decided: December 29, 1978.
DAUGHTERS OF MIRIAM CENTER FOR THE AGED, A NON-PROFIT CORPORATION OF THE STATE OF NEW JERSEY, APPELLANT
MATTHEWS, DAVID, SECRETARY OF HEALTH, EDUCATION AND WELFARE; AND BLUE CROSS ASSOCIATION/HOSPITAL SERVICE PLAN OF NEW JERSEY
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 77-0054)
Before Seitz, Chief Judge, and Adams and Rosenn, Circuit Judges.
Opinion OF THE COURT
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 voluntary."*fn10 It held that the regulation regarding the recapture of accelerated depreciation should be applied only prospectively, and refused to allow the fiscal intermediary to recapture accelerated depreciation for periods ending on or before December 31, 1969.
The Commissioner of Social Security examined the Review Board's decision on his own motion,*fn11 and revised that part of the decision that disallowed the recapture of accelerated depreciation for fiscal periods ending prior to January 1, 1970. The Center then filed suit in the District Court for the District of New Jersey, alleging that retroactive application of the depreciation recapture regulation (1) exceeds statutory authorization and (2) is unconstitutional.
On November 3, 1977, the district court granted summary judgment in favor of the defendants, thus sustaining the decision of the Commissioner. The trial judge interpreted 42 U.S.C. § 1395x(v)(1)(A)(ii), which directs that the regulations shall "provide for the making of suitable retroactive corrective adjustments," as authorizing the retroactive application of regulations such as the one in question. He also upheld the regulation and its retroactive application against constitutional attack, concluding that it is " "reasonably related to the purposes of the enabling legislation' "*fn12 because it ensures that the cost of providing services to non-Medicare patients will not be borne by the Medicare program. The Center's arguments that consideration be given to the fact that the Center is a non-profit organization and that since it is continuing in the program the accelerated and straight-line methods of depreciation would eventually even out were deemed unpersuasive by the district court.
A timely appeal to this Court was filed by the Center, challenging (1) the statutory authorization for, and (2) the constitutionality of, the retroactive application of the recapture regulation.
Our approach to the problems raised in this appeal differs to some degree from the position urged upon us by each of the litigants. It is evident that statutory authorization would exist for a depreciation recapture regulation that, by its terms, is to apply retroactively. Such authorization may be inferred from § 1395hh, which states that, "(t)he Secretary shall prescribe such regulations as may be necessary to carry out the administration of the insurance programs under this subchapter." See Adams Nursing Home of Williamstown, Inc. v. Mathews, 548 F.2d 1077, 1082 (1st Cir. 1977). However, 20 C.F.R. § 405.415 itself is silent as to whether excess depreciation is to be recaptured for years prior to 1970, the year in which that regulation was promulgated. Instead, retroactive application of the regulation was decreed in a provision of the Provider Reimbursement Manual that was issued as an expression of the guidelines and policies that HEW was adopting to implement such regulation. The initial issue before us, then, is whether retroactive application to the Center of the depreciation recapture regulation is consistent with the purpose and design of that regulation.
Counsel for the defendants, as well as the dissent, insist that the Center must bear the burden of proving that such retroactive application is arbitrary and irrational. Such standard is said to be required by Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 96 S. Ct. 2882, 49 L. Ed. 2d 752 (1976), where the Supreme Court, in upholding the Black Lung Benefits Act of 1972, 30 U.S.C. § 901 Et seq., against a due process challenge to the statute's retroactive impact, stated:
It is by now well established that legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality, and that the burden is on one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way.*fn13
In our view, it would be improper to invest the administrative agency's retroactive modification at issue in the present case with a similar presumption of constitutionality. It is now well accepted that "courts do not substitute their social and economic beliefs for the judgment of legislative bodies, who are elected to pass laws,"*fn14 and that " "(f)or protection against abuses by legislatures the people must resort to the polls, not to the courts.' "*fn15 The constitutional legitimacy that inheres in Congress by virtue of its accountability to the electorate is absent, however, from the administrative process, and consequently, serious questions are continually being raised and with increased frequency regarding the legitimacy of the administrative apparatus within the framework of American government.*fn16 Near the center of the growing concern over legitimacy lies the apprehension that the critical choices of our society will more and more be made by administrative personnel who ofttime are not, as a practical matter, accountable to anyone and whose decisions are immune from challenge.
