# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2008 Decided May 12, 2009

No. 07-5345

H EARTLAND R EGIONAL M EDICAL C ENTER

, A PPELLANT

v.

K ATHLEEN S EBELIUS

, S ECRETARY OF H EALTH AND H UMAN S ERVICES

, A PPELLEE

Appeal from the United States District Court
for the District of Columbia (No. 00cv02802)

Michael B. DeSanctis argued the cause for appellant.
With him on the briefs were Donald B. Verrilli Jr.

, Michelle

A. Groman , and Christopher L. Crosswhite

.

Thomas H. Dupree Jr. , Deputy Assistant Attorney General, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Jeffrey S. Bucholtz

, Acting Assistant Attorney General, Jeffrey A. Taylor , U.S. Attorney, and Michael Jay Singer , Attorney. R. Craig

Lawrence , Assistant U.S. Attorney, entered an appearance.2

Before: G INSBURG , T ATEL and B ROWN

, Circuit Judges

.

G INSBURG

, Circuit Judge : In 2000 the Department of
Health and Human Services denied Heartland Regional
Medical Center status within th e Medicare program as a sole community hospital (SCH) for the years 1992 through 1999. HHS based its decision upon a 1992 regulation that provided a hospital located within 35 mile s of a “like” hospital could qualify as an SCH only if it was in a rural area. As a consequence of the denial, Hear tland received reimbursement
for less than the actual cost of the healthcare it provided to
Medicare beneficiaries duri ng those years. Heartland petitioned the district court for review under the Administrative Procedure Act, arguing the district court had vacated the rural location rule in 1998, wherefore HHS should have held a hearing to consid er the hospital’s fact-specific
claim to be an SCH. The di strict court granted summary judgment to HHS without deci ding whether the court’s 1998
decision had indeed vacated the rule. We conclude the 1998 decision did not vacate the rural location requirement and therefore affirm the judgment of the district court on that ground.

I. Background

Part A of the Medicare program “provides basic protection against the costs of hospital ... care” for the elderly and disabled. 42 U.S.C. § 1395c . A hospital that provides inpatient services to a Medicare beneficiary receives reimbursement under the Prospective Payment System (PPS), which pays a fixed amount regard less of the actual cost of the

care. Id. § 1395ww. Because a hospital may incur a loss
whenever it treats a Medicare beneficiary, the Congress,
concerned not to overburden a hos pital that is the only source of care in its vicinity, exempted “sole community hospitals”3

from the PPS: An SCH instead receives reimbursement for the actual cost it incurs in providing care to each Medicare beneficiary. See Clinton Mem’l Hosp. v. Shalala , 10 F.3d 854, 855–56 (D.C. Cir. 1993) (d iscussing both Congress’s “[a]ware[ness] that some hospi tals might not flourish” under the PPS and its decision to codify HHS’s exemption for SCHs). In 1992 the Medicare Statute defined an SCH as “any hospital ... located more than 35 road miles from another hospital ... [or one] that, by reason of [other] factors ... is the sole source of inpatient hospital services reasonably available to individuals in a ge ographic area.” 42 U.S.C. § 1395ww(d)(5)(D)(iii). An HHS regulation interpreted the other “factors” in such a way th at a hospital located within 35 miles of “other like hospitals” would be an SCH only if it was “located in a rural area,” 42 C.F.R. § 412.92(a) (1992), meaning “any area outside an urban area,” including any “Metropolitan Statistical Area (MSA) ... as defined by the Executive [ sic ] Office of Management and Budget,” id. § 412.62(f)(1)(ii)–(iii).

In order to apply for SCH status under the 1992 regulation, a provider would cont act its “fiscal intermediary,”
which would make a recommendation to the Health Care Financing Administration (HCFA), * id. § 412.92(b)(1)(i)–(v), the unit within HHS that administered the Medicare program pursuant to a delegation from the Secretary. The HCFA’s decision to disapprove a hospital’ s application for SCH status was subject to review by the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo(a) (1992); 42 C.F.R. § 405.1835(a) (1992).

