MARGARET M. HECKLER, SECRETARY OF HEALTH AND HUMAN SERVICES, ET AL., PETITIONERS V. ABINGTON MEMORIAL HOSPITAL, ET AL. No. 85-52 In the Supreme Court of the United States October Term, 1985 The Acting Solicitor General, on behalf of the Secretary of Health and Human Services, et al., petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Third Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Third Circuit PARTIES TO THE PROCEEDINGS The petitioners are Margaret M. Heckler, Secretary of Health and Human Services and Carolyne K. Davis, Administrator, Health Care Financing Administration. The respondents are numerous hospitals and health-care providers in Pennsylvania. They are listed in the margin. /*/ TABLE OF CONTENTS Opinions below Jurisdiction Statute involved Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-10a) is reported at 750 F.2d 242. The opinion of the district court (App., infra, 11a-28a) is reported at 576 F.Supp. 1081. JURISDICTION The judgment of the court of appeals, (App., infra, 29a-30a) was entered on December 13, 1984. A petition for rehearing was denied on February 14, 1985 (App., infra, 31a-33a)). On May 7, 1985, Justice Brennan extended the time for filing a petition for a writ of certiorari to June 14, 1985. On June 3, 1985, Justice Brennan further extended the time for filing a petition for a writ of certiorari to July 14, 1985. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE INVOLVED Title XVIII of the Social Security Act requires the Federal Hospital Insurance Trust Fund to reimburse hospitals for services provided to Medicare patients. 42 U.S.C. 1395g(a). The Act limits Medicare reimbursement to the lesser of the "reasonable cost" or "customary charges" for these services. 42 U.S.C. 1395f(b)(1). The Act defines "reasonable cost" as follows (42 U.S.C. 1395x(v)(1)(A)): The reasonable cost of any services shall be the cost actually incurred, * * * and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs * * *. In prescribing the regulations referred to in the preceding sentence, the Secretary shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. Such regulations may provide for determination of the costs of services on a per diem, per unit, per capita, or other basis, may provide for using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services * * *, and may provide for the use of charges or a percentage of charges where this method reasonably reflects the costs. Such regulations shall (i) take into account both direct and indirect costs of providers of services * * * in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (ii) provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive. QUESTION PRESENTED Whether the court of appeals erred in invalidating the regulation of the Secretary of Health and Human Services that established a formula for reimbursing hospitals for the portion of malpractice insurance cost attributable to Medicare patients and in requiring the Secretary to reimburse hospitals according to a prior regulation. STATEMENT This case arises in the context of ongoing efforts of the Secretary of Health and Human Services to comply with dual prongs of a statutory obligation which has proved unusually difficult to implement. As we discuss, those efforts are now going forward in a new rulemaking proceeding. 1. In 1965, Congress amended the Social Security Act to add Title XVIII, creating a federal medical insurance program for the elderly (Medicare Act). 42 U.S.C. 1395 et seq. /1/ Participating providers of health care services (principally hospitals and skilled-care nursing homes) are reimbursed for services to Medicare patients out of the Federal Hospital Insurance Trust Fund, which is funded by Social Security tax revenues. 42 U.S.C. 1395g(a), 1395i. The Medicare Act authorizes the Secretary of Health and Human Services to reimburse hospitals for their "reasonable cost", both direct and indirect, of providing services to Medicare-insured patients. /2/ 42 U.S.C. 1395f(b)(1). Subject to a number of qualifications, the Act defines "reasonable cost" as "the cost actually incurred," and authorizes the Secretary to promulgate "regulations establishing the method or methods to be used, and the items to be included, in determing such costs * * *." 