548 F.

2d 1077

ADAMS NURSING HOME OF WILLIAMSTOWN, INC.,

Plaintiff, Appellee,
v.
F. David MATHEWS, Secretary of Health, Education and
Welfare, et al., Defendants, Appellants.
No. 76-1212.

United States Court of Appeals,

First Circuit.
Feb. 2, 1977.

John K. Villa, Atty., Appellate Section, Civ. Div., Dept. of Justice,

Washington, D. C., with whom Rex E. Lee, Asst. Atty. Gen., Washington,
D. C., James N. Gabriel, U. S. Atty., Boston, Mass., Robert E. Kopp and
Judith S. Feigin, Attys., Appellate Section, Civ. Div., Dept. of Justice,
Washington, D. C., were on brief, for defendants, appellants.
Thomas C. Fox, Washington, D. C., with whom Kearons J. Whalen and
Reder & Whalen, Pittsfield, Mass., were on brief, for plaintiff, appellee.
Before COFFIN, Chief Judge, and McENTEE and CAMPBELL, Circuit
Judges.
COFFIN, Chief Judge.

In the court below, appellee, Adams Nursing Home of Williamstown, Inc.

(Adams), obtained an injunction preventing the enforcement of a Medicare
regulation issued by the Secretary of Health, Education and Welfare
(Secretary). Some background is necessary to an understanding of the case.
Medicare1 is administered by a combination of private and governmental
entities. Those eligible for Medicare benefits are given treatment by a qualified
"provider of services"; the provider is paid, not by the patient, but by a federal
trust fund. 42 U.S.C. 1395g. Payment is frequently made through "fiscal
intermediaries", private organizations acting under contracts with the Secretary.
42 U.S.C. 1395h. Fiscal intermediaries also conduct audits of providers and
otherwise assist in administering the Medicare program.

Providers are ordinarily paid the "reasonable cost" of their services. 42 U.S.C.
1395b. The Secretary is authorized to issue regulations refining the meaning of
"reasonable cost"; he must ensure that Medicare payments do not subsidize
private patients and that private patients do not bear any of the costs of
Medicare services. 42 U.S.C. 1395x(v)(1)(A)(i). As might be expected,
determining the "reasonable cost" of capital assets is a major source of
uncertainty, and as soon as the program was under way the Secretary issued
regulations to deal with the problem. His original rules allowed providers to
depreciate any capital assets used to serve Medicare patients and to treat the
depreciation as a cost of providing care. Between November, 1966, and August,
1970, the method of computing depreciation was left largely to the provider;
providers could choose straight line depreciation or some form of accelerated
depreciation. Straight line depreciation yields an even flow of reimbursement
payments during the expected life of the asset, while accelerated depreciation
produces larger payments in the early years and smaller ones toward the end of
the asset's life. In 1970, the Secretary decided to restrict the future use of
accelerated depreciation. He also issued a regulation designed to "recapture"
the difference between accelerated and straight line depreciation when
providers using the accelerated method left the program.2

Adams was a provider between 1967 and 1972. During this period it took
accelerated depreciation on some assets. When the nursing home withdrew
from the program, its fiscal intermediary applied the recapture regulation and
claimed that Adams owed the program $4,739 for depreciation taken in 1967,
1968, and 1969. Adams brought this suit to enjoin the Secretary from collecting
the asserted debt. The Secretary asks us to overturn the district court's
injunction; he attacks the court's jurisdiction as well as its decision on the
merits. We reject the jurisdictional challenge, but reverse on the merits.

In his jurisdictional argument, the Secretary claims that he is shielded from

judicial intervention by 42 U.S.C. 1395ii, which incorporates 42 U.S.C.
405(h). The incorporated section says:"The findings and decisions of the
Secretary after a hearing shall be binding upon all individuals who were parties
to such hearing. No findings of fact or decision of the Secretary shall be
reviewed by any person, tribunal, or governmental agency except as herein
provided. No action against the United States, the Secretary, or any officer or
employee thereof shall be brought under section 41 of Title 28 to recover on
any claim arising under this subchapter."

