Hardy Wilson Memorial Hospital v. Sebelius

Case: 09-60312 Document: 00511209076 Page: 1 Date Filed: 08/19/2010

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

August 19, 2010

No. 09-60312

Lyle W. Cayce

Clerk

HARDY WILSON MEMORIAL HOSPITAL; SHARKEY-ISSAQUENA

COMMUNITY HOSPITAL; ALLIANCE HEALTHCARE SYSTEMS INC;

JEFFERSON COUNTY HOSPITAL; CLAIBORNE COUNTY HOSPITAL,

Plaintiffs-Appellants

v.

KATHLEEN SEBELIUS, SECRETARY, DEPARTMENT OF HEALTH &

HUMAN SERVICES, In her official capacity as Secretary of the United States

Department of Health and Human Services; CHARLENE FRIZZERA, In her

official capacity as Acting Administrator of the Centers for Medicare and

Medicaid Services,

Defendants-Appellees

Appeal from the United States District Court

for the Southern District of Mississippi

Before SMITH, GARZA, and CLEMENT, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Appellants, five acute-care hospitals (“Providers”), sued the Secretary of

the Department of Health and Human Services (“HHS”) and the Centers for

Medicare and Medicaid Services (“CMS”), alleging that CMS’s method for

calculating reimbursement payments for costs incurred by Providers’ psychiatric

units between 2003 and 2005 violated 42 U.S.C. § 1395ww(b)(3)(A) and was

inconsistent with the agency’s own regulations. The district court granted

CMS’s motion for summary judgment, holding that the agency’s interpretation

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of the governing statutory and regulatory provisions was reasonable. For the

reasons set forth below, we REVERSE and REMAND.

I

A brief review of the regulatory scheme governing Medicare

reimbursements for Providers is necessary to understand the parties’ dispute.

Hospitals participating in Medicare are typically compensated pursuant to the

Prospective Payment System (“PPS”), whereby they receive a fixed amount for

services rendered to each patient. However, psychiatric units within acute-care

hospitals, such as Providers, were excluded from the PPS regime and paid

pursuant to a reimbursement program enacted in the Tax Equity and Fiscal

Responsibility Act of 1982 (“TEFRA”) § 101, 42 U.S.C. § 1395ww.

TEFRA reimbursements were determined through a two-step process.

First, a “target amount” was calculated for each hospital. During a hospital’s

first year under the system, the target amount consisted of “the allowable

operating costs of inpatient hospital services . . . for the preceding 12-month cost

reporting period.” 42 U.S.C. § 1395ww(b)(3)(A)(i). In subsequent years, the

target amount from the previous year was updated by the applicable percentage

increase specified by the statute. 42 U.S.C. § 1395ww(b)(3)(A)(ii). After

determining the target amount for a particular year, a reimbursement ceiling

was calculated by multiplying the target amount for a hospital by the number

of discharges from that hospital in the same year. See 42 C.F.R. § 413.40(a)(3).

Reimbursements could not exceed the ceiling. CMS issued regulations

implementing TEFRA’s scheme of calculating the “target amount” in a base year

and updating it in subsequent years. See 42 C.F.R. § 413.40(c)(4)(i)–(ii).

TriSpan Health Services (“TriSpan”), one of CMS’s fiscal intermediaries,

calculated Providers’ reimbursements pursuant to 42 C.F.R. § 413.40(c)(4)(ii),

which set each hospital’s target amount equal to the previous year’s target

amount increased by a statutory update factor.

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In the Balanced Budget Act of 1997 (“BBA”), Congress enacted additional

limits on reimbursement payments, including those for the psychiatric units in

Providers’ hospitals. See 42 U.S.C. § 1395ww(b)(3)(H). For fiscal years (“FY”)

1998 through 2002, the target amounts for those hospitals could not exceed the

75th percentile of target amounts for all hospitals in the same class of providers.

See id. Much like TEFRA, the BBA provided that this capped amount must be

multiplied by update factors prescribed as part of the cap scheme for each year

of the five-year period. 42 U.S.C. § 1395ww(b)(3)(H)(i).

