CATHOLIC HEALTH INITIATIVES v. SEBELIUS

THOMAS WHEELER, Judge

In this bid protest, Plaintiff DGR Associates, Inc. ("DGR") challenges the Department of the Air Force's decision to conduct an 8(a) program small business set-aside procurement for housing maintenance, inspection, and repair services at Eielson Air Force Base, Alaska. DGR contends that the Air Force violated the Small Business Act, 15 U.S.C. § 657a(b)(2)(B) (2006), by not giving priority to HUBZone small business concerns when there is a reasonable expectation that two or more such concerns would submit offers and that the award could be made at a fair market price. DGR is a qualified HUBZone small business concern, but is not eligible to compete under the 8(a) program. DGR prevailed in a timely bid protest at the Government Accountability Office ("GAO"), but the Air Force announced that it would not follow the GAO's recommended decision. DGR then filed suit in this Court, requesting declaratory and injunctive relief. The Air Force awarded the contract under the 8(a) set-aside procurement to Defendant-Intervenor General Trades Services, Inc. Defendant represented that the Air Force suspended performance of the contract pending the Court's ruling in this case.

Defendant opposes DGR's protest, arguing that the lawsuit is untimely because it was not filed before the closing date for receipt of proposals, citing Blue Gold Fleet L.P. v. United States, 492 F.3d 1308 (Fed. Cir. 2007). Defendant also argues that, under the Small Business Administration's regulations, the Air Force was not required to give any priority to HUBZone small business concerns. The outcome of this dispute turns on the interpretation of the statutory language that Congress used to establish the section 8(a) and HUBZone small business programs. Despite executive agency memoranda to the contrary, this Court and the GAO have held that the plain meaning of the Small Business Act mandates a priority to the HUBZone program. Mission Critical Solutions v. United States, 91 Fed. Cl. 386 (2010),appeal docketed, No. 2010-5099 (Fed. Cir. Apr. 2, 2010); DGR Assocs., Inc., B-402494, 2010 CPD ¶ 115 (Comp. Gen. May 14, 2010); Mission Critical Solutions, B-401057, 2009 CPD ¶ 93 (Comp. Gen. May 4, 2009); Int'l Program Group, Inc., B-400278 et al., 2008 CPD ¶ 172 (Comp. Gen. Sept. 19, 2008). The Ninth Circuit has reached a similar conclusion, giving priority to the HUBZone program. Contract Mgmt., Inc. v. Rumsfeld, 434 F.3d 1145, 1149 (9th Cir. 2006).

The Court has before it Defendant's and Defendant-Intervenor's motions to dismiss for lack of jurisdiction, and the parties' cross-motions for judgment on the administrative record. For the reasons stated below, the Court sustains DGR's protest. DGR has not waived its right to challenge the Air Force's section 8(a) solicitation because it followed required protest procedures at the agency level and at the GAO before filing suit in this Court.Blue Gold Fleet does not require a protester raising a solicitation impropriety to file suit before the closing date for receipt of proposals, provided that timely challenges first have been made at the agency or before the GAO. See 492 F.3d at 1313, and "Discussion," Part A, below.

On the issue of statutory interpretation, the language of the Small Business Act granting priority to the HUBZone program could not be more clear. By using the phrases "notwithstanding any other provision of law . . . a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns," Congress established a priority for the HUBZone program over other competing small business programs. See 15 U.S.C. § 657a(b)(2)(B). If Congress intended something different from what it stated, Congress alone must enact an appropriate amendment, as this Court can only apply the laws as written. See, e.g., Conn. Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992) ("[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there."). The executive agency memoranda reflecting disagreement with this interpretation, more than anything, simply express disbelief that Congress could have intended a priority for the HUBZone program. These agencies would be better served to seek legislative relief from Congress rather than judicial relief in this Court.

The referenced executive agency memoranda consist of: (1) Office of Management and Budget Memorandum, dated July 10, 2009; (2) Department of Justice, Office of Legal Counsel, Memorandum, dated August 21, 2009; and (3) Office of the Under Secretary of Defense, Director, Defense Procurement and Acquisition Policy, Memorandum, dated May 18, 2010.

With the issuance of this decision, the Court permanently enjoins Defendant from proceeding with the contract unlawfully awarded to General Trades Services, and from awarding any contract that is not in compliance with the Small Business Act as interpreted herein.

The Small Business Act

Congress enacted the Small Business Act ("the Act") to "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns." 15 U.S.C. § 631(a) (2006). The Small Business Administration ("SBA") is charged with carrying out the policies of the Act and with promulgating the necessary rules and regulations to fulfill its statutory responsibilities. Id. §§ 633(a), 634(b).

To further the goal of aiding small businesses, Congress has established certain programs to assist qualifying small businesses in obtaining "a fair proportion" of Federal contracts. Id. §§ 631(a), 637(a)(1)(C), 657a. Two of the Act's programs are relevant to this case: (1) the 8(a) Business Development Program, which assists those firms owned and controlled by socially and economically disadvantaged individuals, 15 U.S.C. § 637; and (2) the HUBZone Program, which assists those small businesses operating in a "historically underutilized business zone." Id. §§ 632(p)(2), 657a.

"It is the policy of the United States that small business concerns, small business concerns owned and controlled by veterans, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women, shall have the maximum practicable opportunity to participate in the performance of contracts let by any Federal agency. . . ." 15 U.S.C. § 637(d)(1).

A. 8(a) Business Development Program

Congress established the 8(a) Business Development Program through an amendment to the Act in 1978. Pub.L. No. 95-507, §§ 201-202, 92 Stat. 1757, 1761 (1978) (codified as amended at 15 U.S.C. § 637). The program's stated purpose is to "promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals." 15 U.S.C. § 631(f)(2). It also "expand[ed] the program for the procurement by the United States of articles, supplies, services, materials, and construction work from small business concerns owned by socially and economically disadvantaged individuals." Id. The Act defines socially disadvantaged individuals as "those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." Id. § 637(a)(5). "Economically disadvantaged individuals" are defined as those "whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged."Id. § 637(a)(6)(A).

The Act sets a government-wide contracting goal for the 8(a) program of "not less than 5 percent of the total value of all prime contract and subcontract awards for each fiscal year." Id. § 644(g)(1). Pursuant to the Act, the SBA is empowered to enter into contracts with federal procurement agencies to furnish goods and services and then to "arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns. . . ." 15 U.S.C. § 637(a)(1)(A)-(B). SBA's authority to award an 8(a) contract is conditioned on the requirement that the award be made as a result of an offer submitted in response to a published solicitation "relating to a competition conducted pursuant to subparagraph (D)." Id. § 637(a)(1)(C)(i). Subparagraph (D)(i) provides:

A contract opportunity offered for award pursuant to this subsection shall be awarded on the basis of competition restricted to eligible Program Participants if (I) there is a reasonable expectation that at least two eligible Program Participants will submit offers and that award can be made at a fair market price. . . .

Id. § 637(a)(1)(D)(i)(I). A contracting officer's decision to set aside a contract opportunity under the 8(a) program is discretionary. Id. § 637(a)(1)(A). The SBA also must agree that competition for the procurement be limited to those firms participating in the 8(a) program. Id. If the contracting officer decides not to make the contract available for award under the 8(a) program or the contracting officer and the SBA disagree over the terms and conditions of a contract to be awarded, the SBA Administrator may appeal the agency's decision. Id. A contract may not be awarded to an 8(a) small business if "the award of the contract would result in a cost to the awarding agency which exceeds a fair market price." Id.

B. HUBZone Program

The Small Business Reauthorization Act of 1997 added the HUBZone Program to the Small Business Act in order to assist small businesses operating in a "historically underutilized business zone," defined as an area located within one or more qualified census tracts, non-metropolitan counties, Indian reservations, or base closure areas. See Pub.L. No. 105-135, § 602(b)(1)(B), 111 Stat. 2592, 2627 (codified as amended at 15 U.S.C. § 657a). The SBA is responsible for administering the HUBZone program. 15 U.S.C. § 657a(a).

To qualify for the program, a company must have its principal office in a HUBZone area and at least 35 percent of the company's employees must reside in a HUBZone. Id. § 632(p)(5). A qualified HUBZone small business is eligible to receive federal contracts on a sole-source basis, through competition restricted to HUBZone concerns, or through a ten percent pricing preference for contracts awarded on the basis of full and open competition. Id. § 657a(b)(2)-(3).