* The HCFA is now known as The Centers for Medicare and
Medicaid Services. See Centers for Medicare & Medicaid Services; Statement of Organization, Functions and Delegations of Authority; Reorganization Order, 66 Fed. Reg. 35,437 (2001).4

Heartland Regional Medical Ce nter, which is located in St. Joseph, Missouri, applied for status as an SCH in 1992.
The HCFA denied Heartland’s application because Heartland is in an urban area, to wit, the St. Joseph MSA, and is fewer than 35 miles from the nearest like hospital. Heartland appealed to the PRRB, arguing HHS lacked authority to promulgate the rural location re quirement. The PRRB held it lacked jurisdiction to resolve this legal question and therefore granted the hospital’s request to seek direct judicial resolution of its challenge.

Heartland repaired to the di strict court, where it argued the rural location requirement was inconsistent with the Medicare Statute and, in any ev ent, HHS had not adequately explained why the requirement wa s appropriate. The district court disagreed on both those counts, Heartland Hosp. v.
Shalala , No. 95-951, slip op. at 15, 19 (D.D.C. June 15, 1998) ( Heartland I ), but it accepted Hear tland’s alternative argument that HHS had defined “u rban area” by reference to
the OMB’s definition of an MSA without adequately considering other approaches raised in public comments upon the proposed rule. The district court held that, because HHS had “fail[ed] ... to respond to reasonable alternative” definitions of an urban area, the rule was “invalid,” id. at 23– 24, wherefore the court “remande d [the rule] to [HHS] for action consistent with the [court’s] opinion.”

On remand HHS issued a notice of proposed rulemaking
to reconsider its decision to de fine “urban area” as an MSA.

See Proposed Rule: Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2000 Rates, 64 Fe d. Reg. 24,716, 24,732 (1999). Meanwhile, the HCFA reopened its adjudication of
Heartland’s claim to status as an SCH. After receiving further5

public comments in the rulemaking proceeding, HHS
considered the alternatives but decided to retain the rural location requirement and its MSA-based definition. See Final Rule: Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2000 Rates, 64 Fed. Reg. 41,490, 41,513–15 (1999). Shortly thereafter, however, the Congress amended the Medicare Statute to preclude HHS from mainta ining the rural location requirement. Consolidated A ppropriations Act, 2000, Pub. L. No. 106-113, app. F, tit. IV .A, § 401, 113 Stat. 1501, 1501A369 (1999). On August 31, 2000 the HCFA designated Heartland an SCH, effective as of January 1, 2000.

On September 6, 2000 the HCFA denied Heartland’s request that it be deemed an SCH for the years 1992 through 1999, giving three reasons. Firs t, the HCFA reasoned that the
court in Heartland I had not vacated th e rural location requirement but had merely remanded it to HHS to consider alternatives to defining “urban area” as an MSA; once HHS had duly considered and rejected the alternatives, the HCFA could lawfully deny Heartla nd’s application based upon the rural location requirement. The HCFA reasoned in the alternative that, even if the court in Heartland I did vacate the rule, the HCFA could, in adj udicating Heartland’s status, adopt the same rural locatio n requirement and apply it retroactively to 1992 based upon HHS’s reasoning in the 1999 rulemaking. The HCFA’s third reason for denying SCH
status was new: Heartla nd’s 1992 application had not adequately defined the hospital’s service area.

Heartland returned to the di strict court and filed both a motion to enforce the judgment in Heartland I and a challenge under the APA to the HCFA’s new decision. In the motion to enforce, Heartland sought reimbursement of its actual costs of care for Medicare beneficiaries, plus interest,6

for the years 1992 through 1999. The district court denied that motion, Heartland Hosp. v. Thompson , 328 F. Supp. 2d 8, 15 (D.D.C. 2004) ( Heartland II ), and we affirmed because
“even if Heartland I vacated the rural area requirement, the only obligation it expressly imposed on the agency was to
consider the two a lternatives suggested during the comment period,” Heartland Reg’l Med. Ctr. v. Leavitt , 415 F.3d 24, 29 (2005) ( Heartland III ).

In its APA challenge to the HCFA’s three reasons for denying it status as an SCH, Heartland argued the district
court in Heartland I had vacated the rural requirement and remanded the matter for HHS to develop the particular facts
relevant to Heartland’s claim to be an SCH. The district court granted summary judgment to HHS without deciding whether
it had in Heartland I vacated the rural location requirement, Heartland Reg’l Med. Ctr. v. Leavitt , 511 F. Supp. 2d 46, 52 (D.D.C. 2007) ( Heartland IV ), relying upon our statement in
Heartland III that “with or without v acatur, an agency that cures a problem identified by a court is free to reinstate the original result on remand,” 415 F.3d at 29–30. By considering alternatives in its 1999 rulemaking, HHS had cured the problem and thereby cleared the way for the HCFA to apply the rural location requi rement and deny Heartland’s application. Heartland IV , 511 F. Supp. 2d at 52–56. Heartland appeals that ruling, which we review de novo

. See Venetian Casino Resort, L.L.C. v. EEOC , 530 F.3d 925, 929 (D.C. Cir. 2008).

