GOOD SAMARITAN HOSPITAL v. SHALALA, SECRETARY OF HEALTH AND HUMAN SERVICES

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Argument of Carel T. Hedlund

Chief Justice Rehnquist: We'll hear argument next in Number 91-2079, Good Samaritan Hospital v. Donna E. Shalala.

Ms. Hedlund, you may proceed whenever you're ready.

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

This case involves the reasonable cost methodology under the Medicare program.

Under that provision, the Secretary is to reimburse providers for their reasonable cost of providing services to Medicare beneficiaries.

The statute defines "reasonable costs" as those costs actually incurred, excluding therefrom any part of incurred costs found to be unnecessary in the efficient delivery of needed health services.

The statute requires the Secretary to do two things.

The first is, it authorizes the Secretary to use a variety of methods to determine a provider's reasonable costs in the first instance, and then in clause 2 of the same section, it requires the Secretary to make suitable retroactive, corrective adjustments for individual providers when the methods produce inaccurate results.

The issue in this case is what kind of individual retroactive corrective adjustments does clause 2 require?

Are they adjustments to bring an individual provider's reimbursement into line with reasonable cost as it's defined in the statute... that is, actual costs excluding those due to unnecessary services or to inefficiency?

That is the position the hospital contends that clause 2 requires... or is it simply an adjustment to reconcile the interim payments the provider receives during the year with the amount that the methods say that you get, with the Secretary's regulatory method?

In this case, the petitioners are six rural Nebraska hospitals.

Prior to the cost years under appeal, their costs were always under the Medicare cost limit.

Beginning with the years under appeal, however, their costs exceeded the Medicare cost limits for the first time.

The hospitals still had the same necessary costs that they had in prior years.

The record shows there were no findings that the hospitals operated inefficiently.

The Secretary admitted in his answer to the complaint that the cost limits for areas that have a high percentage of part-time employment is artificially low, it is set artificially low, and yet the cost limits were applied in this case to disallow a substantial portion of the hospitals' necessary operating costs.

The Secretary applies the Medicare cost limits in a conclusive fashion.

That means a provider cannot be reimbursed for costs in excess of the cost limits even if the provider can demonstrate that the costs are reasonable and necessary unless the provider's costs fall within one of a very few narrow exceptions that the Secretary has provided for, and in this case both parties agree there were no regulatory exceptions applicable to these providers.

In this Court, we are not challenging the validity of the routine cost-limit methodology as a general rule.

We are saying that for these particular providers the reimbursement produced by the Secretary's methods was inadequate under the statutory standard.

That is, it failed to reimburse the provider's actual, necessary costs, excluding those costs due to inefficiency or unnecessary services, and what the hospitals are seeking is the opportunity to show that their costs in excess limits of the cost limits were reasonable.

Unknown Speaker: And you think the statute expressly provides it in that final provision.

Mr. Hedlund: I believe Clause (ii) provides that.

The words of Clause (ii) are obviously central to this case, and they say that the Secretary shall provide for the making of a suitable retroactive corrective adjustment where for a provider of services for any fiscal period the aggregate reimbursement produced by the methods of determining costs proves to be inadequate or excessive.

Unknown Speaker: And you assert that the Georgetown opinion supports you.

Mr. Hedlund: Yes.

Unknown Speaker: And your opponent--

Mr. Hedlund: And they say it doesn't.

Unknown Speaker: --They say it doesn't, yes.

Mr. Hedlund: Right.

Unknown Speaker: And they say it supports them.

Mr. Hedlund: Yes.

Well, if you look at this Court's reading of the plain language of Clause (ii), at the beginning of the Georgetown decision this Court said repeatedly--

Unknown Speaker: Do you have a page number in the Georgetown case that you think supports you--

Mr. Hedlund: --Yes.

Unknown Speaker: --Squarely?

Mr. Hedlund: On page 472 in the Supreme Court Reporter the... it says,

"We agree with the court of appeals that Clause (ii) directs the Secretary to establish a procedure for making case-by-case adjustments to reimbursement payments where the regulations prescribing computation methods do not reach the correct result in individual cases. "

That's one place.

Unknown Speaker: That's on page 472.

Mr. Hedlund: 47... I have the Supreme Court copy of that.

I'm sorry.

109 Supreme--

Unknown Speaker: 109 Supreme Court--

Mr. Hedlund: --472.

It goes on to say later, on that same page,

"These adjustments are required when for a provider the aggregate reimbursement produced by the methods of determining costs is too high or too low. "

The Court goes on to say, again on that page, that (ii)--

Unknown Speaker: --This, incidentally, is at page 210 of the U.S. Reports.

Mr. Hedlund: --Thank you very much.

It says that Clause (ii), rather than permitting modification to the cost method rules and their general formulation, is intended to authorize case-by-case inquiry into the accuracy of reimbursement determinations for individual providers.

Unknown Speaker: But when the Court spoke of accuracy, wasn't it talking about something just in the normal meaning of those terms different from the methodology, and isn't the suggestion given there the same suggestion that is given by the three final words in the statute itself which refers to the result being either inadequate or excessive?

That isn't language which seems to call into question the methodology.

It seems to be language that assumes that there is a comparatively easy way of finding out whether a particular resolve, a particular total, if you will, is right or wrong, and if that is so, that of course supports the Government's position.

