Opinion ID: 513483
Heading Depth: 2
Heading Rank: 1

Heading: The Procedural Validity of the Secretary's TEFRA Bonus Payment Policy

Text: 33 The Hospitals challenge the procedural and substantive validity of the Secretary's policy of paying TEFRA bonuses at the final settlement stage of the Medicare reimbursement process. Because we find that the Secretary's policy is procedurally invalid, we need not examine the policy's substantive validity. 4 34 The Administrative Procedure Act, 5 U.S.C. Secs. 500-576 (1982 & Supp. IV 1986) (APA) sets limits on the ways in which the Secretary may adopt new rules. When a policy acts as a substantive rule and alters an existing regulatory scheme, the Secretary must adopt that policy according to procedures set forth in the APA. See 5 U.S.C. Sec. 553. 35 APA section 553 requires administrative agencies to give the public notice of proposed rules by publishing those rules in the Federal Register. 5 U.S.C. Sec. 553(b). Section 553 also establishes the public's right to participate in the rulemaking process by requiring agencies to give the public an opportunity to consider and comment on proposed rules before the rules are adopted. Sec. 553(c). The procedures required by section 553 are commonly called notice and comment rulemaking procedures. 36 Not all administrative rules are subject to section 553 notice and comment rulemaking procedures. Rules, or policies, that merely clarify or explain existing law or regulations are exempt from section 553 requirements. Linoz v. Heckler, 800 F.2d 871, 877 (9th Cir.1986) (quoting Powderly v. Schweiker, 704 F.2d 1092, 1098 (9th Cir.1983)) (emphasis added). Such rules, or policies, are called interpretive rules. Id.; Sec. 553(b)(3)(A). Rules that effect a change in existing law or policy, are subject to the notice and comment rulemaking requirements of section 553. Linoz, 800 F.2d at 877 (quoting Powderly, 704 F.2d at 1098) (emphasis added). These rules are called substantive rules. Id. 37 The label an agency gives to a particular statement of policy is not dispositive. Anderson v. Butz, 550 F.2d 459, 463 (9th Cir.1977). This court must inquire into the substance and effect of the policy pronouncement. Id. Thus, it does not matter whether the Secretary calls his pronouncements in the 1982 Manual or the 1984 Memorandum policy statements, interpretive rulings, or substantive rulings. We must independently determine the effect of the Secretary's statements, and decide whether they were adopted according to the appropriate procedures. 38 The parties dispute the proper characterization of the Secretary's TEFRA bonus payment policy. The Secretary contends that his policy of paying TEFRA bonuses at the final settlement stage of the Medicare reimbursement process is merely an interpretive ruling, which explains and clarifies the relationship of the TEFRA bonus program to the three-step Medicare reimbursement scheme. The Hospitals argue that the Secretary's TEFRA bonus payment policy changed the regulatory practice of paying all amounts owed to providers under the Medicare program at the tentative settlement stage of the reimbursement process. 5 39 If the Secretary's TEFRA bonus payment policy acted as an interpretive ruling, and merely explained or clarified the Medicare reimbursement scheme, then the policy was not subject to the procedural requirements of APA section 553. If the Secretary's policy acted as a substantive ruling, however, and changed the Medicare reimbursement scheme, then the Secretary should have formally adopted that policy through notice and comment rulemaking procedures. 6 Neither the 1982 Manual nor the 1984 Memorandum conformed to the notice and comment rulemaking requirements of APA section 553. As a result, we must find that the Secretary's TEFRA bonus payment policy is procedurally invalid if it acts as a substantive ruling. 40 In supporting his position that the TEFRA bonus payment policy merely clarified the pre-existing regulatory scheme, the Secretary argues that the TEFRA statute, the TEFRA regulations, and the regulations concerning the three-step Medicare reimbursement process all fail to establish the timing of TEFRA bonus payments. Because the Secretary contends that there was no law governing the timing of TEFRA bonus payments, he asserts that his TEFRA bonus payment policy could not have changed any existing law or policy. Instead, he argues that his policy merely explained how TEFRA bonuses fit into the three-step Medicare reimbursement process. 41 First, the Secretary alleges that the three-step Medicare reimbursement process of interim payments, tentative settlements, and final settlements was established to reimburse only actual, out-of-pocket costs incurred by medicare providers. Unlike most reimbursement payments, TEFRA bonuses do not reimburse providers for actual, out-of-pocket costs. Rather, the bonuses reward providers for keeping out-of-pocket costs from rising too quickly. Accordingly, the Secretary concludes that the regulations regarding interim payments, tentative settlements, and final settlements shed no light on the timing of TEFRA bonus payments. 7 42 Second, the Secretary argues that the TEFRA statute and the TEFRA regulations are silent on the issue of when TEFRA bonuses should be paid. According to the Secretary, the TEFRA statute, 42 U.S.C. Sec. 1395ww(b), simply describes how TEFRA bonuses and penalties will be calculated. The TEFRA regulations, 42 C.F.R. Sec. 413.40, state that TEFRA bonuses and penalties should be determined at the tentative settlement stage. The Secretary insists that the word determined, as it is used in the TEFRA regulations, means only calculated, and not paid. Thus, the Secretary concludes that the TEFRA statute and the TEFRA regulations set forth only the means of calculating TEFRA bonuses and fail to state a timetable for bonus payments. 43 In light of the above arguments, the Secretary contends that his policy statements in the 1982 Manual and the 1984 Memorandum simply filled a vacuum of information and explained and clarified the timing of TEFRA bonus payments. 44 We are not persuaded by the Secretary's characterization of his TEFRA bonus payment policy. The Secretary is correct in noting that neither the TEFRA statute nor the TEFRA regulations explicitly spell out a timetable for TEFRA bonus payments. When read together, however, the TEFRA statute, the TEFRA regulations, and the tentative settlement regulations, clearly indicate that TEFRA bonus payments should be made at the tentative settlement stage of the Medicare reimbursement process. 