# Saint Francis Hospital, Inc. v. Azar

> District Court, N.D. Oklahoma · August 4, 2020

URL: https://www.frixlaw.com/law-library/cases/10386446

## Case

- **Court:** District Court, N.D. Oklahoma
- **Decided:** August 4, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

SAINT FRANCIS HOSPITAL, INC., )
AHS HILLCREST MEDICAL CENTER, LLC, )
and ST. JOHN MEDICAL CENTER, )
)
Plaintiffs, )
)
v. ) Case No. 19-CV-170-GKF-JFJ
)
ALEX M. AZAR, II, Secretary, )
U.S. Department of Health and Human Services, )
)
Defendant. )
OPINION AND ORDER
Plaintiffs Saint Francis Hospital, Inc., AHS Hillcrest Medical Center, LLC, and St. John
Medical Center (collectively, Providers) bring this suit under Title XVIII of the Social Security
Act, as amended, seeking judicial review of the January 25, 2019 decision of the Provider
Reimbursement Review Board (PRRB), designated Decision Number 2019-D11. The parties filed
opposing briefs on the issue: the Motion for Summary Judgment [Doc. 30] of the Providers and
the Motion for Judgment on the Administrative Record [Doc. 33] of defendant Alex M. Azar, II,
the Secretary of Health and Human Services (the Secretary). For the reasons set forth below, the
court concludes that Decision Number 2019-D11 is not arbitrary, capricious, an abuse of
discretion, or contrary to law.
I. Factual and Regulatory Background
“Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. (2006), establishes the
federally funded health insurance program for the aged and disabled, commonly known as
Medicare.” Via Christi Reg’l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1261 (10th Cir. 2007),
abrogated on other ground by, Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019). The Medicare
program provides reimbursement to hospitals for both direct graduate medical education costs
(direct GME) and indirect costs of medical education (IME). 42 U.S.C. §§ 1395ww(d)(5)(B), (h).
The amount reimbursable by Medicare for direct GME and IME depends, in part, on the number
of full-time equivalent (FTE) residents trained by the hospital during the reporting year. 42 C.F.R.

§§ 412.105(a)(1), 413.76(a). In 1986, Congress amended the Medicare statute to permit the
inclusion of time spent by residents in nonhospital settings towards determining FTE for purposes
of direct GME payments owed “if the hospital incurs all, or substantially all, of the costs for the
training program in that setting.” Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-
509, § 9314(a), codified at, 42 U.S.C. § 1395ww(h)(4)(E). Similarly, in 1997, Congress amended
the Medicare statute to authorize inclusion of time spent by residents or interns in a nonhospital
setting to determine FTE for purposes of IME “if the hospital incurs all, or substantially all, of the
costs for the training program in that setting.” Balanced Budget Act of 1997, Pub. L. 105-33, §
4621(b)(2), codified at, 42 U.S.C. § 1395ww(d)(5)(B)(iv).
In 2010, Congress enacted § 5504 of the Patient Protection and Affordable Care Act, Pub.

L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010) (ACA), which amended the Medicare statute.
Specifically, § 5504 amended § 1395ww(h)(4)(E) of the Medicare statute—related to direct
GME—to insert the following prefatory statement before the existing language related to
calculation of FTE: “effective for cost reporting periods beginning before July 1, 2010.” The
ACA also amended §1395ww(h)(4)(E) to include the following new clause:
[E]ffective for cost reporting periods beginning on or after July 1, 2010, all the time
so spent by a resident shall be counted towards the determination of full-time
equivalency, without regard to the setting in which the activities are performed, if
a hospital incurs the costs of the stipends and fringe benefits of the resident during
the time the resident spends in that setting. If more than one hospital incurs these
costs, either directly or through a third party, such hospitals shall count a
proportional share of the time, as determined by written agreement between the
hospitals, that a resident spends training in that setting.
42 U.S.C. § 1395ww(h)(4)(E)(ii). Additionally, § 5504 of the ACA amended § 1395ww(d)(5) of
the Medicare statute—related to IME—to insert the following prefatory statement before the
existing language related to calculation of FTE: “[e]ffective for discharges occurring on or after
October 1, 1997, and before July 1, 2010.” The Act also amended § 1395ww(d)(5) to include the
following new clause:
Effective for discharges occurring on or after July 1, 2010, all the time spent by an
intern or resident in patient care activities in a nonprovider setting shall be counted
towards the determination of full-time equivalency if a hospital incurs the costs of
the stipends and fringe benefits of the intern or resident during the time the intern
or resident spends in that setting. If more than one hospital incurs these costs, either
directly or through a third party, such hospitals shall count a proportional share of
the time, as determined by written agreement between the hospitals, that a resident
spends training in that setting.

42 U.S.C. § 1395ww(d)(5)(B)(iv)(II). Subsection (c) of § 5504 states as follows:
The amendments made by this section shall not be applied in a manner that requires
reopening of any settled hospital cost reports as to which there is not a
jurisdictionally proper appeal pending as of the date of the enactment of this Act on
the issue of payment for indirect costs of medical education under section
1886(d)(5)(B) of the Social Security Act (42 U.S.C. § 1395ww(d)(5)(B)) or for
direct graduate medical education costs under section 1886(h) of such Act (42
U.S.C. 1395ww(h)).

The Providers are Medicare-certified acute care hospitals located in Tulsa, Oklahoma. [AR
000026]. From 2001 to 2007, the Providers each operated graduate medical education programs
for interns and residents in various specialty areas in affiliation with the University of
Oklahoma/University of Oklahoma College of Medicine, Tulsa (University). [Id.]. To that end,
the Providers were members of the Tulsa Medical Education Foundation, Inc. (Foundation), which
was established to administer the training of residents in hospital and nonhospital settings. [AR
000027].
The Providers executed written Graduate Medical Education Affiliation Agreements with
the University (Affiliation Agreements). [Id.]. Pursuant to the Agreements, the Providers together
incurred “all or substantially all” of the costs for the training programs in the Nonhospital Clinics,
as defined in 42 C.F.R. § 413.78, to which the FTEs rotated. [AR 000029].

From Fiscal Years 2001 through 2006, the Providers claimed intern and resident FTEs in
their cost reports to reflect intern and resident time spent in patient care activities at Nonhospital
Clinics in connection with approved medical residency training programs (Claimed FTEs).1 [AR
000027]. The Medicare Contractor initially approved the Providers’ Medicare reimbursement for
resident training at Nonhospital Clinics, the documentation of which included the Claimed FTEs.
[AR 000028]. However, in 2007, the Medicare Contractor reopened the Providers’ FY 2001
through FY 2006 cost reports, and removed the Claimed FTEs based on its determination the
Providers did not individually (that is, one hospital alone) incur “all or substantially all of the costs
for a training program in a nonhospital setting.” [Id.; AR 000340-000384; AR 000390-000399].
The Providers appealed the disallowances to the PRRB. [AR 000028; AR 000125-000169]. After

several years of procedural back and forth, on January 25, 2019, the PRRB issued the Decision,
concluding that the Medicare Contractor “properly reduced the Providers’ GME and IME FTE
resident counts to exclude resident rotations spent in nonhospital settings for the fiscal years at
issue.” [Doc. 1-1, p. 15]. Because the CMS Administrator declined to review the PRRB’s
decision, [AR 000018], the PRRB’s decision constitutes the final decision of the Secretary in this
matter. See 42 U.S.C. § 1395oo(f).

