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AHA v. BOWEN

May 29, 1986

AMERICAN HOSPITAL ASSOCIATION, Plaintiff,
v.
OTIS R. BOWEN, et al., Defendants


William B. Bryant, Senior United States District Judge.


The opinion of the court was delivered by: BRYANT

WILLIAM B. BRYANT, SENIOR UNITED STATES DISTRICT JUDGE

 This case is before the court on defendant's motion to dismiss or in the alternative for summary judgment, and on plaintiff's cross-motion for summary judgment. For the reasons discussed below, both motions are granted in part and denied in part.

 I. Background

 This case concerns the means by which the Department of Health and Human Services ("HHS") has implemented the Peer Review Improvement Act of 1982, 42 U.S.C. § 1320c et seq., a critical element of the Medicare Program.

 To receive payment under PPS, hospitals must have an agreement with a Utilization and Quality Control Peer Review Organization ("PRO"). 42 U.S.C. § 1395cc (a)(1)(F). The PRO generally is responsible for reviewing a hospital's administration of the Medicare Program: it determines whether the services provided to Medicare beneficiaries are medically necessary and allowable under the program, whether the quality of care meets professionally recognized standards, and whether proposed in-hospital care could be provided more economically on an out-patient basis. 42 U.S.C. §§ 1320c-3 (a)(1). The PRO also is responsible for determining, based on its review, whether Medicare shall make payment for medical services. 42 U.S.C. § 1320c-3 (a)(2). The PRO determination of whether payment shall be made generally is conclusive. Id.

 HHS is directed to designate geographic areas corresponding to each state, to be served by individual PROs. 42 U.S.C. § 1320c-2(a). HHS then must enter agreements, for an initial two-year term, with a PRO in each area. 42 U.S.C. § 1320c-2(b)(1) and (c)(3). HHS has considerable discretion in negotiating each of these contracts. It may negotiate different agreements with each PRO; it may make agreements without regard to any federal laws regarding contracts which it determines to be inconsistent with the PRO program. 42 U.S.C. § 1320c-2(e).

 To qualify as a PRO an entity must be composed of a sufficient number of physicians practicing in the PRO area to carry out the requisite review functions. 42 U.S.C. § 1320c-1. The contract between the PRO and HHS must include negotiated objectives against which PROs will be judged and must contain negotiated specifications for use of regional norms, or modification of national norms, for performing review functions. 42 U.S.C § 1320c-2(c)(7). The PRO must specify in its contract the types of cases it will review. 42 U.S.C. § 1320c-3(a)(4). HHS has entered into contracts with a PRO in each PRO area.

 To participate in the Medicare program, hospitals must enter into agreements with the PRO in its area. The agreement between the hospital and the PRO must allow PROs to review the validity of diagnostic information provided by the hospital, to review the completeness, adequacy and quality of care provided, to review the appropriateness of hospital admissions, and to review the appropriateness of care provided for which extra Medicare payments are sought. 42 U.S.C. § 1395cc(a)(1)(F). Hospitals were required to enter into such agreements by November 15, 1984. Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 2347(b).

 Congress empowered HHS to promulgate regulations governing PROs in order to implement the PRO program. 42 U.S.C. § 1320c-3(a)(8). The Act provides few specifics regarding how the PRO is to conduct its business on a day-to-day basis, and by empowering HHS to promulgate regulations, Congress evidently envisioned HHS creating the myriad procedures necessary to administer the program. Prior to the filing of the complaint in this action, HHS promulgated several regulations pertaining to the PRO program. See 42 C.F.R. §§ 412.42; 412.44; 412.46; 412.48; 412.82; 462.100 et seq. These regulations haphazardly touch on an incomplete and disparate selection of PRO procedures, including basic PRO review functions, DRG validation; reporting hospital misrepresentations, and review of hospital determinations of noncoverage. The parties agree these regulations were promulgated as required by The Administrative Procedure Act, 5 U.S.C. § 553.