II. Analysis

Heartland contends that because Heartland I vacated the
rural location rule in force from 1992 to 1998 and HHS did not promulgate a new rural location rule until 1999, the HCFA retroactively applied a rural location requirement in7

the 2000 adjudication when it denied the hospital’s application for reimbursement as an SCH in 1992 through 1999. Although Heartland does not dispute that a principle announced in adjudication is necessarily retroactive, see Rivers v. Roadway Express, Inc. , 511 U.S. 298, 311–12 (1994); Goodman v. FCC , 182 F.3d 987, 994 (D.C. Cir. 1999), the hospital points out that the agency could not have applied HHS’s 1999 rule retroactively to deny Heartland’s application “unless that power [had been] conveyed by Congress in express terms,” Bowen v. Georgetown Univ. Hosp. , 488 U.S. 204, 208–09 (1988). Heartland asserts the Congress gave the agency no su ch power and therefore the HCFA had but two options on rema nd: It could have either (a) adjudicated Heartland’s application by reference solely to the statutory criteria in fo rce from 1992 through 1999, which
did not include a rural location requirement, or (b) adopted a rural location requirement, as a matter of statutory interpretation, and applied it retroactively through adjudication. In either event, Heartland argues, the HCFA should have permitted Heartland to argue against the adoption of a rural location requirement and to submit evidence related to its eligibility unde r the statutory crit eria. The HCFA’s refusal to permit the introduction of such argument and evidence was, according to the hos pital, “arbitrary, capricious, an abuse of discretion, or othe rwise not in accordance with law,” 5 U.S.C. § 706(2)(A). Heartland also raises procedural and substantive challenges to the HCFA’s alternative ground for denying its application, viz. , that the hospital did not properly define its service area.

HHS does not take issue with Heartland’s analysis of the options open to the HCFA on remand — assuming, as Heartland does, the district court in Heartland I vacated the8

rural location requirement. * Instead, HHS disputes that assumption. Citing Allied-Signal, Inc. v. United States Nuclear Regulatory Commission , 988 F.2d 146 (D.C. Cir. 1993), HHS contends the district court did not vacate the rule because vacatur of the regulation would have been contrary to this circuit’s precedent and unw arranted in light of the “prospect of the rule’s bei ng readopted upon the basis of a more adequate explanation of the agency’s reasoning,” Ill.
Pub. Telecomms. Ass’n v. FCC , 123 F.3d 693, 693 (D.C. Cir. 1997).

We agree with HHS that Heartland I did not vacate the rural location requirement. Th e hospital’s argument to the contrary is based upon the erro neous proposition that when a district court declares a regul atory requirement “invalid,” it thereby necessarily vacates the regulation in which that requirement is expressed. See Heartland I , slip op. at 24.

To determine the effect of the judgment in Heartland I

, however, we must look not only to the district court’s having declared the rural location rule “invalid,” but also to the nature of the flaw in the ag ency decision there under review, to circuit law governing the proper remedy for such a flaw, and to the remanding court’s analys is of that flaw, viewed in
the context of “the decision as a whole.” See Select Specialty Hosp. of Atlanta v. Thompson , 292 F. Supp. 2d 57, 68–69 (D.D.C. 2003). In Illinois Public Telecommunications Ass’n

v. FCC , for example, we granted the petition for review, stating only that “we remand this issue to the agency for further consideration.” 117 F.3d 555, 564 (1997). Upon granting the petitioners’ motion fo r clarification, we looked to

* HHS does not agree with Heartland, however, that any further proceedings were required before the HCFA could rule against Heartland’s application.9

the law governing remedies and explained that our prior judgment should be understood to have vacated the rule because the accompanying opinion indicated the agency had “little or no prospect” of curi ng the defect in the rule. See Ill.
Pub. , 123 F.3d at 693–94; see also Ill. Pub. , 117 F.3d at 564 (doubting agency had basis for factual conclusion it had adopted “cavalierly,” wit hout acknowledging contrary empirical evidence, and defended on reconsideration by stating only that it “disagree[d]” w ith contrary proposition).