1 Saint Francis Hospital also claimed these costs in Fiscal Year 2007.
II. Standard of Review
The Providers seek judicial review pursuant to 42 U.S.C. § 1395oo(f)(1), which
incorporates the Administrative Procedure Act’s standard of review.2 5 U.S.C. § 706; see also
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Pursuant to the Administrative

Procedure Act, the court shall set aside agency action found to be “arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law” or “in excess of statutory jurisdiction,
authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(A), (C).
The Tenth Circuit has stated
[a]n agency’s action is arbitrary and capricious where the agency

(1) entirely fail[s] to consider an important aspect of the problem, (2) offer[s] an
explanation for its decision that runs counter to the evidence before the agency, or
is so implausible that it could not be ascribed to a difference in view of the product
of agency expertise, (3) fail[s] to base its decision on consideration of the relevant
factors, or (4) ma[kes] a clear error of judgment.

N.M. Health Connections v. U.S. Dep’t of Health & Human Servs., 946 F.3d 1138, 1162 (10th Cir.
2019) (quoting W. Watersheds Project v. Bureau of Land Mgmt., 721 F.3d 1264, 1273 (10th Cir.
2013)). However, the scope of review is “narrow.” Dep’t of Commerce v. New York, 139 S. Ct.
2551, 2569 (2019). The court must determine only “whether the Secretary examined ‘the relevant
data’ and articulated ‘a satisfactory explanation’ for his decision, ‘including a rational connection
between the facts found and the choice made.’” Id. (quoting Motor Vehicle Mfrs. Ass’n of the

2 In the Amended Complaint and Motion for Summary Judgment, the Providers also invoked the
federal mandamus statute, 28 U.S.C. § 1361. The Secretary argues that mandamus jurisdiction
does not apply. [Doc. 34, pp. 29-30 n.11]. In the Providers’ Response in Opposition to the
Secretary’s Motion for Judgment on the Administrative Record and Reply to the Secretary’s
Opposition to the Providers’ Motion for Summary Judgment [Doc. 38], the Providers state “[s]ince
the Court clearly has jurisdiction under 42 U.S.C. § 1395oo(f)(1), the Secretary’s contention [that
mandamus is inappropriate] is largely academic, and the Hospitals will not further dispute it here.”
[Doc. 38, p. 22 n.14]. Thus, the court does not consider the federal mandamus statute.
United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). The court cannot
“substitute [its] judgment for that of the Secretary,” and must confine itself “to ensuring that he
[or she] remained ‘within the bounds of reasoned decisionmaking.’” Id. (quoting Baltimore Gas
& Elec. Co. v. Nat. Res. Def. Council, Inc., 462 U.S. 87, 105 (1983)).

The Tenth Circuit generally applies the two-step test established in Chevron, U.S.A., Inc.
v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to determine whether an agency
acted within its statutory authority. WildEarth Guardians v. U.S. Fish & Wildlife Serv., 784 F.3d
677, 683 (10th Cir. 2015). Pursuant to the Chevron test, the court must first determine “whether
Congress has directly spoken to the precise question at issue.” Chevron, U.S.A., 467 U.S. at 842.
“If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency,
must give effect to the unambiguously expressed intent of Congress.” Id. at 842-43. If, however,
“the statute is silent or ambiguous with respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible construction of the statute.” Id.
In the Tenth Circuit, “[r]eviews of agency action in the district courts must be processed

as appeals.” Olenhouse v. Commodity Credit Corp., 42 F.3d 1560, 1580 (10th Cir. 1994)
(emphasis in original). Thus, “the district court should govern itself by referring to the Federal
Rules of Appellate Procedure,” and the court’s review is confined to the administrative record.
Id.; see also N.M. Health Corrections, 946 F.3d at 1161.
III. Analysis
The Providers generally argue that §§ 5504(a) and (b) of the ACA “explicitly allowed
hospitals to share the costs of resident training at nonhospital locations and to claim the
proportionate FTEs,” and that § 5504(c) of the Act “allowed hospitals with pending appeals—like
the [Providers]—to benefit from the statutory change.” [Doc. 30, pp. 11-12]. Thus, the Providers
contend that the Secretary’s interpretation of § 5504 to the contrary is flawed—and therefore the
January 25, 2019 Decision was arbitrary, capricious, and in excess of its statutory authority—for
three primary reasons: (1) the Secretary’s interpretation renders § 5504(c) superfluous; (2) it
contradicts the plain-meaning of 42 C.F.R. § 413.78(g)(6) (2010); and (3) the policy did not

undergo proper notice and comment rulemaking. [Doc. 30, pp. 28-29]. Alternatively, the
Providers contend that the Claimed FTE must be counted under pre-ACA laws and regulations.
The court separately considers each argument.
A. Superfluousness of § 5504(c)
The Providers first argue that the Secretary’s interpretation of § 5504(c) to not require
reopening of cost reports with pending appeals of IME and direct GME on the date of the
enactment of the ACA renders the entirety of § 5504(c) superfluous.
Generally, it is the duty of the court “to give effect, if possible, to every clause and word
of a statute.” Duncan v. Walker, 533 U.S. 167, 174 (2001) (quoting United States v. Menasche,
348 U.S. 528, 538-39 (1955)). The U.S. Supreme Court has therefore expressed its “‘reluctan[ce]

to treat statutory terms as surplusage’ in any setting.” Id. (quoting Babbitt v. Sweet Home Chapter,
Cmtys. for a Great Ore., 515 U.S. 687, 698 (1995)). However, “the canon against superfluity
assists only where a competing interpretation gives effect ‘to every clause and word of a statute.’”
Microsoft Corp. v. i4i Ltd. P’ship, 564 U.S. 91, 106 (2011) (quoting Duncan, 533 U.S. at 174); see
also Marx v. Gen. Revenue Corp., 568 U.S. 371, 385 (2013) (“The canon against surplusage is not
an absolute rule.”); Corley v. United States, 129 S. Ct. 1558, 1572 (2009) (Alito, J., dissenting)
(“Like other canons, the antisuperfluousness canon is merely an interpretive aid, not an absolute
rule.”).
Section 5504(c) states “[t]he amendments made by this section shall not be applied in a
manner that requires reopening of any settled hospital cost reports as to which there is not a
jurisdictionally proper appeal pending as of the date of the enactment of [the ACA]” on the issue
of IME or direct GME costs. The Providers construe the phrase “as to which there is not a

jurisdictionally proper appeal pending” to require the reopening of cost reports with pending
appeals of IME and direct GME and to permit § 5504(a) and § 5504(b) to apply to those appeals.
However, the Providers’ proposed interpretation conflicts with the plain language of § 5504.
Pursuant to the ACA, the new standard established by § 5504(a)—permitting more than one
hospital to share in direct GME—is “effective for cost reporting periods beginning on or after July
1, 2010.” Likewise, the new § 5504(b) standard for IME is “[e]ffective for discharges occurring
on or after July 1, 2010.” The statutes have separate standards, that do not explicitly permit
multiple hospitals to share costs, that apply to cost reporting periods and discharges prior to July
1, 2010. 42 U.S.C. § 1395ww(h)(4)(E)(i); 42 U.S.C. § 1395ww(d)(5)(B)(iv)(I). The Providers’
proposed interpretation would render the distinction meaningless. See Covenant Med. Ctr., Inc. v.

