Mason General Hosp. v. Secretary of Dept. of Health and Human Services

• Citation: 809 F.2d 1220
• Decision Date: 21 January 1987
• Docket Number: No. 86-1011,86-1011
• Parties: , 16 Soc.Sec.Rep.Ser. 168, Medicare&Medicaid Gu 36,022 MASON GENERAL HOSPITAL; Edward W. Sparrow Hospital; Mary Free Bed Hospital; Oaklawn Hospital; Community Health Center; and St. Francis Hospital, Plaintiffs-Appellants, v. SECRETARY OF the DEPARTMENT OF HEALTH AND HUMAN SERVICES; Carolyn K. Davis, Adm'r., Health Care Financing Admin., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1220

809 F.2d 1220

55 USLW 2429, 16 Soc.Sec.Rep.Ser. 168,

Medicare&Medicaid Gu 36,022

MASON GENERAL HOSPITAL; Edward W. Sparrow Hospital; Mary

Free Bed Hospital; Oaklawn Hospital; Community

Health Center; and St. Francis

Hospital, Plaintiffs-Appellants, v. SECRETARY OF the DEPARTMENT OF HEALTH AND HUMAN SERVICES;

Carolyn K. Davis, Adm'r., Health Care Financing

Admin., Defendants-Appellees.

No. 86-1011.

United States Court of Appeals,

Sixth Circuit.

Argued Nov. 18, 1986.

Decided Jan. 21, 1987.

Chris Rossman, David A. Ettinger, Todd B. Adams, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., William G. Christopher, argued, Kenneth R. Marcus, for plaintiffs-appellants.

Stuart M. Gerson/Wm. G. Kopit, David H. Larry, Washington, D.C., for amicus curiae.

Martin F. Palus, Asst. U.S. Atty., Grand Rapids, Mich., Ann T. Hunsaker, Asst. Gen. Counsel, Dept. of H.H.S., Edgar C. Morrison, Jr., argued, Washington, D.C., for defendants-appellees.

Before KEITH and GUY, Circuit Judges and EDGAR, District Judge. ^*

RALPH B. GUY, JR., Circuit Judge.

This case represents one of a long line of cases challenging the promulgation by the Secretary of Health and Human Services of the 1979 Medicare Malpractice Rule, 42 C.F.R. Sec. 405.452(b)(1)(ii) (subsequently renumbered Sec. 405.452(a)(1)(ii) (1985)) (the 1979 Rule). The procedural history set forth below is complicated but important to our resolution of the issues on appeal.

On March 28, 1983, plaintiff hospitals (the hospitals) filed suit in the district court alleging that the 1979 Rule was substantively invalid under the Administrative Procedure Act (APA), 5 U.S.C. Sec. 706(2)(A), as arbitrary, capricious, and an abuse of the Secretary's discretion. They further requested a declaration that the Secretary had illegally applied the 1979 Rule in determining the hospitals' Medicare reimbursement for its 1980 fiscal year and asked that the hospitals be awarded the sums which would have been due to them under the prior rule which had been in effect since passage of the Medicare reimbursement regulations in 1966. 31 Fed.Reg. 14,808.

By judgment dated November 4, 1985, the district court granted the hospitals' motion for summary judgment, concluding that the Secretary's promulgation of the 1979 Malpractice Rule (1) was arbitrary and capricious and an abuse of discretion, and (2) violated certain provisions of the Medicare Act. However, instead of awarding the requested relief, the court remanded the case to the Secretary, stating as follows:

The Court notes that the Secretary is currently working on a proposed regulation that will replace the current malpractice rule. The Secretary proposes that this regulation will be applied retroactively to July 1, 1979. Because of this retroactivity, this case is remanded without prejudice to the Provider Reimbursement Review Board for proceedings consistent with this opinion. The Provider Reimbursement Review Board will apply such new regulations as effectively promulgated by the Secretary.

The referenced "proposed regulation" had been published on June 17, 1985, and was in substance virtually identical to the prior 1979 Rule. ¹ The Secretary was, at that time, accepting comment on the proposed rule pursuant to section 553(b) of the APA preparatory to publication of the rule in final form.

On December 23, 1985, the hospitals appealed from that part of the district court judgment remanding the case to the Provider Reimbursement Review Board (PRRB). Three weeks later, on January 15, 1986, this court issued its decision in Cumberland Medical Center v. Secretary of HHS, 781 F.2d 536 (6th Cir.1986), striking down the 1979 Malpractice Rule as arbitrary and capricious in violation of the Medicare Act. We also resolved the issue of the appropriate relief to be granted to the successful plaintiff hospitals. Although we noted that the Secretary's proposed rule was scheduled to be effective retroactively to 1979, we declined to order remand for application of that rule when finalized.