Mr. Hedlund: Well, I think the term inadequate or excessive in the statute referred back to the first sentence--

Unknown Speaker: Well then, why didn't it refer to unreasonably high or unreasonably low, because the statute doesn't talk about adequacy or excessiveness, it talks about reasonable cost.

Mr. Hedlund: --But it discusses the... when a provider's... when the reimbursement methods do not fully take into account the provider's actual, reasonable cost, I think it may be helpful in this regard to go back to some of the legislative history.

When the Medicare statute was created in 1965, Congress said that the reasonable cost methodology was intended to reimburse the actual costs of providers, however widely they vary from institution to institution, except where they're substantially out of line with comparable institutions, and it gave the Secretary in the first part of the statute--

Unknown Speaker: It seems to say two different things, but I won't stop there.

Mr. Hedlund: --It gave the Secretary the flexibility to use a variety of methods, including the cost-limit methods, to try to get as close as possible to reimbursing what a provider's actual costs were, but then all the methods are subject to the overriding mandate of Clause (ii) that there be an individual retroactive adjustment when those methods do not satisfy the statutory standard of what at that point was actual cost.

In 1972, Congress amended the statute with the cost limits.

It put into the definition of reasonable costs those costs actually incurred excluding those attributable to inefficiency or unnecessary services, and when it added the cost-limit authority into the statute, it inserted that in the third sentence of this statute, and the third sentence is what lays out all the variety of methods the Secretary could use.

All of those methods remain subject to Clause (ii), which is an individual adjustment.

Unknown Speaker: Well, but that's the issue in the case, isn't it?

Is it the methodology which is subject to Clause (ii), or is the computation of results under the methodology?

Mr. Hedlund: If the methodology--

Unknown Speaker: I mean, simply to say that the methodology is subject to Clause (ii) it seems to me is in effect to assume the conclusion that you've got to reach.

Mr. Hedlund: --What we're saying, the test is whether the individual provider's reimbursement... not the method, but the actual money that goes to the providers is excessive or inadequate to meet the statutory standard.

Unknown Speaker: Right, and the question is whether that adequacy or inadequacy is to be reviewed in such a way that would allow a departure from the methodology, or whether it is to be reviewed in such a way as to provide, in effect, a final year-end computation that would correct any cumulative errors from the monthly instalment reimbursement.

Mr. Hedlund: When Congress enacted the cost limit in 1972, it very clearly says in the legislative history that the cost limits were to be presumptive, and that costs that could not be justified by providers would not be reimbursed.

The reason the cost limits were put into place, Congress said, is it recognized that intermediaries were having a very difficult time identifying which costs of a given provider were too high and explaining why they were too high, and Congress decided to shift the burden of proof.

It gave the Secretary the authority to establish cost limits that were going to be presumptive measures of reasonableness, and then every provider if it felt it could justify the reasonableness of its costs over the limits would be able to do so.

Unknown Speaker: Now, is there any administrative procedure for doing that in addition to or apart from subsection... the regulations that are mandated by subsection (ii)?

Mr. Hedlund: The Secretary has... I think there are mechanisms available, regulatory mechanisms available.

The Secretary has not implemented them to do so.

Unknown Speaker: If that is so, that undercuts your argument that that is the object of subsection (2), that an opportunity to litigate the inappropriateness of the presumption is the object of subsection (2).

Mr. Hedlund: I think actually the language of the book-balancing regulations that were cited in the Georgetown decision, the actual language of the regulations, is broad enough to encompass the kind of adjustment that we seek.

On... it's on page 473 of my copy of the decision, the language of the book-balancing regulation that's quoted there says that it's supposed to... the retroactive adjustment will represent the difference between the amount received by the provider during the year for covered services and the amount determined in accordance with a method of cost apportionment to be the actual cost of services rendered to beneficiaries during the year.

Cost apportionment is just a mechanism for dividing costs between Medicare patients and non-Medicare patients.

It's not a method of determining what the pot of costs is that you're talking about, and the wording of this regulation is broad enough to encompass the Clause (ii) adjustment that we seek.

It has not been implemented that way by the Secretary.

One of the other book-balancing regulations that the Secretary cites in their brief on page 21... it's the regulation at 405.405(c)... talks about the retroactive adjustments.

It says,

"The retroactive payments will take fully into account the costs that were actually incurred. "

That language is broad enough to encompass the kind of adjustment that we're seeking under Clause (ii), but they have not been implemented in that fashion by the Secretary.

Unknown Speaker: Ms. Hedlund, even if you're correct that Clause (ii) requires more than book-balancing and is some kind of escape valve for the hospitals, even so, doesn't that leave HHS with some discretion as to how to implement that provision in Clause (ii)?

And the Secretary has promulgated regulations providing for a scheme of exceptions to the cost-limit rules and has spelled out the circumstances where the Secretary is going to allow adjustments.

Why isn't that a valid exercise of any duty that HHS may have here?

Mr. Hedlund: I don't think that the exhaustion... excuse me, the exception regulations comply with the language of the statute, because the statute says there shall be a retroactive adjustment for a provider for any fiscal period.

It doesn't say, for some providers.

It doesn't say, those providers that the Secretary may choose to have--

Unknown Speaker: Well, do you take the position, then, that HHS can't meet any requirement that may exist there by the adoption of reasonable rules and regulations, rather than dealing with it as you propose here?

Mr. Hedlund: --If the exception's regulations perhaps had had another provision in it that it would allow providers to appeal to demonstrate that their costs over the cost limits were reasonable, for whatever reason, that would do it, but they haven't done that.

