American Hospital Association v. Bowen
834 F.2d 1037 (1987)
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Rule of Law:
Agency directives that detail an enforcement strategy, which do not alter the underlying substantive standards of a statute but merely focus agency scrutiny, qualify as procedural rules or general statements of policy exempt from the Administrative Procedure Act's notice-and-comment requirements.
Facts:
- In 1982, Congress passed the Peer Review Improvement Act, requiring the Department of Health and Human Services (HHS) to contract with private Peer Review Organizations (PROs) to monitor the quality and medical necessity of services provided to Medicare beneficiaries.
- The Act gave HHS broad discretion to design the peer review system and negotiate contracts with PROs in different geographic areas.
- Hospitals wishing to receive Medicare reimbursements were required by law to enter into agreements with the HHS-designated PRO in their area.
- HHS issued a Request for Proposals (RFP) to solicit bids from potential PROs, which detailed specific review procedures and areas of focus.
- HHS also issued a series of directives and transmittals to PROs, instructing them to focus their reviews on particular areas, such as hospital readmissions within seven days and pacemaker implant procedures.
- HHS entered into contracts with PROs that incorporated these focused review procedures and also included specific, numerical 'objectives' for reducing certain types of admissions, procedures, and adverse patient outcomes.
- HHS implemented this entire framework of directives, RFPs, and contracts without using the public notice-and-comment process prescribed by the Administrative Procedure Act.
Procedural Posture:
- The American Hospital Association (AHA) filed a petition for rulemaking with the Department of Health and Human Services (HHS), requesting the promulgation of a complete set of regulations for the PRO program.
- After HHS failed to provide a substantive response, AHA filed suit against HHS in the U.S. District Court for the District of Columbia.
- The complaint sought a declaratory judgment that HHS's transmittals, directives, Request for Proposals, and contracts were invalid for failure to comply with the APA's notice-and-comment requirements.
- The district court granted summary judgment in favor of AHA, invalidating most of the challenged communications and contracts as substantive rules that required notice-and-comment.
- HHS, the defendant, appealed the district court's judgment to the U.S. Court of Appeals for the D.C. Circuit.
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Issue:
Does the Department of Health and Human Services' implementation of the Medicare peer review program through a series of directives, transmittals, a Request for Proposals, and contracts, without formal notice-and-comment rulemaking, violate the Administrative Procedure Act?
Opinions:
Majority - Wald
No. The Department of Health and Human Services' implementation of the peer review program does not violate the Administrative Procedure Act because the challenged actions fall within the APA's exceptions for procedural rules and general statements of policy. The transmittals and directives are classic procedural rules because they merely map out an enforcement strategy for HHS's agents (the PROs) by concentrating review on areas with high potential for abuse, without altering the substantive standard of what constitutes 'medically necessary' care under the Medicare Act. The Request for Proposals (RFP) is a non-binding 'general statement of policy' as it only announces HHS's tentative intentions for contract negotiations, leaving the agency free to exercise discretion. Similarly, the specific numerical objectives in the PRO contracts are deemed general statements of policy because HHS characterizes them as hortatory goals rather than binding norms, and they are worded to target only 'unnecessary' procedures, thus mirroring the statute's substantive standard.
Concurring-in-part-and-dissenting-in-part - Mikva
Yes, in part. While most of the agency's actions were permissible, the specific numerical objectives included in the PRO contracts are substantive rules that violate the Administrative Procedure Act for lack of notice and comment. These objectives are not merely 'hortatory' goals; they are performance-based requirements that PROs are contractually obligated to achieve and will be judged against for contract renewal. The pressure to meet these hard numbers creates a substantial risk that PROs will deny reimbursement for services that are in fact medically necessary, thereby substantively altering the rights and interests of hospitals and patients. The purpose of the APA is to allow public participation before such a significant impact occurs, not to 'wait and see' if the rule causes harm in practice.
Analysis:
This decision significantly clarifies the scope of the APA's exceptions for procedural rules and general statements of policy, granting agencies substantial flexibility to implement and manage enforcement programs through informal mechanisms. By classifying enforcement strategies and even specific numerical targets as non-substantive, the court allows agencies to direct their resources and guide their contractors without undergoing formal rulemaking for every operational detail. However, the majority's willingness to accept the agency's characterization of the numerical objectives as 'hortatory' and adopt a 'wait and see' approach creates potential uncertainty, suggesting that a rule's classification could depend on its future application, a point strongly contested by the dissent.
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