42 U.S.C. 1395x(v)(1)(A). Under the Act, the Secretary's regulations defining "reasonable cost" (ibid): may provide for determination of the costs of services on a per diem, per unit, per capita, or other basis, (and) may provide for using different methods in different circumstances * * *. The Act further directs the Secretary to define "reasonable cost" in a way that prevents cost-shifting between Medicare and non-Medicare patients. Medicare costs may not be borne by non-Medicare patients, and "costs with respect to (non-Medicare patients) will not be borne by (the Medicare) programs * * *." Ibid. 2. At the outset of the Medicare program, the Secretary chose to satisfy this dual statutory mandate by reimbursing malpractice insurance premiums according to a general formula used for all overhead costs. 31 Fed. Reg. 14808 (1966). Under this formula, hospital overhead expenses, designated "general and administrative" (G&A) costs, were allocated to the hospital's revenue-producing cost centers (e.g., operating room or emergency room) and then apportioned to Medicare and non-Medicare patients according to the utilization of the cost center by each category of patient, as measured by patient charges. C.A. App. 76-77. For example, under this "patient utilization" formula, if 35% of the patient charges in the operating room were for Medicare patients, then 35% of the overhead expenses allocated to the operating room would be reimbursed by Medicare. The precipitous rise in malpractice insurance costs in the early 1970's occasioned an administrative review of the area. In contrast to the situation that existed when the Medicare reimbursement regulations were issued in 1966, within the next decade malpractice premiums rose sharply and became "a large part of hospital budgets." Adm. Rec. Vol. 5 (comments of Ancilla Domini Health Services at 2); 44 Fed. Reg. 31641 (1979). The Secretary eventually concluded that application of the existing "patient utilization" formula to malpractice insurance costs no longer conformed to the second prong of the statutory directive: that Medicare funds not subsidize the costs of non-Medicare patients. The Secretary noted that the average recovery by Medicare patients in malpractice suits is smaller than that of non-Medicare patients, since Medicare patients are usually elderly, and life expectancy and earnings potential are significant elements in malpractice awards. Ibid. Accordingly, the evidence before the Secretary indicated that Medicare patients received smaller payments on malpractice claims. Adm. Rec. Vol. 3 (Medical Malpractice Closed Claim Study at 5-10). Since Medicare patients represented smaller per capita exposure than other patients, the "patient utilization" approach to apportioning the costs of malpractice premiums, which did not account for this significant discrepancy in a major reimbursable cost, was inconsistent with the Secretary's statutory obligation. 44 Fed. Reg. 31642 (1979). After notice and public comment (see 44 Fed. Reg. 15744 (1979)), the Secretary issued the regulation challenged in this case. 44 Fed. Reg. 31642 (1979); App., infra, 34a-42a. The new rule removes malpractice insurance premiums from the undifferentiated pool of G&A costs because (1) "malpractice costs are so significant" and (2) "the disproportionate allocation of malpractice costs to Medicare is so great." Ibid. Under this rule, a hospital's malpractice premiums for each cost year are allocated to Medicare according to the hospital's actual malpractice loss experience (the ration of Medicare-patient malpractice claims paid to total claims paid for the year in question and the previous four years). 44 Fed. Reg. 31642 (1979), promulgating 42 C.F.R. 405.452(b) (later recodified as 42 C.F.R. 405.452(a)(ii)). In the case of hospitals with no paid claims during this five-year period, reimbursement is made according to the national ratio of paid Medicare-patient malpractice claims to total paid claims, which the Secretary computed at 5.1%. App., infra, 36a. 3. Following issuance of the new "paid claims" rule, hospitals all over the country contested the rule in proceedings before the Provider Reimbursement Review Board (PRRB). /3/ The PRRB then issued the appropriate certifications under 42 U.S.C. 1395oo(f)(1), following which suits were brought in numerous district courts around the country. /4/ To date, there have been 26 district court decisions (in addition to the decision below); of which 6 have upheld the rule /5/ and 20 have invalidated it on various grounds. /6/ There have been decisions by the courts of appeals in the District of Columbia, Third, Fifth, Seventh, Tenth and Eleventh Circuits. /7/ The District of Columbia Circuit noted that the new rule is a "fair formulation of