CMS promulgated regulations implementing the BBA cap scheme. See 42

C.F.R. § 413.40(c)(4)(iii). The cap regulation specified the calculation of a

“hospital-specific target amount,” defined as the “net allowable costs in a base

period increased by the applicable update factors” for the subject period. 42

C.F.R. § 413.40(c)(4)(iii)(A). That amount was then to be compared to the 75th

percentile of the target amount for hospitals in the same class. 42 C.F.R.

§ 413.40(c)(4)(iii)(B). The final target amount for reimbursement “is the lower

of the amounts specified” in subsections (c)(4)(iii)(A) and (B). For the Providers

in this case, the capped amount was the lesser of the two figures and thus, the

BBA provisions resulted in significantly lower reimbursements.

In 1999, Congress enacted the Medicare, Medicaid, and SCHIP Balanced

Budget Refinement Act (“BBRA”), further refining the reimbursement rules for

Providers. Congress directed CMS, beginning at the end of the cap period in FY

2003, to make “payments for inpatient hospital services furnished by psychiatric

hospitals or units . . . in accordance with the prospective payment system.” Pub.

L. No. 106-113, 113 Stat. 1501 (1999). However, CMS did not implement

Congress’s directive until 2005. Thus, during the period from the expiration of

the BBA cap provisions in 2002 until 2005, CMS had to determine how to

calculate target amounts under the existing statutory and regulatory

framework.

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In 2003, after the BBA cap provisions expired, Providers submitted their

reimbursement requests to TriSpan on the basis of the hospital-specific target

amounts under 42 C.F.R. § 413.40(c)(4)(iii)(A). TriSpan rejected those figures,

and based on CMS’s directives, calculated reimbursements pursuant to 42 C.F.R.

§ 413.40(c)(4)(ii), using the target amount actually applied to each Provider in

the previous year, that is, a capped amount. Providers dispute this calculation,

arguing that by basing their FY 2003 target amounts on the FY 2002 capped

amount, CMS has impermissibly extended the impact of the BBA cap provisions

beyond their 2002 expiration date.

Providers appealed TriSpan’s calculation to the Provider Reimbursement

Review Board, which granted expedited judicial review because resolution of the

claim required a decision on the legality of CMS’s regulations. In the district

court, Providers argued that their reimbursements in 2003, 2004, and 2005

should have been calculated using an uncapped hospital-specific target amount

based on reasonable cost. CMS argued that under 42 U.S.C.

§ 1395ww(b)(3)(A)(ii) and 42 C.F.R. § 413.40(c)(4)(ii), the reimbursable target

amount in subsequent years must be based on the previous year’s amount, even

if that amount resulted from BBA caps. The difference in the reimbursement

methods is illustrated as follows:

Fiscal Year Hospital-Specific 75th Percentile Final Target

Target Amount Capped Amount Amount Actually

Under the BBA Reimbursed

1997 $25,330.72 n/a $25,330.72

1998 $25,330.72 $10,534.00 $10,534.00

1999 $25,337.58 $10,787.00 $10,787.00

2000 $25,507.64 $8,870.71 $8,870.71

2001 $25,752.51 $9,323.93 $9,323.93

2002 $25,958.53 $9,696.35 $9,696.35

2003 $26,867.08 n/a $10,035.72

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Providers believe that their 2003 target amount should be $26,867.08, which is

derived by applying the statutory update factor to the 2002 “hospital-specific

target amount” of $25,958.53. In other words, Providers argue that the “target

amount” was always equal to the hospital-specific allowable costs from the base

year as adjusted to the current year. CMS, on the other hand, contends that the

proper reimbursement in 2003 is $10,035.72, derived by applying the statutory

update factor to the previous year’s final target amount of $9,696.35 actually

paid to the Providers under the 75th percentile cap. Thus, according to CMS,

the capped amount becomes a hospital’s “target amount” for purposes of

calculating its subsequent year’s reimbursement.

