Catholic Health Initiatives v. Sebelius

INITIATIVES, HEALTH CATHOLIC al., Appellants

et SEBELIUS, Secretary, United

Kathleen Health and Department Of

States Services, Appellee.

Human 09-5377.

No. Appeals, Court

United States of Columbia Circuit.

District May

Argued 13, 2010. Aug.

Decided

Paul D. argued Clement cause him on the briefs were appellants. With Keough L. Harold Christopher J. Richards. Solet, Attorney, Depart-

Irene M. U.S. Justice, argued ap- ment of the cause was Michael pellee. With her on the brief Raab, Attorney. Kaersvang, Dana L. S. Lawrence, institutions, Attorney, Craig and R. Assis- classes of agencies, and ser- Attorney, appearances. entered tant U.S. ....” vices Id. regulations The describe reasonable SENTELLE, Judge, Before Chief costs as “related to the care of Medicare

BROWN, Judge, and Circuit beneficiaries,” 413.9(c)(3), § 42 C.F.R. and RANDOLPH, Judge. Senior Circuit “determined in accordance with regula- Opinion by for the Court filed Senior 413.9(b). tions,” § id. Reasonable costs Judge Circuit RANDOLPH. necessary include “all proper and costs incurred in furnishing” Medicare services. concurring judgment in the filed Opinion 413.9(a). § Necessary Id. proper and Judge BROWN. Circuit costs are those direct and indirect costs RANDOLPH, Judge: Senior Circuit appropriate “that are in helpful and devel- appeal from an This is order oping and maintaining operation granting summary judgment court district patient activities,” care facilities and and Secretary of Health and Human that are “substantially out of line with” Initiatives, Health Services. Catholic costs of similar institutions. Id. nonprofit corporation, charitable and a (c)(2). 413.9(b)(2), § group nonprofit hospitals of its affiliated issued Provider an action under the Medicare Act brought Reimbursement Manual. The Manual premiums to recover had contains “guidelines policies to imple paid malpractice, compensa- workers’ regulations ment Medicare which set forth tion, and other insurance. The principles for determining the reasonable paid premiums to First Initiatives In- provider services,” cost of but it “does not through surance Ltd. from 1997 have the regulations.” effect of Centers wholly Catholic Health owns Initia- First Services, for Medicare and Medicaid Pro tives, Cayman which is based in the Is- Manual, vider Reimbursement Part lands. Foreword, (“PRM”). at I The Manual general, In considers mal does bind Medicare’s “fiscal intermediar practice, compensation, workers’ and other ies”—private firms under contract with the liability premiums part insurance to be Secretary to provider review reimburse hospital’s “reasonable costs” incurred ment claims and determine the amount providing services to Medicare beneficia 1395h; § due. See 42 U.S.C. Yale-New such, ries. As the costs are reimbursable. Leavitt, Hosp. Haven v. The Medicare Act defines the “reasonable (2d Cir.2006); Mary St. Nazareth Hosp. cost of services” to be “the cost actual Schweiker, Ctr. incurred, ly excluding any part therefrom (D.C.Cir.1983).1 unnecessary of incurred cost found to be purchasing Rather than insurance delivery the efficient of needed health ser market, providers some Medicare have es- 1395x(v)(1)(A). vices....” companies— tablished their own insurance cost” “reasonable “shall be deter known “captives”—for purpose regulations mined accordance with es insuring against malpractice themselves tablishing the method methods to be used, included, certain other PRM and the items to be claims. determining types such costs for various 2162.2.A. If domestic 1395h; 413.24(f). replaced In fiscal intermediaries were See 42 U.S.C. 42 C.F.R. by "medicare administrative contractors.” recog- States classifications United

corporation, rating organizations. to those of other nized securities comparable charges are may include Additionally, the Manual states investments companies, is entitled to listed provider paying equity affiliated securities that the dividend paid the premiums exchange pro- stock reimbursement on a United States offshore, captive But the captive. equity Id. in se- vided that the investment reimbursement prohibits the percent not exceed 10 curities does do captive’s investments if the premiums assets, the company’s the admitted with rule: following the comply not with any specific equity in issue investment invest- captives, of offshore percent In the case limited to 10 of the total further (All by captive a related ments such equity security investment. risk invest- company are limited to low annually captives required submit in States dollars such ments United intermediary a certified designated to a by issued the United and notes bonds independent from an certified statement Government; is- debt securities States actuary attesting to public accountant or or by corporations States sued United non-compliance with compliance entities within United governmental previous pe- for the requirements these top in two classifica- rated States riod.) These investments cannot be recognized secu- by tions United States loans or used as collateral for pledged at the time of rating organizations rities by captive parties relat- obtained investment; foreign debt securities directly or indi- ed to the either corpora- of United States subsidiaries may be made in rectly, nor investments top rated in the two classifications tions organization. a related recognized securities by United States § Initiatives Insur- PRM 2162.2.A.4. First of in- rating organizations at the time satisfy requirements. these ance did parent where the United vestment During period contested it invested as (on guaranteed corporations States forty fifty percent much as of its assets securities) payment of the face of the equity securities. securities; deposits and subsidiaries’ noncompli- In light of First Initiatives’ Deposit) (including Certificates Manual, hospitals disal- ance with the foreign or their United States banks premium payments their on the lowed subsidiaries, foreign banks rated reports cost submitted to annual top two short term classifications intermediaries. 42 Medicare’s fiscal rat- recognized States securities United 405.1801(b)(1). C.F.R. ing organizations. Low risk invest- sought to recover then those ments also include investments of hearing § 2162.2.A.4 at a by challenging including for- non-United States issuers Re- before the Provider Reimbursement eign governments corporations Board, panel with au- view a five-member supranational agencies top rated affirm, modify, or reverse an thority to two States rec- classifications United intermediary’s decision. rating organizations ognized securities (h). (Here 1395oo(a), (d), interme- (effective made on or with investments merely diary accept decision was 10/11/91). after Effective for invest- pre- hospitals’ own disallowance of their 10/06/95, made on or after ments costs.) give the mium The Board must captive in- limitation on related offshore an in- “great weight,” but—unlike is extend- company surance investments by it. termediary—is not bound low ed to include the above described § 405.1867. top rated in the three C.F.R. risk investments decision, to two the Board to be consistent with both the Medicare In a three limitations in regulations-—was the investment statute and the Medicare held a “valid lawful, of the Manual were 2162.2.A.4 not whether the PRM regula- and the extension” of the statute was itself lawful.” Catholic Health Initia There- governing “reasonable cost.” tions Sebelius, F.Supp.2d tives v. majority provi-

