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WASHINGTON HOSP. CTR. v. HECKLER

January 5, 1984

The Washington Hospital Center, et al., Plaintiffs,
v.
Margaret M. Heckler, Defendant; Georgetown University Hospital, George Washington University Hospital, Plaintiff, v. Margaret M. Heckler, Defendant



The opinion of the court was delivered by: BRYANT

 Civil Action No. 83-2830 is before the court on cross-motions for summary judgment; for purposes of this ruling it is consolidated with C.A. No. 83-2341, which came before the court on cross-motions for partial summary judgment. The plaintiffs, nonprofit hospitals, challenge the repeal of a Medicare regulation by the Secretary of HEW in 1969. They contend that notice and opportunity to comment should have been provided in accordance with the informal rulemaking provisions of the Administrative Procedure Act (APA), 5 U.S.C. § 553; they also claim that the agency failed to justify the repeal adequately and that the decision was therefore arbitrary and capricious. The Secretary argues that the challenged regulation fell under the "grants and benefits" exemption of the APA, and that in any event, objections to the repeal at this late date are barred by laches. Upon consideration of all of the submissions of the parties, the court grants the motions of the Secretary.

 I. Background

 The regulation in question was promulgated on November 22, 1966, along with a package of rules defining the methods and criteria for reimbursement of "providers," i.e. institutions which provide services to Medicare patients. Generally the rules implement the statutory requirement that providers be reimbursed for the "reasonable cost" of their services, 42 U.S.C. § 1395f(b). Under the regulatory scheme providers normally submit an annual cost report to a fiscal intermediary (usually a private insurer such as Blue Shield) in order to obtain reimbursement. 42 C.F.R. §§ 405.406(b), 405.453(f).

 A percentage of a provider's allowed cost was to be added to its annual reimbursement under 42 C.F.R. § 405.428. *fn1" This allowance had two components. A portion of it was to cover costs which may have escaped specific recognition due to "lack of percision [sic] in methods for determining costs at the present stage of development of cost finding." 31 Fed. Reg. 14816. The remainder was "in lieu of a specific interest return on equity capital." 31 Fed. Reg. 7871. The amount of the allowance was 2% of the provider's costs, reduced to 1 1/2% in the case of proprietary providers, which were given a specific interest return on equity under 42 C.F.R. § 405.429. Id.

 The 2% (and 1 1/2%) allowance was an attempt to "attract hospitals to the [Medicare] program and . . . to insure the adequacy of the financial incentive." Hospital Authority of Floyd County v. Heckler, 707 F.2d 456, 458 (11th Cir. 1983). The allowance was "tolerated" during the initial stages of Medicare, id., then repealed on June 27, 1969, for cost reporting periods beginning after June 30th of that year. No notice or opportunity to comment was provided before the repeal, although those procedures had accompanied the promulgation of the package of rules in 1966. A brief explanation of the repeal and the lack of APA procedure was given in the Federal Register:

 
This amendment is prepared to conform to the Department of Health, Education, and Welfare budget policy for fiscal 1970 in implementation of the President's Review of the 1970 Budget which was released on April 15, 1969, by the Executive Office of the President. For this reason, it is determined that compliance with the notice, public procedure, and effective date requirements of the Administrative Procedure Act, 5 U.S.C. 553, is unnecessary. [ Id. ]

 Two of the plaintiffs in C.A. No. 83-2341 claimed entitlement to the 2% allowance on their 1980 cost reports; the plaintiffs in C.A. No. 83-2830 claimed the 2% allowance on their cost reports for 1981. All of the plaintiffs in C.A. No. 83-2341 had claimed entitlement to a return on equity and, in a paper filed with the Provider Reimbursement Review Board (the Board) in 1982, relied on the 2% allowance as an alternative method for computing the amount of their entitlement.

 On July 22, 1983, the Board held that it lacked the authority to decide the substantive issues regarding return on equity. On July 28th the Board held that it lacked the authority to decide the procedural validity of the repeal of the 2% allowance. The present cases were filed in this court within the 60-day period allowed by statute.

 II. Discussion

 The plaintiffs contend that the Secretary should have provided notice and opportunity to comment before repealing the 2% allowance, as required generally for informal rulemaking. But rulemaking under the Medicare Act was not subject to notice and comment requirements prior to 1971; only then did the Secretary expressly waive the "grants and benefits" exemption of the APA. *fn2" Humana of South Carolina v. Califano, 191 U.S. App. D.C. 368, 590 F.2d 1070, 1084 (D.C. Cir. 1978). The grants and benefits exception thus would seem to extend to the repeal of the 2% allowance in 1969. The plaintiffs, however, offer several reasons why the exception does not apply.

 First, the plaintiffs note that the Secretary did not mention the grants and benefits exception in the notice of repeal. Invoking the exception at this stage, they argue, constitutes "post hoc rationalization." But this argument misconstrues the issue. The question is whether notice and comment procedure was required at all; if not, no explanation (post hoc or otherwise) was required for failing to provide it. See St. Joseph Hospital v. Heckler, 570 F. Supp. 434, 439 (N.D. Ind. 1983).

 The plaintiffs also argue that the repeal had "substantial impact" on providers. It is unclear, however, that the substantial impact doctrine applies in this context. Traditionally the substantial impact test is used to distinguish between substantive rules and those which are merely interpretative, procedural, or general statements of policy, hence exempt from notice and comment requirements under 5 U.S.C. § 553. See Association of National Advertisers v. FTC, 199 U.S. App. D.C. 29, 617 F.2d 611, 629 n.20 (D.C. Cir. 1979) (Wright, J., concurring). The grants and benefits exception does not depend on any such substance-procedure test. See Humana of South Carolina, 590 F.2d at 1082.

 Moreover, even if the substantial impact test is relevant in some grants-and-benefits cases, *fn3" it is not relevant here. The plaintiffs in this case failed to protest the repeal of the 2% allowance for over a decade. They apparently did not claim the allowance on their cost reports before 1980, nor did they at any time petition the agency under 5 U.S.C. § 553(e). *fn4" They did not take their claim to court until 1983 -- fourteen years after the repeal -- although they could have done so immediately, see Humana of South ...


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