Humana of South Carolina, Inc., a proprietary hospital, asserts procedural, statutory and constitutional challenges to a regulation promulgated by the Secretary of Health, Education and Welfare limiting the rate of return on equity capital recoverable as a cost item by providers of services under the Medicare Act.1 The District Court assumed jurisdiction, rejected Humana's procedural objection, ruled in its favor on the statutory ground and accordingly declined to reach its constitutional arguments.2 We hold that the court lacked power to entertain the statutory contentions because Humana failed to pursue available administrative procedures furnishing the exclusive approach to judicial review of claims such as these. We affirm the District Court's disposition in all other respects.

* In 1965, Congress adopted the Medicare program to extend federal subsidization of medical care to the aged.3 Hospital insurance coverage under Part A of the Medicare Act ordinarily is effected through cost-reimbursement directly to providers of services rather than to beneficiaries.4 Generally, reimbursement is handled by private organizations acting as fiscal intermediaries pursuant to contract with the Secretary.5 Amounts paid are dictated by the "reasonable cost" of covered services or the provider's "customary charge" therefor, whichever is less.6

As originally enacted, the Medicare legislation made no provision for a return on equity capital to proprietary facilities. By virtue of his authority to promulgate regulations governing payment of "reasonable cost(s),"7 however, the Secretary undertook to afford a "bonus factor" an allowance of two percent above costs otherwise recoverable to all participating institutions.8 In 1966, Congress amended the Act by adding Section 1395x(v)(1)(B), which expressly recognized return on equity capital to proprietary skilled nursing facilities.9 In its report on the amending bill, the House Ways and Means Committee urged the Secretary to fashion regulations enabling a return for proprietary hospitals,10 the rate therefor to be determined by resort to principles "comparable" to those underlying Section 1395x(v)(1)(B), which in terms related only to skilled nursing facilities.11 The Secretary issued a regulation to that end, incorporating for proprietary hospitals the maximum rate authorized in Section 1395x(v)(1)(B) for nursing institutions.12

Humana commenced suit in May 1975, predicating jurisdiction on the federal questions presented,13 the Administrative Procedure Act14 and two other statutory provisions.15 Its complaint sought an injunction against enforcement of the Secretary's return-on-equity regulation for proprietary hospitals, a declaration of the regulation's incompatibility with the governing statute, and retroactive corrective adjustments in amounts theretofore paid under the regulation. Humana alleged that reimbursement authorized by the regulation was so low as to contravene statutory principles mandating reimbursement of "reasonable costs"16 and proscribing subsidization by non-Medicare patients of hospitalization costs17 of Medicare beneficiaries. Inadequate reimbursement was said also to constitute a taking of property without just compensation in violation of the Fifth Amendment. Humana challenged the Secretary's regulation on procedural grounds as well, asserting that it had been promulgated without required adherence to procedures set forth in the Administrative Procedure Act.18

The District Court took jurisdiction of all counts.19 It held that administrative prescriptions of the sort in issue are exempt from the procedural demands of the Administrative Procedure Act,20 but that Humana had shown prima facie that the Secretary's regulation, in tying the maximum rate for proprietary hospitals to that statutorily set for proprietary skilled nursing facilities, operated to keep reimbursement21 unreasonably low. The court granted a summary judgment for Humana on the statutory ground without reaching the constitutional contentions22 and ordered the Secretary to conduct a study to determine a rate of return on equity capital for proprietary hospitals consonant with the principles undergirding the rate that Congress fixed for proprietary skilled nursing facilities.23

The Secretary appeals from the rulings on jurisdiction and statutory entitlement. In turn, Humana cross-appeals the determination on applicability of the Administrative Procedure Act to the contested regulation. We hold that the District Court lacked power to entertain Humana's substantive claims because of its failure to resort preliminarily to the administrative process erected by the Medicare Act. We reach a contrary conclusion in regard to Humana's procedural challenge, and on that issue we affirm the District Court on the merits.

