Respondents Brief — Good Samaritan Hospital v. Shalala

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Supreme Court, us. |

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No. 91-2079 DEC 39 1099

In the Supreme Court of the United Statexa~———~

OCTOBER TERM, 1992

GooD SAMARITAN HOSPITAL, ET AL., PETITIONERS

Louis W. SULLIVAN, SECRETARY OF

HEALTH AND HUMAN SERVICES

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE RESPONDENT

KENNETH W. STARR

: Solicitor General

SUSAN K. ZAGAME

Acting General

Counsel

DARREL J. GRINSTEAD

Associate General

Counsel EpDWarp C. DuMont

HENRY R. GOLDBERG Assistant to the Solicitor General

STUART M. GERSON

Assistant Attorney General

EDWIN S. KNEEDLER

Assistant to the Solicitor General

Deputy Associate ANTHONY J. STEINMEYER

General Counsel JOHN P. SCHNITKER

GERARD KEATING Altorneys

Attorney Department of Justice

Department of Health Washington, D.C. 20530

& Human Services (202) 514-2217

Washington, D.C. 20201

—— rE ——————— Or

QUESTION PRESENTED

Whether a health care provider may invoke 42 U.S.C.

1395x(v)(1)(A) (ii), which authorizes regulations pro-

viding for the making of “suitable retroactive corrective

adjustments” to Medicare reimbursements, to obtain

reimbursement in excess of valid regulatory cost limits that

are specifically authorized by Section 1395x(v)(1)(A).

(1)

TABLE OF CONTENTS

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Summary ofargument....__..

Argument:

A medicare provider cannot circumvent valid cost

limits in the Secretary’s reimbursement regulations

by invoking the provision in clause (ii) of 42 U.S.C.

1395x(v) (1) (A) for “suitable retroactive correc-

tive adjustments” .

A. The text of the Act menmeste ( the res

implementation of clause (ii) through regula-

tions that provide only for a year-end, “book-

balancing” adjustment of a provider's total re-

imbursement within the framework of the cost

B. The history of clause (ii) and the 1972 amend-

ments authorizing cost limits both support the

Secretary's interpretation of clause (ii) in this

1. Clause (ii) as originally enacted ~~

2. The 1972 cost limit amendments ..................

C. Petitioners’ reliance on clause (ii) in this case

is forec'osed by this Court’s decision in Bowen v.

George. cwn University Hospital

D. The Secretary's interpretation of clause (ii),

which is consistent both with Georgetown and

with the original construction of the statute, is

entitled to deference from this Court

Conclusion ._—s.................. ee

Page

IV Vv

Cases—Continued : Page

TABLE OF AUTHORITIES ee . |

Cases : Page King v. St. Vincent’s Hospital, 112 S. Ct. 570 “

ES ae cee error

Albert Einstein Medical Center v. Sullivan, Civil PR ee ) k Jewish Medical Center v. Richardson,

No. 91-6119 (E.D. Pa. Nov. 24, 1992) _.. iden 39 486 F.2d 668 (2d Cir. 1973) 38

Ardestani v. INS, 112 S. Ce. GAS CIGG8) .........-....... 14 Lech "Inc. v. NLRB, 112 S. Ct. 841 (1992). 40

Batterton Vv. Francis, 432 U.S. 416 (1977) —.......... 18 M wrevenyy Sawa Hosp. v. B 839 F.2d 1504

Bethesda Hosp. Ass'n V. Bowen, 485 U.S. 399 (11th Cir. 1988) et sosnadiundininnabamas 39, 41

(3989) -.......... ce ie ee 2, 37 Memorial Hospital v. Sullivan, 779 F. Supp. 1406

Bowen v. Georgetown University Hospital, 488 (D.D.C. 1991) anaes eta heels 40

U.S. 204 (1988) 9, 10, 12, 14, 23, 25-26, 33, 34, 36, 40

Bowen Vv. Yuckert, 482 Se fll, ae 18

Chevron U.S.A. Ine. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984)... 14

City of Austin v. Heckler, 753 F.2d 1316 (5th Cir.

1985) ........... ARES een We OER ey See PAB TEL TAS 32

Clark v. Uebersee Finanz-Korporation, 332 U.S.

RASS IES IG: REE RM ales 33

Daughters of Miriam Center for the Aged V.

Mathews, 590 F.2d 1250 (2d Cir. 1978)... 39

Davis v. United States, 495 U.S. 472 (1990)... 22

EI. DuPont de Nemours & Co. v. Collins, 432 U.S.

RP CITI ‘censsisisensscitasiotaciniihteiahiesaieiatecas cesta inte ta. 22

Eskaton American River Hosp. v. Aetna Life Ins.

Co., [1990 Transfer Binder] Medicare and Medi-

caid Guide (CCH) © 38,279 (Nov. 27. 1989) _. 40

Estate of Cowart Vv. Nicklos Drilling Co., 112 S. Ct.

I i 14

Fairfax Hosp. Ass’n, Inc. v. Califano, 585 F 2d

EE St 32

Fairfax Nursing Center Vv. Califano, 590 F.2d 1297

EERIE BY Oe 39

FTC v. Mandel Bros., 359 U.S. 385 (1968) ............. 22

Hazelwood Chronic & Convalescent Hospital, Inc.

Vv. Weinberger, 543 F.2d 703 (9th Cir. 1976),

vacated, 430 U.S. 952 (1977) 39

Hennepin County v. Sullivan, 883 F.2d 85 (D.C.

Cir. 1989) , cert. denied, 493 U.S. 1043 (1990) 10, 36, 49

Humana of Illinois, Inc. v. Heckler, No. 84-1727

(7th Cir. Apr. 18, 1985) 39

Humana of South Carolina v. Califano, 590 F.2d

fe sill aiaiealtida 39

Mercy Community Hosp. v. Blue Cross Associa-

tion/Blue Cross of Florida, Inc., [1983-1 Trans-

fer Binder] Medicare and Medicaid Guide

(CCH) © 32,316 (Nov. 4, 1982)... ae 39

Mt. Diablo Hospital v. Sullivan:

963 F.2d 1175 (9th Cir. 1992), petition for

cert. pending, No. 92-720 6, 35

No. C-89-2714-DLJ (N.D. Cal. May 24, 1990),

rev'd, 963 F.2d 1175 (9th Cir. 1992), peti-

tion for cert. pending, No. 92-720 36

Mt. Sinai Hospital of Greater Miami, Inc. v. Wein-

berger, 376 F. Supp. 1099 (S.D. Fla. 1974),

aff'd, 517 F.2d 329 (5th Cir. 1975) 38

Red Lion Broadcasting Co. v. FCC, 395 U.S. 367

PPS E se NETS eae. <r PY Ea eee 22-23

Regents of the Univ. of California Vv. Heckler, 771

F.2d 1182 (9th Cir. 1986) ..................... 39, 41

St. James Hospital v. Heckler, 760 F.2d 1460 (7th

Cir.) , cert. denied, 474 U.S. 902 (1985)... 39

St. Paul-Ramsey Medical Center v. Bowen, 816

ny CO 9, 39

Schweiker v. Gray Panthers, 453 U.S. 34 (1981). 15

Sierra Medical Center v. Sullivan, 902 F.2d 388

STE SS eg ee eae ane mere! 10, 36, 40

Springdale Convalescent Center Vv. Mathews, 545

F.2d 943 (Gth Cir. 1977) .......................0000... 39

Sutter Community Hospitals v. Heckler, No. S-82-

204 (RAR) (E.D. Cal. Feb. 16, 1984), aff'd,

765 F.2d 150 (9th Cir. 1985) 40

Udall v. Tallman, 380 U.S. 1 (1965) .. 23

United States v. James, 478 U.S. 597 (1986) 14

7 vil

Cases—Continued : Page Statutes and regulations—Continued : Page

United States Vv. Mendoza, 464 U.S. 154 (1984)... 40 Social Security Amendments of 1965, Pub. L. No.

