OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, PETITIONER
V. GEORGETOWN UNIVERSITY HOSPITAL, ET AL.

   No. 87-1097

   In the Supreme Court of the United States

   October Term, 1987

   On Writ of Certiorari to the United States Court of Appeals for the
District of Columbia Circuit

   Brief for the Petitioner

                       PARTIES TO THE PROCEEDING

   In addition to the parties named in the caption, Howard University
as Howard University Hospital, Tuscon Hospital Liquidating Corp.
(formerly Tuscon General Hospital), Greater Southeast Community
Hospital, Tuscon Medical Center, St. Cloud Hospital, and Community
Hospital of Battle Creek were plaintiffs in actions in the district
court.  These parties also were appellees in the court of appeals.

            TABLE OF CONTENTS
   Questions Presented
   Parties to the Proceeding
   Opinions below
   Jurisdiction
   Statutes involved
   Statement
   Summary of argument
   Argument:
      I.  Neither the Administrative Procedure Act
          nor the Medicare Act bars the Secretary of
          Health and Human Services from promulgating
          a retroactive cost limit rule pursuant to his
          general rulemaking authority under the Medicare
          Act
          A. The district court's 1983 order, which
             invalidated the Secretary's 1981 rule,
             did not reinstate the Secretary's prior
             1979 rule so as to prohibit, on remand,
             the Secretary's promulgation in 1984 of
             a retroactive rule
          B. The Administrative Procedure Act
             does not bar retroactive regulations
          C. The Secretary's retroactive cost limit
             rule is not inconsistent with the
             Medicare Act
          D. The Secretary's decision to apply
             his 1984 cost limit rule retroactively
             was not arbitrary and capricious
      II. Section 1861(v)(1)(A)(ii) of the Medicare
          Act specifically authorizes the Secretary's
          promulgation of a retroactive cost limit rule
          to prevent excessive reimbursement
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-19a) is reported
at 821 F.2d 750.  The opinion and order of the district court (Pet.
App. 20a-42a) are unreported.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 43a-44a) was
entered on June 26, 1987.  A petition for rehearing was denied on
September 1, 1987 (Pet. App. 45a-46a).  On November 23, 1987, Chief
Justice Rehnquist extended the time for filing a petition for a writ
of certiorari to and including December 30, 1987.  The Secretary filed
a petition for a writ of certiorari on that date.  This Court granted
certiorari on February 29, 1988.  The jurisdiction of this Court rests
upon 28 U.S.C. 1254(1).

                           STATUTES INVOLVED

   5 U.S.C. 551 provides in pertinent part:

      For the purpose of this subchapter --

                      * * * * *

      (4) "rule" means the whole or a part of an agency statement of
      general or particular applicability and future effect designed
      to implement, interpret, or prescribe law or policy or
      describing the organization, procedure, or practice requirements
      of an agency * * *.

   42 U.S.C. (Supp. III) 1395x(v)(1)(A) provides in pertinent part:

      The reasonable cost of any services shall be the cost actually
      incurred, excluding therefrom any part of incurred cost found to
      be unnecessary in the efficient delivery of needed health
      services, and shall be determined in accordance with regulations
      establishing the method or methods to be used, and the items to
      be included, in determining such costs for various types or
      classes of institutions, agencies, and services;  * * *.  Such
      regulations may provide for determination of the costs of
      services on a per diem, per unit, per capita, or other basis,
      may provide for using different methods in different
      circumstances, may provide for the use of estimates of costs of
      particular items or services, may provide for the establishment
      of limits on the direct or indirect overall incurred costs or
      incurred costs of specific items or services or groups of items
      or services to be recognized as reasonable based on estimates of
      the costs necessary in the efficient delivery of needed health
      services to individuals covered by the insurance programs
      established under this subchapter, and may provide for the use
      of charges or a percentage of charges where this method
      reasonably reflects the costs.  Such regulations shall (i) take
      into account both direct and indirect costs of providers of
      services (excluding therefrom any such costs, including standby
      costs, which are determined in accordance with regulations to be
      unnecessary in the efficient delivery of services covered by the
      insurance programs established under this subchapter) in order
      that, under the methods of determining costs, the necessary
      costs of efficiently delivering covered services to individuals
      covered by the insurance programs established by this subchapter
      will not be borne by individuals not so covered, and the costs
      with respect to individuals not so covered will not be borne by
      such insurance programs, and (ii) provide for the making of
      suitable retroactive corrective adjustments where, for a
      provider of services for any fiscal period, the aggregate
      reimbursement produced by the methods of determining costs
      proves to be either inadequate or excessive.

                          QUESTIONS PRESENTED

   1. Whether the Administrative Procedure Act, 5 U.S.C. (& Supp. IV)
551 et seq., prohibits an agency from promulgating retroactive
regulations even if the decision to apply a regulation retroactively
is not arbitrary, capricious, an abuse of discretion, or otherwise
contrary to law.

   2. Whether Section 1861(v)(1)(A)(ii) of the Medicare Act, 42 U.S.C.
(Supp. III) 1395x(v)(1)(A)(ii), which allows the Secretary of Health
and Human Services to promulgate "regulations * * * for the making of
suitable retroactive corrective adjustments where, for a provider of
services for any fiscal period, the aggregate reimbursement produced
by the methods of determining costs proves to be either inadequate or
excessive," specifically authorizes the Secretary to promulgate a
retroactive regulation establishing a ceiling on reimbursement for
hospitals' wage costs, and to apply that regulation in reimbursement
proceedings not final at the time that the regulation was promulgated.

                               STATEMENT

   1. At the time of the events at issue in this case, all "providers"
of health care services to Medicare beneficiaries were reimbursed by
the Secretary of Health and Human Services (HHS) on an annual basis
for the "reasonable costs" of those health care services.  42 U.S.C.
(& Supp. III) 1395f(b), 1395x(v) and (v)(1)(A).  /1/ Congress
expressly authorized the Secretary to promulgate regulations
"establishing the method or methods to be used, and the items to be
included, in determining" reasonable costs (42 U.S.C. (Supp. III)
1395x(v)(1)(A)).  Alarmed by dramatic increases in the cost of
hospital care, Congress in 1972 amended the statute to authorize the
Secretary to "establish() * * * limits on the * * * costs * * * to be
recognized as reasonable" (42 U.S.C. (Supp. III) 1395x(v)(1)(A)).
Thus, "based on estimates of the costs necessary in the efficient
delivery of needed health services," the Secretary may by regulation
limit both the types and amounts of costs that are reimbursable under
the Medicare program (42 U.S.C. (Supp. III) 1395x(v)(1)(A)).

   In 1979, the Secretary exercised his authority to establish cost
limits by promulgating a regulation that prescribed ceilings upon
Medicare reimbursement for hospitals' inpatient general routine
operating costs.  See 44 Fed. Reg. 31806.  The regulation divided
these costs into two categories:  wage costs and all other costs.  It
fixed maximum reimbursable non-wage costs on a nationwide basis for
various categories of hospitals;  the rule also set nationwide wage
ceilings, but made those cost limits subject to adjustment on a
hospital-by-hospital basis to account for variations in wage rates
over different geographic areas.  The adjustment was made by applying
to the nationwide wage cost ceilings an index derived from Bureau of
Labor Statistics data for hospital wages in the particular geographic
area.  A particular hospital's wage cost ceiling was thus dependent
upon the index number for that hospital's geographic area.  Id. at
31807-31808.  The wage indices for each geographic area for hospital
cost reporting periods beginning on or after July 1, 1979, were set
forth in the regulation (id. at 31812-31813);  /2/ the 1980 indices
were published one year later (45 Fed. Reg. 41868, 41875-41876).

   In 1981, the Secretary adjusted the formula used to calculate the
wage indices by excluding data concerning the wages paid by hospitals
owned by the federal government.  See 46 Fed. Reg. 33638-33639.  The
Secretary explained that "(b)ecause these hospitals typically use
national pay scales, the amounts they pay their employees do not
necessarily reflect area wage levels.  We believe excluding data from
these hospitals will help improve the accuracy of the wage index
adjustment" (id. at 33639).

   The Secretary viewed this refinement in the index methodology as a
"minor technical change()" (46 Fed. Reg. 33638 (1981)).  He
accordingly did not provide notice or an opportunity to comment before
placing the revised index formula into effect.  The Secretary further
found that the public interest required that the new wage indices be
placed into effect immediately (id. at 33640).

   Several hospitals sought judicial review of the Secretary's action
in the United States District Court for the District of Columbia,
claiming that the Secretary had violated the Administrative Procedure
Act (APA), 5 U.S.C. (& Supp. IV) 551 et seq., by failing to provide
notice and an opportunity to comment before altering the wage index
methodology.  The court concluded that "the Secretary's decision to
exempt the (decision to alter the index methodology) from notice and
comment must be declared unlawful" because it was not supported by
"good cause," within the meaning of Section 553(b)(B) of the APA (Pet.
App. 58a-60a).  /3/ Citing the provisions of the Medicare Act limiting
the availability of judicial review, /4/ the district court declined
to issue an injunction barring the application of the 1981 wage
indices to the plaintiffs' reimbursement claims.  Instead, it entered
an order declaring that the revised wage indices were "invalid" (id.
at 66a).  The court observed that the effect of this declaration upon
the determination of reimbursement levels for Medicare providers after
June 30, 1981, "must be determined in the first instance by the
Secretary and her delegates administering the claims procedures" (id.
at 63a).

   Rather than appeal this decision, the Secretary elected to cure the
procedural defect identified by the district court.  In February 1984,
the Secretary issued a notice of proposed rulemaking in which she
proposed to reissue the 1981 wage indices and invited comment thereon.
 See 49 Fed. Reg. 6175.  The notice stated that the indices set forth
in the proposed rule would apply to cost reporting periods beginning
on or after July 1, 1981 and ending after September 30, 1981, but
would not apply to reporting periods beginning on or after October 1,
1982 (ibid.).  /5/ Thus, "the rule was to apply to cost accounting
periods that would have been covered prospectively by the Secretary's
1981 rule had that rule been promulgated in accordance with the
procedural requirements of the APA" (Pet. App. 9a).

   The Secretary stated (49 Fed. Reg. 6177 (1984)) that

      the exclusion of Federal government hospital data would improve
      the accuracy of the wage index because most Federal hospitals
      characteristically employ physicians and other high salaried
      professionals whose salaries are based on national rather than
      local wage scales.  This factor tends to overstate the average
      hospital wage in areas with Federal institutions as compared to
      areas without such Federal facilities.  Since the purpose of the
      wage index is to reflect area-by-area differences in the
      labor-related component of hospital costs, the exclusion of
      Federal hospital data better enables the wage index to
      accurately reflect area-by-area labor-related costs.

   The Secretary observed that where non-federal hospitals pay wages
similar to those paid by the federal government, the data from
non-federal hospitals would reflect those wages, and "the exclusion of
Federal wages would have little effect on the wage index" (ibid.).
If, on the other hand, "wages paid to Federal hospital employees are
higher than most area hospital wage levels, then the inclusion of
Federal data results in most hospitals receiving a higher Medicare
cost limit than is warranted based on their expected costs.  Such a
result defeats the purpose of the cost limits, which is to limit a
provider's reimbursement to only those costs necessary in the
efficient delivery of needed health services." Ibid.

