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National Association for Home Care v. Shalala

February 26, 2001


The opinion of the court was delivered by: Date Emmet G. Sullivan United States District Judge

[27-1][27-2][32-1] (EGS)


I. Introduction

Plaintiff National Association for Home Care (NAHC) is an organization comprised of home health care agencies located throughout the United States. Defendant Department of Health and Human Services (HHS) is the federal agency charged with administering Medicare. NAHC alleges that HHS has contravened the Regulatory Flexibility Act (RFA) in its promulgation of a 1997 rule concerning reimbursement of Medicare-certified home health care agencies. Plaintiff asks that the case be remanded to HHS so that the agency can redo its RFA analysis. Upon consideration of defendant's motion to dismiss the second amended complaint, or, in the alternative, for summary judgment, plaintiff's cross motion for summary judgment, and all responsive pleadings related to these motions, the Court holds that there is no genuine issue of material fact and defendant is entitled to judgment as a matter of law. Accordingly, defendant's motion for summary judgment [27-1][27-2] is GRANTED and plaintiff's cross motion for summary judgment [32-1] is DENIED.

II. Statutory Background

Medicare, *fn1 the complex statutory and regulatory program that provides health care for elderly and disabled Americans, is administered by the Department of Health and Human Services through the Health Care Financing Administration (HCFA). See 42 U.S.C. §§ 1395c, 1395d. Many Medicare beneficiaries receive outpatient treatment under the supervision of home health care agencies. These patients have varied medical needs ranging from short-term care to long-term care, from infrequent check-ups to frequent visits. Pursuant to written participation contracts between HCFA and the home health agencies (HHA), the agencies furnish specified health services to Medicare beneficiaries, and HCFA reimburses the agencies in accordance with the Medicare Act and its regulations. 42 U.S.C. §§ 1395c, 1395d, 1395cc.

Prior to the Balanced Budget Act of 1997 (BBA), Pub. L. 105-33, Medicare paid home health care agencies on a retrospective cost basis; that is, home health care agencies were reimbursed after services had been rendered. Medicare paid home health care agencies the lesser of the actual "reasonable costs" *fn2 they incurred, or the maximum per-visit cost determined by the Medicare Act. See 42 U.S.C. §§ 1395x(v)(1)(A), (L). Overpayments and underpayments were corrected retroactively. 42 C.F.R. § 413.60(c).

With the BBA, Congress modified this payment system to control costs and reduce fraud in the home health care system. Pub. L. No. 105-33, §§ 4602 & 4603. The BBA directed that, effective October 1, 1999, home health care agencies would be paid under a prospective payment system (PPS) similar to that used for other Medicare providers, such as hospitals. 42 U.S.C. § 1395ff(a), (b). Under the PPS, Medicare providers receive predetermined payments intended to cover each patient's individual medical needs.

In addition to reducing fraud in the long term, Congress aimed to realize immediate savings until the implementation of the PPS. To that end, the BBA required HCFA to establish an Interim Payment System (IPS). 42 U.S.C. § 1395x(v)(1)(L). Under the IPS, home health care agencies were to be paid for cost reporting periods beginning on or after October 1, 1997, based on the lowest of three calculations:

1) the the home health care agencies' actual reasonable allowable costs;

2) a revised aggregate per-visit limit not to exceed 105% of the median per-visit costs;

3) a new aggregate per-beneficiary limit. 42 U.S.C. § 1395x(v)(1)(L).

The per visit and per beneficiary limitations are calculated in the aggregate for each HHA. In other words, an individual beneficiary's number of visits is not limited, but the HHA's total reimbursement for all patients is capped. See, e.g., 42 U.S.C. § 1395x(v)(1)(L)(ii).

Congress intended to reduce the total annual payments for treating patients under the IPS. For example, while the per-visit cost limits used to be calculated at 112% of the mean of the labor-related and non-labor per-visit costs for freestanding home health agencies, the IPS lowered the limit to 105% of the median of such costs. See 42 U.S.C. § 1395x(v)(1)(L)(i)(I),(IV).