"an a = ne. V. United States, 536 F.2d 347 (Ct. - 89-97, § 102, 79 Stat. 291, 42 U.S.C. 1395 et seg...2, 19, 20

Social Security Amendments of 1972, Pub. L. No.

Statutes and regulations: 92-603, 86 Stat. 1329:

Medicare and Medicaid Budget Reconciliation § 223, 86 Stat. 1393-1394 ee 4

Amendments of 1984, Pub. L. No. 98-369, § 223 (a), 86 Stat. 1393 2 eeeeneceeeenenes 29, 30

§ 2316(a), 98 Stat. 1081 7 § 227 (c), 86 Stat. 1405 ee eeeeeeeeeeeenenneee 20

Medicare and Medicaid Budget Reconciliation § 249(b), 86 Stat. 1426 0 tee 20

Amendments of 1985, Pub. L. No. 99-272, 20 C.F.R.:

§ 9103(a), 100 Stat. 156 7, 82 a a 4

Social Security Act: Section 405.401 (a) (1967) 20

Tit. XI, § 1102, 42 U.S.C. 1302 15, 26 Sections 405.401-405.454 .......—O—S—SS 4

Tit. XVITI, 42 U.S.C. 1395 et seq.: Section 405.402(a) 27

42 U.S.C. 1395c to 1395i-4 (1988 & Supp. Section 405.402(a) (1967) 21

I 2 Section 405.402 (b) (1) (1967) 00. 21, 27

42 U.S.C. 1395¢ to 1395il ($§ 1801-1875, Section 405.402 (b) (1)-(2) 0 21

79 Stat. 291-332) SaAaaenee eee 19 Section 405.402(b) (2) 28

42 U.S.C. 1395f(b) (§ 1814(b), 79 Stat. ET Sn 4

Rares aaa aoe, 19, 26 Section 405.405 (c) 00000 21

42 U.S.C. 1395f(b) (1) (1982) 2 Section 405.405 (0) .2......0.0.2.....-ceccececececeeeee 26

42 U.S.C. 1395g (§ 1815, 79 Stat. 297) 2,11, Section 405.451 .00.0.0.................... es 22

17, 19, 25, 26, 27, 28, 34 Section 405.451 (b) (1) (1967) 27, 33

BS STEEL AED 26, 38 Section 405.451 (c) (1967)... 4, 21, 28

_ 42 U.S.C. 1395x(v) (§ 1861(v), 79 Stat. Section 405.451 (c) (2) (1967) 00. 30

Ses 15, 19-20, 26 See a 4

42 U.S.C. 1395x(v)(1) (§ 1861(v) (1), ESSE en 22

79 Stat. 322-323) 0 20 Section 405.454(a) (1967) 2000 33

42 U.S.C. 1395x(v) (1) (A) (§ 1861(v) Section 405.454(b) 27

EEE ccceveeseneenfpassim Section 405.454 (c)-(e) 0000 22

42 U.S.C. 1895x(v) (1) (A) (i) 20, 29 Section 405.454 (c) (4) (1967) 0 26

42 U.S.C. 1395x(v) (1) (A) (ii) (§ 1861 Section 405.454 (d) (2) (1967)... 26

(v) (1) (A) Gii)) SD ee passim Section 405.454 (e) (1967) 000. 26

42 U.S.C. 1395hh (§ 1871) 15, 26, 39 Section 405.454(f) (1967) 22, 27, 33

42 U.S.C. 1395mm(h) (3). 41 Section 405.454(f) (1) (1967) 26

42 U.S.C. 139500 ~ ee Section 405.460 (1975) 0000 5

42 U.S.C. 139500(f) (1)... 8, 37 Section 405.460(a) (1975) 00 30

4z2 U.S.C. 1395ww(b) (1988 & Supp II Section 405.460(f) (1975) 00 30

[aes 4 3 TD 2

42 U.S.C. 13895ww(d) 3 Section 405.1885(a) (1984). 39

Regulations—Continued :

Vil

42 C.F.R.:

Pt. 412 .. ee Niele SUED dee ee ae

Sections 412. 22-412. 23 . baer a am SCE ee

Section 413. 5(b) (1) . I aa alle

IID cs ccsssnsnegnenmnmmnnennnnenmsel 2,4,

Section 413.9(b) (1) —............... SR ese

Section 413.9 (c) (2) 0.0.0.0...

Section 413.20(b) ......... a peaTa aE

I a srnieaereeneemntain

EEE

I srtaeanesaiatinns

Section 413.30(a) (2) 00

Section 413.30(b) —........... ae SSA

Section 413.30(c)-(f) ............. aa eee

aR BED ccccccccenccsnncccssscccenscsccnssossnee 5,

Section 413.30 (e) (1) 0.0.0.0

TESTER a

EEE SIT nana

ee tienes

Ee 26

Section 413.64(d) (2)... ............ ae 26

Section 413.64(e) Teena 26

I 2,4, 15

Section 413.64 (f) (1) 2000... cccccccccecccceeeeee 26

oo Oe

EESRSRSaaSannwSiak

Miscellaneous :

31 Fed. Reg. 14,808 (1966) 2000.00. 20, 26

39 Fed. Reg. (1974) :

42 Fed. Reg. 52,826 (1977) 000... saiasaeniaiiniids

44 Fed. Reg. (1979) :

ee ne rset tan 6

$e EER TA gE TS 6,7

ens 7

Miscellaneous—Continued : Page

ALLTEL A

1st Annual Report on Medicare, H.R. Doc. No.

331, 90th Cong., 2d Sess. (1968) . 25

HCFA Ruling No. 89-2, [1990 Transfer Binder]

Medicare and Medicaid Guide (CCH) ‘ 38-236

Ce, GED, TEI ccccsaniserinenstnnenansmenmuapannesmatenianmetasmeics 40

H.R. Rep. No. 213, 89th Cong., Ist Sess. (1965)... 20, 21

H.R. Rep. No. 231, 92d Cong., Ist Sess. (1971)..4, 28, 29

Reimbursement Guidelines for Medicare: Hear-

ing Before the Senate Comm. on Finance, 89th

Cong., 2d Sess. (1966) ........ 2 23

S. Rep. No. 404, 89th Cong., ist Sess. Pt. I

(1965) . 20, 21, 27, 28, 29

8. Rep. No. 1230, 92d Cong., 2d Sess. (1972) 4, 28, 29, 30,

31, 32

N. Singer, Sutherland Statutory Construction

ES ee ee PREPS wee a La 33

Iu the Supreme Court of the United States

OCTOBER TERM, 1992

No. 91-2079

GooD SAMARITAN HOSPITAL, ET AL., PETITIONERS

vz.

Louis W. SULLIVAN, SECRETARY OF

HEALTH AND HUMAN SERVICES

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-17a)

is reported at 952 F.2d 1017. The decision of the district

court ‘Pet. App. 19a-36a) is not officially reported.

