Kaiser Foundation Hospitals v. Kathleen Sebelius

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 7, 2012 Decided March 5, 2013

No. 12-5037

KAISER FOUNDATION HOSPITALS, DOING BUSINESS AS KAISER

FOUNDATION HOSPITAL - ANAHEIM, DOING BUSINESS AS

KAISER FOUNDATION HOSPITAL - BELLFLOWER, DOING

BUSINESS AS KAISER FOUNDATION HOSPITAL - FONTANA,

DOING BUSINESS AS KAISER FOUNDATION HOSPITAL - HARBOR

CITY, DOING BUSINESS AS KAISER FOUNDATION

HOSPITAL - PANORAMA CITY, DOING BUSINESS AS KAISER

FOUNDATION HOSPITAL - RIVERSIDE, DOING BUSINESS AS

KAISER FOUNDATION HOSPITAL - SAN DIEGO, DOING BUSINESS

AS KAISER FOUNDATION HOSPITAL - SUNSET, DOING BUSINESS

AS KAISER FOUNDATION HOSPITAL - WEST LOS ANGELES,

DOING BUSINESS AS KAISER FOUNDATION

HOSPITAL - WOODLAND HILLS,

APPELLEE

v.

KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLANT

Appeal from the United States District Court

for the District of Columbia

(No. 1:11-cv-00092)

2

Howard S. Scher, Attorney, U.S. Department of Justice,

argued the cause for appellant. With him on the briefs were

Stuart F. Delery, Acting Assistant Attorney General, Ronald

C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney.

R. Craig Lawrence, Assistant U.S. Attorney, entered an

appearance.

Jordan B. Keville argued the cause for appellee. With

him on the brief was Jonathan P. Neustadter. Harry R. Silver

entered an appearance.

Before: ROGERS, BROWN and KAVANAUGH, Circuit

Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge: The Kaiser plaintiffs (“Kaiser”)

are a consortium of ten teaching hospitals located in Southern

California that receive Medicare payments to offset the costs

associated with training “full-time equivalent” residents and

intern physicians (“FTEs”). In 1997, Congress capped those

payments in such a way that the number of FTEs the hospitals

trained in 1996 would dictate the maximum reimbursement in

all future years. Although Kaiser and the Health and Human

Services Secretary (“Secretary”) agree the 1996 data is not

accurate, the Secretary believes this predicate fact cannot be

corrected outside the three-year reopening window, 42 C.F.R.

§ 405.1885.1 Concluding otherwise, the District Court granted

Kaiser’s motion for summary judgment and remanded to the

agency. Kaiser Found. Hosps. v. Sebelius, 828 F. Supp. 2d

1

Technically, the Secretary has adopted the views of the

Administrator of the Centers for Medicare and Medicaid Services

(“CMS”).

3

193, 204 (D.D.C. 2011). Unpersuaded by the Secretary’s

narrow, arbitrarily applied interpretation, we affirm.

I

A

As the District Court explained:

The Medicare program, established under Title

XVIII of the Social Security Act and administered

through CMS, provides federally funded health

insurance to eligible aged or disabled persons. See

generally 42 U.S.C. § 1395 et seq. Under the

program, the Department of Health and Human

Services “reimburses medical providers for services

they supply to eligible patients.” Northeast Hosp.

Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011); see

generally 42 U.S.C. § 1395 et seq. In order to be

reimbursed, hospitals must submit an annual cost

report detailing the expenses they incurred during the

past fiscal year. See 42 C.F.R. §§ 413.20, 413.24. The

Secretary has contracted with fiscal intermediaries to

audit cost reports, determine how much Medicare

owes each provider, and issue interim payments. See

42 U.S.C. § 1395h; 42 C.F.R. § 405.1803.

Among other things, Medicare reimburses

approved teaching hospitals for the direct costs of

graduate medical education (GME) — e.g., salaries

and benefits for residents and interns. See 42 C.F.R.

