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AMERICAN HOSPITAL ASS'N v. SCHWEIKER

January 8, 1982

AMERICAN HOSPITAL ASSOCIATION, PLAINTIFF,
v.
RICHARD S. SCHWEIKER, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Bua, District Judge.

MEMORANDUM OPINION

This cause comes before the court on motions for summary judgment, brought by all parties pursuant to F.R.Civ.P. 56. There being no disputed questions of material fact, the motions will be dealt with as a matter of law.

Plaintiff, American Hospital Association (hereinafter AHA), seeks review pursuant to the Administrative Procedure Act, 5 U.S.C. § 706, of various regulations promulgated under the authority of Titles VI (the "Bill-Burton Act") and XVI of the Public Health Service Act, 42 U.S.C. § 291 et seq. and 42 U.S.C. § 300q et seq. (1976 and 1980 Supp.) respectively. The regulations are codified at 42 C.F.R. §§ 124.501 et seq. and 124.601 et seq. No challenge has been made to the procedure by which the regulations were issued. Rather, plaintiff challenges these regulations on substantive grounds contending that they: 1) retroactively impair contractual rights and thus violate the fifth amendment due process provision of the Constitution and 2) are beyond the scope of the authorizing statute.

The regulations define the manner in which health care providers must comply with two assurances they gave in return for receipt of federal construction funds under the Hill-Burton Act. These assurances required providers to "make available a reasonable volume of services to persons unable to pay" (the charity care assurance) and to make their facilities "available to all persons" residing in their service area (the community service assurance.) 42 U.S.C. § 291c(d), 300s-1(b)(1)(k).

Formerly, compliance with the charity care assurance was brought about by means of an "open-door" policy which required providers to certify that no person would be denied medical care because of inability to pay. 42 C.F.R. § 42-111(d)(2). The new regulations eliminate this open-door policy and set strict compliance standards at 3% of the facilities' operating costs or 10% of federal assistance received (adjusted to account for inflation) whichever is less. 42 C.F.R. § 124.503(a). Deficits and excesses in compliance in a given year are carried over to subsequent years as an adjustment to that year's compliance requirement. 42 C.F.R. § 124.503(b), (c) and (d). In the ease of a deficit an "affirmative action" program is required. 42 C.F.R. § 124.504. Sections 124.502 and 124.509 provide for methods to determine what qualifies as charity care. The compliance requirements apply to recipients of Title VI loans until the loan is repaid. 42 C.F.R. § 124.501(b).

The community service assurance regulations prohibit exclusion of persons in the provider's territorial area on grounds other than need for the service or availability of the service in that facility. 42 C.F.R. § 124.603(a). Section 124.603(a) also allows denial of non-emergency services to those unable to pay for them unless such person qualifies for charity care. Section 124.-603(c) requires providers to make arrangements to provide access to Medicare and Medicaid programs. Certain exclusionary policies are prohibited by § 124.603(d).

Regulations were also promulgated for both assurances regarding notice to patients (124.505, 124.603), investigation and enforcement (124.511, 124.606) and reporting and records (124.510, 124.605).

I.

The regulations in question have been promulgated pursuant to two statutes. The original authorizing statute is the Hill-Burton Act. The wording of the statute is broad.*fn1 It encompasses both the power to promulgate initial regulations*fn2 and to modify regulations related to compliance with assurances given as a condition of funding under the statute. Plaintiff challenges the constitutionality of the regulations promulgated pursuant to the authorizing statute, charging that they retroactively impair contractual rights in violation of the due process component of the fifth amendment. It is this court's conclusion that plaintiff's argument is without merit.

Plaintiff contends that it has been deprived of due process on two overlapping grounds: 1) that the regulations allegedly alter and impair the health care providers' contractual rights and 2) that the regulations operate retroactively to alter pre-existing obligations of the providers. Since any alteration of a contractual right against the federal government is necessarily a due process problem*fn3 and since an existing, executory contract could only be altered by regulations which operate retroactively,*fn4 plaintiff's arguments are really one — that it has been deprived of property rights without due process. See Lynch v. U.S., 292 U.S. 571, 54 S.Ct. 840, 78 L.Ed. 1434 (1934).

Plaintiff's contention, cast in due process language, is that property rights which were acquired by contract with the federal government have been violated by the promulgation of the challenged regulations. Plaintiff asserts that the forms and applicable regulations involved in obtaining Hill-Burton funds constitute a contract. The relevant forms oblige the health care providers to give assurances of charity care and community service and oblige the government to give federal funds in return. Although these forms, in and of themselves, could not constitute a contract because of the indefiniteness of their terms, AS&W Club of Waukegan v. Drobnick, 26 Ill.2d 521, 187 N.E.2d 247 (1962); Brewer v. Daubert Chemical Corp., 72 Ill. App.3d 718, 28 Ill.Dec. 911, 391 N.E.2d 110 (1979), plaintiff maintains that the regulations in force at the time its members received Hill-Burton funds were incorporated into the alleged agreement, thus making the obligations contained in the application forms definite and enforceable.

In several cases dealing primarily with the issue of implying a private right of action for the indigent third party beneficiaries of the alleged contract, courts have indicated that they accept the existence of a contractual relationship created by the forms; however, none of the holdings have specifically discussed whether the regulations are incorporated into the contract. Euresti v. Stenner, 458 F.2d 1115 (10th Cir. 1972); Corum v. Beth Israel Med. Ctr., 359 F. Supp. 909 (S.D.N.Y. 1973); AHA v. Harris, 625 F.2d 1328 (7th Cir. 1980) (dissenting opinion). Assuming, for the moment, the validity of these court's findings that a contract exists, it is nevertheless true that since, as is shown below, the Secretary has the power to modify the regulations after the federal funds have been paid, this power was also a part of the terms of any contract that may have arisen. Cf. Ogden v. Saunders, 25 U.S. 212, 12 Wheat 213, 6 L.Ed. 606 (1827).

The Secretary's power to modify the regulations in question has been demonstrated in several recent cases. In Austin Welfare Rights Organization v. St. Davis Community Hosp., No. A-78-CA-63 (W.D.Texas, March 13, 1980), the court, in construing the grant of regulatory authority*fn5 to the Secretary contained in the Hill-Burton Act found no retroactivity problem in the promulgation by the Secretary of regulations which modified those in effect when the defendant hospital gave its original charity care and community assurances. The court stated,

  Approval of the hospital's application for
  Hill-Burton funds was made conditional on an
  assurance that in the operation of the project
  there will be compliance with the applicable
  requirements of the regulations prescribed under
  § 291c(e) of this title . . .
  42 U.S.C. § 291e(b)(3). This statutory provision is sufficient
  to put the hospital on notice that ...

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