CANONSBURG GENERAL HOSPITAL, Appellant v. Sylvia Mathews BURWELL, Secretary, U.S. Department of Health and Human Services, Appellee.
No. 13-5370.
United States Court of Appeals, District of Columbia Circuit.
Argued Sept. 21, 2015. Decided Dec. 1, 2015.
807 F.3d 295
See also 2001 WL 36339671.
Benjamin M. Shultz, Attorney, United States Department of Justice, argued the cause for the appellee. Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Vincent H. Cohen, Jr., Acting United States Attorney and Michael S. Raab, Attorney, were with him on brief. R. Craig Lawrence, Assistant United States Attorney, entered an appearance.
Before: HENDERSON, Circuit Judge, and EDWARDS and SENTELLE, Senior Circuit Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge:
To administer Medicare reimbursements to healthcarе providers, the Congress authorized the Secretary (Secretary) of the Department of Health and Human Services (HHS) to promulgate regulations setting the maximum cost amount HHS may reimburse a healthcare provider for services provided a Medicare beneficiary. Pursuant to this authority, the Secretary issued regulations setting out reasonable cost limits (RCLs) for specified medical services and establishing certain exceptions to those limits. Canonsburg General Hospital (Canonsburg) was the beneficiary of one such exception for many years beginning in 1987. Then, in 1998, it alleged that the Secretary‘s revised calculation of the exception unlawfully created a “reimbursement gap“, which unfairly deprived it
I. BACKGROUND
A. REASONABLE COST LIMITS AND THE ATYPICAL SERVICES EXCEPTION IN MEDICARE REIMBURSEMENT
Through the Centers for Medicare and Medicaid Services (CMS), the Secretary provides for the reimbursement of the reasonable costs of healthcare services for Medicare beneficiaries. See
The first is the system for managing the costs of reimbursement. Healthcare providers submit requests for reimbursement for services provided to Medicare beneficiaries, subject to the RCLs the Secretary has calculated based on statutory and regulatory restrictions. See
One such exception is the “atypical services” exception, which generally allows a healthcare provider to be reimbursed above the RCLs if the service it provides is, inter alia, “atypical in nature and scope.”1
The second relevant aspect of the Medicare reimbursement scheme involves the claims process itself. Under that process, an SNF submits a claim for reimbursement to a private intermediary, which processes the claim and provides reimbursement under CMS‘s authority. See
B. WESTERN DISTRICT OF PENNSYLVANIA LITIGATION
Canonsburg is a hospital-based SNF that has participated in the Medicare reimbursement program since 1984. Beginning in fiscal year 1987, Canonsburg applied for, and obtained, the atypical services exception for costs exceeding its RCLs. In 1994, however, the Secretary‘s revised gap methodology interpretation of section 2534.5 began to limit Canonsburg‘s reimbursements.3
In 2001, Canonsburg appealed a final reimbursement decision of the Secretary in the Western District of Pennsylvania, challenging section 2534.5 as applied to its reimbursements for fiscal years 1987 through 1990 and 1993. See Canonsburg I, 2001 WL 36339671, at *1. Canonsburg alleged that section 2534.5 was arbitrary, capricious and inconsistent with statutory language because it (1) “violate[d] the applicable cost limit statu[t]e,
C. ADMINISTRATIVE PROCEEDINGS
In the late 1990s—and separate from the Canonsburg I litigation—Canonsburg began an administrative challenge to its reimbursement for fiscal year 1996. Canonsburg included in its reimbursement request a disallowance of $470,528, corresponding to the gap created by section 2534.5, but nevertheless claimed that it should be entitled to those funds. The Medicare intermediary granted Canonsburg the atypical services exception in a May 4, 1998 decision but disallowed the $470,528 in costs corresponding to the section 2534.5 gap. The intermediary also disallowed an additional $46,765 of offset costs that, according to its calculations, should have been included in the section 2534.5 gap but were not listed in the disallowance filed with Canonsburg‘s reimbursement request. Canonsburg appealed the $526,2934 of disallowed costs to the PRRB, which reversed the intermediary‘s decision.5 Canonsburg made the same