Under the HUBZone program, a contracting officer must award on the basis of competition restricted to qualified HUBZone small businesses if certain conditions are met. Specifically, subparagraph (b)(2)(B) of Section 657a states:

Notwithstanding any other provision of law . . . a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

Id. § 657a(b)(2)(B) (emphasis added). The two conditions set forth in this provision — "a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers" and "that the award can be made at a fair market price" — are commonly referred to as "the rule of two." See id.

If the rule of two is not satisfied, the HUBZone program provides that a contracting officer, "[n]otwithstanding any other provision of law," 15 U.S.C. § 657a(b)(2), may award a sole source contract to any qualified HUBZone small business concern if:

. . . the qualified HUBZone small business concern is determined to be a responsible contractor with respect to performance of such contract opportunity, and the contracting officer does not have a reasonable expectation that 2 or more qualified HUBZone small business concerns will submit offers for the contracting opportunity. . . ."

Id. § 657a(b)(2)(A)(i).

In addition, similar to the 8(a) program, the SBA Administrator may appeal a contracting officer's decision to "not award a contract opportunity under this section to a qualified HUBZone small business concern." Id. § 657a(b)(2)(C). The HUBZone statute further provides that a "Government-wide goal for participation by qualified HUBZone small business concerns shall be established at . . . not less than 3 percent of the total value of all prime contract awards for fiscal year 2003 and each fiscal year thereafter." Id. § 644(g)(1).

Factual Background

The relevant facts of this case are not in dispute, and are taken from the administrative record, Plaintiff's complaint, and the parties' memoranda in support of their motions for judgment on the administrative record.

Plaintiff DGR is the incumbent contractor for maintenance, inspection, and repair services in military family housing at Eielson Air Force Base, Alaska (the "Base"). Admin. R. ("AR") 424-25. DGR performed the military housing maintenance services pursuant to a five-year firm fixed price contract, which expired in 2009. AR 904, 909. After the expiration of the five-year contract, DGR performed the services pursuant to work orders under a Blanket Purchase Agreement ("BPA"). AR 982. On June 14, 2010, the Air Force notified DGR that it was terminating DGR's BPA effective July 15, 2010. Id. DGR is a qualified HUBZone small business concern. AR 425.

A. The Initial Solicitation Set Aside for HUBZone Small Businesses

On January 9, 2009, the Air Force issued a competitive solicitation for maintenance, inspection, and repair services at the Base in Alaska. See Pl.'s July 9, 2010 Mot. 4; see also Solicitation No. FA5004-09-R-0001 (re-posted as Solicitation No. FA5004-09-R-C014 on April 1, 2009) ("Solicitation I"). The Air Force set aside Solicitation I for qualified HUBZone small business concerns. AR 419. At least four offerors submitted proposals in response to Solicitation I. Id. On June 4, 2009, the Air Force awarded the contract to Inuit Services, Inc. (Pl.'s July 9, 2010 Mot. 5.)

DGR protested the eligibility of Inuit Services at the SBA, whereupon Inuit Services admitted that it was not a qualified HUBZone small business concern. Id.; see also Size Appeal of Inuit Services, Inc., SBA No. SIZ-5079 (Oct. 9, 2009). The Air Force withdrew the award to Inuit Services and cancelled Solicitation I. (Pl.'s July 9, 2010 Mot. 5.) Solicitation I is not in dispute in this case.

B. The Re-issued Solicitation Set Aside for 8(a) Program Participants

Before issuing its second solicitation ("Solicitation II"), the Air Force, in coordination with the SBA, conducted market research to determine the best method of procuring a follow-on contract for military housing maintenance services at the Base. AR 1-17. The Air Force's research revealed that it could set the solicitation aside either for qualified HUBZone concerns or 8(a) small businesses. AR 5. However, the contracting officer determined that it was in the best interests of the Air Force to offer the contract for an 8(a) competition. Specifically, in an October 27, 2009 "Market Research Analysis Report," the contracting officer stated: "Based on the 354th Contracting Squadron failing to meet its [fiscal year 2009] mandated [small disadvantaged business] goal and far exceeding their HUBZone goal, it has been determined to be in our best interest to set this procurement aside as a competitive 8(a)." Id. The contracting officer further observed that the Air Force had "exceeded our HUBZone goals by over 600% and missed our small disadvantaged business (SBD, includes 8(a)s) by 53%." AR 423, 506.

On December 2, 2009, the Air Force posted a synopsis of Solicitation II, which sought a cost reimbursable requirements contract for Base family housing maintenance services. AR 55-206. Solicitation II limited the pool of offerors to qualified 8(a) small businesses and set January 25, 2010 as the response date for the submission of proposals. AR 55-59. Solicitation II included a one-year base period and two one-year option periods. The base period was to run from March 1, 2010 to February 28, 2011. Id.

On December 16, 2009, DGR requested the Air Force set-aside Solicitation II for qualified HUBZone small business concerns rather than 8(a) program participants. AR 24-25. DGR argued that 15 U.S.C. § 657a required the Air Force to award Solicitation II under the HUBZone program. Id. In support of its position, DGR cited the GAO's decision in Mission Critical Solutions, B-401057, 2009 CPD ¶ 93 (Comp. Gen. May 4, 2009), which concluded that an agency could not proceed with an 8(a) program award without first considering whether a set-aside to a qualified HUBZone small business concern is required. AR 25-31. The Air Force responded that the GAO's Mission Critical decision was not binding, and that it therefore would proceed with a competitive section 8(a) set-aside. AR 32-47, 444-57, 949-62. The Air Force attached to its response an August 2009 memorandum from the Department of Justice, Office of Legal Counsel ("OLC") issued in reaction to the GAO's Mission Critical decision. AR 32-47 (Memorandum from Jeannie S. Rhee, Deputy Assistant Attorney Gen., Office of Legal Counsel, Dep't of Justice (Aug. 21, 2009)). In this memorandum, the OLC concluded that the Small Business Act "does not compel SBA to prioritize the HUBZone Program [over the 8(a) Program] in the manner GAO determined to be required." AR 35, 38-45. The OLC further explained that its opinion was binding on all executive agencies, notwithstanding any GAO decision to the contrary. AR 46-47.

The Air Force issued Solicitation II as a section 8(a) set-aside on December 22, 2009, with proposals due on January 25, 2010. AR 60-206 (Solicitation No. FA5004-10-R-0001). Solicitation II provided that the successful offeror was to supply all management, supervision, personnel, labor, equipment, vehicles, service calls, materials, tools and other items and services necessary to perform maintenance to 1,184 military family housing units at the Base. AR 61-75.

C. DGR's Agency-Level And GAO Protests

On January 22, 2010, DGR filed an agency-level protest with the Air Force, protesting its failure to set aside Solicitation II for qualified HUBZone small business concerns. AR 415-22. DGR requested the Air Force postpone the closing date for receipt of proposals pending the determination of its protest. AR 422. The Air Force did not postpone the closing date, and proposals were received on January 25, 2010, as required by Solicitation II. AR 424. The agency formally denied DGR's protest on February 4, 2010. AR 423.

DGR protested to the GAO on February 4, 2010. AR 424-32. DGR asserted: (1) "Federal law requires this Solicitation [to] be set aside for qualified HUBZone companies;" (2) "The procedure for selection for award is inconsistent with the stated evaluation factors;" (3) "The Solicitation Performance Work Statement is ambiguous and requires bidders to unnecessarily speculate as to significant work requirements;" and, (4) "DGR was prejudiced by the Air Force's actions." AR 427. DGR later dismissed the second and third grounds of its protest after a senior attorney at the GAO advised DGR through "outcome prediction" that it likely would not prevail on those grounds. AR 918. On March 5, 2010, the Air Force informed the GAO that because "[i]t is Air Force Policy to comply with the OLC opinion not to provide priority to HUBZones but rather to treat them with parity with the other small business programs," the Air Force "will not comply with a GAO opinion contrary to that policy." AR 489.

On May 14, 2010, the GAO sustained DGR's protest. AR 921-25;see DGR Assocs., Inc., B-402494.1, 2010 CPD ¶ 115 (Comp. Gen. May 14, 2010). The GAO held that the Air Force had to consider whether it could expect two or more qualified HUBZone small business concerns to submit proposals at a fair market price, in accordance with the "plain language of the HUBZone statute." AR 921-23. The GAO further concluded that, if the Air Force could expect two or more qualified HUBZone small business concerns to submit proposals at a fair market price, then it must cancel Solicitation II and issue a new solicitation as a HUBZone set-aside. Id.

