Regions Hospital v. Shalala

PETITIONER:Regions Hospital
RESPONDENT:Shalala
LOCATION:The White House

DOCKET NO.: 96-1375
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 522 US 448 (1998)
ARGUED: Dec 01, 1997
DECIDED: Feb 24, 1998

ADVOCATES:
Lisa Schiavo Blatt –
Lisa S. Blatt – Department of Justice, argued the cause for the respondent
Ronald N. Sutter – Argued the cause for the petitioner

Facts of the case

Under the Medicare Act a hospital may obtain a reimbursement for certain graduate medical education (GME) programs for interns and residents by preparing certain reports. The GME Amendment, section 9202(a), of the Medicare and Medicaid Budget Reconciliation Amendments of 1985 directs the Secretary of Health and Human Services to determine, for a hospital’s cost reporting period starting during fiscal year 1984, the amount “recognized as reasonable” for GME costs. The Amendment then directs the Secretary to use the 1984 amount, adjusted for inflation, to calculate a hospital’s GME reimbursement for subsequent years. The Secretary’s “reaudit” regulation permits a second audit of the 1984 GME costs to ensure accurate reimbursements in future years. A reaudit of Regions Hospital significantly lowered the Hospital’s allowable 1984 GME costs. Subsequently, the Hospital challenged the validity of the reaudit rule. Ultimately, the District Court granted the Secretary summary judgment, concluding that the rule reasonably interpreted Congress’ prescription and that the reauditing did not impose an impermissible “retroactive rule.” The Court of Appeals affirmed.

Question

Is the Secretary of Health and Human Services’ “reaudit” rule a reasonable interpretation of the GME Amendment of the Medicare and Medicaid Budget Reconciliation Amendments of 1985?

William H. Rehnquist:

We’ll hear argument first this morning in Number 96-1375, Regions Hospital v. Donna Shalala.

Mr. Sutter.

Ronald N. Sutter:

Mr. Chief Justice, and may it please the Court:

This case presents a straightforward question of statutory construction.

At issue is the meaning of 42 U.S.C. 1395ww(h)(2)(A), which is quoted on page 19 of petitioner’s opening brief.

As the Sixth Circuit correctly concluded in the Toledo case, this is a simple statute.

It directs the Secretary to do one thing.

It directs the Secretary to determine an average, nothing more.

The numerator in this case is the amount recognized as reasonable under this subchapter for GME costs for 1984.

The statute itself does not direct the Secretary to determine the numerator, and the reason why is clear from the words, under this subchapter.

The statute does not say, under this section, or under this paragraph, but it says, under this subchapter, and there was already a longstanding process in place for determining the amount recognized as reasonable for each year, including 1984.

William H. Rehnquist:

Well, determine I think could quite reasonably be read to mean, use some discretion, or judgment.

I mean, it seems to me if they just meant calculate they would have said calculate.

Ronald N. Sutter:

Well, I think when you’re referring to an average, determine and calculate are essentially equivalent, and there are, Mr. Chief Justice, within 1395ww(h) other provisions where it’s clear that Congress did intend to confer significant authority on the Secretary.

One such provision is 1395ww(h)(2)(E), which is on page 3 of petitioner’s appendix.

I will use ellipses here, but there it says, in the case of a hospital that did not have an approved medical residency training program, ellipses, during fiscal year 1984, the Secretary shall, ellipses, provide for such approved FTE resident amount as the Secretary determines to be appropriate.

Now, this is language that does clearly grant the secretary discretion.

Here we have activist language.

In (a), the provision we’re dealing at… with, the Congress was telling the Secretary, divide A by B, divide one number by another.

There is also, if–

Antonin Scalia:

Mr. Sutter–

–The problem I have with this provision is what it is that the word recognized modifies.

You win, it seems to me, if it is to be read, that the average amount recognized as… recognized as reasonable under this subchapter.

Does under this subchapter go with recognized?

If it does, I think your case is strengthened.

But it could also be read, the average amount recognized as reasonable under this subchapter.

You understand what I’m saying?

If it has to have been recognized under this subchapter, you’re… the text obviously refers to a 19… to a prior determination.

Ronald N. Sutter:

–Right.

Antonin Scalia:

It has already been recognized.

Ronald N. Sutter:

Right.

Antonin Scalia:

Under this subchapter.

But it could also be read as recognized as reasonable under this subchapter, so that the prepositional phrase, under this subchapter, goes with reasonable.

Now, why is it that I should read it the first way rather than the second?

Ronald N. Sutter:

Well, there are a number of reasons, but one is that there is one, and only one statutory provision in the medicare subchapter that does provide for recognizing an amount as reasonable, and that is 42 U.S.C. 1395oo (a), which we have quoted at pages 11 and 12 of petitioner’s appendix.

The relevant language is at the top of page 12, which refers to a final determination, which we know as the notice of program reimbursement for the NPR, as to the amount of total program reimbursement due the provider for the items and services for which payment may be made under this subchapter for the period covered by such report.

The words that are used in the GME statute is, amount recognized as reasonable under this subchapter.

Here in 1395oo(a) we have a specific amount, it is recognized as reasonable… that is, there’s a final determination of program reimbursement… it is specifically under this subchapter, and it’s specifically for a period.

This is a very important provision in the medicare subchapter, and in fact is one that this Court has seen before in the Bethesda Hospital Association case decided in 1988.

Antonin Scalia:

Well, that… I mean, that’s all very persuasive if you read the phrase as recognized under this subchapter.

I think you point out quite correctly to that provision.

That’s the only provision it could refer to if it’s talking about something that has been recognized under this subchapter.

But if it’s just talking about something that has been recognized as reasonable, or that will in the future be recognized as reasonable, then it could refer to a new determination and not one that has already been made.