The district court granted CMS’s motion for summary judgment,

concluding that the agency’s method for calculating target amounts for

psychiatric hospitals and units was consistent with the governing statutes and

regulations. Applying the two-step test articulated in Chevron, U.S.A., Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the district court

first concluded that the statute was ambiguous. It then concluded that the

method CMS used to calculate reimbursement payments between 2003 and 2005

was permissible. The court also rejected Providers’ argument that 42 C.F.R.

§413.40(c)(4)(iii) compelled CMS to calculate Providers’ target amount based on

the hospital-specific target amount, rather than the actual target amount

applied in the previous year, i.e., a capped amount.

Providers appeal, claiming that the court erred in (1) finding CMS’s

method for calculating reimbursements permissible under the governing

statutes and (2) finding CMS’s calculations consistent with its own regulations.

II

“We review the district court’s decision de novo, both because it is a

summary judgment, and because it requires us to answer issues of statutory

interpretation.” S.D. ex rel. Dickson v. Hood, 391 F.3d 581, 585 (5th Cir. 2004).

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III

In determining whether CMS’s interpretation of the TEFRA

reimbursement provisions at issue is permissible, this court must first determine

“whether Congress has directly spoken to the precise question at issue.”

Chevron, 467 U.S. at 842. If the statute is clear, then the court must enforce it

as written. See id. However, if the statute is “silent or ambiguous with respect

to the specific issue,” id. at 843, the court must assess the administrative

decision-making process to determine whether the agency’s action is entitled to

Chevron deference. United States v. Mead Corp., 533 U.S. 218, 226–31 (2001);

see also BCCA Appeal Group v. EPA, 355 F.3d 817, 824–25 (5th Cir. 2003).

“[A]dministrative implementation of a particular statutory provision qualifies

for Chevron deference when it appears that Congress delegated authority to the

agency generally to make rules carrying the force of law, and that the agency

interpretation claiming deference was promulgated in the exercise of that

authority.” Mead, 533 U.S. at 226–27. If the agency’s decision resulted from a

sufficiently formal process to warrant deference, see id. at 230, then we assess

whether the agency’s interpretation is “based on a permissible construction of

the statute,” Chevron, 467 U.S. at 843. “[A] court may not substitute its own

construction of a statutory provision for a reasonable interpretation made by the

administrator of an agency.” Id. at 844; see also Tex. Office of Pub. Util. Counsel

v. FCC, 265 F.3d 313, 320 (5th Cir. 2001) (“The question is not whether we might

have preferred another way to interpret the statute, but whether the agency’s

decision was a reasonable one.”).

A

Our first step is to determine whether the statute is ambiguous. Both

Providers and CMS argue that Congress directly spoke to the issue of how to

calculate hospital reimbursements during the disputed years. The district court

disagreed. Although the district court found that Congress had specifically

defined “target amount” in 42 U.S.C. § 1395ww(b)(3)(A), and Congress had

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explicitly defined how caps were to be calculated from 1998 to 2002, the court

concluded that Congress had not spoken clearly about how CMS was to calculate

reimbursements for any gap period between the expiration of the caps and the

implementation of the new PPS payment regime. Accordingly, the district court

determined that the statute was silent as to the gap period.

We begin with the text of the statute. The reimbursable “target amount”

is defined as follows:

[T]he term “target amount” means, with respect to a hospital for a

particular 12-month cost reporting period – (i) in the case of the first

such reporting period for which this subsection is in effect, the

allowable operating costs of inpatient hospital services . . . for such

hospital for the preceding 12-month cost reporting period, and (ii) in

the case of a later reporting period, the target amount for the

preceding 12-month cost reporting period, increased by the

applicable percentage increase under subparagraph (B) for that

particular cost reporting period.

42 U.S.C. § 1395ww(b)(3)(A). The BBA cap provision, governing reimbursements

from 1998 to 2002, specified that CMS was to “estimate the 75th percentile of

the target amounts for such hospitals within such class” and “update the amount

. . . for each cost reporting period . . . by a factor equal to the market basket

percentage increase.” 42 U.S.C. § 1395ww(b)(3)(H). It further specified that “the

target amount for such a hospital or unit may not exceed the amount” calculated

under the 75th percentile formula specified. Id.