Jurisdiction of Humana's suit hangs on the interplay of several provisions of the Social Security Act. Section 205(h), directly applicable to Title II of the Act, ordains that the "findings and decisions of the Secretary after a hearing shall be binding" upon all participants therein.24 It further specifies:

No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 41 of Title 28 to recover on any claim arising under this subchapter.25

In Weinberger v. Salfi,26 the Supreme Court construed Section 205(h) to intercept jurisdiction under 28 U.S.C. § 1331(a) the successor to the Section mentioned27 over a constitutional assault on a duration-of-relationship requirement of the Social Security Act limiting eligibility of surviving wives and step-children for Social Security disability insurance benefits.28 The Court noted that the language of Section 205(h) is "sweeping and direct,"29 precluding general federal-question jurisdiction under Section 1331(a) "irrespective of whether resort to judicial processes is necessitated by discretionary decisions of the Secretary or by his nondiscretionary application of allegedly unconstitutional statutory restrictions."30 By operation of Section 205(h), the sole avenue to judicial review is that provided in Title II of the Social Security Act itself Section 205(g),31 which exacts as a "jurisdictional prerequisite" a "final decision" of the Secretary.32 Since that requirement, the Court added, is "something more than simply a codification of the judicially developed doctrine of exhaustion" it could "not be dispensed with merely by a judicial conclusion of futility."33

Section 205(h) and consequently Salfi has bearing on the litigation before us because it was incorporated into the Medicare Act by Section 1395ii "to the same extent . . . applicable . . . to (Title II)."34 Section 205(g), however, was borrowed only for limited purposes not here pertinent;35 the review procedure applicable to provider-reimbursement disputes is found in Section 1395Oo.36 Under that provision, administrative review must be obtained before the Provider Reimbursement Review Board when a provider is displeased with the total amount of reimbursement approved by its fiscal intermediary.37 Following a "final decision" by the Board or a "reversal, affirmance, or modification" thereof by the Secretary, a provider can press its claims in a federal court.38

In Association of American Medical Colleges v. Califano,39 we construed Section 205(h), in light of Salfi, to foreclose jurisdiction under Section 1331(a) and to direct litigation through Section 1395Oo in a suit challenging an administrative regulation limiting allowable reimbursement as inconsistent with the statutory mandate to recompense "reasonable costs."40 We further held that Section 205(h), in order to preserve the integrity of the statutory review process, shuts off all alternative routes to court "when the Act's review procedures . . . allow judicial consideration of the particular action."41 In such cases, "before a suitor may obtain judicial consideration of a claim"42 "seeking eventual realization of provider-cost reimbursement under the Medicare Act,"43 "he must first present the claim to the Provider Reimbursement Review Board and obtain a 'final decision' by it."44 Humana endeavors to distinguish the present case from our decision in American Medical Colleges on several grounds, each of which we consider in turn.

* Humana first points out that the regulation it seeks to nullify was promulgated in 1966, and asserts that it has been responsible for inadequate cost-reimbursement since that time. Moreover, the Provider Reimbursement Review Board is an available forum only with respect to claims for accounting periods ending on or after June 30, 1973.45 As Humana seeks readjustment of its cost allowances for periods both before and after the creation of the Review Board, it asserts that jurisdiction lies for the whole of its suit. Denial of jurisdiction over this litigation, so the argument goes, would leave Humana completely without remedy for its pre-1973 claims, and its constitutional contentions would thus never be judicially evaluated. This problem was not presented in American Medical Colleges, which concerned only periods within the Review Board's authority.

Several courts have addressed the questions of federal-court jurisdiction over Medicare actions arising before provision for effective judicial review following determinations by the Provider Reimbursement Review Board. These courts generally agree that the Supreme Court's approach to Section 1331(a) jurisdiction in Salfi was influenced by the availability there of judicial review under Section 205(g).46 Accordingly, they have declined to construe Section 205(h) as barring all avenues to review of provider-reimbursement controversies prior to establishment of a statutory process culminating in judicial consideration of a provider's claims.47 "That all decisions ultimately find a jurisdictional basis demonstrates," in the Seventh Circuit's view, "that there is little judicial quarrel with the proposition that, when constitutional questions are in issue, the courts generally will not read a statutory scheme as taking the extraordinary step of foreclosing jurisdiction unless Congress' intent to do so is manifested by clear and convincing evidence."48 The existence of jurisdiction by some mode or another with respect to pre-1973 provider actions is also suggested by pertinent legislative history.49

But Humana's suit, unlike those just discussed, involves not only pre-1973 claims but also claims implicating periods susceptible to Review Board jurisdiction, and the same assertedly infirm regulation underlies each. The District Court assumed jurisdiction to adjudicate the validity of the Secretary's regulation without differentiating between its pre-1973 and post-1973 effects, and the remedy it afforded is wholly prospective.50 We think that in permitting Humana to succeed in its broad-based legal assault on a reimbursement-limiting regulation without first resorting to the administrative process to the extent usable, the District Court sanctioned a circumvention of the congressional scheme. Whether or not Humana's pre-1973 claims for reimbursement were reviewable by a statutorily-specified route, its post-1973 claims certainly were. And as our decision in American Medical Colleges and, indirectly, the Supreme Court's in Salfi make clear, any grievance respecting the amount of cost reimbursement due a provider must first be submitted for any administrative processing available under the Act's procedures.51