JURISDICTION

The judgment of the court of appeals was entered on

December 30, 1991. A petition for rehearing was denied

on February 7, 1992. Pet. App. 18a. On April 28, 1992,

Justice Blackmun extended the time for filing a petition

for a writ of certiorari to and including July 6, 1992. The

petition was filed on June 26, 1992, and was granted on

October 13, 1992. The jurisdiction of this Court rests on

28 U.S.C. 1254/1).

(1)

STATEMENT

1. The Medicare program, enacted in 1965 as Title

XVIII of the Socia! Security Act,' provides for payment

of certain medical expenses on behalf of eligible aged

and disabled persons. Under Part A of the Medicare

program, hospitals, skilled nursing facilities and home

health agencies are reimbursed for primary care that

they provide to Medicare beneficiaries. See 42 U.S.C. 1395c

to 1395i-4 (1988 & Supp. II 1990). The Act directs the

Secretary of Health and Human Services to “periodically de-

termine the amount which should be paid under | Part A|

to each provider” for services furnished to Medicare

beneficiaries, and to pay the amounts so determined to

the provider at least monthly, with adjustments neces-

sary to account for past overpayments and underpay-

ments. 42 U.S.C. 1395g. Such interim payments are

made on the basis of the provider’s estimated costs. See

42 C.F.R. 413.64(e) and (f). At the end of the cost

year, the provider submits a cost report, which furnishes

the basis for the Secretary’s fiscal intermediary to deter-

mine the provider’s actual reimbursable costs for that

year. See 42 C.F.R. 405.1803, 413.20(b), 413.24(f); see

also id. $$ 413.9(b), 413.64(f).* a

For the years at issue, a Part A provider was reim-

bursed for the “reasonable cost” of the services it fur-

nished or its “customary charges” for those services,

whichever was less. 42 U.S.C. 1395f(b) (1) (1982).

1Pub. L. No. 89-97, 79 Stat. 291, codified at 42 U.S.C. 1395 et

seq.

2 The Part A program is administered on the Secretary’s behalf

by fiscal intermediaries (typically private insurance companies),

whose decisions on cost reports may be appealed to the Provider

Reimbursement Review Board. See 42 U.S.C. 1239500: Bethesda

Hosp. Ass'n V. Bowen, 485 U.S. 399 (1988).

3 Beginning on October 1, 1983, most hospital inpatient services

under Part A have been reimbursed in accordance with fixed rates

Section 1861(v)(1)‘A) of the At defines “reasonable

cost” as “the cost actually incurred, excluding therefrom

any part of incurred cost found to be unnecessary in the

efficient delivery of needed health services,” and it directs

the Secretary of Health and Human Services to promul-

gate regulations establishing the method or methods for

determining reasonable cost. 42 U.S.C. 1395x(v) (1) (A).

The same section also requires the regulations to “pro-

vide for the making of suitable retroactive corrective

adjustments where, for a provider of services for any

fiscal period, the aggregate reimbursement produced by

the methods of determining costs proves to be either

inadequate or excessive.” 42 U.S.C. 1395x(v) (1) (A) (ii)

[hereinafter “clause (ii)”]. The Secretary has issued

comprehensive regulations establishing principles of rea-

sonable cost reimbursement. See 42 C.F.R. Pt. 413. As

required by clause (ii), those regulations provide for

retroactive corrective adjustments after the provider has

submitted its final cost report for the fiscal year. “The

retroactive adjustment will represent the difference be-

tween the amount received by the provider [in interim

payments] during the year for covered services * * * and

the amount determined in accordance with an accepted

method of cost apportionment to be the actual cost of

prescribed under the Prospective Payment System (PPS). See 42

U.S.C. 1395ww(d); 42 C.F.R. Pt. 412. The PPS system is not

at issue here. PPS does not apply, however, to skilled nursing

facilities or home health agencies. We have been informed by the

Health Care Financing Administration (HCFA) in the Department

of Health and Human Services that there are 6,211 skilled nursing

facilities and 6,009 home health care agencies currently participating

in the Medicare program. Those providers receive approximately

$7.65 billion annually in Medicare payments, and HCFA estimaies

that approximately $400 million in claims are disallowed each vear

as a result of applicable cost limits. In addition, 2,832 hospitals are

excluded from PPS and are instead subject to rate-of-increase limits,

similar to the Secretary’s cost limits, under 42 U.S.C. 1395ww/(b)

(1988 & Supp. II 1990). See 42 C.F.R. 412.22-412.23 (1991).

services furnished to beneficiaries during the year.”’ 42

C.F.R. 413.9(b); see also id. § 413.64(f).

At the inception of the Medicare program, essentially

all of a provider’s “actual costs” were “allowable,” how-

ever widely they might have varied among providers or

even among a single provider’s patients, so long as the

costs were not “substantially out of line” with those of

similar institutions. See, e.g., 20 C.F.R. 405.451(c)

(1967).* Such “allowable” costs were apportioned be-

tween a provider’s Medicare and non-Medicare patients

in order to determine the “reasonable cost” of services

reimbursable under the Medicare program. See id.

$§ 405.403, 405.452. Congress soon became concerned,

however, that in practice the “reasonable cost” standard

allowed providers to recover whatever costs they incurred,

no matter how inefficiently. See H.R. Rep. No. 231, 92d

Cong., Ist Sess. 82-85 (1971); S. Rep. No. 1230, 92d

Cong., 2d Sess. 188-189 (1972). Congress responded to

that problem in 1972 by revising 42 U.S.C. 1395x(v)

(1) (A) to tighten the statutory definition of “reasonable

cost” and to authorize the Secretary to promulgate regu-

lations establishing limits (“based on estimates of the

costs necessary in the efficient delivery of needed health

services’) on the costs that would be “recognized as

reasonable” for purposes of Medicare reimbursement.

Pub. L. No. 92-603, § 223, 86 Stat. 1393-1394.

In 1974 the Secretary promulgated the first regulations

establishing cost limits for certain items and services,

together with an initial schedule of per diem limits ap-

* The regulations concerning determination of costs reimbursable

under Medicare were originally codified at 20 C.F.R. 405.401-405.454

(1967). They have been twice redesignated, first at 42 C.F.R. Pt.

405, see 42 Fed. Reg. 52,826 (effective October 1, 1977), and most

recently at 42 C.F.R. Pt. 413, see 51 Fed. Reg. 34,790 (effective

October 1, 1986). We give parallel citations only when it seems

useful to do so. The key provisions cited herein have remained

substantially unchanged since their original promulgation.

plicable to inpatient “general routine service costs.” 39

Fed. Reg. 20,164, 20,168-20,170 (1974); see 20 C.F.R.

405.460 (1975), redesignated as 42 C.F.R. 413.30. The

cost limits in force have been updated annually since

then. See, e.g., 57 Fed. Reg. 29,410 (1992) (home health

agencies); 57 Fed. Reg. 46,177 (1992) (skilled nursing

facilities). The limits are based on provider classifica-

tions and other factors the Secretary finds “appropriate

and practical,” including type of service furnished, geo-

graphical area, institutional size, nature and mix of

services furnished by the provider, and patient mix. See

42 C.F.R. 413.30(b). ;

The regulations establish a general rule that reimburs-

able costs may not exceed the applicable cost limits.

42 C.F.R. 413.30(a)(2). The regulations do, however,

specify circumstances in which the limits may be ex-

ceeded. For example, an exemption from the cost limits

may be granted to new providers, sole community hos-

pitals, and small rural hospitals. 42 C.F.R. 413.30(e).

