Swaine, Attorney, Dept. of Justice, with whom Stuart M. Gerson, Asst. Atty. Gen., Jay B. Stephens, U.S. Atty., and Anthony J. Steinmeyer, Attorney, Dept. of Justice, Washington, DC, were on the brief, for appellee.

Before: MIKVA, Chief Judge, SILBERMAN and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge SILBERMAN.

Dissenting opinion filed by Chief Judge MIKVA.

SILBERMAN, Circuit Judge:

The Secretary of Health and Human Services denied appellant hospitals' claims for reimbursement under the Medicare program, and they sought review of the Secretary's decision in the district court. Appellants claimed that in limiting them to the lower reimbursement rates allowed to rural hospitals, the Secretary ignored appellants' "urban" character and arbitrarily and capriciously refused to grant them an exception from the classification scheme. The district court dismissed appellants' complaint for failure to state a claim under FED.R.CIV.P. 12(b)(6). On appeal, the hospitals contend that in ruling on the Secretary's 12(b)(6) motion the district court improperly looked beyond the face of the complaint to the Secretary's statements in the Federal Register and decided the merits of the case. Such a decision, they argue, should have been left to summary judgment. The district court may, however, examine matters of public record in ruling on a Rule 12(b)(6) motion, and when a district court is reviewing agency action--sitting as an appellate tribunal--the legal questions raised by a 12(b)(6) motion and a motion for summary judgment are the same. We therefore affirm the dismissal.


Under the Prospective Payment System implemented in 1983, the Medicare program does not reimburse hospitals for their actual costs. Instead, the Department of Health and Human Services (HHS) pays hospitals fixed rates based on average costs that are calculated according to both the type of service provided and the hospital's geographic location. See 42 U.S.C. § 1395ww(d) (1983). The Medicare Act charges the Secretary of HHS with calculating both national and regional average costs for various procedures and specifies that the costs be computed separately for urban and rural areas. See id. § 1395ww(d)(2). A hospital classified as part of an urban area will receive higher Medicare reimbursements because the hospital's payment rate will be based on the higher average costs of urban hospitals.

Appellants are all hospitals in counties classified as rural for purposes of Medicare reimbursement. The statute defines an urban area as "an area within a Metropolitan Statistical Area [ (MSA) ] (as defined by the Office of Management and Budget) [ (OMB) ] or within such similar area as the Secretary has recognized under subsection (a) of this section by regulation." Id. § 1395ww(d)(2)(D). Under OMB regulations, a county adjacent to an MSA is included within the MSA if a specified percentage of its residents commute to the urban center. See 50 Fed.Reg. 35,685 (1985). Appellants do not qualify as urban under that provision, however, because they are located in counties that border on not one, but two or more MSAs. Their counties have the requisite percentage of commuters to neighboring MSAs, but because the commuters travel to multiple MSAs rather than a single one, those counties are classified as rural. 1

As noted, the OMB system is not required by the terms of the statute. The Secretary may define urban areas "similar" to, but not the same as, OMB's MSAs, see 42 U.S.C. § 1395ww(d)(2), and the statute further states that the Secretary "shall provide ... for such other exceptions and adjustments to such [prospective] payment amounts ... as the Secretary deems appropriate." Id. § 1395ww(d)(5)(C)(iii) (1983). The Secretary has, for the most part, declined to exercise the power to modify the OMB classification scheme. See 42 C.F.R. §§ 412.62(f), 412.63(b) (1984). In notice and comment proceedings in 1984, 1985, and 1986, the Secretary considered suggestions to depart from the OMB system to take into account the anomalous commuting patterns of counties such as those in which appellant hospitals are located. The Secretary concluded that the existing system provided the best method currently available for making the urban/rural classification and that there were no other "generally accepted criteria" that could objectively distinguish urban from rural hospitals. See 49 Fed.Reg. 234, 254 (1984); see also 50 Fed.Reg. 35,646, 35,684-85 (1985).

