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Supreme Court Asked to Review APA Ruling; Outcome Will Impact Providers, Attorneys Say

Tuesday, April 15, 2014

By Peyton M. Sturges  

April 14 -- A government request for U.S. Supreme Court review of whether an agency altered its interpretation of a regulation without adhering to the Administrative Procedure Act has the potential to significantly impact the health-care industry, attorneys told Bloomberg BNA.

At issue is a ruling by the U.S. Court of Appeals for the D.C. Circuit, which said the Department of Labor erred in not obtaining notice and comment before issuing a reinterpretation of a 2006 DOL opinion letter. Supreme Court review could spotlight the extent to which agencies can revisit and change the guidance they have previously issued without triggering APA requirements--a serious matter for the heavily regulated health care industry.

The case is especially important because of the number of agencies and rules that govern health-care organizations and because the D.C. Circuit is the federal forum in which many, if not most, regulatory challenges are brought, the attorneys said. “This is a case that members of the health-care industry should be watching closely,” James F. Segroves, a partner with Hooper, Lundy & Bookman PC in Washington, said.

High court review of the D.C. Circuit ruling is likely, the attorneys predicted, because the petition filed by the government, as well as a petition filed by the intervenors, identify a circuit split on the APA issue and argue that the appellate ruling conflicts with the APA's language and high court decisions interpreting it.

The petitions also claim that, if left undisturbed, the ruling will force agencies to use limited resources to comply with APA requirements when altering or amending interpretive rules or guidance that weren't, themselves, subject to the APA when originally issued.

Effect on Providers

Segroves said the importance of the case for members of the health-care industry shouldn't be underestimated. The sheer number of regulations affecting providers, and the possibility that agencies such as the Centers for Medicare & Medicaid Services could reverse course on definitive interpretations of important regulations, make this an important case to follow, he said.

“Needless to say, it would not be a good thing for the health-care industry if an agency such as the CMS could flip-flop on a definitive interpretation of its regulations at the drop of a hat,” he said. “I believe the chances the Supreme Court will decide to review this case are extremely high.”

Stephen S. Zashin, a partner with Zashin & Rich in Cleveland, agreed that the case has broad application to health-care organizations. “The issue is whether a federal agency may go back and forth with respect to a definitive regulatory interpretation on which a regulated entity may have relied,” Zashin said.

“Health-care employers, like other employers, are put in a difficult situation when they act based on an agency's regulatory interpretation and that interpretation is subsequently changed without a notice and comment opportunity,” he added.


“This is a case that members of the health-care industry should be watching closely.”  
--James F. Segroves,
Hooper, Lundy & Bookman PC, Washington

“The greatest concern for these organizations is dealing with gray areas and obtaining reliable legal advice when that advice is based on an agency's regulatory interpretation that was changed without proper notice.”


Impact of APA on Tax-Exempt Health Care Sector

The latitude agencies have under the APA to revisit and alter existing guidance could have significant consequences in the tax-exempt hospital sector, which faces a complex array of Internal Revenue Service regulations and guidance. The D.C. Circuit's 1974 decision in Eastern Kentucky Welfare Rights Org. v. Simon, 506 F.2d 1278 (D.C. Cir. 1974), is an example of a case with health-care ramifications that tackled the APA issue head-on.

The case arose in the context of the IRS's issuance of Rev. Rul. 69-545, in which the IRS first enunciated its “community benefit standard.” That standard recognized community benefits and “the promotion of health” by tax-exempt hospitals as charitable purposes qualifying those hospitals for exempt status underInternal Revenue Code §501(c)(3).

Eastern Kentucky Welfare Rights Organization challenged the IRS's adoption of Rev. Rul. 69-545, which abandoned the IRS requirement that hospitals could qualify as charitable organizations under 501(c)(3) only if they provided free or below cost services to those unable to pay, without engaging in notice and comment ruling under the APA. The group claimed the policy shift was a “major change” subject to the APA, but the D.C. Circuit, in a 2-1 decision, held that the APA didn't apply to the IRS's revenue ruling.

Dissenting Judge J. Skelly Wright wrote that Rev. Rul. 69-545 “worked a substantial change in the availability of hospital services for the poor” but that “neither the poor nor anyone else was given notice of the proposed change or allowed to comment on it.” Not only does the APA protect the rights of interested parties to participate in rulemaking activities, it provides a vehicle for agencies to obtain an “education” that allows them to make informed decisions, he added.

When the group sought high court review of the D.C. Circuit's ruling, the Supreme Court found the organization lacked standing, side-stepping the APA issue.