   The Secretary stated that the reissuance of the 1981 wage indices,
which had been calculated without wage data from federally-owned
hospitals, "avoids placing an unwarranted hardship and burden on
intermediaries and many hospitals, while it would impose only a
minimal burden on a few hospitals" (49 Fed. Reg. 6177 (1984)).
Because "(t)he inclusion of Federal data in the wage index at this
point in time would result in overpayments to many hospitals,"
intermediaries might be forced to review already-settled cost reports
and hospitals that had received excess reimbursement would be required
to repay these sums to the government (ibid.).  "In contrast, those
few hospitals that would receive less reimbursement if Federal
hospital data are excluded from the wage index would not be unduly
harmed or burdened by the reissuance of the wage index," because those
hospitals could only have relied on the wage indices published in 1981
(ibid.).  "Since these limits are prospectively established and
published in advance, all hospitals knew before the beginning of their
respective cost reporting periods what their cost limit would be.  * *
* This proposed notice would simply put the previously set cost limits
back into effect." Ibid.

   After considering comments submitted by interested parties, the
Secretary reaffirmed the propriety of the change in index methodology
and reissued the 1981 wage indices in final form (49 Fed. Reg. 46495
(1984)).  She rejected the contention that the application of the 1984
rule to 1981 cost years constituted an impermissible retroactive rule,
observing that "as a practical matter hospitals could only have relied
on the (1981) rule in determining their respective cost limits" for
the cost periods that would be covered by the 1984 rule (id. at
46497).  Because "(e)ach hospital (therefore) knew in advance of its
cost reporting period what its cost limit would be for this period,"
the Secretary concluded that the 1984 rule could properly be applied
to 1981 cost reporting periods (ibid.).

   2. Respondents are health care providers that stand to receive
greater compensation if federal wage cost data were included in their
wage cost index for 1981 than if federal data are excluded.  After the
Secretary reissued the original 1981 wage indices, respondents' fiscal
intermediaries recouped funds previously reimbursed to respondents
under wage indices that included federal hospital wage data.
Respondents thereupon obtained the necessary certification from the
Provider Reimbursement Review Board and commenced several actions in
the United States District Court for the District of Columbia
challenging the Secretary's decision to apply the revised index
calculation methodology to their 1981 cost periods (see 42 U.S.C.
(Supp. III) 1395oo(f)(1)).  The district court consolidated the
actions and entered judgment in favor of respondents.  The court
declined to address respondents' claims that the Secretary lacked the
statutory authority to issue retroactive rules.  Instead, the court
held that the Secretary could not properly apply the 1981 wage indices
retroactively on the facts of this case.  See Pet. App. 20a-42a.

   In so ruling, the district court applied the five-factor balancing
test set forth in Retail, Wholesale & Dep't Store Union v. NLRB, 466
F.2d 380, 390 (D.C. Cir. 1972).  The court concluded (Pet. App. 38a)
that "the balancing of factors in this case compels the conclusion
that Medicare statute interests are only minimally served, if at all,
by the Secretary's retroactive application of his reissued wage index
to recoup funds from these plaintiffs.  In contrast, the ill effects
of the Secretary's actions are substantial for these plaintiffs and
for the general integrity of the administrative rule-making process.
Accordingly, retroactive application against these plaintiffs must be
denied."

   3. The court of appeals affirmed, but rested its decision upon
grounds different from those adopted by the district court (Pet. App.
1a-19a).  The court acknowledged that adjudicatory orders issued by
administrative agencies may be given retroactive effect.  But, citing
the Administrative Procedure Act's definition of a "rule" as "an
agency statement of general or particular applicability and future
effect" (5 U.S.C. 551(4) (emphasis added)), the court concluded that
"the APA requires that legislative rules by given future effect only.
Because of this clear statutory command, equitable considerations are
irrelevant to the determination of whether the Secretary's rule may be
applied retroactively;  such retroactive application is foreclosed by
the express terms of the APA" (Pet. App. 13a;  see id. at 11a-12a).

   The court stated that when the district court invalidated the 1981
rule, "it necessarily reinstated the Secretary's 1979 rule, which
required the Secretary to reimburse providers using a formula that
included federal-hospital data" (Pet. App. 13a (emphasis in
original)).  "The Secretary's 1984 rule obviously can have no
application to cost accounting periods that were, by virtue of the
District Court's ruling, governed by the Secretary's 1979 rule"
(ibid.).  In the court's view, "agencies would be free to violate the
rulemaking requirements of the APA with impunity if, upon invalidation
of a rule, they were free to 'reissue' that rule on a retroactive
basis" (id. at 14a).  The court acknowledged that if an agency rule is
invalidated on procedural grounds, "the agency must, of course, be
given an opportunity to correct the procedural defect and promulgate a
new rule";  but "the corrected rule, like all other legislative rules,
(must) be prospective in effect only" (ibid.).  /6/

   The court of appeals acknowledged that Congress may "override the
general terms of the APA by explicitly authorizing retroactive
regulations in an agency's organic statute" (Pet. App. 14a).  The
court of appeals, however, rejected petitioner's contention that the
retroactive 1984 regulation was specifically authorized by Section
1861(v)(1)(A)(ii) of the Medicare Act, 42 U.S.C. (Supp. II)
1395x(v)(1)(A)(ii), which empowers the Secretary of Health and Human
Services to issue "regulations" that "provide for the making of
suitable retroactive corrective adjustments where * * * the aggregate
reimbursement produced by the methods of determining costs proves to
be either inadequate or excessive." According to the court of appeals,
the Secretary could not rely on the retroactive adjustments provision
to support the 1984 rule because the provision was not explicitly
cited by the agency in promulgating that rule (Pet. App. 16a).  The
court stated that "(i)t was not until the litigation in the District
Court that the Secretary sought to invoke the retroactive adjustments
provision as authority for the rule" (ibid.).

   In any event, the court held, "Congress did not intend to empower
the Secretary to promulgate retroactive cost-limit rules" (Pet. App.
15a (emphasis in original)).  The court discerned "a critical
distinction between the power to promulgate retroactive rules of
general application and the power to make retroactive corrective
adjustments in the reimbursements of particular providers whose
aggregate reimbursements are shown to be either 'inadequate or
excessive'" in case-by-case evidentiary proceedings (id. at 17a).  It
concluded that Section 1861(v)(1)(A)(ii) confers only the latter power
upon the Secretary, authorizing him to make retroactive adjustments to
individual reimbursement determinations where he is able to "prove
that inadequate or excessive reimbursements to a provider have
resulted from his 'methods of determining costs'" (Pet. App. 18a
(citation omitted)).  Where, as in this case, there is no
individualized proof that the reimbursement awarded respondents
exceeded their reasonable costs, the court held that the Secretary has
no authority to adjust those reimbursement awards retroactively (id.
at 18a-19a).

                          SUMMARY OF ARGUMENT

   A. The court of appeals' decision in this case rests on two
untenable propositions:  (1) that a court order invalidating an agency
rule on procedural grounds automatically reinstates the agency's prior
rule and thereby precludes any subsequent retroactive rulemaking;  and
(2) that a "retroactive application (of agency rules) is foreclosed by
the express terms of the APA" (Pet. App. 13a).  Both propositions are
inconsistent with established tenets of federal administrative law.

   When a reviewing court sets aside an agency rule because of a
procedural violation, the court's order does not finally determine
what rule should apply.  Such an order simply rejects one attempt by
the agency to answer that question and does not deprive the agency of
its congressionally-delegated responsibility to reexamine the issue on
remand.  Indeed, an agency's authority to engage in curative
rulemaking is well-settled.

   Moreover, neither the APA's definition of "rule" nor its
legislative history supports the court's and respondents' view that
the APA bars retroactive rulemaking.  The reference to "future effect"
in the definition of "rule" merely expresses the notion that a rule is
a statement of law or policy that is not applied in the same
proceeding in which it is announced;  any application or enforcement
will occur only in the future.  Indeed, the legislative history
reveals that Congress understood that the "future effect" of a rule
might well include an effect on past transactions and that Congress
considered, and rejected, the very prohibition on retroactive
rulemaking that respondents and the court of appeals now read into the
APA.

   Nor does the Medicare Act itself specifically prohibit the
Secretary from promulgating retroactive cost limit rules following
judicial invalidation of cost limit rules previously proposed by the
Secretary.  The provision of the statute authorizing the Secretary to
adopt cost limit rules, which was enacted in 1972, does not speak to
this question.  Although the legislative history reflects Congress's
understanding that cost limit rules would generally operate
prospectively, there is no suggestion that Congress intended to curb
the Secretary's discretion to promulgate retroactive rules where a
court has invalidated the Secretary's previous rules because of
procedural violations.

   In our view, the Secretary has general rulemaking authority under
the Medicare Act to promulgate a retroactive cost limit rule so long
as his decision is not arbitrary, capricious, an abuse of discretion,
or otherwise contrary to law.  Where, as in this case, the retroactive
regulation is "curative" in character -- that is, it merely cures a
procedural error in a prior rule without changing its substance --
then the element of unfair surprise often associated with retroactive
lawmaking is simply not present.  Respondents had adequate notice that
the reasonableness of their costs would be assessed against the
substantive standard of the 1984 rule because that rule simply adopted
the same standard as the 1981 rule, which was in place when
respondents incurred their costs.  On the other hand, if the
retroactive cost limit is not upheld, respondents will receive a
windfall at the taxpayers' expense.  Thus, there can be no contention
that the Secretary's decision to issue a retroactive rule is arbitrary
and capricious.

   B. The decision of the court of appeals is also wrong because,
wholly apart from the Secretary's general rulemaking authority under
the Medicare Act, the Secretary has properly construed Section
1861(v)(1)(A)(ii) of the Medicare Act as authorizing retroactive
regulations establishing a cost limit ceiling.  Section
1861(v)(1)(A)(ii) allows the Secretary to promulgate "regulations * *
* for the making of suitable retroactive corrective adjustments where,
for a provider of services for any fiscal period, the aggregate
reimbursement produced by the methods of determining costs proves to
be either inadequate or excessive." In this case, the prior (1979)
cost limit rule constitutes "the method() of determining costs" that
the Secretary has deemed to cause "excessive" reimbursement, and the
retroactive regulation challenged in this case is for the express
purpose of making a "retroactive corrective adjustment()" in such
reimbursement.  Because the statutory language "admits of" the
Secretary's construction, which is not contradicted by the legislative
history and which offers a sensible implementation of Congress's
purpose, it must be upheld.  See Young v. Community Nutrition Inst.,
476 U.S. 974, 981 (1986);  Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S.
837, 842-844 (1984).

