National Medical Enterprises, Inc. v. Sullivan

• Decision Date: 20 February 1992
• Docket Number: No. 90-55287,90-55287
• Citation: 957 F.2d 664
• Parties: , 36 Soc.Sec.Rep.Ser. 415, Medicare & Medicaid Guide P 40,019 NATIONAL MEDICAL ENTERPRISES, INC., Plaintiff-Appellant, v. Louis W. SULLIVAN, M.D., * Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 664

957 F.2d 664

60 USLW 2603, 36 Soc.Sec.Rep.Ser. 415,

Medicare & Medicaid Guide P 40,019

NATIONAL MEDICAL ENTERPRISES, INC., Plaintiff-Appellant, v. Louis W. SULLIVAN, M.D., ^* Secretary of Health and Human Services, Defendant-Appellee.

No. 90-55287.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 10, 1991.

Decided Feb. 20, 1992.

Patric Hooper, Hooper, Lundy & Bookman, Los Angeles, Cal., for plaintiff-appellant.

Donna Eden, Office of the General Counsel, Dept. of Health and Human Services, Baltimore, Md., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before TANG, REINHARDT and WIGGINS, Circuit Judges.

REINHARDT, Circuit Judge:

This case involves a challenge to the validity of a regulation promulgated by the Secretary of Health and Human Services (the Secretary ¹) that limits the cumulative allowable return on equity capital attributable to goodwill payable to Medicare providers. The primary question presented is whether the regulation is reasonably related to the purposes of the Medicare statute and thus within the Secretary's authority to issue. We conclude that the regulation is so related, and that its provision for the calculation of cumulative return on goodwill does not constitute unlawful retroactive rulemaking. Accordingly, we affirm the district court's grant of summary judgment to the Secretary.

I

For the years at issue in this appeal, the Medicare statute, 42 U.S.C. §§ 1395 et seq., authorized payment to all types of proprietary (for-profit) providers of health care services of "a reasonable return on equity capital ... invested in the facility and used in the furnishing of such services." Id. § 1395x(v)(1)(B) (1988). ² The statute expressly delegated the task of defining Medicare reimbursable equity capital to the Secretary. Id. § 1395x(v)(1)(A)-(B). Prior to 1970, the Secretary's regulations permitted the inclusion in Medicare reimbursable equity capital of goodwill, defined as "the excess of the price paid for such facility or assets over the fair market value of tangible assets at the time of purchase." 20 C.F.R. § 405.429 (1969). ³ In 1970, the Secretary eliminated Medicare reimbursement for goodwill for proprietary facilities acquired after August 1, 1970. 35 Fed.Reg. 12,330 (1970), codified as amended at 42 C.F.R. § 413.157(c)(2) (1990). In 1976, the Secretary issued the regulation that is the subject of this appeal. The 1976 amendment to the regulation governing return on equity capital limited the cumulative allowable return on goodwill for pre-August, 1970, acquisitions to one hundred percent, commencing with payments made on or after August 1, 1970. 41 Fed.Reg. 46,291 (1976), codified as amended at 42 C.F.R. § 413.157(c)(3) (1990). Thus, for example, if the annual Medicare rate of return on equity capital approximated ten percent, reimbursement for that portion of a pre-August, 1970, equity capital investment attributable to goodwill would cease after ten years.

Appellant National Medical Enterprises, Inc., (NME) is a publicly traded Nevada corporation that owns and operates proprietary hospitals and other health-related businesses throughout the United States. NME purchased the hospitals at issue in this appeal in 1969, at prices that reflected positive amounts of goodwill. From 1969 through 1979, NME received Medicare return on equity capital payments that included reimbursement for that goodwill. In 1980, pursuant to the 1976 amendment to the regulation governing return on equity capital, NME's Medicare fiscal intermediary excluded further reimbursement for goodwill from NME's return on equity capital payment. ⁴ NME appealed the intermediary's decision to the Provider Reimbursement Review Board (PRRB), where it requested that the PRRB certify the sole issue involved, namely, the validity of the 1976 regulation limiting Medicare reimbursement for pre-August, 1970, goodwill, for expedited judicial review pursuant to 42 U.S.C. § 1395oo(f)(1). After determining that it lacked the authority to decide the legal question presented, the PRRB issued the requested certification.

