5 Soc.sec.rep.ser. 188, Medicare&medicaid Gu 33,981humana Hospital Corp., Inc., Plaintiff-appellant, v. Ronald Blankenbaker, As Commissioner of the Indiana Stateboard of Health, and Indiana State Board Ofhealth, Defendants-appellees, 734 F.2d 328 (7th Cir. 1984)

Humana Hospital Corporation brings this appeal from the district court's dismissal of its complaint for lack of jurisdiction due to failure to exhaust administrative remedies. Humana seeks judicial review of a state agency decision, affirmed by a state hearing officer, to recommend to the Secretary of Health and Human Services (HHS) that she deny Humana's application for federal reimbursement of its capital expenses for construction of a new hospital. We affirm the district court.

Section 1122 of the Social Security Act, as amended in 1972,¹  provides the statutory authority under which the Secretary of HHS²  may exclude the costs of a medical facility's capital expenditures from the facility's rates that are reimbursed under the federal Medicare and Medicaid programs. The congressional goal of this section is twofold: to limit federal reimbursements for health care capital expenditures to those that are necessary, thereby discouraging duplicative projects that increase the costs of medical care; and to encourage rational health care planning under the control of state and local agencies. See Wilmington United Neighborhoods v. HEW, 615 F.2d 112, 119-20 (3d Cir.), cert. denied, 449 U.S. 827, 101 S. Ct. 90, 66 L. Ed. 2d 30 (1980) (citing H.R.Rep. No. 231, 92d Cong., 2d Sess., reprinted in 1972 U.S.Code Cong. & Ad.News 4989, 5065-66).

The Secretary of HHS may enter into a "1122 agreement" with a state under which a state "designated planning agency" (DPA) is authorized to make findings and recommendations to the Secretary regarding proposed health care capital expenditures. 42 U.S.C. § 1320a-1(b) (1). Under such an agreement, a proponent of a health care capital expansion project must submit its proposal to the DPA for review. The DPA must make findings and recommend to the Secretary approval or disapproval of the project for reimbursement. If the DPA recommends approval, the Secretary is obliged to follow that positive recommendation. See id. at Sec. 1320a-1(d). If, however, the DPA recommends disapproval of the project, the proponent is entitled to appeal the negative recommendation in a "fair hearing" before a state-appointed hearing officer under procedures established and maintained by the DPA. Id. at Sec. 1320a-1(b) (3). The regulations promulgated under this section in 1973, 42 C.F.R. Part 100 (1983), provide that the findings and recommendations of a hearing officer supersede those of the DPA. 42 C.F.R. Sec. 100.106(c) (4). Thus, a hearing officer's decision reversing the DPA's adverse recommendation again would require the Secretary to approve reimbursement.

The Secretary may disapprove reimbursement for a project only if: (1) the proponent failed to notify the DPA of its proposal at least sixty days prior to its obligation for expenditures, 42 U.S.C. § 1320a-1(d) (1) (A); 42 C.F.R. Sec. 100.108(a) (1); or (2) the DPA has notified the proponent that the expenditure does not conform with the standards, criteria, or plans developed by the DPA, and has granted the proponent an opportunity for a fair hearing, 42 U.S.C. § 1320a-1(d) (1) (B); 42 C.F.R. Sec. 100.108(a) (2). However, even if the Secretary could disapprove reimbursement under section 1320a-1(d) (1), the Secretary may conclude that exclusion of these capital expenditures would discourage the operation or expansion of an efficient facility or would be otherwise inconsistent with the effective organization and delivery of health care. Upon so concluding, the Secretary shall not exclude such expenses. 42 U.S.C. § 1320a-1(d) (2); 42 C.F.R. Sec. 100.108(b). Thus, the Secretary must follow the positive recommendation of the DPA or hearing officer unless the proponent made an untimely application; but the Secretary may disregard a negative recommendation if certain procedures were not followed or if the Secretary determines on the merits that denial of reimbursements would be harmful to health care delivery. Any person dissatisfied with the Secretary's determination may request reconsideration by the Secretary. 42 U.S.C. § 1320a-1(f); 42 C.F.R. Sec. 100.108(d).

On September 30, 1981, Humana filed an application with the designated planning agency named in Indiana's 1122 agreement with HHS, the Indiana State Board of Health (Board), proposing to construct a 150-bed hospital in Indianapolis. The Board asked twice for additional information, which Humana provided, and deemed Humana's application complete for its review on December 23, 1981. Dr. Blankenbaker, Board commissioner, notified Humana on February 21, 1982, that the Board would recommend against inclusion of Humana's proposed capital expenses in the reimbursed rates. Humana sought a fair hearing to appeal the Board's action. The hearing officer affirmed the recommendation of the Board, notifying Humana of its decision on April 9, 1983.

