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Daughters of Miriam Center for Aged v. Matthews

decided: December 29, 1978.



Before Seitz, Chief Judge, and Adams and Rosenn, Circuit Judges.

Author: Adams


When Congress establishes a program to aid a particular segment of the population, it often perceives a need and envisions a goal, but as a practical matter cannot sketch the intricate details for implementing its plan. In such cases, the task of administration is frequently delegated to an agency, which is directed to develop necessary rules in light of experience. To ensure the fullest possible attainment of the legislative directives, the agency occasionally must modify its regulations to meet changing circumstances. These curative measures usually are treated deferentially by the courts, even when they upset the expectations of private parties. But sometimes, and particularly when a modification is applied retroactively, a corrective rule is found to sweep too broadly, abridging statutory authorization, exceeding the scope of a controlling rule, or even violating constitutional rights.

On this appeal, we must determine whether a curative change in the portion of the Medicare regulations dealing with nursing homes is to be applied retroactively in the factual situation presented here. Nursing homes that provide services to Medicare beneficiaries are reimbursed for their "reasonable cost" in providing such services, including the expense of acquiring their capital assets, as prorated over the useful lives of such assets. Initially, the governing regulations permitted nursing homes to prorate the expense of their assets under either straight-line or accelerated methods of depreciation. To eliminate certain abuses, however, the regulations were amended in 1970 to require that the government recapture from any provider that abandons the program or that experiences a substantial decrease in utilization by Medicare patients the excess reimbursement that resulted from the provider having depreciated its assets under an accelerated rather than the straight-line method. By administrative fiat, such amendment was given retroactive as well a prospective effect.

Daughters of Miriam Center for the Aged (the Center) experienced a substantial decrease in utilization by Medicare patients within the meaning of the new regulation during 1973, so the Secretary of Health, Education and Welfare (Secretary), who supervises the Medicare program, ordered the recapture from it of $148,324 the difference between accelerated and straight-line depreciation for the previous six years. The Center challenged, on statutory and constitutional grounds, the application to it of the depreciation recapture regulation, but was denied relief in the district court. Because we disagree with HEW's position that retroactive application to the Center of such regulation so as to permit recovery of excess reimbursements for years prior to 1970 is consistent with the purpose underlying such regulation, that portion of the judgment that is based upon retroactive application of the recapture regulation will be reversed.


Under the Medicare Act, 42 U.S.C. § 1395 Et seq., hospitals, nursing homes, and similar-type facilities that are providers of services to Medicare patients generally may not charge such patients directly for the services provided. 42 U.S.C. § 1395cc(a)(1). Instead, the Secretary of HEW, usually through designated fiscal intermediaries, reimburses each provider for the "reasonable cost" incurred by it in rendering such care. 42 U.S.C. §§ 1395(f)(b), 1395h. The provider is reimbursed periodically, though not less often than monthly, for its estimated expenses, based on billings submitted to the Secretary or his designated fiscal intermediary. At the close of the fiscal year, the provider submits a cost report, and the Secretary then determines by audit the amount of reimbursement to which the provider is entitled for that period. Adjustments are thereafter made in the current periodic payments so that the actual reimbursement for the year coincides with the amount due under the audit. 42 U.S.C. § 1395g.

Recognizing that health facilities use a variety of methods to determine patient charges and the expenses of rendering care, Congress refrained from specifying the method to be used for calculating "reasonable cost." Rather, in 42 U.S.C. § 1395x(v)(1)(A),*fn1 Congress delegated to the Secretary of HEW the responsibility for promulgating regulations that establish the methods to be adopted and the items to be included in the determination of "reasonable cost." Although the Secretary is given considerable leeway in fashioning the regulations, he is instructed that "reasonable cost" is to reflect the cost "actually incurred" in supplying the services, so that the cost of delivering services to Medicare patients will not be imposed on the provider's other patients, and the cost of caring for non-Medicare patients will not be borne by the Medicare program. The section also states that the regulations are to

provide for the making of suitable retroactive corrective adjustments where, for a provider of services of any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive.