D. DGR's Request For Fees And Costs

The GAO awarded DGR its fees and costs of filing and pursuing the protest. AR 923. On May 24, 2010, DGR submitted to the Air Force a request for payment of its fees and costs. AR 934-42. The Air Force refused DGR's request. AR 943. On June 8, 2010, DGR submitted its request to the GAO for determination. AR 969-81. DGR's request is still pending at the GAO. See AR 983-93 (documenting Air Force's June 14, 2010 response to the GAO); see also Pl.'s July 9, 2010 Mot. 7.

E. Air Force's Contract Award to General Trades Services

On May 27, 2010, the Air Force informed the GAO in a letter that it would not comply with the GAO's decision sustaining DGR's protest. AR 945-46. The Air Force contended that memoranda from the Office of Management and Budget and the Department of Justice constituted "binding" and "mandatory" guidance on the prioritization of HUBZone small business concerns. Id. These memoranda directed executive agencies, including the Air Force, to follow 13 C.F.R. §§ 126.605 and 126.607, and to place qualified HUBZone small business concerns and section 8(a) program participants on an equal footing for the award of contracts. AR 945-65.

The Air Force notified DGR on June 14, 2010 that it would terminate DGR's work order effective July 15, 2010. AR 982. On June 15, 2010, DGR requested the Air Force to identify the new contractor who would provide the services, and the Air Force's method of procuring the contract. See Pl.'s July 9, 2010 Mot. 8;see also Pl.'s TRO Mem. 155-56. The Air Force responded on June 16, 2010, stating that: (1) it "intends to award a contract and not a BPA;" (2) "the name of the potential awardee cannot be released at this time;" and (3) "no explanation [is] needed, for we will award a new contract, not a BPA." (Pl.'s TRO Mem. 155.) The Air Force announced a "competitive 8(a) set-aside" award to General Trades Services on June 17, 2010. AR 994. On June 28, 2010, DGR filed its suit in this Court.

Bid Protest Jurisdiction and Applicable Standards of Review

The Court of Federal Claims has jurisdiction to review pre-award and post-award bid protests pursuant to the Tucker Act, 28 U.S.C. § 1491(b)(1) (2006), as amended by the Administrative Dispute Resolution Act of 1996, Pub.L. No. 104-320, § 12(a)-(b)(1996). The Court reviews bid protests under the standards set forth in the Administrative Procedure Act ("APA"), 5 U.S.C. § 706. See 28 U.S.C. § 1491(b)(4); NVT Techs., Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir. 2004). The APA provides that an agency's decision is to be set aside only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); Banknote Corp. of America, Inc. v. United States, 365 F.3d 1345, 1350 (Fed. Cir. 2004); Tech. Sys., Inc. v. United States, 50 Fed. Cl. 216, 222 (2001). Therefore, "a bid award may be set aside if either (1) the procurement official's decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure." Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324, 1332 (Fed. Cir. 2001).

DGR's bid protest is based upon an alleged violation of law. When challenging a procurement on this ground, "the disappointed bidder must show a clear and prejudicial violation of applicable statutes or regulations." Impresa, 238 F.3d at 1333. In pre-award protests, the protester can establish prejudice by showing "a non-trivial competitive injury which can be redressed by judicial relief." Weeks Marine, Inc. v. United States, 575 F.3d 1352, 1361 (Fed. Cir. 2009) (quoting WinStar Commc'ns, Inc. v. United States, 41 Fed. Cl. 748, 763 (1998)). In post-award protests, the protester must establish prejudice by showing that there was a "substantial chance" it would have received the contract award absent the alleged violation. See Bannum, Inc. v. United States, 404 F.3d 1346, 1353 (Fed. Cir. 2005) (citing Info. Tech. Applications Corp. v. United States, 316 F.3d 1312, 1319 (Fed. Cir. 2003)). A protester is "not required to show that, but for the alleged error, the protester would have been awarded the contract." Data Gen. Corp. v. Johnson, 78 F.3d 1556, 1562 (Fed. Cir. 1996).

A. Motion to Dismiss for Lack of Subject Matter Jurisdiction

In ruling on Defendant's motion to dismiss for lack of subject matter jurisdiction, this Court is "obligated to assume all factual allegations to be true and to draw all reasonable inferences in plaintiff's favor." Henke v. United States, 60 F.3d 795, 797 (Fed. Cir. 1995) (citing Scheuer v. Rhodes, 416 U.S. 232, 236-37 (1974) and Catawba Indian Tribe v. United States, 982 F.2d 1564, 1568-69 (Fed. Cir. 1993)). The non-moving party bears the burden of establishing jurisdiction by a preponderance of evidence. Reynolds v. Army Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir. 1988). In ruling on the motion to dismiss, this Court is not confined to the complaint, but can consider "`evidentiary matters outside the pleadings.'" Thomas v. United States, 34 Fed. Cl. 619, 621 (1995) (quoting Indium Corp. of America v. Semi-Alloys, Inc., 781 F.2d 879, 884 (Fed. Cir. 1985)). Dismissal is appropriate when the Court lacks jurisdiction over the subject matter. See Rules of the Court of Federal Claims ("RCFC")12(b)(1).

B. Motion for Judgment on The Administrative Record

Pursuant to RCFC 52.1, the parties have filed cross-motions for judgment on the administrative record, requiring the Court to conduct a proceeding akin to an expedited trial on the record.See RCFC 52.1, Rules Committee Note (July 13, 2009) ("Summary judgment standards are not pertinent to judicial review upon an administrative record."); see also Bannum, 404 F.3d at 1356; A D Fire Prot., Inc. v. United States, 72 Fed. Cl. 126, 131 (2006). The Court reviews a motion for judgment on the administrative record to determine whether "given all the disputed and undisputed facts, a party has met its burden of proof based on the evidence in the record." DMS All-Star Joint Venture v. United States, 90 Fed. Cl. 653, 661 (2010) (citing Bannum, 404 F.3d at 1355-56). In other words, in evaluating the parties' cross-motions, the Court considers whether the "protestor has met its burden of proof that an award is arbitrary, capricious . . . or violates to prejudicial effect an applicable procurement regulation." Tech. Sys., 50 Fed. Cl. at 222.

The Court may make findings of fact where necessary. Bannum, 404 F.3d at 1356. The existence of a material issue of fact, however, does not prohibit the Court from granting a motion for judgment on the administrative record, and the Court is not required to conduct an evidentiary proceeding. See id. at 1357 (instructing the Court of Federal Claims to make factual findings under RCFC 52 "as if it were conducting a trial on the record"). In this case, the relevant facts are not in dispute.

Discussion

A. DGR Did Not Waive Its Right to Bring Suit in This Court.

Defendant and the awardee, General Trades Services, argue that the Court lacks jurisdiction over DGR's protest because DGR did not file suit in this Court until well after the closing date for receipt of proposals. They contend that, to challenge a defect in the procuring agency's solicitation, the protester must file suit in the Court of Federal Claims before the close of the bidding process. (Def.'s July 9, 2010 Mot. 20-27; Defendant-Intervenor's July 9, 2010 Mot. 3-6.) They principally rely upon three cases in support of their proposition: Blue Gold Fleet L.P. v. United States, 492 F.3d 1308 (Fed. Cir. 2007);Weeks Marine, Inc. v. United States, 575 F.3d 1352 (Fed. Cir. 2009); and Esterhill Boat Service Corp. v. United States, 91 Fed. Cl. 483 (2010), appeal docketed, No. 2010-5074 (Fed. Cir. Feb. 16, 2010).

A protest of an alleged defect in an agency's solicitation can be lodged in different venues. A prospective offeror can file an "agency-level protest" by protesting to the procuring agency that a flaw in the solicitation should be remedied. Federal Acquisition Regulation ("FAR"), 48 C.F.R. § 33.103 (2010). An agency-level protest based upon an alleged impropriety in a solicitation must be filed with the agency "before bid opening or the closing date for receipt of proposals." Id. § 33.103(e). Prior to filing a protest, federal procurement policy encourages parties to resolve concerns "at the contracting officer level through open and frank discussions." Id. § 33.103(b). Procurement regulations stress that the agency "should provide for inexpensive, informal, procedurally simple, and expeditious resolution of protests," and that "[w]here appropriate, the use of alternate dispute resolution techniques, third party neutrals, and another agency's personnel are acceptable protest resolution methods." Id. § 33.103(c). The agency-level procedures are intended "to resolve agency protests effectively, to build confidence in the Government's acquisition system, and to reduce protests outside of the agency[.]" Id. § 33.103(d).

