Chippewa Dialysis v. Leavitt, Michael O.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2007 Decided December 21, 2007

No. 06-5371

CHIPPEWA DIALYSIS SERVICES,

APPELLANT

v.

MICHAEL O. LEAVITT, IN HIS OFFICIAL CAPACITY AS

SECRETARY OF HEALTH AND HUMAN SERVICES,

APPELLEE

Consolidated with

06-5372, 06-5373

Appeals from the United States District Court

for the District of Columbia

(No. 04cv00218)

(No. 04cv00219)

(No. 04cv00222)

Jeffrey A. Lovitky argued the cause and filed the briefs for

appellants.

Daniel J. Davis, Attorney, U.S. Department of Justice,

argued the cause for appellee. With him on the brief were Peter

D. Keisler, Assistant Attorney General, Jeffrey A. Taylor, U.S.

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Attorney, and Thomas M. Bondy, Attorney. R. Craig Lawrence,

Assistant U.S. Attorney, entered an appearance.

Before: HENDERSON and TATEL, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: Claiming that their patients require

atypically high-cost dialysis services, three Michigan dialysis

providers asked the Secretary of Health and Human Services to

reimburse them at higher rates than Medicare normally pays for

such services. The Secretary denied the requests, the district

court granted summary judgment to the Secretary, and the

providers now appeal. Among other things, they argue that the

standard the Secretary used to assess treatment costs qualifies as

an “interpretative rule,” “statement of policy,” and/or “guideline

of general applicability,” and therefore should have been

published in the Federal Register under the applicable statute.

Although we agree, we need not remand two of the providers’

cases because independent grounds exist to uphold the

Secretary’s decision as to them. With regard to the third

provider, we reverse and remand for further proceedings.

I.

The Secretary of Health and Human Services reimburses

facilities providing dialysis services under the Medicare

program based on a “prospective determination of a rate . . . for

each mode of care based on a single composite weighted

formula.” 42 U.S.C. § 1395rr(b)(7). This “composite rate”

represents the approximate per treatment cost the Secretary

expects dialysis providers to incur for various treatments. Id.

In unusual circumstances, providers can request exceptions

to the composite rate. Id. Under the regulations in effect at the

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time of the events at issue here, a facility providing treatment for

end stage renal disease (ESRD) could request an exception to

the composite rate if it projected it would have higher costs per

treatment than the composite rate and showed the higher costs

were attributable to certain factors, one of which, central to this

case, is “[a]typical service intensity (patient mix).” 42 C.F.R. §§

413.180(b), 413.182 (2005). To qualify for this exception, “[a]

facility must demonstrate that a substantial proportion of the

facility’s outpatient maintenance dialysis treatments involve

atypically intense dialysis services.” Id. § 413.184(a)(1).

According to the Secretary, a facility must show both an atypical

patient mix and atypically intense dialysis services, and given

that the providers nowhere challenge this interpretation, we

accept it as well. The facility bears the burden of proving it has

met the criteria and its excessive costs are reasonable. Id. §

413.180(g).

Appellants are three Michigan dialysis providers—Alpena

Dialysis Services (“Alpena”), Northern Michigan Hospital

(“Northern”), and Chippewa Dialysis Services

(“Chippewa”)—that applied for exceptions to the ESRD

composite rate. The Centers for Medicare and Medicaid

Services (CMS), at that time known as the Health Care

Financing Administration, reviewed their exception requests.

All three providers based their exception requests on atypical

patient mix, specifically, higher than average percentages of

aged and diabetic patients. Consistent with CMS’s Provider

Reimbursement Manual (PRM), each provider sought to show

that its patients, due to their special needs, required more hours

of nursing services than did patients in other facilities. See PRM

§ 2725.1.

CMS denied all three requests. As to atypical nursing

services, it stated that “[n]ational audited data for 1988 and

1991, the latest available, show that average direct patient care

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hours . . . were 3.00 hours per treatment.” Alpena Dialysis

Servs., No. 2004-D6, Provider Reimbursement Rev. Bd. 4 (Dec.

22, 2003); N. Mich. Hosp., No. 2004-D7, Provider

Reimbursement Rev. Bd. 6 (Dec. 22, 2003); Chippewa Dialysis

Servs., No. 2004-D5, Provider Reimbursement Rev. Bd. 5 (Dec.

22, 2003). Because the per treatment hours of all three

providers fell below that level—2.78 hours for Alpena, 2.66

hours for Northern, and 2.90 hours for Chippewa—CMS

concluded they had failed to show atypical nursing services and

were thus ineligible for the exception. Alpena, No. 2004-D6, at

4; N. Mich. Hosp., No. 2004-D7, at 6; Chippewa, No. 2004-D5,

at 5.