fore the Board treated (D.D.C.2009). Granting summary judg Health “compulsory.” sion as Catholic Secretary, ment favor of the the court Co., Ins. Initiatives v. Mutual Omaha found Board’s adherence to the (Jan. 24, No.2007-D14 PRRB Decision interpretation Manual’s was “not plainly Decision”). 2007) (“Board majority erroneous or inconsistent with the statute that, in- captive unlike domestic explained regulation....” or the Id. at 123. companies, captives pres- surance Secretary in- The defends the Manual’s captives ent an “inherent risk”: “offshore on ground vestment limitations the foreign govern- are under the control of comprise the limitations an “interpreta- subject same ments and are not the 553(b)(A); § tive” rule. See 5 U.S.C. Am. insurers, regulation as domestic level” of Mining Cong. Safety v. Mine & Health regulated by the states. In which (D.C.Cir.1993). Admin., 995 F.2d 1106 As addition, percent equity the ten limit on it, Secretary puts “the cost of insur- “is in line with the asset allo- investments ance that Medicare is asked to among cations found domestic insurance can reimburse be considered ‘reasonable’ companies.” dissenting The two Board only premiums actually if those purchase believed that 2162.2.A.4 of the members Reliability coverage.” depends reliable on “appropriate applica- Manual was not an insurer,” “the financial soundness of the statutory tion of Medicare reasonable cost Appellee depends Br. of at on of link principles,” that it was “devoid competence regulator of the insurer’s regula- to the standards in the expressed pervasiveness regulations, of its tions,” justified and that it could not be rule, id. at 29-31.2 The “exempt an from the no- contends, is consistent with the statute and provisions tice and comment of the Admin- ” regulations, supported by substantial evi- Act.... The per- istrative Procedure ten dence, arbitrary capricious. and not Id. was, stated, cent the dissenters 14-17, at 28. example “why rulemaking pro- of hospitals dispute The each of these as- establishing cess is critical to standards They regu- such as those involved here.” sertions. claim that the rule lates insurance investment decisions and Catholic Health and the scope therefore lies outside the of the Sec- brought this action in the district court retary’s “reasonable cost” under Secretary’s delegate—the after the Admin- addition, In hospi- the Medicare Act. istrator of the Centers for Medicare and important premise tals believe that an of to review the Medicaid Services—declined majority wrong. the rule is The Board Board’s decision. captives believed that offshore “are not 1395oo(f); 42 C.F.R. 405.1877. The subject industry regu- to the same level of court the issue as “whether district viewed agencies by applied lations to onshore ruling—which the Board’s found the reim- companies.” Board Deei- expressed bursement standard the PRM State insurance assumption Secretary’s argument that the reason to doubt the at least as assumes insurers, applied heavily regulated company but we will make less an insurance is, nothing likely of this. the more it will fail. There submitted at the Manual are sufficient. There But the evidence sion at 6. the Board showed “that hearing question, before is an antecedent discussed equity in- the level of state dissenting Board members and raised— domestically cap- domiciled vestments although elaboration—by without much Br. essentially Appel- zero.” tives is hospitals. question is whether the fact, “only minority In lants Manual’s investment limitations for off- captive in- states—twenty-three—regulate is, captives shore as the con- all.” at 40. The surers at Id. tends, an “interpretive rule.” that the argue that to the extent Manual’s category To fall within the promote intended to limitations were interpretive, prop the rule must “derive a solvency of the off- strength financial existing osition from an document whose insurer, arbitrary limitations are shore meaning compels logically justifies un- because are both overbroad and proposition. The substance derived The limitations are over- derinclusive. proposition fairly must flow from the sub broad, instance, they permit because existing stance of the document.” Robert only in equity investments securities Rules, Anthony, “Interpretive” “Legis A. out pay point dividends. Yet the Rules, “Spurious” lative” and Rules: Lift many companies appear that that to be 1, ing Smog, 8 Admin. L.J. Am. 6 n. U. as dur- financially sound—such Microsoft (1994). fairly 21 If the rule cannot be seen years Google—do and ing the issue interpreting regulation, a or a statute pay The Manual’s investment dividends. (as here) enforced, and if it is “the rule is underinclusive, hospi- limitations are interpretive exempt not an from no claim, requirement tals no because there is rulemaking.”3 tice-and-comment Central captive diversify that a its investments. FCC, 205, Coop. v. 402 212 Tex. Tel. may Although equity no one investment (D.C.Cir.2005) (citing Syncor Corp. v. percent make than ten of a Int’l up cap- more (and Shalala, 90, (D.C.Cir.1997)); thus 127 F.3d 95 equity holdings per- tive’s one assets), Picciotto, nothing 345, cent of its total the United States v. 875 F.2d prevents having (D.C.Cir.1989); USDA, a from all 347-49 Hoctor v. instance, in, (7th Cir.1996).4 corpora- 165, 170 of its assets one 82 F.3d PRM tion’s bonds. See 2162.2.A.4. Although § 2162.2.A.4 of the Manual identify does not what it purporting is We do not decide whether interpret, the Manual’s Foreword claims Medicare Act’s cost reasonable rule, every that would rests on the percent authorize the ten or reasoning language whether in “reasonable cost” in the statute and evidence support enforcing regulations. of the Board’s decision and the But An- as Professor Act, contemplates legislative 42 The Medicare 'rule' that ... [both] 1395x(v)(1)(A), requires “reasonable cost” may interpret and [rules] 'law.' regula to "be determined with in accordance regulations at The EPA issue in Chevron establishing tions or methods to method U.S.A., Inc. v. Natural Resources Defense used, be and the items to be included....” Council, Inc., 2778, 467 U.S. necessarily This allows to con (1984), instance, interpret- 81 L.Ed.2d 694 regulations, appear strue her but it does not 'stationary ed the term source' in the Clean to allow to be based on a "reasonable cost” (and more). good a Air Act did deal Nor part regulation rule that is neither of a nor an say interpre- one there is clear 'line between interpretation regulation. of a policymaking.' Manning, John F. tation Rules, Texas, Nonlegislative 72 Geo. Wash. L.Rev. In Central 402 F.3d at we ac- (2004).” knowledged that the "APA's definition of record, written, agency legislating statute ticular thony has the relevant Henry vague “consists of or vacuous through rulemaking. should act J. equitable,’ ‘just Watchman, ‘fair and terms—such as Friendly, Night?, What reasonable,’ interest,’ public (1967). ‘in the in Benchmarks tooWe process announcing like—the and the that recognized have “numerical limits applications that specify propositions readily by judicial cannot be derived rea ordinarily is not one of inter- those terms soning,” although occasionally courts draw those terms in them- pretation, because such limits.5 Mo. Pub. Serv. Comm’n v. supply do not substance from which selves FERC, (D.C.Cir.2000). 