A prospective offeror also may file a protest of a solicitation defect at the GAO. See GAO Regulations, 4 C.F.R. § 21.2(a) (2009). Protests at the GAO based upon alleged improprieties in a solicitation "shall be filed prior to bid opening or the time set for receipt of initial proposals." Id. § 21.2(a)(1). However, in circumstances where a protester first challenges a solicitation impropriety through an agency-level protest, a subsequent protest filed at the GAO will still be timely, even after the closing date for receipt of bids or proposals, if filed within ten days of adverse agency action:

(3) If a timely agency-level protest was previously filed, any subsequent protest to GAO filed within 10 days of actual or constructive knowledge of initial adverse agency action will be considered, provided the agency-level protest was filed in accordance with paragraphs (a)(1) and (a)(2) of this section, unless the contracting agency imposes a more stringent time for filing, in which case the agency's time for filing will control. In cases where an alleged impropriety in a solicitation is timely protested to a contracting agency, any subsequent protest to GAO will be considered timely if filed within the 10-day period provided by this paragraph, even if filed after bid opening or the closing date for receipt of proposals.

Id. § 21.2(a)(3).

A prospective offeror may file a protest at the Court of Federal Claims, without first filing an agency-level protest or a GAO protest. Also, a party may file suit at the Court of Federal Claims after protesting to the agency or to the GAO, or while agency or GAO proceedings are still pending. Unlike agency-level or GAO protests, there are no regulatory time limits for filing at the Court. The Tucker Act provides the jurisdictional basis for the Court to hear bid protests, stating that the Court of Federal Claims:

If a protester commences judicial proceedings concerning the same subject matter of a GAO protest, the GAO will dismiss any pending case involving that subject matter. See 4 C.F.R. § 21.11.

. . . shall have jurisdiction to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement. . . . [The Court] shall have jurisdiction to entertain such an action without regard to whether suit is instituted before or after the contract is awarded.

28 U.S.C. § 1491(b)(1) (2006).

Faced with the above choices for challenging the Air Force's solicitation at Eielson Air Force Base, the Court will examine the timeliness of DGR's protest actions. The solicitation's closing date for receipt of proposals was January 25, 2010. AR 51-53. Under the described protest framework, the Court particularly must analyze what actions DGR took before this date, and how diligently DGR continued to press its argument thereafter.

On December 16, 2009, more than one month prior to the closing date and before the Air Force had issued the solicitation, DGR requested the Air Force to set aside the solicitation for qualified HUBZone small business concerns. AR 24-31. DGR cited the GAO's decision in Mission Critical Solutions, B-401057, 2009 CPD ¶ 93 (Comp. Gen. May 4, 2009), holding that a procuring agency by statute must give priority to HUBZone set-asides over other program preferences contained in the Small Business Act.Id. On December 17, 2009, the Air Force rejected DGR's position, relying upon the Department of Justice memorandum which concluded that agencies are not bound by the GAO's Mission Critical Solutions decision. AR 32. The Air Force stated that market research supported a competitive 8(a) set-aside. Id. The Air Force formally issued the solicitation on December 22, 2009, limiting offerors to participants enrolled in SBA's 8(a) program. AR 51.

On January 22, 2010, three days before the closing date for receipt of proposals, DGR filed an agency-level protest with the Air Force, protesting the agency's failure to set aside the solicitation for qualified HUBZone small business concerns. AR 415-22. On January 25, 2010, the Air Force went ahead with the closing date for receipt of proposals without amending the solicitation as DGR had requested. AR 51-53. DGR understood that the Air Force thereby had acted adversely to DGR's agency-level protest. Id.

On February 4, 2010, within ten days of the Air Force's adverse action, DGR timely filed a protest with the GAO, docketed as B-402494. AR 425-57. That same day, the Air Force issued a decision on DGR's agency-level protest, ruling that the Air Force was not obligated by law to set aside the solicitation for qualified HUBZone small business concerns. AR 423. On May 14, 2010, the GAO sustained DGR's protest. DGR Assocs., Inc., B-402494, 2010 CPD ¶ 115 (Comp. Gen. May 14, 2010). The GAO ruled that the Air Force first must consider whether two or more qualified HUBZone small businesses could be expected to submit offers, and whether award could be made at a fair market price as required by 15 U.S.C. § 657a. Id. The GAO recommended that the Air Force cancel the current solicitation and re-issue it as a HUBZone set-aside. Id. The GAO awarded DGR its attorneys' fees and costs of filing and pursuing the protest, pursuant to 4 C.F.R. § 21.8(d)(1). Id.

In a May 27, 2010 letter, received by DGR's counsel on June 7, 2010, the Air Force informed the GAO that it would not comply with the GAO's decision sustaining DGR's protest. AR 945-68. The Air Force stated that its action was based upon the July 10, 2009 Office of Management and Budget memorandum, the August 21, 2009 Department of Justice Office of Legal Policy memorandum, and the May 18, 2010 Defense Department memorandum, all of which the Air Force attached to its letter. Id. On June 17, 2010, the Air Force announced the award of a contract to General Trades Services. AR 994. DGR filed suit in this Court for declaratory and injunctive relief on June 28, 2010. Even though DGR prevailed in its protest before the GAO, the Air Force has refused to pay DGR's attorneys' fees and costs of filing and pursuing the protest. AR 943.

The facts presented in this case are quite distinguishable from those in Blue Gold Fleet, 492 F.3d at 1311-12. In that case, involving a National Park Service procurement of ferry services to San Francisco's Alcatraz Island, the protester complained that the agency improperly evaluated proposals because the solicitation did not include the wage and benefit requirements of the Service Contract Act, 41 U.S.C. §§ 351- 358. The Federal Circuit agreed with the Court of Federal Claims' characterization that the protest was "a challenge to the terms of the solicitation," and held that the protest was untimely. 492 F.3d at 1313. The Federal Circuit ruled that "a party who has the opportunity to object to the terms of a government solicitation containing a patent error and fails to do so prior to the close of the bidding process waives its ability to raise the same objection subsequently in a bid protest action in the Court of Federal Claims." Id.

In Blue Gold Fleet, the protester had done nothing to challenge the omission of Service Contract Act requirements prior to the closing date for receipt of proposals. 492 F.3d at 1315. Instead, the protester waited until the Park Service had completed its evaluation of proposals. Id. After hearing that the Park Service had selected another offeror for award, only then did the protester take action. Id. The protester first filed a protest at the GAO, but upon learning of concerns about GAO's jurisdiction, the protester then filed suit at the Court of Federal Claims. Id. at 1311-12. All of these actions occurred at least six months after the closing date for receipt of proposals.Id.

In contrast, DGR challenged the Air Force's solicitation before the closing date for receipt of proposals, first with a letter to Air Force contracting officials, and then in a formal agency-level protest. DGR took these actions in compliance with the FAR, 48 C.F.R. § 33.103, adhering to the federal government's stated policy of attempting to resolve protests at the contracting officer and agency level. Id. § 33.103(b), (c). When these actions proved unsuccessful, DGR timely protested to the GAO within ten days of adverse agency action, 4 C.F.R. § 21.2(a)(3), and the GAO sustained DGR's protest. At each step, DGR followed applicable FAR and GAO protest procedures. DGR diligently pursued its solicitation challenge, quite unlike the protester in Blue Gold Fleet.

The Federal Circuit's precise wording in Blue Gold Fleet was that "a party who has the opportunity to object to the terms of a government solicitation containing a patent error and fails to do so prior to the close of the bidding process waives its ability to raise the same objection subsequently in a bid protest action in the Court of Claims." 492 F.3d at 1313 (emphasis added). Contrary to the position of Defendant and Intervenor, this language does not suggest that a party challenging a solicitation error must file suit in the Court of Federal Claims before the close of the bidding process. All it says is that a party must have done something prior to the closing date to protest the solicitation error, before raising "the same objection subsequently . . . in the Court of Federal Claims." Following Defendant's and Intervenor's interpretation of Blue Gold Fleet would have parties running into the Court of Federal Claims to challenge solicitation errors, instead of pursuing other available avenues of relief. Such an outcome would be directly at odds with government policy to seek resolution of protests within the agency.