Underlying Dispute

The petitions challenge a D.C. Circuit decision that rejected a 2010 administrator interpretation issued by the Labor Department's Wage and Hour Division regarding provisions of a Fair Labor Standards Act regulation, finding the agency didn't adhere to a public notice-and-comment rulemaking process before issuing the interpretation.

At the crux of the case is a 2006 DOL opinion letter that concluded that mortgage loan officers were exempt from the FLSA's minimum wage and overtime protections. Four years later, in 2010, the agency reversed course and released an administrator's interpretation that “explicitly withdrew” the 2006 letter.

The Mortgage Bankers Association challenged DOL's 2010 interpretation, alleging that the agency violated the APA by not first providing public notice and a comment period before significantly revising a definitive regulatory interpretation, as required under the D.C. Circuit's rulings in Paralyzed Veterans of America v. D.C. Arena, 117 F.3d 579 (D.C. Cir. 1997) and Alaska Professional Hunters Association v. FAA, 177 F.3d 1030 (D.C. Cir. 1999).

In those cases, the appeals court held that “[w]hen an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish [under the APA] without notice and comment.”

The U.S. District Court for the District of Columbia, in a June 2012 decision, sided with the DOL and found that the D.C. Circuit in MetWest Inc. v. Sec'y of Labor, 560 F.3d 506 (D.C. Cir. 2009), recognized an exception to the notice-and-comment requirement where a party didn't “substantially and justifiably rely” on an earlier agency interpretation.

Reversing, the D.C. Circuit followed its precedent to find that a notice-and-comment period was required under the APA because the 2010 guidance was a “definitive” regulatory interpretation that significantly reversed the agency's 2006 opinion letter.

The appeals court rejected the Labor Department's argument that the MBA could prevail only if it showed “substantial and justifiable reliance on a well-established agency interpretation.” Instead, the court held that reliance isn't a “separate and independent requirement,” but is “just one part of the definitiveness calculus.”

Petition: Review Warranted

The petition pointed to well-established administrative law principles and argued that the APA doesn't require notice and comment rulemaking for interpretive rules and shouldn't, therefore, require those procedures for changes designed to correct or modify a prior interpretive regulation. The D.C. Circuit's rule that such formal rulemaking is required is contrary to the unambiguous text of the APA and conflicts with the Supreme Court's teachings on the proper scope of APA review, it said.

According to the petition, the D.C. Circuit's decision conflicts with decisions by other federal appeals courts, including a decision by the U.S. Court of Appeals for the First Circuit that, in Warder v. Shalala, 149 F.3d 73 (1st Cir. 1998), held CMS's predecessor agency “was entitled to change its interpretation of Medicare regulations without notice-and-comment rulemaking.” Although the agency's interpretive rule was challenged because it allegedly changed the agency's policy governing Medicare reimbursement for a medical device, the First Circuit found that a change to an interpretive rule wasn't subject to APA requirements.

The Medicare program, with “thousands of pages of interpretative rules that address myriad details,” is just one of many complex government programs that “are heavily dependent upon interpretive rules to inform the public about the agency's understanding of the details of the regulatory regime,” the petition said.

The decision also is problematic, the petition argued, because the D.C. Circuit didn't require the MBA to demonstrate that its members had relied on the prior DOL interpretation. The court is requiring agencies to “undertake notice-and-comment rulemaking simply to explain to the public that the agency has corrected or revised its previous legal interpretation of a regulation in some significant way--even if no one has ever relied on the prior interpretation,” the petition said.

The government's petition was filed by Donald B. Verrilli Jr., Stuart F. Delery, Edwin S. Kneedler, Anthony A. Yang, Douglas N. Letter and Anthony J. Steinmeyer, all with the Department of Justice, Washington. The intervenors' petition was filed by Adam W. Hansen, Nichols Kaster LLP, San Francisco, Paul J. Lukas and Rachhana T. Srey, Nichols Kaster PLLP, Minneapolis, and Sundeep Hora, Alderman, Devorsetz & Hora PLLC, Washington.

 

To contact the reporter on this story: Peyton M. Sturges in Washington at psturges@bna.com

To contact the editor responsible for this story: Barbara Yuill at byuill@bna.com


The government's petition is at http://op.bna.com/hl.nsf/r?Open=psts-9h7mhv. The intervenors' petition is at http://op.bna.com/hl.nsf/r?Open=psts-9h7mhu. The D.C. Circuit's decision is available at http://www.bloomberglaw.com/public/document/Mortgage_Bankers_Association_v_Seth_Harris_et_al_Docket_No_120524.

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