NME timely filed suit against the Secretary in the Central District of California, where the majority of the hospitals at issue in this appeal are located. See 42 U.S.C. § 1395oo(f)(1) (1988). The complaint challenged the 1976 regulation on both procedural and substantive grounds. NME claimed that the Secretary had failed to adhere to the notice and comment procedure prescribed by section 553 of the Administrative Procedure Act (APA), 5 U.S.C. § 553, in promulgating the regulation, and that the regulation was inconsistent with congressional intent and arbitrary and capricious in violation of section 706 of the APA, 5 U.S.C. § 706. NME further claimed that, because the 1976 regulation provided for computation of cumulative return on equity capital attributable to goodwill starting from August, 1970, 42 C.F.R. § 413.157(c)(3) (1990), the Secretary had engaged in unlawful retroactive rulemaking. The parties filed cross-motions for summary judgment, and the district court granted the Secretary's motion. This appeal, which is limited to NME's substantive challenges, followed. ⁵

II

We review de novo the district court's decision regarding the validity of the challenged regulation under section 706 of the APA. Regents of Univ. of Calif. v. Heckler, 771 F.2d 1182, 1187 (9th Cir.1985). Our review of the regulation under that section is limited to determining whether the regulation exceeded the Secretary's statutory authority or was arbitrary, capricious, or an abuse of discretion. 5 U.S.C. § 706(2)(A), (C) (1988); Holy Cross Hosp. v. Heckler, 749 F.2d 1340, 1344 (9th Cir.1984). We will uphold a regulation promulgated pursuant to the Medicare enabling statute, 42 U.S.C. § 1395hh, "so long as it is 'reasonably related to the purposes of the enabling legislation.' " Holy Cross Hosp., 749 F.2d at 1344 (quoting Mourning v. Family Publications Serv., 411 U.S. 356, 369, 93 S.Ct. 1652, 1660, 36 L.Ed.2d 318 (1973)). Because NME has failed to demonstrate that the 1976 regulation limiting Medicare reimbursement for equity capital investment attributable to goodwill is inconsistent with or contrary to congressional intent, and because we find that the Secretary stated a reasonable, nonarbitrary basis for his action, we conclude that the regulation does not violate section 706 and that the district court's grant of summary judgment to the Secretary on that claim was proper.

A

The Medicare statute authorizes payment to Medicare providers of a reasonable return on equity capital, but does not specify how "equity capital" is to be defined for purposes of such reimbursement. 42 U.S.C. § 1395x(v)(1)(B) (1988). Rather, as we have noted, the statute expressly delegates the task of defining "equity capital" to the Secretary. Id. § 1395x(v)(1)(A)-(B). "If Congress has explicitly left a gap for the agency to fill," we will give the resulting regulation "controlling weight" unless it is "manifestly contrary to the statute." Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843-44, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). An examination of the language and legislative history of section 1395x(v)(1)(B) reveals no such contradiction of congressional design.

Both section 1395x(v)(1)(B) and its legislative history indicate Congress's intention that proprietary providers be reimbursed for equity capital investment only to the extent that such investment is used in the furnishing of health care services. Pub.L. 89-713, sec. 7, 80 Stat. 1111 (1966), codified as amended at 42 U.S.C. § 1395x(v)(1)(B) (1988); Conf.Rep. No. 2317, 89th Cong., 2d Sess. (1966), reprinted in 1966 U.S.C.C.A.N. 3692. Consistent with this legislative mandate, the Secretary has defined Medicare reimbursable equity capital as that portion of the provider's investment "related to patient care," including "net working capital maintained for necessary and proper operation of patient care activities." 31 Fed.Reg. 14,816 (1966), codified as amended at 42 C.F.R. § 413.157(c)(1)(i)-(ii) (1990). Accordingly, in order to determine whether the imposition of a cap on Medicare reimbursement for goodwill is "manifestly contrary to the statute," we must ascertain the extent to which goodwill is related to patient care. That task is made infinitely simpler by the Secretary's 1970 decision to eliminate Medicare reimbursement for goodwill entirely for post-August, 1970, acquisitions of proprietary health care facilities. The 1970 regulation clearly represents a determination that goodwill is unrelated to the delivery of patient care services. ⁶ Given that conclusion by the agency charged with administering the Medicare statute, the 1976 regulation phasing out return on equity attributable to goodwill for pre-August, 1970, acquisitions does not frustrate congressional intent, but rather constitutes a reasonable and prudent attempt to limit Medicare expenditures to those authorized by Congress.

Congress' failure to amend section 1395x(v)(1)(B) in response to the 1970 and 1976 regulatory changes affecting Medicare reimbursement for goodwill lends further support to our conclusion that the 1976 regulation is reasonably related to the purpose of the Medicare statute. We recognize that congressional inaction alone does not necessarily signify congressional approval of administrative pronouncements. Cook Inlet Native Ass'n v. Bowen, 810 F.2d 1471, 1476 (9th Cir.1987). Where Congress has reenacted or amended a statute in the interim, however, "congressional failure to revise or repeal the agency's interpretation is persuasive evidence that the interpretation is the one intended by Congress." NLRB v. Bell Aerospace Co., 416 U.S. 267, 275, 94 S.Ct. 1757, 1762, 40 L.Ed.2d 134 (1974) (footnote omitted); see also Holy Cross Hosp. v. Heckler, 749 F.2d 1340, 1345 (9th Cir.1984). As...