The correct interpretation of Blue Gold Fleet is that, if a party has challenged a solicitation impropriety before the close of the bidding process, the party is not precluded from later filing its protest at the Court of Federal Claims. A party must do something before the closing date to preserve its rights, and must thereafter pursue its position in a timely manner. In Blue Gold Fleet, the protester did nothing, but in this case, DGR made the requisite challenge and prevailed at the GAO. The Court hardly can conceive of a greater injustice than to say to DGR "even though you followed applicable protest procedures and prevailed at the GAO, now you are out of luck because you failed to file a judicial action in the Court of Federal Claims before the close of the bidding process." Defendant's added insult to DGR would be that "the Air Force has decided not to follow the GAO's decision in your favor, and there is nothing you can do to prevent it."

Similarly, the Federal Circuit's decision in Weeks Marine, 575 F.3d at 1362-63, is not on point. There, the protester challenged a Corps of Engineers solicitation by filing suit in the Court of Federal Claims before the closing date for receipt of proposals. Defendant argued that the protester had not alleged any competitive injury, and therefore lacked standing to challenge the solicitation. Id. at 1358. On this issue, and because of Blue Gold Fleet, the Federal Circuit ruled that the protester had the requisite standing:

In light of Blue Gold Fleet, were we to hold that Weeks cannot now challenge the MATOC solicitation in the Court of Federal Claims, we effectively would be saying that this court has set up a judicial scheme whereby a party runs afoul of the waiver rule if it waits to challenge a solicitation (as Blue Gold Fleet did), but is properly dismissed on standing grounds if it raises the challenge pre-award (as Weeks has done). Such a result would be anomalous.

Weeks Marine, 575 F.3d at 1363. The Federal Circuit, quotingWinStar Communications, Inc. v. United States, 41 Fed. Cl. 748, 763 (1998), held that standing is met in a pre-award protest by showing "a non-trivial competitive injury which can be redressed by judicial relief." Weeks Marine, 575 F.3d at 1361. This case has no bearing in DGR's circumstances because Weeks filed suit before the closing date for receipt of proposals. See id. at 1356. The Federal Circuit's ruling that the Court of Federal Claims has protest jurisdiction when a party challenges a solicitation by filing suit before the close of the bidding process does not mean that this Court lacks jurisdiction in DGR's case.

Finally, the recent decision in Esterhill Boat Service, 91 Fed. Cl. at 487-88, is not authority for dismissing DGR's protest. InEsterhill, the procurement involved a Department of Veterans Affairs ("VA") building lease for a community-based outpatient clinic. The protester challenged a solicitation requirement that the leased space of 8,000 to 9,000 square feet must be located on one floor. Id. at 485. The protester, as the incumbent, could not satisfy the "one floor" requirement in its current space. Id. The protester submitted a letter to the contracting officer on July 10, 2009 protesting the "one floor" requirement before the close of the bidding process, but the VA proceeded to accept bids on July 31, 2009 as scheduled. Id. at 485 n. 4. The protester then filed a protest at the GAO on August 17, 2009, which the GAO dismissed as untimely because it was not received within ten days of adverse agency action. Id. Following the GAO's dismissal, the protester filed suit at the Court of Federal Claims.

The Court found Esterhill's judicial action to be untimely, because Esterhill waived its right to challenge the terms of the solicitation. In explaining the ruling, the Court observed:

Esterhill raised concerns about the one-floor requirement both to the contracting officer and to the GAO. Mr. Waye [the contracting officer] confirmed that the requirement was mandatory; the GAO declined jurisdiction. Thus, plaintiff made substantial efforts to obtain redress, particularly as compared to those of Blue Gold. Esterhill apparently gambled on winning the contract anyway, which was entirely within its rights, but then sued when it lost the gamble. Once Esterhill learned that the VA considered the one-floor requirement mandatory, it should have filed suit in this court. Esterhill could have and should have protested immediately after its meeting with Mr. Waye.

Esterhill, 91 Fed. Cl. at 488.

The circumstances of Esterhill and DGR are materially different. Esterhill allowed its challenge to the "one floor" requirement to lapse after learning that the contracting officer considered this requirement to be mandatory. Esterhill took no further action until filing an untimely protest at the GAO. By that time, Esterhill was too late, and had waived its right to challenge the terms of the solicitation. In contrast, DGR at all times pressed ahead with its challenge to the Air Force's solicitation, and did not waive any of its rights. DGR's lawsuit was timely filed in the Court of Federal Claims, even though filed after the close of the bidding process.

The Court's finding of jurisdiction over DGR's protest is not inconsistent with Blue Gold Fleet, Weeks Marine, or Esterhill. The analysis in each case is to determine whether the party filing suit at any time waived its right to challenge an error in the solicitation, either before the procuring agency, the GAO, or this Court. As discussed above, the plaintiff had waived its right in Blue Gold Fleet and in Esterhill, but the plaintiff DGR has not. The Weeks Marine decision does not involve a waiver issue, and need not be considered for this purpose.

To be fair, dicta in Esterhill may have caused Defendant and Defendant-Intervenor to proffer their untenable argument for dismissal of DGR's suit. In commenting upon the Federal Circuit's decisions in Blue Gold Fleet and Weeks Marine, the Court stated:

The appeals court could have allowed contractors to file agency-level protests to preserve their pre-award claims, or to object in a manner other than by filing suit in federal court. Instead, the court ruled that a contractor wishing to object to terms of a solicitation must file suit in the Court of Federal Claims before the bidding process ends, or not at all.

Esterhill, 91 Fed. Cl. at 487. This observation overstates the holding of Blue Gold Fleet and Weeks Marine. The Federal Circuit has not thrown out the administrative process embodied in the FAR and GAO bid protest procedures, and has not held that protesters must rush into the Court of Federal Claims if they want to preserve their rights to challenge a solicitation error. Neither Blue Gold Fleet nor Weeks Marine stands for this proposition. Rather, the proper inquiry is to assess whether a party has timely pursued an alleged defect in a solicitation as allowed by law, and whether the party has diligently pressed its position without waiver at each step of the way. The Court finds here that DGR has not waived its right to challenge the Air Force's solicitation. Therefore, Defendant's and Intervenor's motions to dismiss are denied.

B. The Small Business Act Grants Priority to The HUBZone Program.

The parties agree that this cls within that category. With respect to the ten percent limits "it is impossible to give a reasoned distinction between numbers just a hair on the OK side of the line and ones just a hair on the not-OK side." Missouri Pub. Serv. Comm'n, 215 F.3d at 4. Here the Secretary has not even made the attempt.

The short of the matter is that there is no way an interpretation of "reasonably costs" can produce the sort of detailed — and rigid — investment code set forth in § 2162.2.A4. This is essentially the point of the dissenting Board members. The statute gives the Secretary authority to promulgate regulations defining "the method or methods to be used, and the items to be included, in determining" what constitutes a provider's "reasonable costs." 42 U.S.C. § 1395x(v)(1)(A). We may assume, without deciding, that the Manual's investment limitations are an "extension" of the reasonable cost provisions in this section and the corresponding regulation, as the Board majority thought, and we may assume that the limitations are "consistent" with those provisions, as the Secretary has argued. But neither assumption leads to the conclusion that the Manual's limitations represent an interpretation of the Medicare Act or of the regulations. See Hoctor, 82 F.3d at 170.

It might have been a closer case if the Secretary's Manual had indicated that premiums paid to financially unstable captive offshore (or domestic) insurance companies do not represent "reasonable costs." But § 2162.2.A.4 of the Manual embodies a "flat" rule, and the "`flatter' a rule is, the harder it is to conceive of it as merely spelling out what is in some sense latent in a statute or regulation. . . ." Hoctor, 82 F.3d at 171.

Hoctor analyzed whether a U.S. Department of Agriculture rule requiring a fence of at least eight feet to enclose lions, tigers, and leopards was an interpretation of a regulation providing that the enclosure had to be of "such material and of such strength as appropriate for the animals involved." 82 F.3d at 167-68. Writing for the court, Judge Posner held that "[e]ven if . . . the eight-foot rule is consistent with, even in some sense authorized by, the structural-strength regulation, it would not necessarily follow that it is an interpretive rule. It is that only if it can be derived from the regulation by a process reasonably described as interpretation." Id. at 170.