HHS's statutory mandate," 749 F.2d at 802, but remanded the case for consideration of the entire administrative record. The other courts of appeals have held the new rule invalid on one or more grounds. The present case arose from suits filed by various hospitals in the Eastern, Middle and Western Districts of Pennsylvania, that were eventually consolidated in the Eastern District. Respondents had received reimbursement under the new rule for the year ended June 30, 1980, and sought instead to be reimbursed for that year under the prior standard. The amount directly at issue in these suits (i.e., the difference between reimbursement under the old and new formulas for the 1980 cost year) is approximately $6.7 million. The district court held that the rule was invalid under the Administrative Procedure Act (APA) and the Medicare Act (App., infra, 27a). Under the APA, the court held that the statement of basis and purpose was inadequate because it failed to respond adequately to several points raised in the comments, including challenges to the statistical validity of the data upon which the Secretary relied (id. at 17a-19a). The court also held that the rule was arbitrary and capricious because of the statistical inadequacy of the data (id. at 19a-21a). Under the Medicare Act, the district court held the rule invalid on the grounds that it could lead to "bizarre" results; that malpractice premiums are designed not only to cover losses but also to cover administrative expenses unrelated to amounts paid claimants (such as claims handling expense); that malpractice insurance benefits all patients equally because it is required by law and it protects the hospital's ability to stay in business; and that the Medicare-to-total-claims ratio of an individual hospital, as well as the national ratio of 5.1%, have "very little, if any, relationship to the hospital's current cost of maintaining malpractice protection" (id. at 21a-27a). The court of appeals affirmed, adopting the opinion of the district court (App., infra, 1a-10a). The court of appeals also held that the appropriate remedy was a remand to the PRRB with directions to award reimbursement according to the old "patient utilization" formula. The court held that invalidation of the Secretary's new reimbursement formula left the prior formula in effect, and thus payment under the prior formula was required. The court rejected the Secretary's contention that the remand should allow further rulemaking proceedings (id. at 9a-10a). 4. On June 17, 1985, following the decision of the court of appeals, the Secretary published a notice in the Federal Register initiating new rulemaking proceedings. 50 Fed. Reg. 25178. The notice proposes to maintain the paid-claims formula as the basic rule; however, on the basis of more recent data it would increase the "national ratio" (used to calculate reimbursement of hospitals with no paid claims experience) from 5.1% to 11.6%. Both provisions would be applied retroactively to July 1, 1979. /8/ 50 Fed. Reg. at 25187, 25188. The Secretary's new proposal contains an extensive discussion of data not available when the paid-claims formula was originally proposed -- i.e., cost reports filed by hospitals in connection with claims for reimbursement for cost years ending January 1, 1982 to September 29, 1983. Since these reports include malpractice payment data for the four previous cost years, this new data base covers a five-year period ending in 1983. 50 Fed. Reg. at 25179-25181. REASONS FOR GRANTING THE PETITION This case presents a question of great practical importance to the public fisc and to the evenhanded administration of a major federal program. In HHS's estimation, for the period from July 1, 1979 to October 1, 1986, /9/ the application to all providers of the former patient-utilization rule instead of the paid-claims rule would increase federal expenditures by $730 million dollars. Although the rule currently under consideration by the Secretary would (if promulgated and upheld by the courts) reduce that economic impact, the judgment below, unless vacated, would cost almost $7 million. Moreover, if the decision below remains intact, respondents would reap an unwarranted windfall -- they would be reimbursed for cost year 1980 under the old formula, while all other providers would be reimbursed for all relevant years under the new formula HHS is now in the process of issuing. The decision below also poses a troublesome administrative law issue. In addition to invalidating