Unknown Speaker: But you don't think the Secretary can say, here are the reasons that we are going to take account of?

Mr. Hedlund: I don't think that satisfies the plain language of the statute, which is for a provider for any fiscal period.

I think any provider needs to be given that opportunity to demonstrate that its costs are reasonable under the statutory standard.

Unknown Speaker: Ms. Hedlund, you would give the Secretary this much, wouldn't you, you would say that if you come up with an accounting methodology, a cost accounting methodology that shows you have been inadequately reimbursed but the Secretary, using another cost accounting methodology which is also reasonable, finds that you haven't been reimbursed, and both methodologies are perfectly respectable ones, you lose?

You won't even give him that much?

Mr. Hedlund: I'm not sure I fully understand--

Unknown Speaker: Well, I mean, there are a lot of ways to skin the cat, and economists have developed a lot of different methodologies, and very often either one is a reasonable methodology.

If the Secretary is using a reasonable methodology, the mere fact that you come up with another methodology, which is also reasonable, that shows you've been inadequately reimbursed, that would not entitle you to compensation, would it?

That's not involved in this case, but--

Mr. Hedlund: --It's not.

Unknown Speaker: --I'm just trying to see how far you're trying to roll over the Secretary here.

[Laughter]

Mr. Hedlund: I think that the statute... we're not challenging the methodology, so... the statute says when any methodology, when the aggregate reimbursement produced by all the methodologies is inadequate under that statutory standard--

Unknown Speaker: How are you going to prove that you've been inadequately compensated without going through some system of proof?

Mr. Hedlund: --We need to go through a system of proof.

That's what we would like to do, and--

Unknown Speaker: And then it might be quite reasonable, but the Secretary's is, too, as Justice Scalia suggests.

Mr. Hedlund: --The test of reasonableness is one that's been used a very long time in Medicare.

It derives from the 1965 legislative history that I said before, which is that it's to reimburse costs however widely they vary, except where they are substantially out of line with costs of comparable providers.

And the Provider Reimbursement Review Board right now hears cases all the time where the issue is, was a particular cost of a provider reasonable, and the level of proof the provider has to meet is to show that its costs were comparable, or substantially in line with costs of comparable providers, and that kind of exercise goes on all the time at the Provider Reimbursement Review Board, so we're not seeking some kind of new methodology by which to prove that the costs are reasonable.

With respect to the Secretary's book-balancing interpretation, if you step back and look at the structure of the statute, it seems to me there are two kinds of retroactive adjustment required.

One is required for every provider, every year, and that is the kind of reconciliation the Secretary does, and we contend that that reconciliation is governed by section 1395(g).

1395(g) is the section that provides for interim payments to providers throughout the year, and then it requires that there be necessary adjustments on account of overpayments or underpayments, and that those adjustments should be made prior to settlement of the cost report.

That final adjustment that takes place prior to settlement of the cost report is exactly what the Secretary's book-balancing interpretation does in this case.

That's all that the Secretary says they should do, and we contend that that is entirely covered under section 1395(g).

If you look at Clause (ii), the language of Clause (ii) says it requires an adjustment for a provider, for any fiscal period.

It doesn't say, every provider for every period.

That language in Clause (ii) does not contemplate an adjustment for every provider every year.

It's not the book-balancing that's governed by section 1395g.

Unknown Speaker: It's in a section entitled "Reasonable Costs".

Mr. Hedlund: That's correct, as opposed to the other reconciliation method--

Unknown Speaker: Determination of amount.

Mr. Hedlund: --Determination of payment amount.

Unknown Speaker: Well, isn't 1395g what guides the Government in determining how much to pay out at the outset?

Mr. Hedlund: 1395g--

Unknown Speaker: Rather than being a retroactive adjustment.

Mr. Hedlund: --I think there's retroactive--

Unknown Speaker: Doesn't 1395g tell the Secretary what it has to pay out on an ongoing basis--

Mr. Hedlund: --It says--

Unknown Speaker: --Prospectively and with the right to make adjustments, and section... Clause (ii) that we're concerned with is a retroactive adjustment, or am I incorrect?

Mr. Hedlund: --My reading of section 1395g is that when it says, with necessary adjustments on account of previously made overpayments or underpayments, that's sort of a retroactive settling up.

A provider gets interim payments throughout the year.

Unknown Speaker: In calculating the ongoing payments that the Secretary makes to the hospital, or to the provider.

Mr. Hedlund: But it's also on a year-to-year basis, because those necessary adjustments also are made prior to settlement.

This section says its made prior to settlement of the cost report.

So there are interim payments made throughout the year.

When a provider files its cost report there is often what's called a tentative settlement that's made... that's the preliminary reconciliation... and then when the cost report is finally settled, there's the final reconciliation, and I think this language on account of previously made underpayments or overpayments is taken into account in that final settlement process.

Thank you.

I'd like to reserve the rest of my time for rebuttal.

Unknown Speaker: Very well, Ms. Hedlund.

Mr. Dumont, we'll hear from you.

Argument of Edward C. DuMont

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

Petitioners in this case were subject to exactly the same regulatory cost limits that applied to all similar Medicare providers during the years at issue.

Their costs exceeded those limits, and they concede that they did not qualify for any of the exemptions or exceptions provided in the Secretary's regulations.

In the courts below, petitioners challenged the validity of the regulatory cost limits, saying that they were arbitrary and irrational.

They lost that challenge, and in this Court they concede that the regulatory cost limits are generally valid.