CMS argues that a straightforward reading of these provisions plainly

supports its interpretation. Subsection (b)(3)(A)(ii) defines “target amount” for

any reporting period after the first period as “the target amount for the

preceding 12-month cost reporting period.” Since it is undisputed that 2003,

2004, and 2005 qualify as later reporting periods, the agency argues that

subsection (b)(3)(A)(ii) unambiguously directed it to calculate Providers’

reimbursements based on the preceding year’s target amount. And, because

subsection (b)(3)(H) requires that from 1998 to 2002, the target amount may not

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exceed the 75th percentile capped amount, CMS was required to use the final

capped target amount paid in 2002 rather than the full hospital-specific amount

to calculate the 2003 target amount.

Providers counter that the relevant statutory provisions unambiguously

support their interpretation. Providers first argue that CMS’s reading only

makes sense if § 1395ww(b)(3)(A)(ii) is read in isolation, and that an inquiry into

the meaning of the statutory language must bear in mind “the Act’s structure or

relationship to other statutes.” See Amoco Prod. Co. v. Vill. of Gambell, 480 U.S.

531, 552 (1987). Accordingly, Providers contend that § 1395ww(b)(3)(A)(ii) must

be read in light of the immediately preceding subsection. Subsection (b)(3)(A)(i)

defines “target amount” for the first reporting period as “the allowable operating

costs of inpatient hospital services.” Subsection (b)(3)(A)(ii) defines the target

amount for subsequent periods as the “target amount for the preceding 12-month

cost reporting period,” which, according to Providers, ties the definition for later

reporting periods in subsection (b)(3)(A)(ii) to the initial “target amount” defined

in subsection (b)(3)(A)(i). In other words, a hospital’s “target amount” equals its

hospital-specific allowable costs from the base year trended forward to the

current year.

To bolster that contention, Providers point out that § 1395ww(b)(3)(J)

refers to the amount calculated under § 1395ww(b)(3)(H) as “the limiting or cap

amount,” while the “target amount” is the amount determined under

§ 1395ww(b)(3)(A). Although § 1395ww(b)(3)(H) states that the “target amount”

may not exceed the 75th percentile, according to Providers, Congress’s choice of

language in § 1395ww(b)(3)(J) makes clear that it intended to distinguish

between a “cap amount” under § 1395ww(b)(3)(H) and the “target amount” under

§ 1395ww(b)(3)(A). Thus, Providers argue, the use of the words “target amount”

in subsection (b)(3)(A)(ii) could not have referred to a capped amount even if that

capped amount was the amount actually paid in the preceding year.

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Finally, and perhaps most persuasively, Providers make two arguments

based on legislative intent. First, they argue that Congress’s intent in passing

TEFRA was that reimbursements always be based on hospital-specific cost. In

§ 1395ww(b)(3)(A)(i), Congress directed that the target amount be based on a

hospital-specific number, and then updated each year from that original number.

And, although Congress did not intend hospitals above the 75th percentile of

costs to be reimbursed based on their actual costs during the BBA cap period,

Congress intended that the BBA cap exception to the usual scheme of

reimbursing based on hospital-specific cost was to be time-limited. Additionally,

Providers argue that CMS’s interpretation thwarts Congress’s clear intent that

the BBA caps end in 2002. CMS’s interpretation has the contrary effect of

perpetuating the caps beyond the cap period by using the 2002 cap

reimbursement amount as the basis for reimbursement calculations in

subsequent years. In fact, under CMS’s interpretation, Congress could have

achieved the same result by enacting BBA caps for only a single year. But it did

not do so. Rather, it imposed caps for a limited time period of five years.

