Opinion ID: 486487
Heading Depth: 1
Heading Rank: 2

Heading: the effect of the new 1986 regulation on this litigation

Text: 46 We first turn to the Secretary's claim of mootness in light of the new regulation promulgated during the pendency of this appeal. As indicated above, the mootness inquiry is a threshold issue that applies to all thirty-five hospitals here as appellees. The 1986 regulation also raises thorny questions about the appropriate remedy (if the case is not moot). The district courts awarded payment to the hospitals using the pre-1979 rules, but the Secretary now argues that the hospitals should be paid using the 1986 rule. 47 The new rule was promulgated on April 1, 1986, with an effective date of May 1, 1986. 51 Fed.Reg. 11142 (Apr. 1, 1986). On May 19, 1986, the Secretary raised in his reply brief the question of mootness, arguing that the litigation was only a challenge to the 1979 rule, which is no longer the controlling regulation. The Secretary stated that the new regulation will substantially benefit most Medicare providers. Appellant's Reply Brief at 4. This is true, however, only relative to the 1979 regulation; it is incorrect in relation to the pre-1979 rules. 48 According to the Secretary, the new 1986 rule is a combination of the 1979 rule (invalidated in Lloyd Noland ) and the pre-1979 rule. See Appellant's Reply to Appellees' Opposition to Appellant's Motion to Vacate at 25; 51 Fed.Reg. at 11186; see also supra note 13 (explaining, in simple terms, mechanics of new rule). Under the new rule, a hospital with a 25% Medicare Patient utilization rate would receive reimbursement for 8.97% of its medical malpractice costs. This compares to 25% under the pre-1979 rule and, probably, 5.1% under the 1979 rule. Similarly, a hospital with a 50% Medicare utilization rate would receive 22.11% of its malpractice costs, instead of 50% (pre-1979) or probably 5.1% (1979). See generally 51 Fed.Reg. at 11189-90 (table of reimbursement percentages under new 1986 rule). We conclude that most, if not all, of the appellee hospitals would receive substantially less under the 1986 rule than under the pre-1979 regulation. 19 49 The new regulation, promulgated in the wake of the consistent rejection of the 1979 rule by courts around the country, seems to be specifically aimed at short-circuiting on-going litigation challenging the Medicare reimbursement. By its own terms, the new regulation is retroactive to the 1979 cost years, but only for those hospitals that still have open cost reports, i.e., hospitals that appealed their cost reports to the PRRB (and then to the courts) but have yet to receive a final determination. 20 Because the reasonable cost reimbursement scheme has been largely replaced, see supra note 3, the 1986 regulation has only limited prospective effect; only a small percentage of future Medicare reimbursement will be covered by the new rule. See 51 Fed.Reg. at 11186-87. For the affected cost reports, according to the Secretary, the fiscal intermediaries will automatically calculate reimbursement using the new rule, with no additional information being gathered from the hospitals. 51 Fed.Reg. at 11149. 21 50 The 1986 rule presents some new and difficult questions for this court in this case. For the reasons stated below, we hold that this case is not moot. Because of this holding, we must then decide what the appropriate remedy should be. Without attempting to decide the validity of the 1986 regulation, we hold that it should not be applied to the claims of the litigants in this case, and they should be reimbursed under the pre-1979 regulations. 22
51 This court is among the first to consider fully the mootness implications and retroactive effect of the 1986 regulation. In this case, we join the Sixth Circuit in rejecting the Secretary's mootness suggestion and in denying retroactive effect to the 1986 rule. See Mason General Hospital v. Secretary of the Department of Health and Human Services, 809 F.2d 1220 (6th Cir.1987). 23 The only other courts to have addressed the questions have responded differently as to the impact of the 1986 rule. 24 None of those courts, however, discussed their analysis in full. 52 The case or controversy requirement of the Constitution requires that moot cases be dismissed; in a moot case, there is no longer the vitality and interest among the parties that our adversary system of justice requires. As the Supreme Court has made clear, the burden of demonstrating mootness 'is a heavy one.'  