Consistency with the statute may be enough to sustain a rule duly promulgated after notice and comment, just as consistency with the Commerce Clause, Art. I, § 8, cl. 3, may be enough to sustain the constitutionality of a statute. But no one would say, for instance, that the detailed provisions of the Clean Air Act were interpretations of the language of the Constitution. The same is true here. The connection between § 2162.2.A.4 of the Manual and "reasonable costs" is simply too attenuated to represent an interpretation of those terms as used in the statute and the regulations.

Our concurring colleague agrees with us that § 2162.2.A.4 of the Manual cannot be sustained as a valid interpretation of "reasonable cost." Based on her reading of Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995), our colleague does not put her conclusion in those terms and then criticizes us for determining that the Manual provision is not a proper interpretive rule. Our colleague's approach rests on what we perceive as a misreading of Guernsey. At no point did the Supreme Court suggest that interpretive rules do not have to interpret. The issue was not presented. Guernsey simply recognized that a particular provision in the Manual constituted "a prototypical example of an interpretive rule," id. at 99, 115 S.Ct. 1232, something that cannot be said about the provision we have in front of us.

Thus we are told that the "investment restrictions in the Manual are clearly outside [the] scope" of the Secretary's authority "to define the `reasonable cost'," Concurring Op. at 501; that there is no "nexus" between the Manual provision and "reasonable cost," id.; that the "rigid" rule in the Manual lacks "any rational connection" to the statute's "`reasonable cost' principle," id. at 498; and so forth.

For the reasons given, the judgment of the district court is reversed. We remand the case to the district court with instructions to set aside the decision of the Provider Reimbursement Review Board and for such other relief as the district court deems appropriate in view of this decision.

So Ordered.

BROWN, Circuit Judge, concurring in the judgment:

The court holds section 2162.2.A.4 of the Secretary's Provider Reimbursement Manual is invalid because the Secretary failed to promulgate it by notice-and-comment rulemaking. The court thus leaves the door open for the Secretary to promulgate an identical provision restricting the investment decisions of a provider's offshore captive insurance company as a full-fledged rule. But a deeper flaw runs through the Manual provision that cannot be cured by more procedure: it exceeds the Secretary's authority under the Medicare statute to determine the "reasonable cost" for which providers are reimbursed. Accordingly, I would close the door left enticingly ajar by the court and hold the Manual provision invalid as beyond the Secretary's authority.

I

Catholic Health Initiatives and its affiliated hospitals (the hospitals) challenge the Manual provision as exceeding the Secretary's authority under the Medicare statute. It is a cardinal principle of administrative law that an agency may act only pursuant to authority delegated to it by Congress. See Lyng v. Payne, 476 U.S. 926, 937, 106 S.Ct. 2333, 90 L.Ed.2d 921 (1986) ("[A]n agency's power is no greater than that delegated to it by Congress."); Transohio Sav. Bank v. Dir., Office of Thrift Supervision, 967 F.2d 598, 621 (D.C. Cir. 1992) ("It is central to the real meaning of the rule of law . . . that a federal agency does not have the power to act unless Congress, by statute, has empowered it to do so."). When an agency has acted beyond its delegated authority, a reviewing court will hold such action ultra vires, Transohio, 967 F.2d at 621, or a violation of the Administrative Procedure Act (APA), 5 U.S.C. § 706(2)(C) (directing courts to "hold unlawful and set aside agency action . . . in excess of statutory jurisdiction, authority, or limitations, or short of statutory right").

Congress delegates authority to agencies through legislation, and we therefore look to the agency's enabling statute to determine whether it has acted within the bounds of its authority or overstepped them. See Univ. of the D.C. Faculty Ass'n/NEA v. D.C. Fin. Responsibility Mgmt. Assistance Auth., 163 F.3d 616, 620 (D.C. Cir. 1998) (explaining ultra vires claim requires the court to review statutory language to determine whether "Congress intended the [agency] to have the power that it exercised when it [acted]"). The Secretary defends the Manual provision as within her authority under 42 U.S.C. § 1395x(v)(1)(A), which provides:

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. . . .

The Secretary argues, and the hospitals agree, that she has considerable discretion under this section to define what "reasonable cost" means. See Rickey Manor, Inc. v. Schweiker, 684 F.2d 130, 134 (D.C. Cir. 1982) ("It is well established that Congress granted the Secretary broad discretion to develop the `reasonable cost' concept, subject, of course, to the general standard enunciated in 42 U.S.C. § 1395x(v)(1)(A)."). However, the Secretary and the hospitals disagree over whether the Manual provision is a permissible exercise of that discretion.

The Manual provision, which the court quotes in full, places three specific investment restrictions on "offshore captives": (1) an offshore captive seeking to invest its assets must invest 90% or more of them in "low risk investments," defined to include certain categories of government bonds, debt securities, and bank deposits; (2) an offshore captive may invest 10% or less of its assets in "dividend paying equity securities listed on a United States stock exchange"; and (3) an offshore captive must limit its investment in any one equity issue to 10% of the captive's total equity security investment. Manual ch. 21 § 2162.2.A.4. The Secretary will consider the insurance premiums a provider pays its offshore captive insurance company to be "reasonable costs" reimbursable under the Medicare program only if the captive satisfies all three investment restrictions. But, as the hospitals argue persuasively, none of the restrictions fits comfortably, or even plausibly, within the plain meaning of "reasonable cost."

II

First, the investment restrictions exceed the Secretary's "reasonable cost" authority because they cause a blanket disallowance of reimbursement of a provider's insurance premiums, even though liability insurance coverage generally is an allowable cost of the provider's Medicare program. The Secretary freely admits "[t]here is no dispute that the costs of purchasing malpractice and workers' compensation insurance are, as a general matter, necessary and proper costs of furnishing health services to Medicare beneficiaries." Appellee's Br. at 23. Nevertheless, if a provider's offshore captive fails to observe just one of the three investment restrictions, the Secretary disallows 100% of the provider's premiums.

The absurd results arising from the investment restrictions' blanket disallowance rule are easy to grasp. For example, if a provider's offshore captive insurer invested in ten dividend-paying equity securities listed on a United States stock exchange, placing 1% of its assets in each security, the Secretary would reimburse the provider for air premiums paid to the captive. But if the captive insurer invested 1% in eleven divided paying U.S. equity securities, the Secretary would refuse to reimburse the provider for a single penny of its premiums. Likewise, if the captive invested 98% of its assets in what the Manual defines as "low risk investments" but placed 2% of its assets in a single U.S.listed equity security, the Secretary would deny any reimbursement. And in both of these illustrations, the Secretary's reimbursement decision would not change even if the captive remained solvent and paid substantial claims on behalf of the provider.

When the Secretary has established rigid all-or-nothing approaches to reimbursement under section 1395x(v)(1)(A), this court and others have rejected them as lacking any rational connection to "reasonableness." See, e.g., St. Mary of Nazareth Hosp. Ctr. v. Schweiker, 718 F.2d 459, 467 (D.C. Cir. 1983) (rejecting Manual section 2345 because "for all practical purposes [it] would mean that hospitals would not be reimbursed at all for the costs of rendering care to Medicare patients in special care units. This result is ridiculous, contrary to the letter of 42 U.S.C. § 1395x(v)(1)(A). . . ."); County of LA. v. Sullivan, 969 F.2d 735, 741 (9th Cir. 1992) (explaining that "because the 100% limitation unnecessarily restricts reimbursement for ancillary services provided to Medicare patients, we hold that it contravenes the statutory requirements that the Secretary reimburse the hospitals for their reasonable costs and not shift Medicare patients' costs to non-Medicare patients or the hospitals themselves"); Nw. Hosp., Inc. v. Hosp. Serv. Corp., 687 F.2d 985, 992 (7th Cir. 1982) (holding a "blanket disallowance of related-party interest expense . . . is broader than either the language or the purpose of the Medicare statute can be construed to authorize [where] the government concedefd] interest expense is generally considered to be part of the `reasonable cost' of providing Medicare services"); see oho Samaritan Health Serv. v. Bowen, 811 F.2d 1524, 1531 (D.C. Cir. 1987) (noting that "[u]nder § 1395x(v)(1)(A), the sanction for [a provider's request for reimbursement of] `high costs' would be non-reimbursement for the unduly high portion, not denial for the whole fee"). The investment restrictions section 2162.2.A.4 of the Manual are no less harsh than the blanket disallowances struck down in prior decisions as exceeding the Secretary's "reasonable cost" authority under section 1395x(v)(1)(A).