Although both sides make persuasive points, we need not determine which

is the better argument. Rather, we are tasked with determining whether

Congress has spoken clearly. Based on the plausible, competing arguments put

forth by the parties, we are compelled to find the statute ambiguous. See, e.g.,

United States v. Valle, 538 F.3d 341, 345 (5th Cir. 2008) (“A statute is ambiguous

if it is susceptible to more than one reasonable interpretation or more than one

accepted meaning.” (quotations omitted)).

Congress did not specify how CMS was to calculate reimbursements after

the expiration of the caps because Congress had directed CMS to implement a

PPS regime. However, because the PPS regime was not in place by 2002, CMS

was left to calculate reimbursements in the gap. As CMS points out,

§ 1395ww(b)(3)(A)(ii) defines “target amount” for “later reporting periods” as the

target amount for the preceding twelve months. And although Providers

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attempt to persuade us that the (b)(3)(A)(ii) definition must be read in light of

(b)(3)(A)(i), it is not, on the face of the statute, completely obvious that the

allowable operating cost language in (b)(3)(A)(i) should be read into (b)(3)(A)(ii).

On the other hand, although CMS’s textual argument is strong, the structure of

the provision indicates that reimbursements in a later reporting period should

bear significant relation to the initial cost-based amount. Moreover, Providers

present a strong argument that CMS’s reading of the statute is contrary to

Congress’s intent that the BBA caps exist only from 1998 to 2002. But, on the

other hand, Congress enacted the 1999 BBRA reforms to shift Providers to the

fixed-amount PPS system at the end of the BBA cap period. Thus, Congress’s

intent changed as to the type of reimbursements Providers were entitled

to— from a model of cost-based reimbursements to fixed-amount

reimbursements—which Congress expected would be in place at the end of the

cap period.

Because neither side is able to demonstrate that Congress unambiguously

spoke to the precise issue of how to calculate the target amount in 2003, 2004,

and 2005, we find that under the first step of Chevron analysis, the statute is

ambiguous. See also Ark. State Hosp. v. Leavitt, No. 4:07CV00624, 2008 WL

4531714, at *4–5 (E.D. Ark. Oct. 8, 2008) (finding the statute “somewhat unclear

. . . as to the factors to be taken into account in calculating the target amounts

after . . . 2002”); Chalmette Med. Ctr., Inc. v. Dep’t of Health & Human Servs.,

No. 08-4027, 2009 WL 2488265, at * 4–5 (E.D. La. Aug. 11, 2009) (finding the

statute unambiguously directed CMS to calculate the 2003 target amount based

on the 2002 capped amount because “when the hospital-specific target amount

exceeded the cap, the target amount became the cap amount,” but assuming

arguendo that the statute was silent and proceeding to the second step of the

Chevron analysis).

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B

The parties agree that CMS’s regulations are entitled to Chevron deference

if the statute is ambiguous. Indeed, courts have long recognized Congress’s

delegation of extremely broad regulatory authority to the agency in the Medicare

and Medicaid area. Wis. Dep’t of Health & Family Servs. v. Blumer, 534 U.S.

473, 497 n.13 (2002). Congress has delegated general rulemaking authority with

respect to Medicare to the Secretary, who in turn has delegated that authority

to CMS. See, e.g., 42 U.S.C. § 1395hh(a)(1) (“The Secretary shall prescribe such

regulations as may be necessary to carry out the administration of the insurance

programs under this subchapter.”). Furthermore, CMS’s regulations

implementing both Congress’s initial directive to base reimbursements on a

“target amount” as defined in § 1395ww(b)(3)(A) and Congress’s later cap

program under § 1395ww(b)(3)(H) were the product of notice and comment

rulemaking. See Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 1998 Rates; Final Rule, 62 Fed.

Reg. 45,966, 46,018 (Aug. 29, 1997) (final rule implementing 42 U.S.C.

§ 1395ww(b)(3)(H)); Medicare Program; Limitations on Reimbursable Hospital

Costs and the Rate of Hospital Cost Increases; Final Rule, 48 Fed. Reg. 39,412,

39,417–19 (Aug. 30, 1983) (final rule implementing 42 U.S.C.