In addition, an exception may be granted in particular

situations involving, inter alia, atypical services, ex-

traordinary circumstances beyond the provider’s control,

or essential community hospital services. 42 C.F.R.

413.30(f).°

2. During the cost years at issue in this case, the

Secretary classified providers according to two criteria

for cost limit purposes: (a) an area wage index, and

(b) location within or without a Standard Metropolitan

Statistical Area (SMSA).

®* Exceptions operate differently from exemptions. Exemptions

attach to the operations of any provider that falls into an exempt

category. Exceptions involve careful evaluation of particular cir-

cumstances, and lead to ar edjustment “only to the extent the [ex-

cess| costs are reasonable, attributable to the circumstances speci-

fied, separately identified by the provider, and verified” by program

administrators. 42 C.F.R. 413.30(f).

a. The Secretary adopted the wage index system in

1979 as a way of adjusting for variations in wage levels

among geographical areas. 44 Fed. Reg. 11,612, 11,613

(1979).® Initially, the Secretary relied for this index on

data obtained from the Bureau of Labor Statistics (BLS).

Ibid. The BLS data were criticized because, among other

things, they failed to account for local variations in the

proportion of part-time to full-time workers. The Secre-

tary concluded, however, that the BLS statistics were

the “most reliable data available” at the time. See, e.g.,

45 Fed. Reg. 41,868, 41,871 (1980); 49 Fed. Reg. 234,

257 (1984).’

6 Prior to adoption of a wage index, the Secretary had used per

capita income in the area to adjust for variations in wage levels

among providers. Most public comments on the proposed wage index

agreed that such an index was an improvement over the use of per

capita incomes. 44 Fed. Reg. 31,806, 31,807 (1979).

7 Petitioners complain (Pet. Br. 5 & n.4) that distortions in the

BLS data were “known by the Secretary from the earliest use of

the wage index.” That assertion is irrelevant here, given that

petitioners were unsuccessful below in their challenge to the rea-

sonableness of the Secretary’s cost limits, including the wage index

(see page 10, infra), and have not renewed that challenge in this

Court. In any event, the Secretary has maintained only that the

BLS data were adequate, not that they were perfect. The July 1981

Memorandum prepared by the Health Care Financing Administra-

tion which petitioners cite (Pet. Br. 5 n.3) noted that although the

“BLS data cause unavoidable distortions affecting the accuracy of

the index for some locales,” they represent the “best source currently

available” because “[t]here is no other data source of national scope

which will eliminate the[se] index distortions * * *.” Pltf’s Mot.

for Summ. Jdgmt., Exh. D, at 1, 5. Moreover, the Secretary “pro-

posed in 1981 to develop an appropriate database [to take account

of part-time workers] by modifying the Medicare cost report, but

the proposal was delayed in part because of opposition from the

hospital industry.” Mt. Diablo Hospital v. Sullivan, 963 F.2d 1175,

1180 (9th Cir. 1992), petition for cert. pending, No. 92-720. See

also 49 Fed. Reg. 27,438, 27,439 (1984) (in 1983, HCFA established

a joint working group of participants from various state associa-

tions to evaluate alternatives to the BLS data).

In 1984, Congress directed the Secretary to conduct

a wage index study to adjust for variations in the num-

bers of part-time employees. Medicare and Medicaid

Budget Reconciliation Amendments of 1984, Pub. L. No.

98-369, § 2316(a), 98 Stat. 1081. Based on data obtained

through that study, the Secretary revised the wage index

in 1986 to account for part-time employees. 51 Fed. Reg.

16,772 (1986). Congress subsequently directed that the

revised index be applied to patient discharges occurring

on or after May 1, 1986. Medicare and Medicaid Budget

Reconciliation Amendments of 1985, Pub. L. No. 99-272,

§ 9103(a), 100 Stat. 156.

b. As noted above, during the years at issue providers

were also classified demographically. In 1974, the Secre-

tary decided to use a provider’s location within a Stand-

ard Metropolitan Statistical Area “as a proxy for an

urban location.” Locations not within an SMSA* were

considered “nonurban” or rural. 39 Fed. Reg. 20,168

(1974). Because it is generally more expensive to operate

a hospital in an urban area than in a rural one, 44 Fed.

Reg. 11,613 (1979), HCFA set a higher cost limit for

providers within an SMSA than for providers outside an

SMSA.

3. Petitioners are six rural Nebraska hospitals whose

costs exceeded the applicable cost limits for some of the

years between 1980 and 1984. On review of their cost

reports for those years, petitioners challenged the validity

of the applicable cost limits. They also asked the Secre-

tary’s Provider Reimbursement Review Board (PRRB)

for a “suitable retroactive corrective adjustment,” citing

clause (ii) of 42 U.S.C. 1395x(v)(1)(A) as authority

for an individualized departure from the cost limits, even

though they did not qualify for an exemption from or

*In 1983, the Office of Management and Budget changed this

terminology to Metropolitan Statistical Area (MSA). For con-

venience, we will continue to use the term SMSA here.

exception to those limits under the regulations. In par-

ticular, petitioners claimed that the cost limits did not

properly account for the high proportion of part-time

employees in their work force, and did not permit rural

hospitals to show that they incurred costs similar to those

of urban hospitals. The PRRB, which is bound by the

Secretary’s regulations, concluded that it lacked authority

over petitioners’ legal challenges, thus allowing petition-

ers to seek immediate judicial review. Pet. App. 37a-

54a; 42 U.S.C. 139500(f) (1).

Petitioners then filed this suit in the United States

District Court for the District of Nebraska. They con-

tended (1) that the wage index was arbitrary and ca-

pricious, because it was “calculated without regard to

the effect of the use of part-time or full-time employee

data”; (2) that classification of hospitals as rural or

urban “without possibility of an exception” had “no

rational basis”; and (3) that they were in any event

entitled by clause (ii) of 42 U.S.C. 1395x(v) (1) (A) to

relief in the form of “suitable retroactive corrective ad-

justments to the costs limits.” J.A. 13-15. Petitioners

requested an order declaring the applicable cost limit

schedules “illegal on their face” or, in the alternative,

“an order requiring the Secretary to reimburse [peti-

tioners] for their reasonable costs for the years under

appeal without regard to the cost limits.” J.A. 18-19.’

The district court granted summary judgment for

petitioners. Pet. App. 19a-36a. The court did not ad-

* A provider’s reimbursable costs for its cost period ending after

September 30, 1982 (at issue for each petitioner in this case) deter-

mines the provider’s “base year” costs under the Prospective Pay-

ment System. See note 3, supra. Base year costs in turn affect the

provider’s reimbursable costs for each of the first four PPS years.

If petitioners are successful in obtaining additional reimbursement

for 1982 in this case, they are entitled to an upward adjustment in

their “hospital-specific” reimbursement rate under PPS for the four

subsequent years. J.A. 16-19.

dress petitioners’ facial challenge to the wage index and

rural /urban classifications used in establishing the cost

limits. Rather, it agreed with petitioners that “the Secre-

tary must allow |them] an opportunity, under clause (ii),

to demonstrate that they are entitled to reimbursement of

reasonable costs beyond the amount already determined

[to be] reasonable under the cost limits schedule.” Jd.

at 26a. Adhering to the Fighth Cirecuit’s decision in

St. Paul-Ramsey Medical Center v. Bowen, 816 F.2d 417

(1987), the district court held that “[t]he Secretary

has a statutory duty under clause (ii) to ensure that the

necessary corrective adjustments are made whenever the

methods of cost calculation fail to reimburse a provider

for its reasonable costs.” Pet. App. 29a. It accordingly

rejected the Secretary’s contention that clause (ii) “only

authorizes a year-en’ ‘book balancing’ adjustment” to

ensure that the provider “receives what is due under

the cost limits as applied.” Pet. App. 27a-28a, 3la-33a.