CMS also found that Northern and Chippewa had failed to

substantiate atypical patient mix. As to Northern, it found that

although the provider had a higher than average percentage of

patients sixty-five or older, its percentage of diabetic patients,

properly calculated, virtually matched the national average. N.

Mich. Hosp., No. 2004-D7, at 4-5. In addition, Northern’s

mortality rate and average length of stay both fell below national

averages. Id. at 5. As to Chippewa, CMS found that although

the provider served higher than average percentages of diabetic

patients and patients sixty-five or older, its average length of

stay, percentage of patients with hypertension, and average age

of patients all fell below national averages. Chippewa, No.

2004-D5, at 4. CMS made no finding about patient mix

regarding Alpena, resting its decision instead on the provider’s

failure to demonstrate atypical nursing services. Alpena, No.

2004-D6, at 3.

Challenging (among other things) CMS’s use of the 3.0

hours per treatment standard, all three providers appealed to the

Provider Reimbursement Review Board (“Board”). At the

hearing before the Board, a CMS Health Insurance Specialist

testified as to the source of what the Board referred to as the

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“3.0 hours per treatment standard.” Alpena, No. 2004-D6, at 8;

N. Mich. Hosp., No. 2004-D7, at 9; Chippewa, No. 2004-D5, at

8. According to the witness, the supporting data was “primarily

obtained from audited cost reports of freestanding ESRD

facilities for fiscal years 1988 and 1989. The data was selected

based upon a stratified random sample that was statistically

representative of freestanding facilities in the United States.”

Alpena, No. 2004-D6, at 8; N. Mich. Hosp., No. 2004-D7, at 9;

Chippewa, No. 2004-D5, at 8. Relying on various government

reports, the witness further testified that 3.5 hours was “a more

realistic standard, and that the application of the 3.0 hours

threshold in denying the Provider[s’] exception request[s] was

a very generous and liberal standard.” Alpena, No. 2004-D6, at

8; N. Mich. Hosp., No. 2004-D7, at 10; Chippewa, No. 2004-D5,

at 8.

The Board rejected the providers’ challenge to the 3.0 hours

per treatment standard, noting that “[a]lthough the Provider[s]

cited various deficiencies in the data and methodology employed

by [CMS] in establishing the 3.0 hours per treatment standard,

. . . the Provider[s] did not present alternative data which would

support the use of another standard.” Alpena, No. 2004-D6, at

14; N. Mich. Hosp., No. 2004-D7, at 14; Chippewa, No. 2004-

D5, at 13. By contrast, CMS demonstrated that “a more realistic

contemporary standard for the duration of a dialysis session may

have increased to 3.5 hours.” Alpena, No. 2004-D6, at 13; N.

Mich. Hosp., No. 2004-D7, at 14; Chippewa, No. 2004-D5, at

13.

The Board also affirmed CMS’s conclusion that Northern

and Chippewa had failed to show an atypical patient mix,

explaining that although the providers’ patient populations may

have contained higher than average percentages of aged and

diabetic patients, “the variations did not reflect a substantial

deviation from the national norms.” N. Mich. Hosp., No. 2004-

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D7, at 13; Chippewa, No. 2004-D5, at 12. According to the

Board, the providers had also failed to consider other factors

CMS addressed in reviewing patient mix, “i.e., mortality rate,

length of stay for patients requiring inpatient admission, average

age of patient population, and individual patient diagnosis.” N.

Mich. Hosp., No. 2004-D7, at 13; Chippewa, No. 2004-D5, at

12.

Although the Board found that CMS erred by failing to

determine whether Alpena had an atypical patient mix, it went

on to make that determination for itself. Employing the same

language it used in rejecting Northern’s and Chippewa’s

appeals, the Board found that Alpena’s higher percentages of

aged and diabetic patients “did not reflect a substantial deviation

from the national norms” and that the provider had failed to

consider other factors, “i.e., mortality rate, length of stay for

patients requiring inpatient admission, average age of patient

population, and individual patient diagnosis.” Alpena, No.

2004-D6, at 12. Accordingly, the Board affirmed the denial of

Alpena’s request.

The three providers sought review in the district court, and

both sides moved for summary judgment. The district court

granted the Secretary’s motion for summary judgment as to

Northern and Chippewa, but initially denied it as to Alpena.