County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S.Ct. 1379, 1383, 59 L.Ed.2d 642 (1979) (quoting United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897, 97 L.Ed. 1303 (1953)). In County of Los Angeles v. Davis, the Supreme Court articulated a two part test for mootness: 53 Simply stated, a case is moot when the issues presented are no longer 'live' or the parties lack a legally cognizable interest in the outcome. We recognize that, as a general rule, voluntary cessation of allegedly illegal conduct does not deprive the tribunal of power to hear and determine the case, i.e., does not make the case moot. But jurisdiction, properly acquired, may abate if the case becomes moot because 54 (1) it can be said with assurance that there is no reasonable expectation .. that the alleged violation will recur, and 55 (2) interim relief or events have completely and irrevocably eradicated the effects of the alleged violation. 56 When both conditions are satisfied it may be said that the case is moot because neither party has a legally cognizable interest in the final determination of the underlying questions of fact and law. 57 440 U.S. at 631, 99 S.Ct. at 1383 (citations omitted). 58 Beyond this mootness test, there are also at least three exceptions to the mootness doctrine. The first exception concerns a situation where the issues are capable of repetition, yet evading review. B & B Chemical Co. v. United States Environmental Protection Agency, 806 F.2d 987, 990 (11th Cir.1986). 25 With this test and exception to it in mind, we must consider the effect of the 1986 regulation on this litigation. 26
59 The Secretary argues that the hospitals were only challenging the 1979 rule, and now that the 1979 rule is no longer the current, controlling rule, the hospitals no longer have any claims in this litigation. 27 The hospitals, however, have from the outset sought a judgment not only invalidating the 1979 rule but also requiring payment under the pre-1979 rules. 28 In his initial brief, the Secretary did not question the hospitals' interest in reimbursement under the pre-1979 rule. The 1986 rule does not eliminate the hospitals' continuing interest in pre-1979 reimbursement. And finally, it is undisputed that for the vast majority of hospitals in this case, the 1986 rule would not completely and irrevocably eradicate the reduction in reimbursement effected by the 1979 rule. 29 60 A review of cases dealing with mootness supports a rejection of the Secretary's mootness arguments. The 1986 rule does in fact provide to most hospitals a higher reimbursement than permitted under the 1979 rule, but it is nevertheless lower than under the pre-1979 rule. A number of Supreme Court and appellate cases reveal how sensitive is the requirement that the intervening event provide complete relief to the plaintiffs in a litigation. In two election cases decided on the same day, for example, the Court found one case moot and rejected mootness in another. In Hall v. Beals, 396 U.S. 45, 90 S.Ct. 200, 24 L.Ed.2d 214 (1969), the Court dismissed as moot a case challenging a six-month residency requirement for voting. Prior to decision by the Court, the state legislature changed the requirement to two months; because all of the plaintiffs, at the time of the start of the litigation, would have been able to vote under the new rule, the case was moot. 30 On the other hand, in Brockington v. Rhodes, 396 U.S. 41, 90 S.Ct. 206, 24 L.Ed.2d 209 (1969), the Court found that an intervening reduction of a signature requirement (to get on a ballot) from 7% to 4% of registered voters did not moot the case where the plaintiff would not have met the new requirement either. 61 This case is unlike that in Richardson v. Wright, 405 U.S. 208, 92 S.Ct. 788, 31 L.Ed.2d 151 (1972), where the Court remanded the case to the Secretary of Health, Education and Welfare. The plaintiffs in that case had had their disability benefits suspended without notice or opportunity to present evidence to defend the benefits. Prior to oral argument, the Secretary adopted a new regulation which provided all of the requested pre-suspension process except an opportunity for an oral presentation. While not finding the case to be moot, the Court withheld judicial action pending application of the new regulation. The Court reasoned that the additional process for the individual plaintiffs may provide the claimants with all of the process to which they were entitled, and so the Court could avoid the question of the oral presentation. In Richardson, it was possible that on remand the new procedures would fully satisfy the plaintiff's substantive claims. In this case now before this court, however, there is no mystery about what would happen on a remand to the Secretary--the Secretary has made it quite clear that the 1986 rule would be applied and that the hospitals would receive less than under the pre-1979 rule. Because we cannot hope to avoid the difficult legal issues presented in this case, as the Supreme Court did in Richardson, the Richardson case does not suggest to us a finding of mootness. 