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SWEDISH HOSP. CORP. v. SHALALA

April 5, 1993

SWEDISH HOSPITAL CORP., et al., Plaintiffs,
v.
DONNA E. SHALALA,1 Secretary of Health and Human Services, Defendant.



The opinion of the court was delivered by: WILLIAM B. BRYANT

 This memorandum addresses plaintiffs' petition for attorneys' fees in a group of cases, brought by Medicare provider hospitals, challenging the 1979 Malpractice Rule changing the method for calculating reimbursement of malpractice insurance premiums. *fn2" Plaintiffs prevailed on the merits. Petitioners now seek attorneys' fees and expenses under the "bad faith" fees provision of the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412(b) (1988), which provides the same relief against the government as would be available against any other party at common, law. In the alternative, petitioners argue that they are entitled to attorneys' fees and expenses under 28 U.S.C. § 2412(d)(1)(A), because the "position of the United States" is not "substantially justified."

 Background

 Medicare is a system of health insurance for the aged and disabled. 42 U.S.C. § 1395c (1988 & Supp. III 1991). Prior to 1979, participating provider hospitals included their medical malpractice insurance expenses in a General and Administrative ("G & A") "cost pool," along with other overhead costs, and received Medicare reimbursement proportional to the hospitals' Medicare beneficiary utilization rate. In other words, if 25% of the total services, measured in dollar value, provided by a hospital in a particular cost year" went to Medicare patients, Medicare would reimburse the hospital for 25% of its malpractice insurance premiums for that year. The new Malpractice Rule, effective for cost reporting periods beginning July 1, 1979, removed malpractice insurance from the G & A pool, and instead reimbursed malpractice insurance expenses based upon the proportion of malpractice claims actually paid out to Medicare beneficiaries during that year and the four preceding years. *fn3"

  Preliminary research had suggested that Medicare beneficiaries receive proportionately less in malpractice claims than the non-Medicare patient population, primarily because Medicare patients are, on average, older. The Secretary of Health and Human Services ("the Secretary") anticipated saving more than three hundred million dollars each year in reimbursements under the 1979 Rule, and rushed the Rule through without proper analysis. Thousands of hospitals challenged the Rule on substantive and procedural grounds. This court, along with several others, *fn4" initially upheld the Rule, based upon materials submitted by the plaintiffs and the Secretary. Walter O. Boswell Memorial Hospital v. Heckler, 573 F. Supp. 884 (D.D.C. 1983) ("Boswell I"). It subsequently emerged that important documents from the administrative record had not been made available for review. The Court of Appeals, finding that this court had been "confronted with large gaps in the facts and opinions before the agency," remanded for reconsideration in light of the full eleven-volume administrative record, simultaneously spelling out detailed criteria to apply in evaluating that record. Walter O. Boswell Memorial Hospital v. Heckler, 242 U.S. App. D.C. 110, 749 F.2d 788, 793 (D.C.Cir. 1984) ("Boswell II"). On remand, this court found the basis and purpose statement accompanying the 1979 Rule to be deficient under the Administrative Procedure Act, 5 U.S.C. § 553(c) ("APA"), and the Rule to be "arbitrary and capricious" in violation of the APA, 5 U.S.C. § 706(2)(A) & (C), and the "reasonable cost" provisions of the Medicare Act, 42 U.S.C. § 1395x(v)(1)(A). Walter O. Boswell Memorial Hospital v. Heckler, 628 F. Supp. 1121 (D.D.C. 1985) ("Boswell III").

 On April 1, 1986, while Boswell III was pending on appeal on the question of remedy, *fn5" the Secretary promulgated a new malpractice reimbursement rule. 42 C.F.R. § 413.56 (1986). *fn6" The Secretary purported to apply the 1986 Rule retroactively to the cost years at issue in the 1979 Rule litigation. Alleging that the 1986 Rule replaced the 1979 Rule, the Secretary claimed that the 1986 Rule rendered all 1979 Rule cases moot. On May 23, 1986 the Secretary filed a suggestion of mootness and Motion to Vacate the district court judgments in Boswell III. On November 21, 1986, the Court of Appeals deferred ruling on the Secretary's motion and instead remanded the cases to this court to determine the validity of the promulgation and application of the 1986 Rule.