Sebelius, 994 F. Supp. 2d 862, 873 (E.D. Mich. 2014), aff’d, 603 F. App’x 360 (6th 2015). Because
the Providers’ competing interpretation does not give effect to “every clause and word” of the
statute, application of the canon against superfluity is inappropriate to require the court to adopt
that interpretation.3

3 Further, the U.S. Supreme Court has stated that “[t]he Affordable Care Act contains more than a
few examples of inartful drafting” and therefore “specifically with respect to this Act, rigorous
application of the canon [against surplusage] does not seem a particularly useful guide to a fair
construction of the statute.” King v. Burwell, 135 S. Ct. 2480, 2492 (2015). And, apart from the
context of the ACA, the Court has recognized “[t]here are times when Congress enacts provisions
that are superfluous.” Microsoft Corp, 564 U.S. at 106 (quoting Corley, 556 U.S. at 325). This
may be one of those times. See Covenant Med. Ctr., Inc. v. Burwell, 603 F. App’x 360, 364 (6th
Cir. 2015).
Nor can § 5504(c) otherwise be construed to require reopening. The Providers point to a
phenomenon called “negative pregnant with the affirmative,” pursuant to which the statute must
be construed to reflect a Congressional presumption that by “stating that reopening will not be
required where there is not a pending appeal, it clearly meant that reopening would be required

where there is a pending appeal.” [Doc. 30, p. 36 (emphasis in original)]. However, the Providers
point to no Tenth Circuit authority adopting a “negative pregnant with the affirmative”
construction, and the court declines to apply the principle in the first instance under the
circumstances. Rather, the Providers’ interpretation “commits the fallacy of denying the
antecedent.” Ace Fire Underwriters Ins. Co. v. Romero, 831 F.3d 1285, 1291 n.7 (10th Cir. 2016)
(citing TorPharm, Inc. v. Ranbaxy Pharm., Inc., 336 F.3d 1322, 1329 n.7 (Fed. Cir. 2003));
Covenant Med. Ctr., Inc., 994 F. Supp. 2d at 871-72. The Providers state § 5504(c)’s prohibition
against applying the amendments in a manner that requires reopening of settled hospital cost
reports as to which there is not a jurisdictionally proper appeal pending, requires reopening in
instances of a jurisdictionally proper pending appeal. “But this does not logically follow, as an

example illustrates: Because it’s not cold outside, it’s not snowing. It is now cold outside,
therefore it must be snowing.’” Ace Fire Underwriters Ins. Co., 831 F.3d at 1291 n.7 (internal
quotation omitted) (quoting Agri Processor Co. v. NLRB, 514 F.3d 1, 6 (D.C. Cir. 2008)).
Moreover, a requirement to reopen, as advocated by the Providers, is contrary to the well-
recognized discretionary nature of the reopening decision. See 42 C.F.R. § 405.1885(c); Your
Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 452 (1999). Thus, the court cannot
conclude that Congress intended § 5504(c) to impose a requirement to reopen settled cost reports
as to which there is a jurisdictionally proper appeal pending.
Further, the Providers’ interpretation requires the court to reach a second, equally,
problematic conclusion—that Congress intended the new standards articulated in §§ 5504(a) and
(b) to apply retroactively. This second conclusion runs afoul of the presumption against retroactive
legislation.

[T]he presumption against retroactive legislation is deeply rooted in our
jurisprudence, and embodies a legal doctrine centuries older than our Republic.
Elementary considerations of fairness dictate that individuals should have an
opportunity to know what the law is and to conform their conduct accordingly;
settled expectations should not be lightly disrupted.

Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994) (internal footnote omitted). Thus, a court
must not “give retroactive effect to statutes burdening private rights unless Congress had made
clear its intent.” Id. at 270; see also Immigration & Naturalization Serv. v. St. Cyr, 533 U.S. 289,
316 (2001) (quoting Landgraf, 511 U.S. at 316) (“A statute may not be applied retroactively,
however, absent a clear indication from Congress that it intended such a result. ‘Requiring clear
intent assures that Congress itself has affirmatively considered the potential unfairness of
retroactive application and determined that it is an acceptable price to pay for the countervailing
benefits.’”). The presumption applies “in cases involving new monetary obligations that fell only
on the government.” Landgraf, 511 U.S. at 271 n.25; Yale-New Haven Hosp. v. Leavitt, 470 F.3d
71, 87 n.16 (2d Cir. 2006) (Medicare Act).
Section 5504 includes “no clear indication” that Congress intended § 5504(c) to be applied
retroactively. Rather, “Congress expressly indicated in the statute itself what standards apply to
what cost periods.” Covenant Med. Ctr., Inc., 994 F. Supp. 2d at 872. The Providers urge the
court to construe § 5504(c) as a limitation or qualification of the effective dates included in §§
5504(a) and (b), rather than a nullification, pursuant to the general/specific canon. However, as
discussed above, the court does not construe § 5504(c) as a specific grant of permission. Further,
unlike §§ 5504(a) and (b), § 5504(c) does not explicitly relate to the calculation of FTE but, rather,
to the appeals process.
Additionally, the court notes that, although the ACA’s next section, § 5505, includes
language that authorizes the Secretary to act retroactively, § 5504 includes no similar language.

Covenant Med. Ctr., Inc., 994 F. Supp. 2d at 874; Cf. Pub. L. No. 111-148 § 5505(c), 124 Stat.
119 (Mar. 23, 2010). As recognized by a Sixth Circuit panel, “[t]hat language in turn creates a
negative implication of its own: that Congress did not want the Act’s reimbursement rules to be
retroactive, period.” Covenant Med. Ctr., Inc., 603 F. App’x at 364 (emphasis in original).
Finally, the Providers invoke the “absurdity” exception to the plain language rule. [Doc.
30, pp. 39-42]. Pursuant to the “absurdity” exception, the court must not apply a statute’s plain
language “where a plain language interpretation would lead to an outcome so ‘absurd’ that
Congress clearly could not have intended such an outcome.” Resolution Tr. Corp. v. Westgate
Partners, Ltd., 937 F.2d 526, 529 (10th Cir. 1991); see also In re McGough, 737 F.3d 1268, 1276
(10th Cir. 2013) (“[W]here a plain language interpretation of a statute would lead to an absurd