The court remanded the case to the Secretary for “con-

sideration of | petitioners’! reasonable expenses in excess

of the cost limit rules in effect for the years under ap-

peal.” Jd. at 32a. ,

4. The court of appeals reversed. Pet. App. la-17a.

The court agreed with the Secretary that its prior inter-

pretation of clause (ii) in St. Paul-Ramsey was effec-

tively overruled by this Court’s decision in Bowen v.

Georgetown University Hospital, 488 U.S. 204 (1988).

Pet. App. lla. Under Georgetown, the panel explained,

“clause (ii) does not permit changes in the methods used

to reimburse costs, but only corrective adjustments to the

aggregate amounts” disbursed to providers. Jd. at 12a.

Accordingly, clause (ii) “merely allows a year-end book

balancing of the monthly installments with the aggregate

amount due for the year.” Jbid. On this basis, the court

rejected petitioners’ claims for additional reimbursement

under clause (ii), holding that the relief petitioners

sought—to have “the methodology changed to correct

what they believe are inequalities in the system’”—would

“amount to a retroactive change in the methods used to

compute costs that, after Georgetown, is invalid.” Id.

at 13a. Such a methodological change weuld constitute a

“second bite at the apple” on claims for reimbursable

costs, a result that clause (ii) “does not allow.” Jd. at

13a-14a (citing Hennepin County v. Sullivan, 883 F.2d

85, 92 (D.C. Cir. 1989), cert. denied, 493 U.S. 1043

(1990), and Sierra Medical Center v. Sullivan, 902 F.2d

388, 393 (5th Cir. 1990) ).

The court of appeals also upheld the validity of the

Secretary’s cost limit regulations, finding “nothing arbi-

trary or capricious about the cost limit methodology used

by the Secretary.” Pet. App. 14a-15a. The court explained

that “|bljoth the wage index and the rural/urban dis-

tinction were based on objective data and regulations,”

and it rejected petitioners’ argument that the regulations’

failure to account for part-time workers and the use of

SMSA criteria to designate “urban” hospitals rendered

the limits invalid. /bid.

SUMMARY OF ARGUMENT

In the courts below, petitioners challenged the validity

of the cost limits prescribed by the Secretary for the

years in question. The court of appeals rejected that chal-

lenge, and petitioners do not renew it here. Instead,

petitioners seek to use clause (ii) of 42 U.S.C. 1395x

(v)(1)(A) to achieve the same result. Petitioners’ ex-

pansive interpretation of clause (ii) is at odds, however,

with the language of the clause, the statutory language

as a whole, the history and contemporaneous interpreta-

tion of the relevant provisions, and this Court’s decision

in Bowen v. Georgetown University Hospital, 488 U.S.

204 (1988). Petitioners’ approach would undermine the

efficacy of the cost limits specifically authorized by Con-

gress, and convert the orderly reimbursement scheme

that now exists into an endless series of ad hoc determi-

nations in derogation of otherwise valid regulatory

standards.

The plain language of clause (ii) supports the Secre-

tary’s interpretation of its function. The clause’s “retro-

spective” and “corrective” thrust are consistent with the

Secretary’s view that it contemplates adjustments of a

“book-balancing” nature, rather than the type of broad

exceptions (with prospective as well as retrospective

practical effect) sought by petitioners. Similarly, the

Secretary's interpretation—unlike that advanced by peti-

tioners—respects the clause’s focus on the aggregate

reimbursement produced by the applicable cost determi-

nation methods, the relationship of the clause (ii)

adjustment to the interim payment system established

under 42 U.S.C. 1395g, and the statutory command that

validly promulgated cost limits be “recognized as reason-

able” for Medicare purposes. At the very least, the

Secretary’s implementation of clause (ii), through regu-

lations that form an integral part of the complex regu-

latory scheme mandated by the statute to give content

to the “reasonable cost” standard, represents a permissi-

ble construction of the statute and is entitled to judicial

deference.

The meaning of clause (ii) that is evident from its

language and the text of 42 U.S.C. 1395x(v) (1) (A)

as a whole is confirmed by its history and contemporane-

ous interpretation. The legislative history of clause (ii)

itself suggests no reason for departing from the inter--

pretation required by its text. Moreover, the initial

regulations implementing the Medicare reimbursement

provisions, promulgated little more than a year after the

statute’s enactment, reflect in their language and struc-

ture precisely the “book-balancing” interpretation of

clause (ii) that the Secretary relies on here. This inter-

pretation was also brought to the attention of Congress

within a year of the statute’s enactment. From the out-

set, clause (ii) was interpreted as an important but

limited provision relating to year-end accounting under

the reimbursement provisions; there was no suggestion

of the different and far more expansive role urged by

petitioners.

Congress toughened the governing principles of cost

reimbursement in 1972, in part by authorizing the Secre-

tary to promulgate “limits on the * * * incurred costs

* * * to be recognized as reasonable” for Medicare pur-

poses. Petitioners concede that they do not qualify for any

exemption or exception from the cost limits thereafter

promulgated by the Secretary. They contend, however,

that clause (ii) confers on them a substantive right to in-

dividual, ad hoe adjudication of their claim that certain of

their costs were “reasonable,” and hence reimbursable

without regard to the otherwise valid cost limit rules.

In fact, petitioners are merely trying to use clause (ii)

to fight again the battle that they lost when the court of

appeals correctly refused to invalidate the cost limits

applicable to petitioners for the years in issue.

Petitioners’ reliance on clause (ii) in this case is

foreclosed, however, by this Court's decision in Bowen V.

Georgetown University Hospital, supra. In Georgetown, the

Court rejected an interpretation of clause (ii) that would

have authorized retroactive, substantive cost reimburse-

ment regulations. The Court’s discussion of clause (ii)

makes clear that the clause plays only the more lim-

ited role assigned to it by the initial regulations-

which the Court cited with approval—-and advanced by

the Secretary here. Georgetown specifically states that

clause ‘ii! does not permit changes in the methods, in-

cluding costs limits, used to compute “reasonable costs,”

and disapproves exactly the sort of wholesale retroactive

revision of cost determination methods that would be the

practical effect of accepting petitioners’ position.

Finally, petitioners make much of the fact that the

Secretary's position on the meaning of clause (ii) has

varied at times between the inception of the program and

the decision in Georgetown. The Secretary’s varying posi-

tion stemmed largely, however, from the disarray that

prevailed among the lower courts on this issue for some

time before Georgetown. Since Georgetown, and taking

into account this Court’s authoritative construction of the

statute in that case, the Secretary has returned to his

original construction. The fact that the Secretary once

took a somewhat broader view does not affect the valid-

ity of his current position, or the deference due it from

the courts.

ARGUMENT

A MEDICARE PROVIDER CANNOT CIRCUMVENT

VALID COST LIMITS IN THE SECRETARY’S REIM-

BURSEMENT REGULATIONS BY INVOKING THE

PROVISION IN CLAUSE (ii) OF 42 U.S.C. 1395x(v)(1)

(A) FOR “SUITABLE RETROACTIVE CORRECTIVE

ADJUSTMENTS”

In the courts below, petitioners challenged the cost

limits prescribed by the Secretary for the years in ques-

tion on the ground that the wage index and SMSA clas-

sifications on which the limits were based did not fully

recognize the costs petitioners reasonably incurred. The

court of appeals rejected that challenge, and petitioners

do not renew it here. Accordingly, as the case comes to

this Court, the cost limits must be regarded as entirely

lawful in their application to petitioners for the years

in question,

Petitioners now seek through clause (ii) of 42 U.S.C.

