Appalachian Regional Healthcare, Inc. v. Shalala

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 14, 1997 Decided December 23, 1997

No. 96-5215

Appalachian Regional Healthcare, Inc.,

Appellant

v.

Donna E. Shalala, Secretary of Health and Human Services,

Appellee

Appeal from the United States District Court

for the District of Columbia

(94cv1365)

Joe W. Fleming, II argued the cause and filed the briefs

for appellant.

Jeffrey G. Micklos, Attorney, United States Department of

Health and Human Services, argued the cause for appellee,

with whom Frank W. Hunger, Assistant Attorney General,

United States Department of Justice, Mary Lou Leary, Unit-

ed States Attorney, Harriet S. Rabb, General Counsel, United

States Department of Health and Human Services, Robert P.

Jaye, Acting Associate General Counsel, and Henry R.

Goldberg, Deputy Associate General Counsel, were on the

brief.

Before: Silberman, Sentelle, and Garland, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Silberman.

Dissenting opinion filed by Circuit Judge Sentelle.

Silberman, Circuit Judge: Appalachian Regional Health-

care contends that the Provider Reimbursement Review

Board unreasonably interpreted the Medicare as Secondary

Payer provisions of the Social Security Act, 42 U.S.C.

s 1395y(b) (1994), in approving the reduction of Appalachian's

Medicare reimbursements for the fiscal years ending 1985

through 1991. The district court disagreed, and entered

summary judgment in favor of the Secretary of Health and

Human Services. We affirm the judgment.

I.

Appalachian Regional Healthcare, Inc., a nonprofit Ken-

tucky corporation, owns and/or operates 10 hospitals in Ken-

tucky, Virginia, and West Virginia. It has entered into

Medicare provider agreements with the Secretary of Health

and Human Services and its hospitals thus are qualified to

receive Part A reimbursement for the inpatient health care

services they provide to covered beneficiaries. Appalachian

is reimbursed under the Prospective Payment System (PPS)

created by section 601 of the Social Security Amendments of

1983, codified at 42 U.S.C. s 1395ww(d) (1994). Although a

detailed explanation of this rather complex system is not

required here, roughly, PPS requires the Secretary to classify

a covered beneficiary's discharge into one of approximately

500 Diagnosis Related Groups (DRG), "based on essential

data abstracted from the inpatient bill for that discharge."

42 C.F.R. s 412.60(c) (1996). Reimbursement depends on the

DRG to which a patient is assigned and the average cost of

treating such a diagnosis, "regardless of the [actual] number

of conditions treated or services furnished during the pa-

tient's stay." 42 C.F.R. s 412.60(c)(2) (1996). A provider,

therefore, is reimbursed the same amount for each similarly

classified patient discharge, even if the actual cost of caring

for patients in that DRG varies.1 Until PPS was enacted,

providers were reimbursed under a cost-based system,

whereby Medicare paid either a hospital's customary charge

for or the reasonable cost of a particular item or service,

whichever was lower. See Methodist Hosp. of Sacramento v.

Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994).

Appellant's annual reimbursement is calculated based on

the annual cost report it must submit to its so-called "fiscal

intermediary," Blue Cross/Blue Shield of Kentucky, which is

authorized, as the Secretary's agent, to audit and, if neces-

sary, adjust Appalachian's report. The intermediary thought

Appalachian's cost reports for fiscal years ending 1985, 1986,

1987, 1988, 1989, 1990, and 1991 reflected a misreading of

section 1862(b) of the Social Security Act, 42 U.S.C.

s 1395y(b) (1994), known as the Medicare as Secondary Pay-

er (MSP) provisions, and reduced Appalachian's reimburse-

ment by $1,010,414.2 It is the Secretary's reading of these

provisions, in light of the statutory change in method of

reimbursement, that gives rise to the parties' dispute.

Section 1862(b)(2) of the MSP provisions forbids the Secre-

tary from making payment under Part A "with respect to any

item or service" to the extent that payment has been or

__________

1 The effect of PPS is that if a hospital can treat a particular

diagnosis more efficiently than the average hospital, it will make

money, as it may keep the difference between its actual cost and the

PPS payment for a particular DRG. Conversely, if its costs are

above average, the hospital must accept a shortfall.

