dissenting.
A fundamental requirement of the Administrative Procedure Act (APA) is that interested persons be given notice of proposed substantive regulations and an opportunity to comment. See 5 U.S.C. § 553. The majority concludes that the rule in question, Provider Reimbursement Manual § 2534.5 (the PRM rule), is exempt from the APA’s notice and comment requirement because it is an “interpretive” rule. See id. § 553(b)(A). I believe that the PRM rule is substantive. Because the rule was enacted without notice and an opportunity for comment, it should therefore be declared invalid.
I. BACKGROUND
As explained by the majority, the governing statute establishes different cost limits for free-standing versus hospital-based skilled nursing facilities. Freestanding skilled nursing facilities (FS-SNFs) have a cost limit equal to 112% of the mean per diem costs of all FS-SNFs, which the parties refer to as Level 1. The cost limit for hospital-based skilled nursing facilities (HB-SNFs) is computed through a two step process: first, one determines 112% of the mean per diem costs of all HB-SNFs, which the parties refer to as Level 3, and that number is then compared with Level 1. The amount midway between Levels 1 and 3 is the cost limit for HB-SNFs, which the parties refer to as Level 2. Thus, in the majority’s illustrative scenario, $80 is Level 1, the cost limit for FS-SNFs, $120 is Level 3, equaling 112% of the average per diem cost of HB-SNFs, and $100 is Level 2, the cost limit for HB-SNFs. All of these numbers represent the average daily cost, per person, of operating various skilled nursing facilities.
Facilities that provide atypical services, which tend to be more expensive, may seek upward adjustments for expenditures above their cost limits. Under the reimbursement review process originally set up by 42 C.F.R. § 413.30(f), the Health Care Financing Administration granted upward adjustments to HB-SNFs that demonstrated that their costs were (1) reasonable, (2) attributable to atypical services, (3) separately identified, and (4) independently verified. See 42 C.F.R. § 413.30(f). In the years 1984-1990, St. Francis received full compensation under this regulation for its direct service costs that exceeded its cost limit, having demonstrated that its extra expenses were reasonable and legitimately due to the costs of providing atypical services. For example, if St. Francis’s routine costs had averaged $100 per person per day during those years, and its atypical direct service costs had totaled $30 per day, then the facility would have recovered the $30 above its cost limit upon making the showing called for in the regulation.
The PRM rule changed this system. Under the PRM rule, St. Francis’s atypical service expenditures are recoverable only to the extent that its total costs exceed Level 3. Using the same illustrative numbers as before, if St. Francis’s routine service costs are $100 and its atypical service costs are $30, it would recover only $10 (($130 total eosts)-($120 Level 3)) of the $30 it expended on atypical services. When a provider’s total costs do not exceed Level 3, none of its atypical service *949costs are recoverable. Thus, in 1991 and 1992, when St. Francis’s requests for an upward adjustment were evaluated under the PRM rule, the facility could not recover any of its expenditures above its cost limit (Level 2) because its total costs did not exceed Level 3. This was true even though the Secretary acknowledges that St. Francis’s expenditures were legitimately spent for the provision of atypical services.
II. ANALYSIS
A. The PRM rule is substantive
This court has set out the following broad guidelines for determining the nature of an administrative rule: “An interpretive rule simply states what the administrative agency means, and only reminds affected parties of existing duties.... On the other hand, if by its action the agency intends to create new law, rights or duties, the rule is properly considered to be a legislative rule.” Michigan v. Thomas, 805 F.2d 176, 182-83 (6th Cir.1986) (citations and internal quotation marks omitted). The exemption for interpretive rules must be narrowly construed by the courts in view of the important purposes served by the APA’s procedural requirements. See, e.g., Caraballo v. Reich, 11 F.3d 186, 195 (D.C.Cir.1993).
In defending its conclusion that the PRM rule is interpretive rather than substantive, the majority emphasizes that the controlling statute, 42 U.S.C. § 1395yy, leaves the exemption-granting process to the Secretary’s discretion. Her department’s prior regulation on the subject preserves that discretion, subject to the four requirements listed above. See 42 C.F.R. § 413.30(f). The majority therefore maintains that the PRM rule is simply a guide to the Secretary’s exercise of discretion. It concludes that “the [PRM] rule does not effect new substantive reimbursement standards inconsistent with prior regulations — the central characteristic of a substantive rule.” Op. at 947.