                               ARGUMENT

   I. NEITHER THE ADMINISTRATIVE PROCEDURE ACT NOR THE MEDICARE ACT
BARS THE SECRETARY OF HEALTH AND HUMAN SERVICES FROM PROMULGATING A
RETROACTIVE COST LIMIT RULE PURSUANT TO HIS GENERAL RULEMAKING
AUTHORITY UNDER THE MEDICARE ACT

   The Secretary's 1984 cost limit rule is a valid exercise of his
general rulemaking authority under the Medicare Act.  See 42 U.S.C. (&
Supp. III) 1395x(v)(1)(A), 1395hh, 1395ii.  Respondents appear to
argue (see Br. in Opp. 5-6) that the effect of the 1983 district court
order, which invalidated the Secretary's 1981 rule (see Pet. App.
49a-64a), was to reinstate the agency rule that predated the
invalidated rule.  For this reason, they suggest, the Secretary lacked
authority on remand to promulgate a new retroactive rule.  Respondents
further contend that retroactive cost limit rules are barred by the
APA's definition of a rule and by the legislative history of the 1972
amendments to the Medicare Act.  Each of these claims is without
foundation.

   A. The District Court's 1983 Order, Which Invalidated the
Secretary's 1981 Rule, Did not Reinstate the Secretary's Prior 1979
Rule so as to Prohibit, on Remand, the Secretary's Promulgation in
1984 of a Retroactive Rule

   Respondents contend that the Secretary's failure to appeal the
district court's invalidation of its 1981 rule reinstated the
Secretary's prior 1979 rule and precluded any subsequent retroactive
rulemaking.  Respondents, however, fundamentally misapprehend the
scope of an agency's authority on remand from a court order
invalidating an agency rule on procedural grounds.  They also ignore
the traditional role of curative rulemaking.

   1. Contrary to respondents' contention (Br. in Opp. 5-6;  see also
Pet. App. 13a), a decision by a reviewing court setting aside an
agency rule because of procedural irregularities does not finally
decide the question what rule should apply.  It merely rejects one
attempt by the agency to answer that question.  On remand, the agency
retains authority "to deal with the problem afresh, performing the
function delegated to it by Congress";  the fact that the agency
committed a procedural error in its prior endeavor does not confer on
anyone a "vested right" in any particular regulatory outcome on
remand.  SEC v. Chenery Corp., 332 U.S. 194, 200-201 (1947);  /7/ see
Burlington Northern Inc. v. United States, 459 U.S. 131, 142 (1982);
NLRB v. Food Store Employees Union, Local 347, 417 U.S. 1, 10 (1974);
FPC v. Idaho Power Co., 344 U.S. 17, 20 (1952);  Addison v. Holly Hill
Fruit Products, Inc., 322 U.S. 607, 619-622 (1944);  see also Motor
Vehicle Mfrs. Ass'n of the United States v. State Farm Mutual Auto.
Ins. Co., 463 U.S. 29, 57 & n.21 (1983).

   Respondents' contention is not only contrary to well-established
tenets of administrative law, it is also unworkable.  If an order of a
reviewing court setting aside an agency rule on procedural grounds
reinstates the agency's prior rule, and precludes further attempts by
the agency to modify the prior rule other than prospectively, the
result would be that the court rather than the agency would have
determined agency policies for the period covered by the
procedurally-flawed rule.  Such a result is particularly anomalous in
that the reinstated rule is one that the agency has already found to
be unsatisfactory and which, indeed, may even be contrary to
intervening statutory provisions.  Moreover, this result would force
agencies to seek review of many more lower court decisions
invalidating regulations because of procedural defects in order to
protect their regulatory authority.  There is no warrant for this kind
of judicial intrusion into agency policymaking prerogatives.  An
agency should be permitted to exercise its discretion following a
remand to determine in the first instance the suitable course of
action.  Cf. Vermont Yankee Nuclear Power Corp. v. NRDC, Inc., 435
U.S. 519 (1978) (holding that a court may not impose procedural
requirements on an agency on remand beyond those required by statute).

   Accordingly, the district court's 1983 order invalidating the
Secretary's 1981 rule did not finally decide the question of the
appropriate standard to be applied in calculating the wage cost
reimbursement owed to respondents under the Medicare program.  The
court's order simply rejected -- on procedural grounds -- one answer
to that question.  The Secretary therefore retained his authority "to
deal with the problem afresh, performing the function delegated to
(him) by Congress" (SEC v. Chenery Corp., 332 U.S. at 200-201).  /8/
He was not required to appeal the 1983 district court order to
preserve his authority to promulgate the same rule after correcting
the procedural error.

   Nor is there any merit to respondents' claim (Br. in Opp. 8), that
this deprives them of the "fruits of their victory." Respondents did
not challenge the substance of the 1981 rule (see Pet. App. 51a),
which was set aside solely because of procedural deficiencies.
Consequently, the only "fruit" to which respondents are entitled is
notice and an opportunity to comment as provided by 5 U.S.C. 553 --
which they in fact received on remand.  Respondents cannot convert an
exclusively procedural victory into a substantive victory on the
merits that entitles them, in contravention of Congress's mandate, to
reimbursement for costs inefficiently incurred.

   2. In addition, contrary to respondents' claim (Br. in Opp. 7), the
Secretary's 1984 rule does not make "a mockery of" administrative
procedure by reenacting without substantive change the Secretary's
1981 rule.  There is nothing inherently suspect or improper about such
a procedure.  Quite the opposite is true;  courts have long upheld
similar exercises in "curative" lawmaking because they do not raise
any of the problems of inadequate notice generally associated with
retroactive rules.

   As this Court observed in Graham & Foster v. Goodcell, 282 U.S.
409, 429 (1931), which concerned the analogous question of the
validity of curative legislation, a distinction must be drawn "between
a bare attempt of the legislature retroactively to create liabilities
for transactions * * * fully consummated in the past * * * and the
case of a curative statute aptly designed to remedy mistakes and
defects in the administration of government where the remedy can be
applied without injustice." Curative acts "impair() no substantial
right or equity" and are "free of the elements of novelty and surprise
which have led to condemnation, as unreasonable and arbitrary, of
other retroactive legislation." Swayne & Hoyt, Ltd. v. United States,
300 U.S. 297, 302 (1937);  see Forbes Pioneer Boat Line v. Board of
Comm'rs, 258 U.S. 338 (1922);  United States v. Heinszen & Co., 206
U.S. 370 (1907);  see also Van Emmerik v. Janklow, 454 U.S. 1131
(1982) (White & Blackmun, JJ., dissenting from dismissal of appeal).
"It is when things go wrong that the retroactive statute often becomes
indispensable as a curative measure;  though the proper movement of
law is forward in time, we sometimes have to stop and turn about to
pick up the pieces." L. Fuller, The Morality of Law 53 (rev. ed.
1969).  /9/

   For similar reasons, "(t)he retroactive curing, without change of
content, of a defective regulation seems the least objectionable
application of administrative retroactivity." Note, Retroactive
Operation of Administrative Regulations, 60 Harv. L. Rev. 627, 628
(1947);  cf. Holly Hill Fruit Products, Inc., 322 U.S. at 621.  The
circumstances of this case well illustrate why curative retroactive
rules do not raise the same concerns about prejudice and unfair
surprise associated with other forms of retroactive rules.  The wage
indices at issue here were initially promulgated as an entirely
prospective regulation issued in 1981.  When that regulation was
invalidated by the district court on procedural grounds in 1983, the
Secretary decided not to appeal that determination;  instead -- after
subjecting the regulation to prior notice and comment -- she reissued
the 1981 regulation in 1984.  Because the 1984 regulation adopted the
identical substantive standard as had been adopted in 1981, all
hospitals affected by the 1984 rule -- including respondents -- were
plainly on notice before they incurred the costs subject to the 1984
rule that the reasonableness of those costs would be measured against
the standards contained in that rule.  No serious hardship therefore
results from the 1984 retroactive rule.  To the contrary, because more
hospitals are benefited by the rule than are burdened, a hardship
would result absent retroactivity.  See 49 Fed. Reg. 6177 (1984).

   3. Finally, there is no merit to the court of appeals' assertion
that "agencies would be free to violate the rulemaking requirements of
the APA with impunity if, upon invalidation of a rule (based on a
procedural defect), they were free to 'reissue' that rule on a
retroactive basis" (Pet. App. 14a).  A decision by a reviewing court
invalidating a rule for failure to conform to the procedural
requirements of the APA means, at the very least, that the agency must
follow those procedures before it repromulgates its rules.  By
affording the required procedures on remand the agency has not
violated the law "with impunity" -- it has corrected the legal error.

   Moreover when an agency is required to conduct new rulemaking
proceedings that are free from procedural defects, it must consider
any information obtained during those proceedings, and respond to
significant comments made.  See State Farm Mutual Auto. Ins. Co., 463
U.S. at 43.  The agency may be persuaded by such comments to adopt a
different rule.  Or, it may decide, based on the new administrative
record generated by those proceedings, to adopt the same substantive
rule.  In either event, its decision will be subject to further review
under the arbitrary and capricious standard of the APA.  See 5 U.S.C.
706(2)(A).  Moreover, where the agency decides, as the Secretary did
here, to apply the new rule retroactively, it must defend its decision
to do so under that same standard of review.  As discussed (pages
36-40, infra), the Secretary's decision to adopt a retroactive rule in
1984 was not arbitrary and capricious.

   B. The Administrative Procedure Act Does not Bar Retroactive
Regulations

   Congress passed the APA in 1946, over 40 years ago.  Until the
court of appeals' decision in this case, however, no court appears to
have construed the APA to impose what amounts to a complete ban on
retroactive rules, including the promulgation of curative regulations,
such as those challenged in this case.  /10/ Courts /11/ and
commentators /12/ alike have instead generally expressed the view --
which is consistent with principles of administrative law pre-dating
the APA /13/ -- that agencies may promulgate retroactive rules so long
as their retroactive effect is reasonable and not otherwise barred by
law.  Cf. Heckler v. Community Health Services, 467 U.S. 51, 60 n.12
(1984) ("an administrative agency may not apply a new rule
retroactively when to do so would unduly intrude upon reasonable
reliance interests").  Nothing in the language, structure, or
legislative history of the APA supports the contrary view urged by
respondents and embraced by the court of appeals.

   1. The APA defines "rule" as "an agency statement of general or
particular applicability and future effect" (5 U.S.C. 551(4)).
Contrary to the court of appeals' ruling, however, the inclusion of
the words "future effect" in this definition does not bar retroactive
rulemaking.  The "future effect" of a rule, in the context of Section
551(4), refers simply to when a rule applies, not to what
transactions, whether past or present, it applies.  A rule does not
govern anything until it is legally "effective." Hence, a rule may, as
in this case, be effective in the future, yet, once effective, concern
transactions that were completed prior to its effective date.  See 49
Fed. Reg. 46495 (J.A. 29).  /14/

   The reference to "future effect" therefore serves simply to
distinguish rulemaking from adjudication, not to prohibit retroactive
regulations as a matter of law.  In this respect, the APA adheres to
the traditional view, which is that a legislative "rule" is a
statement of law or policy that is not applied or enforced in the same
proceeding in which it is announced;  any application or enforcement
occurs only in the future, i.e., in an adjudication.  Cf. J.
Dickinson, Administrative Justice and the Supremacy of Law 21 (1927)
(emphasis added) ("What distinguishes legislation from adjudication is
that the former * * * must be applied in a further proceeding before
the legal position of any particular individual will be definitely
touched by it * * *.");  id. at 15 n.25 (emphasis added)
(administrative regulations "lay down general rules and leave them to
be applied in a later proceeding to the facts of particular cases");
see also Davis, supra, 57 Yale L.J. at 921.