31 62 In a case analogous to this one, the Sixth Circuit rejected a suggestion of mootness in, coincidentally, a Medicare case where the Secretary of Health, Education and Welfare argued that intervening amendments to the Social Security Act fully satisfied the plaintiffs' concerns. See Himmler v. Califano, 611 F.2d 137, 149 (6th Cir.1979). Because the Sixth Circuit found that the amendments only ameliorated but did not eliminate the plaintiffs' concerns, the court rejected the suggestion of mootness. Similarly, the former Fifth Circuit rejected a suggestion of mootness after the Environmental Protection Agency (the defendant-respondent in the case) withdrew its required approval of a state air quality plan. See Natural Resources Defense Council v. Environmental Protection Agency, 489 F.2d 390 (5th Cir.1974), rev'd in part on unrelated grounds sub nom. Train v. Natural Resources Defense Council, 421 U.S. 60, 95 S.Ct. 1470, 43 L.Ed.2d 731 (1975) (not addressing mootness question on appeal and thus implicitly accepting Fifth Circuit's rejection of mootness challenge to jurisdiction). Although the challenged air quality plan was no longer current, the EPA's position [was] still considerably at odds with the position taken by the [plaintiffs]. Id. at 405. In that case, the facts revealed that the EPA was likely to approve a plan very similar to the challenged plan. Therefore, the Fifth Circuit refused to find the case moot. In this case, the Secretary has already adopted a rule similar to the invalidated 1979 rule. 63 The 1986 rule does not afford the complete relief anticipated by the Supreme Court in County of Los Angeles v. Davis in its two prong test for mootness. The parties still have an interest in this litigation sufficient to satisfy the constitutional requirement of a vital case or controversy. In light of these two factors, we hold that the claims of the hospitals have not been mooted by the promulgation by the Secretary of the 1986 regulation.
64 In addition to a finding that the 1986 regulation does not eliminate the hospitals' interest in reimbursement under the pre-1979 rules, the second prong of the County of Los Angeles mootness test also suggests a rejection of the mootness argument. In this case, it cannot be said with assurance that 'there is no reasonable expectation ..' that the alleged violation will recur. 440 U.S. at 631, 99 S.Ct. at 1383. This rule, in conjunction with the exception to the mootness doctrine for cases capable of evading review, supports a finding that this case is not moot. 65 The facts of this case are unlike most instances where the evasion exception is appropriate; usually the exception applies to cases with very short duration. Nevertheless, if this case is dismissed as moot, we would be creating a class of cases capable of evading judicial review by the very fact that, after years of litigation challenging an administrative regulation, an agency would be able to moot a given lawsuit by promulgating a new regulation. If we were to find this case moot, the hospitals would have to restart on a long and expensive litigation, only to be confronted again with the possibility that the Secretary could moot that litigation. The Secretary has in fact even acknowledged that such a scenario is conceivable; the Secretary suggested that this possibility should not be a cause for concern. See 51 Fed.Reg. at 11186. 66 Without at all wishing to suggest any improper motive on the part of the Secretary in this case, and realizing that the Secretary is concerned about the liquidity of the trust fund crucial to the entire Medicare program, it is still a concern that a finding of mootness could permit, in some future case, an abuse of the interaction between administrative agencies and the courts. Where a court is asked to adjudicate the legality of an agency order, it is not compelled to dismiss the case as moot whenever the order expires or is withdrawn. Nader v. Volpe, 475 F.2d 916, 917 (D.C.Cir.1973). In a review of agency action, a sufficiently live controversy may remain in a case even after a regulation or order initially giving rise to the case is no longer in effect. See Southern Pacific Terminal Co. v. ICC, 219 U.S. 498, 515, 31 S.Ct. 279, 283, 55 L.Ed. 310 (1911); Environmental Defense Fund, Inc. v. Gorsuch, 713 F.2d 802, 810-11 (D.C.Cir.1983); Big Rivers Electric Corp. v. EPA, 523 F.2d 16, 19 (6th Cir.1975), cert. denied, 425 U.S. 934, 96 S.Ct. 1663, 48 L.Ed.2d 175 (1976). 