1, 4 215 F.3d Our Lifting can be derived.” propositions statement in Missouri Public Service re at 6 n. 21. Smog, L.J. U. Admin. Am. USDA, lied on Hoctor v. opinion Paralyzed This court’s Veterans (7th Cir.1996). agen Hoctor held that an L.P., America v. D.C. Arena stated cy legislative performs function when it much same. (not makes but arbitrary “reasonable (D.C.Cir.1997). Paralyzed In support, sense) ‘arbitrary capricious’ rules Picciotto, Veterans cited United States that are consistent with the statute or in which the Park Service issued a case regulation under which the rules are pro specifying types property detailed rule it, mulgated but not derived from because Lafayette “may not be stored” they represent arbitrary choice among supposed- Park. 875 F.2d at 346. The rule A implementation. methods of rule that ly regulation allowing “addi- interpreted likely turns on a number is arbitrary conditions” to be added tional reasonable in this sense.” Hoctor cautioned The court held permits. to demonstration court did not mean “that an interpret “open- that the rule did not this rule can never have a compo numerical ended” and therefore could not at 171. Examples nent.” 82 F.3d in this because it was not issued after be enforced circuit Mining Congress include American 346, and comment. Id. at 349. notice Administration, Safety v. Mine & Health general principle against Another cuts (D.C.Cir.1993), 995 1106 Chipp and Secretary. Among things, other Leavitt, Dialysis ewa Services v. provides § of the Manual that 2162.2.A.4 (D.C.Cir.2007) (dicta). 172, “Espe an insurer’s “investments in cially scientific and other technical ar may paying equity include dividend securi- eas, quantitative where criteria are com on a stock ex- ties listed United States mon, general a rule that translates a norm change provided that the investment may justifiable into a number be as inter equity per- does not 10 securities exceed Hoctor, pretation.” 82 F.3d at 171. assets, company’s of the admitted cent The Hoctor court concluded that “[w]hen any specific equity with the investment in agencies arbitrary base rules on choices percent issue further limited 10 of the legislating, and so these rules are security equity Judge total investment.” legislative or require substantive and no that Friendly agency wrote when an wants terms,” tice rulemaking.” “in and comment Id. 170- principle to state a numerical par- that cannot be from a 2162.2.A.4 falls that terms derived Section within See, e.g., Thirty-Seven days completed United States v. Pho instituted within 14 with- tographs, 402 U.S. 28 days. reading held that The Court these (1971), a feder L.Ed.2d construed necessary time limits into statute was authorizing al the seizure and forfei statute being save it from declared unconstitutional imported ture of obscene materials to mean in violation of the First Amendment. judicial proceedings that forfeiture had to be Consistency may percent to the ten with the statute be respect category. With enough duly promulgated to sustain a rule give reasoned impossible limits “it is comment, just a hair after notice and as consis- just on between numbers distinction Clause, I, Art. just tency ones a hair with the Commerce of the line and the OK side 3, may enough § Pub. cl. be to sustain the side.” Mo. Serv. on the not-OK constitutionality of a But no one Comm’n, at 4. Here the Secre statute. instance, that the detailed attempt. say, would made has even Air Act were in- provisions of the Clean matter is that there is of the The short terpretations language of the of the Con- of “reasonable way interpretation no an true stitution. The same is here. the sort of detailed— produce can costs” § connection between 2162.2.A.4 of the set forth in rigid—investment code simply Manual and “reasonable costs” is essentially point 2162.2.A.4.6This is an represent interpreta- too attenuated to dissenting of the Board members. tion of those terms as used the statute Secretary authority to gives statute regulations. and the regulations defining “the promulgate used, concurring colleague agrees and the Our with us method or methods to be included, that 2162.2.A.4 cannot determining” items to be what of the Manual provider’s interpretation “reasonable sustained as a valid of “rea- constitutes 1395x(v)(1)(A). reading costs.” We sonable cost.”8 Based on her 42 U.S.C. assume, Guernsey Hospital, may deciding, without the Shalala Memorial (cid:127) Manual’s investment limitations are 514 U.S. S.Ct. 131 L.Ed.2d (1995), provi colleague put of the reasonable cost our does not her “extension” corresponding and the conclusion in those terms and then criti- sions this section regulation, majority thought, determining as the Board cizes us for that the Manual proper interpretive we assume that the limitations is not a rule. provisions, colleague’s approach with those rests on what we are “consistent” as Our argued. perceive misreading Guernsey. But neither as a At assumption point Supreme suggest leads to the conclusion no did the Court an in that represent interpretive the Manual’s limitations rules do not have to inter- terpretation presented. of the Medicare Act or of the was not pret. issue Hoctor, regulations. Guernsey simply recognized partic- 82 F.3d at 170.7 that a court, might Writing Judge a 6. It have been closer case if the 167-68. for the Posner eight-foot held that if ... rule premi- “[e]ven Manual had indicated that with, consistent even some sense author- paid financially captive ums to unstable off- by, structural-strength regulation, ized it (or domestic) companies shore insurance do necessarily would not follow that it is an represent But “reasonable costs.’’ interpretive only rule. is that if it can be It 2162.2.A.4 of Manual embodies "flat’’ “ regulation by process derived from rea- rule, is, and the 'flatter' rule the harder it Id. at sonably interpretation.” described as merely spelling is to conceive of it as out what regula- latent in a is in some sense statute or Hoctor, tion. ...” 82 F.3d at 171. 8.Thus we are told that the “investment re- clearly strictions in the outside Manual Department Hoctor analyzed whether a U.S. Secretary's authority scope” of the “to [the] Agriculture requiring a fence of at cost',” Concurring Op. define the 'reasonable lions, eight tigers, 501; least to enclose feet at that there is no "nexus” between id.; cost,” leopards interpretation was of a an provision and “reasonable providing “any that had to be of “rigid” the enclosure rule in the Manual that the lacks “ strength appro- and of such 'reason- “such material rational connection” to statute's 498; id. at principle,” priate at and so forth. for the animals involved.” able cost’ it delegated by Congress.”); “a than that in the Manual constituted provision ular Dir., an example of Bank v. prototypical Transohio Sav. Office of rule,” something at id. Supervision, 967 F.2d Thrift provision we (D.C.Cir.1992) (“It cannot be said about is central to the real have in front of us. meaning of the rule of law ... that a agency power federal does not have the given, judgment

