Mercy Hosp. of Laredo v. Heckler

• Decision Date: 06 December 1985
• Docket Number: No. 84-2382,84-2382
• Citation: 777 F.2d 1028
• Parties: , Medicare&Medicaid Gu 35,051 MERCY HOSPITAL OF LAREDO, et al., Plaintiffs-Appellants, v. Margaret M. HECKLER, In Her Official Capacity as Secretary of Health & Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1028

777 F.2d 1028

11 Soc.Sec.Rep.Ser. 291, Medicare&Medicaid Gu 35,051

MERCY HOSPITAL OF LAREDO, et al., Plaintiffs-Appellants, v. Margaret M. HECKLER, In Her Official Capacity as Secretary of Health & Human Services, Defendant-Appellee.

No. 84-2382.

United States Court of Appeals Fifth Circuit.

Dec. 6, 1985.

Wood, Lucksinger & Epstein, Dennis M. Barry, Washington, D.C., for plaintiffs-appellants.

Daniel K. Hedges, U.S. Atty., Linda M. Cipriani, C.J. (Neil) Calnan, James R. Gough, Asst. U.S. Attys., Houston, Tex., Kermit Fonteno, Dallas, Tex., for Margaret Heckler.

Appeal from the United States District Court for the Southern District of Texas.

Before RANDALL, JOHNSON, and GARWOOD, Circuit Judges.

GARWOOD, Circuit Judge:

Appellants, Medicare provider hospitals, brought this suit challenging the disallowance by the Secretary of Health and Human Services of their claims for reimbursement of certain claimed costs of contract physical therapy services. The district court denied relief. It determined that the derivation and the application of cost guidelines by the Secretary was neither arbitrary, capricious or an abuse of discretion, nor in excess of her statutory authority to establish and implement a Medicare cost reimbursement program; that the guidelines as applied did not create an impermissible classification by distinguishing between physical therapy contractors and in-hospital physical therapy departments; and that appellants had generally failed to utilize the available administrative exceptions process. Because appellants have failed to exhaust their administrative remedies, we affirm the denial of relief.

Facts and Proceedings Below

Appellants are twenty-four ¹ Medicare provider hospitals ("Hospitals," "Providers" or "appellants") located in southern and south central states, including six in Texas. They are predominantly small hospitals, typically having 50-99 beds, located in small towns with populations of less than 15,000. Only three are larger than 150 beds; only one is located in an urban area (Austin, Texas). Six are located in what the Bureau of Labor Statistics ("BLS") denominates Standard Metropolitan Statistical Areas ("SMSA's"), but five of these operate in nonurban environments.

The appellant Hospitals contracted with Physical Therapy Associates ("PTA") for the provision of physical therapy services in lieu of maintaining their own departments. ²

The Hospitals filed Medicare reimbursement cost reports with their respective Medicare fiscal intermediaries ³ for calendar year 1976. The relevant intermediaries determined that each Hospital's claimed contract physical therapy costs exceeded the guideline amounts established by the Medicare Bureau (see note 3, supra ) and disallowed the excess costs. The Hospitals joined in a group appeal to the Provider Reimbursement Review Board ("PRRB") respecting these disallowances. See 45 C.F.R. Sec. 405.1837; see also 42 U.S.C. Sec. 1395oo (b).

On February 29, 1979, following a hearing and creation of a substantial record, the PRRB reversed in part the intermediaries' disallowances. It upheld the disallowances as to those appellants operating within an SMSA, but found that the guidelines (which had been based upon data from SMSA's) were inapplicable to the nineteen rural Hospitals.

On April 27, 1979, the Administrator of the Health Care Financing Administration (the "Administrator"), as the delegate of the Secretary of the (then) Department of Health, Education and Welfare (now the Department of Health and Human Services), reviewed the PRRB decision on his own motion. See 42 U.S.C. Sec. 1395oo (f)(1); 42 C.F.R. Sec. 405.1875. He reversed the PRRB insofar as it held the guidelines to be inapplicable to the non-SMSA Hospitals; he affirmed its implicit decision that the cost guidelines were applicable to Hospitals operating within SMSA's. This in effect upheld the various intermediaries' decisions. The Administrator's decision constituted a final agency action. 42 U.S.C. Sec. 1395oo (f)(1); 42 C.F.R. Sec. 405.1877.

In May 1979, the Hospitals filed this suit in the United States District Court for the Southern District of Texas, seeking review of the Administrator's decision. See 42 U.S.C. Sec. 1395ooo (f)(1). The Federation of American Hospitals and the American Physical Therapy Association ("APTA") filed amicus curiae briefs in support of the Hospitals' position. Cross-motions for summary judgment were filed, and were argued during March 1982. On April 30, 1984, the district court granted summary judgment in favor of the appellee, the Secretary of Health and Human Services. The district court determined that the Administrator's decision should be upheld because it was not "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." See Administrative Procedure Act ("APA"), Sec. 706(2), 5 U.S.C. Sec. 706(2). The court determined that the Secretary's rules and regulations, and her guidelines, were reasonably related to the purposes of the enabling statute, and that there was substantial evidence to support her decision to disallow the disputed costs by application of the guidelines. The court noted specifically that most (all but three) of the appellant Hospitals had failed to utilize the administrative exception process available to them to seek reimbursements not limited by the guideline amounts. See 42 C.F.R. Sec. 405.432(f). The court determined also that the Hospitals' equal protection claim--essentially that the cost limitations standards applied to them differed from those applied to provider hospitals with in-hospital physical therapy departments--was without merit.

