STATE OF WISCONSIN, DEPARTMENT OF HEALTH AND SOCIAL SERVICES, PETITIONER V. OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES No. 86-648 In the Supreme Court of the United States October Term, 1986 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit Memorandum for the Respondent in Opposition Petitioner, the Wisconsin Department of Health and Social Services (Wisconsin), challenges certain disallowances found by the Secretary of Health and Human Services (the Secretary) during an audit of Wisconsin's compliance with Medicaid's "utilization control" requirements. Wisconsin claims that the Secretary abused his discretion in concluding that the State was not adhering to federal Medicaid rules. 1. Medicaid is a joint federal-state program "providing federal financial assistance to States that choose to reimburse certain costs of medical treatment for needy persons." Harris v. McRae, 448 U.S. 297, 301 (1980). States that elect to participate in the program must comply with requirements imposed by the Medicaid Act and by the Secretary. See 42 U.S.C. (& Supp. II ) 1396a; Atkins v. Rivera, No. 85-632 (June 23, 1986), slip op. 2; Schweiker v. Gray Panthers, 453 U.S. 34, 36-37 (1981). The utilization control provisions of the Medicaid Act are designed to ensure that states receiving federal funds under the Act effectively control the use of inpatient services by Medicaid beneficiaries. At all times relevant to this case, /1/ the Act required state Medicaid programs to ensure that, whenever a Medicaid patient was admitted to a nursing home or hospital, "a physicial certifies at the time of admission, * * * and * * * recertifies, where such services are furnished over a period of time, * * * at least every 60 days * * * , that such services are or were required to be given on an inpatient basis because the individual needs or needed such services" (42 U.S.C. 1396b(g)(1)(A)). In implementing the Act, the Secretary promulgated regulations requiring that the physician's recertification for a patient treated in a "skilled nursing facility" (SNF) must explicitly state that "SNF services are or were needed." 42 C.F.R. 456.260(a)(1). Similarly, recertification for a patient treated in an "intermediate care facility" (ICF) -- a type of facility that provides a lower level of services than does an SNF -- must explicitly state that "ICF services are or were needed." 42 C.F.R. 456.360(a)(1). The Secretary's interpretation of these regulations, which was furnished to state Medicaid agencies, requires that states treat SNF-certified patients in SNFs, and ICF-certified patients in ICFs. See Social Rehabilitation Service, Medicaid Action Transmittal No. 75-122 (Nov. 13, 1975); Health Care Financing Admin. (HCFA), Medicaid Action Transmittal No. 80-68 (Sept. 1980). 2. In June 1982, March 1983, and September 1983, HCFA, which conducts program audits, found that Wisconsin was not in compliance with federal requirements. It found that several ICFs in Wisconsin were treating Medicaid patients certified for SNF care, and that two SNFs in Wisconsin were treating Medicaid patients certified as needing only ICF care. Consequently, the Secretary reduced Wisconsin's federal financial assistance by approximately $300,000 pursuant to a formula set forth in the statute (42 U.S.C. 1396b(g)(5)). The State appealed the disallowances to the HHS Departmental Grant Appeals Board, arguing that its system of utilization control was an improvement on the system adopted by the Secretary. Although Wisconsin had never proposed to amend its Medicaid plan in this respect, the State contended that it had established a system of "variances" that permitted patients certified for one type of facility to remain in a different type of facility. /2/ The Grant Appeals Board upheld the disallowances, and Wisconsin sought review in the United States District Court for the Western District of Wisconsin. The district court reversed (Pet. App. 153-179). It ruled that Wisconsin's variance procedures had "enough logical force" behind them "to justify requiring the Secretary to point to more specific legislative authorization for rejecting the State's position" (id. at 163). The district court remanded the case to the Board with orders to consider whether Wisconsin's variance procedures were justified by the existence of "transfer trauma" (id. at 178-179), an issue that had not been raised by the State in the proceedings before the Board. /3/ The court of appeals reversed, one judge dissenting (Pet. App. 101-152). It concluded that the statutory language respecting utilization control, "while not overly specific, is certainly susceptible to the interpretation the Secretary has given it, and his reading of the regulations that implement those sections is less strained than Wisconsin's" (Pet. App. 114). Noting that the State had presented no evidence on the legal or medical significance of "transfer trauma" to the Board, the court of appeals did not comment on the merits of that issue (id. at 108 n.7, 114). 3. The decision below is correct. Petitioner does not allege, nor is there, a conflict among the circuits on the question presented. The statutory provisions at issue have been superseded by subsequent legislative actions. Further review is unwarranted. a. Wisconsin asserts (Pet. 25) that the court of appeals "did not conduct the careful analysis of the Medicaid Act and its implementing regulations which the APA requires." To the contrary, the court of appeals reviewed the applicable statutes and regulations in considerable detail (Pet. App. 111-116), noting that the agency's interpretation is "'entitled to a presumption of regularity'" (id. at 111, quoting Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971)). The court described both Wisconsin's and the Secretary's competing interpretations of these provisions, then concluded that "the Secretary's interpretation is a rational attempt to balance the cost efficiency and quality of care concerns of the federal government and is fully compatible with the statute, regulations and legislative history." Pet. App. 114. The court of appeals correctly concluded that it could not undertake the State's suggested analysis of "transfer trauma" -- an analysis that Wisconsin reiterates here (Pet. 15-16) -- because "judicial review of agency fact-finding is limited to evidence on the record below and * * * Wisconsin presented no medical evidence to support the existence of transfer trauma" (Pet. App. 108 n.7). In short, the court said that the State had chosen the wrong method of challenging the Secretary's decisionmaking: "Wisconsin must persuade federal authorities at