2 The precise amounts in issue for each fiscal year are: FY

ending 1985: $49,112; FY ending 1986: $159,206; FY ending 1987:

$127,803; FY ending 1988: $79,853; FY ending 1989: $147,157; FY

ending 1990: $225,229; FY ending 1991: $222,054. Appalachian

seeks judgment in the total amount, plus interest on the judgment

as allowed by 42 U.S.C. s 1395oo(f)(2) (1994).

reasonably can be expected to be made by a primary payerC

other health insurance, such as worker's compensation, an

employer group health plan, or liability insurance. During

the fiscal years at issue, Appalachian's hospitals provided

services to Medicare beneficiaries who were also covered

under other health insurance--primarily coal miners covered

under the black lung benefits program administered by the

Division of Coal Mine Workers Compensation of the United

States Department of Labor. The black lung program, how-

ever, only pays for those medical services related to pneumo-

coniosis. Thus, the payments Appalachian received from

Labor--which included a markup over cost--were in full

satisfaction of the hospitals' charges for only certain items of

care, such as pulmonary x-rays or the use of a respirator.

Section 1862(b)(2), then, prohibited the Secretary from mak-

ing payment for those items or services paid for by the black

lung program, but was ambiguous as to how the Secretary

could keep from doing so under the PPS system.

Appellant thought it was entitled to keep its profit margin

on the payments received from the black lung program (and

other primary payers); it therefore offset only the portion of

those payments representing a hospital's costs against Medi-

care's PPS reimbursement. Blue Cross/Blue Shield inter-

preted the MSP provisions to require instead that the entire

primary payment be deducted from the total PPS reimburse-

ment that otherwise would have been due the provider. The

following example illustrates the difference. Assume that

Medicare's PPS reimbursement to Appalachian for having

provided six services to a covered beneficiary during an

inpatient stay was $20. Assume further that two of those

services fell within the coverage of the black lung program,

for which Labor paid $15. The intermediary would subtract

the full $15 primary payer payment from the $20 PPS

payment that would have been made had there been no other

insurance, leaving a PPS reimbursement of $5 to be made.

Appalachian, however, would offset only that portion of the

$15 payment attributable to the hospital's costs against the

$20 PPS payment. Using the fiscal year 1987 cost to charge

ratio (a number representing a hospital's average markup as

determined by the intermediary) for one of Appalachian's 10

hospitals--.658--Appalachian would have multiplied the $15

primary payer payment by the .658 cost to charge ratio, and

would deduct the product--$9.87--from the $20 PPS pay-

ment, leaving a PPS payment of $10.13 to be made. Under

its method, then, Appalachian would be reimbursed $10.13 +

$15 = $25.13, placing them in "substantially the same posi-

tion" with respect to primary payer payments as it was prior

to the enactment of PPS. Under the intermediary's ap-

proach, by contrast, the provider could never receive more in

combined payments than it would have received from Medi-

care in the absence of other insurance coverage.

Appalachian sought review of the intermediary's adjust-

ments by the Provider Reimbursement Review Board. The

Board issued five separate decisions, which were, Appalachian

informs us, identical in all material respects, affirming Blue

Cross/Blue Shield's adjustments in each fiscal year. The

Secretary's delegate, the Administrator of the Health Care

Financing Administration, declined to review the Board's

decision. Left undisturbed, the Board's decision constituted

final agency action reviewable by statute in the district court

for the District of Columbia. See 42 U.S.C. s 1395oo(f)(1)

(1994).

II.

We note at the outset the limited nature of appellant's

claim. Recognizing the statute's ambiguities, Appalachian

does not assert that its cost exclusion method is the only

permissible way to construe the MSP provisions in this

context.3 Rather, it argues that the Board's reading (in

effect, the Secretary's) of those provisions is unreasonable.