Finally, we note that the proposed regulation is nearly identical to the current Malpractice Rule. Withholding reimbursement under these circumstances would have the undesirable effect of allowing the Secretary a second chance to establish a proper record for the Malpractice Rule, delaying indefinitely the hospitals' right to payment. If the Secretary does indeed pass a valid retroactive regulation, her right to seek adjustments will not be affected by our order that reimbursements under the prior regulation be made now.

Id. at 539. ² In so ruling, we joined the five other circuits which had considered the issue of the relief to be granted and held that, upon invalidation of the 1979 Rule, the prior method of reimbursement is reinstated until replaced by a valid new regulation. See, e.g., Abington Memorial Hospital v. Heckler, 750 F.2d 242, 244 (3d Cir.1985); Menorah Medical Center v. Heckler, 768 F.2d 292, 297 (8th Cir.1985). See also Action on Smoking and Health v. CAB, 713 F.2d 795, 797 (D.C.Cir.1983) (recognizing that vacating or rescinding invalidly promulgated regulations has the effect of reinstating prior regulations). This action is also in accord with our statutory authority under the APA, 5 U.S.C. Sec. 706(2) (1982) ("The reviewing court shall ... hold unlawful and set aside agency action....") (emphasis added). Thus, the case was remanded to the district court with orders that the hospitals be reimbursed, with interest, under the formula set forth in the prior regulation. Cumberland, 781 F.2d at 539. Subsequently, and during the period that this case was being briefed before this court, the Secretary reissued the proposed regulation as an interim final rule, published on April 1, 1986, with an effective date of May 1, 1986. 51 Fed.Reg. 11,142 (April 1, 1986). This rule, however, specifies that it is applicable to cost reporting periods beginning on or after July 1, 1979, precisely the same period as was formerly governed by the invalidated 1979 Rule. Id. The court has received additional briefing on these recent developments, wherein the Secretary now argues that this action has been mooted by the promulgation of the April 1, 1986, rule (the 1986 Rule), since this rule, by its terms, automatically applies to these plaintiffs. Additionally, the Secretary contends that he clearly has the statutory authority to engage in the type of retroactive rulemaking at issue in this case and that the 1986 Rule is both substantively and procedurally valid under the APA and the Medicare Act. In rebuttal, the hospitals argue that the Secretary lacks the power under the Medicare Act to promulgate the 1986 Rule retroactively or that, even if he possesses such power, the 1986 Rule should not be applied under the facts of this case. Further, plaintiffs argue that the action is not moot and that the 1986 Rule is also invalid since it was not properly promulgated pursuant to APA notice and comment requirements.

As we view the case in its present posture, its resolution hinges on the determination of only one crucial issue: whether the 1986 Rule can validly be applied retroactively to hospital cost reporting periods beginning on July 1, 1979, a period of almost seven years prior to the Rule's effective date of May 1, 1986. This was the question we specifically left open in Cumberland, and which we resolve today in holding that, under the circumstances presented here, the Secretary is prohibited from engaging in the type of retroactive rulemaking at issue in this case.

I.

The Secretary contends that the proper standard of review of the district court's remand order is that of abuse of discretion; however, we find that standard inapposite under the facts of this case. Under the controlling statutory provision, 42 U.S.C. Sec. 1395oo (f)(1), a provider is entitled to obtain expedited judicial review of any action "which involves a question of law or regulations relevant to the matters in controversy whenever the Board determines ... that it is without authority to decide the question...." Id. 42 C.F.R. Sec. 405.1842 sets forth the applicable procedures for obtaining such final decision of the Board as to the scope of its authority. The hospitals received their letter granting expedited judicial review on January 28, 1983. This letter constitutes a determination by the PRRB that the contested issue involves a question of law which is beyond its statutory authority. The decision of whether to grant retroactive force to a newly promulgated agency rule is a question of law for the courts, with no overriding obligation of deference to the agency decision. Retail, Wholesale and Department Store Union v. NLRB, 466 F.2d 380, 390 (D.C.Cir.1972). See also Daughters of Miriam Center for the Aged v. Mathews, 590 F.2d 1250, 1259 (3d Cir.1978) ("the administrative agency here has no particular expertise concerning the issue of retroactivity. To the contrary, the extent to which retroactive effect may be given to a promulgation is governed by principles of law that have been developed and refined by the courts, primarily in the context of constitutional adjudication.") Case law includes numerous examples where a court reviewed the validity of a new law or regulation promulgated during the pendency of litigation concerning its predecessor. Bradley v. Richmond School Board, 416 U.S. 696, 709, 94 S.Ct. 2006, 2015, 40 L.Ed.2d 476 (1974) (court of appeals did not remand but "heard argument as to the applicability of [a law passed after the district court decided the case] to this and other litigation"); Harper Grace Hospitals v. Schweicker, 691 F.2d 808 (6th Cir.1982), reh'g denied, 708 F.2d 199 (1983) (court determined whether amendment to Medicare Act during pendency of appeal was applicable). Accordingly, we see no reason to remand this case to the PRRB, the Secretary, or to the district court for resolution of this issue.

II.

We begin our analysis by noting that we are dealing here...