South Hills Health System v. Bowen
| Decision Date | 30 December 1988 |
| Docket Number | No. 87-3551,87-3551 |
| Citation | 864 F.2d 1084 |
| Parties | , Medicare&Medicaid Gu 37,606 SOUTH HILLS HEALTH SYSTEM, A Pennsylvania Hospital Corp. and the Robert Packer Hospital (Guthrie Medical Center), Loch Haven Hospital, Evangelical Community Hospital, Centre Community Hospital, Wilkes Barre General Hospital, and Dubois Regional Medical Center, Intervening Plaintiffs, Appellants v. Otis BOWEN, Secretary of Health and Human Services, and Blue Cross of Western PA. |
| Court | U.S. Court of Appeals — Third Circuit |
Roland Morris (argued), Jane Dalton Elliott, Duane, Morris & Heckscher, Philadelphia, Pa., for appellants.
Timothy M. White (argued), Office of the General Counsel, Dept. of Health and Human
Services, Washington, D.C., for appellees.
Before HIGGINBOTHAM and BECKER, Circuit Judges, and HUYETT, District Judge. *
This case presents the question of whether the district court improperly refused to enjoin the Secretary of the Department of Health and Human Services ("HHS") from releasing certain Medicare related hospital cost reports to persons requesting them under the Freedom of Information Act, 5 U.S.C. Sec. 552 (1983) ("FOIA"). Appellants are eight hospitals located in Pennsylvania, required by law to submit these annual cost reports to HHS's Health Care Financing Administration ("HCFA") as a condition to reimbursement for the health care services they provide to Medicare beneficiaries. The district court granted summary judgment for the Secretary. The court concluded that the disclosure rule was neither inconsistent with applicable regulations, arbitrary and capricious, nor a violation of either the Trade Secrets Act, 18 U.S.C. Sec. 1905 (1983), or the fifth amendment's guarantee of due process, since a valid HCFA regulation, 42 C.F.R. Sec. 401.135(c) (1987), requires the Secretary to release the cost reports. We agree with the district court that the disclosure regulation is not inconsistent with other agency regulations, and we find that it is authorized by law as required by the Administrative Procedure Act ("APA"). However, we find that a challenge to the regulation as arbitrary and capricious is premature at this time, as the agency has not yet had an opportunity to make a record in response to the appellants' argument that a significant change in market conditions has rendered the regulation arbitrary. Accordingly, the district court did not have jurisdiction over the arbitrariness and capriciousness challenge brought by the appellants. We will therefore affirm the decision of the district court in part, vacate it in part, and remand with instructions that the district court dismiss in accordance with this opinion.
Title XVIII of the Social Security Act, 42 U.S.C.A. Secs. 1395-1395xx (1983) ("the Act"), established the program of Health Insurance for the Aged and Disabled popularly known as Medicare. The Secretary of Health and Human Services ("the Secretary") administers the program through the HCFA. Hospitals that participate in the Medicare program are required, by statute and regulation, to submit annual cost reports to the HCFA. See 42 U.S.C.A. Sec. 1395g(a) (1983); 42 C.F.R. Sec. 413.20(b) (1987). 1 These reports set forth in detail the costs incurred by hospitals in providing medical services, and enable HCFA to calculate appropriate reimbursement levels for participating health care providers. Since 1975, an HCFA regulation, 42 C.F.R. Sec. 401.135(c) (1987), has made the reports available to any member of the public who requests them in writing. 2
In July 1984, South Hills Health System ("South Hills"), which operates a hospital, a home health care agency, and a nursing home, was notified by Blue Cross of Western Pennsylvania that several hospitals had made Freedom of Information Act requests for copies of its facilities' cost reports. Blue Cross also notified South Hills that it planned to provide the information upon receipt of the reports' copying costs from the requesters. South Hills immediately wrote to Blue Cross, objecting to disclosure. It contended that the information was confidential and, as such, exempt from mandatory disclosure under the FOIA, 5 U.S.C. Sec. 552(b)(4) (1983) ("Exemption 4"). 3 Moreover, it claimed that disclosing this information to its competitors would seriously jeopardize its marketplace position.