For the reasons statute, Congress, by act unless has em- remand the district court is reversed. We so.”). powered agency it to do an When court with instruc- the case to district beyond delegated authority, a has acted its the decision of the Pro- tions to set aside court reviewing will hold such action tiltra Reimbursement Review Board and vider vires, Transohio, the district court for such other relief as or in view of this decision. appropriate deems violation the Administrative Procedure 706(2)(C) (APA), Act (directing So Ordered. to “hold courts unlawful and set aside BROWN, Judge, concurring Circuit ... agency statutory action excess of judgment: limitations, jurisdiction, authority, or statutory right”). short of 2162.2.A.4of the The court holds section Man- Secretary’s Provider Reimbursement Congress delegates authority agen failed ual is invalid because through legislation, cies and we therefore notice-and-comment promulgate agency’s enabling look to the statute to The court thus leaves the rulemaking. determine whether it has acted within the Secretary to open promulgate door for the authority of its overstepped bounds provision restricting the in- identical Faculty them. See Univ. the D.C. a provider’s vestment decisions of Responsibility v. D.C. Fin. & Ass’n/NEA company as a full- Auth, Mgmt. Assistance deeper rule. But a flaw runs fledged (D.C.Cir.1998) (explaining ultra vires claim through provision the Manual that cannot requires statutory the court to review lan procedure: more it exceeds be cured in guage “Congress to determine whether Secretary’s authority under the Medi- [agency] power tended the to have the to determine the “reasonable care statute [acted]”). it exercised when it The Secre providers for which are reimbursed. cost” defends the Manual as with Accordingly, I would close the door left in her under 42 U.S.C. enticingly ajar by the court and hold the 1395x(v)(1)(A), provides: beyond invalid as any The reasonable cost of services shall Secretary’s authority. incurred, actually excluding be the cost any part therefrom of incurred cost I unnecessary found to be in the efficient Catholic Health Initiatives and its affili- services, delivery of needed health (the hospitals) challenge the ated shall be determined accordance with exceeding Secre- regulations establishing method or tary’s authority under the Medicare stat- used, methods to and the items to be principle ute. It is a cardinal of adminis- included, in determining such costs for agency may only trative law that an act institutions, types various classes pursuant authority delegated to to agencies, and services.... Congress. Lyng Payne, v. 476 U.S. Secretary 926, 937, argues, and the 90 L.Ed.2d 921 (“[A]n (1986) agree, no that she has considerable discretion agency’s power greater to tice compensation under this section define what “reason and workers’ Manor, Richey are, able cost” means. See Inc. matter, general necessary as a (D.C.Cir. Schweiker, proper furnishing costs of health services 1982) (“It Congress established that is well Br. Appellee’s Medicare beneficiaries.” Secretary granted the broad discretion to Nevertheless, at 23. if a provider’s off- develop concept, the ‘reasonable cost’ sub captive just shore fails observe one of course, ject, general standard restrictions, the three investment the Sec- enunciated retary provider’s disallows 100% of the 1395x(v)(1)(A).”). However, the Secre premiums. hospitals disagree over arising The absurd results from in- permis is a whether the vestment restrictions’ blanket disallowance sible exercise of that discretion. easy grasp. example, rule are For if a provision, The Manual which the court provider’s captive offshore insurer invest- full, quotes places specific three invest- equity ed in ten dividend-paying securities captives”: ment restrictions on “offshore listed on a exchange, United States stock (1) captive seeking an offshore to invest its placing security, 1% of its assets in each assets must invest 90% or more of them in Secretary provid- would reimburse the investments,” “low risk defined to include er for all premiums paid to the captive. bonds, categories government certain But if captive insurer invested 1% (2) securities, debt and bank deposits; an paying equity eleven divided U.S. securi- captive may offshore invest 10% or less of ties, Secretary would refuse paying equity its assets “dividend secu- to reim- rities listed on a United burse provider single penny States stock ex- for a of its (3) change”; and captive Likewise, must premiums. captive if the invest- limit equity its investment in one issue ed 98% of its assets in what the Manual captive’s equity security 10% the total defines as “low risk investments” but investment. Manual ch.21 2162.2.A.4. placed 2% of its in a single assets U.S.- Secretary will consider the insurance listed equity security, would provider pays cap- its offshore deny any reimbursement. inAnd both of company tive insurance to be “reasonable illustrations, these Secretary’s reim- costs” reimbursable under the Medicare bursement change decision would not even program only if captive satisfies all if the remained and paid solvent But, three investment restrictions. as the substantial provid- claims on behalf of the hospitals argue persuasively, none of the er. comfortably, restrictions fits plau- or even When the rig established sibly, within plain meaning of “reason- all-or-nothing approaches id to reimburse able cost.” 1395x(v)(1)(A), ment under section this rejected court and others have them as II lacking any rational connection to “reason First, the investment restrictions exceed See, e.g., ableness.” Mary St. Nazareth “reasonable cost” Schweiker, Hosp. Ctr. v. 718 F.2d 467 because cause a blanket disallowance (D.C.Cir.1983) (rejecting Manual section of a provider’s reimbursement of insurance 2345 practical purposes because “for all premiums, though liability even insurance mean [it] would would not coverage generally is allowable cost of at all be reimbursed for the costs of ren provider’s program. Medicare The “[tjhere Secretary freely dering patients special care to Medicare admits is no dis- pute that purchasing malprac- ridiculous, the costs of care units. This result is con- majority patients.” to the of its provider of 42 U.S.C. trary to the letter 1395x(v)(1)(A)....”); L.A. v. County § Manual ch.21 2104.3.C. The (9th Cir.1992) Sullivan, 735, 741 explanation why no credible reim- has limita the 100% that “because (explaining premiums bursement of insurance should reimbursement unnecessarily restricts tion differently. any be treated to Medicare ancillary provided services for The investment restrictions also do not that it contravenes we hold patients, in accurately actually reflect the “cost statutory requirements that the by provider curred” at the time it sub their reason reimburse premiums mits the insurance to its off patients’ and not shift Medicare able costs 1395x(v)(1)(A) shore Section captive. the hos patients costs non-Medicare “[t]he states reasonable cost ser themselves”); Inc. v. Hosp., Nw. pitals actually vices shall be the cost incurred.” (7th Corp., 687 F.2d Hosp. Serv. 1395x(v)(1)(A) (emphasis add Cir.1982) disallowance (holding “blanket ed). provider obtaining A incurs the cost of expense ... is related-party interest liability coverage insurance when it sub language than either the broader premiums captive. mits statute can be of the Medicare purpose Regardless of whether or how the offshore govern construed to authorize [where] expense gener captive subsequently premiums interest invests the ment concede[d] ally part to be of the ‘reason regardless considered the captive whether ever services”); providing cost’ of Medicare able claim, pays “actually the provider has Bow Health Serv. v. see also Samaritan providing incurred” cost of services to (D.C.Cir.1987) en, 1524, 1531 patients pays Medicare at the moment it 1395x(v)(1)(A), (noting that “[u]nder premiums. Secretary’s The reim for reim provider’s request sanction for [a bursement for the “reasonable cost” of the non- ‘high bursement costs’ would be of] liability insurance therefore provider’s unduly high por for the reimbursement paid, be a function of the premiums should fee”). tion, whole not denial for the coverage cap not of the the offshore investment restrictions section may eventually provide. tive Secre Manual are no less harsh 2162.2.A.4 of the tary’s investment restrictions thus are an than the blanket disallowances struck provider’s inaccurate measure of the cost exceeding prior down decisions “actually obtaining incurred” in authority un “reasonable cost” coverage captive and ex from its offshore 1395x(v)(1)(A). der section ceed her under section that the Secre The Manual itself reveals 1395x(v)(1)(A). the stark difference be appreciates principle explored extensively This was applica tween a blanket disallowance and Secretary, a number of courts after the 1395x(v)(1)(A)’s“reasonable tion of section 1979, promulgated a new instance, in disallow principle. cost” For calculating providers’ reimbursement of luxury items or ser ing reimbursement of (the Mal malpractice insurance vices, the Manual instructs that once the Rule). Menorah practice Med. Ctr. intermediary luxury concluded a item (8th Cir.1985). Heckler, to a patient, or service was furnished successfully challenged the Mal Providers be reduced “allowable costs must practice many Rule before courts as ex luxury between the costs difference Secretary’s authority under ceeding the actually items or services furnished 1395x(v)(1)(A). See, e.g., at 296 section id. of the usual less ex the reasonable costs prove sys- “a by (noting could pensive items or services furnished reimbursing malpractice premiums statutory obligation to reconcile the tem of solely proportion malprac on the based to reimburse costs with reasonable accurately premium will reflect obligation prevent tice losses related to cross-subsi costs”); County Hosp. Mem’l v. dization between Medicare and non-Medi Bedford Servs., 769 F.2d Health & Human care patients. See id. at 799-800. Cir.1985) (4th (holding the Mal Recognizing the tension between section contrary 1395x(v)(1)(A)’s Rule to section practice reasonable cost 1395x(v)(1)(A) “[b]y basing because reim requirements, cross-subsidization we re solely malpractice bursement of costs on manded the to case the district court be history, has failed loss agency cause the had failed to consider expenses, take account of administrative an alternative to the Malpractice Rule— disproportionate share of which will be separate pools of risk for Medicare and by borne non-Medicare under the patients patients—that might non-Medicare more Secretary’s system”). accurately reflect the actual Medicare by providers. costs incurred Id. Rule,