§ 413.75. The amount of GME reimbursement is

based in part on the number of FTEs in the hospital’s

training program. See 42 U.S.C.

§ 1395ww(d)(5)(B)(ii); 42 C.F.R. § 413.79(d). In

4

1997, Congress imposed a cap on the number of

FTEs a hospital may include for purposes of

calculating future GME payment, which is known as

the “GME FTE cap.” See 42 U.S.C.

[§] 1395ww(h)(4)(F); 42 C.F.R. § 413.79(c)(2)(i).

Specifically, for cost-report periods beginning on or

after October 1, 1997, the hospital’s unweighted FTE

count — meaning the actual number of FTEs before

applying statutorily specified weighting factors —

“may not exceed the number . . . of such full-time

equivalent residents for the hospital’s most recent

cost reporting period ending on or before December

31, 1996.” 42 U.S.C. [§] 1395ww(h)(4)(F). In other

words, the FTE count a hospital included in its latest

pre-1997 report would determine its cap (and thereby

affect its reimbursement) for the indefinite future.

Hospitals’ pre-1997 reports included only a

weighted FTE count. See 62 Fed. Reg.

46,004(V)(I)(2)(a). Because the FTE cap is calculated

based on the unweighted count, and additional data

needed to be collected to calculate that figure, the

caps were not established until the providers’ first

cost report for the period beginning on or after

October 1, 1997 — which for [Kaiser] was filed in

1998. Id. at 46,004, 46,005; see also 42 C.F.R.

§ 413.79. “FTE count,” therefore, refers to the

weighted figure provided in the hospitals’ pre-1997

cost reports, and “FTE cap” refers to the cap

established thereafter based on the unweighted FTE

count.

Once the GME FTE cap is established, the

intermediary takes it into account when reviewing a

hospital’s cost reports. See 42 C.F.R. § 413.79. After

5

such review, the intermediary issues a “notice of

program reimbursement” (NPR) indicating how much

Medicare owes the hospital for the fiscal year covered

by the report. See 42 C.F.R. § 405.1803. The hospital

has 180 days from receipt of the NPR to request a

review by the Provider Reimbursement Review

Board (PRRB). See 42 U.S.C. § 1395oo(a). If the

hospital does not timely appeal the NPR, the cost

report is considered final. See 42 C.F.R.

§ 405.1807(c).

The reimbursement determination may

nevertheless be reopened — upon a provider’s

request or at the intermediary’s own initiative —

within three years of the date of the NPR. . . . Once

three years has passed, the intermediary’s

determination is deemed “closed” and can no longer

be reopened.

Kaiser, 828 F. Supp. 2d at 195–96.

B

Before this litigation began, a separate group of Northern

California-based Kaiser hospitals complained clinic-based

residents were mistakenly excluded from their “Indirect

Medical Education” (“IME”) resident FTE count. The PRRB

agreed these residents should be included, see Kaiser Found.

Grp. v. Aetna Life Ins. Co., PRRB Dec. No. 96-D50 (Aug. 14,

1996), and the CMS affirmed, see Kaiser Found. Grp. v.

Aetna Life Ins. Co., HCFA Administrator Decision (Oct. 21,

1996) reprinted in [1996–2 Transfer Binder] Medicare &

Medicaid Guide (CCH) ¶ 44,980. Following suit, the present

Kaiser plaintiffs requested a similar adjustment in their own

IME resident FTE count but “did not request a similar

6

adjustment for GME purposes in their 1996 cost reports.”

Appellant Br. at 14.

This oversight would haunt Kaiser. For years, Kaiser’s

intermediary used the inaccurate resident FTE count from the

1996 cost report coupled with additional data from the 1998

cost report — the “predicate facts” — to generate artificially

low GME FTE caps.2 Kaiser only challenged the errant data

in its appeal of the intermediary’s handling of the 1999–2003

cost reporting years. By then, however, the 1996 and 1998

cost reporting years were “closed.” They had fallen outside of

the three-year reopening window.