The Manual itself reveals that the Secretary appreciates the stark difference between a blanket disallowance and application of section 1395x(v)(1)(A)'s "reasonable cost" principle. For instance, in disallowing reimbursement of luxury items or services, the Manual instructs that once the intermediary has concluded a luxury item or sendee was furnished to a patient, the "allowable costs must be reduced by the difference between the costs of luxury items or services actually furnished and the reasonable costs of the usual less expensive items or services furnished by a provider to the majority of its patients." Manual ch. 21 § 2104.3.C. The Secretary has no credible explanation why reimbursement of insurance premiums, should be treated any differently.

The investment restrictions also do not accurately reflect the "cost actually incurred" by a provider at the time it submits the insurance premiums to its offshore captive. Section 1395x(v)(1)(A) states "[t]he reasonable cost of any services shall be the cost actually incurred." 42 U.S.C. § 1395x(v)(1)(A) (emphasis added). A provider incurs the cost of obtaining liability insurance coverage when it submits the premiums to the offshore captive. Regardless of whether or how the offshore captive subsequently invests the premiums and regardless of whether the captive ever pays a claim, the provider has "actually incurred" a cost of providing services to Medicare patients at the moment it pays the premiums. The Secretary's reimbursement for the "reasonable cost" of the provider's liability insurance therefore should be a function of the premiums paid, not of the coverage that the offshore captive may eventually provide. The Secretary's investment restrictions thus are an inaccurate measure of the provider's cost "actually incurred" in obtaining insurance coverage from its offshore captive and exceed her authority under section 1395x(v)(1)(A).

This principle was explored extensively by a number of courts after the Secretary, in 1979, promulgated a new regulation for calculating reimbursement of providers' malpractice insurance premiums (the Malpractice Rule). See Menorah Med. Ctr. v. Heckler, 768 F.2d 292, 293 (8th Cir. 1985). Providers successfully challenged the Malpractice Rule before many courts as exceeding the Secretary's authority under section 1395x(v)(1)(A). See, e.g., id. at 296 (noting Secretary could not prove "a system of reimbursing malpractice premiums based solely on the proportion of malpractice losses will accurately reflect premium costs"); Bedford County Mem'l Hosp. v. Health Human Servs., 769 F.2d 1017, 1023-24 (4th Cir. 1985) (holding the Malpractice Rule contrary to section 1395x(v)(1)(A) because "[b]y basing reimbursement of malpractice costs solely on loss history, the Secretary has failed to take account of administrative expenses, a disproportionate share of which will be borne by non-Medicare patients under the Secretary's system").

In striking down the Malpractice Rule, one court perceptively explained why the Secretary's approach to reimbursement was inconsistent with insurance cost principles: "[T]he Malpractice Rule violates the Medicare Act [by] fail[ing] to recognize that malpractice insurance protects against the risk of future loss. Even if a provider has never incurred any actual malpractice losses, for example, it must still purchase malpractice insurance because of the risk that losses will be incurred in the future." St. James Hosp. v. Heckler, 760 F.2d 1460, 1472 (7th Cir. 1985). The court noted that "[t]he carrying of malpractice insurance must be deemed a reasonable cost, and thus reimbursable by Medicare, regardless of whether a hospital has paid one dollar or one million dollars in malpractice claims over the relevant five-year period." Id. Thus, "[t]o the extent that the Malpractice Rule does not reimburse these costs, . . . it violates the Medicare Act's mandate that providers are entitled to government reimbursement for the `reasonable cost' of the services they provide for Medicare patients." Id.

When we considered a challenge to the Malpractice Rule, we were more cautious than many courts. See Walter O. Boswell Mem'l Hosp. v. Heckler, 749 F.2d 788, 799 (D.C. Cir. 1984). We recognized the Malpractice Rule required the Secretary to reconcile the statutory obligation to reimburse reasonable costs with the related obligation to prevent cross-subsidization between Medicare and non-Medicare patients. See id. at 799-800. Recognizing the tension between section 1395x(v)(1)(A)'s reasonable cost and cross-subsidization requirements, we remanded the case to the district court because the agency had failed to consider an alternative to the Malpractice Rule — separate pools of risk for Medicare and non-Medicare patients — that might more accurately reflect the actual Medicare costs incurred by the providers. Id. at 802-03. However, we still required the Secretary's approach to be consistent with both the reasonable cost and cross-subsidization requirements, and with the ultimate purpose of fairly reimbursing hospitals for their Medicare-related insurance premiums. See id. at 801 (noting Secretary's interpretation of the Medicare statute to deny hospitals "some of their premium costs" was not arbitrary and capricious because "paying the percentage of premiums reflecting losses from Medicare patients would in the long run fairly compensate the insurance companies for their expenses, and thus would fairly reimburse the hospitals for necessary expenditures").

In contrast to the Malpractice Rule, the investment restrictions here blatantly contravene section 1359x(v)(1)(A) by preventing the hospitals from obtaining any reimbursement of their insurance premiums, while at the same time forcing the hospitals' non-Medicare patients to pay all of the cost of purchasing liability insurance coverage for Medicare patients, thereby violating section 1395x(v)(1)(A)'s prohibition on cross-subsidization. The courts that found the Malpractice Rule problematic undoubtedly would be even more troubled by section 2162.2.A.4 of the Manual since it makes no attempt to fairly approximate the provider's costs for obtaining insurance coverage if the offshore captive has failed to comply with one or more of the investment restrictions.

Furthermore, the Secretary has utterly failed to explain why it is unreasonable for a provider to purchase insurance coverage from an offshore captive that fails to invest according to the Secretary's mandate. One does not have to be a hedge fund manager to recognize it may be extremely un reasonable to invest one's assets as dictated by the Manual provision. A cap' live insurer, like any other prudent investor, may need to adjust its investment portfolio multiple times in a given year to respond to changing market conditions. What may be a wise investment one year may be foolish the next. If it is often reasonable for an offshore captive to invest its assets contrary to the investment restrictions in the Manual provision, then it can hardly be unreasonable for a provider to pay premiums to the captive. And as the hospitals note, Medicare does not reimburse providers for malpractice claims, so the providers have every incentive apart from the Secretary's involvement to ensure they receive coverage from their insurers. The close alignment of interests between a provider and its captive insurer only adds to this incentive. The senselessness of punishing a provider for the investment decisions of its offshore captive insurer is underscored by the irrational nature of the investment restrictions themselves.

The Secretary's primary justification for the restrictions is that they are necessary to ensure offshore captives maintain sufficient reserves to pay future claims on behalf of Medicare providers. See Appellee's Br. at 23-24. The Secretary argues, "On a very practical level, [insurance premium] costs — even if in line with those paid by other, similarly situated providers — can be considered `reasonable' only if they actually purchase reliable coverage for the insured providers." Id. at 23. Unmasked, however, the Secretary is asserting section 1395x(v)(1)(A) permits her to micromanage the investment decisions of offshore captive insurers, despite her lack of expertise in either investment strategy or insurance. See St. Mary of Nazareth Hosp. Ctr., 718 F.2d at 466 (declining to defer to Secretary's statutory interpretation announced in Manual provision where agency's expertise was not implicated). The Medicare statute grants the Secretary authority to administer a reimbursement program for providers, not authority to establish an investment management program for vendors. It is unsurprising then that the Secretary's interpretation is far afield from Congress' intent for section 1395x(v)(1)(A) to meet providers' actual costs, both direct and indirect, of providing services to Medicare patients. See S.Rep. No. 89-404 (1965), reprinted in 1965 U.S.C.C.A.N. 1943, 1976 (June 30, 1965) ("The provision in the bill for payment of the reasonable cost of services is intended to meet the actual costs, however widely they may vary from one institution to another, except where a particular institution's costs are found to be substantially out of line with those of institutions similar in size, scope of services, utilization, and other relevant factors.").

In sum, although the Secretary has broad authority section 1395x(v)(1)(A) to define the "reasonable cost," this authority is not unlimited, and the investment restrictions in the Manual provision are clearly outside its scope. This case does not require us to determine what may be the outer limits of the Secretary's authority. Because the Manual provision has no discernible nexus with the Secretary's authority to determine reimbursement of "reasonable costs" under section 1395x(v)(1)(A), it is invalid.

