Aldisert and A. Leon Higginbotham, Jr., Circuit Judges and Meanor,*fn* District Judge. Meanor, D. J., dissenting.
A. LEON HIGGINBOTHAM, JR., Circuit Judge.
Since time immemorial it has been argued that "The King can do no wrong;" therefore, his subjects can neither complain of, nor be indemnified for, the "wrongs" of the King nor for the wrongs of the King's agents. In a different context, we are now asked to affirm a somewhat similarly archaic concept in favor of the United States government, regardless of its effect on innocent persons. Even though the agent of the Secretary of Health and Human Services*fn1 on five different occasions over a two and one-half year period wrongly advised a charitable health care provider that certain costs were reimbursable, and even though the health care provider in good faith made expenditures and incurred obligations in excess of $70,000 in reliance on the explicit advice of the agent of the Secretary, and even though the repayment of those "costs" may cause a significant diminution of home health care availability to ill and poor people in a rural medically underserved area, the Secretary now seeks to hold the health care provider liable for recoupment of the reimbursed costs. In effect, the government seems to argue that: "We, just like the King and his agents, can do no wrong, regardless of the grievous consequences we cause innocent people."*fn2 The issue we must decide is whether, on the facts of this case, the Secretary can be estopped from recouping monies from the very party that was induced, by the government agent's totally erroneous advice, into incurring the expenses for which the reimbursements were made.
Appellants, Community Health Services of Crawford County, Inc. (CHS), a non-profit corporation and Ada Werner, Frank E. Werner, and Shirley Sorger, individuals within the county who utilize CHS ' services, ask this court to set aside the summary judgment order of the United States District Court for the Western District of Pennsylvania. Plaintiffs/Appellants have filed two separate suits against the Secretary and its agent, the Travelers Insurance Companies (Travelers). Appellants claim that the decisions of the Provider Reimbursement Review Board (PRRB) and the Secretary, which allowed recoupment of overpayments to CHS under Medicare cost reimbursement procedures, were erroneous. Though appellants assert several grounds for reversal, we agree only that the District Court erred in finding that the United States cannot be estopped from recouping the alleged overpayment. Under the egregious facts of this case and in view of the affirmative misconduct of the government's agent -- Travelers -- we will reverse the judgment of the district court.
CHS is a charitable health care provider incorporated under the laws of Pennsylvania. In 1966 it entered into an agreement with the Secretary whereby CHS agreed to provide home health care services to eligible individuals under the Medicare provisions of the Social Security Act.*fn3 The Secretary agreed to reimburse CHS for reasonable costs of such services. In April, 1975, CHS entered into contracts with the Mercer County Consortium Services, Inc. by which CHS was to employ participants in a program established under the Comprehensive Employment and Training Act of 1973*fn4 (CETA) which is designed to provide job training and experience for unemployed individuals to enhance their future employability. Under the terms of the CETA grants, "CHS was to employ program participants furnished by the regional CETA administration, and it was to be reimbursed for the salaries and fringe benefits paid to those employees."*fn5
John C. Wallach, CHS ' administrator, testified that CETA workers enabled the agency to expand the range of services it provided and to meet the mushrooming demand for health services in the economically depressed and impoverished rural area in which it functioned.*fn6 CHS had designated the county that CHS serves as a medically underserved area.*fn7 It is understandable that from 1975 to 1978 CHS ' units of service burgeoned from just under 4,000 to 81,000 per year. In 1979 they increased to over 100,000 units of service.*fn8 CETA funds became a critical source for financing this expansion because CHS was otherwise dependent upon Medicare reimbursements and charitable contributions.*fn9 In 1975-1976, CETA grants of $53,402 represented 25% of CHS ' budget; in 1976-1977 CETA grants of $81,141 represented 24% of its budget; in 1977-1978, CETA grants of $104,524 represented 18%.*fn10
Medicare regulations provide that revenue received by providers in the form of donor-restricted grants, or gifts that must be used to pay designated operating expenses, must be set off against the expenses submitted to Medicare for reimbursement in the provider's cost report.*fn11 However, the Provider Reimbursement Manual at § 612 provides an exception to required offsets known as "Seed Money Grants."*fn12 "Seed Money" is defined in § 612.2 as "grants designated for the development of new health care agencies or for expansion of services of established agencies. . . ."*fn13 Thus, the critical question arose as to whether the CETA grants had to be offset against expenses CHS submitted to Medicare for reimbursement.