Humana filed this lawsuit in the Southern District of Indiana two days later, charging Dr. Blankenbaker and the Board with violations of section 1122, the regulations promulgated thereunder, federal and Indiana administrative law, and due process, for alleged procedural and substantive failures by the Board and in the fair hearing.³  Humana sought declaratory and injunctive relief to prevent the Board from forwarding its negative recommendation to the Secretary of HHS. When considering Humana's request for a preliminary injunction, Judge Dillin advanced to the merits and held that he lacked jurisdiction to review the state agency actions due to Humana's failure to exhaust its administrative remedies before the Secretary of HHS. Humana Hospital Corp. v. Blankenbaker, 83 C 516 (S.D. Ind. April 28, 1983). Humana herein appeals Judge Dillin's decision.

Although the statute contemplates four possible stages of agency action (the DPA recommendation, the hearing officer's action, the Secretary's initial determination, and the Secretary's final determination after reconsideration), section 1122 speaks only to judicial review of the Secretary's determination. "A determination by the Secretary under this section shall not be subject to administrative or judicial review." 42 U.S.C. § 1320a-1(f). The regulations, while following the statutory language expressly proscribing judicial review of the Secretary's determination, 42 C.F.R. Sec. 100.108(e), suggest that courts may review the decisions of hearing officers. " [W]here judicial review of such decision [s] is obtained, the final decision of the reviewing court, to the extent that it modifies the findings and recommendations of the designated planning agency, shall to such extent supersede the findings and recommendations of the designated planning agency." Id. at .106(c) (4). Further, the regulations provide that reconsideration by the Secretary will be based upon the record of the proceedings, which includes the record of any judicial proceedings. Id. at .108(d) (2).

The Board and Dr. Blankenbaker argue that a court may not review administrative action at any stage of the 1122 process short of the Secretary's final determination, because administrative remedies remain available and because the court's decision would be subject to review by a federal agency, an unconstitutional result. Yet, as Humana aptly points out, denial of judicial review prior to the Secretary's final determination could leave the courthouse doors forever closed to Humana, due to the clear statutory prohibition against judicial review of the Secretary's determination.

Humana argues that the Eighth Circuit's recent case, First Federal Savings and Loan Association of Lincoln v. Casari, 667 F.2d 734 (8th Cir.), cert. denied, 458 U.S. 1106, 102 S. Ct. 3484, 73 L. Ed. 2d 1367 (1982), involves facts "indistinguishable" from the case at hand and is precedent for allowing federal court review at this stage of the administrative process. We note preliminarily that both federal and state courts have been called upon to review administrative actions under section 1122 and the regulations and agreements thereunder, on complaints brought by both proponents of disapproved projects and opponents of approved projects. A consistent path of judicial review has yet to emerge.

In Casari, the plaintiff, titleholder of a defunct nursing home, proposed to reopen the facility but was met with an adverse recommendation from the state DPA and affirmance of that decision by the fair hearing officer. Shortly after the plaintiff filed suit in federal court, the Secretary of HHS accepted the DPA's recommendation and decided to exclude the nursing home capital expenditures from reimbursement. The plaintiff sought review of only the state agency proceedings, although the relief granted by the Eighth Circuit, enjoining transmission of the negative recommendation to the Secretary, would impact ultimately on the Secretary's determination.

As in the instant action, the plaintiff in Casari asserted that the DPA lacked authority to act on the plaintiff's application for failure to establish and disseminate procedures for administering its 1122 agreement. Finding this a procedural rather than a substantive challenge to DPA action,⁴  the Eighth Circuit agreed with the plaintiff that judicial review was appropriate.⁵  The court determined that the section 1122(f) clear prohibition of judicial review of the Secretary's determination should not preclude judicial review of the procedural aspects of intermediate state DPA action. 667 F.2d at 740. The court relied on cases holding that procedural review of agency action is available even when judicial review is withdrawn, id. at 739-40, and noted that the statutory withdrawal of judicial review of the Secretary's determination exposed the "glaring absence" of a similar withdrawal of judicial review of intermediate administrative decisions while the HHS regulations clearly assumed that judicial review of hearing officer decisions would occur. Id. at 740.⁶ 

Casari did not touch upon the issues of exhaustion of administrative remedies and separation of powers. We therefore decline to follow Casari, and embark on our own evaluation of "the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration." Abbott Laboratories v. Gardner, 387 U.S. 136, 148-49, 87 S. Ct. 1507, 1515, 18 L. Ed. 2d 681 (1967).