67 This case presents two additional concerns that militate against a finding of mootness. First, we would be creating a situation in which an agency, if it were inclined, could avoid review of an agency action and potentially abuse the review process. The ability to moot a case by replacing a challenged regulation with a similar rule after years of litigation could be abused. Second, the ability of an agency to moot a case at will could lead to an enormous waste of judicial resources. 32 Both of these concerns, about judicial resources and abusive rulemaking, are present in the case now before the court, and lead to the conclusion that the case is not moot. 33 68 Our rejection of the Secretary's mootness arguments are further supported by equitable concerns arising from the court's and appellees' reliance on the Secretary's statements early in the litigation in this court. Nine months before the new 1986 rule became final (but well after the Secretary had begun work on it), the Secretary requested that we hold the Baptist Hospital appeal (prior to its consolidation with the Tallahassee Memorial case) in abeyance pending the disposition of a petition for rehearing in the Lloyd Noland case: 69 Appellants suggest that judicial economy would best be served by holding the briefing in this appeal in abeyance pending final disposition in Lloyd Noland. While one of the instant cases involves a jurisdictional issue not present in Lloyd Noland, that issue--[the self-disallowance question]--goes only to two hospitals. Thus, whatever the outcome of Lloyd Noland, it will be dispositive as to all but two hospitals in the instant appeal, and even the [self-disallowance] issue will be mooted as to the two hospitals if the Court disposes of the case on rehearing in the Secretary's favor. Accordingly, it seems wasteful to spend time and money at this point in briefing the instant appeal. If the Lloyd Noland outcome should leave any outstanding issues for decision, the briefing in this appeal could then be so limited. 70 Appellant's Motion to Hold This Appeal in Abeyance Pending Decision in Another Case at 2, Baptist Hospital (Aug. 14, 1985). But for the court's granting of this motion, the case of many of the appellees here would have been briefed and argued (and probably decided) before the new rule became final. A party cannot request a delay in this court and then later attempt to use that delay to tactical advantage. Had the Secretary suggested, in his motion to hold the litigation in abeyance, that the rights of the opposing parties might be compromised by a delay, this court might have hesitated to grant the delay. 34
71 Having held that the 1986 regulation does not moot the case and require a dismissal, we are still confronted with the question of whether the hospitals should be reimbursed under the 1986 rule or the pre-1979 rule. As noted above, it would not be inconsistent to reject the suggestion of mootness but still hold that the 1986 regulation should apply. For the reasons discussed below, however, we hold that the hospitals should receive reimbursement under the pre-1979 regulations. 35 In doing so, we join the only other court in the country to address fully the issue of the retroactivity of the 1986 rule. See Mason General Hospital v. Secretary of the Department of Health and Human Services, 809 F.2d 1220, 1231 (6th Cir.1987). 72 At the outset, we note that the Secretary claims to have broad authority to make retroactive regulations under 42 U.S.C. Sec. 1395x(v)(1)(A) (1982). 36 While it is clear that the Secretary has the power to make corrective adjustments in the reimbursement of individual hospitals and groups of hospitals, we join the Sixth Circuit in finding that the Secretary's power under Sec. 1395x(v)(1)(A) to make retroactive rules is limited. See Mason General, 809 F.2d at 1225-27. 37 If the power the Secretary seeks is not limited, then he would have the almost unreviewable ability to change retroactively any of the rules within which the hospitals operate; he would be able to reduce the amount of reimbursement the hospitals are due long after the hospitals actually receive and spend the money. 38 We cannot accept such a broad power, and we therefore will review the Secretary's action in this case using the standard judicial tests of retroactive administrative actions. 73 Because the 1986 rule is retroactive on its face, there is no need to remand the case to the agency for a determination of whether the rule was intended to be retroactive. 39 In analyzing this retroactivity, we are guided by the Supreme Court's statement that the effects of retroactivity must be balanced against the mischief of producing a result which is contrary to a statutory design or to legal and equitable principles. SEC v. Chenery Corp., 332 U.S. 194, 203, 67 S.Ct. 1575, 1581, 91 L.Ed. 1995 (1947). 40