When the district court decided Heartland I in 1998, the law of this circuit was (as it had been since 1993) that in deciding whether to vacate a flawed agency action, the district court should be guided by two pr incipal factors: (1) “‘the
seriousness of the ... deficiencies’” of the action, that is, how likely it is “the [agency] will be able to justify” its decision on remand; and (2) “the disruptive consequences of vacatur.” Fox Television Stations, Inc. v. FCC , 280 F.3d 1027, 1048– 49, modified on reh’g on other ground , 293 F.3d 537 (2002) (quoting Allied-Signal, 988 F.2d at 150–51); Ill. Pub. , 123 F.3d at 693–94 (applying Allied-Signal factors but also citing ABA House of Delegates R ec. No. 107B (ABA Report) (1997), which lists additional “factors to guide the court’s ... discretion”). Heartland mainta ins that, because the district court did not apply the Allied-Signal factors in Heartland I , it
must have intended to vacate the rural location rule. The Allied-Signal factors were well understood, however, when
the district court decided Heartland I . Because both factors unambiguously pointed to remand wi thout vacatur, and that is what the opinion, on its face, suggests, that is how the judgment should be understood.

The district court in Heartland I declared the rural requirement “invalid” solely be cause of “[t]he failure of [HHS] to respond to reasonable al ternative” ways of defining10

“urban areas,” slip op. at 23–24, and remanded the matter to HHS “for action consistent with the foregoing opinion,” which could only mean responding to those alternatives. When an agency may be able readily to cure a defect in its explanation of a decision, the first factor in Allied-Signal
counsels remand without vacatur. See La. Fed. Land Bank
Ass’n v. Farm Credit Admin. , 336 F.3d 1075, 1085 (D.C. Cir. 2003); Ronald M. Levin, “Vacation” at Sea: Judicial Remedies and Equitable Disc retion in Administrative Law , 53

D UKE L.J. 291, 379 (2003) (citing AB A Report and endorsing cases in which the “perception [that agency may be able to cure defect] tends to militate towards leaving the action in place while the agency addresses the deficiency”); ABA Report (“special circumstances ” justifying remand without
vacatur include “substantial lik elihood that the agency, after further consideration, will be able to remedy its error and reach a similar overall result on a valid basis”).

The second factor — the disruptive effect of vacatur — pointed in the same direction. Under the rule in effect from 1992 through 1998, Heartland and si milarly situated hospitals were not eligible for reimbursement as SCHs. See 42 C.F.R. § 412.92(a) (1992). Vacating the rural location requirement for eligibility likely would have required HHS to make payments to those hospitals for those years and for any subsequent years until the ag ency repromulgated the same rule and gave an adequate reason for rejecting the alternatives. Reinstating the same rule, how ever, likely would not have enabled HHS to recover paymen ts made for 1992 through the time of reinstatement, as is implied by the HCFA’s position in the order under review, viz.

, that if the court in Heartland I had vacated the 1992 rule, then the presumption against retroactive rulemaking outlined in Georgetown would have prevented the HCFA from applying the 1999 rule in order to deny Heartland’s application. Without deciding whether the11

agency correctly understood the st atute (as it then was) to preclude retroactive application of a rural location rule, we
think it sufficient for the purpose of the second Allied-Signal
factor that vacatur of the ru ral location requirement would have raised substantial doubt about HHS’s ability to recoup payments it made for years prio r to reinstatement of that requirement. See Georgetown , 488 U.S. at 207, 215 (rejecting HHS’s attempt, through promulga tion of a retroactive rule, to recoup payments made in respons e to vacatur of rule). In sum, both factors counseled remand without vacatur, and we
conclude that is what th e district court did in Heartland I

.