   The structure of the APA supports this view.  Section 553(d) shows
that Congress was aware of the distinction between when a rule is
effective and whether a rule, once effective, applies to past or
present transactions.  It also shows that Congress spoke only to the
first issue in the APA.  Section 553(d) provides that "(t)he required
publication or service of a substantive rule shall be made not less
than 30 days before its effective date" except in certain specified
circumstances.  /15/ Congress's intention in Section 553(d) to ensure
a future "effective date" for agency rules is consistent with its
defining a rule in terms of its "future effect" in Section 551(4).
Neither statutory provision touches on the question whether a rule,
once effective, may govern past transactions or events.  /16/

   2. The legislative history also refutes respondents' proposed
construction of the APA.  It shows that Congress considered and
rejected proposals to ban retroactive regulations, possibly out of
concern that such a ban would be overly broad and would call into
question the propriety of the very type of curative rulemaking engaged
in by HHS in this case.  In addition, the legislative history of
Congress's adoption of the "future effect" language in the definition
of a rule makes clear that Congress did not equate that language with
the absence of retroactivity.

   a. The enactment of the APA in 1946 was the culmination of over
eight years of careful study and debate involving the Congress,
Executive Branch, and private bar.  See generally Wong Yang Sung v.
McGrath, 339 U.S. 33, 36-41 (1950);  H.R. Rep. 1980, 79th Cong. 2d
Sess. 6-15 (1946), reprinted in Senate Comm. on the Judiciary, 79th
Cong., 2d Sess., Administrative Procedure Act -- Legislative History
233, 241-250 (1946) (hereinafter APA Leg. Hist.);  Attorney General's
Manual on the Administrative Procedure Act 5-7 (1947) (hereinafter
Attorney General's Manual).  The Senate and House held lengthy
hearings on proposed legislation.  /17/ A Committee appointed by the
Attorney General undertook an in-depth study of federal administrative
law, which resulted in the publication of a final Committee Report
along with 27 monographs on the practices of various administrative
agencies.  /18/ And the American Bar Association (ABA) and the
National Conference of Commissioners on Uniform State Laws each
debated and developed their own proposed model federal administrative
procedure acts.  /19/

   In the course of these exhaustive deliberations, Congress did not
overlook the issue of retroactive rules.  Indeed, several congressmen
and the ABA proposed that retroactive rules should be expressly barred
except in limited circumstances.  Significantly, the wording of their
proposals confirms that those in Congress who wished to prohibit
retroactive rules understood the difference between retroactivity and
legal effectiveness, and accordingly took care specifically to
proscribe the former and to require that the latter did not occur
until after publication of the rule.  Their bills typically provided
that "(n)o rule or order shall be retroactive or effective prior to
its publication or service unless such effect is both expressly
authorized by law and required for good cause." H.R. 5237, 78th Cong.,
2d Sess. Section 5(e) (1944) (1946) (same);  H.R. 1117, 79th Cong.,
1st Sess. Section 5(e) (1946) (same);  S. 2030, 78th Cong., 2d Sess.
Section 5(e) (1944) (same except no "expressly");  H.R. 5081, 78th
Cong., 2d Sess. Section 5(e) (1944) (no "expressly");  see Commentary,
30 A.B.A. J. 229 (1944) (no "expressly").

   Congress, however, omitted any reference to "retroactive" rules in
the version ultimately enacted.  As described above, Section 553(d)
provides only that a legislative rule is, except in limited
circumstances, not legally "effective" until 30 days after its
publication in the Federal Register.  Congress's deliberate omission
of the reference to retroactive rules is strong, if not dispositive,
evidence that it did not intend to bar retroactive rulemaking in the
APA.  Cf. Bowen v. Galbreath, No. 86-1146 (Feb. 24, 1988), slip op. 3.

   Moreover, there is reason to believe that Congress understood that,
absent such an explicit statutory prohibition, agencies would have the
power to promulgate retroactive rules in appropriate cases.  Courts
and commentators alike then recognized that agencies had the authority
to promulgate retroactive rules (see note 13, supra).  Indeed, in
1944, during congressional consideration of the APA, this Court held
that a federal agency should engage in retroactive rulemaking.  See
Addison v. Holly Hill Fruit Products, Inc., supra.  /20/

   Finally, the legislative history suggests that Congress was advised
of the need for curative regulations of the type at issue in this case
and may have declined, for that very reason, to bar retroactive rules.
 During the final House hearings in 1945 on six pending bills, two of
which generally barred retroactive rules.  (see H.R. 339, supra;  H.R.
1117, supra), Representative Gwynne questioned Carl McFarland, former
member of the Attorney General's Committee and then-Chairman of the
ABA committee on administrative law concerning the impact of the
pending proposals on retroactive rules:

   McFarland:  Now there is another point that seems to be fairly well
agreed upon * * * and that is the rules of an agency, before finally
going into effect, should be deferred for, say 30 days * * *.

                      * * * * *

   Rep. Gwynne:  What about the retroactive effect of regulations?

   McFarland:  That is quite a subject in itself.

   Rep. Gwynne:  Do these bills provide that the individual is
protected against that?

   McFarland:  Yes;  there is provision respecting that in one or two
of the bills.  In connection with retroactivity, there are various
problems.  One is the retroactivity of curative regulations.

   1945 House Hearings 32, reprinted in APA Leg. Hist. 76, 78.

   The exchange is significant in several respects.  First, it
provides further evidence of a common understanding among those
involved in the APA's enactment that future legal effectiveness is not
equivalent to a prohibition on retroactive rules.  While McFarland
stated that there was general concensus regarding the propriety of the
former, the retroactivity issue was, by contrast, "quite a subject in
itself." Second, the discussion confirms that only those two bills
that expressly barred retroactive rules, neither of which were
ultimately enacted, actually limited retroactive rules.  Finally, the
discussion provides at least some evidence that members of Congress
had been advised that the need for "curative regulations" presented a
"problem()" for any ban on retroactive rules.  This suggests the
possibility that Congress ultimately rejected a ban at least partly
for that very reason.  /21/

   b. The legislative history of Congress's inclusion of the phrase
"future effect" in the APA's definition of "rule" is likewise
consistent with our reading of the law.  It shows that the language
was added merely for purposes of clarification and not for the purpose
of making any substantive change in the law.  Congress, in effect,
intended to codify, not depart from, the traditional meaning of an
agency "rule." /22/ A prohibition on retroactive rules, however, would
have been just such a major departure from settled law and agency
practice.

   The phrase "future effect" first appeared in the language of the
bill reported by the House Judiciary Committee in 1946, which both
chambers subsequently passed.  None of the prior bills had referred to
"future effect" in defining "rule." Proposals for legislation had
instead invariably defined a "rule" as an agency statement of "general
application," consistent with then-recent congressional enactments and
the views of prominent commentators.  Compare, e.g., S. 674, 77th
Cong., 1st Sess. Section 102(c) (1941) ("of general application"),
reprinted in 1941 Senate Hearings Pt. 1, at 3, and H.R. 339, supra,
Section 1 ("of general applicability"), reprinted in 1945 House
Hearings 139, with Federal Register Act, ch. 417, Section 5, 49 Stat.
501 ("general applicability and legal effect") and Fuchs, Procedure in
Administrative Rule-Making, 52 Harv. L. Rev. 259, 265 (1938) ("(I)t is
useful to define rule-making as the issuance of regulations or the
making of determinations which are addressed to indicated but unnamed
and unspecified persons or situations * * *.").

   Although the definition of "rule" in pending legislative proposals
maintained its focus on "general applicability" through March 1946,
when the Senate initially passed the legislation, the Senate did make
one change in wording.  In response to the concern expressed during
House hearings and in agency comments that the requirement of "general
applicability" would improperly place certain proceedings -- such as
rate determinations by the Interstate Commerce Commission -- outside
the definition of agency "rulemaking," the Senate Judiciary Committee
amended the definition of "rulemaking" to include "any prescription
for the future of rates, wages, financial structures" (S. Rep. 752,
79th Cong., 1st Sess. 11 (1945), reprinted in APA Leg. Hist. 197;  see
Senate Comm. on the Judiciary, 79th Cong., 1st Sess. (Comm. Print
1945), excerpt reprinted in APA Leg. Hist. 14;  1945 House Hearings
77-80, reprinted in APA Leg. Hist. 123-126).

   The House Judiciary Committee accepted the language added by the
Senate (shifting it, however, to the definition of "rule") and added
more language to the same effect, including the requirement of "future
effect." In particular, the House Committee modified the definition of
"rule" to state that a rule has "general or particular applicability
and future effect." H.R. Rep. 1980, 79th Cong., 2d Sess. 2, 19-20, 49
& n.1 (1946), reprinted in APA Leg. Hist. 236, 254, 283 & n.1).  /23/
The accompanying House Report leaves no doubt that the words "future
effect" pertained to the legal effectiveness of a rule and application
in a further proceeding and did not proscribe the imposition of
retroactive regulations when otherwise in accordance with law.  The
Report explains that "(t)he phrase 'future effect' does not preclude
agencies from considering, and so far as legally authorized, dealing
with past transactions in prescribing rules for the future" (H.R. Rep.
1980, supra, at 49 n.1, reprinted in APA Leg. Hist. 283 n.1).
According to the Report, therefore, a rule may, as in this case, be
effective in the "future," yet, once effective, "deal() with past
transactions."

   Senate consideration of the bill, as amended and passed by the
House, confirms that the legislators did not believe that the new
House language barred retroactive rules.  The Senate sponsor of the
legislation stressed that the Attorney General had concluded that "the
amendments which had been made by the House * * * were merely
explanatory in nature" (92 Cong. Rec. 5790 (1946) (remarks of Sen.
McCarren), reprinted in APA Leg. Hist. 422;  see H.R. Rep. 1980,
supra, at 57, reprinted in APA Leg. Hist. 291 (letter from Attorney
General Tom C. Clark)).  The sponsor also assured another Senator that
the House changes "do not materially affect the intent of the act" (92
Cong. Rec. 5791, reprinted in APA Leg. Hist. 423).  With that
assurance, debate on the changes by the House immediately ended and
the bill was passed (ibid.).

   c. In light of these explicit statements of legislative intent, the
court of appeals plainly erred in ruling that "future effect" evinces
congressional intent to prohibit retroactive rules.  Congress
repeatedly declined to do just that in considering proposals for
legislation.  And, in commenting on the addition of the "future
effect" language, the House Report specifically disavowed any
intention of doing so.