 Before this court decided that issue, the Court of Appeals held, in an unrelated case, that the Secretary lacked the power to promulgate retroactive Medicare rules. Georgetown University Hospital v. Bowen, 261 U.S. App. D.C. 262, 821 F.2d 750 (D.C.Cir. 1987). The Supreme court granted certiorari and affirmed on December 12, 1988. Bowen v. Georgetown University Hospital, 488 U.S. 204, 102 L. Ed. 2d 493, 109 S. Ct. 468 (1988) ("GeorgetownI "). On January 26, 1989, the Health Care Financing Administration ("HCFA") issued HCFA Ruling 89-1, indicating that Health and Human Services ("HHS") would no longer seek to apply the 1986 Malpractice Rule retroactively. Plaintiffs in the cases consolidated here would receive reimbursement, for the cost years in litigation, under the pre-1979 utilization method. On May 25, 1989, plaintiffs filed their petition for attorneys' fees.

 The cases at issue in this petition did not address cost years subject to prospective application of the 1986 Rule. *fn7" However, it is worth noting that on July 17, 1991, this court approved a Consent Order in a separate case, Children's National Medical Center, et al. v. Sullivan, C.A. No. 90-1362, providing that HHS would not enforce the 1986 Rule against the parties' cost years in litigation. *fn8" On September 29, 1991 HHS issued HCFA Ruling 91-1, effective the next day, indicating that HCFA would follow the Children's National Court Order in adjudicating other properly pending claims and appeals, paying cost claims in those pending cases according to the pre-1979 utilization method. HHS has since filed motions to dismiss in other pending cases involving prospective application of the 1986 Rule, arguing that HCFA 91-1 renders those cases moot. See Swedish Hospital Corp., et al. v. Shalala, C.A. No. 91-0525; County of Los Angeles v. Shalala, C.A. No. 91-2333; La Palma Intercommunity Hospital et al. v. Shalala, C.A. No. 91-2337. Plaintiffs in those cases continue to seek relief in the form of rescission of the 1986 Rule, arguing that the Children's National Consent Order does not provide sufficient protection against future application of the 1986 Rule to hospitals not party to that decree, and that HCFA 91-1 lacks the permanence rescission would provide. On the merits, plaintiffs' main argument is that the 1986 Rule does not meet the minimal requirements for lawfully replacing the pre-1979 utilization method spelled out by the Court of Appeals in Boswell II.

 Attorneys' Fees Under the Equal Access to Justice Act

 A. Bad Faith

 Section 2412(b) of the EAJA authorizes an award of attorneys' fees against the government "to the same extent that any other party would be liable under the common law." One of the common law's narrow exceptions to the American Rule, under which each party pays its own fees, permits awards against a losing party who has acted "in bad faith, vexatiously, wantonly, or for oppressive reasons." Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 258-259, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975). Bad faith awards are made "only in extraordinary circumstances and for dominating reasons of fairness." Nepera Chemical, Inc. v. Sea-Land Service, Inc., 253 U.S. App. D.C. 394, 794 F.2d 688, 702 (D.C.Cir. 1986).

 Awards under the "bad faith" exception may be made for conduct before or during the litigation. Nepera, 794 F.2d at 701; Hall v. Cole, 412 U.S. 1, 15, 36 L. Ed. 2d 702, 93 S. Ct. 1943 (1973). Conduct giving rise to litigation may be found in bad faith where a party, "confronted with a clear statutory or judicially-imposed duty towards another, is so recalcitrant in performing that duty that the injured party is forced to undertake otherwise unnecessary litigation to vindicate plain legal rights." American Hospital Ass'n v. Sullivan, 290 U.S. App. D.C. 397, 938 F.2d 216, 220 (D.C.Cir. 1991) (quoting Fitzgerald v. Hampton, 545 F. Supp. 53, 57 (D.D.C. 1983)). See also Vaughan v. Atkinson, 369 U.S. 527, 530-31, 8 L. Ed. 2d 88, 82 S. Ct. 997 (1962). Conduct during litigation that may be found in bad faith includes misconduct in discovery, Fritz v. Honda Motor Co., 260 U.S. App. D.C. 275, 818 F.2d 924, 925 (D.C.Cir. 1987); or dilatory tactics or misrepresentations to the court. Lipsig v. National Student Marketing Corp., 214 U.S. App. D.C. 1, 663 F.2d 178, 181 (D.C.Cir. 1980).

 Three alleged Secretarial actions lie at the core of plaintiffs' bad faith claim:

 
1. Promulgation of the 1979 Rule despite knowledge that it was both procedurally defective ...

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