The administrative structure established under Medicare made it quite difficult for CHS to get an answer to the above question. The administrative process precluded CHS from presenting an inquiry directly to the Secretary. Rather, it was required to consult a fiscal intermediary appointed by the Secretary to serve as his agent. The intermediary's primary duty involved processing claims and payments to providers such as CHS. The intermediary was required statutorily to relay information and instructions from the Secretary to providers and to serve as a channel of communication from providers to the Secretary.*fn14 Consequently, Wallach presented the question of the appropriate treatment of CETA funds to the intermediary, appellee Travelers Insurance Companies. From 1975 to August 1977, Wallach discussed this issue with Michael Reeves, Travelers' Medicare Manager, on five separate occasions.*fn15 On each occasion, Reeves advised Wallach that Medicare would not offset the CETA grants against reimbursable costs because they qualified as a "seed money" exception to reimbursement offsets as provided in § 612.2 of the Provider Reimbursement Manual.*fn16 CHS prepared its cost reports without offsetting its CETA grants from its reimbursable costs, and Travelers approved CHS ' reports for the years 1975, 1976 and 1977. CHS used this additional money to finance the expansion of the health care services it provided to Medicare beneficiaries.*fn17
During the years that CHS inquired into the treatment of CETA grants, the Secretary had neither formulated nor promulgated an official policy on the treatment of CETA funds. Administrative procedures applicable to this situation obliged Reeves to refer CHS ' inquiries to the Health Care Financing Administrator. Consequently, Reeves was making a policy judgment in his own discretion in advising CHS that CETA funds were seed money and did not have to be offset. It was not until August 4, 1977 that he finally requested instructions about the treatment of CETA grants from the Philadelphia office of the Department's Bureau of Health Insurance as Reeves testified he was required to do under administrative procedures.*fn18
The instructions Reeves received from Robert C. Griffith, the Program Officer of the Health Care Financing Administration, contradicted the advice Reeves had given to CHS. Griffith declared that CETA funds did not qualify as seed money and were therefore to be offset against the provider's reimbursable costs.*fn19 CHS was advised of this instruction by letter dated October 7, 1977 and personally by Reeves on November 9, 1977.*fn20
Statutory procedures*fn21 authorize the Secretary to periodically review providers' cost reports. Thus, a determination made by an intermediary may be reopened and revised if, within three years after notice of the intermediary's determination, the Secretary notifies the intermediary that its determination is inconsistent with applicable law, regulations or general instructions of the Secretary.
Claiming authority under 42 C.F.R. § 405.1885, the Secretary reopened CHS ' cost reports for 1975, 1976 and 1977 to recoup the CETA funds he claimed should have been offset against the costs Medicare reimbursed for those years. Beginning in May 1978, Travelers issued Notices of Program Reimbursements to recapture from CHS the following amounts: for the cost year ending October 31, 1975, $7,694.00; for the cost year ending October 31, 1976, $32,460.00; for the cost year ending October 31, 1977, $31,326.00. The total for the three years, $71,480, was to be offset against Medicare reimbursements owed to CHS for services it had provided to Medicare beneficiaries.*fn22 The Secretary demanded that CHS return these alleged overpayments pursuant to 42 C.F.R. § 405.1885. CHS filed a civil action*fn23 against the Secretary and Travelers requesting the district court to enter a Temporary Restraining Order and an injunction claiming that the Secretary's and Travelers' actions were unlawful and would bankrupt it and force it to cease providing health services to its beneficiaries. Three beneficiaries joined CHS as plaintiffs.*fn24 The district court granted plaintiffs' petition for a Temporary Restraining Order against the Secretary and Travelers.*fn25 CHS then pursued administrative remedies through an appeal from the Secretary's decision filed with the PRRB. On November 13, 1979, by stipulation of counsel, the Secretary agreed to cease recouping any of the alleged overpayments, and CHS agreed to a stay in its civil action.*fn26
A hearing was held before the PRRB on January 22, 1980, and the Board rendered its decision on March 12, 1980.*fn27 The PRRB concluded that the CETA grants did not come within the "seed money" exception to reimbursement offsets and that CHS would have to return these monies for the cost years 1976 and 1977. CHS was not required to return those for the cost year 1975 since the notice of reopening was improper and could not be reissued because the three year statutory limitation on reopening the 1975 cost report had expired. The PRRB's decision thus reduced the alleged overpayment to $63,839.
CHS then brought Civil Action No. 80-56B in the United States District Court on April 10, 1980 to review the PRRB's determination of the $63,839 for the cost years 1976 and 1977.*fn28 On the Secretary's unopposed motion, the Court consolidated civil action No. 78-74B with this action.*fn29 The parties filed motions for summary judgment. On December 29, 1980, the court granted the Secretary's and Travelers' motion for summary judgment and denied that of CHS and the individual beneficiaries.*fn30
On January 14, 1982, appellants filed their notice of appeal. They claim, inter alia, that the Secretary should be estopped from recovering the overpayments because his affirmative misconduct induced CHS to include in its cost reports expenses that were covered by CETA grants. We agree with the appellants.