Ronald N. Sutter:

Well, I do… I think the timing here would preclude that, because COBRA 9202(e), which we have cited at page 6 of our reply brief, clearly reflects that Congress intended these amounts to be established by 1987.

That was well within the reopening period for 1984 in all cases.

There’s no reason why Congress would have wanted to have two amounts.

David H. Souter:

Well, there’s no reason it would want two amounts, but there is a reason that it might want a corrected amount, and suddenly a figure which in the past has been used solely to calculate a reimbursement for 1 year is going to be the basis for reimbursement in effect in perpetuity until the law gets changed, so I mean, there’s a… there would be a good reason on Congress’ part to want to make sure that the ultimate figure was the right one.

Ronald N. Sutter:

Oh, I agree with you.

They would.

David H. Souter:

So we’re not talking… I mean, it’s not as though… but I guess my only point is, I don’t see that you get anywhere by saying Congress wouldn’t have wanted two figures.

Congress wants one figure and it wants the right figure.

Ronald N. Sutter:

And I think there’s every reason to believe that we do have the right figure here.

We have–

David H. Souter:

Let me ask you this.

Going back to Justice Scalia’s question, on your reading, what is served by having the modifier, as reasonable, in there at all, because on your reading once the figure has been recognized, that’s it for all purposes, including future calculation.

Ronald N. Sutter:

–I think that avoids a potential question as to whether the lower cost or charges principle applies.

Under reasonable cost standards–

David H. Souter:

But… may I interrupt you here?

Ronald N. Sutter:

–Sure.

David H. Souter:

In any given… in the case of any given hospital for the base year there has been, at least in the past with respect to that year, that annual reimbursement, only one figure recognized, isn’t that so?

David H. Souter:

In other words, the Secretary didn’t say, well, we’ll reimburse you either the A amount or the B amount, depending on methodology.

Ronald N. Sutter:

Well, there has been only one figure recognized as reasonable, but in certain cases that may not have been what was actually paid and the reason why is that, under 42 U.S.C. 1395f(b), a hospital got paid the lower of its reasonable cost or its customary charges.

Now, in almost all cases the reasonable costs would be lower, but there could be cases where the customary charges were lower, and to avoid any ambiguity the words, as reasonable make clear that you’re looking at the amount that was recognized as reasonable–

Ruth Bader Ginsburg:

Is that your interpretation of it, or is there any basis for saying that what Congress had in mind was that sometimes the hospital might charge even less than what was reasonable?

Ronald N. Sutter:

–Well, that’s in the statute.

That’s 42 U.S.C. 1395f(b).

Ruth Bader Ginsburg:

But you’re giving that as a reason–

Ronald N. Sutter:

Right.

Ruth Bader Ginsburg:

–for why the word reasonable is in there.

Ronald N. Sutter:

Right.

Ruth Bader Ginsburg:

And my question to you was, is that just your interpretation?

Ronald N. Sutter:

That’s my interpretation.

That’s why I think it’s important to have the words, as reasonable.

Ruth Bader Ginsburg:

Do I understand you right that you wouldn’t be having any claim here if the Secretary had made the reopening period 5 or 6 years instead of 3 years?

Is that right?

Ronald N. Sutter:

Well, I think in this case, in light of COBRA 9202(e), it is clear that Congress intended the per-resident amount to be established by 1987, which was well within the existing reopening period, and I think prompt implementation was very important, just as in the case of–

Ruth Bader Ginsburg:

But if you would… suppose there hadn’t been the 3-year.

Suppose from the start the Secretary had said, I want the reopening period to be 6 years.

Ronald N. Sutter:

–You mean that was a general period for all years?

Ruth Bader Ginsburg:

Just the same regulation as the Secretary now has, except instead of saying 3, it says 6.

Then do I understand that you wouldn’t have any claim?

Ronald N. Sutter:

Well, as we pointed out in footnote 8 of our reply brief, the current reopening regulation is a pretty broad construction of the statute, but you would certainly have a very different case here.

Our case is based upon the fact that there was an amount recognized as reasonable under this subchapter, and the Secretary is not using that amount.

Ruth Bader Ginsburg:

Yes, I understand that argument, but I just wanted to be clear on two things.

One, if the Secretary made a longer period you wouldn’t be contesting that the amount that the Secretary ultimately arrived at is an amount that is reasonable.

Ronald N. Sutter:

We would… yes.

We would say there needs to be uniformity, and whatever’s the final determination for 1984, that is the amount that would be used for purposes of this average, that’s correct.

Anthony M. Kennedy:

Just following up on Justice Ginsburg’s question, you would agree the agency could have repealed the 3-year window for examining the costs if it had chosen to do so by regulation?

Ronald N. Sutter:

Well, I don’t think so in this case because of COBRA 9202(e).

That clearly reflected Congress’ intent that this would be established by 1987, and in any event–

Anthony M. Kennedy:

So the statute froze into place the congressional… pardon me, the administrative regulations on re-audit?

Ronald N. Sutter:

–If it expected to be done by 1987, which Congress made clear that it did, I think it would… it did that, yes.

I mean, this is a rate system.

It’s not a retrospective payment system like reasonable cost, and one of the important things for a rate is that they be set in advance so that everyone knows what the rate’s going to be and so that you have predictability.

John Paul Stevens:

May I ask you a question about one of the phrases that troubles me?

It’s a hard statute to follow, but you quoted to us from sections oo and so forth.

They were in the statute before 1986, I believe.

Ronald N. Sutter:

Yes, that’s correct.

John Paul Stevens:

And therefore the duty to make a determination existed before the 1986 amendment.

Now, therefore, the word in the 1986 amendment that seems interesting to me is the Secretary shall determine.

