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Cotovsky-Kaplan Physical Therapy Assoc. v. United States


decided: January 7, 1975.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 74 C 555 William J. Bauer, Judge.

Hastings, Senior Circuit Judge, and Cummings and Stevens, Circuit Judges.

Author: Stevens

STEVENS, Circuit Judge.

The question is whether a supplier of services, whose own interests are not directly regulated by statute or administrative action, has standing to challenge a regulation which requires his regulated customers to take their patronage elsewhere.

Plaintiffs, five professional physical therapy corporations, appeal from a dismissal of their complaint, which alleges that a Medicare regulation adopted by the Secretary of the Department of Health, Education & Welfare deprives them of property without due process of law; the district court, in an unreported memorandum opinion and order, concluded that plaintiffs lacked standing to challenge the constitutionality of the regulation.

The regulation in question was adopted on July 16, 1973, by the Secretary pursuant to his authority under 42 U.S.C. § 1395x(o)(6) (Supp. II, 1972) to establish conditions of participation for "home health agencies"*fn1 in the federal Medicare program. Home health agencies provide services such as nursing care, physical therapy, or speech therapy to recipients of Medicare benefits. The statute states that these "home health services" may be provided by the agencies themselves "or by others under arrangements with them made by such agency. . . ."*fn2

The challenged regulation, 20 C.F.R. § 405.1221(a) (38 Fed. Reg. 18980 (1973))*fn3 provides, in pertinent part, that:

A public or nonprofit home health agency must provide at least one of the qualifying services directly through agency employees but may arrange with another public or nonprofit agency or organization to provide the second qualifying service and any additional services.*fn4

Thus, the regulation requires, as a condition of their continuing participation in the Medicare program, that nonprofit home health agencies may contract out the provision of physical therapy services only to nonprofit therapy agencies or organizations, and not to proprietary corporations such as the plaintiffs. The plaintiffs have alleged that various home health agencies have notified the plaintiffs that their physical therapy contracts may be terminated in order to protect the Medicare certification of the agencies. The essence of plaintiffs' Fifth Amendment challenge to the regulation is that it arbitrarily discriminates against profit-making physical therapy corporations in favor of nonprofit therapy organizations and individual profit-seeking therapists.*fn5

In Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 25 L. Ed. 2d 184, 90 S. Ct. 827, and Barlow v. Collins, 397 U.S. 159, 25 L. Ed. 2d 192, 90 S. Ct. 832, the Court held that a party possesses standing to seek nonstatutory judicial review of administrative action if he "alleges that the challenged action has caused him injury in fact, economic or otherwise," and if "the interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question." 397 U.S. at 152, 153.*fn6

It is not necessary for us to consider whether the subsequent decisions of the Court in Arnold Tours, Inc. v. Camp, 400 U.S. 45, 27 L. Ed. 2d 179, 91 S. Ct. 158, and Investment Company Institute v. Camp, 401 U.S. 617, 28 L. Ed. 2d 367, 91 S. Ct. 1091, have vitiated the need to comply with the "zone of interests" component, as some commentators have suggested,*fn7 for we are satisfied that plaintiffs' interests, as described in their complaint, are arguably within the zone regulated by the statute.

The "zone of interests" component of the Data Processing test of standing is itself composed of two parts, for it refers both to "protected" interests and "regulated" interests. Since Data Processing, the Court has upheld standing for plaintiffs asserting that their interests were "protected" by statute, but the Court has not had occasion to decide any standing cases which turn on whether the plaintiffs' interests were within the "regulated" zone. In analyzing the standing of the physical therapy corporations in this case we are, however, guided by the Court's reminder in Data Processing that

Where statutes are concerned, the trend is toward enlargement of the class of people who may protest administrative action. 397 U.S. at 154.