§ 1395ww(b)(3)(A)). So too was CMS’s regulation directing the calculation of

reimbursements following the expiration of the cap period. Medicare Program;

Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year

2003 Rates; Final Rule, 67 Fed. Reg. 49,982, 50,103–04 (Aug. 1, 2002) (directing

that “for cost reporting periods beginning in FY 2003, the hospital or unit should

use its previous year’s target amount, updated by the appropriate rate-of-

increase percentage”). Accordingly, the regulations at issue here are entitled to

Chevron deference, see Mead, 533 U.S. at 226–27, and we will not overturn

CMS’s interpretation so long as it is not “arbitrary, capricious, or manifestly

contrary to the statute,” Chevron, 467 U.S. at 844.

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CMS’s decision to base reimbursements in 2003, 2004 and 2005 on the

amount of the previous year’s reimbursement is not “manifestly contrary to the

statute.” Id. Indeed, § 1395ww(b)(3)(A)(ii) directs CMS to calculate the target

amount for any year after the base year as “the target amount for the preceding

12-month cost reporting period, increased by the applicable percentage increase.”

In 2002, Providers’ target amounts exceeded the 75th percentile and thus had

to be reduced because, under § 1395ww(b)(3)(H), “the target amount . . . may not

exceed” that cap. Thus, basing the 2003 to 2005 reimbursements on the capped

amounts rather than the Providers’ individual costs is not manifestly contrary

to the statutory language, because the previous year’s target amount was not

permitted to exceed the cap amount. Nor is CMS’s position arbitrary or

capricious. Under CMS’s regulations, the “target amount” is equal to “the

hospital’s target amount for the previous cost reporting period increased by the

update factor.” 42 C.F.R. § 413.40(c)(4)(ii). Although Providers’ arguments

about the proper way to interpret the statute are persuasive, Providers

acknowledge that at the second step of the Chevron analysis, arguing that one

interpretation is “better” than another is a losing game. Thus, although

Providers may offer a “better” interpretation by taking into account the structure

and purpose of the statute, CMS’s reading finds substantial support in the text

of § 1395ww(b)(3)(A)(ii) and is backed by solid reasoning. CMS’s interpretation,

therefore, falls within the range of permissible interpretations.

IV

In reviewing Providers’ claim that the agency’s interpretation of its own

regulation is contrary to the text of the regulation, we must first determine

whether the regulation is ambiguous. See Christensen v. Harris Cnty., 529 U.S.

576, 588 (2000). “Our task is not to decide which among several competing

interpretations best serves the regulatory purpose. Rather, the agency’s

interpretation must be given ‘controlling weight unless it is plainly erroneous or

inconsistent with the regulation.’” Thomas Jefferson Univ. v. Shalala, 512 U.S.

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504, 512 (1994) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414

(1945)). However, where a regulation is unambiguous, “[t]o defer to the agency’s

position would be to permit the agency, under the guise of interpreting a

regulation, to create de facto a new regulation.” Christensen, 529 U.S. at 588.

A

Pursuant to its authority under TEFRA, CMS promulgated 42 C.F.R.

§ 413.40(c)(4)(i)–(ii), defining the calculation of target amounts, and

§ 413.40(c)(4)(iii), implementing the BBA caps for the period from 1998 to 2002.1

Under subsection (c)(4)(i), CMS directed its fiscal intermediaries to calculate the

target amount as “the hospital’s allowable net inpatient operating costs per case

for the hospital’s base period increased by the update factor for the subject

period.” For subsequent cost periods, subsection (c)(4)(ii) defined the target

amount as the “hospital’s target amount for the previous cost reporting period

increased by the update factor . . . .” Both subsections (c)(4)(i) and (ii) were

“subject to provisions of paragraph (c)(4)(iii),” the provision implementing the

BBA caps. Subsection (c)(4)(iii) provided for the calculation of the target amount

during the cap period as follows:

In the case of a psychiatric hospital or unit, rehabilitation hospital

or unit, or long-term care hospital, the target amount is the lower

of the amounts specified in paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of

this section.

(A) The hospital-specific target amount.