Alpena v. Leavitt, No. 04-218, slip op. at 34 (D.D.C. Sept. 18,

2006). The court found that because CMS had failed to base its

Alpena decision on patient atypicality, “the Board erred by

deciding Alpena’s case on the issue of patient atypicality

without giving the facility an adequate opportunity to present

arguments on that issue.” Id. at 24. After the Secretary moved

for reconsideration, however, the district court granted his

motion for summary judgment, finding that regardless of

whether Alpena had an atypical patient mix, it was unqualified

for the exception because it had failed to establish atypical

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nursing services. See Alpena v. Leavitt, No. 04-218, slip op. at

4 (D.D.C. Nov. 15, 2006). “[R]emand would serve no useful

purpose,” the district court concluded, because “independent,

legally sufficient ground[s] for denial of Alpena’s exception

request” existed. Id.

The providers now appeal. All three challenge the Board’s

use of the 3.0 hours per treatment standard, arguing that the

Medicare Act required the Secretary to publish it in the Federal

Register. 42 U.S.C. § 1395hh(c)(1). In addition, they argue that

the 3.0 hours per treatment standard is unsupported by

substantial evidence. Northern and Chippewa also dispute the

Board’s conclusion that they failed to demonstrate atypical

patient mix. Alpena contests the Board’s atypical patient mix

finding, arguing that it had no notice that the Board would

decide the issue itself.

“Because the district court entered a summary judgment, we

review its decision de novo and therefore, in effect, review

directly the decision of the Secretary.” St. Luke’s Hosp. v.

Thompson, 355 F.3d 690, 693 (D.C. Cir. 2004) (quoting

Lozowski v. Mineta, 292 F.3d 840, 845 (D.C. Cir. 2002)). “[W]e

will set aside the [Secretary’s] factual findings only if

unsupported by substantial evidence on the record as a whole;

we will set aside the [Secretary’s] legal conclusions only if

‘arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with the law.’” Proffitt v. FDIC, 200 F.3d 855, 860

(D.C. Cir. 2000) (quoting 5 U.S.C. § 706(2)(A), (E)).

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II.

We begin with the issue common to all three

providers—whether the Secretary should have published the 3.0

hours per treatment standard in the Federal Register. The

Medicare Act requires that “[t]he Secretary shall publish in the

Federal Register, not less frequently than every 3 months, a list

of all manual instructions, interpretative rules, statements of

policy, and guidelines of general applicability.” 42 U.S.C. §

1395hh(c)(1). The statute does not define these terms, nor, as

far as we are aware, has any court interpreted them as used in

this statute. We have, however, fleshed out two of the

phrases—interpretative rules and statements of policy—as used

in the Administrative Procedure Act, 5 U.S.C. § 553(b)(A). In

Syncor International Corp. v. Shalala, 127 F.3d 90 (D.C. Cir.

1997), we explained that an interpretative rule “typically reflects

an agency’s construction of a statute that has been entrusted to

the agency to administer.” Id. at 94. An interpretative rule,

Syncor explains, can also “construe an agency’s substantive

regulation.” Id. By contrast, a statement of policy “represents

an agency position with respect to how it will treat—typically

enforce—the governing legal norm. By issuing a policy

statement, an agency simply lets the public know its current

enforcement or adjudicatory approach.” Id. Although nothing

in the APA requires agencies to publish interpretative rules and

statements of policy, we nonetheless think that Syncor’s

definition of those phrases is helpful in the context we face here.

Indeed, we have observed that, “as the Medicare Act was drafted

after the APA,” the reference to interpretative rules—and by

extension policy statements—in the Medicare Act suggests that

Congress intended the terms to be “at least similar in scope” to

identical provisions in the APA. See Monmouth Med. Ctr. v.

Thompson, 257 F.3d 807, 814 (D.C. Cir. 2001).

Issued pursuant to the Medicare Act, the relevant

regulation, 42 C.F.R. § 413.184(a)(1) (2005), states that in order

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to qualify for the atypical patient mix exception, providers must

show “that a substantial proportion of the facility’s . . . dialysis

treatments involve atypically intense dialysis services.” Id. The

regulation, however, includes no standard for measuring

“atypically intense dialysis services.” Because the 3.0 hours per

treatment standard fills this gap, it looks a lot like an

“interpretative rule.” To use Syncor’s language, the standard

reflects the agency’s “construction of a statute that has been

entrusted to the agency to administer.” Syncor, 127 F.3d at 94.

The 3.0 hours per treatment standard also informs the public of

the agency’s adjudicatory approach to determining exception

requests based on nursing hours. In this sense, it could qualify

as a “statement of policy,” given that it “represents an agency

position with respect to how it will treat . . . the governing legal

norm.” Id.

In the end, however, we need not decide whether the 3.0

hours per treatment standard qualifies as either an interpretative

rule or a statement of policy because we believe it most clearly

qualifies under the Medicare Act as a guideline of general

applicability. According to the record, the Secretary has applied

the standard not only to the three cases at issue here, but also to

at least three others decided in 1994. Indeed, CMS’s own

witness testified that the agency had used the 3.0 hours per

treatment standard as the threshold in the past and intended to

continue using the standard, at least until “legislation is revised.”