It is, of course, open to speculation what repercussions such questioning may eventually have upon the standards that guide judicial review of various types of administrative promulgations.*fn17 For instance, to date courts generally have considered themselves bound by legislative rulemaking rules promulgated pursuant to congressional delegation and in compliance with the procedural requirements of the Administrative Procedure Act and have said they would overturn such rules only when they are not " "reasonably related to the purposes of the enabling legislation.' "*fn18 Such an accommodating standard of review has been justified on the ground that "(w)hen Congress has delegated to an agency the authority to make rules having (the) force of law and the agency uses the proper procedure to act reasonably and within the delegated power, the reviewing court has no more power to substitute (its) judgment for that of the reviewing agency than it has to substitute (its) judgment for that of Congress in determining the content of a statute."*fn19 Nonetheless, it appears that in recent years legislative rulemaking has been subjected to a more intensive level of judicial review than the reasonableness standard would suggest.*fn20
For the purpose of this appeal, however, we need not anticipate future developments, since retroactive application to the Center of the depreciation recapture regulation was mandated solely by an interpretative rule found in the Provider Reimbursement Manual. Interpretative rulemaking those statements made by an agency to give guidance to its staff and affected parties as to how the agency intends to administer a statute or regulation "(is) not controlling upon the courts"*fn21 inasmuch as they are not promulgated pursuant to a delegation by Congress of authority to legislate. Instead, courts remain free to substitute their judgment for that of the agency in determining how the statute or regulation is to be implemented. Describing the attitude with which courts regard interpretative rules, Justice Jackson commented in a famous passage that
rulings, interpretations and opinions of the (responsible agency) . . ., while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.*fn22
In exercising our independent judgment whether the depreciation recapture regulation should be applied retroactively to the Center, as the Manual directs, we search in vain for a statement of the reasons that prompted the adoption of such an approach.*fn23 Moreover, the position taken by HEW in its Manual conflicts with the tenor of an earlier remark by the Commissioner of Social Security to the effect that it would be unfair to providers were HEW to make retroactive changes in the principles upon which "reasonable cost" is computed.*fn24 Finally, we note that the administrative agency here has no particular expertise concerning the issue of retroactivity. To the contrary, the extent to which retroactive effect may be given to a promulgation is governed by principles of law that have been developed and refined by the courts, primarily in the context of constitutional adjudication. Accordingly, we now examine such principles to determine whether the depreciation recapture regulation should be given retroactive effect in the present case. Because we shall conclude that retroactive application to the Center of the depreciation recapture regulation is incompatible with such principles, we shall exercise the prerogative that we have when reviewing interpretative rules and refrain in the present case from giving the regulation the retroactive effect contemplated by the manual provision.