   It is not surprising therefore that the court of appeals' decision
is contradicted by the authoritative manual on the APA published by
the Attorney General's Committee on Administrative Procedure one year
after the statute's enactment.  The Committee there concluded that
"(n)othing in the Act precludes the issuance of retroactive rules when
otherwise legal" (Attorney General's Manual 37).  /24/ The Manual's
construction of the APA is entitled to considerable deference.  See
Steadman v. SEC, 450 U.S. 91, 103 n.22 (1981);  Chrysler Corp. v.
Brown, 441 U.S. 281, 302 n.31 (1979);  Vermont Yankee Nuclear Power
Corp. v. NRDC, Inc., 435 U.S. at 546.

   C. The Secretary's Retroactive Cost Limit Rule Is not Inconsistent
with the Medicare Act

   There is likewise no merit to respondents' contention (Br. in Opp.
9-11) that the Medicare Act itself bars the Secretary from
promulgating a retroactive cost limit rule in the context of this
case.  Significantly, respondents can point to no language in the text
of the Medicare Act indicating that Congress enacted such a
prohibition.  /25/ Instead, respondents principally rely (Br. in Opp.
9) on the legislative history of Section 223(b) of the Social Security
Amendments of 1972, Pub. L. No. 92-603, 86 Stat. 1393, which amended
Section 1861(v)(1)(A) to allow the Secretary to promulgate cost limit
rules on a presumptive and class-wide basis.  /26/ In commenting on
this change, the House and Senate reports contrast the Secretary's new
authority to issue cost limit rules with the prior medicare cost
reimbursement scheme, under which excessive costs could be disallowed
only on a case-by-case basis.  The reports state that the new
"authority to set limits on costs recognized for certain classes of
providers * * * would be exercised on a prospective, rather than
retrospective, basis so that the provider would know in advance the
limits to Government recognition of incurred costs and have the
opportunity to act to avoid having costs that are not reimbursable."
H.R. Rep. 92-231, 92d Cong., 1st Sess. 83 (1971);  S. Rep. 92-1230,
92d Cong., 2d Sess. 188 (1972).

   The validity of the Secretary's 1984 cost limit rule, however, does
not depend on the scope of the Secretary's authority to promulgate
cost limit rules in the first instance, which is the focus of the
statements upon which respondents rely.  Rather, its validity turns on
the scope of an agency's authority, following judicial invalidation of
a wholly prospective cost limit rule because of procedural
irregularities, to promulgate a new rule on remand that applies to the
same time period that would have been covered by the invalidated rule.
 Different considerations apply in the context of a judicial remand.
/27/

   First, invalidation of the agency's prior rule does not eliminate
the agency's duty to fulfill its statutory mandate, which, as in this
case, may warrant the promulgation of a retroactive rule.  For
example, where the invalidated rule is the first ever promulgated by
the agency to implement a federal program, congressional intent could
be wholly undermined if, as respondents argue, the agency were unable
to promulgate new rules that apply to the same time period.  See
Addison v. Holly Hill Fruit Products, Ind., 322 U.S. at 619-622.  The
same concerns apply, albeit to a lesser degree, in a case such as this
one where the invalidated rule is not the first promulgated following
the statute's enactment.  Cf. SEC v. Chenery Corp., supra;  Burlington
Northern Inc. v. United States, supra (invalidation of rate order does
not "revive" earlier outdated rate order).  At stake in this case is
fulfillment of Congress's determination that a provider "should not be
shielded from the economic consequences of its inefficiency,"
including excessively high labor costs.  See H.R. Rep. 92-231, supra,
at 83, 84;  see also S. Rep. 92-1230, supra, at 187, 188.  That
purpose would be wholly frustrated if procedural irregularities were
allowed to immunize providers from cost limit rules designed to root
out such inefficiencies.

   Moreover, because the substance of the 1984 cost limit rule does
not differ from the prospective rule promulgated in 1981
prospectively, the Secretary's curative rulemaking did not interfere
with the providers' ability to "know in advance the limits to
Government recognition of incurred costs";  nor did it deny the
provider "the opportunity to act to avoid having costs that are not
reimbursable." H.R. Rep. 92-231, supra, at 83;  S. Rep. No. 92-1230,
supra, at 188.  The 1981 rules put respondents on notice, before they
are incurred, of how wage costs for which they subsequently sought
reimbursement under the Medicare Act would be computed.  Hence, the
concerns expressed in the legislative history are not implicated here
and do not support invalidation of the Secretary's 1984 cost limit
rule.

   D. The Secretary's Decision to Apply His 1984 Cost Limit Rule
Retroactively Was not Arbitrary and Capricious

   Respondents may also argue that, even if neither the APA nor the
Medicare Act specifically prohibits retroactive cost limit rules, the
Secretary's 1984 cost limit rule is invalid because the Secretary's
decision to adopt a retroactive rule was itself arbitrary and
capricious.  /28/ We, of course, agree that the absence of any
prohibition on retroactive rules in either the APA or the Medicare Act
does not mean that the Secretary's decision to promulgate a
retroactive rule must be upheld in every case.  The Secretary's
exercise of his general rulemaking authority to adopt a retroactive
rule must be set aside if it is "arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law" (5 U.S.C.
706(2)(A)).  Unlike respondents, however, we do not believe that the
Secretary's 1984 decision runs afoul of that standard of review.

   The touchstone for determining whether an agency's decision to
adopt a retroactive rule is arbitrary and capricious is this Court's
decision in SEC v. Chenery Corp., 332 U.S. 194 (1947), which upheld
the retroactive application of a new principle of law in the context
of an adjudication.  The Court there stated that "such retroactivity
must be balanced against the mischief of producing a result which is
contrary to a statutory design or to legal or equitable principles.
If that mischief is greater than the ill effect of the retroactive
application of a new standard, it is not the type of retroactivity
which is condemned by law." Id. at 203.  /29/

   The Secretary's decision in 1984 to promulgate a retroactive rule
easily satisfies this test.  First, the purpose of the retroactive
regulation is to avoid a windfall by respondents at the expense of the
government:  the recovery of approximately $2 million in costs that
the Secretary has deemed to be inefficiently incurred, and which, for
that reason, should not be reimbursed by Medicare.  /30/ As we have
discussed (pages 15-18, supra), respondents have no legitimate claim
of entitlement to reimbursement based on their invalidation of the
1981 rule on procedural grounds.  The district court's ruling in 1983
entitled them to certain notice and comment procedures should the
Secretary decide to reissue the rule, but not to any specific
substantive result.  In addition, the 1984 retroactive cost limit rule
benefited more hospitals than it burdened.  See 49 Fed. Reg. 6177
(1984) (retroactive rule "avoids placing an unwarranted hardship and
burden on intermediaries and many hospitals, while it would impose
only a minimal burden on few hospitals").  The public interest
therefore weighs strongly in favor of the retroactive rule to avoid
both any undue windfall to respondents and undue burden on other
providers.

   Second, respondents can claim no reasonable reliance interest
because the 1984 retroactive rule is merely curative in character.
"(T)he individual who claims that a vested right has arisen from the
defect is seeking a windfall since, had the legislature's or
administrator's action had the effect it was intended to and could
have had, no such right would have arisen." Hochman, supra, 73 Harv.
L. Rev. at 705.  In this case, respondents incurred all the relevant
costs before the 1981 regulation was invalidated by the district
court.  Consequently, respondents had ample notice that the
reasonableness of those costs would be assessed against the standard
ultimately contained in the 1984 rule.  Certainly there is no reason
to believe that respondents would have acted differently but for the
nominal retroactivity of the 1984 rule.  /31/

   Finally, the voluntary nature of the Medicare program, coupled with
respondents' longstanding knowledge that "retroactive corrective
adjustments" of one form or another were authorized by Section
1861(v)(1)(A)(ii) of the Act, /32/ further diminishes the strength of
respondents' claims that retroactive application of the 1984 cost
limit rule is somehow unfair.  "'When providers joined the (Medicare)
program, they knew that "small repairs" in the regulatory scheme were
likely;' indeed, the statute warned that they would be reimbursed only
for 'reasonable cost' and that retroactive adjustments might be
necessary to ensure that no overpayments were made." Daughters of
Miriam Center for the Aged v. Mathews, 590 F.2d 1250, 1261 (3d Cir.
1978) (quoting Adams Nursing Home of Williamstown, Inc. v. Mathews,
548 F.2d 1077, 1081 (1st Cir. 1977)).  Indeed, because providers, such
as respondents, are equally entitled under the statutory scheme to
retroactive increases in reimbursement in appropriate circumstances,
they are especially hard pressed to complain about unfairness in
retroactive decreases.  See Fairfax Nursing Center, Inc. v. Califano,
590 F.2d 1297, 1300 (4th Cir. 1979).  /33/

   II. SECTION 1861(v)(1)(A)(ii) OF THE MEDICARE ACT SPECIFICALLY
AUTHORIZES THE SECRETARY'S PROMULGATION OF A RETROACTIVE COST LIMIT
RULE TO PREVENT EXCESSIVE REIMBURSEMENT

   Even if the 1984 retroactive cost limit rule were somehow invalid
as an exercise of the Secretary's general rulemaking authority,
Section 1861(v)(1)(A)(ii) of the Medicare Act, 42 U.S.C. (Supp. III)
1395x(v)(1)(A) (Clause (ii)), independently authorizes the Secretary
to promulgate such a rule.  /34/

   1. Clause (ii) empowers the Secretary of Health and Human Services
to issue regulations that "provide for the making of suitable
retroactive corrective adjustments where * * * the aggregate
reimbursement produced by the methods of determining costs proves to
be either inadequate or excessive." There is considerable disagreement
among the lower courts regarding the scope of the Secretary's
authority under this provision.  /35/ As the court of appeals itself
acknowledged (Pet. App. 16a (footnote omitted)), the courts "have
struggled to define the precise contours of the retroactive correct
adjustments provision."

   In the Secretary's view, Clause (ii) authorizes the Secretary to
issue a retroactive regulation of general application where, as in
this case, the application of a prior cost reimbursement regulation
has resulted in systemically excessive or inadequate reimbursement.
The validity of the Secretary's construction depends, of course, on
its reasonableness.  See, e.g., Young v. Community Nutrition Inst. 476
U.S. at 980-981;  Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. at
842-844;  Chemical Mfrs. Ass'n v. NRDC, Inc., 470 U.S. 116, 125
(1985).  Where "Congress has not directly addressed the precise
question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the absence of
an administrative interpretation." Chevron U.S.A. Inc. v. NRDC, Inc.,
467 U.S. at 842.  Rather, the only question is whether the Secretary's
understanding of the statute is "sufficiently rational to preclude a
court from substituting its judgment for that of the (Secretary)."
Young v. Community Nutrition Inst., 476 U.S. at 981;  see Chemical
Mfrs. Ass'n v. NRDC, Inc., 470 U.S. at 125.  Indeed, even if the
"Court of Appeals' reading of the statute may seem to some to be the
more natural interpretation," the Secretary's view must be upheld so
long as the "phrasing * * * admits" of that reading.  See Young v.
Community Nutrition Inst., 476 U.S. at 980.