(1) In the case of all hospitals and units . . . the

hospital-specific target amount is the net allowable costs in a

base period increased by the applicable update factors.

***

(B) One of the following for the applicable cost reporting period–

(1) For cost reporting periods beginning during fiscal year

1998, the 75th percentile of target amounts for hospitals in

the same class (psychiatric hospital or unit, rehabilitation

1

We note that the current version of the regulations contains some changes to the

relevant language. Thus, for the purposes of this discussion, we refer to the 2002 version of

the regulations which were in force at the time that the BBA caps ended.

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hospital or unit, or long-term care hospital) for cost reporting

periods ending during FY 1996, increased by the applicable

market basket percentage up to the first cost reporting period

beginning on or after October 1, 1997.

(2) For cost reporting periods beginning during fiscal year

1999, the amount determined under paragraph (c)(4)(iii)(B)(1)

of this section, increased by the market basket percentage up

through the subject period, subject to the provisions of

paragraph (c)(4)(iv) of this section.

(3) For cost reporting periods beginning during fiscal year

2000 . . .

***

(4) For cost reporting periods beginning during fiscal years

2001 and 2002 . . .

***

2

42 C.F.R. 413.40(c)(4)(iii) (2002). After the expiration of the caps, CMS reverted

to calculating hospital reimbursements according to subsection (c)(4)(ii). CMS

contends that the only reasonable interpretation of the regulations is that all of

subsection (c)(4)(iii) expired in 2003 because the statutory authority under which

it was promulgated (the BBA) expired at that time. CMS further contends that

the Secretary made unequivocal contemporaneous statements at the time of

promulgation that the entire subsection would have no effect beyond 2002.

Providers argue that CMS’s interpretation is contrary to the text of the

regulation. They argue that § 413.40(c)(4)(iii) unambiguously directs how

reimbursements were to be calculated following the expiration of the caps.

Providers argue that each part of (c)(4)(iii)(B) refers to an explicit year during

the time period from 1998 to 2002, and thus, has no effect after 2002. They point

out, however, that subsection (c)(4)(iii)(A) contains no such time limits and,

because CMS did not revoke subsection (c)(4)(iii) at the expiration of the caps

period, the calculations for 2003 to 2005 must be conducted exclusively under

that section. They further argue that their reimbursements must be based on

2

Omitted (“* * *”) are the particulars of each formula applicable to the calculation of

the 75th percentile cap from 1998 to 2002, which are unimportant to the resolution of the issue

here.

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their reasonable costs, not the capped amounts, because subsection (c)(4)(ii) is

“subject to provisions of paragraph (c)(4)(iii)” and the only provision of (c)(4)(iii)

in effect after 2002 was subsection (A), directing the calculation of the

“hospital-specific target amount (the net allowable costs in a base period

increased by the applicable update factors).”

We reject CMS’s argument that the regulation is ambiguous. When CMS

promulgated (c)(4)(iii), it added the qualifier “[s]ubject to the provisions of

paragraph (c)(4)(iii) of this section . . .” to subsections (c)(4)(i) and (ii). That

“subject to” qualifier in the two subsections is an unambiguous requirement that

the target amount be calculated according to subsection (c)(4)(iii), and only

subsection (c)(4)(iii). To read the regulation otherwise would require us to ignore

the “subject to” language. Heaven v. Gonzales, 473 F.3d 167, 176 (5th Cir. 2006)

(“We are to construe [regulations] to give effect to all words and phrases, if

possible.”). The regulation twice defines “target amount” as “subject to”

subsection (c)(4)(iii), and subsection (c)(4)(iii) instructs that the “target amount”

is the lower of the “hospital-specific target amount” or the capped amount during

the capped years only. After the caps expired in 2002, the only way to calculate

reimbursements was the “hospital-specific target amount” under (c)(4)(iii)(A)

because (c)(4)(iii)(B), by its terms, no longer applied.