Nevertheless, they assert a right to some sort of individualized proceeding in which to seek exactly the same relief on the ground that those limits, although generally valid, should not apply to them.

Unknown Speaker: Mr. DuMont, you refer to the cost limits.

The statute does not refer to the cost limits, does it?

It says

"the reasonable cost of any services shall be the cost actually incurred. "

These are cost estimates, rather than cost limits, aren't they?

You're referring to this as though it's a price regulation scheme, but it isn't, is it?

I thought it was just...

"the reasonable cost of any services shall be the cost actually incurred. "

is how the provision begins.

Mr. DuMont: That's how the provision begins, and that's how the provision stood in 1965 when it was enacted, but in 1972, Congress explicitly enacted authority later on in the same section of the statute for the Secretary to provide for the establishment of limits on the direct or indirect overall incurred costs to be recognized as reasonable for purposes of Medicare reimbursement, and we submit that that language is essentially conclusive of the issue presented in this case.

In fact, there are three principal reasons--

Unknown Speaker: Where are you... okay.

Mr. DuMont: --I'm sorry, I'm reading... I'm in section 1395x(v)(1)(A) about in the middle of the--

Unknown Speaker: I see.

Now, would you be more specific where you are in 1395x(v)(1)(A)?

Mr. DuMont: --Using the copy of the statute that's at the beginning of the petitioners' brief, it's almost at the bottom of page 2 of the petitioners' brief.

Unknown Speaker: Thank you.

Mr. DuMont: In fact, we would assert that there are three principal reasons why this Court should not--

Unknown Speaker: Before you leave that section, would you just... I'm a little slow in following this rather complicated statute.

What in that sentence is it that's so critical and disposes of the whole case, which I think you said that sentence did?

You better tell me which language does it.

Mr. DuMont: --Well, Your Honor, we think that the language... first of all, section 1861 provides the definition of reasonable cost, which is the key to Medicare reimbursement entirely.

It provides that that reasonable cost means necessary cost incurred, and so on--

Unknown Speaker: Right.

Mr. DuMont: --And is to be determined by regulations promulgated by the Secretary specifying the methods to be used in calculating reasonable cost.

Unknown Speaker: Right.

Mr. DuMont: The... in 1972, Congress enacted a specific authorization for a particular method.

That is, the cost limits that are at issue in this case.

Unknown Speaker: Now, is that the sentence that begins, '72?

Mr. DuMont: That entire sentence was not added, but the authorization that it may provide for establishment of limits was added in 1972.

Unknown Speaker: What about Clause (ii)?

Was that in there originally, or was that also added?

Mr. DuMont: Clause (ii) has been there since the beginning of the statute.

Unknown Speaker: In that particular language.

Mr. DuMont: Yes.

The language of Clause (ii) has not changed except to change B to (ii) when they reordered the numbering in the statute.

We would... we think the petitioners focus on Clause (ii), which defines reasonable cost, but as I've been saying, the immediately preceding sentence of the same section explicitly authorizes the Secretary first of all to make estimates of the costs necessary in the efficient delivery of needed health services, which is the language which Ms. Hedlund refers to, and then, on the basis of those estimates, to promulgate limits on the costs to be recognized as reasonable.

If there's a key point in this case, it is that when the Secretary prescribes a valid cost limit, which is to be recognized as reasonable, that, as a matter of statutory authority, pretermits any further inquiry into whether a the valid application of those methods produces a result which is reasonable or not.

Unknown Speaker: Well, I... the concern, though, is that here the statute spells out how the Secretary is going to determine the calculation of reasonable costs, but then subsection (ii), the clause on which petitioners rely, says that where the aggregate reimbursement made by these methods of determining reasonable cost proves to be either inadequate or excessive, that some adjustment will be made, and that suggests at least that it's more than just going through the reasonable cost analysis.

I mean, the language would suggest that.

Mr. DuMont: Well, Your Honor, I think the language suggests... you know, mandates that there must be some adjustment and there's going to be some comparison of aggregate amounts.

We would submit that the language, "inadequate or excessive" at the end of the statute begs the immediate question, inadequate or excessive compared to what?

Now, compared to what has to be reasonable cost, as defined in the statute, but reasonable cost is not self-defining in the statute.

Unknown Speaker: Well, there's another statutory provision, I think that requires the book-balancing, so Clause (ii) must mean something else.

I mean, there's another statute, I think--

--1395g.

1395g, that says you're going to do the book-balancing, so I think probably it's reasonable to read subsection (ii) as requiring something more.

I get bogged down in what the something more might be and how the Secretary could do it.

I mean, maybe the Secretary can do the something more in the very way the Secretary has, by providing exceptions here and there.

They have regulations that deal with many of these things.

Mr. DuMont: Well, I certainly agree that if Clause (ii) requires anything more than we say it does, which is to say, year-end reconciliation, then whatever obligation it imposes on the Secretary is first of all qualified by the words "suitable retroactive corrective adjustments" which implies a certain range of discretion, and second is fully accounted for by the exceptions and exemptions that the Secretary has in fact built into the cost limits.

Now, I should be clear that we do not think those exemptions or exceptions were promulgated under the authority of Clause (ii) because we don't think that is what Clause (ii) is about.

Now, with respect to section 1395g, with respect I think the two statutory provisions really look at different phases of the process in two ways.