   2. The Secretary's suggested interpretation of Clause (ii) is a
reasonable reading of the provision;  the language "admits of" the
Secretary's construction, that construction is not contradicted by the
provision's legislative history, and it represents a sensible attempt
to accommodate Congress's purposes and considerations of
administrative feasibility.

   a. First, contrary to the court of appeals' assertion (Pet. App.
16a-17a), the language does not "plainly" refute the Secretary's view.
 Clause (ii) does not, as respondents suggest (Br. in Opp. 13
(emphasis omitted)), provide that the Secretary may issue regulations
only for the purpose of establishing a "process" for making
"case-by-case" adjustments for "particular providers." The words
"process," "case-by-case," and "particular providers" do not appear
anywhere in Clause (ii).  To the contrary, the statute broadly
authorizes the Secretary to issue "regulations" that "provide for the
making of suitable retroactive corrective adjustments," without
limiting the Secretary's methodology for doing so.  As applied to this
case, the prior (1979) cost limit rule constitutes a "method() of
determining costs" that the Secretary has determined was leading to
"excessive" reimbursement.  The 1984 cost limit rule is, accordingly,
a regulation for the purpose of "making * * * suitable retroactive
corrective adjustments." /36/

   To be sure, the language of Clause (ii) is clearly broad enough to
permit the Secretary to decide that retroactive corrective adjustments
would best be achieved in certain circumstances through case-by-case
adjudications directed to particular providers.  /37/ But, contrary to
respondents' claim, the language of Clause (ii) does not adopt
case-by-case adjudication as the exclusive procedure available to the
Secretary in all circumstances.  It focuses solely on the "method"
that prompted the erroneous reimbursement -- which in this case was a
cost limit rule -- and authorizes the Secretary to promulgate
"regulations" to redress that error.  /38/ "(M)ethods" of
reimbursement differ and those differences may properly influence the
Secretary's determination of the most suitable manner of making a
retroactive corrective adjustment.

   Indeed, the sentence in which Clause (ii) appears begins with the
phrase "(s)uch regulations." That reference logically includes those
"regulations" that the Secretary is authorized to promulgate "for the
establishment of limits on * * * incurred costs" (42 U.S.C. (& Supp.
III) 1395x(v)(1)(A)).  Thus, the literal language of the statute
provides that cost limit regulations shall provide for "suitable
retroactive corrective adjustments." The fact that Clause (ii) was
enacted in 1965, before the cost limit rules were authorized (see page
34, supra), does not undermine this point.  The Secretary may
reasonably construe the meaning of Clause (ii) in accordance with the
settled principle of statutory construction that "the provisions
introduced by the amendatory act should be read together with the
provisions of the original section that were reenacted or left
unchanged, in the amendatory act, as if they had been originally
enacted as one section." See 1a N. Singer, Statutes and Statutory
Construction Section 22.34, at 293 (4th ed. 1985) (footnotes omitted);
 see also id. Section 22.35, at 296.

   b. Nor does the legislative history "plainly" or "unambiguously"
support the court of appeals' and respondents' narrow reading of
Clause (ii), and thus require rejection of the Secretary's own
construction.  Indeed, respondents and the court of appeals do not
cite to any legislative history that discusses the meaning of Clause
(ii).  They rely instead exclusively on legislative history pertaining
to the meaning of Section 223(b) of the Social Security Amendments of
1972, which amended Section 1861(v)(1)(A) to authorize the Secretary
to establish cost limit rules for the Medicare program.  As previously
discussed (page 35, supra), the Senate and House reports accompanying
that amendment suggest that cost limit rules would generally operate
prospectively.  That legislative history, however, sheds little, if
any, light on the meaning of Clause (ii).  The amendment was adopted
seven years after Clause (ii) was enacted;  it left the language of
Clause (ii) intact;  /39/ and its legislative history never even
mentions Clause (ii), let alone discusses the relationship of Clause
(ii) to the Secretary's authority to promulgate cost limit rules.
/40/

   Most fundamentally, the legislative history nowhere states that
Clause (ii)'s reference to "such regulations" should not apply equally
to the cost limit rules and, hence, allow for their retroactive
correction.  In the absence of such legislative history, it is
reasonable for the Secretary to conclude, consistently with the
statutory language, that Congress determined that retroactive
correction of cost limit rules, like other "methods of determining
costs," was appropriate where the "aggregate reimbursement produced *
* * proves to be either inadequate or excessive."

   c. Finally, the Secretary's construction of Clause (ii) should be
upheld because here, as in Young v. Community Nutrition Inst., 476
U.S. at 982, it is "sensible." Congress in 1972 amended the Medicare
Act to redefine "reasonable costs" to exclude costs inefficiently
incurred and, to that end, to authorize the Secretary to promulgate
class-wide cost limit rules (see pages 4, 34 & note 26, supra).
Congress described the new limits as "ceilings," the purpose of which
was "to prevent Government programs from picking up" unreasonable
costs.  Moreover, the reimbursement program could be implemented "on a
class and presumptive basis." H.R. Rep. 92-231, supra, at 84;  see
also S. Rep. 92-1230, supra, at 188, 189.

   A scheme for "retroactive corrective adjustments" through rules of
general application is a sensible, indeed necessary, complement to
these changes, particularly Congress's authorization of class-wide
cost limit rules.  Errors in such rules are often best redressed by
changes in the rules themselves, and only retroactive application of
those changes will achieve an "adjustment" in the prior erroneous
reimbursement award.

   In contrast, the construction of Clause (ii) proffered by
respondents and the court of appeals would frustrate Congress's
overriding purpose of ensuring that hospitals are reimbursed only for
their costs that are necessary "in the efficient delivery of needed
health services" (42 U.S.C. (Supp. III) 1395x(v)(1)(A)).  Respondents
do not deny that the Secretary can make "retroactive corrective
adjustments" where a provider's reimbursement levels were initially
established by cost limit rules.  Nevertheless, respondents apparently
would require the Secretary to make such adjustments by undertaking a
separate adjudication for each individual provider in which it would
be necessary to prove both the flaws in the old reimbursement
methodology and the propriety of the new standard.  As the Fifth
Circuit has observed, however, "regulation (of Medicare reimbursement)
cannot be accomplished on a hospital-by-hospital basis." City of
Austin, Brackenridge Hosp. v. Heckler, 753 F.2d 1307, 1317 (5th Cir.
1985).  A retroactive rule is the only workable method of achieving
"retroactive corrective adjustments" where, as in this case, the
Secretary has determined that a flaw in a prior cost limit rule is
systematically leading to "excessive reimbursement" in a broad class
of cases.  /41/

   Unlike respondents, we cannot suppose that Congress, when it
amended the Medicare Act in 1972 in an effort to prevent the
government from paying for the inefficiencies of others, intended to
require such a wasteful and duplicative administrative practice.  In
any event, the Secretary's conclusion that Congress harbored no such
intent is "sufficiently rational" to be upheld.  See Young v.
Community Nutrition Inst., supra.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   DONALD B. AYER

      Acting Solicitor General /42/

   JOHN R. BOLTON

      Assistant Attorney General

   THOMAS W. MERRILL

      Deputy Solicitor General

   JAMES M. SPEARS

      Deputy Assistant Attorney General

   RICHARD J. LAZARUS

      Assistant to the Solicitor General

   JOHN F. CORDES

   MARK W. PENNAK

      Attorneys

   RONALD E. ROBERTSON

      General Counsel

   TERRY COLEMAN

      Principal Deputy Counsel

   HENRY R. GOLDBERG

   GERARD KEATING

      Attorneys Department of Health and Human Services

   APRIL 1988

   /1/ Most hospitals are no longer reimbursed for inpatient services
to Medicare beneficiaries solely on the basis of the "reasonable cost"
incurred in providing services to Medicare patients.  In Title VI of
the Social Security Amendments of 1983, Pub. L. No. 98-21, Sections
601-607, 97 Stat. 149-172, Congress adopted a new method of
reimbursement known as the prospective payment system (PPS).  Under
PPS (which has been implemented over a four-year transition period
beginning on October 1, 1983), hospitals are paid predetermined rates
for specific services, which rates are not tied to specific costs
incurred by the hospital in providing those services.  See 42 U.S.C.
(Supp. III) 1395ww(d), as amended by the Consolidated Omnibus Budget
Reconciliation Act of 1985, Pub. L. No. 99-272, Section 9102, 100
Stat. 155.  Many Medicare providers are not covered by the prospective
payment system, however, and continue to obtain reimbursement for
their "reasonable" costs.  See 42 C.F.R. 412.20-412.32 (rehabilitation
hospitals, psychiatric hospitals, children's hospitals, and hospitals
with average length of stay greater than 25 days are not covered by
PPS);  42 C.F.R. 413.1 (reasonable cost payment system applies to
skilled nursing facilities, home health agencies, and other facilities
providing services other than in-hospital care).  Moreover, all
providers are reimbursed for some categories of costs on a reasonable
cost basis.  See, e.g., 42 U.S.C. (& Supp. III) 1395ww(a)(4)
(anesthesia services provided by nurse);  42 C.F.R. 412.2(d) (capital
costs, direct medical education costs, costs for direct medical and
surgical services provided by certain physicians in teaching
hospitals).

   /2/ The Secretary subsequently revised the cost limits for this
period (see 44 Fed. Reg. 46949 (1979)).

   /3/ The Secretary did not argue that the annual cost limit schedule
is not subject to APA notice and comment requirements and,
accordingly, the district court did not address that issue.  See Pet.
App. 52a n.4.  As a matter of internal policy, the Secretary has
decided to adhere to APA notice and comment rulemaking procedures in
promulgating provider reimbursement regulations under the Medicare
Act, notwithstanding the exemption from those requirements under the
APA for public property, loans, grants, benefits or contracts.  See 5
U.S.C. 553(a)(2);  36 Fed. Reg. 2532 (1971);  Humana of South
Carolina, Inc. v. Califano, 590 F.2d 1070, 1082-1084 (D.C. Cir. 1978).

   /4/ Under 42 U.S.C. (& Supp. III) 1395oo(f)(1), a Medicare provider
who is dissatisfied with the amount of reimbursement it has obtained
may not seek judicial review until it has submitted its claim for
additional compensation to the Provider Reimbursement Review Board.
See Bethesda Hosp. Ass'n v. Bowen, No. 86-1764 (Apr. 4, 1988), slip
op. 7-8.

   /5/ Reimbursement of routine inpatient costs for those later cost
periods is governed by different rules.  See 49 Fed. Reg. 6175 (1984).

   /6/ In its order denying the petition for rehearing, the court of
appeals stated that "(a)s a general rule, the APA requires that
legislative rules be given future effect only.  Whatever exceptions
might exist to this general rule were not implicated in the case
before us.  Our opinion therefore does not purport to address
circumstances in which there may be an exception to the rule against
retroactive rulemaking." Pet. App. 45a.

   /7/ Respondents' argument is identical to the argument that this
Court rejected in Chenery.  Previously, in SEC v. Chenery Corp., 318
U.S. 80 (1943), the Court set aside as inadequately justified an order
of the Securities and Exchange Commission and had directed that the
case be remanded to the Commission for further proceedings.  Upon
reexamining the problem, the Commission reached the same result.  In
rejecting respondents' claim that the Court's initial decision
precluded the Commission's decision, the Court stated that its prior
decision held "no more and no less than that the Commission's first
order was unsupportable for the reasons supplied by that agency" (332
U.S. at 200).  The Court explained that "(t)he fact that the
Commission had committed a legal error in its first disposition of the
case certainly gave (the respondents) no vested right" and on remand
"therefore, the Commission was bound to deal with the problem afresh,
performing the function delegated to it by Congress" (id. at 200-201).