In striking Malpractice down the However, required 802-03. we still explained one court perceptively why the Secretary’s approach to be consistent Secretary’s approach to reimbursement with both the reasonable cost and cross- prin- was inconsistent with insurance cost requirements, subsidization and with the ciples: Malpractice Rule “[T]he violates purpose fairly ultimate reimbursing [by] Act failfing] recognize Medicare hospitals for their Medicare-related insur malpractice protects against insurance premiums. ance See id. at (noting if provider the risk of future loss. Even Secretary’s interpretation of the Medicare malpractice has never incurred actual losses, deny hospitals statute to “some of their example, purchase it must still premium arbitrary costs” was not malpractice and ca insurance because of the risk pricious “paying because the percentage that losses will be incurred in the future.” Heckler, reflecting losses from Hosp. St. James v. Medi (7th Cir.1985). care patients long would run fairly The court noted that compensate the insurance companies for carrying malpractice “[t]he them expenses, and cost, fairly must be thus would re deemed reasonable Medicare, imburse the necessary thus ex regardless reimbursable penditures”). hospital of whether a paid one dollar or one million in malpractice dollars claims Rule, In contrast to the Malpractice five-year over the relevant period.” Id. investment blatantly restrictions here con Thus, the extent Malpractice “[t]o that the 1359x(v)(1)(A) travene section by prevent costs, Rule does not reimburse these ... it ing from obtaining any reim violates the Medicare Act’s mandate that bursement of their insurance premiums, providers are government entitled to reim- while at forcing the same time hospi bursement for the ‘reasonable cost’ of the patients tals’ non-Medicare pay all of they provide services pa- for Medicare purchasing the cost of liability insurance tients.” Id. coverage for patients, thereby Medicare 1395x(v)(1)(A)’s violating