Ronald N. Sutter:

Right.

John Paul Stevens:

In 1986 it imposed a new duty to make a determination that did not previously exist.

Ronald N. Sutter:

Determine the average.

John Paul Stevens:

Which sounds to me as though they may have said you’re not necessarily bound by what you would have done under the preexisting statute.

Ronald N. Sutter:

Well, it said you shall determine the average, and the amount recognized.

In the normal course the amount recognized for ’84 will be done before you actually determine the average, just because ’84 preceded the first year subject to payment under the new methodology by 2 years.

In petitioner’s case, the first year was ’86, that they would be subject to payment under the new methodology, and the base year would be ’84.

Antonin Scalia:

Well, the old determination didn’t do it resident by resident, did it?

Ronald N. Sutter:

No, no.

It is a–

Antonin Scalia:

The ’84 determination just gave you the total figure.

Ronald N. Sutter:

–That’s correct.

Antonin Scalia:

And what this says is, you figure how much of that is attributable to each full-time equivalent resident.

Ronald N. Sutter:

No, it’s the average–

Antonin Scalia:

Yes.

Ronald N. Sutter:

–for each resident, but what you would have, when you have the NPR you would have with it an audited cost report that would give you an aggregate figure for GME.

Antonin Scalia:

Right.

Ronald N. Sutter:

So you would take that figure, whatever it is, and divide it by your number of residents–

Antonin Scalia:

Right.

Ronald N. Sutter:

–and that’s what you’d get as your number.

David H. Souter:

But it’s interesting that the term which we’re considering is not the amount recognized as reasonable for each full-time… each FTE.

It’s the average amount recognized as reasonable, and the so-called average amount has never been recognized.

That is a purely prospective determination, isn’t it?

Ronald N. Sutter:

Yes, that’s correct, so the Secretary shall determine the average, that’s right.

David H. Souter:

Well, shall determine the average amount, and that so-called average amount has never been determined in the past.

Ronald N. Sutter:

No, but the amount recognized as reasonable under this subchapter is always determined as… in the normal course, and the language here is very similar to the same language that we had in the prospective payment system for operating costs in… for TEFRA.

David H. Souter:

Well, except that it didn’t have the modifier average on there.

It was talking about a different figure.

It was talking… as you have pointed out earlier, it was talking about the numerator.

Ronald N. Sutter:

But the Secretary was directed to compute the average.

David H. Souter:

Yes.

Ronald N. Sutter:

Because you see that there’s an average if you look at 42 U.S.C. 1395ww(a)(4), which defines all of that in terms of average.

So the term that you’re looking at, and looking at what the target amount is, doesn’t use the word average, but it keys into an average when you look at (a)(4), which requires that it’s an average amount, in that case per discharge, and in this case it’s per resident.

Antonin Scalia:

Mr. Sutter, I hope at some point you will tell us… because this has to affect the way you look at this case.

There’s an enormous variation between what the ’84 figure would show and what the recalculation shows.

Ronald N. Sutter:

Right.

Antonin Scalia:

And it gives me, at least, the impression that it’s a pretty terrible system that would carry forward such an enormous error, and if there’s a way to avoid that, I would like to.

Ronald N. Sutter:

Okay.

Well, essentially what happened in this case is, a great portion of that is attributable to the time that the physicians reported as administrative time.

That is, during ’84 they completed time studies, and one of the categories was for administrative time that was always claimed and always allowed as GME.

In the re-audit the intermediary applied a default rule and said, well, your administrative time could have been administrative time for GME, or it could have been administrative time for operating purposes.

We must look… we must see actual data from ’84, or we’re just going to apply an ad hoc default rule, and that’s what occurred in this case.

That… either directly or indirectly, that accounts for about 90 percent of the differential here.

Antonin Scalia:

And your claim is that had that been… had that method of calculation been imposed in 1984 you would have had the facts and figures that would have allocated more of that administrative time to GME.

Ronald N. Sutter:

I believe that to be the case.

I would also say that during ’84 itself no breakdown was required, and–

William H. Rehnquist:

Well, what factual development in the record is there to show that you were hurt by this socalled default rule, that you didn’t have material that you had at one time but had disposed of?

Ronald N. Sutter:

–Well, we… in the record we have… there is the audit adjustment report which shows that these are recharacterizations–

William H. Rehnquist:

Yes.

Ronald N. Sutter:

–of costs.

Ronald N. Sutter:

They’re not… they weren’t disallowances of costs.

They were recharacterizations of cost from GME to operating–

William H. Rehnquist:

Yes, but my question was, what is there in the record that shows you were injured, that you could have produced something had it come up in 1988, but you couldn’t when it came up in 198–

Ronald N. Sutter:

–We haven’t really focused on that because we’re really focusing on the threshold question here, which is, did the Secretary have the authority to re-audit.

William H. Rehnquist:

–Well, then you don’t really rely on the fact that you were hurt by the Secretary’s decision to re-audit if it were justified on other grounds.

In other words, that had the… the Secretary perhaps had authority, but there was very… it was… came to you as a surprise.

You’d thrown your records away.

Ronald N. Sutter:

Well, we haven’t focused on the individual facts because we are–

William H. Rehnquist:

Well, I… you can answer that question yes or no, Mr. Sutter.

Ronald N. Sutter:

–Yes, I think that’s correct, but we are looking at whether the Secretary had the authority to do the re-audit.

Anthony M. Kennedy:

Because a large part of your brief, and I thought it was a convincing argument when I first examined it, was that hospitals have thrown away their records for 1984 and they’re prejudiced, but that seems to be falling–

Ronald N. Sutter:

Well, no they… that did, in fact, happen in this case.