   /8/ The district court refused to issue an order barring the
Secretary from applying the 1981 rule to respondents' reimbursement
claims, holding that the provisions of the Medicare statute requiring
exhaustion of administrative remedies deprived the court of authority
to issue such an order.  The court expressly stated that respondents'
claims were left to be adjudicated in the administrative process.  See
Pet. App. 62a-64a.

   /9/ See generally, Hochman, The Supreme Court and the
Constitutionality of Retroactive Legislation, 73 Harv. L. Rev. 692,
705-706 (1960) (quoting Danforth v. Groton Water Co., 178 Mass. 472,
477, 59 N.E. 1033, 1034 (1901)) ("The Court's favorable treatment of
curative statues is probably explained by the strong public interest
in the smooth functioning of government.  It is necessary that the
legislature should be able to cure inadvertent defects in statutes or
their administration by making what has been aptly called 'small
repairs.' Moreover, the individual who claims that a vested right has
arisen from the defect is seeking a windfall since, had the
legislature's or administrator's action had the effect it was intended
to and could have had, no such right would have arisen.");  Slawson,
Constitutional and Legislative Considerations in Retroactive
Lawmaking, 48 Cal. L. Rev. 216, 239 (1960);  Munzer, A Theory of
Retroactive Legislation, 61 Tex. L. Rev. 425, 470 (1982);  W.
Gellhorn, Administrative Law 300-301 (1940).

   /10/ The court of appeals initially stated that all retroactive
rules were prohibited by the APA (Pet. App. 13a).  In its order
denying the petition for rehearing, the court indicated that there
might be some exceptions to this "general rule," but declined to state
what those exceptions might be (id. at 45a).  That vague order does
nothing to eliminate the fundamental error in the court's legal
analysis -- the conclusion that the APA's definition of a "rule"
imposes an independent limitation upon retroactive rulemaking.

   /11/ See, e.g., Texaco, Inc. v. Department of Energy, 795 F.2d
1021, 1025-1027 (Temp. Emer. Ct. App.), cert. dismissed, 478 U.S. 1030
(1986);  Daughters of Miriam Center for the Aged v. Mathews, 590 F.2d
1250, 1259-1260 (3d Cir. 1978) (interpretative rule);  National Helium
Corp. v. FEA, 569 F.2d 1137, 1145 n.18 (Temp. Emer. Ct. App. 1977);
see also National Ass'n of Indep. Television Producers & Distributors
v. FCC, 502 F.2d 249, 255 nn.10 & 11 (2d Cir. 1974);  General
Telephone Co. v. United States, 449 F.2d 846, 863 (5th Cir. 1971);
cf. Illinois v. Bowen, 786 F.2d 288, 292-293 (7th Cir. 1986)
(retroactive application of a new interpretation of an administrative
regulation).  Even prior decisions of the District of Columbia Circuit
were to the same effect.  See Citizens To Save Spencer County v. EPA,
600 F.2d 844, 879-881 (1979);  see also Maxcell Telecom Plus, Inc. v.
FCC, 815 F.2d 1551, 1554-1556 (1987).

   /12/ See, e.g., 2 K. Davis, Administrative Law Section 7.23, at 109
(2d ed. 1979) ("(R)etroactive rules are valid if they are reasonable
but are invalid if their retroactivity is unreasonable in the
circumstances.");  Davis, Administrative Rules -- Interpretative,
Legislative, and Retroactive, 57 Yale L.J. 919, 921 (1948);  F.
Cooper, Administrative Agencies and the Courts 285 (1951) ("If it is a
legislative regulations, it is normally competent for the agency to
amend its regulation, just as it is proper for a legislature to amend
a statute;  and there is normally nothing to prevent the amended
regulation being applied in situations where it has retroactive
effects.").

   /13/ See, e.g., Addison v. Holly Hill Fruit Products, Inc., supra;
Porter v. Senderowitz, 158 F.2d 435 (3d Cir. 1946) (retroactive price
order), cert. denied, 330 U.S. 848 (1947);  1 F. Vom Baur, Federal
Administrative Law Section 493, at 491 (1942) (footnote omitted) ("In
general, an administrative regulation may not be applied
retroactively.  However, where an original regulation is invalid
because not consistent with the statute or unreasonable, a valid
amended regulation becomes the primary and controlling rule in respect
of the situation presented, even as to past transactions.");  Lee,
Legislative and Interpretative Regulations, 29 Geo. L.J. 1, 29 (1940)
(footnote omitted) ("The administrative officer or agency should be
able to amend its prior legislative regulation just as Congress may
amend its prior legislation.  As a matter of law it should even be
possible to do this with retroactive effect subject to the limits of
the Fifth Amendment due process clause on retroactive legislation and
to the limitations, if any, expressed or implied in the particular
statutory grant of the power to prescribe legislative regulations.");
see also Miller v. United States, 294 U.S. 435, 439 (1935);  Twin City
Milk Producers Ass'n v. McNutt, 123 F.2d 396, 398 (8th Cir. 1941) (see
Twin City Milk Producers Ass'n v. McNutt, 122 F.2d 564 (8th Cir.
1941)).

   This Court's decision in Arizona Grocery Co. v. Atchison, T. & S.F.
Ry., 284 U.S. 370 (1932) is not to the contrary.  The Court ruled in
that case that the Interstate Commerce Commission, having prescribed a
maximum reasonable rate, "may not at a later time, and upon the same
or additional evidence as to the fact situation existing when its
previous order was promulgated, by declaring its own finding as to
reasonableness erroneous, subject a carrier which conformed thereto to
the payment of reparation measured by what the Commission now holds it
should have decided in the earlier proceeding to be a reasonable rate"
(id. at 390).  The Court's ruling, however, did not depend on the
general principle that rules can operate only prospectively.  Rather,
the Court indicated that under the facts of that case, the Commission,
like "the legislature itself," could not "substitute a new rule of
conduct" to govern the past transaction (id. at 389).  Hence, the
Court's ruling appears to rest on constitutional considerations.

   Whether or not the Court's intimation in Arizona Grocery that
Congress would have been without constitutional authority to enact a
retroactive order accurately reflected constitutional doctrine at that
time, this Court's jurisprudence has since clearly evolved.  See,
e.g., Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976).  But in
any event, the type of concerns raised in Arizona Grocery, where the
federal agency dramatically changed the substance of a prior,
specifically-drawn rule and applied its new rule retroactively, is
plainly not implicated here, where the Secretary merely promulgated a
curative rule that did not differ substantively from his earlier
(1981) rule.

   /14/ See Shapiro, The Choice of Rulemaking or Adjudication in the
Development of Administrative Policy, 78 Harv. L. Rev. 921, 953 (1965)
(footnotes omitted) ("Section 2(c) of the (APA) defines a 'rule' as
any agency statement of 'future effect,' but this provision has never
specifically been held to preclude a regulation from having a
retrospective effect or from upsetting reliance interests based on
prior policy.  Nor is the provision of section 4(c), stating that
certain regulations cannot take effect in less than thirty days after
publication, controlling.  * * * (T)he effective date of a regulation
does not necessarily govern its impact.").

   /15/ The requirement of a 30-day delay in effectiveness does not
apply to:  "(1) a substantive rule which grants or recognizes an
exemption or relieves a restriction;  (2) interpretative rules and
statements of policy;  or (3) as otherwise provided by the agency for
good cause found and published with the rule" (5 U.S.C. 553(d)).

   /16/ The statutory context of the "future effect" language upon
which respondents rely likewise renders their interpretation of the
APA implausible.  The relevant provision, Section 551(4), is part of
an introductory provision defining the Act's terms, including the
meaning of "rule." For that reason, Section 551(4) cannot fairly be
characterized as prohibiting rules without "future effect";  at most,
the provision would, under respondents' reading, express congressional
intent that a statement of agency policy or law lacking in future
effect is not a "rule," within the meaning of the APA.  In no event
therefore does Section 551(4) support the court of appeals' much
broader ruling that the APA bars regulations that operate
retroactively.

   /17/ See Administrative Law:  Hearings Before Subcomm. No. 4 of the
House Comm. on the Judiciary, 76th Cong., 1st Sess. (1939);
Administrative Procedure:  Hearings Before A Subcomm. of the Senate
Comm. on the Judiciary, 77th Cong., 1st Sess. Pts. 1-4 (1941);
Administrative Procedure:  Hearings Before the House Comm. on the
Judiciary, 79th Cong., 1st Sess. (1945) (hereinafter 1945 House
Hearings).

   /18/ See Administrative Procedure in Government Agencies, S. Doc.
186, 76th Cong., 3d Sess. Pts. 1-13 (1940) (monograph of the Attorney
General's Committee on Administrative Procedure);  Administrative
Procedure in Government Agencies, S. Doc. 10, 77th Cong., 1st Sess.
Pts. 1-14 (1941) (same);  Administrative Procedure in Government
Agencies, S. Doc. 8, 77th Cong., 1st Sess. (1941) (Report of the
Attorney General's Committee).

   /19/ See Commentaries, 30 A.B.A. J. 6-7, 181, 185-193, 226-229
(1944);  Handbook of the National Conference of Commissioners on
Uniform State Laws 226-231 (1943) (hereinafter 1943 Handbook);
Handbook of the National Conference of Commissioners on Uniform State
Laws 106-109, 329 (1944) (hereinafter 1944 Handbook).

   /20/ In Addison v. Holly Hill Fruit Products, Inc., the Court
invalidated a rule promulgated by the Administrator of the Department
of Labor's Wage and Hour Division, and remanded the case to the
district court with instructions to allow the Administrator to
promulgate a new rule retrospectively (see 322 U.S. at 619).  The
Court reasoned that such a disposition was most "consonant with
justice," "law," and "logic" (ibid.).  The Court never doubted that
the Administrator had authority to promulgate a retroactive rule
"within the authority given him by Congress" (id. at 619, 621), and
specifically relied on its own precedent upholding curative laws (id.
at 622).  Likewise relying on cases involving curative laws, even
those dissenting from the Court's disposition of the case in Addison
agreed that there may be occasion when "corrective needs may prompt
and vindicate a grant of such authority" (id. at 641 (Rutledge, J.,
dissenting)).

   /21/ In earlier Senate Hearings, the General Counsel of the
Railroad Retirement Board also advised Congress concerning the need
for retroactive rules in certain circumstances.  See 1941 Senate
Hearings Pt. 2, at 540 (testimony of Lester P. Schoene).

   /22/ See Davis, supra, 57 Yale L.J. at 926 ("The traditional
meaning of the word 'rule' remains, and is clarified by the specific
language of (the APA) * * *.  The overall result is that 'rule' still
has about the same meaning as it did before the Act, except that the
Act clarifies some points that were doubtful.").  See note 13, supra.