This is a provision of the Social Security Act, and in most cases it merely
requires a claimant to exhaust his administrative remedies before seeking
judicial relief, which is made available by 42 U.S.C. 405(g). But section

405(g) is not fully incorporated into the Medicare subchapter. See 42 U.S.C.
1395ii. That subchapter permits judicial review when the Secretary disqualifies
providers of services, 42 U.S.C. 1395ff(c), but decisions about the amount of
reimbursement due to a provider are not explicitly made reviewable.3
6

Adams argues that this court has jurisdiction nonetheless, relying primarily on
the judicial review provisions of the Administrative Procedure Act, 5 U.S.C.
701-706.4 Our circuit has treated these provisions as an independent grant of
jurisdiction. Bradley v. Weinberger, 483 F.2d 410, 413 (1st Cir. 1973). The
provisions operate only when several requirements have been met. If judicial
review has not been expressly authorized by statute, courts may review only
"final agency action for which there is no other adequate remedy in a court". 5
U.S.C. 704. And judicial review is barred when "agency action is committed
to agency discretion by law" or when it is precluded by statute. Id. 701(a). Of
these possible barriers, the government relies solely on the last. 5 It argues that
42 U.S.C. 405(h) precludes review. The literal words of 405(h), however,
do not restrict jurisdiction based on the Administrative Procedure Act; they
deal only with jurisdictional grants contained in title 28. See generally RuizOlan v. Secretary, Department of Health, Education and Welfare, 511 F.2d
1056, 1058 (1st Cir. 1975).

The government finds support for its position in Weinberger v. Salfi, 422 U.S.
749, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975). In Salfi, the Supreme Court held
that federal question jurisdiction under 28 U.S.C. 1331 is barred by 405(h),
a result that is consistent with a literal reading of 405(h). This holding was
apparently limited to cases in which judicial review could be obtained by other
means. 422 U.S. at 762, 95 S.Ct. 2457. We do not think that Salfi restricts our
jurisdiction over this case. Several other courts have also reached a similar
conclusion.6 Sanders v. Weinberger, 522 F.2d 1167, 1171 (7th Cir. 1975), cert.
granted, 426 U.S. 905, 96 S.Ct. 2225, 48 L.Ed.2d 829 (1976); Hunt v.
Weinberger, 527 F.2d 544, 546-47 (6th Cir. 1976); Lejeune v. Matthews, 526
F.2d 950, 952-53 & n.2 (5th Cir. 1976); Whitecliff, Inc. v. United States, 536
F.2d 347, 349-51 (Ct.Cl.1976). See also South Windsor Convalescent Home,
Inc. v. Mathews, 541 F.2d 910, 913 n.3 (2d Cir. 1976). But cf. St. Louis Univ.
v. Blue Cross Hosp. Serv., 537 F.2d 283 (8th Cir. 1976), cert. denied, --- U.S. ---, 97 S.Ct. 484, 50 L.Ed.2d 584 (1976).7

Turning to the merits, we face the argument, accepted by the district court, that
the Secretary's "recapture" regulation violates the Fifth Amendment's guarantee
of due process.8 The district judge relied on the decisions of several other
courts. South Windsor Convalescent Home, Inc. v. Weinberger, 403 F.Supp.
515 (D.Conn.1975), rev'd for lack of jurisdiction,541 F.2d 910 (2d Cir. 1976);

Springdale Convalescent Center v. Mathews, Civ. No. 75-1562A

(N.D.Ga.1975); Hazelwood Chronic and Convalescent Center v. Weinberger,
Civ. No. 73-210 (D.Ore.1974), rev'd, 543 F.2d 703 (9th Cir. 1976); Hutchison
Nursing Home, Inc. v. Burns, 236 N.W.2d 312 (Sup.Ct.Iowa 1975), cert.
denied, 426 U.S. 945, 96 S.Ct. 3163, 49 L.Ed.2d 1182 (1976). The theme of
these cases is that the recapture regulation overturns vested property rights and
is therefore an invalid retrospective act.
9