To be sure, that may be a fruitless pursuit even with respect to accounting periods amenable to Review Board adjudication, let alone those preceding. But because the requirement is "something more than simply a codification of the judicially developed doctrine of exhaustion," as the Supreme Court instructs it may "not be dispensed with merely by a judicial conclusion of futility."52 Congress has made the judgment that the Secretary in the first instance must decide whether any administrative relief is forthcoming, and the question grinds to a halt right there.

We do not mean to suggest that an administrative endeavor will necessarily turn out to be unrewarding. An unanticipated construction of a governing regulation by the Review Board, or a decision on grounds alternative to those advanced by the intermediary or provider,53 might well defy appearances of inanity. Even an adverse determination might be instructive to a reviewing court.54 And when, as here, operation of the same regulation is responsible for pre-1973 and post-1973 complaints alike, a determination on the latter may shed light on the former. Moreover, the Medicare provider-reimbursement deliberative process contemplates possible review by the Secretary of the Review Board's decision;55 and, as the Secretary suggested at oral argument, he can discretionarily confer relief for periods antedating the Review Board's jurisdiction or otherwise unobtainable from that body.56 Thus Humana's assertion of pre-1973 claims cannot excuse, in the circumstances of this case, its failure to resort to the Provider Reimbursement Review Board before institution of its suit in the District Court.57

Humana asserts secondly that general federal-question jurisdiction extends to this case because its challenge is essentially procedural. As we have indicated, the District Court ordered the Secretary to undertake a study to ascertain a reasonable return on equity capital for proprietary hospitals,58 but purported not to find the current level actually unreasonable.59 In view of that, Humana maintains that this suit falls without the ambit of Section 205(h). Put another way, this supposedly is not an "action . . . brought . . . to recover on any claim" arising under the Medicare Act,60 but one designed to compel the Secretary to give appropriate procedural consideration to the issue of allowable return on equity.

In addressing this contention, we think it necessary to separate Humana's statutory and constitutional arguments from its Administrative Procedure Act thesis.61 The former are unmistakably directed at upsetting on the merits the Secretary's determination on an element of cost-reimbursement. As we have noted, the Secretary specified by regulation the maximum return on equity capital affordable to participating proprietary hospitals, based on his reading of the Medicare Act.62 Humana has disputed the Secretary's view that the Act imposes a rigid constraint on return on equity when a proprietary hospital is involved, and has insisted that the Secretary's regulation affirmatively affronts the Act as a barrier to payment of reasonable costs, and as a virtual requirement that non-Medicare patients bear a portion of the cost of services extended to individuals protected by the Act.63 Humana has contended additionally that should the statute be interpreted to authorize a return on equity capital in an amount no greater than that provided by the regulation, it would violate the Fifth Amendment.64

Humana's presentation to the District Court was designed to demonstrate that reimbursement obtained in the past compares unfavorably with the return on equity capital realized by comparable institutions resulting in adverse financial consequences and subsidization of Medicare beneficiaries by non-Medicare patients and that adherence to the statutory command to recompense reasonable costs would inexorably result in an appreciable hike in available return. Accepting Humana's statutory construction, and perceiving a prima facie case that past reimbursement was inadequate, the court ordered the Secretary to conduct a rulemaking proceeding to find an acceptable reimbursement level.65 Accordingly, Humana's request for retroactive adjustments was deferred.66 Humana's fundamental grievance, then, centers on the amount of cost-reimbursement representing a return on equity capital, a subject amenable to Review Board adjudication. That Humana solicited and obtained an order compelling the Secretary to engage in a full-dress redetermination of the allowable rate of reimbursement does not except this case from Section 205(h). Unquestionably, it is a challenge on the merits to the limitation on returns-on-equity reimbursement imposed by the Secretary's regulation.