Retroactive measures whether promulgated by a legislature or by an administrative agency have traditionally been subjected to stricter scrutiny than have prospective measures.*fn25 Thus, as already mentioned, the validity of a prospective regulation by an administrative agency "will be sustained so long as it is "reasonably related to the purposes of the enabling legislation.' "*fn26 In contrast, "courts have generally compared the public interest in the retroactive rule with the private interests that are overturned by it" in deciding whether to uphold a retroactive promulgation.*fn27 Such disparate treatment is justified because retroactive laws interfere with the legally-induced and settled expectations of private parties to a greater extent than do prospective enactments. Still, retroactive rules designed to cure defects in regulatory schemes, such as the Medicare program, are often sustained because the "interest in the retroactive curing of such a defect in the administration of government outweighs the individual's interest in benefiting from the defect."*fn28
The regulation permitting recapture of accelerated depreciation has been termed a curative measure, promulgated to correct an error or defect in the previous regulation.*fn29 Specifically, the Secretary perceived that the regulation as it originally stood facilitated abuse of the Medicare program by some providers. That regulation permitted a nursing home to choose between accelerated and straight-line methods for depreciating its assets. Although eventually, over the entire useful life of the asset, both methods would yield full reimbursement of cost to the provider, the amount received in any given year would vary in accordance with the method chosen. Under the straight-line method, a nursing home would recoup the identical sum during each year of the asset's useful life, while under either of the two accelerated methods it would recover as an item of cost a greater amount during earlier years than during later years.*fn30 Thus, if a provider cared for the same number of Medicare patients each year, under the straight-line method of depreciation, the cost of the asset attributable to each patient would be allocated evenly among the patients and recovered by the provider as it rendered the services. On the other hand, under an accelerated method of depreciation, part of the cost of caring for patients in later years would be charged to the Medicare program during the earlier years, even before the provider encountered those expenses.
Affording nursing homes the opportunity to depreciate their assets on an accelerated basis was considered necessary to encourage them to participate in the Medicare program. However, it also created a loophole, and permitted some providers to obtain undeserved windfalls. Such providers would opt to depreciate their assets on an accelerated basis, recovering from the program as a reimbursement for their costs amounts that they had not yet earned. But instead of remaining in the program and providing the care for which they had already been partially reimbursed, they would quit, pocketing more than their "reasonable cost," and, in effect, reducing their overhead costs of caring for private patients. Such a state of affairs could not be countenanced in view of the explicit statutory directive that the regulations shall ensure that "the costs with respect to individuals not so covered (by Medicare) will not be borne by (Medicare) . . . ."*fn31 Accordingly, the Secretary promulgated 20 C.F.R. § 405.415(d)(3) in 1970, which authorized recapture of accelerated depreciation from providers that terminate their participation in the Medicare program or that experience a substantial decrease in Medicare utilization.
Prospective application of this curative measure must, of course, be sustained, because it is "reasonably related to the purposes of the enabling legislation." And with respect to such prospective application, the definition of substantial decrease in utilization that is offered in the Provider Reimbursement Manual reflects the considered judgment of the agency that was charged with administering the Medicare program and therefore, in the absence of any reason for being disregarded, commands judicial deference.
Similarly, Retroactive application of § 405.415(d)(3) so as to recapture pre-1970 accelerated depreciation from providers that Terminate their participation in the Medicare program after August 1, 1970 as is authorized by the Provider Reimbursement Manual is reasonable, and accordingly has been upheld by those courts of appeals that have passed on the question of its validity. See Adams Nursing Home, Inc. v. Mathews, 548 F.2d 1077 (1st Cir. 1977); Springdale Convalescent Center v. Mathews, 545 F.2d 943 (5th Cir. 1977); Hazelwood Chronic & Convalescent Hospital, Inc. v. Weinberger, 543 F.2d 703 (9th Cir. 1976), Vacated and remanded on other grounds, 430 U.S. 952, 97 S. Ct. 1595, 51 L. Ed. 2d 801 (1977). These tribunals have wisely concluded that the public interest in recouping overpayments from homes that have left the Medicare program outweighs whatever disappointment has been caused to them. "When providers joined the program, they knew that "small repairs' in the regulatory scheme were likely;"*fn32 indeed, the statute warned that they would be reimbursed only for "reasonable cost" and that retroactive adjustments might be necessary to ensure that no overpayments were made. Where a provider that had depreciated on an accelerated basis voluntarily leaves the program and will not in the foreseeable future care for any additional Medicare patients, it has undeniably been overpaid for its services. Not to collect the excess of accelerated depreciation over straight-line depreciation in such circumstances would be to permit a clear derogation from the public policy manifested in the legislative arrangement.