1395xiv)(1)(A) precisely the same result—avoidance

of the cost limits—that outright invalidation of those

limits would have accomplished. They contend that the

requirement in clause (iii that the Secretary’s “reason-

able cost” regulations provide for “suitable retroactive

corrective adjustments” in certain circumstances entitles

them to reimbursement in excess of the valid cost limits

promulgated pursuant to the immediately preceding sen-

tence of 42 U.S.C, 1895x(v)(1)(A). Petitioners’ expan-

sive vision of clause (ii) is inconsistent with the carefully

circumscribed language of clause (ii), the text of 42

U.S.C. 1395x(v)(1)(A) as a whole, the history and

contemporaneous interpretation of those provisions, and

this Court’s decision in Bowen v. Georgetown University

Hospital, supra. In addition, the approach petitioners

urge would undermine the efficacy of the cost limits that

Congress specifically authorized. The result would be to

convert the existing system of orderly reimbursement

within the regulatory framework implementing the stat-

utory “reasonable cost” standard into an endless series

of ad hoc determinations in derogation of otherwise valid

regulatory standards.

A. The Text Of The Act Supports The Secretary’s Imple-

mentation Of Clause (ii) Through Regulations That

Provide Only For A Year-End, “Book-balancing”

Adjustment Of A Provider’s Total Reimbursement

Within The Framework Of The Cost Limit Regulations

“The starting point in statutory interpretation,” of

course, “‘is ‘the language |of the statute] itself.’”’ Ardes-

tani V. INS, 112 S. Ct. 515, 519 (1991) (quoting United

States v. James, 478 U.S. 597, 604 (1986)). If “Con-

gress has directly spoken on the precise question at issue”

and “the intent of Congress is clear, that is the end of

the matter”; “the court, as well as the agency, must give

effect to the unambiguously expressed intent of Con-

gress.” Chevron U.S.A. Ine. Vv. Natural Resources De-

fense Council, Inc., 467 U.S. 837, 842-843 (1984). See

also Estate of Cowart v. Nicklos Drilling Co., 112 S. Ct.

2589, 2594 (1992). On the other hand, “[i]f * * * Con-

gress has not directly addressed the precise question at

issue,” the question is “whether the agency’s answer is

based on a permissible construction of the statute,” for

“considerable weight should be accorded to an executive

department’s construction of a statutory scheme it is en-

trusted to administer.” Chevron, 467 U.S. at 843-844.

Such deference is especially appropriate in this case, be-

cause the Social Security Act (of which the Medicare Act

is a part) “is among the most intricate ever drafted by

Congress,’ and Congress accordingly has “conferred on

the Secretary exceptionally broad authority to prescribe

standards” by regulation. Schweiker v. Gray Panthers,

453 U.S. 34, 43 (1981); see 42 U.S.C. 1302, 1395xiv)

(1)(A), 1395hh. Finally, of course, “a statute is to be

read as a whole, since the meaning of statutory language,

plain or not, depends on context.” King v. St. Vincent's

Hospital, 112 S. Ct. 570, 574 (1991) (citations omitted).

The foregoing principles support the validity of the

Secretary’s regulations implementing clause (ii). Under

those regulations, the adjustments contemplated by

clause (ii) are essentially of a “book-balancing” na-

ture, reflecting the difference between the total of the

interim payments received by the provider during the

year, based on its estimated costs, and the actual costs

the provider is found at the close of the year to have

properly incurred under the Secretary’s regulations.

42 C.F.R. 413.9(b), 413.64(f). Conversely, the text of the

Act refutes petitioners’ interpretation of clause (ii), un-

der which a provider would be entitled to seek reimburse-

ment in excess of the valid cost limits prescribed in the

regulations simply by claiming that its higher costs satis-

fied some vague standard of “reasonableness.”

Clause (ii) is contained in Subsection (1)(A) of Sec-

tion 1861(v) of the Act, which sets forth the statutory

definition of “reasonable costs.” 42 U.S.C. 1395x(v).

Subsection (1)(A) states in pertinent part:

The reasonable cost of any services * * * shall be

determined in accordance with regulations estab-

lishing the method or methods to be used, and the

items to be included * * *. Such regulations * * *

may provide for the establishment of limits on the

direct or indirect overall incurred costs or incurred

costs of specific items or services or groups of items

or services to be recognized as reasonable based on

estimates of the costs necessary in the efficient de-

livery of needed health serviecs to individuals covered

by the insurance programs established under | Medi-

care| * * *. Such regulations shall * * * (ii) pro-

vide for the making of suitable retroactive corrective

adjustments where, for a provider of services for any

fiscal period, the aggregate reimbursement produced

by the methods of determining costs proves to be

either inadequate or excessive.

This language supports the limited role of clause (ii)

reflected in the Secretary’s regulations, and undermines

petitioners’ far more expansive and open-ended vision of

the clause.

First, the entire thrust of clause (ii) is retrospective,

indicating that it comes into play only at the end of an

accounting period and therefore serves an accounting

purpose. Thus, clause (ii) refers to “retroactive” ad-

justments, for a “fiscal period,” where aggregate reim-

bursement “proves” to be either inadequate or excessive.

The Secretary’s year-end, book-balancing approach is

consistent with that focus. By contrast, if Congress had

intended clause (ii) to afford a provider a right to insist

upon individualized exceptions to regulatory standards

(including cost limits) on equitable grounds, as peti-

tioners contend, there would have been no reason to give

it only retrospective effect.

Second, clause (ii) refers to “corrective” adjustments.

That reference strongly suggests that clause (ii) is mod-

est in scope and contemplates only the elimination of in-

accuracies in the application of reimbursement methods

prescribed by regulation—e.g., where year-end data con-

cerning actual costs show that the estimates on which

interim payments were based were erroneous—-not the

revisiting of substantive reimbursement policies. By con-

trast, petitioners’ interpretation pays no heed to the term

“corrective.” Petitioners’ approach would necessitate a

fresh inquiry into substantive reimbursement issues at

the end of each year, and would require an adjustment

even where the reimbursement methods prescribed by

regulation had been properly applied on the basis of

accurate data.

Third, clause (ii) focuses on whether the ‘“aggregate’’

reimbursement produced by all “methods” employed in

determining reasonable costs for the provider for the fis-

cal period was either inadequate or excessive. The quoted

terms indicate that clause (ii) takes the various “meth-

ods” prescribed by the Secretary as a given, and is con-

cerned only with the bottom-line issue addressed by the

Secretarv’s book-balancing regulations. Petitioner’s ap-

proach, vy contrast, would disaggregate the inquiry and

permit the provider to question and seek a departure

from each and every “method” (validly prescribed by

the Secretary) that was utilized in calculating the pro-

vider’s reasonable costs. The Secretary’s implementation

of clause (ii) through the book-balancing regulations also

ecomports with 42 U.S.C. 1395g, which provides for in-

terim, pre-audit payments to providers based on esti-

mated costs. That Section necessarily contemplates some

mechanism under other provisions of the Act, to reconcile

those interim payments with the provider’s actual costs

at the end of the year. Clause (ii) provides that mech-

anism. Petitioner’s approach ignores this relationship

between clause (ii) and 42 U.S.C. 1395g.