the paid-claims rule, the court of appeals required the Secretary to reimburse respondents under the former patient-utilization rule that the Secretary concluded no longer complies with the statutory mandate. Yet the court of appeals did not evaluate the validity of the prior rule; nor did it afford the Secretary an opportunity to cure the defects the court perceived in the new rule. /10/ While these issues are of sufficient importance to warrant this Court's review, this is not the optimal moment for their plenary consideration. The pendency of a new rulemaking proceeding that is anticipated to conclude before this case could be heard and decided on the merits indicates that a more appropriate course would be to grant the petition for a writ of certiorari, vacate the judgment below, and remand for reconsideration by the court of appeals in light of the soon-to-be-issued regulation. In that way the legal issues will be framed more precisely and concretely for judicial scrutiny in light of the new regulation, and this Court would not be required to address the validity of that regulation in the first instance. 1. The Medicare Act's definition of "reasonable costs" poses a practical dilemma for the Secretary. The requirement that the actual, necessary costs of services to Medicare patients be reimbursed, coupled with the prohibition of payment for services to non-Medicare patients, presents a knotty regulatory problem. The problem is particularly acute when overhead, or G&A, costs are to be allocated. While the patient utilization formula was an appropriate response in 1966, the subsequent explosion in malpractice insurance costs brought imbalance to the cost equation. The Secretary's response recognized that a difference existed between the malpractice claims experience of Medicare and non-Medicare patients. In seeking to fashion a rule that more accurately reflected the source of malpractice insurance costs, the Secretary acted with fidelity to the statutory prohibition against reimbursement of costs generated by non-Medicare patients. Medicare patients are by definition either disabled or elderly and it was neither arbitrary nor capricious for the Secretary to conclude that these conditions would affect the life-expectancy and earnings-potential components of malpractice awards. The Secretary's authority under the Medicare Act to determine Medicare patient costs on a "per unit, per capita, or other basis" and to use "different methods in different circumstances" grants her substantial latitude. 42 U.S.C. 1395x(v)(1) (A). Thus, the Act empowers the Secretary to conclude, if circumstances warrant, that a basis other than per capita allocation is warranted in the malpractice insurance context, and that the reduced exposure generated by Medicare patients justifies a formula that seeks more accurately to distinguish the costs of insuring services to those patients from those to younger, non-disabled patients. "To uphold (the Secretary's regulation) 'we need not find that (its) construction is the only reasonable one, or even that it is the result we would have reached had the question arisen in the first instance in judicial proceedings.' We need only conclude that it is a reasonable interpretation of the relevant provisions." American Paper Institute, Inc. v. American Electric Power Service Corp., 461 U.S. 402, 422-423 (1983) (emphasis in original; citations omitted), quoting Unemployment Compensation Comm'n v. Aragon, 329 U.S. 143, 153 (1946); Aluminum Co. of America v. Central Lincoln Peoples' Utility District, No. 82-1071 (June 5, 1984), slip op. 8-9; see Mourning v. Family Publications Service, Inc., 411 U.S. 356, 371-372 (1973). Under the governing authorities, the court of appeals should have accorded deference to the Secreatary's effort to comply with her dual statutory mandate. 2. In invalidating the Secretary's implementation of her authority, the court of appeals relied on (1) the Administrative Procedure Act and (2) the Medicare Act. Since the new rulemaking the Secretary has initiated will produce a new record and a new statement of basis and purpose, the procedural issues raised by the prior record are not of continuing signficance. However, unless vacated by this Court, the Third Circuit's interpretation of the Medicare Act would be relevant to the new rulemaking proceeding and thus would have continuing significance. In two important respects, this interpretation is inconsistent with the interpretation adopted by another court of appeals. First, the Third Circuit adopted the district court's holding that the Act requires the reimbursement formula to take into account the hospital's Medicare patient utilization rate, since a formula that takes no account of that rate can lead to "bizarre" results in individual cases (App., infra 6a, 21a). By contrast, in Walter O. Boswell Memorial Hospital v. Heckler, 749 F.2d 788 (D.C. Cir. 1984), the District of Columbia Circuit accepted the Secretary's contention that the new formula will "result in a fair division of the long-run average" despite "superficially peculiar" short-run results. 