arguments before the PRRB that it had made in Canonsburg I in 2001 and also relied on more recent decisions invalidating section 2534.5 as arbitrary and capricious. See St. Luke‘s Methodist Hosp. v. Thompson, 315 F.3d 984, 988-89 (8th Cir.2003) (striking down section 2534.5 because HHS misconstrued reimbursement for typical and atypical services costs); Montefiore Med. Ctr. v. Leavitt, 578 F.Supp.2d 129, 133-34 (D.D.C.2008) (finding section 2534.5 violated APA because HHS failed to provide notice and comment in promulgating section 2534.5); Mercy Med. Skilled Nursing Facility v. Thompson, No. C.A.99-2765TPJ, 2004 WL 3541332, at *2-3 (D.D.C. May 14, 2004) (same). Canonsburg did not mention Canonsburg I in its PRRB filings. The PRRB found section 2534.5 to be “illogical[],” concluding that the Secretary confused typical and atypical services costs in her section 2534.5 calculation and created a gap inconsistent with statute and regulation. See Provider Reimbursement Review Board Decision 41-42. The PRRB
On discretionary review of the PRRB decision, the CMS Administrator reversed the PRRB.6 The Administrator concluded that section 2534.5 is “reasonable and appropriate, as [it] closely adhere[s] to” the statutory and regulatory language establishing RCLs and “in no way alters, or revises, Medicare policy as set forth in the regulations” implementing the atypical services exception. Decision of the Administrator 13-14. She further determined that section 2534.5 does not “constitute ... a change in policy requiring notice and comment rule-making under
D. PROCEEDINGS IN D.C. DISTRICT COURT
Canonsburg timely filed the instant suit in district court seeking judicial review of the CMS Administrator‘s decision. As in Canonsburg I, Canonsburg argued that section 2534.5 is arbitrary and capricious because it is inconsistent with the governing statute and regulations, represents an arbitrary change to the Agency‘s long-standing interpretation of the regulations, was promulgated without required notice and comment and discriminates in favor of freestanding SNFs. The Secretary answered, raising issue preclusion as an affirmativе defense. See generally
On October 17, 2013, the district court granted the Secretary‘s motion for summary judgment on the issue preclusion ground. See Canonsburg II, 989 F.Supp.2d at 30. The сourt noted that Canonsburg did not dispute that the validity of section 2534.5 had been raised and contested, and actually and necessarily decided, in Canonsburg I. See id. at 17. It rejected Canonsburg‘s waiver and equity arguments. See id. at 18-19, 24-27. The court held “that, because the parties and issues are identical to those in Canonsburg I, ... the plaintiff had a full and fair
II. ANALYSIS
We review a grant of summary judgment de novo. Dist. Hosp. Partners v. Burwell, 786 F.3d 46, 54 (D.C.Cir.2015). Summary judgment is granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Under our precedent, a party is barred from relitigating an issue if three conditions are met:
First, the same issue now being raised must have been contested by the parties and submitted for judicial determination in the prior case. Second, the issue must have been actually and necessarily determined by a court of competent jurisdiction in that prior case. Third, preclusion in the second case must not work a basic unfairness to the party bound by the first determination.
Yamaha Corp. of Am. v. United States, 961 F.2d 245, 254 (D.C.Cir.1992), cert. denied, 506 U.S. 1078 (1993) (citations omitted). Canonsburg claims that, under Poulin v. Bowen, 817 F.2d 865 (D.C.Cir.1987), the Secretary waived her issue preclusion affirmative defense by failing to raise it during the administrative proceedings. Canonsburg further argues that, because the Secretary did not raise issue preclusion before asserting it as an affirmative defense in district court, the Chenery doctrine barred the district court‘s consideration of it in the first instance. Although Canonsburg does not dispute that the first two Yamaha requirements for issue preclusion are met, conceding that it raised the same issues in Canonsburg I and that the Canonsburg I court actually and necessarily decided them, Arg. Recording at 2:58-3:30, it claims that issue preclusion works a basic unfairness to it because it is contrary to the policy underpinnings of the defense.