outcome which Congress clearly could not have intended, we employ the absurdity exception to
avoid the absurd result.”). However, the Tenth Circuit has stated that the “link between the
‘absurdity’ exception and congressional intent is crucial.” Resolution Trust Corp., 937 F.2d at
529. “It is not enough for a court to find that upon application of the plain meaning of a statute, a
given outcome is foolish. Instead, a court so finding must be convinced that the result is so absurd
that Congress, not the court, could not have intended such a result.” Id. (emphasis in original).
Accordingly, “[o]ne claiming that the plain, unequivocal language of a statute produces an absurd
result must surmount a formidable hurdle.” Robbins v. Chronister, 435 F.3d 1238, 1241 (10th Cir.
2006). The doctrine applies “only when it would have been unthinkable for Congress to have
intended the result commanded by the words of the statute—that is, when the result would be ‘so
bizarre that Congress could not have intended it.’” Id. (quoting Demarest v. Manspeaker, 498 U.S.
184, 190-91 (1992)).
The Providers have failed to “surmount the formidable hurdle” to apply the absurdity

doctrine. The Tenth Circuit has recognized that “the absurdity rule is ‘a tool to be used to carry
out Congress’ intent—not to override it.’” In re McGough, 737 F.3d at 1276 (quoting Resolution
Trust Corp., 937 F.2d 529). The Providers argue that Congress could not have intended to render
§ 5504(c) entirely superfluous or absurd by requiring reopening with application of the original
rule (against sharing). [Doc. 30, p. 41]. However, as previously stated, “[t]here are times when
Congress enacts provisions that are superfluous.” Microsoft Corp, 564 U.S. at 106. Further,
applying the plain language does not create a result “so bizarre that Congress could not have
intended it.” Robbins, 435 F.3d at 1241. The plain language of § 5504(c) prohibits application of
§§ 5504(a) and (b) “in a manner that requires reopening of any settled hospital cost reports as to
which there is not a jurisdictionally appeal pending as of the date of the enactment of th[e] Act on

the issue of payment” for IME and direct GME. The Providers argue that the Secretary’s
interpretation is unnecessary because it is well-established that the decision to reopen is
discretionary. However, Congress could rationally have wished to clarify that issue with respect
to certain claims. Moreover, insofar as the Providers assert that Congress could not have intended
to permit reopening subject to the rule against sharing, the court “cannot reject the plain meaning
of statutory language just because Congress may not have anticipated the result compelled by that
language in a particular case.” Robbins, 435 F.3d at 1242. Thus, the Secretary’s interpretation
does not lead to a result that is so “unthinkable” to warrant application of the absurdity doctrine.
The plain language of § 5504 governs, and reopening is not required.
Finally, the court concurs with the conclusion of the U.S. District Court for the District of
Maine, that “even if I were to conclude that the statutory language is ambiguous,” the Secretary’s
interpretation of § 5504 constitutes “a permissible construction of the statute.” See E. Maine Med.
Ctr. v. Burwell, 159 F. Supp. 3d 109, 120 (D. Me. 2016) (quoting Chevron, 467 U.S. at 838).4

B. Construction with the Plain Meaning of 42 C.F.R. § 413.78(g)(6) (2010)
The Providers next contend that the Secretary’s interpretation is inconsistent with 42 C.F.R.
§ 413.78(g)(6) (2010), and the Secretary’s prior construction of that regulation. Effective January
1, 2011, § 413.78(g) stated, in relevant part, as follows:
(g) For cost reporting periods beginning on or after July 1, 2010, the time residents
spend in nonprovider settings such as freestanding clinics, nursing homes, and
physicians’ offices in connection with approved programs may be included in
determining the number of FTE residents in the calculation of a hospital’s resident
count if the following conditions are met—

(2) The hospital or hospitals must incur the costs of the salaries and
fringe benefits of the resident during the time the resident spends in
the nonprovider setting. If more than one hospital incurs these costs,
either directly or through a third party, the hospitals must count a
proportional share of the time that residents train at the nonhospital
setting(s) as recorded in a written agreement between the hospitals.

***

(6) The provisions of paragraphs (g)(1)(ii), (g)(2), (g)(3), and (g)(5) of
this section cannot be applied in a manner that would require the
reopening of settled cost reports, except those cost reports on which

4 The Providers argue that the court should afford less deference to the Secretary’s interpretation
of § 5504 in light of the U.S. Supreme Court’s decision in Kisor v. Wilkie, 139 S. Ct. 2400 (2019).
In Kiser, the Court considered whether it should overrule the deference standard articulated in
Auer v. Robbins, 519 U.S. 452 (1997), which defers to an agency’s reasonable reading of a
genuinely ambiguous regulation. The Providers assert that, in Kisor, “the Supreme Court imposed
significant new limits on when Auer deference applies.” [Doc. 30, p. 27]. Even if the Kisor
opinion limits the applicability of Auer deference, Kisor relates to the appropriate deference to be
given to an agency’s interpretation of its governing regulations, not statutes. Kisor, 139 S. Ct. at
2414; see also id. at 2425 (Roberts, C.J., concurring in part).
there is a jurisdictionally proper appeal pending on direct GME or
IME payments as of March 23, 2010.

42 C.F.R. § 413.78(g) (2010) (emphasis added). The Providers argue that the phrase “except those
cost reports on which there is a jurisdictionally proper appeal” requires the reopening of costs
reports on which a pending appeal exists and application of the new standards set forth in §§
5504(a) and (b). However, as recognized by the Sixth Circuit, effective October 1, 2014, the
Department of Health and Human Services amended § 413.78(g)(6) to state as follows:
The provisions of paragraphs (g)(1)(ii), (g)(2), (g)(3), and (g)(5) of this section shall
not be applied in a manner that requires reopening of any settled cost reports as to
which there is not a jurisdictionally proper appeal pending as of March 23, 2010,
on direct GME or IME payments. Cost reporting periods beginning before July 1,
2010 are not governed by paragraph (g) of this section.

42 C.F.R. § 413.78(g)(6).5 “[A] new version of a regulation supersedes the old version as soon as
an agency adopts it in a final rule.” Covenant Med. Ctr., Inc., 603 F. App’x at 364-65 (citing
Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 741-42 (1996)).6 Thus, the amended version of §
413.78(g)(6) explicitly prohibits expense sharing through retroactive application of § 5504 and its
implementing regulation, § 413.78(g)(2).
The Providers argue that application of the version of § 413.78 that became effective on
October 1, 2014, raises retroactivity concerns because the amendment was a substantive change,

5 Section 413.78 was subsequently amended effective May 8, 2020 with respect to the Public
Health Emergency associated with COVID-19. Medicare and Medicaid Programs, Basic Health
Program, and Exchanges; Additional Policy and Regulatory Provisions in Response to the
COVID-19 Public Health Emergency, 85 Fed. Reg. 27,550, 27,623 (May 8, 2020). The
amendment did not alter the language of subsection (g)(6).