In opposition to such strong public interest stands the relatively weak private interest of the provider that voluntarily terminated its participation in the Medicare program. On the one hand, to the extent that such provider planned from the start to take advantage of the accelerated depreciation formula by dropping out of the program after being reimbursed in accordance with the higher rates available under such formula, the provider's expectation concededly was foiled by the recapture regulation. But "(w)hile such an expectation may not be wholly illegitimate, it would seem to have nothing to recommend it other than the traditional desire to take advantage of a loophole."*fn33 Assuming, on the other hand, that the provider left the program for nonsuspect reasons, it expected to be reimbursed only for its "reasonable cost," and consequently its expectation was not upset at all.
We may further accept, without deciding, that the public interest in recovering overpayments justifies the retroactive application of the depreciation recapture regulation to those providers that, though they have not formally ended their relationship with the Medicare program, have effectively achieved such a result by substantially decreasing to a nominal figure the proportion of Medicare patients under their care. Vindication of the public interest in curing defects in the regulatory scheme must not be hampered by such formalistic distinctions as whether the provider terminated its participation officially, or merely constructively.
Nevertheless, in our view, the balance between public and private interests shifts dramatically in the situation where the regulation is applied retroactively to recapture excess accelerated depreciation from a home in the Center's situation. When a provider continues to participate actively in the Medicare program, as the Center does, the public interest in forcing such a provider to change from an accelerated method to the straight-line formula is minimal, since there is no indication that such provider is taking undue advantage of the program. Even if the provider suffers a decline in Medicare patients during one or more years, it may well experience higher levels of utilization in subsequent years. In such event, the losses to the Medicare program from that one year will have been more than compensated for by the increased use of the facility during later years. Thus, only after Medicare utilization over the entire useful life of the asset is assessed can it be determined whether the provider has been overpaid for the services it actually rendered.
Indeed, the facts of the present case amply demonstrate this point. During the base period consisting of the years 1971 and 1972, the Center experienced a Medicare utilization of 31.29 percent. In 1973, its utilization was only 16.47 percent, a drop of 47.36 percent from the base period.*fn34 However, based upon figures adverted to by the Center and not disputed by the government, the Center's utilization by Medicare patients increased markedly in the two subsequent years, so that for the fiscal period ending December 31, 1975, its Medicare utilization was 41.89 percent.*fn35 Should this trend continue, the years of plenty may well make up for the lean years.*fn36
Admittedly, there remains some marginal public interest in having the recapture regulation apply retroactively to a provider in the Center's position. Administrative convenience may suggest that once a substantial decline in utilization during any year indicates the possibility that an overpayment will eventually result, the Secretary need not wait for the useful life of the capital asset to elapse, but may recapture the excess accelerated depreciation immediately. Certainly this public interest despite its relative insignificance may justify prospective application of the recapture regulation because it is reasonably related to the underlying legislative purpose; it cannot, however, support retroactive application of that provision in the face of the weighty, countervailing private interests affected here.
In a retroactivity challenge, such as the present one, a critical question is how the challenger's conduct, or the conduct of others in its class, would have differed if the rule in issue had applied from the start.*fn37 In the Center's case, that question may be answered with a degree of certainty. Had the Center been apprised in 1967, when it first joined the Medicare program, that upon choosing to depreciate its capital assets on an accelerated basis it also assumed the risk that should its utilization by Medicare patients substantially decrease in the future it would be vulnerable to recapture of the excess depreciation already taken, the Center undoubtedly would have opted for the straight-line method. The assumption by the Center of that formidable risk, whose fruition might well have a grievous effect on its cash flow and capital acquisition plans, probably would not have been warranted inasmuch as both methods of depreciation would in the end produce the same amount of reimbursement for its costs. But the Center was not so apprised, and drew up its financial plans upon the expectation that it may calculate the "reasonable cost" of its capital assets on an accelerated basis. When the "rules of the game" were suddenly modified, HEW claimed that the Center owed the Medicare program over $148,000. This severe impact upon the Center's finances, overturning its settled expectations, outweighs the negligible public interest in applying the new provision retroactively to it.*fn38
Our decision not to apply the recapture regulation retroactively in the present case is influenced by an additional factor: The Review Board found that the decrease in the Center's utilization by Medicare patients in 1973 was substantially related to the imposition in 1971 of more stringent requirements for eligibility for Medicare benefits. Inasmuch as the decline here was precipitated by governmental action rather than by any conduct on the part of the Center, it does not seem appropriate for HEW first to set up the cause and then to punish the provider for its consequences.