A. ADMINISTRATIVE WAIVER UNDER POULIN
Canonsburg argues that, under Poulin, the Secretary‘s failure to raise issue preclusion before the PRRB—or on the Administrator‘s discretionary review of the PRRB—constitutes waiver of the defense in district court. We disagree.
In Poulin, the plaintiff filed for Social Security disability benefits in 1974 but his claim was denied by the Social Security Administration. See 817 F.2d at 868. He refiled his disability-benefits application in 1980 and the administrative law judge (ALJ), the Social Security Administration Appeals Council and the district court all rejected his application on the merits.
Poulin makes two uncontroversial points. First, an agency‘s failure to raise issue preclusion in its answer in federal court may constitute waiver under
Even assuming the Secretary had the power to reopen Canonsburg I,10 this appeal is a far cry from Poulin. The PRRB, which, according to the record, appears to have been unaware of Canonsburg I, interpreted section 2534.5 in the first instance
Our more recent precedent also defeats Canonsburg‘s argument that we have adopted a robust administrative waiver (D.C. Cir. 1990), we explained that Poulin is “applicable only when the agency has clearly stated or otherwise demonstrated that it has in fact reopened the original case on the merits and consequently has held a mandatory ... hearing to reconsider the prior claim afresh.” Id. at 558; cf. Sendra Corp. v. Magaw, 111 F.3d 162, 167 (D.C.Cir.1997) (under Poulin, agency decision is reviewable on the merits if it exercises discretion to reopen claim). In Morris, we noted that Poulin is limited to cases in which the agency fails to raise issue preclusion as an affirmative defense in district court or it expressly declines to apply issue preclusion when available during administrative proceedings. Morris v. Sullivan, 897 F.2d 553, 557 n. 8 (D.C.Cir.1990) (“Morris readily concedes, however, that factually, Poulin is distinguishable ... in two important ways. First ... [the Poulin ALJ] declined to exercise his discretion to dismiss” on the basis of res judicata and, second, “the Secretary in Poulin failed to plead res judicata as a defense, thereby waiving his right to interpose it” (some alteration in original)); see generally Nixon v. United States, 978 F.2d 1269, 1297 (D.C.Cir.1992) (Henderson, J., concurring) (in Poulin, court “did no more than state that parties waive their own right to raise res judicata by failing to plead it“). And in Stanton v. District of Columbia Court of Appeals, 127 F.3d 72, 76 (D.C.Cir.1997), we declared, citing Poulin, that “[r]es judicata is an affirmative defense that may be lost if not pleaded in the answer; it may not ordinarily be asserted for the first time on appeal.” Id. at 76; see also U.S. Postal Serv. v. NLRB (USPS), 969 F.2d 1064, 1069 (D.C.Cir.1992) (“[C]ourts do not forcе preclusion pleas on parties who choose not to make them....“). Other circuits have also refrained from developing any administrative waiver doctrine for issue preclusion that extends beyond our analysis in Poulin. See, e.g., Chavez v. Bowen, 844 F.2d 691, 692-93 (9th Cir.1988) (allowing res judicata claim on appeal despite ALJ failing to consider res judicata defense in subsequent administrative decision); cf. Kane v. Heckler, 776 F.2d 1130, 1132 (3d Cir.1985) (“[W]here the administrative process does not address an earlier decision, but instead reviews the entire record in the new proceeding and reaches a decision on the merits, the agency has ... waived application of res judicata.“). At most, one circuit has included an unsupported statement in a footnote regarding administrative waiver. See, e.g., Mun. Resale Serv. Customers v. FERC, 43 F.3d 1046, 1052 n. 4 (6th Cir.1995) (stating, in footnote without citation to other authority, court would not recognize res judicata defense because defense was not invoked before agency).
In sum, the Secretary did not waive her issue preclusion affirmative defense by not raising it at the administrative stage;11
B. ISSUE PRECLUSION AND CHENERY
Next, Canonsburg argues that the district court violated the Chenery doctrine by considering the Secretary‘s issue preclusion defense even though issue preclusion was not raised during the administrative proceedings. We disagree.