I respectfully disagree. At a minimum, the PRM rule adds a fifth, unwaivable requirement to the four reimbursement criteria set out in 42 C.F.R. § 413.30. At a maximum, the PRM rule conflicts with the prior regulation. In either case, it imposes new financial restrictions on the HB-SNFs that it regulates, thus requiring notice and comment prior to its enactment. See 5 U.S.C. § 553.
Before the PRM rule was promulgated, the Secretary was free to reimburse HB-SNFs that provided atypical services for all of their costs, including those costs above the applicable cost limit. Indeed, in the years prior to 1991, the Secretary routinely granted upward adjustments to St. Francis, reimbursing all of its direct expenditures for atypical services. Under the PRM rule, however, the Secretary no longer determines whether amounts spent on atypical services between Levels 2 and 3 should be compensated. The costs of such atypical services, even if they otherwise conform to the four requirements of 42 C.F.R. § 413.30(f), are never recoverable.
A rule that adds a new requirement to a set of existing requirements is substantive, and requires notice and comment before it can be enacted. See Ohio Dep’t of Human Svcs. v. Dep’t of Health & Human Svcs., 862 F.2d 1228, 1235 (6th Cir.1988) (holding that the department’s adoption of a “maintenance amount ceiling” for noninstitution-alized spouses of institutionalized Medicaid recipients required notice and comment because it added a requirement that was not compelled by or implicit in the existing regulations); see also Perales v. Sullivan, 948 F.2d 1348, 1354 (2d Cir.1991) (determining that a rule was substantive when it required state Medicaid submissions to provide assurance that the state possessed supporting documentation); Linoz v. Heckler, 800 F.2d 871, 877 (9th Cir.1986) (concluding that a department provision excluding payment for ambulance service from one hospital to another solely to obtain the services of a specialty physician was a substantive rule where “instead of simply clarifying a pre-existing regulation, *950[it] carved out a per se. exception”). The case of Shalala v. Guernsey Memorial Hosp., 514 U.S. 87, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995), upon which the majority relies, is consistent with the cases just cited. See id. at 100, 115 S.Ct. 1232 (“We can agree that APA rulemaking would still be required if PRM § 233 adopted a new position inconsistent with any of the Secretary’s existing regulations”).
Moreover, other courts have held that rules like the PRM rule, which impose binding constraints on an agency’s existing discretion, are generally considered substantive. See Ohio Dep’t of Human Svcs., 862 F.2d at 1234 (concluding that a rule was substantive, in part, because it was “mandatory, not advisory”); Guardian Fed. Sav. & Loan Ass’n v. Federal Sav. Loan Ins. Corp., 589 F.2d 658, 666-67 (D.C.Cir.1978) (“If it appears that a so-called policy statement is in purpose or likely effect one that narrowly limits administrative discretion, it will be taken for what it is — a binding rule of substantive law.”).
The Secretary argues that “nothing forbids an agency from changing its interpretations.” I do not quarrel with the proposition that an agency may change its rulings or interpretations over time. An agency is not free, however, to adopt new substantive regulations without notice and comment. Indeed, in both cases cited by the Secretary in which an agency modified its regulations, the change was preceded by notice and comment. See American Trucking Ass’ns v. A.T. & S.F. Ry. Co., 387 U.S. 397, 404, 87 S.Ct. 1608, 18 L.Ed.2d 847 (1967) (allowing the Interstate Commerce Commission to adopt rules, pursuant to notice and comment, which altered its previous policies regarding trailer-on-flatcar service); Western Coal Traffic League v. United States, 719 F.2d 772, 777 (5th Cir.1983) (allowing the Interstate Commerce Commission to change its methodology for evaluating a carrier’s market dominance by enacting a new regulation pursuant to notice and comment).