In support of the latter argument, South Hills asserted that competition in the health care marketplace had increased since the promulgation of the regulations, due in part to a change in the method of calculating Medicare reimbursement to health care providers. In 1983, as part of its general program of reducing the federal budget deficit, Congress passed the Social Security Amendments of 1983. These amendments changed the system of calculating payments to hospitals and other providers participating in the Medicare program from a system based on the providers' "reasonable costs," a payment regime based on a hospital's actual costs, to a "prospective payment system," a flat rate system. Pursuant to the change, the HCFA reimburses participating hospitals for the costs of inpatient care in accordance with a payment schedule for standard types of patient cases, called Diagnosis Related Groups. 42 U.S.C. Sec. 1395ww(d) (Supp.1985). Congress's intent in mandating this change was its desire to increase hospital cost efficiency. See Staff of the House Committee on Ways and Means, 98th Cong., 1st Sess., Social Security Act Amendments of 1983 (Comm.Print 1983), reprinted in 382 Medicare and Medicaid Guide 131, 132 (C.C.H.1983). South Hills argues that this change has caused such increased competition in the health care market as to render the disclosure regulation, 42 C.F.R. Sec. 401.135(c), "no longer viable or realistic." Appellants' Appendix ("App'ts.App.") at 26A. South Hills has continued to rely principally on this argument throughout its dealings with the HCFA and in this litigation. Since we hold only that the district court had no jurisdiction to consider an arbitrariness and capriciousness challenge to the regulation until a proper party made a 553(e) petition for reconsideration of the rule, we specifically make no finding as to the accuracy of these assertions.
Blue Cross initially replied that it was required to release the reports absent a court order to the contrary. Upon further discussion with regional HCFA officials, however, Blue Cross agreed to forward the documents to HCFA's Office of Public Affairs in Baltimore and to allow that office to review the FOIA requests and notify South Hills whether HHS would release the reports. In November 1984, HCFA's Baltimore public affairs office informed South Hills by telephone that the Medicare cost reports would be released. Shortly thereafter, South Hills representatives met with HCFA Baltimore officials, who agreed to further delay disclosure until they had re-examined the applicable regulation to determine whether release of the reports was authorized. In January 1986, HCFA's FOIA officer informed South Hills by letter that, although the agency would continue to examine its policy regarding release of Medicare cost reports, South Hills's cost reports would be released in accordance with 42 C.F.R. Sec. 401.135(c) (1987). HCFA then granted South Hills's request that it further delay the release of the cost reports so that South Hills could file an appeal from HCFA's decision.
In January 1986, South Hills filed a complaint in the United States District Court for the Western District of Pennsylvania, seeking reversal of HCFA's decision on the grounds that: (1) release under authority of 42 C.F.R. Sec. 401.135(c) would violate certain other HCFA disclosure regulations; (2) 42 C.F.R. Sec. 401.135(c) does not authorize release because it is arbitrary, capricious, and an abuse of the Secretary's discretion under the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(A) (1982); 4 (3) disclosure of the cost reports would violate the Trade Secrets Act, 18 U.S.C. Sec. 1905 (1983); and (4) disclosure of its Medicare cost reports--without HCFA's individualized consideration of each requested report to determine whether release is precluded by Exemption 4--would violate South Hills's constitutional right to due process guaranteed by the fifth amendment. In addition, South Hills sought preliminary and permanent injunctions restraining the Secretary and Blue Cross of Western Pennsylvania from releasing its Medicare cost reports to any person or entity not connected with the Medicare program in an official government capacity.
The district court subsequently granted motions permitting fourteen additional hospitals to intervene as plaintiffs, and granted leave for the Hospital Association of Pennsylvania to file a brief amicus curiae in support of South Hills. With the approval of the district court, all parties stipulated that the Secretary and Blue Cross would not release the Medicare cost reports of the plaintiffs pending final judgment of the district court.
In August 1987, the district court entered an order denying the motions for summary judgment filed by South Hills and the intervening plaintiffs and granting the motions for summary judgment of the Secretary and Blue Cross. The district court found that the cost data contained in the Medicare reports was confidential commercial or financial information of the kind covered by both Exemption 4, 5 U.S.C. Sec. 552(b)(4), and the Trade Secrets Act, 18 U.S.C. Sec. 1905. South Hills v. Bowen, No. 86-178, slip op. at 7 (W.D.Pa. Aug. 6, 1987). It held, however, that 42 C.F.R. Sec. 401.135(c) did not violate any other HHS or HCFA regulation, that it properly authorized disclosure notwithstanding the cost reports' confidential nature, and that, under the altered reimbursement regime, it is neither arbitrary and capricious, nor...
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