45 The tentative settlement regulations state that the tentative settlement stage of the Medicare reimbursement process is designed to bring the interim payments made to the provider during the period into agreement with the reimbursable amount payable to the provider for the services furnished to program beneficiaries during that period. 42 C.F.R. Sec. 413.64(f)(1) (emphasis added). This process compares the total amount of reimbursement the provider is due to receive from the program  with the total interim payments made during the year. Sec. 413.64(f)(3) (emphasis added). 46 Contrary to the Secretary's interpretation, the tentative settlement regulations do not limit reimbursement payments to repayments of actual, out-of-pocket costs. In fact, the language of the tentative settlement regulations is quite broad. The phrases reimbursable amount payable to the provider and total amount of reimbursement the provider is due to receive from the program strongly imply that all amounts due the provider under the Medicare program will be both calculated and paid at the tentative settlement stage of the reimbursement process. 47 This implication is confirmed by the language of the TEFRA statute and the TEFRA regulations. As noted above, TEFRA bonuses are not repayments of actual, out-of-pocket costs. Rather, they are bonus payments to reward providers for limiting costs. TEFRA penalties, on the other hand, are partial repayments of actual, out-of-pocket costs. Thus, TEFRA penalties fit within the common meaning of the word reimbursement, while TEFRA bonuses do not. Nonetheless, the TEFRA statute and the TEFRA regulations treat both TEFRA penalties and TEFRA bonuses as reimbursement due a provider under the Medicare program. 48 The TEFRA statute refers to TEFRA bonuses and penalties equally as the amount of the payment with respect to ... operating costs. 42 U.S.C. Sec. 1395ww(b)(1)(A), (B). The TEFRA regulations are even more explicit. They refer to both TEFRA bonuses and TEFRA penalties as reimbursement. 42 C.F.R. Sec. 413.40(d)(1), (iii), (iv). Thus, despite the different nature of TEFRA bonuses and TEFRA penalties, both the statute and the regulations treat TEFRA bonuses and penalties as the kinds of payments that should, absent a clearly established regulatory exception to the general rule, be included in the total amount of reimbursement due a medical services provider under the Medicare program. 49 In addition to using language that conforms both TEFRA bonuses and TEFRA penalties to the language of the tentative settlement regulations, neither the TEFRA statute nor the TEFRA regulations give any indication that TEFRA bonus payments should be excluded from the tentative settlement stage of the Medicare reimbursement process. Thus, the tentative settlement regulations combined with the TEFRA statute and the TEFRA regulations call for payment of TEFRA bonuses at the tentative settlement stage. 50 The TEFRA regulations further support to the conclusion that TEFRA bonuses should be paid at the tentative settlement stage of the Medicare reimbursement process. The regulation requires that intermediaries determine the amount of TEFRA bonuses and penalties at the end of each 12-month cost reporting period. Id. Sec. 413.40(d)(1)(i), (iii), (iv). The phrase at the end of each 12-month cost reporting period tracks the tentative settlement regulations, which state that tentative settlement occurs at the end of the reporting period. Sec. 413.64(f)(1). Although the word determined does not necessarily mean paid, that would appear to be the logical meaning of the word in this context where the tentative settlement regulations and the TEFRA regulations fit together in every other respect. 51 We hold that the existing regulatory scheme indicates that TEFRA bonuses are part of the total reimbursement due a provider, which must be paid at the tentative stage of the Medicare reimbursement process. Any policy that excludes TEFRA bonuses from the established scheme of paying the total amount of reimbursement the provider is due at the tentative settlement stage represents a change in law and policy that must be promulgated according to the notice and comment rulemaking requirements of APA section 553. Because the Secretary adopted his TEFRA bonus payment policy without following section 553 requirements, the policy is procedurally invalid. 52 Our holding is supported by Linoz v. Heckler, 800 F.2d 871 (9th Cir.1986). In Linoz, as in the instant case, we had to decide whether a manual statement purporting to merely interpret a regulation was an interpretive ruling or a substantive ruling. The regulation authorized payment for ambulance service to the 'nearest institution with appropriate facilities.'  Id. at 874 (quoting 42 C.F.R. Sec. 405.232(i) (1981)). The manual stated that [t]he individual physician who practices in a hospital is not a consideration in determining whether the hospital has appropriate facilities. Id. n. 2 (quoting section 2120.3F of the Carrier's Manual). We concluded that the regulation stated a general rule, and that the policy in the manual stated a new exception to that rule: 53 [I]nstead of simply clarifying a pre-existing regulation, section 2120.3F carved out a per se exception to the rule that ambulance service to the nearest institution with appropriate facilities was covered under Part B of the Medicare program. The provision withdrew coverage previously provided and thus effect[ed] a change in existing law or policy. We therefore find that it was substantive in nature. 54 Id. at 877 (citations omitted). 55 This case is similar to Linoz. Absent any expression of a timing policy in the TEFRA statute or the TEFRA regulations, the existing regulations regarding the timing of reimbursement govern TEFRA payments. The Secretary's TEFRA bonus payment policy carved out a per se exception to the general rule that all reimbursement due a provider in connection with the Medicare program will be paid and adjusted at the tentative settlement stage. As an exception to the general rule, the Secretary's policy constitutes a substantive ruling that should have been adopted according to the notice and comment rulemaking requirements of APA section 553. 56