In American Medical Colleges, appellants sought, among other things, mandamus to compel the Secretary to promulgate new regulations on cost-reimbursement, arguing that the Secretary, in promulgating the regulation on review, had failed to take into account all factors made relevant by statute.67 We held that neither general federal-question nor mandamus jurisdiction supported the suit. We observed that "the 'sweeping and direct' language of Section 205(h) precludes Section 1331(a) jurisdiction of suits seeking eventual realization of provider-cost reimbursement under the Medicare Act."68 Humana's statutory and constitutional claims rather obviously are of the same breed.69

Section 205(h), as applicable to the Medicare Act,70 embodies a congressional determination that before suit can be brought to secure greater reimbursement, the Secretary must have an opportunity to evaluate the provider's grievance. Humana's statutory and constitutional claims were indisputably intended to supplant the Secretary's assessment of permissible cost-reimbursement with a judicial appraisal that, according to Humana, will undoubtedly ensure more abundant returns. That the District Court declined actually to order retroactive corrective adjustments, but instead directed an administrative redetermination of the acceptable level of reimbursement, cannot alter the essential character and objective of Humana's suit, nor the need for prior resort to the administrative process.71 Truly this was an "action . . . brought . . . to recover on (a) claim" within the contemplation of Section 205(h), at least insofar as the statutory and constitutional grounds are concerned.

We conclude, however, that Humana's Administrative Procedure Act claim is not intercepted by Section 205(h). In stark contrast to its statutory and constitutional contentions, its rulemaking challenge is not directed at establishing error in the Secretary's view of what limits on reimbursement Congress intended or at demonstrating a fundamental unreasonableness in benefit amounts. Rather, the gravamen of the procedural attack is simply that the Secretary failed to adhere to the methodology generally applicable to any rulemaking effort. As such, it falls outside the purview of Section 205(h).

We are mindful that Section 205(h) is "sweeping and direct" in its preclusion of federal-question jurisdiction.72 But, in terms, it bars only actions brought "to recover on any claim" arising under the Medicare Act.73 Suits questioning the constitutionality of statutory provisions limiting the availability of benefits are encompassed within that class,74 as are statutory and constitutional assaults on regulations restricting reimbursement-amount.75 We think, however, that when suit is brought simply to vindicate an interest in procedural regularity, Section 205(h) is not summoned into play.76 Congress felt that before its own, or the Secretary's, assessment of what funds might permissibly be forthcoming should be contested in a federal court, administrative remedies ought to be first pursued, notwithstanding apparent futility of that course. Plainly, that purpose does not buttress a contention that processes mandated by the Administrative Procedure Act were improperly eschewed in promulgation of a rule.77

Nor do we believe that traditional exhaustion principles bar immediate adjudication of Humana's procedural claim, for it is elementary that "the exhaustion (doctrine) contemplates an efficacious administrative remedy."78 Consideration by the Provider Reimbursement Review Board, confined as it is to disputes over the amount properly reimbursable,79 is unavailable with respect to procedural contentions of the sort here advanced, and the Secretary has not adduced an alternative avenue of redress. Moreover, the Secretary has advised that he will not undertake to promulgate a replacement regulation unless judicially compelled to do so.80 Thus, in all probability, Humana will not obtain full relief on its substantive claims which might assuage its procedural complaints by resort to the Review Board.81

Though Section 205(h) precludes a case-by-case determination of futility in circumstances in which it applies, we might take a less wooden approach when not so constrained.82 The issue on Humana's cross-appeal has been decided by the District Court and developed fully by the parties. In light of the fact that it may not be submitted directly for administrative review, and lacking weighty considerations militating against present consideration,83 we think judicial efficacy is best served if we address it now.

Humana contends, and the Secretary appears to concede, that the challenged return-on-equity regulation was not promulgated compliantly with the notice-and-comment requirements delineated in the Administrative Procedure Act. The controversy, rather, is whether the rulemaking in question was exempt from the strictures of the Act by virtue of the "benefits" exception in Section 553(a)(2). By that section, the notice-and-comment method is inapplicable "to the extent that there is involved . . . a matter relating to agency management or personnel or to public property, loans, grants, Benefits, or contracts."84 The District Court agreed with the Secretary that this provision is broad enough to embrace the reimbursement rule that Humana seeks to nullify, and we are of the same view.

The salutary effect of the Act's public comment procedures cannot be gainsaid, so only reluctantly should courts recognize exemptions therefrom.85 But even construed narrowly, Section 553(a)(2) cuts a wide swath through the safeguards generally imposed on agency action.86 Its literal reach is circumscribed somewhat by relevant legislative history,87 but nonetheless a broad domain is preserved for its operation. More specifically, "to the extent that" any one of the enumerated categories is "clearly and directly" involved in the regulatory effort at issue, the Act's procedural compulsions are suspended.88 That the governmental function is not strictly "proprietary," or the regulation's character is not "mechanical," does not curtail Section 553(a)(2)'s permissive effect.89 Public policy may be sorely affected, and the wisdom of public input manifest, but the statutory exemption still prevails when "grants," "benefits" or other named subjects are "clearly and directly" implicated.90