6 The Providers suggest some impropriety in the motivation behind the amendment, noting that
the Secretary amended the regulation while briefing was ongoing in Covenant. The timing of the
amendment, in this instance, does not affect the court’s deference determination. See Smiley, 517
U.S. at 741 (“Nor does it matter that the regulation was prompted by litigation, including this very
suit.”).
rather than a “clarification” of existing policy as advocated by the Secretary. At least one court
has previously rejected this argument. E. Maine Med. Ctr., 159 F. Supp. 3d at 120 n.13 (“Because
this new version of the regulation is merely a clarification of the Secretary’s interpretation, it raises
no retroactivity concerns.”). Nevertheless, in an abundance of caution, the court undertakes an

independent analysis of the earlier version of the regulation.
Looking to its plain language, § 413.78(g)(6), as in effect from January 1, 2011 to
September 30, 2014, explicitly stated that paragraph (g)(2), among others, “cannot be applied in a
manner that would require the reopening of settled cost reports, except those cost reports on which
there is a jurisdictionally proper appeal pending on direct GME or IME payments as of March 23,
2010.” 42 C.F.R. § 413.78(g)(6) (2010). As recognized by the district court in Covenant,
paragraph (g)(6) is “almost identical” in effect to § 5504(c), Covenant Med. Ctr., Inc., 994 F. Supp.
2d at 874, which, as discussed above, this court does interpret to require reopening. Further, even
assuming that paragraph (g)(6) could be construed to require reopening, paragraph (g)(2),
permitting expense sharing, is explicitly limited to “cost reporting periods beginning on or after

July 1, 2010.” 42 C.F.R. § 413.78(g)(2). Paragraphs (d), (e), and (f)—which do not permit expense
sharing—provide the applicable standards for cost reports and discharges from January 1, 1999
through July 1, 2010. The Providers urge the court to interpret paragraph (g)(6) as a limited
exception pursuant to which the preceding paragraphs of subsection (g) can be applied to cost
reports predating July 1, 2010. However, it is well-established that “administrative rules will not
be construed to have retroactive effect unless their language requires this result.” Bowen v.
Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988). Here, the plain language of § 413.78 requires
application of the “all, or substantially all” standard to cost reports or discharges prior to July 1,
2010, and does not explicitly permit sharing.
Further, for the reasons discussed above, § 413.78 as effective from January 1, 2011 to
September 30, 2014, reflects a reasonable agency interpretation of § 5504.7 See Barnhart v.
Walton, 535 U.S. 212, 221-22 (2002); Chevron, 467 U.S. at 843. In the preamble, or “Background
Changes Made by the Affordable Care Act” section, of the final rule, in response to certain

comments, the Secretary stated:
There appears to be a misreading of our interpretation of section 5504(c). The
effective date of the provisions of section 5504 is clearly July 1, 2010. This date is
unambiguously stated in the plain text of section 5504(a), which states that it is
“effective for cost reporting periods beginning on or after July 1, 2010.” Similarly,
section 5504(b) is “effective for discharges occurring on or after July 1, 2010.” Our
discussion of section 5504(c) in the August 3, 2010 proposed rule (75 FR 46385)
only intended to explain our interpretation of the phrase “a jurisdictionally proper
appeal pending” in the context of the plain language of the statute. However, we
are clarifying in this final rule that, as noted above, and unlike some other
provisions of the Affordable Care Act, section 5504 is fully prospective, with an
explicit effective date of July 1, 2010, for the new standards it creates. Nothing in
section 5504(c) overrides that effective date. Section 5504(c) merely notes that the
usual discretionary authority of Medicare contractors to reopen cost reports is not
changed by the provisions of section 5504; it simply makes clear that Medicare
contractors are not required by reason of section 5504 to reopen any settled cost
report as to which a provider does not have a jurisdictionally proper appeal pending.
It does not require reopening in any circumstance; and the new substantive
standard is, in any event, explicitly prospective. We believe if Congress had
wanted to require such action or to apply the new standards to cost years or
discharges prior to July 1, 2010, it would have done so in far more explicit terms.

Medicare Program: Payments to Hospitals for Graduate Medical Education Costs, 75 Fed. Reg.
71,800, 72,136 (Nov. 24, 2010) (emphasis added). The Secretary’s interpretation of § 5504 as
only prospective is a permissible construction of that statute.

7 Because the court concludes that the agency’s interpretation of the administrative rule does not
conflict with the text of § 413.78 itself, the Providers’ discussion of Saint Francis Medical Center
v. Azar—which the Providers cite for the proposition that, where there is a conflict between the
mixed signals contained in a preamble statement and the clear text of a regulation, the regulation
controls—is inapposite. See [Doc. 30, p. 43 (citing 894 F.3d 290, 297 (D.C. Cir. 2018))].
C. Notice and Comment Rulemaking
Regardless, the Providers argue that the Secretary is precluded from applying his
interpretation of § 5504 because it was not the product of proper notice-and-comment rulemaking.
Specifically, the Providers contend that the final rule, effective January 1, 2011, was not a “logical

outgrowth” of the proposed rule and therefore is ineffective. See Allina Health Servs. v. Sebelius,
746 F.3d 1102, 1109 (D.C. Cir. 2014). The Providers point to the Secretary’s statements in the
preamble of the proposed § 413.78:
Section 5504(c) of the Affordable Care Act specifies that the amendments made by
the provisions of sections 5504(a) and (b) shall not be applied in a manner that
would require the reopening of settled cost reports except where the provider has a
jurisdictionally proper appeal pending on the issue of direct GME or IME payments
as of March 23, 2010 (the date of the enactment of Pub. L. 111-148). We are
proposing to interpret “pending, jurisdictionally proper appeal on direct GME or
IME payments” to mean that in order for a hospital to request a change to its FTE
count, direct GME or IME respectively, the “pending, jurisdictionally proper
appeal” must be specific to direct GME or IME respectively. For example, in order
for a hospital to increase its FTE count with regard to an ACA provision that is
unique to IME (such as inclusion in the IME count of didactic time occurring in the
hospital as specified by new section 1886(d)(5)(B)(x)(II)), the hospital’s “pending,
jurisdictionally proper appeal” must be on an IME issue; IME FTEs or the available
bed count. However, if the hospital’s “pending, jurisdictionally proper appeal” is
on an issue that only affects direct GME payments, such as the initial residency
period or the Medicare patient load, that appeal would not be sufficient in order for
the hospital to increase its FTE count with regard to an ACA provision that is
unique to IME, such as didactic time in the hospital setting.

Medicare Program; Proposed Changes to Payments to Hospitals for Certain Inpatient Hospital
Services and for Graduate Medical Education Costs, 75 Fed. Reg. 46,169, 46,385 (proposed Aug.
3, 2010) (emphasis added). Based on this language, the Providers argue that stakeholders could
not have anticipated that the Secretary would adopt an interpretation of § 5504 so as to not require
reopening.
Courts have recognized that “[a]n agency may promulgate a rule that differs from a
proposed rule only if the final rule is a ‘logical outgrowth’ of the proposed rule.” Allina Health
Servs., 746 F.3d at 1107 (quoting Ass’n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d
427, 442 (D.C. Cir. 2012)); see also Mkt. Synergy Grp., Inc. v. U.S. Dep’t of Labor, 885 F.3d 676,
681 (10th Cir. 2018). “A final rule qualifies as a logical outgrowth if interested parties ‘should
have anticipated’ that the change was possible, and thus reasonably should have filed their