74 In making the balance suggested by SEC v. Chenery, we must consider the interests of the parties in reimbursement under the 1986 rule versus the pre-1979 rule. On the one hand, the Secretary is in good faith arguing to conserve the resources of the trust fund from which Medicare is funded. On the other hand is the hospitals' interest in receiving reimbursement under the pre-1979 rule (in most cases substantially more than afforded by the 1986 rule), and in bringing this litigation to a close. 75 The Secretary asserts that the hospitals do not have an interest in avoiding the 1986 rule because it explicitly will not afford lower reimbursement than the 1979 rule. In responding to the asserted interest of the hospitals, however, the Secretary mischaracterizes the comparison: [T]he new rule should be compared to the 1979 malpractice rule because the 1979 rule--was in effect during the retroactive period. [The new rule] will replace the 1979 rule--not the [pre-1979 rule], which was eliminated for purposes of malpractice insurance cost apportionment in 1979. 51 Fed.Reg. at 11185. Retroactive application of this final rule will produce no 'ill effects' because ... hospitals can only benefit under this rule as compared to the 1979 malpractice rule. Id. at 11184. Yet in this circuit, the Lloyd Noland opinion voided the 1979 rule, and ordered that those plaintiffs be paid under the pre-1979 rule. 762 F.2d at 1569. The 1979 rule, invalidated by courts across the country and validated by none, has ceased to carry any authoritative weight. The Secretary now suggests that the void rule be used as a baseline to evaluate the hospitals' interest in reimbursement. Such an approach must be rejected; it would permit the Secretary to benefit from the 1979 rulemaking, even though the hospitals successfully attacked the 1979 rule. 41 Thus, the interest of the hospitals is in the difference between the 1986 reimbursement and the pre-1979 reimbursement (which is what the Lloyd Noland hospitals received). 42 76 In assessing the Secretary's concern about the well-being of the Medicare trust fund, we note that the Secretary has largely limited the retroactive effect of the 1986 rule to hospitals still in litigation. In response to a suggestion that the 1986 rule should apply to all Medicare providers, instead of only those on appeal, the Secretary made clear that the asserted benefits of the new 1986 rule did not outweigh his own concern for administrative finality: 77 In implementing this final rule, ... the general importance of ensuring the finality of decisions on reimbursement issues outweighs whatever benefits might be received by providers whose malpractice insurance costs are outside the reopening period.... Regardless of whether our finality and reopening rules benefit or disadvantage providers in a specific case, their overall role of providing certainty in the administrative process is important enough to warrant their consistent application. 78 51 Fed.Reg. at 11187. Although the Secretary asserts that the pre-1979 reimbursement rule gives hospitals too much, his own concern for administrative finality outweighs his concern about any possible excessive reimbursement. Yet in this case, the hospitals also have a legitimate concern in finalizing this litigation and receiving their reimbursement. The amounts in question are over $100,000 per cost year for some hospitals. The interest that is due to the hospitals since the beginning of this litigation has greatly increased the amount owed to the hospitals. As this court stated in Lloyd Noland, [f]our years is long enough for [the hospitals] to wait for their reimbursement. 762 F.2d at 1569. The litigation has already lasted at least five years. If the 1986 rule were given retroactive effect for these appellee hospitals, the hospitals have indicated that they would go through the pointless administrative review process just to return to court to challenge the 1986 rule. The new litigation would likely run three or more years beyond that point. Just as the 1986 rule bowed to the Secretary's concern about administrative finality, so it should bow to the hospitals' need to receive their reimbursement and their interest in bringing this litigation to a close. Balancing the interests of the hospitals and the Secretary, we decline to require that the 1986 rule be followed for these hospitals, and hold that the hospitals should be paid using the pre-1979 rule.
