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ALVARADO PARKWAY INST. v. MENDEZ

April 9, 1992

ALVARADO PARKWAY INSTITUTE, INC., et al., Plaintiffs,
v.
ENRIQUE MENDEZ, JR., M.D., Assistant Secretary of Defense for Health Affairs, Defendant.


REVERCOMB


The opinion of the court was delivered by: GEORGE H. REVERCOMB

MEMORANDUM AND OPINION

This dispute, which is before the Court on dispositive cross-motions, arises out of the prospectively-determined per diem rate system by which the Civilian Health and Military Program of the Uniformed Services ("CHAMPUS"), 10 U.S.C. § 1071-1104, reimburses hospitals providing inpatient mental health services to CHAMPUS beneficiaries. In essence, the dispute presents two questions: First, when a federal agency discovers it has made a mistake in calculating rates according to a method adopted in a properly promulgated rule, does the retroactive application of its later corrective recalculations to regulated parties constitute impermissible retroactive rulemaking? Second, even if there were no retroactive rulemaking, were the corrective measures of the agency nevertheless unreasonable, or unreasonably executed? On the facts presented here, and for the following reasons, the Court's answer to both questions is "no."

 Plaintiffs are state-licensed hospitals providing inpatient psychiatric services, and are certified by CHAMPUS to provide such services to CHAMPUS patients. Defendant is the Assistant Secretary of Defense for Health Affairs, who is the government official responsible for administering the CHAMPUS program. The responsibility for day-to-day administration of the CHAMPUS program is delegated from defendant to the Director of the Office of CHAMPUS ("OCHAMPUS").

 Plaintiffs argue that OCHAMPUS's decision, announced in the Federal Register on November 28, 1989, to apply a corrected reimbursement rate for inpatient psychiatric services back to October 1, 1989, constituted retroactive rulemaking in violation of CHAMPUS regulations, *fn1" sections 551(4) and 553 of the Administrative Procedure Act ("APA"), *fn2" and common law doctrines disfavoring retroactive rulemaking absent specific Congressional authorization. For his part, defendant denies that the announcement and implementation of a revised reimbursement rate constituted retroactive rulemaking because it did not alter the methodology previously adopted in final regulations. And, although defendant concedes that OCHAMPUS did in one instance violate its own regulations in revising the reimbursement rates, it argues that the violation did plaintiffs no harm, and that as a consequence plaintiffs lack standing to challenge its agency action.

 BACKGROUND

 The facts of this case are largely undisputed. The CHAMPUS program provides medical and dental care for dependents of members of the uniformed services and for certain retired military personnel and their dependents. 10 U.S.C. § 1071. These health care benefits include the treatment of mental illness. 10 U.S.C. § 1077(a)(5). Inpatient mental health services are provided at hospitals like plaintiffs, which are certified by CHAMPUS as eligible to provide such care to CHAMPUS beneficiaries. CHAMPUS pays a portion of the cost of such services to CHAMPUS patients; the patients share in the cost.

 Prior to January 1, 1989, CHAMPUS reimbursed providers of inpatient psychiatric services on the basis of usual and customary charges billed by the hospitals. In 1988, the Department of Defense ("DOD") decided to adopt a more cost-effective method of payment for these services "based on prospectively set fixed rates for each day of hospital services provided." 53 Fed. Reg. 20,585 (June 3, 1988). Accordingly, the DOD commissioned a study by the RAND Corporation to examine the feasibility of a per diem payment system, and published for comment a proposed rule based on the RAND analysis. See 53 Fed. Reg. 34,285 (Sept. 6, 1988). On September 6, 1988, OCHAMPUS responded to public comments and promulgated its final regulations establishing a prospectively determined per diem rate method of payment for inpatient mental health care. See 53 Fed. Reg. 34,285 (codified at 32 C.F.R. § 199.14(a)(2) (1991)).

 Under this new reimbursement system, certain hospitals -- known as "high volume" hospitals -- which have historically provided a sufficient volume of services to CHAMPUS patients to permit a valid rate calculation, were to receive hospital-specific per diem rates. These per diem rates were calculated on the basis of each hospital's actual average daily charges during a period from July 1, 1987 to May 31, 1988, trended forward through an inflationary adjustment to September 30, 1988. See 32 C.F.R. § 199.14(a)(2)(v)(A). *fn3" This period then became the base period in determining per diem rates, except that rates were subject to a "cap" set at the 80th percentile of the average daily charges of all high-volume hospitals. *fn4" Thus, no high-volume hospital, regardless of its actual per diem charges, could receive a rate beyond the rate cap. The capped rate for high-volume hospitals was calculated to be $ 629 per day, and this figure was published in the Federal Register in a section titled "General Description of the CHAMPUS Per Diem Payment System for Psychiatric Hospitals and Units." 53 Fed. Reg. 34,286. Thus conceived, this prospective per diem reimbursement system was to go into effect on January 1, 1989. In most instances, high-volume providers were notified of their respective hospital-specific dates prior to January 1, 1989.