749 F.2d at 801, 802. /11/ This Court, too, has recognized that in large government programs, "rough accommodations" are justified, if not required. Weinberger v. Salfii, 422 U.S. 749, 769 (1975), quoting Dandridge v. Williams, 397 U.S. 471, 485 (1970), and Metropolis Theatre Co. v. City of Chicago, 228 U.S. 61, 69 (1913). The courts below concluded also that the Secretary's formula must reflect to some degree the manner in which insurance companies establish premiums (App. infra, 24a). In contrast, the District of Columbia Circuit concluded in Boswell that "the Medicare Act plainly contemplates instances in which the Secretary does not agree with an insurer's definition of actual costs." 749 F.2d at 801. /12/ These question may eventually have to be resolved by this Court. We are, however, chary of suggesting that they presently are ripe for plenary review. The issues involved should be considerably sharpened by the pending rulemaking, in which the Secretary can build on the experience of judicial criticism of the 1979 rule and react to comments. When that process is complete, the courts below -- and this Court if necessary -- will have a much better basis for assessing all issues concerning the relationship of malpractice losses to malpractice premiums, and the adequacy of a formula utilizing malpractice loss experience under the "reasonable cost" standard of the Medicare Act. 42 U.S.C. 1395x(v)(1)(A). Accordingly, we submit that it would be appropriate for this case to be remanded to the court of appeals for it (or if it prefers, the district court) to reconsider the matter in light of the rule currently under consideration. That course would promote judicial economy and adhere to governing law. It is "the guiding principle" of administrative law that "the function of the reviewing court ends when an error of law is laid bare. At that point the matter once more goes to the (agency) for reconsideration." Federal Power Comm'n v. Idaho Power Co., 344 U.S. 17, 20 (1952). This Court has stated that on remand the agency is not required to apply the prior rule, but rather to reconsider the entire matter. Burlington Northern, Inc. v. United States, 459 U.S. 131 (1982); Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 40, 57 & n.21 (1983). See also Richardson v. Wright, 405 U.S. 208 (1972). In contrast, the court below obligated the Secretary to reimburse respondents under the prior patient-utilization formula, providing no opportunity for the Secretary to exercise her statutory authority to promulgate suitable malpractice premium reimbursement rules. Remand is appropriate also because it is anticipated that by the time this Court could hear the case on the merits, a new rule will have been issued. An appellate court must apply the law in effect at the time it renders its decision. Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 486 n.16 (1981); Bradley v. Richmond School Board, 416 U.S. 696, 711 (1974); Thorpe v. Housing Authority, 393 U.S. 268, 281-283 (1969); United States v. Schooner Peggy, 5 U.S. (1 Cranch) 103, 110 (1801). Thus, the newly-issued rule would establish the measure of reimbursement and the basis for decision in this case and yet, that rule would not have been the subject of scrutiny by the lower courts. /13/ Rather than have this be the initial forum in which the validity of the new rule is litigated, prudence suggests that the issue be presented first to the lower courts. /14/ In that way, if consideration of the issues by this Court is ultimately warranted, it could proceed after proper honing of the issues and on the basis of a complete record (including the pending rulemaking proceeding). Moreover, the disposition we propose would also avoid the unfairness that would result if respondents obtained reimbursement for cost year 1980 based on a formula not applicable to other providers and not applicable to any time period since July 