Standard of Review

The scope of judicial review of an agency decision or of the validity of its regulations or rules is circumscribed. 42 U.S.C. Sec. 1395oo (f); 5 U.S.C. Sec. 706(2); see also DeSoto General Hospital v. Heckler, 766 F.2d 182, 185 (5th Cir.1985); City of Austin, Texas, Brackenridge Hospital v. Heckler, 753 F.2d 1307, 1313-14 (5th Cir.1985); Home Health Services v. Schweiker, 683 F.2d 353, 356-57 (11th Cir.1982). It is especially so in matters of the Secretary's implementation of the Social Security Act, as to which "Congress conferred on the Secretary exceptionally broad authority to prescribe standards for applying certain sections of the Act." Schweiker v. Gray Panthers, 453 U.S. 34, 101 S.Ct. 2633, 2640, 69 L.Ed.2d 460 (1981). As was true in Gray Panthers, the enabling statutory sections implicated here contain express delegation of highly discretionary legislative authority to the Secretary. Compare 42 U.S.C. Secs. 1395x(v)(1)(A), 1395x(v)(5)(A) with 42 U.S.C. Sec. 1396a(a)(17)(B) (at issue in Gray Panthers, see 101 S.Ct. at 2640).

The initial inquiry is whether the agency has acted in a way that has exceeded its statutory authority or which is in conflict with the purposes of the statute. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 823-24, 28 L.Ed.2d 136 (1971); cf. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S.Ct. 1652, 1660-61, 36 L.Ed.2d 318 (1973). If not, a court must determine whether the regulation or rule is "arbitrary, capricious, an abuse of discretion." Overton Park, 91 S.Ct. at 823; see 5 U.S.C. Sec. 706(2). This review is necessarily a narrow one. We must uphold the agency decision or rule if it bears a rational relationship to the statutory purposes and if there is substantial evidence in the record to support it. Mourning, 93 S.Ct. at 1661; Overton Park, 91 S.Ct. at 823; Brackenridge Hospital, 753 F.2d at 1313; Home Health Services, 683 F.2d at 356; cf. Consolo v. Federal Maritime Commission, 383 U.S. 607, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966). This requires not a preponderance of the evidence, but only "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Home Health Services, 683 F.2d at 356; see also Universal Camera Corp. v. NLRB, 340 U.S. 474, 71 S.Ct. 456, 95 L.Ed. 456 (1951); School Board of Broward County v. HEW, 525 F.2d 900 (5th Cir.1976). We may not substitute our judgment for that of the agency. Baltimore Gas & Electric Co. v. Natural Resources Defense Council, 462 U.S. 87, 103 S.Ct. 2246, 2252, 76 L.Ed.2d 437 (1983); Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, 435 U.S. 519, 98 S.Ct. 1197, 1219, 55 L.Ed.2d 460 (1978); Overton Park, 91 S.Ct. at 824. In reaching our decision, we must consider the "record as a whole." Universal Camera, 71 S.Ct. at 461; Brackenridge Hospital, 753 F.2d at 1313. The appropriate inquiry is "whether the regulation comports with the statute ... [and] falls within the boundaries of the grant of power in the enabling act." Brackenridge Hospital, 753 F.2d at 1314.

Even greater deference is appropriate when the question concerns the agency's interpretation of its own "legislative" regulations. Gray Panthers, 101 S.Ct. at 2640. Unless that interpretation is clearly erroneous, we must give it considerable weight. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 100 S.Ct. 790, 797, 63 L.Ed.2d 22 (1980); Batterton v. Francis, 432 U.S. 416, 97 S.Ct. 2399, 2405 n. 9, 53 L.Ed.2d 448 (1977); Udall v. Tallman, 380 U.S. 1, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); cf. Brackenridge Hospital, 753 F.2d at 1313-14. Agency determinations are presumptively valid, Mississippi Hospital Ass'n, Inc. v. Heckler, 701 F.2d 511, 516 (5th Cir.1983); cf. Alabama Nursing Home Ass'n v. Harris, 617 F.2d 388, 393 (5th Cir.1980), and appellants consequently bear a heavy burden of proof to rebut this presumption and to establish that a rule or regulation is void for being arbitrary, capricious, or an abuse of discretion. Mississippi Hospital Ass'n, 701 F.2d at 516; Johnson's Professional Nursing Home v. Weinberger, 490 F.2d 841, 844 (5th Cir.1974). Only if we are left with the firm conviction that the agency has acted arbitrarily and capriciously, or that the...