Whether or not the regulation challenged in this case is valid, it certainly relates to an area of activity which the underlying Medicare statutes direct the Secretary to regulate. He is expressly authorized to adopt "conditions of participation" for home health agencies. 42 U.S.C. § 1395x(o)(6). The subcontracting of physical therapy services by such agencies is specifically authorized in 42 U.S.C. § 1395x(m)(2). It is at least arguable that these statutory provisions give the Secretary power to regulate the kind of physical therapy services which the agency provides, whether the agency provides the services itself or by subcontracting with others. If, as a condition of certification of a home health agency, its contractual relationships with physical therapy corporations, such as plaintiffs, were directly regulated, there would be no doubt that plaintiffs' interests were within the regulated zone. We think the same conclusion is required when the regulation takes the form of a prohibition against doing business with persons who do not satisfy criteria prescribed by the Secretary.*fn8 Since the "zone of interests" test merely requires that plaintiffs' interests in contracting with nonprofit home health agencies be "arguably" within the regulated zone under the statute, the standard is easily met in this case.

Defendants respond and the district court concluded, however, that the regulation purports to regulate only home health agencies and that it does not regulate plaintiffs or their contracts.*fn9 To focus on whether the plaintiffs are directly regulated themselves is to read the Data Processing test too narrowly. The test is not whether these plaintiffs are regulated by the statute but whether the interests asserted by them arguably fall within the zone of interests so regulated.

Nearly three decades before its Data Processing decision, the Supreme Court held that indirect regulation, like that involved in this case, was adequate to confer standing to challenge administrative action. In Columbia Broadcasting System, Inc. v. United States, 316 U.S. 407, 86 L. Ed. 1563, 62 S. Ct. 1194, the Court held that CBS had standing to challenge F.C.C. regulations conditioning the grant of broadcast licenses to local stations on the nature of their contracts with radio networks. Neither CBS nor its contractual relationship with any local station was directly regulated. Nevertheless, in response to a standing argument similar to that made here, the Court held:

Appellant's standing to maintain the present suit in equity is unaffected by the fact that the regulations are not directed to appellant and do not in terms compel action by it or impose penalties upon it because of its action or failure to act. It is enough that, by setting the controlling standards for the Commission's action, the regulations purport to operate to alter and affect adversely appellant's contractual rights and business relations with station owners whose applications for licenses the regulations will cause to be rejected and whose licenses the regulations may cause to be revoked. 316 U.S. at 422 (emphasis added).

Even more directly in point is the holding in Air Reduction Co., Inc. v. Hickel, 137 U.S. App. D.C. 24, 420 F.2d 592 (1969). In that case private producers and distributors of helium challenged regulations of the Secretary of the Interior providing that government contractors must purchase all of their helium requirements for those contracts from the government. The regulations, of course, did not directly regulate the plaintiffs or their contracts with government contractors. Nevertheless, the court of appeals held that they had standing.*fn10

We therefore conclude that if, pursuant to what it perceives to be its statutory authority, a government agency regulates the contractual relationships between a regulated party and an unregulated party, the latter as well as the former may have interests that are arguably within the regulated zone for purposes of testing standing, and for this purpose a total prohibition is a form of regulation.*fn11

As the interests of these plaintiffs arguably fall within the zone regulated by the Medicare statutes, we hold that they have standing to obtain judicial review of 20 C.F.R. § 405.1221(a).*fn12

Finally, in their brief,*fn13 defendants appear to argue that, since the Medicare statutes contain specific provisions for judicial review of administrative actions at the behest of home health agencies and Medicare beneficiaries*fn14 but not of suppliers of services, such as plaintiffs, Congress did not intend to permit such review. Since the district court did not reach this question of "reviewability," it is inappropriate for us to do more than note that defendants must meet the stringent standards set forth in Data Processing, 397 U.S. at 156-157; Barlow v. Collins, 397 U.S. at 165-167; and Abbott Laboratories v. Gardner, 387 U.S. 136, 139-141, 18 L. Ed. 2d 681, 87 S. Ct. 1507, before a Congressional intent to preclude judicial review of this regulation can be found.

The judgment entered below is vacated and the case is remanded to the district court for further proceedings.

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