I mean, we had a total turnover of the reimbursement department between 1984 and the time of the re-audit, and there were records that had been discarded.

That did happen in the case, but I have not been focusing on this, because we’re really looking at the threshold question, which is, did the Secretary have the authority to do this.

Stephen G. Breyer:

–Is the reason you’re not focusing on it because… is the reason, is one reason you’re not focusing on it… one reason because you conceded it out of the case, and I take it the other reason is because they’ve actually promulgated a rule that states, as an equitable solution to the problem of the nonexistence of records, we are allowing providers to furnish documentation from cost reporting periods subsequent to the base period.

Now, am I wrong?

I’ve looked at that.

I tried to find it.

You did mention it in your brief.

Ronald N. Sutter:

Right.

Stephen G. Breyer:

I wanted to know what HHS had done about people who’d thrown their records away, and my law clerk found this rule.

Ronald N. Sutter:

Yes.

Stephen G. Breyer:

Which says, they’re aware of the problem and they’re going to be fair about it.

Ronald N. Sutter:

We–

Stephen G. Breyer:

Now… so is there any answer to this?

Ronald N. Sutter:

–Yes.

Stephen G. Breyer:

What?

What’s the answer?

Ronald N. Sutter:

There’s two answers.

First of all, even where that applies, it’s not fair, and secondly it doesn’t apply here.

Ronald N. Sutter:

Let me go to the first.

They allow a 3-week current time study for 1990, but it’s skewed to the Secretary’s favor.

You get the lower two numbers.

You get what was in the 80… 1984 NPR, or you get the figure in the time study.

It’s also a figure for 1990, which is unrelated to what we’re looking for, which is what was recognized for 1984.

It was not available to the hospital here because this hospital did have time records from 1984, or it had summaries.

The problem wasn’t the time records, it was… the problem was that they were reinterpreted by the Secretary.

Stephen G. Breyer:

But I also have a later sentence in this same thing which, it says, we understand that all this stuff is at best persuasive, so if the intermediary believes any of the changes or modifications distort the reliability of the data, it says we’ll look at the whole thing.

That’s how I read it.

In other words, they’re aware of the problem, they will look at it, and they’ll deal with it appropriately, and I looked at that, and I saw that you yourselves had given up any challenge to the question–

Ronald N. Sutter:

Well, they… yes.

Stephen G. Breyer:

–of the fairness of the give-back of the [dollars] 4 million.

Ronald N. Sutter:

Well, they had a choice.

They could have proceeded with that.

It would have been difficult because the personnel had turned over and records had been lost.

I think if they had proceeded, that they may very well… I think, in fact, they probably would have won, because really the issue they had here is, I think, the same as an issue in another case called Good Samaritan Hospital, which is 873 F. Supp. at 1089-1092, which involved this administrative time, and that that ruled against the Secretary and the Secretary did not appeal.

But they elected not to take that route.

They elected to get at what I would suggest is the heart of the matter, which is, did the Secretary have the authority to re-audit, and if the Secretary didn’t have the authority that really ends the matter.

As far as… I don’t see that it’s necessary to apply any presumption here, but if there is a presumption that is to be applied, I would suggest the presumption is in favor of the final and binding determination that’s made for 1984.

William H. Rehnquist:

Isn’t there some difference between a regulation which perhaps deals with private actors in the… in a private field, say like an FTC regulation of competition, and a regulation issued by the Secretary which basically just determines how Government money is going to be spent?

I mean, don’t we give more latitude to the latter, usually?

Ronald N. Sutter:

Well, perhaps, but I think we have clear language here, and I think we also have the fact that there was already a final and binding determination, and there is a presumption in favor of issue preclusion, and there’s nothing to overcome that presumption here.

William H. Rehnquist:

Well, where does the presumption in favor of issue preclusion come from?

Ronald N. Sutter:

The… well, the Court has established that in cases such as Astoria Federal, and here we have a final and binding determination for 1984.

Hospitals were told they were free to discard their records.

William H. Rehnquist:

Well, but this is not a redetermination for the same purpose.

Ronald N. Sutter:

Well, it still said final and binding.

It was unqualified.

It said final and binding, and–

Ruth Bader Ginsburg:

But up until the change that was made to take this as a base year, final and binding meant, we do it on a year-by-year basis, so that’s… final and binding for purposes of that year, once a 3-year reopening passes is one thing.

Ruth Bader Ginsburg:

To say final and binding forever is something that could come into play only after the ’86 act, am I right, because before then final and binding referred only to the year-by-year determination.

Ronald N. Sutter:

–Well, it was the same thing that was done for PPS in TEFRA.

There, Congress established an… a rate for the future based upon a… an amount recognized under the subchapter for a base year, and the Secretary used the same amount, and it’s important–

Ruth Bader Ginsburg:

Yes, but that’s not answering my question, that I… there was a change, was there not, that up until then–

Ronald N. Sutter:

–But 1986, Justice Ginsburg, was within the reopening period for this year.

I mean, we… the… in some cases the NPR had not even been issued as of the date that this statute was enacted.

In other–

Ruth Bader Ginsburg:

–So you don’t quarrel with any… if all this had been done within the 3 years, you would have no quarrel with it.

Ronald N. Sutter:

–I am… yes.

I mean, there’s… there has to be uniformity.

It’s really the same argument that I made in the PPS context for Georgetown II, and that–

Ruth Bader Ginsburg:

So what you’re saying is, the Secretary got it wrong.

She’s got 3 years to get it right, and if she doesn’t, too bad, it gets rejected into the future until Congress changes it.

That’s the essence of your argument.