First of all, section 1395g is a payment mechanism, and if you look at the beginning of section 1395g, which I believe is quoted on page 20 of petitioners' brief in note 17, the beginning of that section is,

"The Secretary shall periodically determine the amount which should be paid under part A to each provider of services. "

and so on.

Now that refers to something obviously as outside of section 1395g itself as to the substantive determination of how much is to be paid, and we submit that what it refers to is the Secretary's cost determination methods which are in fact specified in section 1395x(v).

Unknown Speaker: Could I ask you, the Secretary has determined the compensation for this provider under his prescribed methodology--

Mr. DuMont: Yes, Your Honor.

Unknown Speaker: --I take it.

Now, Clause (ii) provides... speaks not only of inadequacy but of excessiveness.

Mr. DuMont: That's correct.

Unknown Speaker: Now, how would the Secretary ever go about saying that what we have paid is excessive, even though our methodology says that's supposed to reflect cost?

Mr. DuMont: Well, I think that's a very interesting question, Your Honor, and in fact--

Unknown Speaker: It would be almost impossible, wouldn't it, for the Secretary to confound his own methodology?

Mr. DuMont: --Well, no, Your Honor, in fact I'm not sure that it would be.

Unknown Speaker: Well, I'm just suggesting to you that maybe excessiveness could only really mean book-balancing.

Mr. DuMont: First of all, I think that is by far the most natural interpretation of the statute, is that that language refers to the same kind of accounting comparison that we submit, the comparison of an aggregate reimbursement produced by estimated methods with a total final audited reimbursement produced by the same methods but applied to final numbers.

Now, Your Honor does raise an interesting point, however, which is that in the context of this particular clause, what's sauce for the goose has to be sauce for the gander, so that if in fact Clause 2 provides for some kind of retroactive change in the methods which are applied, then there's no reason why the Secretary couldn't come in and say... because as Justice Scalia said, there's a variety of reasonable methods that could be applied to determining costs.

There's no reason the Secretary couldn't come xx at some point and say well, you know, I know I promulgate these regulations that said that X was reasonable, but now I really think that it should have been X minus 10 and I'm going to apply that on a case-by-case adjudication to every provider in the Medicare program with an open year, and provided that those... both X and X minus 10 are reasonable within some broad unstructured definition, I assume the Secretary gets away with that.

I mean, that seems to me to directly undercut this Court's holding in Bowen v. Georgetown University Hospital.

Unknown Speaker: Mr. DuMont, what about a third possibility, besides the two represented by the Government's position and the petitioners' position here?

Clause (ii) says,

"provide for suitable retroactive corrective adjustments where the aggregate reimbursement provided by the methods of determining costs. "

--methods of determining costs... "prove inadequate or excessive", and if you go back earlier, you'll see that it gives the... the provision gives the Secretary authority to do various things, one of which is to provide for the determination of costs.

Then it continues,

"He may also provide for the establishment of limits. "

Why can't they... isn't it possible that this provision allows them to question the determination of cost, the methodology used to determine cost, but not to determine limits that have been established?

They are different provisions.

Mr. DuMont: That's correct, Your Honor, and we would agree with you that even if Clause (ii) had originally allowed for some kind of originalized challenge to the determination of costs under the original statutory scheme, that once Congress came in in 1972 and spoke very specifically to the concept of imposing costs--

Unknown Speaker: Of established limits.

Can you separate out the two?

Is it possible to decide which portion of the Secretary's action constitutes determining costs and which constitutes establishing limits?

Well, doesn't the limit itself refer to costs, though?

I don't think... it says limits on costs.

Mr. DuMont: --Well, we would submit that the cost limits are, in fact, one of the methods of determining costs.

I mean, that is our position.

I think it is possible technically to separate them in the sense that in order to calculate... the provider comes forward with a report of what it's costs were, and these limits are actually implemented through a per diem schedule, depending where a hospital fits in terms of size and location and so on.

Unknown Speaker: Well, suppose... he's imposed a limit of... imposed limits on costs of specific items or services or groups of items or services.

Clause (ii) couldn't possibly provide for reimbursement beyond those cost limits, could they?

Mr. DuMont: We would submit that no, it could not, because after all, Clause (ii) only authorizes an adjustment in accordance with the methods prescribed by the Secretary, and cost limits are one of those methods, so once you have a validly promulgated applicable limit, we think that ends the question as to those costs.

Unknown Speaker: It's not clear to be why you can't reach the result you want to reach in making these adjustments under 1395g.

Why is 1395g inadequate to accomplish the book-balancing function that you wish to accomplish under subpart (ii)?

Mr. DuMont: First of all, because, as I said the... we think 1395g refers only to a payment mechanism and that the first sentence of 1395g requires an external determination of what amounts are in fact due under--

Unknown Speaker: What kind of determination?

I didn't hear you.

Mr. DuMont: --External, I'm sorry.

Unknown Speaker: External.

Mr. DuMont: External to the standards put forth in 1395g itself.

Secondly, because as a matter of interpretation, if you look at how both 1395g and Clause (ii) were implemented in the initial regulations promulgated by the Secretary, it's quite clear that Clause (ii), as this Court said in footnote 2, I believe, of the Georgetown opinion, the language of Clause (ii) is tracked quite directly by the year-end reconciliation language in the initial regulations.

And we would submit that those regulations being... having been drafted by people who were intimately involved in putting together the statute and having been really discussed with the enacting Congress before they were promulgated, so it was an excellent guide to the original understanding of the terms of the statute were.