comments on the subject during the notice-and-comment period.” Market Synergy Grp., Inc., 885
F.3d at 681 (internal quotations omitted) (quoting CSX Transp., Inc. v. Surface Transp. Bd., 584
F.3d 1076, 1079-80 (D.C. Cir. 2009)).
Here, the Secretary stated that the agency was “proposing to interpret” § 5504(c) to permit
a hospital to request a change to its FTE count only if a “pending, jurisdictionally proper appeal”
exists that is specific to direct GME or IME respectively. However, “[o]ne logical outgrowth of a
proposal is surely . . . to refrain from taking the proposed step.” Stringfellow Mem’l Hosp. v. Azar,
317 F. Supp. 3d 168, 187 (D.D.C. 2018) (quoting New York v. U.S. Envtl. Protection Agency, 413
F.3d 3, 44 (D. C. Cir. 2005)); see also Commodity Futures Trading Comm’n v. Schor, 478 U.S.
833, 845 (1986) (“It goes without saying that a proposed regulation does not represent an agency’s

considered interpretation of its statute and that an agency is entitled to consider alternative
interpretations before settling on the view it considers most sound.”). Further, the Secretary noted
that many commenters “disagreed” with the interpretation of § 5504(c) of the proposed rule and
that some commenters read the proposed application provisions of § 5504(c) to permit application
of the provisions of §§ 5504(a) and (b) to cost reporting periods prior to July 1, 2010. 75 Fed.
Reg. at 72,136. Although not dispositive, the comments suggest that the various parties anticipated
that the final rule might adopt a contrary interpretation. Mkt. Synergy Grp., Inc., 885 F.3d at 681
(internal quotations omitted). Finally, the court notes that the Secretary’s interpretation does not
constitute a change to a longstanding existing practice, disguised as a “clarification,” as the
Secretary was amending a regulation consistent with his interpretation of a new statute. Cf. Allina
Health Servs., 746 F.3d at 1108; see also Abington Mem’l Hosp. v. Burwell, 216 F. Supp. 3d 110,
134 (D.D.C. 2016) (“To read Allina as Plaintiffs’ [sic] do—i.e., as standing for the proposition
that the mere appearance of the word ‘clarify’ in a proposed rule makes it per se impossible for

regulated entities to anticipate that a change is being made—goes much too far, and that is
especially evident where, as here, the agency’s proposed rule otherwise makes it abundantly clear
that the policy being proposed is, in fact, a ‘change’ and a ‘revision’ of a previous rule.”).
More fundamentally, however, the Providers overlook the fact that the cited portion of the
proposed rule says nothing of the applicability of §§ 5504(a) and (b), and is directed solely to
interpreting the phrase “pending, jurisdictionally proper appeal” in the context of § 5504(c).
Throughout the proposed rule, the Secretary explicitly states that sharing of expenses shall be
permitted only after July 1, 2010. See 75 Fed. Reg. at 46,385 (emphasis added) (“We also are
proposing to add a new § 413.78(g) that details how hospitals should count residents that train in
nonhospital sites for cost reporting periods beginning on or after July 1, 2010.); id. at 46,386

(emphasis added) (“Therefore, these statutory changes now allow hospitals to share the costs of
resident training at nonhospital sites, so long as those hospitals divide the resident time
proportionally pursuant to a written agreement, for the purposes of determining their respective
direct GME and IME FTE resident counts at the nonhospital site. These provisions of the statute
are effective for cost reporting periods beginning on or after July 1, 2010 for direct GME, and for
discharges occurring on or after July 1, 2010 for IME. Accordingly, although hospitals that shared
training costs at nonhospital sites could not count any of resident time spent training at those
nonhospital sites prior to July 1, 2010, hospitals can count all of that training time beginning on
or after July 1, 2010, as long as they divide the resident training time proportionally.”). Thus, the
proposed rule makes clear that §§ 5504(a) and (b) shall not apply retroactively, only prospectively,
and is therefore not an impermissible “switcheroo.” Accordingly, the Secretary’s final rule, which
prohibits expense sharing in cost reporting periods prior to July 1, 2010, is clearly the “logical
outgrowth” of the proposed rule.8

Thus, for the reasons discussed above, insofar as the preamble to the final rule reflects the
agency’s interpretation of administrative rule § 413.78, rather than a statute, if the court were to
construe § 413.78 as ambiguous (which it does not), the rule reflects the agency’s “‘fair and
considered’ judgment.” Cf. Kisor, 139 S. Ct. at 2417-18 (“[A] court may not defer to a new
interpretation, whether or not introduced in litigation, that creates ‘unfair surprise’ to regulated
parties.”).9
D. Pre-ACA Laws and Regulations
Finally, in the alternative, the Providers argue that residents rotating to shared nonhospital
settings must be included under the pre-ACA law and regulations because: (1) the anti-sharing
policy was not enacted through notice and comment rulemaking as required by the Medicare

statute’s heightened standards, and (2) the anti-sharing policy is not entitled to Auer deference.

8 For this reason, the court concurs with the U.S. District Court for the District of Maine that new
version § 413.78, which became effective October 1, 2014, “is merely a clarification” of the
Secretary’s interpretation of existing policy as set forth in the version of § 413.78 in effect from
January 1, 2011 to September 30, 2014. Eastern Maine Med. Ctr., 159 F. Supp. 3d at 120 n.13;
see also Falaniko v. Mukasey, 272 F. App’x 742, 749 (10th Cir. 2008) (regulation that clarified
agency’s pre-existing position is “not impermissibly retroactive”).

9 The Providers also contend that deference is not required because interpretation of ACA does not
implicate the agency’s substantive expertise. See Kisor, 139 S. Ct. at 2417. However, Congress
granted the Secretary authority to issue regulations “giving content to the broad outlines of the
Medicare statute.” Thomas Jefferson Univ., 512 U.S. at 506-07; see also 42 U.S.C. §
1395ww(h)(4). Further, judicial deference to an agency’s interpretation of a statute implicates
Chevron, rather than Auer, deference. See Kisor, 139 S. Ct. at 2425 (Roberts, C.J., concurring in
part).
1. Notice and Comment Rulemaking of Anti-Sharing Rule
As previously stated, Congress granted the Secretary authority to promulgate regulations
necessary to administer the Medicare program. See 42 U.S.C. § 1395(a)(1). However, pursuant
to the statute and subject to limited exceptions, the Secretary may not impose a “rule, requirement,

or other statement of policy . . . that establishes or changes a substantive legal standard” unless the
Secretary provides “notice of the proposed regulation in the Federal Register and a period of not
less than 60 days for public comment thereon.” 42 U.S.C. § 1395hh(a)(2), (b)(1); see also Azar v.
Allina Health Servs., 139 S. Ct. 1804, 1817 (2019). The Providers contend that the anti-sharing
policy, or single hospital requirement, established a substantive legal standard so as to warrant
notice and comment, but that the Secretary did not provide it. The court respectfully disagrees.
On May 8, 1998, the Secretary promulgated proposed rules with respect to payment of
direct GME for nonhospital time. Specifically, the Secretary offered the following payment
proposal:
In light of the numerous considerations discussed above, we are proposing a system
whereby we will pay either the hospital or the nonhospital site for the cost of
training in the nonhospital site, depending on which entity incurs “all or
substantially all” of the costs of training in the nonhospital site. An entity incurs
“all or substantially all” of the costs for the training program in the nonhospital
setting if it pays for, at a minimum: that portion of the costs of the teaching
physicians’ salaries and fringe benefits that are related to the time spent in teaching
and supervision of residents; and residents’ salaries and fringe benefits (including
travel and lodging expenses where applicable).