In SEC v. Chenery Corp. (Chenery I), 318 U.S. 80, 63 S.Ct. 454, 87 L.Ed. 626 (1943), the Supreme Court explained that “the courts cannot exercise their duty of review unless they are advised of the considerations underlying the aсtion under review.” Id. at 94. When an agency action rests upon “an exercise of judgment in an area which Congress has entrusted to the agency ... the orderly functioning of the process of review requires that the grounds upon which the administrative agency acted be clearly disclosed and adequately sustained.” Id.; see also id. at 88 (“If an order is valid only as a determination of policy or judgment which the agency alone is authorized to make and which it has not made, a judicial judgment cannot be made to do service for an administrative judgment.“). The Supreme Court further elucidated the Chenery doctrine in SEC v. Chenery Corp. (Chenery II), 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947):
[A] reviewing court, in dealing with a determination or judgment which an administrative agency alone is аuthorized to make, must judge the propriety of such action solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency.
Id. at 196. Neither Chenery I nor Chenery II addressed judicial doctrines such as issue preclusion. The Court did explain, however, that Chenery applies to “a determination or judgment which an administrative agency alone is authorized to make,” Chenery II, 332 U.S. at 196 (emphasis added); in other words, to an agency‘s “exercise of judgment in an area which Congress has entrusted to the agency,” Chenery I, 318 U.S. at 94. Issue preclusion is not a determination specially entrusted to an agency‘s expertise; it is instead the sort of antecedent determination that a court usually makes. Simply put, Chenery does not apply to legal principles like issue preclusion. See Chenery II, 332 U.S. at 196; Chenery I, 318 U.S. at 94.
Our precedent is in accord. We have explained that Chenery only limits judicial review of “factual determination[s] or ... policy judgment[s] that [the agency] alone is authorized to make.” Shea v. Dir., Office of Workers’ Comp. Programs, 929 F.2d 736, 739 n. 4 (D.C.Cir.1991).12 In-
Canonsburg claims that the only recognized exception to the Chenery doctrine applies to the agency reaching a result mandated by statute but for the wrong reason. See United Video, Inc. v. FCC, 890 F.2d 1173, 1190 (D.C.Cir.1989) (“Hence, Chenery reversal is not necessary where, as here, the agency has come to a conclusion to which it was bound to come as a matter of law, albeit for the wrong reason, and where, as here, the agency‘s incorrect reasoning was confined to that discrete question of law and played no part in its discretionary determination.“). But Canonsburg fails to recognize that the court‘s consideration of a judicial doctrine like issue preclusion does not constitute an exception to Chenery—Chenery simply does not apply to the issue in the first place. See Horne, 684 F.2d at 158 n. 4 (“The rule established in Chenery only applies to agency actions that involve policymaking or other acts of agency discretion.” (emphasis added)).
In light of the Supreme Court‘s plain language in Chenery I and II, our own construction of the Chenery doctrine and no persuasive case law to the contrary, we conclude that the Chenery doctrine
C. EQUITABLE CONSIDERATIONS
Finally, Canonsburg argues that applying issue preclusion here is unfair to it. It maintains that equity strongly supports its position because the Secretary has allegedly engaged in a pattеrn of settling litigation challenging section 2534.5 at the district court level before we can rule on its validity.
“There is no general public policy exception to the operation of res judicata.” Apotex, Inc. v. FDA, 393 F.3d 210, 219 (D.C.Cir.2004); see also Federated Dep‘t Stores, Inc. v. Moitie, 452 U.S. 394, 401, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) (“There is simply no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata.” (internal quotation marks omitted)). We limit equitable exceptions to issue preclusion to certain limited circumstances, none of which applies here. First, we have explained that issue preclusion is inappropriate if there has been an intervening “change in controlling legal principles.” See Apotex, 393 F.3d at 219. Second, we havе recognized that issue preclusion would be unfair “if the party to be bound lacked an incentive to litigate in the first trial, especially in comparison to the stakes of the second trial.” Otherson v. Dep‘t of Justice, 711 F.2d 267, 273 (D.C.Cir.1983) (citing Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 333, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971)). In Yamaha, we clarified that, in weighing a party‘s incentive to litigate, we should be concerned with whether “the losing party clearly lacked any incentive to litigate the point in the first trial, but the stakes of the second trial are of a vastly greater magnitude.” 961 F.2d at 254. Similarly, application of issue preclusion is inappropriate if the “prior proceedings were seriously defective.” Martin v. Dep‘t of Justice, 488 F.3d 446, 455 (D.C.Cir.2007) (quoting Blonder-Tongue Labs., 402 U.S. at 333).