CMS’s contention that the Secretary’s contemporaneous statements made

clear that the entirety of subsection (c)(4)(iii) would expire at the end of the cap

period is without support. To be sure, the Secretary did state, when the

regulations were promulgated, that the BBA was enacted “to establish caps on

the target amounts for excluded hospitals or units for cost reporting periods

beginning on or after October 1, 1997, through September 30, 2002.” Final Rule,

62 Fed. Reg. 45,966, 46,018 (Aug. 29, 1997). But that statement is merely a

recitation of the time-limited regulation as it appears in subsection (c)(4)(iii)(B),

not an “unequivocal contemporaneous statement” that the entire section would

have no effect beyond 2002.

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B

Having determined that the regulation is unambiguous, we conclude that

CMS’s interpretation of the regulation is not entitled to deference. The plain

text of subsection (c)(4)(iii) does not support CMS’s contention that “the only

reasonable interpretation of the regulations is that all of subsection (c)(4)(iii)

expired in 2003 because the statutory authority under which it was promulgated

(the BBA) expired at that time.” Tellingly, until 2005, only subsection

(c)(4)(iii)(B)—which contains the caps—had explicit time limits. Section

(c)(4)(iii) and subsection (A) contained no time limits. If CMS intended its

regulation in subsection (c)(4)(iii) to apply only from 1998 to 2002, it should have

expressly limited the time period of the whole section, not just subsection

(c)(4)(iii)(B). But CMS did not do so when it initially promulgated subsection

(c)(4)(iii).

Only after the expiration of the caps, and in the face of criticism from

Providers and other similarly situated hospitals that they should be paid based

on their hospital-specific target amount, not the capped amount, did CMS amend

subsection (c)(4)(iii) to expressly limit the entire subsection to “cost reporting

periods beginning on or after October 1, 1997 through September 30, 2002.” 42

C.F.R. § 413.40(c)(4)(iii) (effective October 1, 2005). CMS stated that it intended

the 2005 amendment to “clarify the language in § 413.40(c)(4(iii) [] to emphasize

that because § 413.40(c)(4)(iii) was no longer applicable for cost reporting periods

beginning on or after October 1, 2002 . . . the target amount for FY 2003 would

be the cap amount paid in FY 2002, updated to FY 2003.” Final Rule, 70 Fed.

Reg. 47,278, 47,465 (Aug. 12, 2005). CMS’s “clarification,” however, is a

substantive change to the regulatory text, one that imposes express time limits

on the whole of subsection (c)(4)(iii) where previously only subsection (c)(4)(iii)(B)

was time-limited. CMS’s reversal of course came too late: “The Secretary is

bound by her own regulations and rulings until she changes them.” Pope v.

Shalala, 998 F.2d 473, 486 (7th Cir. 1993); see also North Ga. Bldg. & Constr.

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Trades Council v. Goldschmidt, 621 F.2d 697, 710 (5th Cir. 1980) (“[T]he agency

is bound to comply with the regulations it promulgates.”).

Further, the 2005 amendment betrays CMS’s contemporaneous

understanding that subsection (c)(4)(iii), as it existed in fiscal years 2003, 2004,

and 2005, did not expire according to its own terms. If CMS is correct that the

whole of subsection (c)(4)(iii) reasonably could be viewed as having no further

effect after 2002, then there would have been no need to amend the regulation

in 2005. FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 143 (2000)

(“The classic judicial task of reconciling many laws enacted over time, and

getting them to make sense in combination, necessarily assumes that the

implications of a statute may be altered by the implications of a later statute.”)

(quoting United States v. Fausto, 484 U.S. 439, 453 (1988) (internal quotation

marks omitted)). “Despite our substantial deference to an agency’s

interpretation of the scope or application of its own regulations, . . . we cannot

allow [CMS] to ignore its own regulation in an attempt to save its

imperfect/unsatisfactory decision-making in this case.” Transactive Corp. v.

United States, 91 F.3d 232, 238 (D.C. Cir. 1996) (citation omitted).

V

For the foregoing reasons, we REVERSE the district court’s grant of

summary judgment and REMAND for proceedings consistent with this opinion.

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