Fourth, clause (ii) requires a corrective adjustment

only where the aggregate reimbursement proves to be

either “inadequate” or “excessive.” But inadequate or

excessive compared to what? The answer must be: in-

adequate or excessive compared to the statutory standard

of reasonableness in 42 U.S.C. 1395x(v)(1)(A) itself.

The content of that standard is found in the various

“methods” including cost limits) that are contained in

‘he regulations prescribed by the Secretary for determin-

ing reasonable costs. Petitioners contend (Pet. Br. 13,

21-22) that clause (ii) requires reimbursement of all

costs they may show to be “reasonable” under some un-

specified standard, regardless of the “methods” estab-

lished by the Secretary’s regulations. This contention

ignores the third sentence of 42 U.S.C. 1395x(v) (1) (A),

which not only authorizes the Secretary to establish cost

limits, but also provides that they shall “be recognized

as reasonable.” It also ignores the fact that clause (ii)

only requires the regulations to provide for those retro-

active corrective adjustments that are “suitable.” The

Secretary may properly determine that it is not “suitable”

to provide for adjustments to accommodate a provider’s

disagreement with validly promulgated cost limits.

Finally, clause (ii) does not authorize an ad hoc dis-

regard of the Secretary’s reimbursement regulations, as

petitioners would have it, but rather prescribes one fea-

ture that those regulations must contain—a provision for

“retroactive corrective adjustments.” Those “retroactive

adjustments” must be made against the standard of the

cost limits themselves, since those limits are also contained

in the regulations and represent, by definition, “reason-

able costs.”

At the very least, the Secretary’s position that clause

(ii) does not require the sort of adjustment petitioners

seek is based on a permissible construction of clause (ii)

and of 42 U.S.C. 1395x(v) (1) (A) as a whole. It there-

fore should, under Chevron, be sustained. Indeed, the

fact that clause (ii) is to be implemented through regu-

lations, as an integral part of the complex regulatory

scheme giving content to the statutory “reasonable cost”

standard, confirms that Congress has delegated that im-

plementation to the Secretary in a manner that commands

particular deference by the courts. See, e.g., Bowen V.

Yuckert, 482 U.S. 137, 145 (1987); Batterton v. Fran-

cis, 482 U.S. 416, 424-426 (1977).

B. The History Of Clause (ii) And The 1972 Amendments

Authorizing Cost Limits Both Support The Secretary’s

Interpretation Of Clause (ii) In This Case

The meaning of clause (ii) evident from its language

and the text of 42 U.S.C. 1895x(v) (1) (A) as a whole is

confirmed by its history and contemporaneous interpreta-

tion. This case specifically involves the interaction of

clause (ii) and the regulatory cost limits promulgated

by the Secretary under explicit authority granted in the

immediately preceding sentence of 42 U.S.C. 1395x(v)

(1) (A). Clause (ii) has been part of the Medicare pro-

gram since its inception in 1965, but the authorization

for cost limits was added by 1972 amendments to the

Medicare statute. Both the original enactment and sub-

sequent amendments support the court of appeals’ rejec-

tion of petitioner’s reliance on clause (ii) to avoid the

cost limits.

1. Clause (ii) as Originally Enacted

a. The Medicare program was established by the Social

Security Amendments of 1965, Pub. L. No. 89-97, § 102,

79 Stat. 291, which added a new Title XVIII, comprising

Sections 1801-1875, to the Social Security Act. Section

1814(b) of the new title, 79 Stat. 296 (codified at 42

U.S.C. 1395f(b)), provided that hospitals and other

health care providers were to be reimbursed (subject to

certain coinsurance and deductible amounts) for the

“reasonable cost” of the services they provided. Section

1815, 79 Stat. 297 (codified at 42 U.S.C. 1395g). directed

the Secretary to “periodically determine the amount

which should be paid * * * to each provider of services

with respect to the services furnished by it,” and to pay

“the amounts so determined” to the provider no less often

than monthly. Section 1814(b) specified that the “reason-

able cost’’—1.e., the amount to be paid to the provider—was

to be “determined” under Section 1861(v), 79 Stat. 322-

323 (codified at 42 U.S.C. 1395x(v)). That section, in

turn, provided for “regulations establishing the method

or methods to be used, and the items to be included, in

determining such costs.” Those regulations could per-

missibly prescribe any of a variety of cost determination

techniques,” but were required by clause (i) to take into

account indirect as well as direct costs and by clause (ii)

to “provide for the making of suitable retroactive cor-

rective adjustments.” The legislative history of the

latter clause furnishes no reason to depart from the in-

terpretation required by its text, discussed at pages 15-18,

supra. The Senate and House reports simply repeat the

language of clause (ii), without further explanation.

S. Rep. No. 404, 89th Cong., 1st Sess. Pt. I, at 186 (1965) ;

H.R. Rep. No. 218, 89th Cong., 1st Sess. 168-169 (1965).

b. The interpretation of clause (ii) required by its

text was reflected in the regulations implementing the

cost provisions of Title XVIII that were issued in final

form in November, 1966, little more than a year after

enactment of the Medicare program. 31 Fed. Reg. 14,808.

The regulations restated the “reasonable cost” principle,

20 C.F.R. 405.401(a) (1967), and implemented state-

ments in the congressional committee reports that the

Act contemplated reimbursement for a provider’s “actual

costs, however widely they may vary from one institu-

tion to another,” subject to limitation only where a par-

1 “Such regulations may provide for determination of the costs

of services on a per diem, per unit, per capita, or other basis, may

provide for using different methods in different circumstances, may

provide for the use of estimates of costs of particular items or serv-

ices, and may provide for the use of charges or a percentage of

charges where this method reasonably reflects the costs.”” Pub. L.

No. 89-97, § 102, 79 Stat. 322-323 (§ 1861(v)(1)).

11 The denomination of the clause—‘(B)” in the original Act—

was changed to “(ii)” in 1972, when Section 1861(v) was amended

and reorganized into subsections (A)-(E). See Pub. L. No. 92-603,

$§ 227(c), 249(b), 86 Stat. 1405, 1426.

ticular provider’s costs were found to be “substantially

out of line” with those of similar institutions. 20 C.F.R.

405.451(c) (1967); see S. Rep. No. 404, supra, at 35-

36; H.R. Rep. No. 213, supra, at 31-32.

The original regulations also implemented the account-

ing and payment provisions of the Act. The introduc-

tory regulation noted as a basic principle that reimburse-

ment was to be furnished on the basis of actual and

current (rather than historical or fixed) costs. 20 C.F.R.

405.402(a) (1967). Thus, “the methods of reimbursement

should result in current payments,” so as not to force

institutions to advance funds well before receiving pay-

ment, and “there should be retroactive adjustment so

that increases in costs are taken fully into account as

they actually occurred, not just prospectively.” 20 C.F.R.

405.402 (b)(1)-(2). Section 405.405(c) of the regula-

tions then described generally the integrated process

adopted to achieve these dual ends:

Basically, therefore. interim payments to providers

will be made for services throughout the year, with

final settlement on a retroactive basis at the end of

the accounting period. * * * The retroactive nay-

ments will take fully into account the costs that were

actually incurred and settle on an actual, rather

than on an estimated basis.

The subsequent, more detailed sections of the regula-

tions reiterated and elaborated upon this basic scheme.