In the remaining cases cited by the Secretary, the challenged modification was an adjudicative ruling as to a specific party rather than a general legislative rule. See Montana Power Co. v. Environmental Protection Agency, 608 F.2d 334, 347 (9th Cir.1979) (affirming an Environmental Protection Agency order determining when construction of a power plant “commenced,” even though the order was inconsistent with prior adjudicative rulings of the agency); NLRB v. Local 103, Int’l Ass’n of Bridge, Structural and Ornamental Iron Workers, 434 U.S. 335, 98 S.Ct. 651, 54 L.Ed.2d 586 (1978) (affirming a cease and desist order issued by the National Labor Relations Board to a striking, uncertified union, which the union alleged was inconsistent with a prior ruling of the agency).
When an agency functions as an adjudicative body, it is under no obligation to act with consistency or to provide notice and an opportunity for comment by interested parties. See Michigan v. Thomas, 805 F.2d at 184 (“An administrative agency may reexamine its prior decisions and may depart from its precedents provided the departure is explicitly and rationally justified.”). Because the PRM rule under consideration is a legislative enactment rather than an adjudicative order, any modifications that it makes to prior regulations are required to have been preceded by notice and comment. See 5 U.S.C. § 553.
B. The PRM rule cannot be construed as an “interpretation” of 42 C.F.R. § 413.30
The majority concludes that by denying compensation to HB-SNFs for the costs of atypical services below Level 3, the PRM rule simply fleshes out the meaning of the terms “reasonableness” of costs and “typicality” of services contained in 42 C.F.R. § 413.30. Op. at 945. I respectfully disagree.
The regulation in question, 42 C.F.R. § 413.30, allows providers to seek compensation for “items or services [that] are atypical in nature and scope.” In denying *951compensation for costs that do not exceed Level 3, the PRM rule seemingly confuses atypical costs with atypical services. The fact that a provider’s costs are atypically high does not necessarily mean that it is providing atypical services. Conversely, the fact that a hospital has below-average costs does not necessarily establish the absence of atypical services.
The facts underlying the present case confirm this point, because it is undisputed that St. Francis provided atypical services at a cost below Level 3 for the years in question. There is thus a critical difference between atypical costs and atypical services. The PRM rule, which focuses on atypical costs, does not define or flesh out the meaning of the atypical services referred to in the prior regulation.
The majority also attempts to construe the PRM rule as an interpretation of the requirement in 42 C.F.R. § 413.30 that a provider’s costs be “reasonable.” It views the rule as a parallel provision to the two-tier system established by 42 U.S.C. § 1395yy. That system reduced the cost limit for HB-SNFs from Level 3 to Level 2, establishing a “discount factor” to account for what Congress found to be their relative inefficiency as compared to FS-SNFs. In the majority’s opinion, the PRM rule similarly factors in the alleged inefficiency of HB-SNFs and discounts reimbursement for atypical services accordingly. See Op. at 945-946.
Closer analysis reveals that the PRM rule is not analogous to the two-tier system. The PRM rule does not function as a commonly understood “discount factor,” because it completely denies compensation for the first amounts spent on atypical services. In other words, an HB-SNF that spends $100 to provide routine services and anywhere from $1 to $20 on atypical services will receive no reimbursement at all for its atypical service costs. These expenditures are arbitrarily deemed to be 100% in efficient or, alternatively, are subjected to a 100% “discount factor.” To the extent that the same hospital raises its atypical costs above $20, however, it will be compensated for those costs. I find it unpersuasive to construe these results as a “discount factor” or a measure of “reasonableness.”
Because the PRM rule should be regarded as more substantive than interpretive, and because it was enacted without notice and comment, the rule should be declared invalid. Contrary to the majority’s fears, such a result would not necessarily require the Secretary to conduct a case-by-case review of every provider’s reimbursement request. The Secretary is free to establish guidelines that will presumptively determine a provider’s eligibility for upward adjustments, thereby relieving her agency of the burden of case-by-case analyses. Those guidelines must, however, be consistent with the dictates of the governing regulation, or they must be enacted pursuant to the notice and comment procedures of the APA.
I would therefore reverse the grant of summary judgment for the Secretary and remand with instructions to enter judgment in favor of St. Francis. Because I would reverse the trial court’s disposition on the ground discussed above, I find no need to reach the other issues covered in the majority’s opinion.