SUNSHINE HEALTH SYSTEMS, INC., PETITIONER V. OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES No. 88-342 In the Supreme Court of the United States October Term, 1988 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit Brief For The Respondent In Opposition TABLE OF CONTENTS Question presented Opinions below Jurisdiction Statement Argument Conclusion OPINIONS BELOW The February 6, 1987, decision of the court of appeals (Pet. App. 12a-33a) awarding petitioner increased medicare reimbursement and interest on the judgment is reported at 809 F.2d 1390. The March 22, 1988, decision of the court of appeals (Pet. App. 1a-11a) reversing the district court's award of prejudgment interest at 15.875%, and remanding for an award at 10.583%, is reported at 842 F.2d 1097. JURISDICTION The judgment of the court of appeals of which petitioner seeks review was entered on March 22, 1988. Petitioner's petition for rehearing was denied by the Ninth Circuit on May 19, 1988 (Pet. App. 34a). The petition for a writ of certiorari was filed on August 16, 1988. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). QUESTION PRESENTED Whether, under 42 U.S.C. 1395oo(f)(2), the rate of prejudgment interest on an award of medicare reimbursement to a proprietary hospital is fixed by the rate allowed as reimbursement for return on equity to that hospital, or the rate allowed for return on equity to an extended care provider. STATEMENT 1. The Health Insurance for the Aged Act, Tit. XVIII (Medicare Act), in 42 U.S.C. 1395oo(f)(2), authorizes the payment of interest to a prevailing party on judicial review of a Medicare reimbursement determination, and directs that such interest shall be "equal to the rate of return on equity capital established by regulation pursuant to section 1395x(v)(1)(B) of this title and in effect at the time the civil action * * * is commenced" (ibid.). Section 1395x(v)(1)(B), as enacted in 1966, directed the Secretary to promulgate Medicare regulations that allowed proprietary facilities providing extended care services to be reimbursed for "a reasonable return on equity capital" (ibid.). The section further provided that the rate of return on equity was "not (to) exceed one and one-half times the average of the rates of interest" for certain specified debt obligations issued by the Federal Hospital Insurance Trust (FHIT) Fund (ibid.). Although inpatient hospital services provided by proprietary hospitals were not included within the meaning of "extended care services," the Conference Report accompanying the bill that became Section 1395x(v)(1)(B) stated that "(t)he conferees expect that the Secretary * * * will apply similar or comparable principles in determining reasonable costs for reimbursement of proprietary hospitals for services furnished by them." H.R. Conf. Rep. 2317, 89th Cong., 2d Sess. 3(1966). Accordingly, the Secretary issued 42 C.F.R. 405.429(a)(1985), /1/ which provided that all proprietary providers -- whether supplying extended care or inpatient hospital services -- would be allowed reimbursement based on a return on equity "set at a percentage rate equal to one and one-half times the average of the rates of interest on certain public debt obligations" (Pet. App. 5a (emphasis in original)). In 1983, Congress enacted amendments to the Medicare Act that established the prospective payment system (PPS), /2/ and in so doing also reduced the rate of return on equity for proprietary hospitals to one times the average rate of interest on the FHIT Fund bonds. See Social Security Amendments of 1983, Pub. L. No. 98-21, Section 601(g)(2), 97 Stat. 162 (codified at 42 U.S.C. (Supp. IV) 1395ww(g)(2)). /3/ The effect of Section 1395ww(g)(2) was to "creat(e) a distinction between proprietary hospitals and other proprietary providers * * * in the rate of return on equity capital to which each was entitled" (Pet. App. 5a). Accordingly, in 1983, the Secretary amended 42 C.F.R. 405.429(a) (1985) to "set the rate of return for proprietary hospitals at a rate equal to the average of specified interest rates" (Pet. App. 5a (emphasis in original)), while keeping the "rate of return for all other proprietary providers (such as skilled nursing facilities offering extended care), at one and one-half times the average rates" (Pet. App. 5a-6a (footnote omitted; emphasis in original)). /4/ 2. In February 1985, petitioner, Sunshine Health Systems, Inc., sought judicial review of the Secretary's designation of a proprietary hospital owned and operated by petitioner as a "new