 Besides these regulations, HHS issued a varied series of communications governing the PRO program, including PSRO Transmittals No. 107 and 108, Medicare Hospital Manual Transmittal No. 367 and Medicare Intermediary Transmittal No. 1079, Medicare Intermediary Transmittal No. 1102, and PRO Program Directive No. 2. These communications contain a wide variety of instructions, guidelines and procedures covering aspects of the PRO program. Other procedures concerning the PRO program are found in the Request for Proposals ("RFP") issued by HHS. This document solicited proposed contracts from entities seeking to become PROs, and it instructed them as to what review procedures the contracts must address, and what provisions they must contain. The contracts ultimately entered into between HHS and the PROs contain the provisions the RFP required.

 The parties agree that none of the documents mentioned above were issued pursuant to the notice and comment procedures of the A.P.A.

 The plaintiff in this action, The American Hospital Association ("AHA") is an Illinois non-stock corporation, representing six thousand member hospitals. On October 10, 1984, faced with the small, incomplete selection of regulations HHS had published implementing the PRO program and the large number of procedures proscribed in documents not published as regulations, AHA filed with HHS a petition for rulemaking, pursuant to 5 U.S.C. § 553(e). In it AHA requested HHS to promulgate a complete set of regulations governing all aspects of the PRO program.

 On December 14, 1984, the then Secretary of HHS, Margaret Heckler, wrote a letter to AHA's general counsel stating that her staff was preparing a response to the petition, but would be unable to respond within the sixty-day period requested by AHA.

 AHA sent another letter on January 8, 1985, requesting a date for HHS's response. No response to this letter was ever received.

 On January 29, 1985, AHA commenced this action. The essence of its complaint is that HHS implemented large areas of the PRO program through the communications listed above at p. 4, thus circumventing the notice and comment requirements of the A.P.A., 5 U.S.C. § 553. They request, inter alia, that this court declare the documents invalid for failure to comply with § 553, and that this court order HHS to promulgate all regulations implementing the PRO program in accordance with notice and comment procedures.

 AHA also complains that HHS's denial of the petition for rulemaking is arbitrary and capricious and an abuse of discretion. They seek an order compelling HHS to grant the petition.

 Prior to the time AHA filed its complaint, HHS had published four notices of proposed rulemaking pertaining to the PRO program. On April 17, 1985, after the complaint was filed, the four sets of final regulations were published in the Federal Register at 50 Fed. Reg. 15,312; 15,335; 15,347; and 15,364.

 The first set of regulations govern PRO review functions generally. They also explain the relationship between the PRO and fiscal intermediaries, hospitals, physicians and patients.

 The second set concern PRO determinations of violations of Medicare procedures by physicians, hospitals and beneficiaries. They state the procedures the PRO is to follow after finding a violation and the sanctions which may be imposed. They also discuss appeal procedures by which an imposition of sanctions may be challenged.

 The third set of regulations govern the acquisition, protection and disclosure of information used by the PRO. The regulations implement the PRO's right of access to hospital records and establish their responsibilities to assure the information is safeguarded.

 Also after the complaint was filed, on May 2, 1985, HHS sent AHA its response and denial to the petition for rulemaking.

 HHS has filed a motion to dismiss or in the alternative for summary judgment. AHA opposes the motion and has filed its own cross-motion for summary judgment.

 II. Discussion

 AHA charges that HHS has implemented aspects of the PRO program through various communications rather than through publishing regulations, illicitly circumventing the APA's notice and comment procedures. They claim these communications are invalid for failure to comply with the APA. HHS raises two responses. First, it claims the four sets of regulations published subsequent to the filing of the complaint establish procedures governing every phase of the PRO program and that therefore the complaint is moot. Second, it claims that the various challenged communications are only interpretive rules, which the A.P.A. excepts from the notice and comment requirements. The communications are valid, they argue, even though they admittedly were not issued in accordance with the A.P.A.