So if those regulations implement Clause (ii) in a substantive provision providing for retroactive reconciliation and book-balancing at the end of the year, then we think that's very good evidence that that's what that clause was intended to do.

Unknown Speaker: Mr. DuMont, this... my question may have been already raised by someone else while I was reading the statute, and I apologize if it's repetitive, but let me ask you this: the aggregate reimbursement which is either inadequate or excessive is described as an aggregate reimbursement produced by the methods of determining costs... not by the methods of deciding how interim reimbursement will be made, not by the methods for determining payment, but by the methods of determining costs.

Doesn't that necessarily mean that the inadequacy must be an inadequacy which implies that there is something wrong with the method itself?

Mr. DuMont: No, Your Honor, for the following reason.

The language methods of determining costs in Clause (ii) is fully broad enough to include the application of those methods in making the estimates that are made in order to make interim payments as directed by section 1395g.

It's really the same--

Unknown Speaker: Why?

I mean, explain that to me.

Mr. DuMont: --Well, you need to have some basis on which to make estimated payments, since the statute directs that you make them at least monthly.

Now, the regulatory direction is to make those estimates as close as possible to what the final result is going to be.

Therefore, what you're really doing is taking estimated data but running them through the same methods that you're eventually going to run the final data through in order to get a result.

Unknown Speaker: But why are those methods for determining costs, which I thought meant costs in the allowable sense used by this section, which is kind of your ultimate determination, or ultimate criterion of what is allowable?

Mr. DuMont: Well, that's quite right, but you pay on an estimated basis your best estimate of what those allowable costs are going to be.

Then you're going to inevitably make some mistakes that will be--

Unknown Speaker: Sure, but if that... and in a way, I guess that's my point.

The statute doesn't speak of determining adequacy... inadequacy or excessiveness by reference to estimated payments.

It's inadequacy or excessiveness by methods of determining costs, which seems to me the ultimate criterion rather than simply the procedure for making interim payments.

Mr. DuMont: --With respect, it's inadequacy or excessiveness of an aggregate reimbursement produced by the methods of determining costs, and we would say that aggregate reimbursement is most naturally interpreted to be a reference to the total bottom-line number you get at the end of the year once you've made a bunch of estimated payments.

Unknown Speaker: If aggregate reimbursement were not there, would you agree that the other side would have a pretty open-and-shut case?

Mr. DuMont: No, I don't think so, Your Honor, because still--

Unknown Speaker: Boy, you won't give up anything.

[Laughter]

Mr. DuMont: --We're trained that way.

Unknown Speaker: They ought to have you figuring the reimbursements.

[Laughter]

But if you didn't have that phrase, "the aggregate reimbursement", then you would simply have the inadequacy or excessiveness... let's take... leave out the word "aggregate".

You'd just have inadequacy or excessiveness or reimbursement produced by methods.

I admit, when you get the word, "aggregate" in there, maybe you introduce an ambiguity.

Mr. DuMont: I think that's true, but I think even without the word "aggregate", you are talking about a reimbursement produced by applying the Secretary's methods, and those methods are... the same methods are applied in determining the estimated payments made during the course of the year.

Unknown Speaker: But of course, aggregate is readily explicable on the other theory as well.

That is, if a method of determining certain of your costs inflate your costs, but a method of determining other ones deflate your costs, you shouldn't be able to claim reimbursement.

You can offset one excess against the other deficiency.

It makes sense on that basis, too.

Mr. DuMont: Well, the word is susceptible to a variety of interpretations, but actually I would urge that ours is the more natural, for this reason: that because you're going to have... you know you're going to have a number of interim payments which are frankly estimates, and you know they're going to be somewhat inaccurate, some may be high, some may be low, you're going to get to the end of the year and you're going to have an aggregate number you've actually paid.

Whereas on their theory, it seems to me what they're really saying is that they're really attacking the method in the sense that they're saying that the cost limits as we've promulgated them are unfair to them as we have placed them on a matrix of possible places you could be on the cost-limit curve, and these are per diem limits, so their argument applies exactly the same way to every patient day of care during the entire year.

It gives you a determinate amount, and all you have to do to aggregate anything there is to add up the total number of patient days and multiply, and I think it's a much less substantial reading of the word "aggregate", actually, than ours.

Unknown Speaker: By the time you get to this provision... g comes before x, am I correct about that?

Mr. DuMont: That's correct.

Unknown Speaker: So at least, even though interim payments isn't mentioned in this section, at least the person who sat down of an evening to read through this statute--

[Laughter]

Has already read about interim payments by the time he gets to this provision, right?

Mr. DuMont: That's correct.

Unknown Speaker: May I follow up with one other question?

Supposing Congress repealed Clause (ii), would you say that there would no longer be any statutory authority for book-balancing pursuant to subsection g?

Mr. DuMont: We think that if Clause (ii) did not exist, it's likely or at least possible that the authority to form some kind of year-end book-balancing could be inferred under the general statutory--

Unknown Speaker: It's rather clear they would be able... if they found they paid $10,000 too much just because they overestimated, it's pretty clear they could have balanced just at the end of the year, couldn't they, without Clause (ii)?

Mr. DuMont: --I suspect that we would argue that the Secretary would have that power.

Unknown Speaker: Yes.

Mr. DuMont: To return for a moment to Mr. Justice Souter's question, I think it's important to realize that there is a tautology involved, we think, in Clause (ii), which is to say that the costs you're going to compare have to be costs that are determined by the Secretary's methods, and you're going to compare them to some standard of reasonableness, but as we also say, the standard of reasonableness is the standard that is produced by the Secretary's methods.