 The regulations promulgated on September 6, 1988, also stated that subsequent increases in per diem rates would be limited to annual increases prescribed by Congress for Medicare providers, and that there would be no update of rates for fiscal year 1989. 32 C.F.R. § 199.14(a)(2)(iv)(C). *fn5" The regulations only discuss retrospective payments in a subsection addressing payments to new hospitals that qualify as high-volume hospitals. See 32 C.F.R. § 199.14(a)(2)(v)(C).

 After the regulation and the originally calculated per diem rates had gone into effect, OCHAMPUS officials discovered that the provider rates as calculated were "substantially erroneous." This error appears to stem from deficiencies in the data base used to calculate the per diem rates. *fn6" As a consequence of these errors, OCHAMPUS officials discovered that in many cases high-volume hospitals were being reimbursed at "substantially inflated" rates. Accordingly, OCHAMPUS officials decided to recalculate the per diem rates, including the "hospital-specific rate cap," to correct error attributable to the faulty data base. *fn7" This recalculation did not apply to all rates, because some hospital-specific per diem rates had already been recalculated prior to October 1, 1989 by CHAMPUS Fiscal Intermediaries *fn8" pursuant to a regulatory administrative review procedure. OCHAMPUS officials decided to honor these recalculated "FI rates."

 OCHAMPUS did not proceed by notice and comment rulemaking procedures in undertaking these recalculations. Rather, OCHAMPUS informally notified those providers whose rates had not been recalculated prior to October 1, 1989 (the beginning of the fiscal year) that rate recalculations were needed, and that the revised rates would be effective as of the beginning of fiscal year 1990. See Regensberg Aff., Attach. C & D. The actual recalculations, however, were not completed before October 1, 1989, notwithstanding the fact that the regulations require that providers receiving hospital-specific reimbursements will be notified of changes in their reimbursement rates prior to the beginning of each fiscal year. Instead, formal announcement of the revised rates and rate cap was made through a Federal Register notice of November 28, 1990. See 54 Fed. Reg. 48,926 (Nov. 28, 1989). This notice stated that revised per diem rates were effective as of October 1, 1989, and that the rate cap was lowered from $ 629 per day to $ 614 per day. Id. at 48,927.

 In addition, the Department of Defense required providers to use the revised per diem rates to recalculate the cost-sharing obligation of CHAMPUS patients for services provided retroactively to January 1, 1989. Providers subject to this additional requirement were notified by letter in late January 1990, rather than by publication in the Federal Register or by promulgation in regulation form.

 Alvarado Parkway Institute, a group of hospitals providing inpatient psychiatric care and part of the high-volume group of providers under CHAMPUS, sought and was denied administrative review of these changes in reimbursement rates. Alvarado subsequently brought suit against the DOD in this Court, and filed its second amended complaint for declaratory, mandamus, and injunctive relief on August 2, 1991. The parties have now cross-moved for summary judgment. *fn9"

 ANALYSIS

 It should be clear that plaintiffs do not challenge the lawfulness of the final rule promulgated on September 6, 1988 and published in the Federal Register. See 53 Fed. Reg. 34,285 (codified at 32 C.F.R. § 199.14(a)(2) (1991)). Plaintiffs claim instead that the recalculation of reimbursement rates was illegal in seven respects: 1) that the application of the revised per diem cap for the base period, announced on November 28, 1989, back to October 1, 1989, constituted impermissible retroactive rulemaking; 2) that OCHAMPUS violated its own regulations in recalculating the base period cap by including eight hospitals that were not in the QRDF data file but which had received hospital-specific per diems in 1989; 3) that the recalculated base period per diem rate violated CHAMPUS regulations because the average daily charge for high volume hospitals was calculated on the basis of claims processed to completion rather than claims paid; 4) that the recalculated cap was based upon an average daily charge for high volume hospitals weighted for days of care rather than for discharges, in violation of CHAMPUS regulations; 5) that OCHAMPUS failed to comply with its own regulations in failing to notify high volume hospitals of the revised rate before the beginning of federal fiscal year 1990, on October 1, 1989; 6) that the recalculations were so erroneous as to have been made in bad faith; and 7) that the deflator used to calculate the base period per diem for hospitals which subsequently became high-volume hospitals was improperly calculated. *fn10"

 The Court is satisfied, on its review of the record and the parties' briefs, that there are no disputed issues of material fact precluding entry of summary judgment in this case. See Fed. R. Civ. P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-52, 91 L. Ed. 2d 202 , 106 S. Ct. 2505 (1986). Review of defendant's actions is governed by section 10(e)(2)(A) of the APA, which permits this Court to set aside agency action only if it is found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). "This standard of review is a highly deferential one. It presumes agency action to be valid." Ethyl Corp. v. Environmental ...


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