Opinion ID: 209692
Heading Depth: 2
Heading Rank: 1

Heading: The Regulation Is Invalid

Text: The central question is whether or not the Nonreconciliation Regulation is valid. The Supreme Court instructs that a reviewing court has no business rejecting an agency's exercise of its generally conferred authority to resolve a particular statutory ambiguity simply because the agency's chosen resolution seems unwise. ... United States v. Mead Corp., 533 U.S. 218, 229, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). The seminal decision governing how federal courts should evaluate the propriety of an agency's regulation is Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). The Chevron Court established a two-step framework for determining the validity of an agency regulation. See Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778; see also Sears v. Principi, 349 F.3d 1326, 1328 (Fed.Cir.2003). In the first step, a court must ask whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. If the statute is ambiguous, the court should proceed to step two and ask whether the agency responsible for filling a gap in the statute has rendered an interpretation that `is based on a permissible construction of the statute.' Koyo Seiko Co. v. United States, 258 F.3d 1340, 1346 (Fed.Cir.2001) (quoting Chevron, 467 U.S. at 843, 104 S.Ct. 2778). We conclude that Congress has not directly spoken to the precise question at issue here. Identifying the precise question at issue is a necessary prerequisite to determining whether or not Congress has directly spoken on it. In this case, the precise question is: is OPM required to engage in reconciliation as part of its current rate-setting process, even in the Final Year of its relationship with a given carrier? The statute5 U.S.C. § 8902is silent on this question. The law does not mention reconciliation at all, much less reconciliation in the Final Year. The only relevant direction Congress gave on this point was that [r]ates charged under health benefits plans ... shall reasonably and equitably reflect the cost of the benefits provided. 5 U.S.C. § 8902(i). Section 8902(i) is not ambiguous. Congress was clear when it said that rates should reasonably and equitably reflect the cost of the benefits provided. Yet the statute does not clearly and unequivocally answer the question at hand, i.e., whether OPM is required to perform reconciliation in the Final Year. Because that question cannot be resolved by referring to the statute alone, we must proceed to step two. Is the Nonreconciliation Regulation based on a permissible construction of the statute? Chevron, 467 U.S. at 843, 104 S.Ct. 2778. With respect to the setting of rates, the statute contains broad, aspirational goals, but no detailed requirements. Thus, Congress has explicitly left a gap for [OPM] to fill, intending that OPM elucidate a specific provision of the statute by regulation. Id. at 843-44, 104 S.Ct. 2778. The import of that is that any ensuing regulation, including the Nonreconciliation Regulation, is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute. Mead, 533 U.S. at 227, 121 S.Ct. 2164. The regulation at issue here is invalid both because it is contrary to the statute and because it is arbitrary and capricious.
The Nonreconciliation Regulation conflicts with 5 U.S.C. § 8902(i). When a regulation directly contradicts a statute, the regulation must yield. Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81, 86, 122 S.Ct. 1155, 152 L.Ed.2d 167 (1997) (A regulation cannot stand if it is arbitrary, capricious, or manifestly contrary to the statute.); Mead, 533 U.S. at 227, 121 S.Ct. 2164. We first briefly reiterate the broader rate-setting framework that OPM has constructed. Congress' charge vis-à-vis rate-setting was to command that rates shall reasonably and equitably reflect the cost of the benefits provided. 5 U.S.C. § 8902(i). We infer that OPM designed its rate-setting mechanism with Congress' command in mind. The process OPM devised includes the pre-contract year estimate of SSSG rates, and then (in all but the Final Year) the mid-contract year reconciliation. The carriers are not challenging this overarching rate-setting structure. See Appellees Texas Health Choice, L.C. and Scott & White Health Plan's Br. at 18. We need not evaluate the propriety of that larger system here. The sole question before us is whether the Nonreconciliation Regulation is valid. That question cannot be answered without viewing the regulationan exception to the established rulein the context of OPM's overall judgment about how best to set rates consistent with § 8902(i). During oral argument, Counsel for the Government concededwith commendable candorthat reconciled rates are a proxy for costs. [2] Oral Arg., available at http:// oralarguments.cafc.uscourts.gov/mp3/XXXX-XXXX.mp3. In truth, this is an unremarkable admission. If the Government were to contend otherwise, it would admit that the heart of its rate-setting methodology patently ignores the one and only rate-setting directive that Congress handed down: that rates should reasonably and equitably reflect costs. OPM's established rate-setting process for ordinary years was designed to produce rates that reasonably and equitably reflect carriers' costs. OPM endeavors to arrive at such rates by ensuring that the rates carriers charge the government are on par with the rates they charge their non-Federal subscribers. OPM concedes this point. Nancy H. Kichak, the Director of the Actuaries, Retirement and Insurance Service for OPM, submitted a declaration (Kichak Declaration) in the proceedings below. In it, she acknowledged that [w]hen OPM negotiates rates with a community rated carrier, its objective is to receive a rate that is derived in a manner consistent with the rate the carrier charges its other, non-Federal groups of a similar size. Joint Appendix, at 78, ¶ 8. This is one rational way to go about implementing Congress' command. The system presupposes that a competitive marketplace for health care services exists. It further assumes that the competitiveness of the market yields rates that are high enough to permit carriers to recoup their costs plus earn a reasonable profit, [3] but not so high as to be unfair. [4] OPM itself confirms this point. In her declaration, Ms. Kichak stated: Community rated health maintenance organizations are at risk when they determine their rates. If they charge too much, they are at risk of losing enrollees in the competitive open season process. If they charge too little, they may not earn enough premiums to meet the covered heath services of the group.