The operative portion of the Board's decision interpreting the

statute is as follows:

The Board finds that s 1862(b)(2) of the Act provides

that payment may not be made with respect to any item

__________

3 Appellant in fact concedes that the Secretary has discretion to

adopt a reasonable method of excluding primary payer payments

for items or services from the PPS payment.

or service to the extent payment has been made or can

reasonably be made from a primary payer. Section

1862(b)(4) of the Act makes provision for coordination of

benefits when the payment by a primary payer for an

item or service is less than the full charge. The Board

finds this permits payment by the Medicare program for

the remainder of such charge, but may not exceed the

amount Medicare would pay if there were no primary

payer. Therefore, the Board concludes the amount

Medicare would pay ... was properly reduced by pri-

mary payer payments.

Appalachian asserts that in this passage, the Secretary has

taken the position perforce that all items and services provid-

ed during an inpatient stay constitute a single item or service

for purposes of the MSP provisions. This construction, Appa-

lachian contends, is plainly contrary to the statute, or alterna-

tively, is unreasonable, because the statute defines the term

"inpatient hospital services" as something composed of the

several individual items and services furnished to a hospital

inpatient during a particular hospital stay. See 42 U.S.C.

s 1395x(b) (1994). All the items and services provided during

a hospital admission, therefore, may not be considered one

single item or service.4

The district court agreed that the Secretary had interpret-

ed "item or service" to mean the entire inpatient hospital

admission. Nevertheless, the judge thought that the Secre-

tary's construction, although awkward, was not unreasonable

__________

4 As additional support, Appalachian points to this statement by

counsel for Blue Cross/Blue Shield made before the Board: "The

approach that ... the Intermediary uses, and we believe the statute

really contemplates, is that the hospital admission, that's a service."

Of course, the intermediary's position is not the Secretary's--it is

the Board's interpretation that matters. In any event, we think it

plain that a statement by intermediary's counsel in the course of an

internal quasi-adjudicatory proceeding "is not the sort of 'fair and

considered judgment' that can be thought of as an authoritative

departmental position." Paralyzed Veterans of Am. v. D.C. Arena

L.P., 117 F.3d 579, 587 (D.C. Cir. 1997) (quoting Auer v. Robbins,

117 S. Ct. 905, 912 (1997)).

in light of the enactment of PPS and the design of the statute

as a whole, and therefore was entitled to Chevron 5 deference.

We think the district judge was correct in concluding that the

statute is ambiguous and that Chevron governed, although we

are not sure the Board's decision actually construed the

phrase "item or service."

The Board recognized that s 1862(b)(2) prohibits Medicare

from duplicating payments made by a primary payer. But

the truth of the matter is that when PPS replaced the cost-

based reimbursement system, s 1862(b)(2) became ambigu-

ous as applied to this sort of situation. It is easy to see how

this provision operated when Medicare's payment directly

corresponded to charges for particular items or services, as it

did under the cost-based system. If a primary payer paid for

a particular item or service, Medicare did not. A PPS

payment is instead in full satisfaction of the bundle of covered

items and services provided during a single inpatient hospital

stay. It is certainly in some sense payment for each of the

individual items or services that compose the bundle. But

because a PPS payment is calculated without regard to a

hospital's actual cost, it cannot be easily separated and allo-

cated to particular items or services. The Secretary, then,

had to figure out a way not to make "payment ... with

respect to any item or service" covered by a primary payer

given that its PPS reimbursement payment is not cost-based

and not directly connected to items or services.

Faced with this ambiguity, the Board understandably

looked to the MSP provisions as a whole for guidance. The

Board derived the general principle that the sum of all

payments should not exceed the amount Medicare would pay

if it were the only insurer from the (b)(4) coordination of

benefits provision. We think it entirely reasonable in inter-

preting the statute for the Board to have done so. As the

government points out, we have said that the MSP provisions

were enacted as a cost-cutting measure, Health Ins. Ass'n of

Am. v. Shalala, 23 F.3d 412, 414 (D.C. Cir. 1994), and the

__________

5 Chevron U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984).

Secretary's interpretation is consistent with this cost-cutting

objective. While the Board's interpretation of s 1862(b)(2)

may have had the same effect as if it had explicitly interpreted

"item or service" in the way that Appalachian suggests, the

Board did not explicitly adopt that rationale. Even if it had

done so we do not think it much matters. The statutory

amendment authorizing the PPS reimbursement method cre-

ated inevitable tension with the concept of payment for items

and services, and the Secretary's general resolution of the

resulting ambiguity is a permissible interpretation of the

statute. To be sure, this case would be easier had the Board

provided a more thorough explanation for its decision. But

the Board's decision is nevertheless "tolerably terse," Greater

Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir.