By contrast, the Secretary has identified no case where he

applied a different standard. As far as the record here is

concerned, then, the 3.0 hours per treatment standard serves as

the baseline by which the Secretary measures providers’

eligibility for the atypical patient mix exception. Given this, and

given that CMS and the Board both repeatedly referred to the

3.0 hours per treatment standard as a “standard,” the Medicare

Act requires the Secretary to publish it in the Federal Register.

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The Secretary’s arguments to the contrary are unpersuasive.

He insists that the 3.0 hours per treatment standard is merely an

“evaluative tool” that evolved from the data as a “reasonable

factual finding[]” during the adjudicatory process. Appellee’s

Br. 36. But guidelines of general applicability can also evolve

from data, and mere citation to the data each time the agency

applies the guideline hardly converts it into a factual finding.

Furthermore, as counsel for the Secretary conceded at oral

argument, the Secretary relied on the same data set in all six

proceedings in the record—the three providers’ requests at issue

here and the three 1994 proceedings. The Secretary also points

out that the providers challenged the 3.0 hours per treatment

standard during the administrative proceedings. This is true, but

irrelevant: a guideline does not cease to be a guideline simply

because the parties had an opportunity to challenge it. Finally,

the Secretary notes that the CMS witness suggested that an even

higher 3.5 hour baseline might be appropriate. This too is

irrelevant, for as we have said many times, agencies are

generally free to change their positions. See, e.g., Williams Gas

Processing-Gulf Coast Co. v. FERC, 475 F.3d 319, 322 (D.C.

Cir. 2006) (“[A]n agency is free to change course in a regulatory

regime provided that it offers a reasoned explanation for so

doing and is not otherwise constrained by statutory

limitations.”). That the Secretary might someday choose to alter

the 3.0 hours per treatment standard in no way suggests that the

standard need not be published in the Federal Register; it simply

means that it represents a standard the Secretary might choose

to modify.

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III.

Given our conclusion that the Secretary should have

published the 3.0 hours per treatment standard, and given that

the Secretary never responds to Alpena’s argument that the

provider lacked notice that the Board would address atypical

patient mix, we shall remand Alpena’s case to the district court

for further proceedings consistent with this opinion. For

Northern and Chippewa, however, we must still consider the

Board’s resolution of the atypical patient mix issue because, if

correct, it would provide an independent ground for upholding

the Board’s decision. See PDK Labs. Inc. v. DEA, 362 F.3d 786,

799 (D.C. Cir. 2004) (“If the agency’s mistake did not affect the

outcome, if it did not prejudice the petitioner, it would be

senseless to vacate and remand for reconsideration.”).

The Board found that Northern’s mortality rate and average

length of stay were lower than national averages, and that

Chippewa’s average length of stay, percentage of patients with

hypertension, and average age of patients were also lower than

national averages. Applying a “totality of the circumstances”

test, the Board concluded that it was “not able to make a clear

determination that the [providers] had . . . atypical patient

mix[es] which justified the incurrence of additional costs per

treatment.” N. Mich. Hosp., No. 2004-D7, at 14; Chippewa, No.

2004-D5, at 12.

The providers nowhere challenge the Secretary’s use of a

totality of the circumstances test. Instead, they point out that

Chippewa’s percentages of aged and diabetic patients exceeded

national averages and that Northern’s percentage of diabetic

patients was also higher. Acknowledging this data, however, the

Board concluded that neither provider had shown “substantial

deviation” from national averages. N. Mich. Hosp., No. 2004-

D7, at 13 (emphasis added); Chippewa, No. 2004-D5, at 12

(emphasis added). At bottom, the providers’ attack on the

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Secretary’s application of the totality of the circumstances test

is woefully incomplete: they do no more than show that some of

the many factors tilt in their direction. Given this, we have no

basis for concluding that the Secretary’s decision was

unsupported by substantial evidence. See, e.g., Ass’n of Data

Processing Serv. Orgs. v. Bd. of Governors of the Fed. Reserve

Sys., 745 F.2d 677, 683-84 (D.C. Cir. 1984) (stating that an

agency decision unsupported by substantial evidence is arbitrary

and capricious). The Secretary’s failure to publish the 3.0 hours

per treatment standard was thus harmless error with regard to

Northern and Chippewa, leaving us with no need to remand their

cases.

IV.

For the foregoing reasons, we affirm the district court’s

grant of summary judgment to the Secretary with respect to

Northern and Chippewa, and reverse and remand with respect to

Alpena.

So ordered.