Ronald N. Sutter:

–I’m saying once that period has passed you are not going to get an accurate result, and I’m also saying that these results were accurate because they were audited determinations, done by experienced intermediaries, and they were done at a time when there was reason to be careful because this was the year to be used for the–

Ruth Bader Ginsburg:

But all that’s another case.

It’s not the one that we have, right?

For purposes of this argument you have accepted, I thought, that the second determination by the Secretary was a reasonable determination.

Ronald N. Sutter:

–No, we’ve not accepted that.

We simply have elected instead to pursue the threshold question.

Sandra Day O’Connor:

Counsel, I–

Ronald N. Sutter:

Which is, did the–

Sandra Day O’Connor:

–I also have a question, and your time is running out, and I did want to ask it.

I take it that what happened after this new statute was passed is that some costs were reclassified–

Ronald N. Sutter:

–Right.

Sandra Day O’Connor:

–from education to operating.

Ronald N. Sutter:

That’s correct.

Sandra Day O’Connor:

And I think there is a regulation… tell me if that’s right… that hospitals can request an upward adjustment in the hospital-specific rate if a reaudit results in the reclassification of costs as operating costs.

Ronald N. Sutter:

Right.

Sandra Day O’Connor:

So in theory, even though this disastrous thing happened, the hospital can ask for an upward adjustment in the rate.

Ronald N. Sutter:

They can ask, but that doesn’t really help.

It doesn’t help because the Secretary’s not changing the Federal rate, which is the primary component of payment under PPS.

It’s also not helping in many cases because the hospitals have to have documentation from 1982, which many of them no longer have.

David H. Souter:

Well, they may not have it, but weren’t they put on notice by the Secretary that there would indeed be this recalculation, so can any hospital at this point claim that they were surprised to find that they would like to look at old records which they tossed out?

Ronald N. Sutter:

No, they weren’t put on notice.

The proposed rule indicated that there might be some reaudits in unspecified circumstances, but it nowhere suggested that there could be a re-audit after the 3-year period had expired.

David H. Souter:

But it didn’t suggest otherwise.

I mean, I–

Ronald N. Sutter:

Yes, it did.

David H. Souter:

–How did it suggest otherwise?

Ronald N. Sutter:

At page 36,592 it reiterated the normal 3-year reopening period and said that there would be a special exception to make conforming amendments for purposes of the hospital-specific rate, but there… but… and it also said to the extent there’s a re-audit those will be begun quickly, before any final rule is issued, so there was absolutely nothing in there that suggested that there would be some sort of audit done after expiration of the 3-year period.

Stephen G. Breyer:

I’m sorry, I’m mixed up now.

I thought that the language I read you says to the hospital during the re-audit, hospital, if you don’t have old records, give us last year’s records.

If you don’t have last year’s records, give us yesterday’s records.

Ronald N. Sutter:

But that wouldn’t apply to this hospital, because it did have the ’84 time records.

Stephen G. Breyer:

So you had all the old records.

Ronald N. Sutter:

No, no, no.

We didn’t have… well, we had the time records.

Stephen G. Breyer:

Right.

Ronald N. Sutter:

And the time–

Stephen G. Breyer:

I… all right.

Explain this particular thing.

Ronald N. Sutter:

–Right.

Stephen G. Breyer:

I thought if there is one piece of paper missing from 1984, the reg says, you don’t have that, you’ve thrown it away, whatever it is, give us your most recent one.

Ronald N. Sutter:

That’s not how it was applied.

Stephen G. Breyer:

That’s not–

Ronald N. Sutter:

If you had the time records, then that’s what they used.

It was the same time records that had been around in ’84, the time that had been claimed as administrative time and had been… that had been claimed as GME, and that had been allowed as GME, and the re-audit conducted 6 years later, the intermediary said, well, we’re… it’s not based upon new evidence.

They just said, we’re going to apply an ad hoc default rule, and also you cannot do a current time study because there are the records from 1984.

William H. Rehnquist:

–Thank you, Mr. Sutter.

William H. Rehnquist:

Ms. Blatt, we’ll hear from you.

Lisa Schiavo Blatt:

Mr. Chief Justice, and may it please the Court:

The GME amendment ties future reimbursements for graduate medical education expenses to 1984 costs.

To implement that new payment system, the Secretary adopted a regulation to ensure an accurate computation of those base year costs.

This regulation was designed to prevent mistakes from being cemented and perpetuated into all future medicare reimbursements.

Antonin Scalia:

Well, he could have done that by re-auditing any ones he was doubtful about within the period.

He had some time before the period expired, didn’t he, the 3-year re-audit period?

Lisa Schiavo Blatt:

That’s correct, and to the extent that the 3-year period expired, the Secretary can no longer recoup that money, but what’s at issue here is the implementation of the statute in which, if there are errors that the Secretary cannot recoup, the Secretary does not want to prevent them from being forever enshrined into all payments.

Antonin Scalia:

No, but my point is, they didn’t have to be forever enshrined.

He had time to do any re-audits that were necessary.

Lisa Schiavo Blatt:

Well–

Antonin Scalia:

Didn’t he?

Without adopting this new regulation.

He could have gone back and reexamined the 1984 year.

Lisa Schiavo Blatt:

–That’s correct, Justice Scalia, and if the Secretary had–

Antonin Scalia:

Moved quickly.

Lisa Schiavo Blatt:

–Had promulgated the rule earlier, then you would have had the re-audit within the 3-year window, and you would have been able to recoup the money, but this regulation by and large for most hospitals missed that 3-year window.

Antonin Scalia:

Okay.

So we don’t have to interpret the statute the way you suggest in order to prevent what would otherwise have been an inevitable enshrinement of past mistakes.

It wasn’t inevitable.

Lisa Schiavo Blatt:

No, Justice Scalia, but the issue is whether the language is consistent with what the Secretary did.