Accepting as much, Kaiser forswears any direct

challenge to the 1996 and 1998 cost reports. Although the

intermediary would have to adjust the total reimbursement for

the open cost reporting years 1999–2003 using the corrected

GME FTE cap, nothing, Kaiser maintains, would necessitate

an adjustment to the total reimbursement from either closed

reporting period. In other words, Kasier does not believe its

challenge would have improper retroactive effect because the

intermediary would not have to reopen any closed cost report.

See Appellee Br. at 11.

The intermediary was unconvinced. Any modification of

the data underlying the 1996/1998 GME FTE cap, it reasoned,

would constitute a reopening of closed years even if it did not

affect Kaiser’s final reimbursement determination. See

Kaiser, 828 F. Supp. 2d at 197. The PRRB agreed with

Kaiser’s position. See Kaiser Found. Hosps. v. Palmetto

GBA/First Coast Serv. Options, PRRB Dec. No. 2011-D1

(Oct. 1, 2010). But the CMS Administrator, after sua sponte

2

A higher FTE cap would have allowed Kaiser to claim —

and presumably obtain — greater reimbursements.

7

review, did not. See Kaiser Found. Hosps. v. Palmetto

GBA/First Coast Serv. Options, HCFA Administrator

Decision (Nov. 30, 2010). Because the Administrator’s

reversal constituted the final decision of the Secretary, see 42

U.S.C. § 1395oo(f), Kaiser renewed its challenge in the

District Court.

Finding in Kaiser’s favor, the District Court granted

Kaiser’s motion for summary judgment and remanded the

matter to the agency. See Kaiser, 828 F. Supp. 2d at 204.

Assuming arguendo that the FTE cap was tied to a specific

cost report, the court concluded modifying FTE counts in

closed years did not constitute a “reopening.” The Secretary’s

interpretation ran afoul of the plain language of the reopening

regulation, id. at 199–200, and, among other shortcomings,

contravened recent cases in which the Secretary took contrary

positions, id. at 200–02. The Secretary appealed.

On appeal, the agency advances two sets of arguments.

First, changes to predicate facts in closed years constitute an

impermissible reopening under § 405.1885. Second, and in

the alternative, even if the modification of predicate facts in a

closed year does not itself amount to a reopening, the change

will necessitate an adjustment of that year’s reimbursement,

which all parties agree constitutes an impermissible

reopening. We consider each argument in turn.3

II

A

3

Like the District Court, we assume arguendo that the cap is

tied to particular cost reports. Kaiser, 828 F. Supp. 2d at 199.

8

In relevant part, the Secretary’s reopening regulation

provides:

A determination of an intermediary . . . may be reopened

with respect to findings on matters at issue in such

determination . . . . Any such request to reopen must be

made within 3 years of the date of the notice of the

intermediary . . . decision . . . .

42 C.F.R. § 405.1885(a) (2001).4 For a provider like Kaiser

that has filed cost reports pursuant to 42 C.F.R §§ 413.20 and

413.24(f), “Intermediary determination” is defined as:

a determination of the amount of total reimbursement due

the provider, pursuant to § 405.1803 following the close

of the provider’s cost reporting period, for items and

services furnished to [Medicare] beneficiaries for which

reimbursement may be made on a reasonable cost basis

under Medicare for the period covered by the cost report.

42 C.F.R. § 405.1801(a). In simpler terms, § 405.1801(a)

speaks of inputs and outputs — the “items and services

furnished” and the “amount of total reimbursement due,”

respectively.

In Kaiser’s view, the reference to “total amount of

reimbursement” establishes that “a cost report [is] only . . .

‘reopened’ . . . where there is a change to the total amount of

4

Although the reopening regulation was amended in 2008, the

court below “cited to this version without explanation.” Appellant

Br. at 5 n.3. We agree with the Secretary, however, that the

“oversight is irrelevant.” Id. The operative language remained the

same. Compare 42 C.F.R. § 405.1885(a) (2001), with 42 C.F.R. §

405.1885(a)(1), (b)(2) (2010).