Retrospective laws are often viewed with some suspicion. Usery v. Turner
Elkhorn Mining Co., 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976). This
suspicion is grounded in some of the same considerations underlying the notion
that legislatures should not "adjudicate" the rights of known individuals. Cf.
United States v. Brown, 381 U.S. 437, 85 S.Ct. 1707, 14 L.Ed.2d 484 (1965).
No such problem infects this regulation, however, for when it was instituted the
Secretary could not know which providers would be forced to disgorge
depreciation payments. But a second purpose is more commonly invoked: laws
that unsettle settled rights can be harsh, and they deserve a special scrutiny.
This principle has received explicit constitutional recognition in the taking and
contract clauses. See Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 43 S.Ct.
158, 67 L.Ed. 322 (1922); El Paso v. Simmons,379 U.S. 497, 85 S.Ct. 577, 13
L.Ed.2d 446 (1965). Of course, not every law that upsets expectations is
invalid; courts have generally compared the public interest in the retroactive
rule with the private interests that are overturned by it. Hochman, The Supreme
Court and the Constitutionality of Retroactive Legislation, 73 Harv.L.Rev. 692,
697 (1960). See Usery v. Turner Elkhorn Mining Co., supra; South Terminal
Corp. v. EPA, 504 F.2d 646, 680 (1st Cir. 1974). Putting aside any attempt to
tailor the conclusory label "vested right" to fit Adams' depreciation payments,
and inquiring instead into Adams' actual expectations and the reasonableness of
those expectations, we find that only a modest private interest is affected by the
Secretary's rule. In any retroactivity challenge, a central question is how the
challenger's conduct, or the conduct of others in his class, would have differed
if the law in issue had applied from the start. If the recapture rule had been laid
down in 1966, those providers who planned to stay in the program would not
have changed their behavior significantly. In the long run there is no difference
between accelerated and straight line depreciation; higher payments generated
by the accelerated method in early years are recouped by reduced payments
later.9 Although Adams now claims that it would have chosen straight line
depreciation if it had foreseen the recapture regulation, the regulation is
designed to leave Adams no better and no worse off than if the nursing home
had chosen the straight line method in the first place.10

10

The rule has a greater impact on the expectations of those who planned from

the start to take advantage of accelerated depreciation by quitting the program

while they were still ahead. Providers with plans of this sort were adversely
affected by the new rule; they might not have joined the program at all if the
regulation had been in effect in 1966. While such an expectation may not be
wholly illegitimate, it would seem to have nothing to recommend it other than
the traditional desire to take advantage of a loophole. More important, any
expectation these providers had must have been discounted by an awareness
that they were joining a new government program, subject to ongoing
regulation by the Secretary. Earlier statutes and regulations did not
unequivocally permit Medicare providers to quit and keep the benefits of
accelerated depreciation,11 and Adams does not suggest that the government
gave informal assurances to providers on this point. When providers joined the
new program, they knew that "small repairs" in the regulatory scheme were
likely. Cf. Danforth v. Groton Water Co., 178 Mass. 472, 477, 59 N.E. 1033
(1901) (Holmes, C. J.). And courts have recognized that the expectations of
those who enter a regulated field are diluted by the knowledge that occasional
changes will be made to better carry out regulatory purposes. Federal Housing
Administration v. Darlington, Inc., 358 U.S. 84, 79 S.Ct. 141, 3 L.Ed.2d 132
(1958).12
11

Against this minor interest stands the Secretary's desire to remedy a perceived
abuse of the Medicare program. In his view, accelerated depreciation
exaggerates the true cost of providing services. Allowing providers to leave the
program without repaying the difference between accelerated and straight line
depreciation would, he believes, unjustly enrich private patients at the expense
of the Medicare program.13 If this abuse could be cured by a purely prospective
rule, the Secretary's retroactive solution would get less deference. But we see
no way to avoid some retroactive impact if the Secretary's purpose is to be
achieved. We note the principle that the government's interest has less weight
when a retrospective law frees the government itself, rather than private parties,
from obligation. See Perry v. United States, 294 U.S. 330, 350-51, 55 S.Ct.
432, 79 L.Ed. 912 (1935); Lynch v. United States, 292 U.S. 571, 576-77, 54
S.Ct. 840, 78 L.Ed. 1434 (1934). Nonetheless, the government here is entitled
to the benefit of any constitutional doubts we may have. Usery v. Turner
Elkhorn Mining Co., supra. We conclude that the Secretary's interest must
prevail; the regulation is constitutional.