When we section challenge prohibi considered a Rule, Malpractice tion on cross-subsidization. we were more cautious The courts than many Malpractice courts. that found the proble See Walter O. Bos Rule Heckler, Hosp. undoubtedly well Mem’l matic would be even more (D.C.Cir.1984). recognized We troubled section 2162.2.A.4of the Man Malpractice required Rule the Secre- ual attempt fairly since makes no in ly coverage reliable for the purchase for ob- provider’s costs approximate Unmasked, coverage providers.” if the offshore Id. at 23. insurance sured taining one or comply however, to with Secretary asserting has failed is section captive 1395x(v)(1)(A) investment restrictions. more of the permits micromanage her to cap of offshore the investment decisions Furthermore, utterly Secretary has insurers, despite expertise her lack of tive for why it is unreasonable explain failed to strategy either investment insurance. coverage purchase to provider Ctr., Mary Hosp. Nazareth See St. that fails to in- captive offshore from an (declining to to defer Secre according Secretary’s to the mandate. vest tary’s statutory interpretation announced fund hedge not have to be a One does extremely provision agency’s exper recognize may be where manager to to one’s assets as implicated). un reasonable invest tise was not The Medicare cap- A provision. grants Secretary authority dictated statute to insurer, prudent like other inves- tive program administer a reimbursement for tor, adjust investment may need to its providers, authority not to establish given year in a to multiple times portfolio management program investment for ven market conditions. changing respond unsurprising dors. It is then that year a wise investment one may be What Secretary’s interpretation is far afield If it often foolish the next. is may be Congress’ from intent for section captive to in- for an offshore reasonable 1395x(v)(1)(A) providers’ to meet actual to the investment contrary its assets vest costs, indirect, providing direct and both then provision, in the Manual restrictions patients. S.Rep. services to Medicare See provid- for a hardly it can be unreasonable (1965), reprinted No. 89-404 in 1965 And pay premiums captive. er (June 1965) U.S.C.C.A.N. note, not Medicare does as the (“The payment in the bill for providers malpractice for reimburse the reasonable cost of services is intended claims, every incen- providers so the have costs, widely actual however to meet the from the involve- apart tive vary one to an they may from institution coverage from they receive ment to ensure other, except particular where a institu alignment of in- insurers. The close their substantially tion’s costs are found be captive and its provider terests between of line with those of institutions similar out only adds to this incentive. The insurer services, utilization, size, scope provider punishing senselessness factors.”). other relevant its offshore the investment decisions of by the irra- sum, insurer is underscored although In nature of the investment restrictions tional authority under section broad 1395x(v)(1)(A) themselves. “reasonable to define the unlimited, cost,” this is Secretary’s primary justification in the Manual the investment restrictions they necessary are the restrictions is scope. its clearly outside maintain suffi- captives to ensure to determine require This case does not us on pay future claims be- cient reserves the outer limits of the Secre what Appellee’s providers. half of Medicare authority. pro the Manual tary’s Because argues, Br. “On at 23-24. nexus with the vision has no discernible level, premium] very practical [insurance reim Secretary’s authority to determine paid if in line those costs—even with under of “reasonable costs” other, be bursement similarly providers—can situated 1395x(v)(1)(A),it invalid. actual- only ‘reasonable’ section considered III support dence what appears Manual, that even then [she] couldn’t The court’s raises several issues opinion promulgate this rule? First, warranting response. because the exceeds the ... Secretary’s Counsel: That position is both our and, indeed, authority, and, we need not should obviously, logical import the provision address whether should position. our through passed have been notice-and-com- Arg. Oral Recording at 11:21-40. rulemaking. ment The court describes the hospitals paid The premi the insurance issue notice-and-comment as “antecedent” ums for they seek reimbursement question Secretary’s to the of the statutory during the period from 1997 to 2002. The authority, Maj. Op. at 494. Not so. Where hearing Board conducted a hospi on the the agency statutory has acted outside its appeal tals’ intermediary’s from the denial authority, notice and comment is no cure of reimbursement in 2004 but did not issue 937, Lyng, for the disease. at See U.S. its decision until 2007. The district court 2333; Transohio, 106 S.Ct. 967 F.2d at issued its decision 2009. It is time for contrast, 621. In holding that the agen- this dispute to end. Fortunately for the cy has statutory authority exceeded its hospitals, the opinion court’s should allow negates any need to delve into the notice- quick resolution of their reimburse and-comment issue. See Am. Bus Ass’n v. claims, since, ment even the investment Slater, (D.C.Cir.2000) 7-8 passed restrictions are through notice-and- (“Because we agency] [the hold had no procedures, comment will be authority promulgate rule apply unable to retroactively them instance, first the Court it finds unneces- hospitals. See Bowen v. Georgetown Univ. sary to up [appellant’s] take notice-and- Hosp., 208-213, 488 U.S. comment claim. agency has exceeded (1988) 102 L.Ed.2d 493 (holding Sec scope authority of the delegated retary authority lacks under section by Congress, and it matters not that 1395x(v)(1)(A) to promulgate cost-limit adhered to the procedural require- APA’s effect). rules with retroactive Neverthe so.”). in doing ments Thus it point- was less, good there is no reason for the court less for to argue the Manual give the Secretary the opportunity to passed should have been by no- prospectively promulgate a imple tice-and-comment rulemaking when it menting precisely the same restrictions plainly Secretary’s exceeded the authority. when she has offered no basis to believe explains why This raised the statutory her reaches far notice-and-comment single issue foot- place. PIA-Asheville, the first brief, note of their Inc. v. opening Appellants’ see Bowen, (D.C.Cir. it, Br. at 32 n. or as the court describes 1988) elaboration,” (noting “without much “the Maj. Op. at offers no new 494, while devoting justification the lion’s substantive share of their for his erstwhile briefs to challenging policy, statu- but instead claims that the exis tory authority. And counsel for hospi- tence of the new incorporating tals confirmed position this was their that policy change should our view” and oral argument: rejecting argument this where court had your position prior Court: So held in is that if decision that policy violat Secretary] gone through