In a more general vein, Congress declared in 42 U.S.C. § 1395hh that "(t)he Secretary shall prescribe such regulations as may be necessary to carry out the administration of the insurance programs under this subchapter."

Exercising the authority vested in him, the Secretary published regulations defining and governing the methods and formulas for determining "reasonable cost." Initially, the regulations permitted providers to include as a "reasonable cost" item the depreciation of their capital assets as computed either under the straight-line method or under one of two accelerated depreciation methods.*fn2 Experience soon showed, however, that use of an accelerated method results in excessive payments to some providers. Therefore, on February 5, 1970, a proposed regulation was promulgated and then published in the Federal Register, 35 Fed.Reg. 2593, becoming effective on August 1, 1970, as 20 C.F.R. § 405.415. Under the new rule, nursing homes certified as Medicare providers after August 1, 1970, were not permitted to use an accelerated method, and presently certified homes were not allowed to use such method for any newly acquired assets. Providers were authorized to continue to depreciate on an accelerated basis those assets for which such method was already being used. But, if a provider terminated its participation in the program, or if the Medicare proportion of its allowable costs decreased substantially, the Secretary was now able to recover the amount by which the reimbursable cost that had been determined by using an accelerated depreciation method and paid to the provider exceeds the reimbursable cost which would have been determined and paid to it by using the straight-line method of depreciation. Such amount could be recouped as an offset to current reimbursement due the provider, or, if the home has left the program, as an overpayment.*fn3

Subsequently, in May, 1972, the Provider Reimbursement Manual, which interprets and elaborates upon the Medicare regulations, was revised in a number of important respects. First, it announced that the new regulation regarding the recapture of accelerated depreciation would be applied retroactively to recover excess reimbursements received by providers during fiscal periods prior to 1970, the year of the new enactment. Second, the Manual made the recapture provision inapplicable to those providers that severed their relationship with the Medicare program effective before August 1, 1970. Third, the Manual explained that for purposes of the recapture rule, a substantial decrease in Medicare utilization occurs "where the provider's ratio of health insurance days to total in-patient days . . . has decreased 25 per cent or more from the base period to the computation period."*fn4 Because the Manual provisions enunciate HEW guidelines and policies for implementing the Medicare regulations but are not issued in accordance with the procedures specified in the Administrative Procedure Act,*fn5 they perforce must be considered interpretative rules.*fn6


The Center is a non-profit organization that owns and operates a skilled nursing facility in Clifton, New Jersey. Of the 244 beds that it maintains, 30 have been certified for use by Medicare patients. From the time it qualified as a provider in 1967, the Center has depreciated its capital assets on an accelerated basis. On November 17, 1975, the Hospital Service Plan of New Jersey, acting as HEW's fiscal intermediary,*fn7 notified the Center that an assessment would be made against it to recover $148,324.00. The assessment was based on a determination that the Center had a 47.36 per cent decrease in Medicare utilization between the base period, consisting of the years 1971 and 1972, and the computation period of 1973,*fn8 and represented the amount that could be recouped under the depreciation recapture regulation for the years 1967 through 1972.

A hearing before the Provider Reimbursement Review Board was requested by the Center, and was held on August 4, 1976. Noting that the regulation itself did not require retroactive recapture of accelerated depreciation, the Board expressed doubts whether the Manual's instruction that the provision be applied retroactively was valid inasmuch as it had not been promulgated in accordance with the rulemaking procedures of the Administrative Procedures Act.*fn9 The Board then found that, as the Center had contended, the decrease in Medicare utilization was no fault of the Center, but rather was caused by a June 1971 revision of HEW regulations that imposed stricter eligibility requirements for individuals seeking to qualify for Medicare coverage. Viewing the provision that changed the requirements for Medicare eligibility together with the provision authorizing the recapture of accelerated depreciation, the Board concluded that "the result penalizes a provider for its decrease in Medicare utilization as if such decrease had been ...

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