Regions Hospital v. Shalala

Background

Regions Hospital, a teaching hospital, sued the Secretary of Health and Human Services over a regulation that allows reauditing of hospitals’ 1984 graduate medical education (GME) costs. In 1986 Congress made 1984 the baseline year for calculating future GME payments. Regions received a 1986 notice showing $9,892,644 in 1984 GME costs; a later reaudit reduced allowable costs to $5,916,868 and lowered the per-resident figure used for future payments. The Secretary issued a 1989 regulation permitting intermediaries to reexamine base-year costs to exclude nonallowable or misclassified items and to correct future reimbursements, but not to recoup payments already finally determined.

Reasoning

The Court asked whether the statute’s phrase “recognized as reasonable” unambiguously barred later reaudits. It found the statute ambiguous and applied the standard of deference to the Secretary’s reasonable interpretation. The Court also held the reaudit rule was not an improper retroactive action because it uses the cost rules in effect when costs were incurred and does not disturb final past payments. On that basis the Court upheld the Secretary’s regulation as a permissible way to ensure accurate base figures for future Medicare GME payments.

Real world impact

The decision allows the health agency to correct base-year errors so future Medicare GME payments reflect allowable costs. Many teaching hospitals could see adjusted future reimbursements when earlier misclassified or excessive costs are removed from the 1984 base. Hospitals still have administrative and judicial routes to challenge specific reaudits, and the rule does not permit reclaiming payments already final.

Dissents or concurrances

Justice Scalia (joined by Justices O’Connor and Thomas) dissented, arguing the statute refers only to amounts already recognized as reasonable in 1984 and that the Secretary lacked authority to redetermine those costs.