   /23/ The additional words "particular" and "future effect" seem to
have had their genesis in two different sources.  The House appears to
have adopted "particular" from the Senate Report's explanation of its
inclusion of specific language designed to bring ratemaking
proceedings within the "rulemaking" definition.  See S. Rep. 752,
supra, at 11, reprinted in APA Leg. Hist. 197 (emphasis added) ("The
specification of the activities that are involved in rule making is
included in order to comprehend them beyond any possible question.
They are defined as rules to the extent that, whether of general or
particular applicability, they formally prescribe a course of conduct
for the future rather than merely pronounce existing rights or
liabilities.").  See H.R. Rep. 1980, supra, at 49 n.1, reprinted in
APA Leg. Hist. 283 n.1 ("The change of the language to embrace
specifically rules of 'particular' as well as 'general' applicability
is necessary in order to avoid controversy and assure coverage of rule
making addressed to named persons.  The Senate committee report so
interprets the provision, and the other changes are likewise in
conformity with the Senate committee report (p.11).").  "Future
effect," however, may have originated in the Model Administrative
Procedure Act adopted in 1944 by the National Conference of
Commissioners on Uniform State Laws.  See 1944 Handbook 106-109, 329
(emphasis added) (defines rule as including "every regulation,
standard, or statement of policy or interpretation of general
application and future effect * * *").  At least one member of that
Conference Committee (Professor Ralph Fuchs) also served on the
Attorney General's Committee.  We could find no explanation for the
Conference's addition of "future effect." Compare ibid. with 1943
Handbook 226-230, 231.

   /24/ The Manual adds that the issuance of retroactive rules should
also be "accompanied by the finding required by section 4(c)"
(Attorney General's Manual 37), which is the finding of "good cause"
that an agency must make if it wishes to make a substantive rule
legally effective less than 30 days from the date of its publication.
Neither the language of the APA nor its legislative history supports
the Manual's apparent assumption that the good cause finding required
for an early effectiveness date automatically applies to the issuance
of retroactive rules.  Perhaps the Committee was anticipating that
certain retroactive rules would also be given early effective dates,
in which case a good cause finding would, of course, be required.

   /25/ The amendatory language relied upon by respondents (42 U.S.C.
(& Supp. III) 1395x(v)(1)(A)) provides that regulations "may provide
for the establishment of limits on the direct or indirect overall
incurred costs or incurred costs of specific items or services or
groups of items or services to be recognized as reasonable based on
estimates of the costs necessary in the efficient delivery of needed
health services to individuals covered by the insurance programs
established under this subchapter").  Contrary to respondents' claim
(Br. in Opp. 9), the phrase "to be recognized" provides no support for
their argument.  That reference to a future event simply reflects the
commonsense notion that reimbursement determinations, by their very
nature, occur after costs have been incurred.

   /26/ In 1972, Congress also amended the definition of "reasonable
cost" to exclude from "cost actually incurred" "any part of incurred
cost found to be unnecessary in the efficient delivery of needed
health services" (Section 223(a), 86 Stat. 1393 (42 U.S.C.
1395x(v)(1)(A)).  The Secretary's new authority to promulgate cost
limit rules was in furtherance of this legislative change in the
statutory measure of "reasonable cost."

   /27/ For this same reason, respondents' reliance on a series of
statements by the Secretary that certain cost limit rules would
operate prospectively is equally misplaced (see Br. in Opp. 10-11).
Respondents refer to no statement by the Secretary that the Medicare
Act bars the issuance of a retroactive cost limit rule following
judicial invalidation of the Secretary's prior rule on procedural
grounds.

   /28/ Respondents also suggest (Br. in Opp. 24-25) that the judgment
of the court of appeals should be affirmed based on substantive
defects in the rule.  Because neither the court of appeals nor the
district court reached that issue, however, we do not believe this
Court should address this contention in the first instance.  If the
Court agrees that the Secretary was not barred from promulgating
retroactive rules and that its decision to adopt such a rule in 1984
was not arbitrary and capricious, the Court should reverse the court
of appeals' judgment and remand the case for consideration of any
remaining issues that were raised below by respondents.

   /29/ Of course, the issuance of a retroactive rule must be
consistent with the Constitution.  The Court has concluded that "(t)he
retroactive aspects of legislation, as well as the prospective
aspects, must meet the test of due process, and the justifications for
the latter may not suffice for the former." Usery v. Turner Elkhorn
Mining Co., 428 U.S. 1, 16-17 (1976).  That due process standard
requires a "showing that the retroactive application of the
(regulation) is itself justified by a rational * * * purpose." Pension
Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 730 (1984).
Respondents, however, have not challenged the constitutionality of the
Secretary's 1984 cost limit rule.

   /30/ For the purpose of considering respondents' claim that the
Secretary's decision to apply his 1984 cost limit rule retroactively
was arbitrary and capricious, the substance of that rule -- which was
not questioned by the court of appeals or district court -- is
presumptively valid.  See note 28, supra.

   /31/ See Illinois v. Bowen, 786 F.2d 228, 292 (7th Cir. 1986) ("A
critical question is how the conduct or practices of the (plaintiff)
would have been different if the current interpretation of the
regulations had applied from the start.");  Adams Nursing Home of
Williamstown, Inc. v. Mathews, 548 F.2d 1077, 1081 (1st Cir. 1977)
("In any retroactivity challenge, a central question is how the
challenger's conduct * * * would have differed if the law in issue had
applied from the start.").

   /32/ As discussed at pages 40-47, infra, Section 1861(v)(1)(A)(ii)
also independently authorizes retroactive application of the
Secretary's 1984 cost limit rule.

   /33/ The district court reached a contrary conclusion in applying
the balancing test set forth in Retail, Wholesale & Dep't Store Union
v. NLRB, supra (Pet. App. 35a-39a).  Its analysis is flawed by its
failure to recognize that respondents' reliance interest must be
assessed as of the time they engaged in the underlying conduct.  The
court erroneously concluded that respondents had a cognizable reliance
interest in retaining the windfall they obtained by virtue of the
Secretary's procedural error.  The court also erred in finding that
the public interest weighed against the application of the revised
methodology for calculation of the indices without first finding that
that methodology was substantively invalid.  If the methodology is
valid (which must be assumed (see notes 28, 30, supra)), it is, by
definition, the proper approach for calculating the reasonable cost.
Any award in excess of that amount violates the statute and therefore
is contrary to the public interest.

   /34/ The court of appeals wrongly suggested that the Secretary
cannot rely on Clause (ii) as authority for his 1984 rule because he
failed to cite to that specific provision or make specific findings
under it in promulgating those rules (see Pet. App. 16a).  But the
Secretary did expressly invoke Section 1861(v) -- of which
(v)(1)(A)(ii) is a subsection -- as authority for the issuance of the
1984 rule.  See 49 Fed. Reg. 6180 (1984);  id. at 46501.  Surely the
Secretary is not required to list separately every subsection upon
which he specifically relies in promulgating a rule.  In any event, as
noted by this Court in Massachusetts Trustees of Eastern Gas & Fuel
Associates v. United States, 377 U.S. 235, 247-248 (1964), an agency's
failure to invoke the correct statutory authority does not require
invalidation of the agency's action where "a mistake of the
administrative body is one that clearly had no bearing on the
procedure used or the substance of the decision reached." See also
NLRB v. Wyman-Gordon Co., 394 U.S. 759, 767 n.6 (1969);  Illinois v.
ICC, 722 F.2d 1341, 1348-1349 (7th Cir. 1983);  cf. Baylor University
Medical Center v. Heckler, 758 F.2d 1052, 1060 n.14 (5th Cir. 1985).
That principle plainly applies here.

   /35/ Some courts of appeals have concluded that "(u)pon determining
that one of his cost reimbursement regulations produces inadequate or
excessive reimbursement payments to providers, the Secretary has a
statutory duty (under Clause (ii)) to make suitable retroactive
corrective adjustments" through the issuance of regulations.
Springdale Convalescent Center v. Mathews, 545 F.2d 943, 954 (5th Cir.
1977).  These courts have held that the Secretary may -- and in some
circumstances must -- apply revised cost reimbursement regulations
retroactively where the prior rule resulted in an improper level of
reimbursement.  Ibid.; see also Pet. 13-14 (citing cases).  The court
below took a narrower view of Clause (ii), holding that the provision
does not empower the Secretary to issue retroactive rules, but only
authorizes retroactive adjustment of reimbursement awards on a
case-by-case basis upon proof that a particular reimbursement award
was either inadequate or excessive.  Pet. App. 16a-19a;  see also Pet.
14.  A third group of courts has stated that the provision does not
permit any retroactive reassessment of reimbursement decisions, but
only directs the Secretary "to promulgate regulations that mandate
retroactive adjustments in the payments received by providers, so as
to bring the amounts paid to them on the basis of their monthly
estimates in line with the amount actually due them under the annual
audit." Daughters of Miriam Center for the Aged v. Mathews, 590 F.2d
at 1258 n.23 (emphasis in original);  see Pet. 14-15.

   /36/ The reference in Clause (ii) to "a provider of services" is
not to the contrary.  It simply means that the Secretary must provide
for the making of retroactive adjustments for "a" provider, but does
not state how the Secretary must do so.  In particular, the provision
does not state that the Secretary must conduct a separate proceeding
for each individual provider.

   /37/ The Secretary's cost limit regulations do establish an
exceptions process through which an individual provider may seek a
reclassification, an exemption or exception from cost limits, or an
adjustment of inpatient operating costs.  See 42 C.F.R. 413.30(d)-(h).

   /38/ Contrary to the court of appeals' suggestion (Pet. App. 12a
n.11), moreover, our construction of Clause (ii) would not allow the
Secretary to make his regulations retroactive for an unlimited period
of time.  Clause (ii) does not override other provisions of the
Medicare Act.  Thus, when a reimbursement award is final and no longer
subject to reopening (see 42 C.F.R. 405.1885), that award cannot be
reconsidered pursuant to a rule issued under Clause (ii).  See 51 Fed.
Reg. 11188 (1986) (stating that retroactive application of medical
malpractice cost standard is limited to cost reports not yet closed
and cost reports still subject to reopening).

   /39/ Prior to the 1972 amendments, however, Clause (ii) was
contained in Section 1861(v)(1)(B).  See 42 U.S.C. (1970 ed.)
1395x(v)(1)(B).

   /40/ In addition, as we discussed previously (pages 35-36, supra),
those statements do not in any event have any bearing on the validity
of a curative rule, such as the Secretary's 1984 cost limit rule,
because it is only nominally retroactive and does not deprive the
provider of fair notice.

   /41/ Conversely, where an existing cost limit rule is
systematically leading to "inadequate reimbursement," within the
meaning of Clause (ii), a retroactive rule may likewise be
appropriate.  Compare St. Paul-Ramsey Medical Center v. Bowen, 816
F.2d 417 (8th Cir. 1987).  Clearly, however, retroactive rules are
authorized by Clause (ii) in either both "inadequate" and "excessive"
reimbursement cases, or in neither circumstance.

   /42/ The Solicitor General is disqualified in this case.