Antonin Scalia:

I understand.

Lisa Schiavo Blatt:

And in this case the statute directs the Secretary to determine an average amount recognized as reasonable under the act for GME costs per resident.

Antonin Scalia:

Why is the word recognized in there?

Your colleague had some difficulty explaining the phrase, as reasonable, but why is the word recognized… why didn’t it just say, the average amount reasonable under this subchapter for direct graduate… why is the word recognized there?

Lisa Schiavo Blatt:

Well, the word recognized under the act, to us the most natural reading of that language is, it’s the costs that are regarded by the statute, acknowledged or regarded or deemed by the statute as allowable, and we think the actual… actually, two points.

This statute does not say the Secretary shall determine an average amount previously determined.

It doesn’t use the word determined.

It says, recognized.

Nor does it refer to section 1395oo, which refers to a fiscal intermediary’s determination.

Lisa Schiavo Blatt:

Nor does it say, the amount previously reimbursed.

John Paul Stevens:

Can I just–

Lisa Schiavo Blatt:

It says recognized as reasonable.

John Paul Stevens:

–May I just interrupt on that first point?

You said, does not say the amount already recognized, but the reason for that it seems to me might be that there’s a… the 3-year period hadn’t run yet, so some of the… some of them had to be in the future.

Lisa Schiavo Blatt:

That’s correct.

Some of them, you hadn’t even… you might not have even had a notice of program reimbursement–

John Paul Stevens:

Correct.

Lisa Schiavo Blatt:

–by April of 1986.

John Paul Stevens:

That’s a good point.

Lisa Schiavo Blatt:

But the point, Justice Stevens, is that recognized as reasonable in our reading of the statute refers to the substantive standard of allowability under the act during the base year.

It’s simply silent as to the process by which the Secretary should make the determination of the per-resident average, and the Secretary had longstanding–

John Paul Stevens:

But do you think it’s fair to assume that Congress thought there might be one amount that would be determined in the 3-year period for the 1984 reimbursement and still a different amount based on 1984 for this permanent program?

Is it reasonable to think Congress thought there would be two 1984 determinations, both of which would be reasonable?

Lisa Schiavo Blatt:

–No.

I think what Congress wanted was the actual… the payment system to be based on an accurate amount, and there is only one accurate amount, and the problem was, when the Secretary promulgated her regulation, at least proposed in 1988, she realized that substantial overpayments had been made for this educational program, and she cited many examples.

The Secretary was also concerned that there had been inconsistent treatment in the costs, and they had not been given sufficient scrutiny, and to prevent those costs, or those errors, rather, from being perpetuated into all future reimbursements, she felt it was important… I guess it was he at the time… to–

John Paul Stevens:

Well, I’m not questioning the reasonableness of her judgment and all that.

I’m just trying to sit… if I’m sitting in Congress in 1986, what did I expect to happen under this language?

Did I expect her to make two different determinations of reasonableness for 1984 for this particular hospital.

Lisa Schiavo Blatt:

–I don’t think the statute speaks to this at all, Justice Stevens.

I think it’s completely silent as to the process.

It’s clear that Congress wanted an accurate amount, and it wanted the per-resident average to be reasonable, and we read that as reasonable under the substantive standards that were in effect during the base year, and the Secretary read that language to permit her to calculate the per-resident average based on an accurate amount.

I just don’t think the… neither the legislative history nor the text addresses this, and presumably Congress was also aware that the Secretary could amend her regulations, and that’s what she did here.

David H. Souter:

Ms. Blatt, would you help me out on one thing?

I thought I understood how the 3-year period works, and now I’m not so sure I do.

I thought that at the end of the… whatever the fiscal year is involved here, the hospital in effect would submit the equivalent of a bill with whatever supporting documents it has to submit, and the bill would either get paid or they would fight it out then and there, but that even after the bill was paid there was a 3-year period during which the Secretary might reopen and do a re-audit.

Is that basically how it does work?

Or, conversely, is the 3-year period simply the period within which, to put it as I was doing it, the bill has to be paid?

Which is it?

Lisa Schiavo Blatt:

No, I think the former description was accurate.

David H. Souter:

Okay.

Lisa Schiavo Blatt:

You get a… excuse me.

The hospital periodically gets paid throughout the year as it incurs the cost.

There’s a year-end book-balancing just based on what the hospital claims as its cost.

David H. Souter:

Okay.

Lisa Schiavo Blatt:

Then sometimes 2 and sometimes even 3 years later there’s a notice of program reimbursement.

David H. Souter:

All right.

Now, the reason I… the reason the question interests me goes back to Justice Stevens’ question.

If that’s the way it works, at the time this statute was passed, would it not normally have been the case that all hospitals would at least have been paid in the first instance and, as an implication of that, their back-up, their figures, their costs would have been recognized in the first instance as reasonable, but they would, nonetheless, have been subject to a re-audit within 3 years.

Lisa Schiavo Blatt:

You’re correct in that the amount of money had been reimbursed, but you use the word recognized as having the same meaning–

David H. Souter:

I was saying–

Lisa Schiavo Blatt:

–as a determination, and we don’t read it–

David H. Souter:

–the reimbursement implies a recognition.

Is that a misuse of the term?

Lisa Schiavo Blatt:

–It could be… that could be one reading of the word recognized, but equally in fact we think a more persuasive reading of the word recognized is recognized by the statute, not determined by a fiscal intermediary.

Congress could have easily have said, come up with an amount previously reimbursed, or previously determined, or it could have said, previously determined under the Secretary’s existing regulations, or determined under 1395oo, which refers to a fiscal intermediary’s determination of the amount of reimbursement due.

It just said, recognized as reasonable.

