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.
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
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.
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
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.
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.
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.
“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
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
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.
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
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
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
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
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
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,
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 email@example.com
To contact the editor responsible
for this story: Barbara Yuill at firstname.lastname@example.org
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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