1, 1979. Proper administration of this important federal program requires that the Secretary's resolution of its dual statutory mandate be applied evenhandedly to all providers. CONCLUSION The petition for a writ of certiorari should be granted, the judgment of the court of appeals vacated, and the case remanded for further proceedings. Respectfully submitted. LAWRENCE G. WALLACE Acting Solicitor General /15/ RICHARD K. WILLARD Acting Assistant Attorney General JERROLD J. GANZFRIED Assistant to the Solicitor General ANTHONY J. STEINMEYER ROBERT V. ZENER Attorneys JULY 1985 /*/ Abington Memorial Hospital, Brandywine Hospital, Bryn Mawr Hospital, Bryn Mawr Rehabilitation Hospital, Columbia Hospital, Ephrata Community Hospital, Germantown Hospital and Medical Center, Graduate Hospital, Holy Redeemer Hospital, Hospital of Philadelphia College of Osteopathic Medicine, Institute of the Pennsylvania Hospital, Jeanes Hospital, Lancaster General Hospital, Lancaster Osteopathic Hospital, Lankenau Hospital, Memorial Hospital-Roxborough, Paoli Memorial Hospital, Pennsylvania Hospital, (The Contributors to the Pennsylvania Hospital, Department for Sick and Injured), Phoenixville Hospital, Presbyterian-University of Pennsylvania Medical Center, Riddle Memorial Hospital, Sacred Heart Hospital, Inc.-Norristown, Sacred Heart General Hospital-Chester, St. Joseph Hospital-Lancaster, Suburban General Hospital-Norristown, Thomas Jefferson University Hospital, Wills Eye Hospital, Friedman Hospital of the Home for the Jewish Aged, Montgomery Hospital, Community General Hospital-Reading, Good Samaritan Hospital-Pottsville, Pottsville Hospital and Warne Clinic, Reading Hospital and Medical Center, Allentown Hospital Association, Allentown Osteopathic Hospital, Easton Hospital, Quakertown Hospital Association, Sacred Heart Hospital-Allentown, Mount Trexler Skilled Nursing Facility of Sacred Hospital-Allentown, Albert Einstein Medical Center, Center City Hospital, Chestnut Hill Hospital, Crozer-Chester Medical Center, Frankford Hospital, Grand View Hospital, Haverford Community Hospital, James C. Giuffre Medical Center, John F. Kennedy Memorial Hospital, Kensington Hospital, Lawndale Community Hospital (MEDIQ, Inc.), Lower Bucks Hospital, Mercy Catholic Medical Center, Methodist Hospital-Philadelphia, Nazareth Hospital, North Penn Hospital, Northwestern Institute of Psychiatry, Pottstown Memorial Medical Center, Rolling Hill Hospital and Diagnostic Center (United Hospitals, Inc.), St. Christopher's Hospital for Children, St. Joseph's Hospital-Philadelphia, St. Mary Hospital-Langhorne, St Mary Hospital-Philadelphia, Southern Chester County Medical Center, Taylor Hospital, Warminster General Hospital (United Hospitals, Inc.), Memorial Osteopathic Hospital, Philhaven Hospital, Annie M. Warner Hospital, Berwick Hospital Corp., Bloomsburg Hospital, Centre Community Hospital, Community General Osteopathic Hospital, Fulton County Medical Center, Geisinger Medical Center, Good Samaritan Hospital of Lebanon, Hanover General Hospital, Hanover General Hospital-Hillview House, Harrisburg Hospital, Lewistown Hospital, Rehabilitation Hospital for Special Services, Sunbury Community Hospital, Sunbury Skilled Nursing Care Unit, Waynesboro Hospital, York Hospital, Barnes-Kasson County Hospital, Barnes-Kasson Skilled Nursing Facility, Barnes-Kasson Home Health Agency, Bucktail Medical Center, Carbondale General Hospital, Community Medical Center, Divine Providence Hospital-Williamsport, Divine Providence Hospital Skilled Nursing Facility-Williamsport, Gnaden Heutten Memorial Hospital, Gnaden Heutten Nursing and Convalescent Center, Lock Haven Hospital, Memorial Hospital, Inc.-Towanda, Memorial Hospital, Inc. Skilled Nursing Facility-Towanda, Mercy Hospital-Scranton, Mid-Valley Hospital, Montrose General Hospital, Inc., Moses Taylor Hospital, Moses Taylor Skilled Nursing Facility, Pittston Hospital (NPW Medical Center of NE, PA, Inc.), Pocono Hospital, The Robert Parker Hospital, St. Joseph Hospital-Hazelton, Soldiers and Sailors Memorial Hospital, Troy Community Hospital, Inc., Tyler Memorial Hospital, Wayne County Memorial Hospital Association, Wayne County Memorial Skilled Nursing Facility, Wayne County Memorial Hospital Home Health Agency, Williamsport Hospital, Wyoming Valley Hospital (NPW Medical Center of NE, PA, Inc.), St. Joseph's Hospital-Carbondale, Charles Cole Memorial Hospital, Charles Cole Memorial Hospital Skilled Nursing Facility, J.C. Blair Memorial Hospital, Allegheny General