12

Adams argues that, even if constitutional, the regulation exceeds the Secretary's
statutory authority. Adams draws a negative inference from a statute requiring
the Secretary to make retroactive adjustments "for any fiscal period" in which
overpayments have been made. 42 U.S.C. 1395x(v)(1) (A)(ii). Adams argues
persuasively that this provision was meant to allow a payment system in which

estimated costs are paid at frequent intervals and adjustments between actual
and estimated costs are made at longer intervals. Because the Secretary has
apparently chosen to make final adjustments every year, he has some difficulty
justifying his recapture regulation which goes back several years under this
provision. Several courts have read this section as a limit on the Secretary's
power to reopen years in which a final settlement has already been made. South
Windsor Convalescent Home, Inc. v. Weinberger, supra; Mount Sinai Hosp. v.
Weinberger, 376 F.Supp. 1099, 1126-36 (S.D.Fla.1974), rev'd, 517 F.2d 329
(5th Cir. 1975); Columbia Heights Nursing Home and Hosp., Inc. v.
Weinberger, 380 F.Supp. 1066 (M.D.La.1974). While we agree that this
provision is not a broad grant of authority to impose retroactive rules, other
provisions give the Secretary authority to issue "such regulations as may be
necessary to carry out the administration of the insurance programs." 42 U.S.C.
1395hh. See also 42 U.S.C. 1395x(v)(1) (A). In this case, we do not think
that the Secretary's general power is limited by the specific grant.14 See
Hazelwood Chronic and Convalescent Center v. Weinberger, supra, 543 F.2d at
707-08.
13

Reversed.

Medicare is known formally as Health Insurance for the Aged and Disabled, 42
U.S.C. 1395-1395pp

The regulation reads as follows:

"When a provider who has used an accelerated method of depreciation with
respect to any of its assets terminates participation in the program, or where the
health insurance proportion of its allowable costs decreases so that cumulatively
substantially more depreciation was paid than would have been paid using the
straight-line method of depreciation, the excess of reimbursable cost,
determined by using accelerated depreciation methods and paid under the
program over the reimbursable cost which would have been determined and
paid under the program by using the straight-line method of depreciation will
be recovered as an offset to current reimbursement due or, if the provider has
terminated participation in the program, as an overpayment. In this
determination of excess payment, recognition will be given to the effects the
adjustment to straight-line depreciation would have on the return on equity
capital and on the allowance in lieu of specific recognition of other costs in the
respective years." 20 C.F.R. 405.415(d)(3) (1975).

In 1972, Congress filled the gap in the statute by creating a Provider

Reimbursement Review Board to settle disputes of this sort. 42 U.S.C.

1395oo. The Board's decisions may be reviewed, 42 U.S.C. 1395oo (f)(1),
but the Board apparently hears only disputes arising from accounting periods
ending on or after June 30, 1973. 42 U.S.C.A. 1395oo, Historical Note. Thus
the act creating the Board comes too late for Adams, which withdrew from the
Medicare program in March, 1972
4

Adams also asserts that jurisdiction is available under 28 U.S.C. 1331. It

attempts to avoid Weinberger v. Salfi, 422 U.S. 749, 95 S.Ct. 2457, 45 L.Ed.2d
522 (1975), by arguing that 42 U.S.C. 405(h) does not cover this case
because the nursing home is not trying "to recover on any claim" against the
program; it is simply forestalling the government's effort to recover a claim.
This argument founders on the requirement that $10,000 be in controversy
before jurisdiction may be taken under 1331. But cf. Pub.L. 94-574, 90 Stat.
2721 (1976). Adams believes that more than its $4,739 is in dispute, because
the Secretary may suspend Medicaid payments to Adams if the nursing home
does not return the excess Medicare depreciation. The parties have addressed
this question only fleetingly in their briefs, and because we find an alternative
source of jurisdiction we need not pursue the matter further

Nor do we see any obstacles to our jurisdiction in the other requirements. The
most worrisome is the exception for action committed to agency discretion, but
the Supreme Court has sharply limited the scope of this exception. Citizens to
Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 28
L.Ed.2d 136 (1971). But cf. St. Louis Univ. v. Blue Cross Hosp. Serv., 537
F.2d 283, 289-91 (8th Cir. 1976), cert. denied, --- U.S. ----, 97 S.Ct. 484, 50
L.Ed.2d 584 (1976)

The Ninth Circuit, on the other hand, has suggested that Salfi does have
implications for jurisdiction based on the Administrative Procedure Act.
Hazelwood Chronic and Convalescent Hosp., Inc. v. Weinberger, 543 F.2d 703
(9th Cir. 1976). The Hazelwood court arrived at this view only by going behind
the Supreme Court's opinion to discover that the plaintiffs in Salfi had alleged
jurisdiction under the Administrative Procedure Act as well as under 28 U.S.C.
1331. The language of Salfi provides only ambiguous support for the Ninth
Circuit's view compare Salfi, supra, 422 U.S. at 753, 95 S.Ct. 2457 with id. at
764, 95 S.Ct. 2457. And the Supreme Court itself apparently thinks that the
question is still open, for the Court has granted certiorari to answer it. Sanders
v. Weinberger, supra, 426 U.S. 905, 96 S.Ct. 2225, 48 L.Ed.2d 829. Moreover,
we have recently been warned not to read too much into cases that seem to
decide issues by implication without directly addressing them. Stone v. Powell,
428 U.S. 465, 96 S.Ct. 3037, 49 L.Ed.2d 1067 (1976)