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal
Year 1999 Rates, 63 Fed. Reg. 25,576, 25,597-25,598 (May 8, 1998) (emphasis added). Thus,
under the proposed rule, a hospital could include a resident’s nonhospital training time in the
hospital’s FTE counts for direct GME and IME, only “if the hospital itself incurs ‘all or
substantially all’ of the costs for the training program in the nonhospital setting.” 63 Fed. Reg. at
25,599 (emphasis added); see also id. (“The hospital would have to assume ‘all or substantially
all’ of the training costs for that nonhospital training time in order to avail itself of the benefit of
including the resident in the hospital’s FTE count for IME and direct GME purposes based on the
proposed modifications to § 413.86.”10

On July 31, 1998, the Secretary promulgated the revised regulation, which provided that
“[u]nder sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act a hospital may include the time
a resident spends in nonprovider settings in its indirect medical education (IME) and direct GME
full-time equivalent count if it incurs ‘all or substantially all’ of the costs of training residents in
the nonhospital site” Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 1999 Rates, 63 Fed. Reg. 40,954, 40,986 (July 31, 1998); see also id. at
63 Fed. Reg. at 40,989. In conjunction with the revised rule, the Secretary responded to
commenters who expressed concern “that if neither the hospital or nonhospital site incurs ‘all or
substantially all’ of the costs, neither setting would receive payment even though each entity incurs
a portion of the training costs.” 63 Fed. Reg. at 40,995. Specifically, one commenter suggested

that the Secretary “should encourage affiliations and provide simpler and clearer guidance for
institutions.” Id. The Secretary responded:
Under this final rule, an entity must incur “all or substantially all” of the costs to
receive payments for the time the resident spends in the nonhospital site. Since we
do not conduct cost-finding to determine who bears “all or substantially all” of the
graduate medical education costs, we are generally dependent on hospital and non-
hospital provider agreements to determine who bears them. As stated earlier in this
final rule as well as in the proposed rule, we do not believe it would be
administratively feasible to apportion payments appropriate to the hospital and
nonhospital site in situations where neither the hospital or nonhospital site agree on

10 Section 413.86 was redesignated as 42 C.F.R. § 413.78(d) without substantive changes for cost
reporting periods after October 1, 2004. See Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg. 48916, 49,111-49,112
(Aug. 11, 2004).
who incurs “all or substantially all” of the costs. We must also consider the
statutory prohibition on double payments in these situations. Furthermore,
although it may be appropriate to provide payment for GME costs where the
nonhospital site incurs only a portion of the training costs, we do not believe it
would be equitable to allow a nonhospital site to be paid where it was incurring
only a portion of the costs but only allow payment to a hospital when it incurs “all
or substantially all” of the costs.

In response to the commenter who suggested that we should encourage
“affiliations,” we believe the revised definition of “all or substantially all” of the
costs provides incentives for hospitals and nonhospital sites to reach agreement
with regard to financial arrangements for training in nonhospital sites to avoid the
situation where neither entity receives payment for GME.

Id. Although not dispositive, that affected persons commented regarding potential “affiliations”
further suggests adequate notice and comment. Market Synergy Grp., Inc., 885 F.3d at 681
(internal quotations omitted). Thus, the 1998 regulation provided notice of the Secretary’s policy
to require that a single hospital incur “all or substantially all” of the costs of direct GME and
IME.11

11 Further, in 2003, the Secretary again submitted the single hospital requirement to notice and
comment. See Medicare Program; Proposed Changes to Payments to Hospitals for Certain
Inpatient Hospital Services and for Graduate Medical Education Costs, 68 Fed. Reg. 45,346,
45,449 (Aug. 1, 2003) (emphasis altered from original) (“We understand the concerns of the
commenters about the requirement for a hospital to incur ‘all or substantially all of the cost’ of
training residents in a training program at a nonhospital site. However, we do not believe this is a
change in policy. We believe that the policy that requires a hospital to incur the cost of ‘the
program’ in the nonhospital site has existed since the passage of the direct GME provisions . . .
and the passage of the IME provision . . . that permitted hospitals to continue to count residents in
nonhospital sites, for purposes of direct GME and IME payment, if the hospital incurred ‘all or
substantially all of the cost’ of residents training in the program.”).
Although the Providers argue that the proposed rule and subsequent regulation related only
to payments for direct GME to qualified nonhospital providers,12 in the proposed rule, the
Secretary specifically stated
In the course of developing our policies for nonhospital providers, we have
reviewed our method for paying hospitals for the costs of training residents in the
nonhospital site. Accordingly, as part of our policy to pay nonhospital providers
for the costs of training residents, we are proposing necessary and appropriate
modifications to our current policy for paying hospitals for such nonhospital
training. Specifically, as part of our proposal to implement section 1886(k) of the
Act, we propose to modify the regulations at § 413.86(f).

63 Fed. Reg. at 25,597 (emphasis added); see also 63 Fed. Reg. at 40,986 (“Additionally, we
proposed that, under certain circumstances, a hospital may continue to receive GME payments for
residents who train in the nonhospital setting.”).13
For the foregoing reasons, the court concludes that, in 1998, the Secretary submitted the
legal standard requiring a single hospital to pay “all or substantially all” of the costs of training by

12 A “qualified nonhospital provider” is defined as a federally qualified health center, a rural health
clinic, Medicare+Choice organizations, and such other providers (other than hospitals) as the
Secretary determines to be appropriate. 42 U.S.C. § 1395ww(k)(2).

13 In reply, the Providers cite, for the first time, the decision by the U.S. District Court for North
Dakota in Medcenter One Health Systems v. Leavitt, 666 F. Supp. 2d 1043 (D.N.D. 2009), in which
the court concluded that the 1998 regulations did not “establish a policy prohibiting hospitals from
splitting the total costs of a medical residency training program.” Id. at 1061. However, that
decision was subsequently reversed by the Eighth Circuit Court of Appeals. See Medcenter One
Health Sys. v. Sebelius, 635 F.3d 348 (8th Cir. 2011). Further, the district court considered the
appropriate reimbursement owed to a qualified non-hospital provider for direct GME costs, not a
hospital, and focused on the term “program” as used in the statute and regulations, an issue not
explicitly raised by the parties herein. Medcenter One Health Sys., 666 F. Supp. 2d at 1055-61.
Moreover, the Medcenter district court did not specifically consider the foregoing regulations in
its order granting plaintiff’s motion for summary judgment and denying defendant’s motion for
summary judgment. Id.
residents at nonhospital sites to notice and comment.14 Because the Secretary satisfied the notice
and comment requirement for its one hospital, or anti-sharing, policy, that standard governs the
applicable time period.
2. Appropriate Deference

Finally, the Providers argue that, even if properly subject to notice and comment, the
Secretary’s prohibition against sharing expenses, and requiring a single hospital to pay “all or
substantially all” of the training costs, is an unreasonable interpretation of the statute and therefore
entitled to no deference.
As previously stated, the Tenth Circuit generally applies the two-step test established in
Chevron, to determine whether an agency acted within its statutory authority. WildEarth
Guardians, 784 F.3d at 683. Because § 413.78 and the single hospital requirement reflect the
agency’s interpretation of § 1395ww(d)(5)(B)(iv) and 1395ww(h)(4)(E), permitting
reimbursement if the hospital incurs “all, or substantially all” of the costs for training, the court
applies Chevron deference.