79 Our decision to require reimbursement under the pre-1979 rule is supported by concerns similar to those expressed in Section II(A)(3) above. While not intending to question the Secretary's good intentions, we cannot condone a regulation aimed specifically at on-going litigations, where the regulation has the effect of preventing the courts from awarding the full relief sought by the parties and already obtained by other hospitals in similar litigation such as Lloyd Noland. To permit such a regulation could effectively insulate the Secretary from review by giving him the power to short circuit a case after years of litigation and require the plaintiff parties to start the entire administrative and judicial review process all over again. As discussed above, the Secretary has acknowledged the possibility that, after a future challenge to the 1986 regulation had partially progressed through the courts, he could promulgate yet another regulation to defuse the challenge to the 1986 rule. 43 Such a power could be used to abuse seriously the litigation process. 80 Our concerns find support in the case law. In a case involving the retroactivity of a Department of Housing and Urban Development (HUD) circular issued after an eviction proceeding had been initiated, the Supreme Court ruled that the new circular should be applied to the ongoing proceeding. The Court noted, however, that a far different case would be presented if HUD were a party to the suit arguing that it could repudiate its obligations under the [relevant] contract because the Housing Authority had failed to apply the circular. Thorpe v. Housing Authority of Durham, 393 U.S. 268, 279 n. 33, 89 S.Ct. 518, 525 n. 33, 21 L.Ed.2d 474 (1969). See also International Ladies' Garment Workers' Union v. Donovan, 733 F.2d 920 (D.C.Cir.1984) (rejecting Labor Secretary's attempt to avoid judgment of court by promulgation of new emergency regulation). While in this case the Secretary has good faith concerns about administrative finality, the fact that this 1986 rule is retroactive only to hospitals whose claims are still being reviewed makes the 1986 rule too similar to a possible abusive regulation. This court cannot condone such potential abuse.
81 Finally, we note the narrowness of our holdings on the mootness and retroactivity questions. We limit our holdings to control only the cases of hospitals that already are in the middle of litigation that began as a challenge to the 1979 rule. We do not express an opinion about the possible cases of hospitals whose claims are still being reviewed by the PRRB and have never reached the federal courts. See 51 Fed.Reg. at 11194. We express no opinion about the effect of the 1986 regulation on calculations under the new Prospective Payment System that has largely replaced the reimbursement system. See 51 Fed.Reg. at 11188. Further, we have not addressed any possible constitutional arguments concerning the due process and equal protection rights of the hospitals that might be affected by the 1986 rule versus those paid under the 1979 rule. See Mason General Hospital v. Secretary of the Dept. of Health and Human Services, 809 F.2d 1220, 1231 (6th Cir.1987). Lastly, to make clear, we do not express any opinion as to the prospective validity of the 1986 rule itself. See id. That issue will surely arise in litigation soon, but the validity of the rule is not appropriately before this court in this case--just as the 1986 rule cannot appropriately prevent this court from considering awarding relief in this case.