9

Medicare compensation paid to a provider.” Appellee Br. at

21. In contrast, “reconsideration of predicate factual issues”

with no effect on closed reimbursements does not reopen the

report. Id. Meaning, the intermediary will only have reopened

a “determination” subject to the three-year reopening window

if it adjusts the output, not the inputs.

The Secretary, by contrast, believes inputs matter

independently of the output. In her view, toggling an input

would constitute a reopening of an “Intermediary

determination” irrespective of its effect on the output.

Consequently, any alteration of predicate facts must be done

within the three-year reopening window. The Secretary

argues the output language cannot be read without reference

to the input language since it is “difficult to imagine that the

‘amount owed’ can in any sense be separated from the data

upon which it is based.” Appellant Br. at 25, 28. In like vein,

the Secretary also maintains that § 405.1801(a)’s cross-

reference to 42 C.F.R. § 405.1803 is suggestive because the

latter’s requirement of notice “[e]xplain[ing] the

intermediary’s determination of total program reimbursement

due,” id. § 405.1803(a)(1)(i), “will necessarily refer to the

data (or predicate facts) upon which the total reimbursement

is based.” Appellant Br. at 25.

The Secretary thinks her interpretation is entitled to

deference under Bowles v. Seminole Rock & Sand Co., 325

U.S. 410 (1945), and its progeny. We disagree. Although

courts will normally give “controlling weight” to an agency’s

interpretation of its own regulations, Thomas Jefferson Univ.

v. Shalala, 512 U.S. 504, 512 (1994) (internal quotation

marks omitted), deference is unmerited where the

interpretation is “plainly erroneous or inconsistent with the

regulation . . . .” Ass’n of Private Sector Colls. & Univs. v.

Duncan, 681 F.3d 427, 442 (D.C. Cir. 2012) (internal

10

quotation marks and citations omitted). Believing the

Secretary’s interpretation to be inconsistent with her own

regulations, we decline the invitation to defer.

To start, we think the plain language of § 405.1801(a)(1),

which defines “determination of an intermediary,” a phrase

that appears in the reopening regulation, too suggestive to

ignore. Where the term “determination” is both spatially

proximate to — and logically bound with — “total

reimbursement,” an output, the mere mention of inputs in a

separate, subsequent clause does not automatically render

those inputs material to the definition.5 Indeed, contextual

clues lead us to believe that the reference to inputs is more

likely illustrative than essential. Consider, for example, the

structure of § 405.1801(a), which consists of four context-

dependent definitions of “Intermediary determination.” When

speaking of “a hospital that receives payments for inpatient

hospital services under the prospective payment system,” the

phrase is defined as:

a determination of the total amount of payment due the

hospital, pursuant to § 405.1803 following the close of the

hospital’s cost reporting period, under that system for the

period covered by the determination.

42 C.F.R. § 405.1801(a)(2). But for the descriptive final

clause, the operative language in this provision and

§ 405.1801(a)(1) would be functionally indistinguishable.

5

Both parties agree that the “total reimbursement” is

“material” because any effort to adjust this figure would necessarily

constitute a reopening of an intermediary determination. Their

dispute turns instead on whether the intermediary’s toggling of the

inputs would, on its own, do the same. This is what we mean when

we speak of materiality — an intermediary action capable of

triggering § 405.1801(a)(1) and, in turn, the reopening provision.

11

Compare id. § 405.1801(a)(1) (“a determination of the

amount of total reimbursement due the provider), with id.

§ 405.1801(a)(2) (“a determination of the total amount of

payment due the hospital”). This is by no means dispositive

indicium of the agency’s intent, but we do think it suggestive.

A functional explanation for the inclusion of the “items and

services” language — to differentiate among contexts — cuts

against the Secretary’s a priori argument that the mere

presence of the input clause is itself proof of its materiality.6

Even assuming § 405.1801 could bear the Secretary’s

strained interpretation, the reopening regulation cannot. Under

§ 405.1885(a), an intermediary determination can “be

reopened with respect to findings on matters at issue in such

determination” if challenged within the three-year window.