1970), and a reading which we can accept, especially in light

of the particular deference we afford the Secretary given the

tremendous complexity of the Medicare statute. See Method-

ist Hosp., 38 F.3d at 1229.

Appellant nevertheless asserts that the Secretary's position

is merely a litigating one and therefore is not entitled to

deference. See Bowen v. Georgetown Univ. Hosp., 488 U.S.

204 (1988). First, the hospital claims that the Secretary's

position is unsupported by regulations, rulings, or administra-

tive practice. We do not understand this since we do have

the Board's adjudicatory decision, and we have already con-

cluded that its statutory interpretations are entitled to defer-

ence. Marymount Hosp. v. Shalala, 19 F.3d 658, 661 (D.C.

Cir. 1994). Appellant also claims that the Secretary's coun-

sel's interpretation of the Board's decision is not entitled to

deference in this litigation. We agree that the Board's

decision must stand on its ownCcounsel cannot justify the

Board's decision before us with an explanation that the Board

itself did not rely upon. But the fact that we think the

Secretary's explanation is the better reading of the Board's

brief opinion does not, of course, mean that we are deferring

to government counsel's explanation.

The district court's judgment is affirmed.

Sentelle, Circuit Judge, dissenting: As the majority

makes clear, the validity of the Secretary's action in this case,

and therefore of the district court decision upholding it,

depends upon the validity of the interpretation of s 1862(b) of

the Social Security Act, 42 U.S.C. s 1395y(b) (1994), by the

Provider Reimbursement Review Board. The relevant por-

tion of that statute provides that

payment under this subchapter may not be made ...

with respect to any item or service to the extent that ...

payment has been made or can reasonably be expected to

be made promptly ... under a workmen's compensation

law or plan of the United States or a State....

42 U.S.C. s 1395y(b)(2)(A). The administration of this sec-

tion may have been fairly straightforward before the 1983

amendments to the Social Security Act, which switched the

reimbursement system from a cost-based system in which the

troublesome phrase "item or service" had an evident meaning

and relevance, to the present Prospective Payment System

("PPS") described in the majority opinion in which the mean-

ing and relevance of that phrase is, as the majority estab-

lishes, not at all apparent. We are all in agreement that to

survive the two-step analysis drawn from Chevron U.S.A. Inc.

v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984), the Board's ruling (as applied by the Secretary) need

not be perfect, or even the best, but only reasonable. The

Secretary's counsel, the district court, and the majority have

all done yeoman's work in demonstrating the possible reason-

ableness of an interpretation of a statute whose critical

wording is probably the result of a congressional oversight in

failing to amend by deletion a no longer sensible operative

phrase. My difficulty lies in the fact that neither the Board

nor the Secretary did the same yeoman's work.

Our review at the second step of Chevron partakes of a

nature similar to the arbitrary and capricious review under

the Administrative Procedure Act, 5 U.S.C. s 706(2)(A). In-

dependent Petroleum Ass'n of America v. Babbitt, 92 F.3d

1248, 1258 (D.C. Cir. 1996). Therefore, even under our

deferential review, an agency's interpretation of an ambigu-

ous statute must at least be a reasoned one in order for us to

determine if it is reasonable. Again, the majority and I are

not in disagreement as to the standard employed. The

majority expressly upholds the Board's (and therefore the

Secretary's) decision because it finds the Board's recorded

reasoning to be "tolerably terse," a styling drawn, quite

properly, from Greater Boston Television Corp. v. FCC, 444

F.2d 841, 852 (D.C. Cir. 1970). That decision, pre-dating

Chevron, recognized in the context of administrative proce-

dure review that "reasoned decision-making remains a re-

quirement of our law." Id. My disagreement with the

majority is a narrow one. That is, although I believe the

majority is correct in the framework of its review, I part

company with it only at the point of whether the agency

action has "cross[ed] the line from the tolerably terse to the

intolerably mute." Id.

