The U.S. Court of Appeals for the District of Columbia has ordered the federal government to pay more than $800,000 to three Washington area hospitals that were underpaid for the labor costs involved in the care of Medicare patients.

In a ruling with broad ramifications in administrative law, a three-judge panel of the court upheld a lower-court ruling in favor of Georgetown University Hospital, Howard University Hospital and Greater Southeast Community Hospital.

The court said the Department of Health and Human Services acted illegally in retroactively applying to the hospitals rules adopted in 1984 to calculate labor costs that should be reimbursed under Medicare, the federal health insurance program for the elderly. The government had sought to apply the 1984 rules to 1982 and 1983.

The retroactive ruling allowed the department to recover more than $2 million from the three local hospitals and other hospitals around the country.

Lawyers on both sides said the court ruling late last month sets an important precedent in forbidding government agencies in general from seeking to retroactively apply regulations set under the Administrative Procedure Act, which governs much of federal rule-making.

"This is the first case in which a court has expressly held that a rule under APA cannot be retroactive," said Ronald N. Sutter, who represented the hospitals. "It has very broad applicability."

"It limits the government's situation to deal with past situations," agreed Terry Coleman, principal deputy general counsel for the Department of Health and Human Services.

"The case would {also} seem to prevent a retroactive rule that would benefit hospitals," he added.

Coleman said the department is considering an appeal of the case to the Supreme Court. Although the government's liability on the labor cost issue is only a few million dollars, the department faces the prospect of paying hospitals as much as $300 million on another related issue governed by the same principle at issue -- its formula for calculating its share of malpractice insurance premiums.

The case in question grew out of a 1981 decision by the Department of Health and Human Services, which oversees Medicare, to recalculate the way it reimburses hospitals for the labor costs they incur in taking care of Medicare patients.

The recalculation would have cost local hospitals several hundred thousand dollars, and the hospitals challenged the new rules, successfully, on the grounds that ample notice wasn't given.

The government reissued the rule three years later, this time adhering to proper procedures, but they gave the regulation retroactive effect.

The hospitals challenged the government again, winning support for their view in U.S. District Court here. The appeals court upheld this decision, arguing in part that the department's behavior violated the Administrative Procedure Act.