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September 27, 1983

MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants

The opinion of the court was delivered by: BRYANT

 In these actions plaintiffs contend that a regulation promulgated by the Secretary of the Department of Health and Human Services which changes the method of governmental reimbursement for expenses incurred for medical malpractice insurance is violative of both the Administrative Procedure Act and the Medicare Act, and seek to enjoin its enforcement. Inasmuch as plaintiffs attack the regulation on the same grounds and seek identical relief, the cases have been consolidated for trial; and they are presently before the court on cross-motions for summary judgment. For the reasons stated below, the court grants the defendants' motions. Plaintiffs' motions are denied.


 Congress enacted Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (the Medicare Act) in 1965 to provide comprehensive health insurance for the aged. Part A covers hospital and some post-hospitalization expenses. 42 U.S.C. §§ 1395c-1395i. Part B provides insurance for physicians' services and other non-hospital or outpatient expenses. 42 U.S.C. §§ 1395j-1395w.

 On March 15, 1979, the Secretary published a notice of proposed rulemaking (NPRM), indicating an intention to discontinue the utilization rate reimbursement method for malpractice insurance costs. The proposed amendment sought to directly apportion reimbursement "based on Medicare malpractice loss experience, instead of the current apportionment basis of Medicare's overall utilization of provider services." 44 Fed. Reg. 15744-15745.

 The NPRM, in a section entitled "Supplementary Information", explained that, under the regulation then in effect, the government was reimbursing "a disproportionate amount of malpractice costs." The support offered for this finding was "a study conducted by an HEW consultant" which found that "malpractice awards for Medicare and Medicaid patients are significantly lower in amount than losses for other patient populations." 44 Fed. Reg. 15745. The proposed rule also provided that, absent a paid claims history, the provider would be reimbursed according to "an actuarial estimate of Medicare's share of these current malpractice costs." Id.

 The NPRM did not mention any specific national ratio figure resembling the final 5.1% of malpractice costs published in the final rulemaking. The NPRM did state that alternative methods to an "actuarial estimate of Medicare's share of these current malpractice costs" could be used, including "a national ratio of Medicare malpractice paid losses to total malpractice paid losses as opposed to a single provider's malpractice loss experience." Id.

 The contested rule, 42 C.F.R. § 405.452(b)(1)(ii) (the Malpractice Rule) which was promulgated on June 1, 1979, effective for cost reporting periods beginning after June 30, 1979, drastically alters the former method used by the government to reimburse the costs of malpractice insurance. Before June 1979, malpractice insurance premiums were considered part of the general indirect costs of providing medical care. The cost of malpractice insurance premiums was accumulated, along with all other general and administrative (G & A) costs, in a "cost center." 42 C.F.R. § 405.453. The government reimbursed these G & A costs, along with the reimbursable costs accumulated in other cost centers, according to the utilization rate of Medicare patients in the hospital, that is, the percent of Medicare patients using the services of the cost center.

 The plaintiffs, Boswell Memorial Hospital, et al., brought an appeal to the Provider Reimbursement Review Board (PRRB), contesting, among other matters, the government's failure to reimburse the cost of medical malpractice insurance premiums according to the utilization rates of Medicare patients in the hospital. Pursuant to the 1980 amendments to the Medicare Act, 42 U.S.C. § 1395 oo (f)(1), the plaintiffs initiated actions before the PRRB to determine whether the Board had jurisdiction to decide the validity of the rule. The PRRB issued a final decision stating it lacked the authority to decide the validity of the Malpractice Rule, thus permitting the plaintiffs to bring this action in district court.

 The plaintiffs allege that the Malpractice Rule is invalid for three major reasons: (1) the promulgation of the rule did not comport with the requirements of the Administrative Procedure Act; (2) the rule is arbitrary and capricious and an abuse of discretion within the meaning of the Administrative Procedure Act; and (3) the regulation violates the Medicare Act because it fails to reimburse the plaintiffs for all costs actually incurred in the delivery of care to Medicare patients. The defendants refute all these allegations, and move this court to uphold the Malpractice Rule as a valid exercise of the Secretary's executive powers, in full compliance with the mandates of the Medicare Act and APA. For the reasons stated below, the court finds that the Malpractice Rule was issued in compliance with the APA, and that it is consistent with the requirements of the Medicare Act.

 I. The Procedural Requirements of the APA

 The Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq. requires that, to promulgate a rule properly, an agency must publish a notice of proposed rulemaking (NPRM) in the Federal Register sufficiently detailed to invite informed public comment. The final rule must contain a basis and purpose statement explaining and supporting the Secretary's final decision and addressing major criticism. Vermont Yankee Nuclear Power Co. v. NRDC, 435 U.S. 519, 556, 55 L. Ed. 2d 460, 98 S. Ct. 1197 (1978). The plaintiffs allege five defects in the notice and comment proceedings respecting the Malpractice Rule: (1) the agency failed to employ notice and comment procedures for the national ratio figure which determines malpractice reimbursement for all hospitals with no paid Medicare claims history during the relevant five-year period; (2) the notice and comment procedure did not provide sufficient information to allow effective comments; (3) the final rule did not include an adequate basis and purpose statement; (4) the Secretary did not adequately respond to the comments which were offered and (5) the entire rulemaking proceeding was a sham since the Secretary had already rendered a final decision before undertaking the notice and comment process.

 A. The National Ratio

 The APA requires that all parties be provided with a statement including the intended purpose of the regulation and a summary of the supporting background research. This circuit stated in Forester v. Consumer Product Safety Commission, 182 U.S. App. D.C. 153, 559 F.2d 774, 787 (D.C. Cir. 1977):

Section 553(b) does not require that interested parties be provided precise notice of each aspect of the regulations eventually adopted. Rather, notice is sufficient if it affords interested parties a reasonable opportunity to participate in the rule-making process.

 The NPRM contained a full explanation of the intended action: the Secretary would reduce reimbursed malpractice costs by introducing a formula linking reimbursement to paid claims losses rather than utilization rate. The NPRM referred to the possibility of a national ratio alternative without specifying the exact figure, however, notice and comment proceedings need not contain every element of the final rule. As our Circuit noted:

The whole rationale of notice and comment rests on the expectation that the final rules will be somewhat different -- and improved -- from the rules originally proposed by the agency. [ Trans Pacific Freight v. Federal Maritme Comm'n, 209 U.S. App. D.C. 27, 650 F.2d 1235, 1249 (D.C. Cir. 1980).]

 In this case, the Secretary gave notice of his intent to profoundly alter the method of compensating hospitals for malpractice insurance ...

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