Hospital, Allegheny Valley Hospital, Aliquippa Hospital, Altoona Hospital, Andrew Kaul Memorial Hospital, Andrew Kaul Memorial Hospital Skilled Nursing Facility, Armstrong County Memorial Hospital, Braddock General Hospital, Bradford Hospital, Brookville Hospital, Brownsville General Hospital, Butler County Memorial Hospital, Central Medical Health Center and Hospital, Clarion Osteopathic Hospital, Clearfield Hospital, Clearfield Home Health Agency, Conemaugh Valley Memorial Hospital, Community Mental Health Center of Beaver County, Corry Memorial Hospital Association, Divine Providence-Pittsburgh, Doctors Osteopathic Hospital, DuBois Hospital, Elk County General Hospital, Ellwood City Hospital, Ellwood City Hospital Skilled Nursing Facility, Eye and Ear Hospital of Pittsburgh, Greene County Memorial Hospital, Greenville Hospital, Hamot Medical Center, Henry Clay Frick Community Hospital, Indiana Hospital, Jameson Memorial Hospital, Keannette District Memorial Hospital, Latrobe Area Hospital, Lee Hospital, Magee-Womens Hospital, McKeesport Hospital, Meadville City Hospital, Memorial Hospital of Bedford County, Mercy Hospital of Johnstown, Mercy Hospital-Pittsburgh, Meyersdale Community Hospital, Miners Hospital of Northern Cambria, Monongahela Valley Hospital, Inc., Montefiore Hospital Ass'n of Western Pennsylvania, Nason Hospital Association, North Hills Passavant Hospital, Ohio Valley General Hospital, Oil City Hospital, Oil City Hospital Skilled Nursing Facility, Podiatry Hospital of Pittsburgh, Port Allegany Community Hospital, Presbyterian-University Hospital, Punxsutawney Area Hospital, Sewickley Valley Hospital, Shadyside Hospital, Sharon General Hospital, Shenango Valley Osteopathic Hospital, Somerset Community Hospital, South Hills Health System Home Health Agency, South Hills Health System, South Hills Health System Skilled Nursing Facility, South Side Hospital of Pittsburgh, Spencer Hospital, St. Clair Memorial Hospital, St. Francis Hospital-New Castle, St. Francis General Hospital-Pittsburgh, St. Francis General Hospital Skilled Nursing Facility, St. Francis General Hospital Home Health Agency, St. John's General Hospital, St. Margaret Memorial Hospital-Pittsburgh, St. Vincent Health Center, Suburban General Hospital-Pittsburgh, Tyrone Hospital, Union City Memorial Hospital, Uniontown Hospital, Warren General Hospital, Washington Hospital, West Allegheny Hospital, Westmoreland Hospital Assoc., West Penn Hospital, Western Psychiatric Institute and Clinic, Windber Hospital and Wheeling Clinic. /1/ The Medicare Act was amended in 1972 to add coverage of certain disabled persons. 42 U.S.C. 1395c, 1395o. /2/ The Medicare Act has recently been amended to provide that after 1986 most hospitals will be reimbursed under a prospective payment system, not the reasonable cost system. See 42 U.S.C. 1395ww. /3/ Under the Medicare Act, the proper level of hospital reimbursement is first determined for the Secretary by a so-called "fiscal intermediary" (such as Blue Cross). The hospitals may then appeal to the PRRB. When proceedings before the PRRB involve an issue of the validity of a Medicare regulation, a matter over which the PRRB has no jurisdiction, the Board may so certify, following which the hospital may bring suit in a United States district court. 42 U.S.C. 1395oo(f)(1). /4/ Suits have been brought in district courts in every circuit except the First. /5/ Athens Community Hospital v. Heckler, 565 F.Supp. 695 (E.D. Tenn. 1983); Cumberland Medical Center v. Heckler, 578 F.Supp. 39 (M.D. Tenn. 1983); Benton County General Hospital v. Heckler, Civ. No. 82-1289 (W.D. Tenn. Oct. 25, 1983); Humana of Aurora, Inc. d/b/a Aurora Community Hospital v. Heckler, Civ. No. 83-Z-70 (D.Colo.Sept. 25, 1983) rev'd, 753 F.2d 1579 (10th Cir. 1985); Walter O. Boswell Memorial Hospital v. Heckler, 573 F.Supp. 884 (D.D.C. 1983), remanded, 749 F.2d 788 (D.C. Cir. 1984); Normandy Osteopathic-North Hospital v. Heckler, Civ. No. 83-1687C(1)(E.D.Mo.Dec. 21, 1984). /6/ Mt. Carmel Mercy Hospital v. Heckler, 581 F.Supp. 1311 (E.D.Mich. 1983); Chelsea Community Hospital v. Heckler Civ. No. 83-6126-AA (E.D. Mich.Dec. 20, 1983); Albany General Hospital v. Heckler, 584 F.Supp. 614 (D.Ore. 1984); St. James Hospital v. Heckler, 579 F.Supp. 757 (N.D.Ill. 1984); aff'd, Nos. 84-1478, 84-1727 (7th Cir. Apr. 8, 1985); Humana of Illinios, Inc. d/b/a Springfield Community Hospital v. Heckler, 584 F.Supp. 618 (C.D. Ill 1984), aff'd, Nos. 84-1478, 84-1727 (7th Cir. Apr. 18, 1985); Bedford