As the Eighth Circuit explained in HealthEast, “[i]t would

make no sense to say that an intermediary determination . . .

could be reopened ‘with respect to’ predicate factual

questions that do not alter the total reimbursement amount.”

HealthEast Bethesda Lutheran Hosp. & Rehab. Ctr. v.

Shalala, 164 F.3d 415, 418 (8th Cir. 1998). It is only when

alteration of the “matters at issue” could change the total

reimbursement determination that it “make[s] sense to say

that a determination could be reopened ‘with respect to’

them.” Id. This interpretation, the court concluded, “is the

6

The Secretary’s argument regarding the intervening citation

to § 405.1803 suffers from the same conceptual shortcomings. That

provision is entirely procedural. It identifies the steps the

intermediary must take to issue a determination but offers no

insight as to what constitutes a reopening. Again, the Secretary has

proffered nothing to convince us that the mere reference to inputs

somehow imbues them with independent, material significance.

12

only interpretation logically consistent with the regulatory

language.” Id. 7 We concur.

Nor do we believe Regions Hospital v. Shalala, 522 U.S.

448 (1998), compels a contrary result. The issue before the

Court in that case was a narrow one: did Congress intend “to

prohibit the Secretary from ensuring an accurate GME base-

year amount by reauditing a provider’s statement of 1984

GME costs for past errors, outside the Secretary’s three-year

reopening window.” Id. at 457. Having found ambiguity in

the relevant statutory language at Chevron Step One, the

Court proceeded to determine the reasonableness vel non of

the Secretary’s reaudit regulation. See id. at 457–60.

“The key point of Regions,” the Secretary contends, “is

the validity of the reaudit regulation; without that regulatory

authority the reaudit of the [closed] cost reports would have

been barred by the reopening regulation.” Reply Br. at 26.

The inferential argument might be restated thusly: the

agency’s decision to promulgate a reauditing provision is

proof that reopening regulation does not, by its own terms,

allow modification of predicate facts in closed years. We

7

The Secretary in HealthEast agreed. With language mirroring

Kaiser’s own, the Secretary concluded that § 405.1801(a) — the

very provision at issue here — “did not apply” to closed year loans

“because the regulation limits reopening only with respect to

‘intermediary determinations,’ which are defined as the final

determinations of the amount a hospital will be reimbursed.”

HealthEast, 164 F.3d at 417. “Since the amounts of the

reimbursements for the [closed year] interest payments were not

disturbed, the Secretary argued, the ‘intermediary determination’

was not improperly reopened.” Id. The PRRB likewise agreed in

Edgemont Hospital v. Mutual of Omaha Insurance Co., PRRB Dec.

No. 95-D34 (Apr. 6, 1995), a decision the Secretary did not reverse

sua sponte.

13

disagree. At most, Regions and its analogue in this Court,

Administrators of Tulane Educational Fund v. Shalala, 987

F.2d 790 (D.C. Cir. 1993), stand only for the proposition that

the Secretary acted reasonably in promulgating a reauditing

regulation in light of statutory silence. We fail to see how the

Secretary’s decision to announce its policy through

rulemaking — a potentially pragmatic decision on the

Secretary’s part8 — would necessarily foreclose the agency

from interpreting the reopening regulation to the same effect.

The Secretary is not unfamiliar with this argument,

having made it as recently as 2009. Citing Regions, the

Secretary indicated that “even if the intermediary had

reaudited and revised the IME FTE determination made in the

1996 base year cost report — and it did not — the Supreme

Court has already held that such reauditing and revision is

reasonable.” Hillcrest Riverside, Inc. v. Sebelius, No. 09-cv-

00018, Memorandum of Points and Authorities in Support of

Defendant’s Cross-Motion for Summary Judgment and

Opposition to Plaintiff’s Motion for Summary Judgment at 19

n.9 (D.D.C. Oct. 2, 2009). Seeing no reason to depart from the

Secretary’s recent wisdom, we hold that the reopening

regulation allows for modification of predicate facts in closed

years provided the change will only impact the total

reimbursement determination in open years.