[the had ed the statutory requirement to reimburse costs). notice-and-comment rulemaking Instead, and reasonable we should do received whatever ordinarily substantial evi- as courts do and answer the “just [vague] us— tions of terms parties put [such have before question ordinarily would re- is not one of inter reasonable”] since that answer particularly in dispute good. pretation, for because those terms them solve this supply selves do not substance from which Second, opinion may the court’s cause Maj. can be derived.” propositions the consequences and unwelcome unintended (internal Op. quotation at 495 marks omit le by calling question procedural into the ted). perspective But this fails to account in the many provisions of other gitimacy way complex regulatory regimes for Guernsey In v. Memori Manual. Shalala really Medicare work. The Secre such as Hospital, Supreme Court affirmed al hybrid rulemaking on a and relies Secretary’s pro to use of the Manual adjudication'—an by approach approved providers to and intermedi guidance vide Guernsey. in 514 at the Court See U.S. aries, describing interpretive its rules as (“The 96-97, APA 115 S.Ct. 1232 does not for the com part of “a sensible structure require specific applications that all the process,” plex Medicare reimbursement further, by a rule evolve precise more 87, 101, 131 514 U.S. S.Ct. adjudication. by rules rather than (1995). noted, As we have L.Ed.2d 106 Secretary’s determining mode of benefits Guernsey explained Court is, adjudication rulemaking both statutory duty promul “does not have a to view, proper our exercise of her statuto every that con gate regulations ‘address mandate.”). ry Interpretive rules are the question process ceivable in the of deter glue regulatory that holds this structure Eather, mining equitable reimbursement.’ together. Secretary’s administration ‘particular reimbursement details not program frequently of the Medicare calls by’ regulations, Secretary] [the addressed for specific applications vague statutory adjudi properly upon ‘relies an elaborate terms, cost,” and, including “reasonable right cative structure which includes the ” noted, agency may we have “an use review Tenet Health- [Board].’ interpretive vague rule transform stat Systems HealthCorp. Thompson, utory duty or right sharply into delineat (D.C.Cir.2001) (quoting duty right.” Co-op., ed Cent. Tex. Tel. 1232). Guernsey, 514 U.S. (D.C.Cir. FCC, Inc. v. opinion ignores Guernsey's The court’s (“[A]n 2005); also see id. provision test for whether a Manual must parrot statutory regu does not have to promulgated by be notice-and-comment latory language but have the effect rulemaking. Guernsey, 514 U.S. at duties.”). creating new “APA (noting 115 S.Ct. 1232 rulemak- the court’s By ignoring principles, these required still ing [the would opinion question many pro calls into other provision] adopted position a new inconsis- See, e.g., Manual. visions Secretary’s existing tent with of the (“An exception ch.2 215.1 to this limita regulations provision] the Manual [but permitted tion when the debt cancella change does not ... a substantive effec[t] percent tion costs are less than 50 of the (internal regulations”) quotation in the omitted). amount of interest cost and amortization Moreover, marks the court fails that have been allowable in expense would identify limiting principles by clear that had the indebtedness not been period providers can dis- cancelled, case, in which the full amount section 2162.2.A.4 from tinguish Manual incurred.”); instance, period will be allowable For provisions. other Manual ch.21, (establishing states, id. 2162.5 10% test process court of an- “[T]he determining relating when losses nouncing propositions specify applica- costs); are allowable insurance deductible (“The ch.21, § allowance for id. 2109.2.D The investment restrictions in the Man associations