While the reasonable cost and per visit limitations already existed under prior law, the per beneficiary limitation is new. To implement the IPS, HCFA promulgated revised per visit cost limits on January 2, 1998. See 63 Fed. Reg. 89, 92-3 (1998). On March 31, 1998, HCFA propounded the new maximum per beneficiary limits. See 63 Fed. Reg. 15,717 (1998). Both of these limits were effective retroactively to October 1, 1997. Plaintiffs contend that HHS failed to satisfy the requirements of the RFA when it issued these regulations. Defendants oppose, arguing that they did not have to comply with RFA analysis requirements because the provisions implementing the IPS and PPS qualified as interpretive rules.

III. Discussion

A. Regulatory Flexibility Act

1. Purposes

The Regulatory Flexibility Act (RFA), enacted in 1980, arose from the concern that small businesses may be forced to bear an unnecessary or disproportionate burden when the federal government issues regulations. See generally Doris S. Freedman, et al., The Regulatory Flexibility Act: Orienting Federal Regulation to Small Business, 93 Dick. L. Rev. 439, 440 (Spr. 1989). The goals of the RFA are:

[F]irst, to increase federal agency awareness and understanding of the impact of regulations on small entities by requiring agencies to identify and explain those impacts; second, to require agencies to communicate and explain their findings to the public, including notification beyond the traditional notice requirement of the APA; third, to analyze alternatives available to small entities in order to minimize impact on those entities; and finally, to provide regulatory relief for small entities. 5 U.S.C. § 601 (note: Congressional Findings and Declaration of Purpose).

It is clear, then, that the RFA was meant to provide protection to small businesses that might be caught in the crosshairs of federal regulations.

2. Relevant Provisions

To effect that protection, the RFA provides that whenever an agency is required by the Administrative Procedure Act (APA), 5 U.S.C. § 553, or any other law, to publish a notice of proposed rulemaking, it must prepare and make available for public comment an initial regulatory flexibility analysis (IRFA). See 5 U.S.C. § 603. When an agency promulgates a final rule, after being required either by the APA or another law to publish a general notice of proposed rulemaking, it must also prepare a final regulatory flexibility analysis (FRFA). The IRFA and FRFA must include, among other things, a statement concerning the impact of the rule on small entities. See 5 U.S.C. §§ 603(a), 604(a)(3). In addition, the IRFA must "contain a description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities." Id. at § 603(c).

The FRFA must contain:

(5) a description of the steps the agency has taken to minimize the significant economic impact on small entities consistent with the stated objectives of applicable statutes, including a statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule and why each one of the other significant alternatives . . . was rejected. 5 U.S.C. § 604(a)(5).

However, the FRFA requirement does not apply if the head of the agency certifies that the rule "will not...have a significant economic impact on a substantial number of small entities." 5 U.S.C. § 605(b). In addition, interpretive rules, because they are exempted from the APA's notice and comment procedures, are exempted from the RFA's strictures as well. *fn3 The RFA's legislative history confirms this second exception. In passing the original RFA, Congress stated that:

[s]ome statutes . . . place explicit limitations on agency discretion in rulemaking. If uniform requirements are mandated by statutes, a statement to that effect would obviate the need to solicit or consider proposals which include differing compliance standards. S. Rep. No. 96-878 at 13 (1980), reprinted in 1980 U.S.C.C.A.N. 2788, 2800. Unless one of these exceptions applies, an agency promulgating a final rule that will have a "significant economic impact on a substantial number of small entities" must perform a proper RFA analysis. 5 U.S.C. § 605(b).