Alternatively, we agree with the District Court that the

Secretary has acted arbitrarily in treating similarly situated

8

A case-by-case approach would have been unwieldy and

inefficient where the Secretary had “reason to believe some

‘questionable’ GME costs had been ‘erroneously reimbursed’ to

providers for their 1984 fiscal year,” Regions, 522 U.S. at 454, and

was obligated to communicate that shortcoming — as well as all

new changes in the methodology for Medicare payments — to

private fiscal intermediaries.

14

parties differently. Kaiser, 828 F. Supp. 2d at 203; see also

Eagle Broad. Grp., Ltd. v. FCC, 563 F.3d 543, 551 (D.C. Cir.

2009) (“[A]n agency may not treat like cases differently.”

(internal quotation marks omitted)); Kreis v. Sec’y of the Air

Force, 406 F.3d 684, 687 (D.C. Cir. 2005) (“[A]n agency

must treat similar cases in a similar manner unless it can

provide a legitimate reason for failing to do so.” (internal

quotation marks omitted)). HHS routinely championed a

permissive interpretation of the reopening regulation when

correction of the predicate facts would have resulted in a

windfall for the agency, see, e.g., HealthEast, 164 F.3d at

416, but adopted a contrary view here, where the benefits

would inure to the provider. At bottom, the Secretary has

given us no reason to think that this inherently suspicious

record was the product of reasoned, good faith

decisionmaking. She has distinguished the cases on their

facts, but these are distinctions without difference. Whether

the reimbursement scheme in HealthEast is distinct from the

one-off “data capture” here, Appellant Br. at 30, for example,

is an entirely moot point; that fact played an inessential role in

how the Secretary interpreted the reopening regulation.

B

The Secretary next argues that “the Medicare Act would

not allow the intermediary to change the 1996 GME resident

count . . . without . . . changing the corresponding

reimbursement amount,” Appellant Br. at 26, which all parties

concede would constitute a reopening of an “Intermediary

determination.”

The District Court rejected this claim out of hand, noting

that the Secretary offered “no legal support for her claim that

the caps cannot be increased without modifying the total

reimbursement for closed years, particularly where Plaintiffs

15

have disclaimed such sums.” Kaiser, 828 F. Supp. 2d at 201.

On appeal, the Secretary attempts to fill the legal void with

three generic provisions of the Medicare statute that allegedly

“entitle[] the provider to the reimbursement due under the

GME . . . formulas.” Appellant Br. at 26.9

We are unmoved. As a threshold matter, the Secretary

has failed spectacularly to square this bold claim with — or

otherwise justify the departure from — HealthEast, Regions,

and (among others) Tulane. See, e.g., Motor Vehicle Mfrs.

Ass’n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 42

(1983); E. Ky. Power Co-op, Inc. v. FERC, 489 F.3d 1299,

1306 (D.C. Cir. 2007) (explaining that an agency “must

provide reasoned analysis indicating that prior policies and

standards are being deliberately changed, not casually

ignored” (internal quotation marks omitted)). Those cases

assumed alterations to predicate facts would not trigger a

mandatory reauditing of closed year reimbursements, see,

e.g., Regions, 522 U.S. at 462, and the Secretary agreed.

III

For the foregoing reasons, the decision of the lower court is

Affirmed.

9

They include 42 U.S.C. §§ 1395ww(h)(1) (“[T]he Secretary

shall provide for payments for [GME] costs in accordance with [42

U.S.C. § 1395ww(h)(3)]”), 1395ww(d)(5)(B) (“The Secretary shall

provide for an additional payment amount for . . . indirect costs of

medical education.”), and 1395g(a) (“The Secretary shall

periodically determine the amount which should be paid under this

part to each provider of services . . . with necessary adjustments on

account of previously made overpayments or underpayments.”).