As previously stated, pursuant to the Chevron test, the court must first determine “whether
Congress has directly spoken to the precise question at issue.” Chevron, U.S.A., Inc., 467 U.S. at
843. “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress.” Id. If, however,

14 Further, the court notes that Allina Health Services is factually distinguishable. Allina Health
Servs., 139 S. Ct. 1804. There, the government admitted that it had not provided notice and
comment, but argued it was not required to do so under the circumstances. Id. at 1810. In addition,
the policy change related to a spreadsheet posted on the Medicare website announcing the 2012
Medicare fractions, which “dramatically—and retroactively—reduced payments to hospitals
serving low-income patients.” Id. at 1808, 1810. Here, the anti-sharing rule, as the Providers dub
it, reflects longstanding Medicare policy.
“the statute is silent or ambiguous with respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible construction of the statute.” Id.
Here, § 1395ww is silent as to whether the “all or substantially all” requirement permits
sharing. See Borgess Med. Ctr. v. Sebelius, 966 F. Supp. 2d 1, 6 (D.D.C. 2013). Thus, the court

must consider whether the anti-sharing policy constitutes a permissible construction of the statute.
The Providers argue that the agency’s construction is unreasonable based primarily on its
failure to consider the effect of 1 U.S.C. § 1, known as the Dictionary Act. Pursuant to § 1, “[i]n
determining the meaning of any Act of Congress, unless the context indicates otherwise . . . words
importing the singular include and apply to several persons, parties, or things.” However, the U.S.
Supreme Court has characterized reliance on the Dictionary Act as “rare” and only when
“necessary to carry out the evident intent of the statute.” United States v. Hayes, 555 U.S. 415,
422 n.5 (2009) (quoting First Nat’l Bank in St. Louis v. Missouri, 263 U.S. 640, 657 (1924)). The
Providers argue that prohibiting expense sharing is contrary to Congress’s intent to expand resident
training in nonhospital sites, rather than reducing it. However, the Secretary addressed this specific

issue and concluded the rule was sufficient to encourage training in nonhospital sites. See 63 Fed.
Reg. at 25,597.
Further, the Medicare statute itself does not suggest that application of the Dictionary Act
is appropriate. As previously stated, the “all or substantially all” requirement relates to
determining a hospital’s approved FTE requirement, which, in turn, is relevant to the hospital’s
“aggregate approved amount.” 42 U.S.C. § 1395ww(h)(3). The “aggregate approved amount” is
used to determine, in part, the hospital payment amount per resident “for a hospital cost reporting
period beginning on or after July 1, 1985.” 42 U.S.C. § 1395ww(h)(3)(A). The Tenth Circuit has
recognized that “in most contexts, the singular article ‘a’ refers to only one item.” Banuelos v.
Barr, 953 F.3d 1176, 1181 (10th Cir. 2020). Thus, when read in the context of § 1395ww(h)(3),
the use of the singular article “a” followed by the phrase “the hospital incurs all, or substantially
all, of the costs,” suggests that Congress did not intend to include the plural with the singular.
Moreover, Congress later used alternative language in the ACA to explicitly apply to

circumstances in which more than one hospital incurs the training costs. See Borgess Med. Ctr.,
966 F. Supp. 2d at 7; see also Patient Protection and Affordable Care Act, Pub. Law No. 111-148
(ACA), as enacted, 42 U.S.C. §§ 1395ww(h)(4)(E) and 1395ww(d)(5)(B).
Finally, even if the Providers offer a “better” interpretation, Chevron does not ask whether
the agency’s interpretation is “best,” only if it is permissible. Aposhian v. Barr, 958 F. 3d 969,
984-85 (10th Cir. 2020) (quoting Atl. Mut. Ins. Co. v. Comm’r of Internal Revenue, 523 U.S. 382,
389 (1998)) (“[T]he task that confronts us is to decide, not whether [the agency’s interpretation is]
the best interpretation of the statute, but whether it represents a reasonable one.”); Hardy Wilson
Mem’l Hosp. v. Sebelius, 616 F.3d 449, 458 (5th Cir. 2010).
Nor does the fact that some Medicare administrative contractors permitted cost sharing

after promulgation of the 1998 regulation suggest that the Secretary’s interpretation is
unreasonable. See Thomas Jefferson Univ., 512 U.S. at 517; Heckler v. Cmty. Health Servs. of
Crawford Cty., Inc., 467 U.S. 51, 65 (1984); Mich. Dep’t of Cmty. Health v. Sec’y of Health &
Human Servs., 496 F. App’x 526, 535 (6th Cir. 2012) (“The fiscal intermediary’s role, however,
is that of a conduit; it is not tasked with or given the power to resolve policy questions.”). For the
reasons set forth herein, the court concludes that the agency’s construction is a reasonable, and
therefore permissible, construction. See Borgess Med. Ctr., 966 F. Supp. 2d at 7. Thus, the court
defers to the interpretation.
Further, insofar as the rule reflects the agency’s interpretation of its regulations, the court
would afford it deference and therefore the agency’s reliance was not arbitrary, capricious, or
contrary to law. As discussed above, the policy was the subject of notice and comment as early as
1998. It was not introduced in this litigation as a “post hoc rationalization,” but rather appears to

have been the Secretary’s policy since at least 1998. Therefore, the interpretation does not
constitute a mere “ad hoc statement” or “unfair surprise.” Nor is the subject matter “distant from
the agency’s ordinary duties,” Kisor, 139 S. Ct. at 2417, because, as previously stated, Congress
has tasked the Secretary with promulgating rules to implement the Medicare statutes, including
computation of FTE. See 42 U.S.C. § 1395ww(h)(4). Thus, the court concludes that the anti-
sharing rule falls with the Secretary’s “significant leeway to say what its own rules mean,” Kisor,
139 S. Ct. at 2418, and therefore defers to the interpretation.
IV. Conclusion
WHEREFORE, the court concludes that the January 25, 2019 decision of the Provider
Reimbursement Review Board (PRRB), designated Decision Number 2019-D11, is not arbitrary,
capricious, an abuse of discretion, or contrary to law. Therefore, the Motion for Summary

Judgment [Doc. 30] of plaintiffs Saint Francis Hospital, Inc., AHS Hillcrest Medical Center, LLC,
and St. John Medical Center is denied. The Motion for Judgment on the Administrative Record
[Doc. 33] of defendant Alex M. Azar, the Secretary of Health and Human Services, is granted.
DATED this 4th day of August, 2020.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10386446. Public record. Not legal advice.