Caseflicks

Supreme Court of the United States • 1988

Bowen v. Georgetown University Hospital

488 U.S. 204 | 109 S. Ct. 468 | 102 L. Ed. 2d 493 | 1988 U.S. LEXIS 5554 | 57 U.S.L.W. 4057

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Takeaway

In short, this case establishes that agencies may not issue retroactive legislative rules unless Congress has clearly given them that power; general regulatory authority and a power to make individualized corrective adjustments are not enough.

Background

Medicare reimburses participating providers for their reasonable costs of treating Medicare beneficiaries. Congress authorized the Secretary of Health and Human Services to establish regulations limiting reimbursable costs. In 1981, the Secretary changed the formula used to calculate a regional hospital wage index by excluding wages paid by federal hospitals. That change reduced reimbursement limits for certain hospitals in the District of Columbia area.

The hospitals challenged the 1981 wage-index rule. A federal district court held that the Secretary had adopted it without the notice and comment required by the Administrative Procedure Act, and therefore declared the rule invalid. The court did not enjoin its enforcement because the hospitals had not exhausted their administrative reimbursement remedies. Rather than appeal, the Secretary settled reimbursement reports using the pre-1981 wage-index method.

In 1984, after notice-and-comment proceedings, the Secretary reissued the 1981 rule and made it retroactive to July 1, 1981. The Secretary then sought to recoup more than $2 million from seven hospitals that had received additional reimbursement after the original rule was invalidated. The hospitals exhausted their administrative remedies and sued. The District Court granted summary judgment for the hospitals, and the D.C. Circuit affirmed, holding that retroactive rulemaking was barred by the APA and by the Medicare Act.

Issues

Issue #1

Whether the Medicare Act's authorization for “suitable retroactive corrective adjustments” permitted the Secretary to reissue a generally applicable cost-limit rule retroactively.

Holding

No. The corrective-adjustment provision authorizes case-by-case reimbursement adjustments for individual providers; it does not authorize retroactive legislative rulemaking.

Reasoning

The Court began with the principle that an agency has only the regulatory authority Congress has delegated. Because retroactivity is disfavored, a statutory grant of rulemaking authority ordinarily does not include power to issue retroactive rules unless Congress conveys that power expressly.

The text and structure of 42 U.S.C. § 1395x(v)(1)(A)(ii) point to individualized adjustments, not revisions of a generally applicable cost methodology. The provision refers to correcting the aggregate reimbursement paid to “a provider” when the methods of determining costs have yielded an excessive or inadequate result. By contrast, the surrounding provisions establish cost-determination methods for providers generally.

A corrective adjustment presupposes that the existing reimbursement method has been applied and that an individual provider's total reimbursement can then be reconciled with its actual reasonable costs. The Secretary's 1984 action did something different: it altered one of the methods for calculating costs itself, then applied that new method to an earlier period.

The Secretary's own longstanding regulations confirmed this narrower reading. They treated retroactive corrective adjustments as year-end reconciliations between a provider's interim payments and its actual reimbursable costs. The 1984 rule was not issued as such an adjustment, and the Secretary invoked this theory only in litigation.

The Court declined to defer to the Secretary's litigation position. That interpretation was unsupported by prior regulations, rulings, or administrative practice and contradicted the Secretary's earlier position that the provision merely allowed year-end balancing for individual providers. Deference belongs to an agency's reasoned and adopted interpretation, not to appellate counsel's post hoc rationale.

Issue #2

Whether the Medicare Act's general grants of rulemaking authority authorized retroactive cost-limit rules, including a rule intended to cure an earlier procedural invalidity.

Holding

No. The Medicare Act contains no express authorization for retroactive cost-limit rulemaking, and its text, legislative history, and administrative history show that Congress intended such limits to operate prospectively.

Reasoning

The Act's general provisions authorizing the Secretary to prescribe necessary regulations and to establish cost limits say nothing about retroactivity. That silence was especially significant because Congress expressly addressed retroactive agency action elsewhere in the same statutory provision by requiring procedures for individualized corrective adjustments.

The legislative history directly supported a prospective-only reading. The House and Senate committee reports explained that cost limits should be imposed prospectively so providers would know in advance which costs would be reimbursed and could avoid incurring costs that Medicare would not recognize.

The Secretary's own regulatory practice reinforced that understanding. Cost-limit regulations and annual schedules from 1974 through 1981 repeatedly described the limits as prospective, required notice before the relevant cost period began, and treated prospective operation as the ordinary and intended application of the statute.

The Secretary argued that a retroactive rule was justified because it merely cured the procedural defect in the 1981 rule and because hospitals had notice of the rule's substantive content. The Court found it unnecessary to decide whether such considerations could matter under other statutory schemes. Under this Medicare statute, Congress had not delegated authority to promulgate retroactive cost-limit rules, so the 1984 reinstatement was invalid.

Concurrences

Justice Scalia

Reasoning

Justice Scalia agreed that the Medicare Act did not authorize the Secretary's retroactive rule, but wrote separately to emphasize an independent ground: the Administrative Procedure Act itself generally bars retroactive legislative rulemaking. In his view, the APA's definition of a “rule” as an agency statement “of future effect” means that a rule may prescribe legal consequences only for the future.

The APA's distinction between rulemaking and adjudication was central to his analysis. Rulemaking is the agency's legislative-type process for regulating future conduct, whereas adjudication determines past and present rights and liabilities. Reading “future effect” to permit rules that alter the legal consequences of past conduct would erase the statutory line between rules and orders.

Justice Scalia distinguished true retroactivity from a rule that operates prospectively but affects the value of earlier decisions or investments. The Secretary could have applied a new wage-index formula to future reimbursements even if hospitals had planned around the old formula. But applying the formula to costs incurred during an earlier period changed the law governing that past period and was impermissibly retroactive.

He also rejected the Secretary's reliance on cases permitting retroactive adjudication. Agencies may often announce and apply legal interpretations through adjudication when resolving past disputes, but that does not make retroactive rulemaking permissible. Nor did the fact that the 1981 rule had given hospitals some notice make the 1984 rule valid; fairness alone cannot supply a form of agency power that the APA does not authorize.

Justice Scalia warned that permitting “curative” retroactive rules after an agency's procedural failure would undermine the APA's notice-and-comment requirements. An agency could issue an invalid rule, then, after a court invalidated it, repeat the rulemaking properly while imposing the new rule on the very period covered by the unlawful original rule. If retroactive rulemaking is genuinely necessary, he explained, the agency must obtain specific authorization from Congress.