Now, our interpretation accommodates that tautology, because we're not talking about changing the methods, we are only talking about changing the data, because the data when you originally make payments are estimated and provisional, and the data when you eventually make final settlement are audited and correct.

Now, petitioners' interpretation, on the other hand, really destroys that tautology because they have to be in a position of saying, well, what you compare this to is some general and rather amorphous statutory standard of reasonableness, which first of all we think is inconsistent with the statutory language--

Unknown Speaker: Well, is there some problem about the provider proving what their actual... what its actual costs were for the year?

Mr. DuMont: --There's a factual question when they prove their actual costs.

Unknown Speaker: Yes.

Mr. DuMont: There's a much more complicated question when they prove their reasonable costs.

Unknown Speaker: Well, I understand that, but there's no problem they can prove what they paid out... I mean, what it actually cost them.

Mr. DuMont: Presumably, yes.

Unknown Speaker: Well, presumably... I would suppose they could.

And I thought, maybe (ii) says you compare what they got under the program with what it cost them and try to determine whether what they got is inadequate.

That's what (ii) says... inadequate or excessive.

Mr. DuMont: That's correct, but again, the question--

Unknown Speaker: And then... and in order to show they were inadequate, you would have to show that the compensation was unreasonably low.

Mr. DuMont: --I believe on their theory you would have to show that it was unreasonably low compared to some statutory standard of reasonableness.

Now, Ms. Hedlund has tried to reimport into that analysis the original regulatory standard, which was substantially out of line with the costs of other similar providers, but frankly I don't know why she would make that concession, because once she's outside of the Secretary's methods, one of which is cost limits and another one of which is the substantially-out-of-line standard, you're really back to a completely unbounded statutory question of whether a particular reimbursement is reasonable within only the statutory definition.

Unknown Speaker: The referent of subsection (ii) that we've been talking about is such regulations, is it not?

Mr. DuMont: That's correct, Your Honor.

Unknown Speaker: It doesn't give any independent right to simply come in and challenge the inadequacy of... it directs the Secretary to come up with regulations dealing with the subject.

Mr. DuMont: That's absolutely correct, Your Honor, and first of all we believe that Clause (ii) has been implemented by regulations which date back to the initiation of the program in the limited way in which we interpret it, and second, even if Clause (ii) means something else from what we think it means, presumably the only appropriate remedy is to remand to the Secretary for promulgation of some kind of regulations to implement that standard with suitable adjustments and suitable limitations.

Unknown Speaker: Is this a fair summary of what you say it means:

"Provided that where, at the end of the year, the provider has received either more or less than the regulations authorize, there shall be a corrective adjustment? "

Mr. DuMont: That's correct, Your Honor.

Just to recap for a moment.

Petitioners challenge the reasonableness and validity of the regulations--

Unknown Speaker: Just suppose... suppose there were two regulations, one on reimbursing for use of facilities, the other for the payment of nurses, and each of those methods was properly applied and the proper payments were made, but the aggregate of the two was... well, let's say that the aggregate of the two was excessive because nurses were paid too much, they were double-paid because their costs were factored into the facilities somehow.

Would you then have a right to recoup?

I.e., you then have two methods, both of which are being used for different things, one's facilities, the other's nurses, but you think that there's... because of this particular hospital, there's a double counting, so you want money back.

Aren't you entitled under this regulation to say that the aggregate is excessive?

Mr. DuMont: --Under Clause (ii), assuming that the regulations have been properly applied, no, we would not be entitled that under Clause (ii).

Now, there might very well be some general common law recoupment power if we had double-paid for a particular cost.

But under Clause (ii), no.

Clause (ii) does not speak to that issue.

Unknown Speaker: Under Ms. Hedlund's view it would.

Mr. DuMont: I assume it would, yes.

We believe the result the petitioners seek would contravene the statutory language enacted in 1972 specifically authorizing cost limits, undermine the whole concept of cost limits, and a sensible and generally applicable scheme in favor of case-by-case adjudication, essentially without standards, undercut the results of this Court's decision in Georgetown, and impose an unacceptable burden on the Secretary and ultimately on the courts.

Thank you, Your Honor.

Unknown Speaker: Thank you, Mr. DuMont.

Ms. Hedlund, you have 8 minutes remaining.

Ms. Hedlund, as part of your presentation at any point, it seems to me that under your interpretation the word "aggregate" is simply superfluous.

Rebuttal of Carel T. Hedlund

Mr. Hedlund: I don't think it's superfluous, because it... you have to wait till all the regulations are applied at the end of the year before Clause (ii) kicks in.

It's a retroactive adjustment, and you look at all the reimbursement produced by all the Secretary's methods.

Unknown Speaker: But you could reach the result your clients reached, and you could reach the results of reimbursement without use of that word.

Mr. Hedlund: Yes, I believe that's correct.

The Secretary indicated that his book-balancing regulations should be entitled to deference because they were the original regulations developed at the beginning of the Medicare program, but I'd like to go back to the point I made earlier, which is the language in those regulations talks about an adjustment that brings reimbursement into line with actual cost.

That's not what the Secretary has done in our case, but that's what the language of the regulation said.

Congress probably understood those words to encompass the kind of adjustment that we're seeking, but they've simply not been applied by the Secretary in that fashion.

Unknown Speaker: Which regulations are these, Ms. Hedlund?