Heartland nonetheless insists th e court must have vacated the rule because it declared the rule “invalid,” but the terms
“invalid” and “vacated” are not synonyms. That is why we may label an agency’s action “invalid” even when we have remanded it for further proceedings without having vacated it. See In re Core Commc’ns, Inc. , 531 F.3d 849, 856 (D.C. Cir. 2008) (noting prior decision held agency rules were “invalid”
but “remand without vacatur left ... rules in place”). Nor are the concepts those terms denote inseparable. Thus, in Rodway v. United States Department of Agriculture , 514 F.2d 809, 813–14 (D.C. Cir. 1975), the agency failed to provide public notice and an opportunity for comment before it adopted regulations establishing an allotment system for the federal food stamp program and then issued the regulations without the “concise general st atement of their basis and purpose” required by APA § 4(c), 5 U.S.C. § 553(c). We held the regulation “invalid as promulgated.” Rodway , 514 F.2d at 817. In light of the “critical importance of the allotment regulations,” however, “we [did ] not order the regulations vacated pending” a curative rulemaking on remand. Id. As

Core Communications and Rodway illustrate, therefore, vacatur need not be the remedy fo r an invalidly adopted rule. Bearing in mind the differe nce between invalidity and12

vacatur, we do not believe the district court in Heartland I
used “invalid” to mean “vacated” when it reasoned that HHS’s procedural “failure ... to respond to [comments] ... render[ed] the adoption of the regulations arbitrary and capricious and, consequently, invalid.” Heartland I , slip op.

at 23–24.

Heartland points out that in the Georgetown case the Supreme Court used “inva lidated” as a synonym for “vacated,” 488 U.S. at 206–07, and cites Action on Smoking
& Health v. Civil Aeronautics Board , 713 F.2d 795 (1983) ( ASH ), because there we stated, “To ‘vacate’ ... means ‘... to make of no authority or validity,’” id. at 797. Neither case, however, tells us that when a c ourt declares a rule “invalid” because the agency’s explanation is inadequate, as the district
court did in Heartland I , it necessarily vacates the rule. Allied-Signal , which came after both cases but before
Heartland I , clearly indicates it does not.

In Georgetown the Court equated “invalidated” and “vacated” in discussing a district court’s decision setting aside a rule for which the agency had not gone through the notice and comment procedure required by the APA. 488 U.S. at 206–07. Similarly, in ASH we were interpreting an eponymous earlier decision, see 699 F.2d 1209 (1983), in which we had “clearly and unequivocally vacated ” a rule, 713 F.2d at 797, because the agency had published a “palpably inadequate” explanation devoid of “reasoning to support its
conclusion” and therefore failed to comply with the requirement that it provide a statement of basis and purpose when promulgating a rule, see 699 F.2d at 1217; see also 713 F.2d at 797–99 & n.2 (when “req uired explanation of the agency’s action is totally absent ,” vacatur is indicated lest remand invite “wholly post hoc rationalization”). Failure to provide the required notice and to invite public comment —13

in contrast to the agency’s failure here adequately to explain why it chose one approach rather than another for one aspect of an otherwise permissible rule — is a fundamental flaw that “normally” requires vacatur of the rule. See Sugar Cane Growers Coop. of Fla. v. Veneman , 289 F.3d 89, 97–98 (D.C. Cir. 2002). So too, when an agency’s explanation of the basis and purpose of its rule is so inadequate that the reviewing court cannot evaluate it, the regulation is subject to vacatur
under the first Allied-Signal factor. See Ill. Pub. , 123 F.3d at 693–94. Therefore, neither Georgetown , which involved a
rule vacated for want of an essential procedural safeguard, nor ASH , which involved an agency ’s failure to offer any
reasoned statement of the basi s and purpose of its action, suggests a court declaring “i nvalid” and remanding a rule with a defect that is likely curable necessarily vacates that
rule.

In sum, because all indications in Heartland I point toward remand without vacatur, we believe the district court left the “invalid” rural location rule in place pending a curative rulemaking. Because Heartland does not argue HHS
failed in 1999 to cure the de ficiencies identified in Heartland

I , it follows that in the 2000 ad judication the HCFA was “free to reinstate the original result” based upon that rule. See
Heartland III , 415 F.3d at 29–30 ; see also Fertilizer Inst. v.

EPA , 935 F.2d 1303, 1312 (D.C. Cir. 1991) (describing remand without vacatur as “allow[i ng] the [rule] to remain in place until” agency cures defect). Therefore, we do not reach Heartland’s various challenges to the HCFA’s adjudication of the hospital’s application for SCH status from 1992 through 1999, which challenges proceed from the premise that the
court in Heartland I vacated the 1992 rule.14

III. Conclusion

For the foregoing reasons the judgment of the district
court is Affirmed.