membership professional beyond ual is limited continuing medical education because have no connection percent actual cost or 5 to the lesser of language to the “reasonable cost” in section Compensation applicable [Reasonable 5x(v)(1)(A) 139 of the Medicare statute. amount.”); id. ch.22 Equivalent] base I would hold the invalid on (establishing specified per- 2208.1.E basis alone. per diem method cost centages for hos- as 93% for short-term apportionment long-term hospitals);

pitals and 98% (“A § 2202.7.II.A.5 minimum

id. ch.22

nurse-patient ratio of one nurse to two per patient day must be main-

patients ...”).

tained. explained

As the counsel “Guernsey ... during argument, oral INTERSTATE NATURAL proposition stands for the the techni GAS ASSOCIATION OF specifics application cal of the of the broad AMERICA, Petitioner appropriately Medicare standards are re adjudication by through agency solved guideline as a tool....”

with the Manual FEDERAL ENERGY REGULATORY In Arg. Recording light at 21:22-51. Oral COMMISSION, Respondent Guernsey’s endorsement of the Secre Energy Resources, LLC, Nextera tary’s “sensible structure” for administer al., et Intervenors. ing program, the Medicare courts should possible tinkering refrain as much as from 09-1016, 09-1024. Nos. regulatory with this framework. Nat’l Enters., Shalala, Med. Inc. v. Appeals, United States Court (D.C.Cir.1995) (deciding Manu District Columbia Circuit. al section “provide[d] three- Argued April part guide allocating costs to routine or ancillary centers” was an Aug. Decided requiring rather than a substantive rule comment); Sentara-Hampton notice and Sullivan, Hosp. v. 759-

Gen. (D.C.Cir.1992) curiam) (per (holding provision subject to notice- rulemaking). Invalidating

and-comment exceeding

the Manual the Sec

retary’s authority thus is less intrusive declaring

than must en

acted, all, by if at notice-and-comment

rulemaking. approach The first affects

only the investment restrictions while the upon procedural

second casts doubt

legitimacy of the Manual as a whole.

Case Details

Case Name: Catholic Health Initiatives v. Sebelius

Court Name: Court of Appeals for the D.C. Circuit

Date Published: Aug 13, 2010

Citation: 617 F.3d 490

Docket Number: 09-5377

Court Abbreviation: D.C. Cir.