We reach this conclusion with some trepidation. The Supreme Court has
granted certiorari on this question, see note 6 supra, and ordinarily we would
await the Court's final decision. In this case, however, we cannot justify the
delay. For if the Court confirms our jurisdiction, Adams will lose on the merits,
and if the Court denies our jurisdiction, Adams will lose on that ground. To
provide the parties with a prompt and conclusive decision, we follow the
consistent direction of our past cases and affirm the district court's assumption
of jurisdiction

Appellee also argues that the recapture regulation is not a proper rule because,
by statute, rules must have a "future effect". 5 U.S.C. 551(4). Since, as we
discuss below, the recapture of depreciation payments is triggered by events
occurring after the rule was issued, this argument fails even on its own terms

We recognize that there are some differences between the methods, even for
those looking to the long run. Cash flow can be very important to any business,
and accelerated depreciation provides a large cash flow at a critical time.
However, the recapture regulation does not deprive Adams of an advantageous
cash flow; Adams has already reaped that benefit

10

Again, there are slight differences in cash flow. Adams expected the large early
payments to be recouped gradually over the life of the asset, while the
regulation recaptures the payments in a single lump sum. But Adams could
obtain the benefits of gradual recoupment by staying in the program. We do not
think that these cash flow differences amount to a constitutionally significant
interest

11

The Secretary was under a statutory duty to write regulations that would
prevent Medicare from subsidizing nonMedicare patients. Pub.L. 89-97,
1861(v)(1)(A), 79 Stat. 286, 323 (1965). Moreover, he was empowered to
make "suitable retroactive corrective adjustments . . . for any fiscal period"
when reimbursements proved excessive. Id. 1861(v)(1)(B). See also id.
1815. While we are not persuaded that these provisions alone authorize a
retroactive regulation of this sort, see pp. 1082-1083 infra, they should have
given the providers warning that any plan to reap a quick profit from the
program might easily go awry

12

The decisions on which the district court relied take a different view of the
providers' interest. These decisions treat the large accelerated depreciation
payments as accurate estimates of the providers' actual costs in the early years.
Beginning with this premise, they analyze the regulation as though it were no
different from a regulation declaring that, because the Secretary failed to
consider possible bulk purchase discounts in computing the cost of medicine, he

intended to retroactively reduce all payments made for medicine in past years.
A rule of this sort would be far more troubling, but we think the present case is
distinguishable. First, depreciation is not an easy cost to compute; it is
unavoidably artificial. We are not inclined to substitute our notions of proper
cost accounting for those of the Secretary, even perhaps especially when
experience in administering the program leads him to correct his original
approach. Second, the advantages of accelerated depreciation are merely
temporary for most providers. Unlike the payments in our hypothetical above,
accelerated depreciation payments are more a loan than a gift, at least for longhaul providers
13

A simple example illustrates the Secretary's reasoning. Suppose a provider buys

an asset with a ten year useful life and uses it exclusively for Medicare patients
in the first five years. In that time, accelerated depreciation payments will
supply two-thirds of the total cost of the asset. If the provider then leaves the
program and serves only private patients thereafter, the patients will constitute
half the total number served, but they will pay only a third of the cost

14

Although to reach this result we must reject the reasoning of the South Windsor
court, the other cases cited by Adams are distinguishable. In both Columbia
Heights and Mount Sinai, the government sought to recover from providers
payments for services that were not covered by Medicare. In each case, the
provider had long treated the services as covered without objection from the
fiscal intermediary. Moreover, the provider could have corrected the mistake at
no great cost if it had been notified earlier, but by the time the government
acted, it was too late for the provider to collect from the patients, who were
ultimately liable. The Secretary was on weaker constitutional ground in those
cases, cf. note 12 supra, and the courts avoided the constitutional question by a
strict reading of the Secretary's statutory powers. Because of the differences
between accelerated depreciation payments and ordinary cost reimbursements,
we do not think such a narrow view of the Secretary's powers is necessary in
this case