For the cost years from 1984 to 1988, appellants claimed reimbursement as urban hospitals despite their ineligibility under the then-existing regulations. After their claims for reimbursement were denied, appellants sought review in the district court pursuant to 42 U.S.C. § 1395oo(f)(1). Appellants asserted that in adhering to OMB's MSA classification system, the Secretary had refused to consider material that had been submitted on the record in earlier notice and comment proceedings and that showed appellants' urban character. The hospitals charged that the Secretary had arbitrarily and capriciously refused to formulate exceptions to the OMB scheme to take into account the anomalies in the commuting patterns of appellants' counties.

The Secretary moved to dismiss, both for lack of subject matter jurisdiction and for failure to state a claim. According to the Secretary, during the years in question the Act committed any decision to deviate from the OMB scheme to the agency's unreviewable discretion. The district court disagreed with the Secretary as to jurisdiction, but the court dismissed appellants' complaint for failure to state a claim under FED.R.CIV.P. 12(b)(6). See Marshall County Health Care Auth. v. Sullivan, Civ. Act. No. 91-0208, Mem. Op. at 5 (D.D.C. Nov. 12, 1991).


Before the district court, appellants argued that the Secretary had illegally (arbitrarily and capriciously) declined to grant an exception to the regulatory scheme for hospitals in counties adjacent to multiple MSAs. Yet the "exception" they called for is a generic modification of the definition of urban areas, a modification which they subsequently obtained by legislative amendment. Of course, as appellants note, the Secretary had, and has, the power to redefine urban areas by regulation--as well as to grant exceptions. Their request could be satisfied, it would seem, by either procedure. And a refusal to engage in rulemaking is, of course, reviewable under the Administrative Procedure Act (APA). See, e.g., American Horse Protection Ass'n, Inc. v. Lyng, 812 F.2d 1, 4-5 (D.C.Cir.1987); Natural Resources Defense Council v. SEC, 606 F.2d 1031, 1047 (D.C.Cir.1979). But since appellants emphasize the Secretary's refusal to grant an exception, the government reasserts in this court a jurisdictional defense--that under the APA the Secretary's decision not to grant an exception is unreviewable. The government claims that the statutory language "as the Secretary deems appropriate" satisfies the APA's exception to judicial review for agency action "[that] is committed to agency discretion by law." 5 U.S.C. § 701(a)(2).

We agree with the government that the language and structure of the statute suggest a broad delegation of discretion to the Secretary either to modify the regulation or to grant an exception. We disagree, however, that the latter determination is completely unreviewable. But see Columbia-Greene Medical Center, Inc. v. Sullivan, 758 F.Supp. 821, 824 (N.D.N.Y.1991). The government relies on Webster v. Doe, 486 U.S. 592, 108 S.Ct. 2047, 100 L.Ed.2d 632 (1988), in which the Supreme Court held that a similarly worded statute that authorized the Director of the CIA to discharge an employee whenever "he shall deem [it] necessary or advisable in the interests of the United States," 50 U.S.C. § 403(c) (emphasis added), granted unreviewable discretion. Id. at 600, 108 S.Ct. at 2052. But the government, in our view, puts too much emphasis on the word "deem." Judicial review is barred under 5 U.S.C. § 701(a)(2) "in those rare instances where 'statutes are drawn in such broad terms that in a given case there is no law to apply.' " Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 820, 28 L.Ed.2d 136 (1971) (citation omitted). In Webster, the lack of reasonable legal standards stemmed from the phrase "advisable in the interests of the United States," which provides no judicially cognizable norm. The statute, after all, dealt with national security--an area in which the judiciary almost invariably defers to the executive branch. As the Webster Court observed, a deferential attitude on the part of Congress, as well, permeated "the overall structure of the NSA [National Security Act]." Webster, 486 U.S. at 600, 108 S.Ct. at 2052.

It is certainly not true, by contrast, that the Medicare statute reflects that degree of fulsome congressional deference to the executive. With respect to the particular provisions relevant to this case, moreover, Congress has provided a rather specific norm--the OMB model--to guide the Secretary's judgment concerning the definition of urban areas. The Secretary may vary the definition, but we surely can hypothesize forms of regulatory amendments that could be thought unreasonable in light of the statute. Were the Secretary arbitrarily to grant an exception for some...

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