Courts are well-advised to refrain from interfering in the administrative process until administrative remedies are exhausted. The agency, here the Secretary of HHS, yet may reach a decision satisfactory to Humana, eclipsing the need for judicial review. First, upon receiving a negative recommendation from the state, the Secretary may decide to approve Humana's application on the merits as consistent with the efficient delivery of health care services. 42 U.S.C. § 1320a-1(d) (2). Even if the Secretary decides to exclude Humana's project from reimbursement, Humana may request that the Secretary reconsider her initial determination, and Humana then may be able to persuade the Secretary to change her mind.

Further, the issues may ripen under subsequent administrative action. The Secretary may eliminate or consolidate some of Humana's concerns, crystalizing the issues for judicial review. For example, the Secretary, when considering the DPA's negative recommendation, may compare the procedures followed at the state level with those envisioned in section 1122(d) (1) (B). This subsection expressly mentions certain procedures that the DPA should have followed in reaching its negative recommendation.⁷  Conceivably the Secretary could recognize the procedural failures alleged by Humana and refuse to follow the recommendation or send the matter back to the DPA for correction.

Further administrative action prior to judicial review will provide the opportunity for resolution or at least refinement of the issues without unnecessary expenditure of judicial resources. See K. Davis, Administrative Law Treatise Sec. 26:1 (2d ed. 1983). We hold that the federal courts lack jurisdiction to review the state agency action at this juncture.⁸ 

Denial of judicial review at this stage of the administrative proceedings will avoid a potential constitutional conflict between the branches of government. The regulations seem to contemplate judicial review of the hearing officer's decision, with the record of judicial proceedings forming part of the record before the Secretary for her review. The Supreme Court consistently has held from its earliest days that no decision of a federal court may be reviewed by the legislative branch; Congress has no judicial power save the power of impeachment. See Hayburn's Case, 2 U.S. (2 Dall.) 408, 410-13 n. (a), 1 L. Ed. 436 (1792), cited in J. Nowak, R. Rotunda, & J.N. Young, Constitutional Law 75 (2d ed. 1983); see also Chicago & Southern Air Lines, Inc. v. Waterman Steamship Corp., 333 U.S. 103, 113-14, 68 S. Ct. 431, 437, 92 L. Ed. 568 (1948).⁹  If judicial review were to proceed at this stage, the Secretary would be bound by the court holding, a result not contemplated by the statute and clearly contrary to the regulations.¹⁰ 

IV. Judicial Review of Secretary's Determination

Humana argues that withholding judicial consideration until after exhaustion of its administrative remedies may serve to deny Humana any judicial review, because defendants may assert section 1122(f) as a bar to judicial review of the Secretary's final determination. We do not intend to abandon Humana with no recourse to the courts. We leave the door open to Humana to seek federal judicial review after exhaustion of its administrative remedies, should it find the Secretary's final determination unsatisfactory.

Under Article III, Congress controls the jurisdiction of the federal courts, and may act to withdraw the courts' jurisdiction over certain types of cases. The Administrative Procedure Act provides that judicial review over administrative agency action is unavailable only where the matter is clearly committed to agency discretion, or where Congress has succeeded in eliminating all judicial review of the subject matter. 5 U.S.C. § 701(a) (1976). The Supreme Court has held that judicial review will not be cut off "unless there is a persuasive reason to believe that such was the purpose of Congress." Abbott Laboratories v. Gardner, 387 U.S. 136, 140, 87 S. Ct. 1507, 1510, 18 L. Ed. 2d 681 (1967); see K. Davis, Administrative Law Treatise Sec. 28.09 (1982 Supp.).

Congress has not convinced us that it intended to eliminate any and all judicial review of the 1122 process. The regulations suggest judicial review of state agency actions, yet we cannot approve judicial review, whether procedural or substantive, of intermediate administrative actions for compliance with section 1122. Review of the Secretary's determination would be the only other opportunity to challenge the administrative process. We do not believe that Congress intended to cut off that opportunity.¹¹ 

The Fifth Circuit has approved procedural review of the Secretary's determinations, at least to the extent of assessing whether the Secretary conformed with her agency's own rules and regulations. See Hollingsworth v. Harris, 608 F.2d 1026, 1027 (5th Cir. 1979) (per curiam). Hollingsworth noted that despite Congress' attempted withdrawal of judicial review, agency action may be reviewed for compliance with the agency's own procedures as outlined in its regulations. Id. (citing Graham v. Caston, 568 F.2d 1092, 1097 (5th Cir. 1978)). In Casari, the Eighth Circuit cited Hollingsworth with approval. 667 F.2d at 740. We hold that at a minimum, judicial review of the Secretary's compliance with the procedures of section 1122 and the regulations thereunder¹²  is available despite section 1122(f).

We affirm the district court's dismissal of Humana's complaint for lack of jurisdiction due to failure to exhaust administrative remedies. In the event that Humana's concerns are not resolved in the administrative process, we hold that upon exhaustion of its administrative remedies Humana may turn to the federal courts for review of the Secretary's final determination.