Mr. Hedlund: The one cited in footnote 2 of the Georgetown decision.

Both of them are actually cited on page 21 of the Government's brief, 405.405(c), which talks about the retroactive payments will take fully into account the costs that were actually incurred, and 405.451(b)(1).

Unknown Speaker: Ms. Hedlund, what about the... what is your response to the question that I asked Mr. DuMont?

Suppose... why isn't it the case that Clause (ii) only refers to adjustment with respect to methods of determining costs, and that is separate in the statute from the establishment of limits on direct or indirect costs.

Would it suffice for your purposes if you had the power to challenge the method of determining costs but not the power to challenge the establishment of limits on the direct or indirect overall incurred costs?

Mr. Hedlund: We did challenge the validity of the cost-limits methods, and we lost on that challenge, and we're saying Clause (ii) assumes or recognizes that valid methods can produce inaccurate reimbursement in individual circumstances, so we... it's not sufficient for our purpose to be able to challenge the cost-limit method.

Unknown Speaker: I'm not sure I understand your response.

Are you challenging the limits in this suit, or are you challenging just the methods, or both?

Mr. Hedlund: The limits are a method.

We're challenging the amount of reimbursement that we were paid under the limits.

Unknown Speaker: So you have to challenge both, the limits and the methods, you're saying.

I thought you were challenging neither.

Mr. Hedlund: In this case, we're... I'm confused by the question--

Unknown Speaker: Well, when I say challenging--

Mr. Hedlund: --Because the cost limits are one of the methods--

Unknown Speaker: --When I say challenging, I mean, you're saying that both the limits and the methods require an exception in your case.

You require an exception from both the limits and the methods in order to get reasonable costs.

Mr. Hedlund: --Yes.

I think the limits are one of the methods, and that's the way this Court construed it in Georgetown.

With respect to the question about, how would the Secretary recapture excessive reimbursement, because Clause (ii) is definitely a two-way street, I would just note that in the past the Secretary has cited Clause (ii) to promulgate regulations to go back and take depreciation from providers in the depreciation recapture cases... it's the Springdale Convalescent Center case out of the Fifth Circuit... when the Secretary has invoked Clause (ii) for a variety of reasons over the years.

Unknown Speaker: If I understand you correctly, the Secretary could invoke Clause (ii), saying to recapture a lot of depreciation he thought was excessive, without promulgating a regulation... just say, we just realized there's this method, that one of the consequences of our regulations is that these hospitals have been able to make all sorts of money because they've overestimated or overaccounted for depreciation, something like that.

Isn't it an open-ended, ad hoc thing?

You just made too much money, ergo it was excessive, ergo we can on a case-by-case method recover some money from you.

Mr. Hedlund: If the Secretary could prove that they had paid more than the actual cost to a provider, they could do that under Clause (ii).

Unknown Speaker: Without a special regulation on depreciating, just doing an accurate accounting job by--

Mr. Hedlund: Not just... well, not just... I think that's different, if it's an accounting question as to whether they didn't properly--

Unknown Speaker: --They just--

Mr. Hedlund: --The costs were properly recorded--

Unknown Speaker: --There are all sorts of cost accountants who can figure costs a million different ways--

Mr. Hedlund: --I'm sure of that.

Unknown Speaker: --As we all know, and they just now have got a new cost accounting expert who figured they've been... your hospitals have been overcharging depreciation for years, so we're going to take a second look at your costs on an ad hoc, case-by-case basis.

Why can't they do that under Clause (ii)?

Mr. Hedlund: Clause (ii) works two ways.

Unknown Speaker: I just wonder who wins this lawsuit if you prevail.

Well, they have--

[Laughter]

Mr. Hedlund: It is a two-edged sword.

It definitely is a two-edged sword.

Unknown Speaker: Well, they'd have the burden, I assume, wouldn't they?

Mr. Hedlund: They would have the burden of showing--

Unknown Speaker: They would have the burden of showing that their own regulation is bad.

Mr. Hedlund: --That's correct, or that it resulted in over-reimbursement, or that the provider's costs were unreasonable.

Unknown Speaker: In a particular case.

Mr. Hedlund: In a particular case.

Unknown Speaker: The regulators generally find that where you've go a place in Nebraska where a lot of people work part-time and not full-time you've got this strange result.

We can recover it without any special regulation.

Mr. Hedlund: Yes.

With respect to the Secretary's assertion that remand for rulemaking might be an appropriate remedy, we don't think that that's the case.

As I said, the actual language of the book-balancing regulations... not the way they've been implemented, but the language is broad enough to encompass the kind of adjustment we're seeking, and--

Unknown Speaker: Do you mean the language of g is broad enough, or the language of x is broad--

Mr. Hedlund: --Of the regulations, the book-balancing regulations, where it talks about a reconciliation to actual cost, that that... Clause (ii) does require regulation.

That regulation... the book-balancing regulation, the actual language is broad enough and in addition--

Unknown Speaker: --So you say the Secretary has just misinterpreted his own regulation.

Mr. Hedlund: --They've been applying them... they've not allowed us to show... to get reimbursement for our actual costs.

They have always construed that regulation far more narrowly than the language in that regulation.

Unknown Speaker: So you say that this is a case in which the Secretary has misconstrued his regulation.

Mr. Hedlund: Misapplied it, I believe.

Chief Justice Rehnquist: Very well.

Thank you, Ms. Hedlund.

The case is submitted.