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1998 Term, Number 11 / April 19, 1999

Today the Supreme Court granted certiorari in three cases, one of which is of potential interest to the business community. Amicus briefs in support of the petitioners are due on June 3, 1999, and amicus briefs in support of the respondent are due on July 6 (because July 3 is a Saturday and July 5 is a Court holiday). Any questions about this case should be directed to Alan Untereiner (202-263-3241) or Donald Falk (202-263-3245) in our newly located Washington office.

Exhaustion of Administrative Remedies — Challenge To Medicare Regulations.  The Court granted certiorari today in Shalala v. Illinois Council on Long Term Care, Inc., No. 98-1109, to decide whether health care providers that participate in the Medicare program may challenge the validity of Medicare regulations in a lawsuit in federal district court under 28 U.S.C. §§ 1331 and 1346 without first exhausting administrative remedies in the Department of Health and Human Services.

The Illinois Council on Long Term Care, Inc. (Council), an association of nursing homes, filed a federal lawsuit challenging various Medicare and Medicaid regulations. The regulations specify minimum health and safety standards for nursing homes seeking reimbursement under the Medicare or Medicaid programs. According to the Council, before the new regulations were adopted, approximately six percent of its members had been required to alter their operations to satisfy the then-applicable standards, but inspections under the new standards resulted in findings that 70 percent of the nursing homes were deficient. The Council attributed this large increase to the new regulations, which the Council claimed were vague and left too much discretion to regulatory inspectors. The Council asked the district court to declare that the new regulations were unconstitutionally vague and failed to afford sufficient opportunities to be heard before financial penalties take effect. The Council also challenged a manual used by the inspectors, arguing that the manual actually constituted a regulation that should have been subject to the notice-and-comment rulemaking requirements of the Administrative Procedure Act (APA), 5 U.S.C. § 553.

The Secretary moved to dismiss, arguing that the exclusive route for obtaining judicial review under the applicable Medicare statutory provision (42 U.S.C. § 1395ii), which applies Section 205h of the Social Security Act (42 U.S.C. § 405h) to the Medicare Act, is through an application for benefits, followed by judicial review of the Secretary's final decision on that application. The Secretary contended that, because none of the Council's members had obtained a final decision on such an application, the Medicare challenges should be dismissed for want of jurisdiction. In an unreported decision, the district court accepted the Secretary's arguments and ruled that Section 1395ii precludes judicial review of claims by Medicare providers until they have exhausted their administrative remedies. The Seventh Circuit reversed, holding that, although Medicare providers must exhaust their administrative remedies prior to seeking judicial review of denials of claims for reimbursement, the exhaustion requirement does not apply to challenges to Medicare regulations. 143 F.3d 1072, 1075-1077 (1998).

The Court granted review (which respondent did not oppose) to resolve an intercircuit conflict (compare Michigan Ass'n of Homes & Servs. for the Aging, Inc. v. Shalala, 127 F.3d 496 (6th Cir. 1997)), and to address uncertainty concerning the effect of amendments to the Medicare Act on the continued viability of the Supreme Court's decision in Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667 (1986), which addressed related issues.

This case clearly will be of great interest to Medicare providers. It also may have significant implications for regulated businesses generally. The Council apparently intends to argue that, because constitutional and APA challenges to regulations cannot be considered in the administrative process, no evidence would be taken or administrative record developed with respect to such challenges, leaving a reviewing court with a limited record to review on appeal. As a result, according to the Council, an exhaustion requirement will have the effect of precluding meaningful judicial review of regulatory schemes challenged on statutory and constitutional grounds. The Court's decision in this case accordingly may have implications beyond the Medicare area and may affect businesses that are subject to other regulatory regimes with similar exhaustion requirements.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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