Antonin Scalia:

But it uses that phrase many other times, or at least several other times in the statute for the very purpose that Justice Souter is describing.

I mean, I don’t know that you can say that other language is more natural for this purpose in other places.

It doesn’t say… it says, recognized under this chapter, this subchapter.

It doesn’t use, recognized as reasonable, but–

Lisa Schiavo Blatt:

That’s correct, Justice Scalia, but the D.C. Circuit in Tulane cited two cases, two instances in which the statute does use the term, recognized as reasonable.

It’s just that there it had a word previously in one instance and it had a to be in another instance, which we think simply highlights the flexibility and the ambiguity in this term.

It just says, recognized as… an amount recognized as reasonable.

It doesn’t say an amount that was, an amount that is, an amount to be, an amount previously, and it’s more of a… it’s silent as to the process by which the Secretary would make this determination.

David H. Souter:

–I was going to say, I suppose for the purposes of your case it doesn’t matter whether my reading is the better one or your reading is the better one.

There’s at least some kind of a reasonable disagreement, and in that circumstance the Secretary supposedly can cast the determinative vote by the way she interprets it.

Lisa Schiavo Blatt:

Thank you, Justice Souter.

I mean, we’re… that would… we’re clearly asking for deference here.

Lisa Schiavo Blatt:

You don’t have to agree, but we happen to think that it is the better reading of the statute.

Ruth Bader Ginsburg:

Well, what about the argument, Ms. Blatt, that’s made that if the Secretary can wait this long, till ’90, ’91, to go around doing what she should have done in the first place, she could do the same thing in ’93?

I believe Mr. Sutter said that this second thought reordering could go on forever, so what’s there to stop her, on your reading, from saying, yes, I came up with a lower figure in ’90 or ’91, but I could get it down even lower and find more misallocations?

Lisa Schiavo Blatt:

Well, Justice Ginsburg, several responses.

First of all, we don’t think the statute addresses this, but it might well be irrational or arbitrary if the Secretary subjected hospitals to perpetual re-audits.

There would also have to be an articulated reason for doing it.

I mean, what the Secretary did here is said we want to make a one-time… clear-the-slate, one-time determination of this average-per-resident amount, and she promulgated a rule to do that.

I don’t know any reason why the Secretary would do it again, maybe if there was fraud, and then she wouldn’t even need to promulgate a regulation.

John Paul Stevens:

Yes, but you’re suggesting there’s something magical about a one-time adjustment.

The other side might argue, well, the first determination they paid on was a one-time, thought-to-be-final adjustment.

If you can have a second one-time adjustment, why not a third and a fourth?

Lisa Schiavo Blatt:

Again, that first… when it was paid originally in 1984, Justice Stevens, the only risk associated with errors was the amount of reimbursement that provider was due in 1984.

When the statute got amended to base all future payments on an equal cost–

John Paul Stevens:

Well, the amendment was in ’86, and there was still… the final determination of reasonableness just on how much you’re going to pay this hospital was still subject to change.

Lisa Schiavo Blatt:

–That’s true, and the price that the Secretary paid for not acting quickly is, she cannot go back and recoup the money.

I mean, that did not hurt the hospitals.

What the Secretary’s trying to do is to prevent future–

John Paul Stevens:

Well then, I’m just not sure why that argument wouldn’t allow her in 1999 to say, well, I can’t recover anything earlier than 1995, say, but I can still change the basic rules for the future.

Lisa Schiavo Blatt:

–And if she doesn’t have a good reason, it would be arbitrary.

John Paul Stevens:

Well, there’s a good reason why.

She didn’t realize there were a lot of misallocations.

She made a lot of mistakes before, which is the same reason she has here.

Lisa Schiavo Blatt:

But Justice Stevens–

John Paul Stevens:

Imperfect knowledge.

Lisa Schiavo Blatt:

–But Justice Stevens, the Secretary went into this round to make this per-resident determination knowing the point of it, and it would… I just can’t imagine a situation where the Secretary would say, okay, I need to do this every 2 years, but if she did articulate a reason it would be judged based on the information the Secretary had in front of her, and whether that was reasonable.

I’d like to just briefly address two things that petitioner said about whether hospitals were on notice of the need to retain records.

The same page that petitioner quotes, which was 53 Federal Register 36,592, says three extremely important things to hospitals, and this was within the time, within the 4-year period under any kind of scenario in which you… the hospitals were permitted to discard physician allocation–

Anthony M. Kennedy:

Do you have a page citation for this–

Lisa Schiavo Blatt:

–Yes.

It was 50–

Anthony M. Kennedy:

–in the petitioner’s brief?

Lisa Schiavo Blatt:

–Well, he just said it a minute ago in his argument, that–

Anthony M. Kennedy:

I see.

Lisa Schiavo Blatt:

–So it’s not cited in the brief.

It’s what the district court in Samaritan Health Systems relied on to say hospitals had notice.

It cites this Federal Register cite.

But the three things were very simple.

The Secretary warned hospitals that a re-audit would be conducted to exclude misclassified and unallowable cost.

It said… and most critically it said, appropriate supporting documentation… the fiscal intermediaries would look at… would ask for appropriate supporting documentation where costs seemed questionable, and 3), equally importantly it said, we can’t… the Secretary indicated that she could not guarantee any time frame in which this re-audit activity would be completed because of budgetary constraints on contractors.

William H. Rehnquist:

What was the date of this Federal Register?

Lisa Schiavo Blatt:

I think September 21, 1988.

Let me check on that.

Yes, September 21, 1988, and under petitioner’s year, his… its cost year ended December ’88.

The–

Antonin Scalia:

Did it say these were going to be general re-audits, or just in… claimed it was just in a few circumstances?