III

The court's opinion raises several issues warranting a response. First, because the Manual provision exceeds the Secretary's authority, we need not and, indeed, should not address whether the provision should have been passed through notice-and-comment rulemaking. The court describes the notice-and-comment issue as "antecedent" to the question of the Secretary's statutory authority, Maj. Op. at 494. Not so. Where the agency has acted outside its statutory authority, notice and comment is no cure for the disease. See Lyng, 476 U.S. at 937, 106 S.Ct. 2333; Transohio, 967 F.2d at 621. In contrast, a holding that the agency has exceeded its statutory authority negates any need to delve into the notice-and-comment issue. See Am. Bus Ass'n v. Slater, 231 F.3d 1, 7-8 (D.C. Cir. 2000) ("Because we hold [the agency] had no authority to promulgate that rule in the first instance, the Court finds it unnecessary to take up [appellant's] notice-and-comment claim. The agency has exceeded the scope of the authority delegated to it by Congress, and it matters not that they adhered to the APA's procedural requirements in doing so."). Thus it was pointless for the hospitals to argue the Manual provision should have been passed by notice-and-comment rulemaking when it plainly exceeded the Secretary's authority. This explains why the hospitals raised the notice-and-comment issue in a single footnote of their opening brief, see Appellants' Br. at 32 n. 13, or as the court describes it, "without much elaboration," Maj. Op. at 494, while devoting the lion's share of their briefs to challenging the Secretary's statutory authority. And counsel for the hospitals confirmed this was their position at oral argument:

The Court: So your position is that if [the Secretary] had gone through a notice-and-comment rulemaking and received whatever substantial evidence support what appears in the Manual, that even then [she] couldn't promulgate this rule?

Counsel: . . . That is both our position and, obviously, the logical import of our position.

Oral Arg. Recording at 11:21-40.

The hospitals paid the insurance premiums for which they seek reimbursement during the period from 1997 to 2002. The Board conducted a hearing on the hospitals' appeal from the intermediary's denial of reimbursement in 2004 but did not issue its decision until 2007. The district court issued its decision in 2009. It is time for this dispute to end. Fortunately for the hospitals, the court's opinion should allow for quick resolution of their reimbursement claims, since, even if the investment restrictions are passed through notice-and-comment procedures, the Secretary will be unable to apply them retroactively to the hospitals. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208-213, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (holding Secretary lacks authority under section 1395x(v)(1)(A) to promulgate cost-limit rules with retroactive effect). Nevertheless, there is no good reason for the court to give the Secretary the opportunity to prospectively promulgate a rule implementing precisely the same restrictions when she has offered no basis to believe her statutory authority reaches that far in the first place. See PIA-Asheville, Inc. v. Bowen, 850 F.2d 739, 740-41 (D.C. Cir. 1988) (noting "the Secretary offers no new substantive justification for his erstwhile policy, but instead claims that the existence of the new regulation incorporating that policy should change our view" and rejecting this argument where court had held in prior decision that the policy violated the statutory requirement to reimburse reasonable costs). Instead, we should do as courts ordinarily do and answer the question the parties have put before us — particularly since that answer would resolve this dispute for good.

Second, the court's opinion may cause unintended and unwelcome consequences by calling into question the procedural legitimacy of many other provisions in the Manual. In Shalala v. Guernsey Memorial Hospital, the Supreme Court affirmed the Secretary's use of the Manual to provide guidance, to providers and intermediaries, describing its interpretive rules as part of "a sensible structure for the complex Medicare reimbursement process," 514 U.S. 87, 101, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995). As we have noted, the Court in Guernsey explained the Secretary "does not have a statutory duty to promulgate regulations that `address every conceivable question in the process of determining equitable reimbursement.' Rather, for `particular reimbursement details not addressed by' regulations, [the Secretary] properly relies upon an elaborate adjudicative structure which includes the right to review by the [Board].'" Tenet HealthSystems HealthCorp. v. Thompson, 254 F.3d 238, 248 (D.C. Cir. 2001) (quoting Guernsey, 514 U.S. at 96, 115 S.Ct. 1232).

The court's opinion ignores Guernsey's test for whether a Manual provision must be promulgated by notice-and-comment rulemaking. See Guernsey, 514 U.S. at 100, 115 S.Ct. 1232 (noting "APA rulemaking would • still be required if [the Manual provision] adopted a new position inconsistent with any of the Secretary's existing regulations [but the Manual provision] does not . . . effec[t] a substantive change in the regulations") (internal quotation marks omitted). Moreover, the court fails to identify clear limiting principles by which the Secretary and providers can distinguish Manual section 2162.2.A.4 from other Manual provisions. For instance, the court states, "[T]he process of announcing propositions that specify applications of [vague] terms [such as "just and reasonable"] is not ordinarily one of interpretation, because those terms in themselves do not supply substance from which the propositions can be derived." Maj. Op. at 495 (internal quotation marks omitted). But this perspective fails to account for the way complex regulatory regimes such as Medicare really work. The Secretary relies on a hybrid of rulemaking and adjudication — an approach approved by the Court in Guernsey. See 514 U.S. at 96-97, 115 S.Ct. 1232 ("The APA does not require that all the specific applications of a rule evolve by further, more precise rules rather than by adjudication. The Secretary's mode of determining benefits by both rulemaking and adjudication is, in our view, a proper exercise of her statutory mandate."). Interpretive rules are the glue that holds this regulatory structure together. The Secretary's administration of the Medicare program frequently calls for specific applications of vague statutory terms, including "reasonable cost," and, as we have noted, "an agency may use an interpretive rule to transform a vague statutory duty or right into a sharply delineated duty or right." Cent. Tex. Tel. Co-op., Inc. v. FCC, 402 F.3d 205, 214 (D.C. Cir. 2005); see also id. ("[A]n interpretive rule does not have to parrot statutory or regulatory language but may have the effect of creating new duties.").

By ignoring these principles, the court's opinion calls into question many other provisions in the Manual. See, e.g., Manual ch. 2 § 215.1 ("An exception to this limitation is permitted when the debt cancellation costs are less than 50 percent of the amount of interest cost and amortization expense that would have been allowable in that period had the indebtedness not been cancelled, in which case, the full amount will be allowable in the period incurred."); id. ch. 21, § 2162.5 (establishing a 10% test for determining when losses relating to insurance deductible are allowable costs); id. ch. 21, § 2109.2.D ("The allowance for membership in professional associations and continuing medical education is limited to the lesser of actual cost or 5 percent of the applicable [Reasonable Compensation Equivalent] base amount."); id. ch. 22 § 2208.1.E (establishing the specified percentages for the per diem method of cost apportionment as 93% for short-term hospitals and 98% for long-term hospitals); id. ch. 22 § 2202.7.II.A.5 ("A minimum nurse-patient ratio of one nurse to two patients per patient day must be maintained . . . .").

As the Secretary's counsel explained during oral argument, "Guernsey . . . stands for the proposition that the technical specifics of the application of the broad Medicare standards are appropriately resolved through adjudication by the agency with the Manual guideline as a tool. . . ." Oral Arg. Recording at 21:22-51. In light of Guernsey's endorsement of the Secretary's "sensible structure" for administering the Medicare program, courts should refrain as much as possible from tinkering with this regulatory framework. See Nat'l Med. Enters., Inc. v. Shalala, 43 F.3d 691, 693, 696-97 (D.C. Cir. 1995) (deciding Manual section 2203 which "provide[d] a three-part guide for allocating costs to routine or ancillary centers" was an interpretive rule rather than a substantive rule requiring notice and comment); Sentara-Hampton Gen. Hosp. v. Sullivan, 980 F.2d 749, 759-60 (D.C. Cir. 1992) (per curiam) (holding Manual provision not subject to notice-and-comment rulemaking). Invalidating the Manual provision as exceeding the Secretary's authority thus is less intrusive than declaring the provision must be enacted, if at all, by notice-and-comment rulemaking. The first approach affects only the investment restrictions while the second casts doubt upon the procedural legitimacy of the Manual as a whole.

* * *

The investment restrictions in the Manual provision are beyond the Secretary's authority because they have no connection to the "reasonable cost" language in section 1395x(v)(1)(A) of the Medicare statute. I would hold the provision invalid on that basis alone.