We have been reluctant to expand these equitable exceptions. For example, we have recognized that even a “patently erroneous” first judgment is insufficient to bar issue preclusion. Otherson, 711 F.2d at 277; see id. (“erroneous” first judgment does not demonstrate unfairness sufficient for court to decline to give judgment preclusive effect); see also City of Arlington v. FCC, — U.S. —, 133 S.Ct. 1863, 1869, 185 L.Ed.2d 941 (2013) (“A court‘s power to decide a case is independent of whether its decision is correct, which is why even an erroneous judgment is entitled to res judicata effect.“). And, if there is mutuality of parties in successive litigation, we explained that “courts should refuse to give the first judgment preclusive effect on grounds that the party lacked adequate incentive to litigate in the first proceeding only upon a comрelling showing of unfairness.” Otherson, 711 F.2d at 277 (emphases added) (internal quotation marks omitted). Thus, if the parties have the same incentive to litigate in both the earlier and the subsequent litigation, if there is no change in the controlling law and if there is no concern about procedural defects in the first litigation, the application of issue preclusion is unlikely to result in a “compelling” showing of unfairness to the party against which it is asserted. See, e.g., Venetian Casino Resort, LLC v. NLRB, 484 F.3d 601, 610 (D.C.Cir.2007) (“We can discern no difference between the incentives that the [plaintiff] may have had in its [earlier] litigation and its incen-
As the district court correctly concluded, Canonsburg‘s incentive to fully litigate the validity of section 2534.5 in Canonsburg I was at least equal to its incentive in Canonsburg II. See Canonsburg II, 989 F.Supp.2d at 19. In fact, the amount in controversy in Canonsburg I was over twice the amount in controversy in Canonsburg II. Compare Compl. ¶ 5, ECF No. 1, Canonsburg II, No. 1:09-cv-02385 (D.D.C. Dec. 17, 2009) (claiming $526,293 as amount in controversy), with Compl. ¶ 15, ECF No. 1, Canonsburg I, No. 2:00-cv-00284 (W.D. Pa. Feb. 11, 2000) (claiming $1,123,755 as amount in controversy).
Issue preclusion protects the functioning of the courts by promoting finality and avoiding the unnecessary expenditure of judicial resources, see Stanton, 127 F.3d at 78, regardless of the possibility that an agency decision might later be found to be superfluous.14 Canonsburg argues that Mercy Medical and Montefiore Medical are cases in which the district court found section 2534.5 invalid under the APA but the Secretary settled both before we could consider the merits of the Secretary‘s interpretation of the atypical services exception. Although we agree with the district court that the settlements have prevented a definitive resolution of the Secretary‘s interpretation of the atypical services exception in section 2534.5, we also agree that they are largely irrelevant to our issue preclusion analysis. See Canonsburg II, 989 F.Supp.2d at 29. First, Canonsburg itself chose not to appeal Canonsburg I to the Third Circuit so that its opposition to HHS‘s settlement practice rings hollow. Second, we have long recognized the public interest in, and importance of, settlement of litigation. See Am. Sec. Vanlines, Inc. v. Gallagher, 782 F.2d 1056, 1060 (D.C.Cir.1986) (“Few public policies are as well established as the principle that courts should favor voluntary settlements of litigation by the parties to a dispute.“); see also Williams v. First Nat‘l Bank, 216 U.S. 582, 595, 30 S.Ct. 441, 54 L.Ed. 625 (1910) (“Compromises of disputed claims are favored by the courts....“). Finally, the Secretary‘s decision to settle unrelated cases does not result in any particular harm to Canonsburg beyond the costs of this litigation.
For the foregoing reasons, we affirm the district court‘s grant of summary judgment to the Secretary.
So ordered.
KAREN LECRAFT HENDERSON
CIRCUIT JUDGE