## Facts

- Congress enacted the Peer Review Improvement Act of 1982, requiring the Secretary of Health and Human Services (HHS) to contract with private peer review organizations (PROs) to monitor Medicare service quality, necessity, and efficiency.
- HHS implemented the PRO program through a mix of formal regulations and numerous non-regulatory materials, including directives, transmittals, program instructions, and PRO contract provisions.
- The American Hospital Association (AHA), representing Medicare-participating hospitals, asserted that many of these non-regulatory materials effectively governed PRO operations and influenced reimbursement outcomes.
- AHA petitioned HHS to conduct notice-and-comment rulemaking for key PRO program requirements; HHS did not grant the request.
- AHA sued, contending the non-regulatory materials were legislative rules issued without compliance with APA § 553.
- The district court granted partial summary judgment for AHA, concluding most challenged materials were substantive (legislative) rules requiring notice and comment and invalidated them to that extent.
- HHS appealed.

## Issues

1. Whether HHS’s PRO directives, transmittals, and contract provisions were legislative rules that required notice-and-comment rulemaking under APA § 553.
2. Whether the challenged materials instead qualified as procedural rules or general statements of policy exempt from APA § 553.
3. Whether practical effects on hospitals’ reimbursement and operations convert enforcement guidance and review “mechanics” into legislative rules.

## Decision

- The D.C. Circuit reversed the district court to the extent it invalidated the challenged materials for failure to undergo notice-and-comment rulemaking.
- The court held the directives and contract provisions were procedural rules or general statements of policy that did not substantially alter hospitals’ rights or interests.
- The court concluded HHS satisfied APA § 553 because the challenged materials did not change substantive Medicare reimbursement or coverage standards but addressed enforcement methods, priorities, and review procedures.
- Judge Mikva concurred in part and dissented in part, arguing some directives functioned as substantive requirements because they effectively determined payment conditions.

## Legal Principles

- A rule generally requires notice-and-comment under APA § 553 if it is a legislative rule that substantially alters the rights or interests of regulated parties.
- Agency materials that set enforcement priorities, monitoring methods, review mechanics, or internal operating procedures may be treated as procedural rules or general statements of policy exempt from notice-and-comment.
- Practical impact on regulated parties does not, by itself, establish that an agency action is legislative; the central inquiry is whether the action changes the governing substantive legal standards.
- Contract terms and procurement-related instruments that structure oversight entities’ performance, without directly imposing new legal obligations on regulated parties, may fall outside APA § 553’s notice-and-comment requirement.

## Conclusion

The D.C. Circuit held that HHS could implement key operational details of the Medicare PRO peer-review system through directives and contract provisions without notice-and-comment rulemaking because those materials did not alter substantive reimbursement standards and instead addressed enforcement procedures and policy guidance.


Am. Hosp. Ass’n v. Bowen, 834 F.2d 1037 (D.C. Cir. 1987)