Our holding is a narrow one. We do not review the approach that was adopted by HEW to remedy a perceived abuse with the attitude that, "as a matter of constitutional law, a scheme more attuned to the equities of a particular provider's situation "would have been wiser or more practical under the circumstances . . . .' "*fn39 Indeed, our decision leaves intact the objectives as well as the details of the curative measure conceived by HEW and enacted through legislative rulemaking as 20 C.F.R. § 405.415.*fn40 Rather, we address the limited issue whether such regulation should be applied retroactively, as dictated by a subsequent modification of the Provider Reimbursement Manual which, because of its assertedly interpretative nature, was promulgated without complying with the safeguards of the Administrative Procedure Act. Not to consider that question would be to abdicate our responsibility to protect the public from arbitrary bureaucratic action, a responsibility that is manifested in the doctrine that permits courts to substitute their judgment for that of administrative agencies when they review interpretative rules. Moreover, in relying upon the accepted balancing test to determine that the regulation should not be applied retroactively to the Center, we assiduously avoid substituting our judgment for that of the administrative agency as to what changes would make the scheme "wiser or more practical;" we leave it to the Secretary to make that determination. We hold only that the agency may not, by an interpretative rule, rewrite a position it had taken previously, and upon which a party had justifiably and materially relied, under the pretext that such retroactive modification is integral to a curative measure, when such retroactivity is not supported by the rationale underlying the curative measure and when at least part of the cause for the party's noncompliance with the curative measure is attributable to the agency.
In view of the result we reach, we need not address the constitutional issue pressed by the Center, namely whether the retroactive application to it of the depreciation recapture regulation deprives it of property without due process of law.*fn41
The judgment of the district court will be reversed with respect to the recapture of the excess of accelerated depreciation over straight-line depreciation for fiscal periods ending on or before December 31, 1969. With respect to such recapture for fiscal periods ending after December 31, 1969, the judgment of the district court will be affirmed, and the cause will be remanded for proceedings consistent with this opinion.
SEITZ, Chief Judge, dissenting.
According to my best reading, the majority holds that HEW impermissibly interpreted 20 C.F.R. § 405.415(d)(3) as allowing the recapture of excess reimbursable depreciation paid before the effective date of that regulation in a case where the affected provider decreased his participation in the Medicare program by more than twenty-five percent after the adoption of that regulation. Because I believe that section 405.415(d)(3), on its face, calls for recapture of depreciation paid prior to its effective date and that the twenty-five-percent rule is a reasonable way to define the term "decrease" in that regulation, I dissent.
I differ with the majority about the source of the retroactivity in this case; I believe that a chronology of important events will illuminate our disagreement. The Center began its participation in the Medicare program in 1967. At that time it elected to use accelerated depreciation. In 1970, HEW banned the use of accelerated depreciation for assets acquired after August 1, 1970. In another regulation enacted at the same time, HEW announced that it would recapture any excess depreciation paid to providers who terminated or constructively terminated their participation in the program:
When a provider who has used an accelerated method of depreciation with respect to any of its assets terminates participation in the program, or where the health insurance proportion of its allowable costs decreases so that cumulatively substantially more depreciation was paid than would have been paid using the straight-line method of depreciation, the excess of reimbursable costs determined by using accelerated depreciation methods and paid under the program over the reimbursable cost which would have been determined and paid under the program using the straight-line method of depreciation will be recovered . . . .