hospital" under Medicare's "prospective payment system" (Pet. 3). The district court invalidated the regulation under which the Secretary made that designation and awarded petitioner additional Medicare reimbursement as well as interest on the judgment pursuant to 42 U.S.C. 1395oo(f)(2) (Pet. App. 13a). The Ninth Circuit affirmed (Pet App. 12a-33a), and the district court subsequently awarded petitioner prejudgment interest at the rate of 15.875% (Pet. App. 2a). The Secretary appealed the district court's interest award, arguing that this rate of interest was inapplicable to proprietary providers of inpatient hospital services (ibid.). The court of appeals (Pet. App. 1a-11a) agreed, and held that the correct rate of interest to be awarded petitioner under the terms of 42 U.S.C. 1395oo(f)(2) was 10.583% (Pet. App. 2a), which was equal to the rate of reimbursement for return on equity allowed to proprietary hospitals under the regulation then in effect, 42 C.F.R. 405.429(a) (1985). In so ruling, the court of appeals rejected petitioner's argument that Section 1395oo(f)(2) requires that the rate of prejudgment interest for all types of Medicare providers be fixed at the rate of return on equity allowed to proprietary facilities furnishing so-called "extended care services." /5/ The court also rejected petitioner's related contention that the language of Section 1395x(v)(1)(B) required it to disregard the terms of 42 C.F.R. 405.429(a) (1985), as it applied to petitioner, in determining the rate of prejudgment interest due petitioner under Section 1395oo(f)(2). Petitioner's suggestion that it ignore the regulation, the court said, was "in direct conflict with Congress' express intent in this area" (Pet. App. 10a) to "inextricably link the calculation of interest with that provided for the return of equity capital" (Pet. App. 8a). The appeals court further found that, contrary to petitioner's assertion, Congress's failure to amend Section 1395oo(f)(2) to include a reference "to (Section 1395ww(g)(2)) and its effect on the rate of return of equity capital for proprietary hospitals" (Pet. App. 9a n.7) did not negate its intent that the prevailing return on equity rate for a proprietary hospital be applied to calculate the hospital's prejudgment interest. Rather, "(i)t (was) sufficient that section 1395oo(f)(2) identifie(d) the relevant regulation for determining the proper rate of interest" (ibid.). Finally, the court observed that petitioner had not challenged the applicable regulation on any ground that could properly be invoked to invalidate a regulation -- that is, that it exceeded the scope of the authority under which it was promulgated, or was arbitrary, capricious, an abuse of discretion, or contrary to law, or because the procedures followed in its issuance were improper (id. at 9a). The appeals court accordingly concluded that "(t)he regulations currently in effect were originally promulgated pursuant to section x(v)(1)(B) and as amended are sufficient for the purposes of litigation interest calculation" (Pet. App. 10a). It therefore reversed and remanded the case with an instruction to award interest at the rate of 10.583% (Pet. App. 11a) -- the applicable rate of reimbursement for return on equity for proprietary hospitals. ARGUMENT The decision below is correct and does not conflict with any decision of this Court or any other court of appeals. Indeed, as petitioner recognizes, the decision below is one of "first impression among the circuits and districts * * * " (Pet. i). Accordingly, review by this Court is unwarranted. 1. Petitioner argues (Pet. 4) that "(c)ontrary to what one might intuitively expect," the rate of prejudgment interest awarded to a proprietary hospital should be fixed at the rate of return for extended care facilities, rather than the rate fixed for proprietary hospitals. As the court of appeals correctly determined, however, nothing in the Medicare Act requires this bizarre result. Section 1395oo(f)(2) does not say that the rate of interest must be equal to the rate of return on equity capital under Section 1395x(v)(1)(B). It says that the rate of interest must be equal to the rate of return on equity capital as "established by regulation pursuant to section 1395x(v)(1)(B)." The applicable regulation, 42 C.F.R. 405.429(a)(1985), was established pursuant to Section 1395x(v)(1)(B). In its original form it applied to both extended care facilities and proprietary hospitals, and prescribed the same rate for each. This was as Congress intended. See