Justice Marshall recently wrote in a dissent that the Supreme Court assumes "that we will know an estoppel when we see one -- [but the majority] provides inadequate guidance to the lower courts in an area of the law that . . . is far from settled. "*fn31 As we seek to ascertain and reconcile the conflicting rationales proffered for application or rejection of the estoppel doctrine in a broad variety of cases involving the government, like Justice Marshall, we find this issue far from settled. Thus, we will first explain the doctrine's historical underpinnings, then trace the recent doctrinal developments and conclude by applying what we believe are the most controlling and compelling precedents to the facts of this case.
The doctrine of estoppel is used to prevent a litigant from asserting a claim or a defense against another party who has detrimentally changed his position in reliance upon the litigant's misrepresentation or failure to disclose some material fact.*fn32 The elements of estoppel ordinarily include a misrepresentation or omission of a material fact by one party; reasonable reliance on that misrepresentation by the other party; and detriment to the other party.*fn33
Courts traditionally have been reluctant to apply estoppel against the government. Considerations of sovereign immunity, separation of powers and public policy, such as the fear of binding the government by the improper acts of its agents because of possible resultant fraud and collusion or the severe depletion of the public treasury, explain this judicial reluctance.*fn34 However, with the great expansion of governmental operations, courts have recently shown a greater willingness to apply estoppel against the government in specific circumstances.*fn35
Although the Supreme Court continues to manifest reluctance to apply estoppel against the federal government, it has acknowledged that estoppel may be properly applied against the government under certain circumstances.*fn36 However, it "has never decided what type of conduct by a Government employee will estop the Government from insisting on compliance with valid regulations governing the distribution of welfare benefits."*fn37
Several circuits, including this circuit, have held that "affirmative misconduct" on the part of a government official will entitle petitioner to invoke estoppel against the government.*fn38 While the Supreme Court has not explicitly adopted the theory of estoppel because of the affirmative misconduct of a governmental official, the Court has given it tacit recognition in decisions holding that the complained of action did not rise to affirmative misconduct warranting the application of estoppel. For example, in INS v. Hibi,*fn39 the Court asserted that, "while the issue of whether 'affirmative misconduct ' on the part of the Government might estop it from denying citizenship was left open in Montana v. Kennedy, 366 U.S. 308, 314, 315, 6 L. Ed. 2d 313, 81 S. Ct. 1336 (1961), no conduct of the sort there adverted to was involved here."*fn40 Just last year the Court similarly held that a Social Security Administration employee's erroneous statement that a woman was ineligible for benefits, and his failure to advise her to apply for them, was less than affirmative misconduct and did not estop the Administration from denying her retroactive benefits.*fn41 The Court's rationale for this result is, inter alia, that the employee's failure to advise the woman was a breach of a manual guideline that did not constitute a regulation and did not have legally binding force. Moreover, petitioner failed to satisfy the procedural requirement of filing an application. Thus, petitioner failed to fulfill her statutorily imposed duty essential to receiving benefits.
Schweiker v. Hansen, supra, implies that one example of affirmative misconduct is the failure of a government employee to perform an act that is required by law. The Second Circuit explicitly stated what the Supreme Court implied. In Corniel-Rodriguez v. I.N.S.,*fn42 the court reversed a deportation order of an alien who inadvertently violated the Immigration and Nationality Act because American consular officers had failed to provide her with certain crucial information. Petitioner received an immigrant visa as the unmarried child of a United States resident, and the American consul failed to warn her that her visa would be automatically voided if she married before arriving in the United States. The official State Department regulations required the consular officer to provide this warning upon issuing the visa to petitioner. She married three days before she left her homeland, and the Immigration and Naturalization Service demanded her deportation after her arrival in the United States. The court found that the officer's failure to comply "with an affirmatively required procedure" was an act of affirmative misconduct.*fn43 The court estopped the government from deporting the alien and declared that it refused "to sanction a manifest injustice occasioned by the government's own failures."*fn44
While Corniel-Rodriguez found affirmative misconduct in the failure to perform a regulation-mandated action, other decisions emphasized equitable considerations in applying estoppel when government employees engaged in conduct on which petitioners relied to their detriment. Thus, the Seventh Circuit estopped the federal government from bringing an action under the Civil False Claims Act against a bank ...