20 C.F.R. § 405.415(d)(3) (presently codified at 42 C.F.R. § 405.415(d)(3)(i) (1977)). In 1972, HEW issued a revised "Provider Reimbursement Manual" containing two items relevant to this case. First, according to the Manual, section 405.415(d)(3) was to be applied retroactively. Second, a decrease of twenty-five percent or more in a provider's "ratio of health insurance days to total inpatient days" would be deemed substantial enough to trigger the recapture of any excess depreciation. In 1973, the Center's participation fell below this twenty-five percent threshold. The Secretary subsequently attempted to recapture excess depreciation, as defined by section 405.415(d)(3), for each year since 1967.
I agree with the majority that the Secretary had statutory authority to adopt a regulation with retroactive effect. I cannot agree, however, that section 405.415(d)(3) required any subsequent administrative gloss to make its retroactive import clear; it had retroactive impact Ab initio. Upon a provider's termination, HEW is entitled to recover "the excess of reimbursable cost determined by using accelerated depreciation methods And paid under the program over the reimbursable cost which would have been determined And paid under the program by using the straight-line method . . . ." (emphasis added) As later noted in the Manual, this provision does not reach providers who terminated before its effective date. But any provider who terminates after the effective date clearly is liable for the difference between the costs he had claimed using accelerated depreciation and the costs that he would have claimed had he used the straight-line method. This calculation is, by necessity, retrospective. A provider who terminated the day after this regulation became effective would be liable for overpayments for all prior years. No other reading of section 405.415(d)(3) makes sense.
Identifying the source of retroactivity is imperative here. The majority strikes down retroactive recovery from the Center because the Manual was an interpretative measure not promulgated under the Administrative Procedure Act. Two illustrations, however, demonstrate that retroactivity predated the interpretative Manual. First, if a provider had constructively terminated its participation however the majority wishes to define that event after 1970 but prior to the adoption of the twenty-five-percent rule in 1972, the Secretary could have invoked the plain terms of section 405.415(d)(3) and could have recovered all overpayments, including those preceding 1970. Second, if the Manual created any offensive retroactivity, then the Secretary should not be entitled to recover any depreciation accruing before 1972. Nevertheless, the majority allows the Secretary's recovery to date back to 1970, the effective date of section 405.415(d)(3), the true source of retroactivity in this case.
The majority, of course, is not "interpreting" section 405.415(d)(3) at all. Instead, it concludes that the twenty-five-percent rule is "fair" only when section 405.415(d)(3) is used to recover overpayments made after 1970. Presumably the majority would require a more significant decrease before allowing the Secretary to recover overpayments predating 1970. In rationalizing this unusual reading of the underlying regulation, the majority seems to invoke principles of estoppel. The Reimbursement Review Board did indeed assert that the government was partially responsible for the Center's predicament. The Commissioner of Social Security, however, contradicted this assertion when he reviewed the Board's decision; the district court affirmed the Commissioner's decision. The majority fails to give any explanation for rejecting the Commissioner's finding.
Turning to appellant's constitutional arguments, I believe that the correct standard of constitutional review for any authorized enactment, legislative or administrative, prospective or retrospective, is that stated by the Supreme Court in Usery v. Turner Elkhorn Mining, 428 U.S. 1, 15, 96 S. Ct. 2882, 2892, 49 L. Ed. 2d 752 (1976):
See also, Springdale Convalescent Center v. Mathews, 545 F.2d 943 (5th Cir. 1977). Because the Center has not met its burden of demonstrating that this regulatory scheme is not rationally related to the valid legislative purpose of ensuring that the agency's methods of cost reimbursement do not overcompensate providers for their services to Medicare patients, I would sustain retroactive application of this regulation. See Summit Nursing Home, Inc. v. United States, 215 Ct. Cl. 581, 572 F.2d 737 (Ct.Cl.1978). In the words of the Supreme Court, a court may not say as a matter of constitutional law that a regulatory scheme more attuned to the equities of an individual provider's situation "would have been wiser or more practical under the circumstances . . . ." Turner Elkhorn Mining, supra, 428 U.S. at 19, 96 S. Ct. at 2894.
I would affirm the judgment of the district court.