 A. Mootness

 To determine whether the complaint is moot, we must analyse each communication to discern whether the rules it contains have been superseded by the new regulations published subsequent to the communications. If so, then the rule is binding on PROs and hospitals by virtue of the validly published regulation, rather than by authority of the communication, and there is no controversy regarding the validity of the communication. The new regulations will have "irrevocably eradicated the effects of the alleged violation." County of Los Angeles v. Davis, 440 U.S. 625, 631, 59 L. Ed. 2d 642, 99 S. Ct. 1379 (1979). If, however, the communications contain rules which are not superseded by the new regulations, and which remain binding on PROs and hospitals, then the controversy remains live and the complaint is not moot.

 B. Legislative and Interpretive Rules

 To determine whether the communications are legislative or interpretive rules, we must analyse each communication with reference to the relevant statutes and regulations issued prior to the communication.

 Interpretive rules specifically are excepted from the notice and comment procedures of the A.P.A. 5 U.S.C. § 553(b)(A). The test to determine whether a rule is interpretive or whether it is legislative and subject to notice and comment procedures is found in Gibson Wine Co. v. Snyder, 90 U.S. App. D.C. 135, 194 F.2d 329, 331 (D.C. Cir. 1952):

 
Legislative rules are those which create law, usually implementary to an existing law; whereas interpretive rules are statements as to what the administrative officer thinks the statute or regulation means.

 Quoted in Cabais v. Egger, 223 U.S. App. D.C. 121, 690 F.2d 234, 238 (D.C. Cir. 1982). The exception the A.P.A. provides is limited to situations where the agency merely is announcing its interpretation of a statute and stating how it believes the statute should be enforced. Joseph v. U.S. Civil Service Commission, 180 U.S. App. D.C. 281, 554 F.2d 1140, 1153 (D.C. Cir. 1977); Pesikoff v. Secretary of Labor, 163 U.S. App. D.C. 197, 501 F.2d 757, 763, cert. denied, 419 U.S. 1038, 42 L. Ed. 2d 315, 95 S. Ct. 525 (1974).

 
As the word interpretive suggests, and as the legislative history makes clear, interpretive rules consist of administrative construction of a statutory provision on a question of law reviewable in the courts.

 Pickus v. U.S. Board of Parole, 165 U.S. App. D.C. 284, 507 F.2d 1107, 1113 (D.C. Cir. 1974).

 For example, in Citizens to Save Spencer County v. U.S. Environmental Protection Agency, 195 U.S. App. D.C. 30, 600 F.2d 844 (D.C. Cir. 1979), our court of appeals considered the status of three rules issued by the E.P.A. without notice and comment. These rules implemented the 1977 amendments of the Clean Air Act, and contained an inconsistency: section 165 required that certain preconstruction review requirements were to come into effect by August 7, 1977, but section 168 indicated that these review requirements did not come into effect until after January 1, 1977.

 E.P.A. issued the three rules to harmonize these inconsistent provisions. The first implemented section 168 as drafted, meaning that the review requirements would not become effective until after the section 165 date. But the court of appeals labeled this decision not to implement section 165 a "classic example" of an interpretive rule.

 
Such a legal assessment of instructions of Congress, even if reaching the conclusion that these instructions are inconsistent and cannot be implemented without administrative harmonization, cannot itself be termed "legislative"; for EPA's assessment in this case created no new law, but merely followed Congress into the administrative abyss that Congress itself had created.

 Id. at 877.

 The first rule was interpretive because it implemented one provision of the statute over another in an evident attempt to make sense of inconsistent statutory direction. By contrast, the second and third rules unabashedly attempted an original compromise between the inconsistent provisions. They implemented the preconstruction review requirements on a third date not provided in the statute; a date seven months after the section 165 date and nine months before the section 168 date. These rules were legislative because they,

 
were founded on no explicit provisions passed by Congress. Unlike the First Rule, which implemented other new . . . requirements according to a schedule in undisputed conformity with the . . . provision of § 168(b), the Second and Third Rules sought to fill a breach on the timing issue . . . . By no stretch of the imagination could ...

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