Greater Boston establishes that in drawing the line be-

tween tolerable terseness and intolerable muteness the court

will uphold an agency where its reasoning, "though of less

than ideal clarity," is such that "the agency's path may

reasonably be discerned." Id. at 851. Here, the Board's

decision required it to interpret the concededly ambiguous

statute governing payment for "any item or service to the

extent that ... payment has been made or can reasonably be

expected to be made," by a plan contemplated in the statute

in a context in which items and services were no longer key to

agency payment, but payment was being made by a covered

plan where that collateral source might or might not cover all

the costs of a patient's treatment depending upon whether

the patient had medical needs supplied that were not directly

encompassed within the pneumoconiosis diagnosis. In com-

mon with appellant, I do not see how the Board could have

accomplished this task without construing the meaning of the

term "any item or service" in the PPS context.

As the majority suggests, appellant understands the

Board's decision as having construed the phrase to mean that

"item or service" encompassed the entire inpatient hospital

admission, an understanding shared by the district court.

Although the question is not free from doubt, I also think that

is what the Board did. I understand the majority's disagree-

ment with appellant, however, because I find it impossible to

determine with any certainty from the "operative portion of

the Board's decision interpreting the statute," Maj. op. at 5,

precisely what the Board did. As the portion the Board's

decision excerpted in the majority opinion reveals, the key

sentence of the operative portion in construing s 1862(b)(4)

reads: "the Board finds this permits payment by the Medi-

care Program for the remainder of this charge, but may not

exceed the amount Medicare would pay if there were no

primary payer." (Emphasis in the original.) This is the

whole of the Board's reasoning. Not only do I not know what

it means, it doesn't even make grammatical or syntactical

sense. Either the clause "but may not exceed the amount

Medicare would pay if there were no primary payer," has no

subject, or the subject of the subordinate clause is the same

as the subject of the independent clause to which it is

appended, to wit "this." The antecedent of the pronoun

"this" comes from the immediately preceding sentence which

reads: "s 1862(b)(4) of the Act makes provision for coordina-

tion of benefits when the payment by a primary payer for an

item or charge is less than the full charge." Therefore,

reading the questionable clause with "this" as its subject,

makes it read "this may not exceed the amount Medicare

would pay if there were no primary payer," where "this" is

the entire preceding sentence--a sentence which neither ex-

ceeds nor equals any payment. In short, I find the Board's

statement of its reasons meaningless. A meaningless state-

ment is intolerably mute, not tolerably terse.

I am further troubled that the Board's statement, whatever

it means, does not provide reasoning supportive of the inter-

pretation of the statute which it and the Secretary seem to

have adopted. It is true that something "may not exceed the

amount Medicare would pay if there were no primary payer."

For example, the amount paid by Medicare may not exceed

that amount. It does not necessarily follow that the sum of

Medicare reimbursement for an "item or service" and the

workmen's compensation primary payment for an admission

inclusive of that "item or service" cannot exceed the amount

Medicare would pay if there were no primary payer. The

latter formulation is not inconsistent with the Board's opinion;

it is simply not supported by it. Thus, I find that the Board's

reasoning is at best opaque and at worst a non sequitur.

I am not suggesting that the Board's interpretation, accept-

ed by the Secretary, is inherently an impermissible one.

Further, I agree with the majority that the Board was faced

with an ambiguity that rendered it entirely reasonable for the

Board to "look[ ] to the [Medicare as Secondary Payer]

provisions as a whole for guidance." Maj. op. at 7. Further,

I am prepared to join with the majority in deferring to a

reasoned interpretation that does just that. However, on the

present record, I do not find such a reasoned interpretation

to which we can defer. Therefore, I would vacate and

remand to the district court for further remand to the Secre-

tary to provide a reasoned decision, lacking on the present

record.