Brief review of the schematics of the Medicare Act relative to provider cost-reimbursement evidences the applicability of Section 552(a)(3) in accordance with the foregoing principles. The Medicare program has as an essential objective alleviation of the financial burdens associated with medical needs borne by the aged and the disabled.91 To effectuate that goal, federal subsidization of indispensable health services may be forthcoming in one of two ways. The first and least common mode is program-reimbursement of medical payments actually made by eligible beneficiaries.92 The alternative method is extension of Medicare funds directly to providers of services on behalf of patients participating in the program.93

Regulations governing the amount of reimbursement allocable to providers, then, plainly implicate administration of Medicare funds. The extent to which providers incidentally benefit from participation in the program may be somewhat uncertain.94 But, as the District Court observed, rules "establishing a reimbursement formula for payments to organizations in order that they actually deliver . . . benefits (to subscribing patients) can only be viewed as 'relating to' those benefits.95 To this we might add our own conviction that the nexus is "clear( ) and direct( )."96

Humana contends, however, that the situation of a provider is closer to that of firms in regulated industries, which generally are afforded an opportunity to participate in rulemaking, than to aid-beneficiaries, who indisputably are affected by the benefits exemption.97 Humana makes much of the fact that providers themselves are not recipients of gratuitous benefits, but of compensation for services performed.98 And though participation in the Medicare hospitalization-insurance program must be initiated by the hospital,99 Humana maintains that as a practical matter such organizations have little choice but to seek certification as a "provider of services."100

That providers are not afforded governmental assistance in the strict sense has little bearing on the applicability of Section 553(a)(2). Certainly a provider's interest in reimbursement is of no greater magnitude than a beneficiary's concern for program funding, and the citizenry is affected no more substantially by rules implicating one rather than the other. Nor does the record indicate that providers participate significantly less willingly in the Medicare program than do beneficiaries. "Realistically, the conditions imposed on (all) recipients of . . . grants, benefits, or public contracts . . . frequently cannot be avoided" for "in the world as it actually is, most people are in no position to refuse the 'privilege' to which the strings are attached."101 Thus neither the impact of the reimbursement regulation on Humana nor the public interest more generally implicated by its promulgation distinguishes the present regulation from others concededly encompassed by Section 553(a)(2). In all cases in which the excepted subject matter is "clearly and directly" involved, the congressional aim was to afford agencies procedural latitude regardless of the interest of affected parties and the public generally in contributing to formulation of the exempted rule.102

Cognizant of the prudence, however, of allowing public input in the wide variety of rulemaking covered by Section 553(a)(2), the Secretary in 1971 elected to waive the exemption and to submit to the normal requirements of the Administrative Procedure Act,103 and regulations promulgated since that time are subject to mandatory rulemaking procedures.104 But the regulation challenged in the instant case was issued in 1966, and consequently was not dependent for its effectiveness upon the Secretary's adherence to the Act's commands. Humana's procedural challenge therefore cannot prevail.

We conclude that the District Court correctly resolved the jurisdictional and constructural issues imposed by Humana's procedural attack. We hold, however, that the District Court lacked jurisdiction to hear Humana's statutory and constitutional objections to the Secretary's determination respecting return on equity capital allowable to proprietary hospitals. Before litigating these issues in a federal court, Humana must first resort to the administrative process set forth in Section 1395Oo.105

Humana has expressed concern that dismissal of its suit pending administrative review could prejudice its pre-1973 reimbursement claims because the Secretary might endeavor to prevent their reassertion on statute-of-limitations grounds.106 We see no need for anxiety on that score. Our holding today is simply that Humana may not maintain its suit as framed in the District Court, nor obtain relief not limited to remediation for periods prior to 1973, without first pursuing available statutory procedures. We thus have not passed directly upon the District Court's jurisdiction over Humana's pre-1973 claims in isolation, and until it becomes clear that judicial power over them is lacking a dismissal of that aspect of the suit would be improper. Accordingly, the District Court should retain Humana's request for an order mandating retroactive corrective adjustments for accounting periods predating the years amenable to Provider Reimbursement Review Board jurisdiction, but pretermit any determination of its own jurisdiction with respect to those claims standing alone. At such time as Humana has satisfied the jurisdictional prerequisites to its post-1973 claims, the District Court can, if necessary, undertake to assess its authority to order adjustments for the earlier years.

Affirmed in part, reversed in part and remanded.