MARGARET M. HECKLER, SECRETARY OF HEALTH AND HUMAN SERVICES,
PETITIONER V. ST. JAMES HOSPITAL AND HUMANA OF ILLINOIS, INC. D/B/A
SPRINGFIELD COMMUNITY HOSPITAL

   No. 85-256

   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, petitions for a writ of certiorari to review the
judgment of the United States Court of Appeals for the Seventh Circuit
in this case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Seventh Circuit

            TABLE OF CONTENTS
  Question presented
  Opinions
  Jurisdiction
  Statute involved
  Statement
  Reasons for granting the petition
  Appendix A
  Appendix B
  Appendix C
  Appendix D
  Appendix E

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-24a) is
reported at 760 F.2d 1460.  The opinions of the district courts (App.,
infra, 27a-45a, 46a-47a) are reported at 579 F. Supp. 757 and 584 F.
Supp. 618.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 25a-26a) was
entered on April 18, 1985.  On July 9, 1985, Justice Stevens extended
the time for filing a petition for a writ of certiorari to and
including August 16, 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 the
"reasonable cost" of services provided to Medicare patients.  42
U.S.C. 1395(b)(1);  42 U.S.C. 1395g(a).  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 capital,
      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 costs attributable to Medicare patients.

                               STATEMENT

   This case concerns the validity of a regulation (App., infra,
48a-56a), of the Secretary of Health and Human Services governing
reimbursement of hospitals for the "reasonable cost" of treating
Medicare patients.  The specific issue is reimbursement of malpractice
insurance premiums.  The regulation and its statutory background are
described in our petition for a writ of certiorari in Heckler v.
Abington Memorial Hospital, No. 85-52 (filed July 11, 1985 ).  /1/

   The present case involves the claims of two hospitals that sought
reimbursement of their malpractice premiums under the so-called
"patient utilization" formula on the ground that the Secretary's
action in replacing that formula with a "paid claims" formula was
invalid.  The district courts held the rule invalid because it had an
inadequate statement of basis and purpose, was arbitrary and
capricious, and violated the Medicare Act.

   The court of appeals affirmed.  It held that the statistical study
on which the Secretary's conclusions were based was inadequate;  that
the Secretary had failed to ascertain the correlation between actual
malpractice losses and premium costs;  and that the Secretary failed
to determine whether the existing system for compensation of overhead
adequately compensated for any imbalance in allocation of malpractice
costs (App., infra, 8a-15a).  The court of appeals also ruled that the
statement of basis and purpose was inadequate (id. at 16a-17a).
Finally, the court of appeals concluded that the rule violated the
Medicare Act, on the grounds (1) that the Secretary had removed
malpractice costs from the general pool without first determining
whether the existing system of overhead compensation violated the Act,
and (2) that by tying compensation to past losses rather than to risk
of future loss, the Secretary violated the Act's requirement to
compensate hospitals for their reasonable cost of insurance (App.,
infra, 18a-22a).

                   REASONS FOR GRANTING THE PETITION

   This case involves the same Medicare regulation that is involved in
Abington, and that is the subject of the pending rulemaking proceeding
described in our petition for a writ of certiorari in that case.  /2/
As in Abington, the decision of the court of appeals in this case
addresses several issues that may be resolved, or at least brought
into sharper focus, by the pending rulemaking proceeding.  Therefore,
as in Abington, we believe that it would be appropriate for the
judgment of the court of appeals to be vacated and the case remanded
for reconsideration in light of the current rulemaking proceeding.

                              CONCLUSION

   The case should be disposed of in light of this Court's disposition
in Heckler v. Abington Memorial Hospital, No. 85-52.

   Respectfully submitted,

   LAWRENCE G. WALLACE

      Acting Solicitor General*

   AUGUST 1985

   /1/ Copies of the petitions for a writ of certiorari in Abington,
No. 85-52, and Heckler v. Humana of Aurora, Inc., No. 85-53 (filed
July 11, 1985), which is a related case, are being served on counsel
for respondents.

   /2/ In our petition (at 7-8) in Abington we cited the various court
of appeals decisions that address the validity of the rule.  After
that petition was filed, the Eighth Circuit held the rule invalid,
relying on the decision of the Seventh Circuit in the present case.
Menorah Medical Center v. Heckler, No. 84-2257 (8th Cir. July 24,
1985).  In addition, on August 5, 1985, the Ninth Circuit vacated the
submission of two related cases pending this Court's disposition in
Abington and Humana of Aurora. St. Joseph's Hospital v. Heckler, No.
84-2168;  Albany General Hospital v. Heckler, No. 84-3865.

   /*/ Acting Solicitor General Fried is disqualified in this case.

                               APPENDIX