County Memorial Hospital v. Heckler, 583 F.Supp. 367 (W.D. Va. 1984); Alexandria Hospital v. Heckler, 586 F.Supp. 581 (E.D. Va. 1984); Lloyd Noland Hospital and Clinic v. Heckler, Civ. No. 83-PT-0868-S (N.D. Ala. Apr. 6, 1984), aff'd, Nos. 84-7444, 84-8699 (11th Cir. June 12, 1985); Metropolitan Hospital, Inc. v. Heckler, Civ. No. C83-502A (N.D. Ga. June 25, 1984), aff'd, Nos. 84-7444, 84-8699 (11th Cir. June 12, 1985); Parkway Medical Center, et al. v. Heckler, Civ. Nos. 83-1005, 83-1700 (S.D. Fla. Sept. 24, 1984); DeSoto General Hospital v. Heckler, Civ. No. 83-1050-B (M.D. La. June 22, 1984), aff'd, No. 84-3577 (5th Cir. July 5, 1985); East Jefferson General Hospital v. Heckler, Civ. No. 83-4107-C (E.D. La. Oct. 19, 1984); Menorah Medical Center v. Heckler, Civ. No. 83-0822-CV-W-4 (W.D. Mo. July 26, 1984); Mercy Medical Center and Unity Medical Center v. Heckler, Civ. No. 3-82-Civ. 1724 (D. Minn. Aug. 17, 1984); Sisters of St. Mary, et al. v. Heckler, Civ. Nos. 83-0789C(4), 83-1604C (C) (E.D. Mo. Nov. 6, 1984); Arkansas Methodist Hospital, et al. v. Heckler, Civ. Nos. J-C-83-106, J-C-83-148 (E.D. Ark. Nov. 1, 1984); St. Anthony Regional Hospital, et al. v. Heckler, Civ. No. C-84-37 (N.D. Iowa Oct 12, 1984); Marshalltown Area Community Hospital v. Heckler, Civ. No. 84-226-B (S.D. Iowa Dec. 17, 1984); Bethesda Hospital v. Heckler, Civ. No. C-1-83-622 (S.D. Ohio Apr. 30, 1985); St. Joseph's Hospital v. Heckler, 583 F.Supp. 1545 (D. Ariz. 1984). /7/ In addition to the present decision, the court of appeals decisions are: Walter O. Boswell Memorial Hospital v. Heckler, 749 F.2d 788 (D.C. Cir. 1984); St. James Hospital v. Heckler, Nos. 84-1478, 84-1727 (7th Cir. Apr. 18, 1985); Humana of Aurara, Inc. v. Heckler, 753 F.2d 1579 (10th Cir. 1985); Lloyd Noland Hospital and Clinic v. Heckler, Nos. 84-7444, 84-8699 (11th Cir. June 12, 1985); DeSoto General Hospital v. Heckler, No. 84-3577 (5th Cir. July 5, 1985). /8/ See note 13, infra. /9/ See note 2, supra. /10/ The district court stated (App., infra, 27a) that "the previous utilization rate method of allocation is not the only possible method * * *." /11/ The Seventh Circuit in St. James Hospital v. Heckler, Nos. 84-1478, 84-1727 (Apr. 18, 1985), slip op. 22-23, agreed with the courts below that the possibility of of unreasonable results in particular cases establishes that the paid claims reimbursement formula violates the Medicare Act. But see DeSoto General Hospital v. Heckler, No. 84-3577 (5th Cir. July 5, 1985), slip op. 11 (Garza, J. concurring) ("the Secretary is on the right tract and I encourage the Secretary to pursue a legitimate study under which a malpractice rule can be issued. I am convinced that (M)edicare patients account for much less of the losses suffered by hospitals in malpractice suits against them * * *"). /12/ The Tenth Circuit in Humana of Aurora, Inc. v. Heckler, 753 F.2d 1579 (1985), held that the paid-claims formula is arbitrary and capricious partly on the ground that malpractice losses are not the only basis from which malpractice premiums are derived. 753 F.2d at 1582. Similarly, the Seventh Circuit held the paid-claims formula arbitrary and capricious because the Secretary "failed to ascertain the extent of the correlation, if any, between actual malpractice losses and premium costs." St. James Hospital v. Heckler, Nos. 84-1478, 84-1727 (Apr. 18, 1985), slip op. 14-15. Of course, the government is not bound by the accounting method insurers or respondents have established for their own purposes. Cf. Exxon Corp. v. Department of Revenue, 447 U.S. 207, 221-223 (1980). /13/ The Secretary is authorized to make "suitable retroactive corrective adjustments" where the reimbursement produced by the present formula is "inadequate or excessive." 42 U.S.C. 1395x(v)(1)(A)(ii). See Adams Nursing Home, Inc. v. Mathews, 548 F.2d 1077 (1st Cir. 1977); 42 U.S.C. 1395hh. Thus, a finding by the Secretary in the new rulemaking proceeding that the patient-utilization formula provides "excessive" reimbursement would, under the Act, require retroactive adjustment of prior reimbursement payments. Such adjustments would not be unfair; hospital have known since 1979 that the Secretary had supplanted the patient-utilization formula. /14/ Should this Court disagree and conclude that the matter is presently ripe for review, then the petition for a writ of certiorari should be granted and the case set for briefing and argument. /15/ Acting Solicitor General Fried is disqualified in this case. APPENDIX