H.R. Conf. Rep. 2317, 89th Cong., 2d Sess. 3(1966). The fact that Section 1395x(v)(1)(B) makes specific reference to extended care facilities does not mean that a regulation dealing with both extended care facilities and proprietary hospitals cannot be one established pursuant to that section. Petitioner characterizes 42 C.F.R. 405.429(a) (1985), in its amended form and as it relates to proprietary hospitals, as a regulation promulgated pursuant to Section 1395ww(g)(2), to which Section 1395oo(f)(2) does not refer (Pet. 6-7). However, the fact that 42 C.F.R. 405.429(a) (1985) was subsequently revised to conform to a later congressional enactment does not negate its character as a regulation promulgated to carry out Congress's mandate in Section 1395x(v)(1)(B). In reducing the rate of return for certain types of proprietary providers to conform to supervening congressional enactments, the Secretary continued to exercise authority conferred by Section 1395x(v)(1)(B). As the court of appeals recognized, Congress was not obliged to amend Section 1395oo(f)(2) to refer to later amendments changing the equity rate in order to preserve the applicability to prejudgment interest of the pertinent prevailing rates set forth in 42 C.F.R. 405.429(a) (1985). Rather, "(i)t (was) sufficient that section 1395oo(f)(2) identifie(d) the relevant regulation for determining the proper rate of interest" (Pet. App. 9a n.7). 2. Petitioner also argues (Pet. 7-9) that Congress could not have intended the 1983 reduction in the return on equity rate effected by Section 1395ww(g)(2) to alter the rate of prejudgment interest for proprietary hospitals because that section now contains a phase-down provision that eliminates reimbursement for return on equity to proprietary hospitals "for cost reporting periods beginning on or after October 1, 1989." Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, Section 9107(a)(1), 100 Stat. 160. We recognize that, under the statute as it now stands, prejudgment interest would no longer be available to proprietary providers of inpatient hospital services after October 1, 1989. This anomalous result, however, is the inevitable consequence of Congress's express intent to tie a provider's rate of prejudgment interest to the same provider's rate of return on equity. Although Congress, in drafting Section 1395oo(f)(2), may not have anticipated that an overhaul of the Medicare reimbursement scheme would result in the phasing-out of reimbursement for return on equity, it did nothing to avoid the effect on prejudgment interest of the phase-out it enacted. In any event, the anomaly has no effect on this case, in which petitioner received prejudgment interest at the rate of 10.583%. Any problems created by the phase-out in future cases should obviously be addressed in the first instance by Congress. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. CHARLES FRIED Solicitor General JOHN R. BOLTON Assistant Attorney General ANTHONY J. STEINMEYER Attorney OCTOBER 1988 /1/ This regulation was redesignated on September 30, 1986, and is now located at 42 C.F.R. 413.157. /2/ Under the PPS, proprietary care providers were no longer reimbursed on a cost basis, but were "paid prospectively on the basis of predetermined rates for services" (Pet. App. 5a). /3/ As amended in 1983, 42 U.S.C. (Supp. IV) 1395ww(g)(2) provided that the amount which is allowable, with respect to reasonably costs of inpatient hospital services for which payment may be made * * *, for a return on equity for hospitals shall * * * be equal to the average of the rates of interest (on certain public debt obligations). /4/ Fourteen months after this action was filed, 42 U.S.C. 1395x(v)(1)(B) was amended to conform the rate of return on equity capital for extended care services with the rate allowed for proprietary hospitals. See Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, Section 9107(b)(2), 100 Stat. 161. Accordingly, the claim raised by petitioner herein applies only to the period from the original application of the PPS -- hospital cost reporting years beginning on or after October 1, 1983 -- to the October 1, 1985, effective date of this amendment. /5/ As explained by the court of appeals below (Pet. App. 4a), "(t)he phrase 'extended care services' is defined in 42 U.S.C. 1395x(h) as referring to various items and services furnished by a skilled nursing facility to an inpatient of that facility, and does not include inpatient hospital services provided by proprietary hospitals, such as (petitioner's)."