The Small Business Regulatory Enforcement Fairness Act, Pub. L. No. 104-121, tit. II (1996)(SBREFA), the 1996 amendment to the RFA, sharpens the RFA's teeth by bolstering its enforceability. See generally Associated Fisheries of Maine, Inc. v. Daley, 127 F.3d 104, 111-14 (1st Cir. 1997) (detailing purpose and legislative history of the RFA). Pursuant to SBREFA, small entities adversely affected or aggrieved by a final agency action are entitled to judicial review of agency compliance with the requirements of the above-discussed § 604, as well as other sections. 5 U.S.C. § 611(a)(1). In granting relief in an RFA action, the court must order the agency to take corrective action consistent with chapters 6 and 7 of volume 5 of the U.S. Code. Chapter 6 provides that corrective action may include a) remanding the rule to the agency, and b) deferring the enforcement of the rule against small entities unless the court finds that continued enforcement of the rule is in the public interest. 5 U.S.C. § 611(a)(4). Chapter 7 includes the scope of review provision of 5 U.S.C. § 706(2). *fn4

Plaintiffs allege that HHS violated § 604(a)(5) of the RFA when it issued both the January 2, 1998, regulation for the revised per-visit limits of the IPS and the March 31, 1998, regulation for the new per-beneficiary limit of the IPS. Plaintiffs base their argument on the absence from both regulations of any examination of alternatives to the adopted rule. *fn5

Defendant does not deny that the regulations did not include searching examination of all the alternatives to the final rules. Defendant argues they were not required to examine alternatives to the proposed rules because the BBA did not grant the Secretary of HHS any discretion in implementing the IPS. Defendant contends that Congress delineated its objectives so exactly that no significant alternatives exist, and therefore, no meaningful RFA analysis can or need be conducted.

B. Whether the Regulatory Flexibility Act Applies

In American Hosp. Ass'n v. Bowen, 834 F.2d 1037 (D.C. Cir. 1987), the D.C. Circuit distinguished an interpretive rule from a substantive one:

Substantive rules are ones which "grant rights, impose obligations, or produce other significant effects on private interests," see Batterton, 648 F.2d at 701-02 (citations omitted), or which "effect a change in existing law or policy." See Alcaraz, 746 F.2d at 613 (quoting Powderly v. Schweiker, 704 F.2d 1092, 1098 (9th Cir. 1983)). Interpretive rules, by contrast, "are those which merely clarify or explain existing law or regulations," Alcaraz, 746 F.2d at 613 (quoting Powderly, 704 F.2d at 1098), are "essentially hortatory and instructional," Alcaraz, 746 F.2d at 613, and "do not have the full force and effect of a substantive rule but [are] in the form of an explanation of particular terms." Gibson, 194 F.2d at 331. Bowen, 834 F.2d at 1045.

The Bowen court went on to state that whether a particular agency action is interpretive or substantive is an ad hoc determination. See id. The court listed some of the distinguishing characteristics of interpretive rules, including that an interpretive rule merely reminds parties of existing duties; that whether a rule may have a substantial impact is not dispositive; and that interpretive rules and their implementing regulations "merely track[]" each other, because the regulations simply explain the requirements of the statute. Id. at 1046.

The BBA's directives concerning implementation of the IPS are extremely specific. For example, in § 4602(c) of the BBA, Congress set the mathematical formula for determining the new per beneficiary limits. See Pub. L. No. 105-33, § 4602(c), codified at 42 U.S.C. § 1395x(v)(1)(L)(v)(I). Congress also mandated that, for beneficiaries who use services furnished by more than one home health agency, the per beneficiary limitations "shall" be prorated among the agencies. See Pub. L. No. 105-33, § 4602(c), codified at 42 U.S.C. § 1395x(v)(1)(L)(vi)(II). In addition, Congress ordered the Secretary not to recognize as reasonable agency costs that exceed for cost reporting periods beginning on or after --

(I) July 1, 1985, and before July 1, 1986, 120 percent of the mean of the labor-related and nonlabor per visit costs for freestanding home health agencies,

(II) July 1, 1986, and before July 1, 1987, 115 percent of such mean,

(III) July 1, 1987, and before October 1, 1997, 112 ...

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