an appropriate time and in an appropriate forum of the soundness of its point of view" on this issue (id. at 114). /4/ b. Wisconsin argues (Pet. 27) that the court of appeals "erroneously applied the 'rational basis standard,' and ignored the 'arbitrary and capricious' test" in reviewing the Secretary's actions. This is incorrect. The court of appeals specifically recognized that the Secretary's decision could not be disturbed "unless it is 'arbitrary, capricious, or constitute(s) an abuse of discretion'" (Pet. App. 111, quoting Overton Park, 401 U.S. at 416). The court found the Secretary's interpretation of the statutory and regulatory language to be "less strained than Wisconsin's" interpretation of the same language (Pet. App. 114). The court of appeals also determined that the Secretary's view was fully supported by the applicable legislative history (id. at 115). /5/ c. Wisconsin asserts (Pet. 38) that the Secretary's interpretation of his regulations is "completely irrational" because it presumes (for example) that "transferring an ICF patient whose needs increase is essential to protect that patient's health and access to appropriate care." But the Secretary's interpretation quite sensibly requires that a patient receive care in the type of facility for which he has been certified by his doctor, viz., that an ICF-certified patient receive care in an ICF, and that an SNF-certified patient receive care in an SNF. If a doctor believes that his patient's health and well-being require that he be treated in a different type of facility, the doctor can recertify the patient accordingly. As the court of appeals concluded, the Secretary's interpretation is properly designed to assure that critical differences between the two types of facilities are preserved (Pet. App. 115). /6/ d. Finally, in an argument made for the first time in this Court, Wisconsin contends (Pet. 41-48) that the Secretary's disallowances conflict with the so-called "free choice" provision of the Social Security Act, 42 U.S.C. 1396a(a)(23). That provision permits Medicaid recipients to obtain covered services from any entity that is willing and qualified to provide those services. See O'Bannon v. Town Court Nursing Center, 447 U.S. 773 (1980). Wisconsin appears to interpret the "free choice" provision as affording a Medicaid recipient an absolute right to obtain services from any qualified facility of his choice, regardless of the level of medical care that he needs, and regardless of the level of medical care that his facility of choice is equipped to provide. See Pet. 44. This interpretation of the "free choice" provision is plainly wrong, for it would render the Medicaid Act's elaborate utilization control provisions little more than a nullity. A patient whose doctor certifies that he needs intermediate care may be said to have a "free choice" among intermediate care facilities. But such a patient obviously does not have a "free choice" to reside in a skilled nursing facility, and thereby to inflict upon the government the substantial and unnecessary additional health costs that residence in such a facility would entail. As Wisconsin itself acknowledges (Pet. 44-45), the legislative history of the "free choice" rule makes it clear that that provision "does not obligate the State to pay the charges of the provider without reference to * * * its standard of care." S. Rep. 744, 90th Cong., 1st Sess. 183 (1967). As properly understood, there is no inconsistency between the utilization control regulations and the "free choice" rule of 42 U.S.C. 1396a(a)(23). A patient certified as needing intermediate care has a right to freedom of choice among qualified ICF providers, and a patient certified as needing skilled nursing care has a right to freedom of choice among qualified SNF providers. 42 U.S.C. 1396(c); 42 C.F.R. 409.31, 440.40, 440.150, 442.250-442.346. Any other construction would make the "free choice" and "utilization control" statutes mutually contradictory. Such an argument would be disfavored under any circumstances; since the argument was not made to either court below, it surely cannot be made for the first time in this Court as a basis for attacking the court of appeals' decision. It is therefore respectfully submitted that the petition for a writ of certiorari should be denied. CHARLES FRIED Solicitor General DECEMBER 1986 /1/ The utilization control provisions of the Medicaid Act were substantially amended by the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, Section 2363, 98 Stat. 1105-1107. This case involves disallowances for 1982 and 1983 and is therefore governed by the prior statutory provisions. /2/ Wisconsin's variance system, which was never approved by the Secretary, permitted long-term residents of both SNFs and ICFs to remain where they were, even if changes in their conditions justified a shift to a different type of facility. In order to obtain such a variance, the patient's physician, family, and a state inspector had to agree with the patient that retention in the existing facility was both desirable and appropriate. Pet. App. 105. /3/ In its petition (at 15-16), Wisconsin defines "transfer trauma" as "trauma brought about by being separated from a spouse residing in the same facility and not needing the different level of care, or by being removed from familiar surroundings after living for a length of time in a particular facility." /4/ The State could have presented evidence about "transfer trauma" in the proceedings before the Board, but it did not do so. Alternatively, the state could have followed the more appropriate course of formally proposing to amend its state Medicaid plan and presenting its "transfer trauma" justification in proceedings before the Secretary (42 U.S.C. (& Supp. II) 1316). It did not take that approach either. /5/ The court also rejected Wisconsin's argument, reiterated here (Pet. 30-31), that the Secretary's interpretation was "arbitrary" on the theory that it could result in overriding physicians' decisions. The court stated that, in fact, the Secretary's interpretation "treats the physician's determination (of the necessary level of care for a patient) as the sole and decisive factor" (Pet. App. 116). /6/ The court of appeals also noted (Pet. App. 104, 116-117) that the Secretary found ICF-certified patients residing in Wisconsin SNFs and thus receiving a higher, more expensive level of services than their physicians had certified as necessary. With respect to those patients, the Secretary's interpretation is clearly consistent with Congress's effort to improve the cost efficiency of the Act's nursing home provisions.