Lisa Schiavo Blatt:

–It said, where costs seemed questionable.

Antonin Scalia:

Where costs seemed questionable?

Lisa Schiavo Blatt:

Yes.

I mean, I read it as quite general.

It said, as indicated.

So that was clear notice, and it’s also… we think the Secretary reasonably believed that hospitals would have retained records, and certainly this case doesn’t involve an as-applied challenge where a hospital has presented evidence that it discarded records, and on that… that’s on that issue, although petitioner has said there’s… that the hospital was prejudiced.

The petitioner did challenge this re-audit for 3 years, but then withdrew all of its challenges in 1994, and we think that is quite significant.

And moreover, the… it wasn’t a default rule applied to the disallowance.

There was a [dollars] 4 million difference, and the reason that was so significant was, most of this did result from the fact that petitioner had records from 1984, and those records showed that administrative costs had been paid when they weren’t related to educational.

Anthony M. Kennedy:

In this case, or in the run-of-the-mind case, does the misallocation indicate that the Government actually paid too much even under the old program, or would the Government come out just the same either way, and it just affects the GME program because of misallocation?

Lisa Schiavo Blatt:

I’m not sure how to answer that question.

The… if the costs were misallocated–

Anthony M. Kennedy:

But I’m glad you understood it, because it’s hard to put–

[Laughter]

Lisa Schiavo Blatt:

–Yes.

Lisa Schiavo Blatt:

If… but let me–

Anthony M. Kennedy:

It’s hard… in other words, was the Government prejudiced for reasons other than the GME program, or was it just under the GME program that it is paying too much or paying too little, depending on who wins here?

Lisa Schiavo Blatt:

–The 1984… the problem in 1984 was that the Government paid too much.

It’s… if you talk about reclass–

Anthony M. Kennedy:

Even without reference to the GME program?

Lisa Schiavo Blatt:

–No.

I think it’s… if the costs were counted as educational, but they should have been operating, and there were caps on operating costs in effect during that year, and they were paid on a pass-through reasonable cost basis, and so the Government paid too much.

Anthony M. Kennedy:

So the Government paid too much even under the 1984 scheme?

Lisa Schiavo Blatt:

Oh, yes.

Anthony M. Kennedy:

All right.

Lisa Schiavo Blatt:

Yes.

I’m… yes, definitely, and the interesting thing about that is, the complaints about the hospital-specific rate and the Federal rate all could have been lodged had the Secretary originally caught these errors in 1984, or had promulgated a rule within the 3-year window.

You would still have problems about what to do about prior year classification, and we think the Secretary quite reasonably allowed hospitals to not only increase their rates for operating costs, but one thing… and in conclusion, I’d like to point this out.

The regulation actually allowed hospitals to increase their GME amounts, and our records reflect that approximately 30 percent of hospitals raised their amounts.

Obviously, more often than not the amounts went down, but there were a significant number of hospitals where the costs went up.

If there are no more questions–

Stephen G. Breyer:

I would like just to be clear in my own mind.

What petitioner said in his brief, in his reply brief on page 15, he says there was a re-audit, and then he says that they changed the classification of certain fixed costs, the administrative costs, from education costs to operating costs, not because of new evidence but because petitioner no longer had audit documentation.

Now, I… I may… I’m not certain what he had in mind by that, but if he actually meant physical pieces of paper, which does seem like a problem, I was concerned about that.

Am I right in thinking that isn’t the problem, because if there are pieces of paper or other kinds of evidence that are no longer around, the Secretary will permit the hospital to introduce–

Lisa Schiavo Blatt:

–Yes.

Stephen G. Breyer:

–other evidence, later evidence, or anything that–

Lisa Schiavo Blatt:

That’s correct, and ironically, Justice Breyer, the petitioner did present subsequent year data, I think we pointed out in our brief, because the time records did not break… this is the very same issue we’re talking about.

This petitioner had time records in 1984 which are very detailed documents, but because the petitioner on the face of the time records did not break down the costs between teaching medical students versus teaching residents, they were allowed to use a new time study, and that’s why there was a settlement in this case and the petitioner actually got an increase in the per-resident average.

So petitioner used that equitable relief in this case, even though… and that’s not because petitioner threw away records.

It’s because petitioner never had the records to begin with.

There’s just simply nothing in the record, at least that we could draw any conclusion that there were records thrown away.

William H. Rehnquist:

–Thank you, Ms. Blatt.

Ms. Blatt, I have one more question.

Do you have any response to the point, which seems to me a fairly substantial one, made by the petitioner that in the same legislation that enacted this provision Congress instructed the Secretary to report back by December 31, 1987 on whether there should be any revisions to provide greater uniformity in the approved FTE resident amounts?

William H. Rehnquist:

Now, how could she possibly have done that by December 31, 1987, unless everything… unless she had made these determinations by 1987?

I mean, isn’t that a pretty clear indication that Congress expected this stuff to be done by ’87?

Lisa Schiavo Blatt:

Well, it might, Justice Scalia, but it would… it certainly goes against petitioner’s reading of the statute, which is that Congress assumed the Secretary had a 3-year window under these regulations, which would have been in 1989, and there’s simply no way that could have been done under this reporting requirement.

But this statute is a reporting requirement, and there were several reporting requirements imposed on the Secretary in this very bill, but even if you read this reporting requirement as a mandate for the Secretary to do something by a date certain, I don’t think you should read in a congressional intent that the Secretary lacks the power to act beyond that statutory deadline.

And one more point.

The… it would have been extremely difficult for the Secretary to have promulgated and finalized a rule, made an evaluation, and reported to the Secretary by December of ’87 under… in all events.

William H. Rehnquist:

Thank you, Ms. Blatt.

The case is submitted.