Section 405.451 (b) (1), defining “reasonable cost,” noted:

. , ,

These regulations also provide for the making of

suitable retroactive adjustments after the provider

has submitted fiscal and statistical reports. The

retroactive adjustment will represent the difference

between the amount received by the provider during

the year * * * and the amount determined in accord-

ance with an accepted method of cost apportionment

to be the actual cost of services rendered to bene-

ficiaries during the year.

Finally, Section 405.454, which contained the most detailed

description of the mechanics of the payment system, pro-

vided in subsections (c) through (e) for interim pay-

ments based on estimates of costs incurred, with adjust-

ments in light of actual experience. Subsection (f) then

provided for initial and final retroactive adjustments to

be made at the end of the reporting period (the first be-

fore the audit and the latter after), in order to balance

the total of the interim payments made during the period

with the aggregate reimbursement ultimately determined

to be due to the provider under the regulations governing

cost allowance and apportionment.

As this Court has noted, the language of Sections

405.451 and 450.454 makes clear that they were intended

specifically to implement clause (ii). Georgetown Univer-

sity Hospital, 488 U.S. at 211-212 n.2. Together with the

other provisions of the regulations outlined above, they

demonstrate that clause (ii) was understood to impose

an important but limited requirement on the Medicare

program’s system of reimbursement accounting: that

whatever interim cost estimates might be used to satisfy

the statutory command to pay providers no less often

than monthly, the regulations must ensure that each pro-

vider ultimately received no more or less than the amount

that would compensate it fully for the allowable costs—

determined as provided elsewhere in the regulations—

it actually incurred in providing care to covered patients

during a given period. No other role (including that

posited by petitioners) was assigned to clause (ii) by the

Secretary. As the contemporaneous interpretation of a

complex regulatory statute by the agency charged with

its implementation, this construction of the Act is, of

course, entitled to great weight. E./. DuPont de Nemours

& Co, v. Collins, 432 U.S. 46, 55 (1977) (quoting FTC v.

Mandel Bros., 359 U.S. 385, 391 (1959) ) ; see also Davis v.

United States, 495 U.S. 472, 484 (1990); Red Lion

Broadcasting Co. v. FCC, 395 U.S. 367, 381 (1969);

Udall v. Tallman, 380 U.S. 1, 16 (1965).

It also is significant that this interpretation was

brought to Congress’s attention at the outset of the pro-

gram. In May, 1966, the Senate Finance Committee—

the committee directly responsible for the legislation

passed by the same Congress only a few months beforo—

held working hearings to consider in detail several issues

raised by the Secretary’s draft reimbursement regulations.

See generally Reimbursement Guidelines for Medicare:

Hearing Before the Senate Comm. on Finance, 89th

Cong., 2d Sess. (1966). Congressional and Executive

Branch participants during these hearings referred re-

peatedly to the retroactive adjustment provision of the

statute as a year-end, book-balancing mechanism. See id.

at 66 (HEW General Counsel Willcox) (“The law spe-

cifically provides for retroactive adjustment at the end

of an accounting period” to correct over-reimburse-

ments); id. at 67 (Social Security Commissioner Ball) ;

id. at 96 (Chief Counsel, Senate Finance Committee)

(the legislation “probably * * * permit{s] an estimate”

of costs, “provided that adjustments, retroactive adjust-

ments, which are authorized by the statute, would re-

capture any excess payments” and make up any under-

payments) ; id. at 109 (Senator Anderson) (“There is a

provision in the bill, I believe, that lets you go back at

the end of a year and refigure your bills.”). Given the

2 These issues included whether depreciation on assets paid for

with public funds should be allowed as a cost, whether the statute

authorized the Secretary to pay more than the actual costs of care,

the propriety of including return on investment as a cost for propri-

etary but not for non-profit facilities, and the legality and desira-

bility of paying participating providers one month's estimated reim-

bursement in advance. See Reimbursement Guidelines for Medicare:

Hearing Before the Senate Comm. on Finance, 89th Cong., 2d Sess.

3 (1966).

specific mention of “retroactive” adjustments, we think

it clear that these statements refer to clause (ii), and

support the Secretary’s construction of its function.”

Finally, in his first annual report to Congress on the

operation of the Medicare system, the Secretary sum-

marized the reimbursement procedure in similar terms,

again invoking clause (ii)’s language of “retroactive

adjustment” :

Under procedures in effect from the start of pro-

gram operations, interim payments approximating a

'® During the Finance Committee hearings the following colloquy

occurred (at 119-120) between Senator Anderson and Social Security

Commissioner Ball, concerning the operation of the provider reim-

bursement process (the specific question being the propriety of a

proposed 2% allowance for costs not specifically identified) :

Senator Anderson: What does the law require?

Mr. Ball: That we pay cost.

Senator Anderson: If you find out you haven't paid cost

you have to pay it then. Why don’t you find out about it?

Mr. Ball: I don’t think that the retroactive provision con-

templates going back over the year and changing the principles.

I think what is contemplated is that you pay first on the basis

of * * * estimates * * *. [Y]Jou make an estimate at the be-

ginning of the year on the basis of these principles. Then at

the end of the year you settle up, on the basis of the principles

put out. It would hardly seem reasonable at the end of the year,

after hospitals had entered into an agreement with you on the

basis of certain principles, to shift all the principles for retro-

active settlement in terms of how you compute a cost. I don't

think that was contemplated at all.

Senator Anderson: Well, why cannot a hospital find out

what its costs are at the end of the first year?

Mr. Ball: Well, the question of what are the costs is a

matter of what principes are agreed upon as the basis for the

cost determination.

Both Congress and the Executive understood from the outset of the

Medicare program that the function of clause (ii) was to authorize

a “settl{ing] up” at “the end of the year,” based on the appropriate

“principles” of reimbursement, whatever those “principles” —defined

elsewhere in the law and regulations—-might be.

ee ee er

provider’s actual costs are made, at least monthly,

and in most cases, weekly, by intermediaries as bills

for covered services are submitted. Intermediaries

make appropriate adjustments in the interim rate of

payment and lump-sum payments to bring past pay-

ments in line with costs during the reporting period.

A retroactive adjustment based on the actual costs

is made at the end of the provider’s reporting period.

ist Annual Report On Medicare, H.R. Doc. No. 331, 90th

Cong., 2d Sess. 41 (1968) (emphasis added); see also

id. at 9.

Thus, from the beginning of the Medicare program,

the function of clause (ii) was to authorize an annual

reconciliation between the aggregate amount of the in-

terim payments made to providers during the year and

the aggregate amount actually found to be owing under

the applicable methods prescribed for determining reason-

able costs. There was no suggestion of the far different

and more expansive role petitioners urge, under which

clause (ii) would furnish independent authority for a

provider (or the Secretary) to alter or evade the sub-

stantive determination of reasonable costs under governing

regulations.

c. Petitioners do not dispute that the regulations dis-

cussed above provided for no more than year-end book

balancing; they claim instead that the entire authority

for such regulations is properly found in 42 U.S.C. 1395g,

rather than in clause (ii) of 42 U.S.C. 1895x(v)(1) (A).

See Pet. Br. 19-21, 23. Petitioners are wrong. To begin

with, their argument ignores the fact that, whatever peti-

tioners may now assert, those charged with the initial

implementation of the Medicare program considered

clause (ii) to be the statutory basis for the retroactive

annual adjustment mechanism they so thoroughly em-

bedded in the regulatory scheme. See Georgetown Uni-

versity Hospital, 488 U.S. at 211 n.2."* Petitioners cite

no evidence that anyone at the time thought differently.

Their argument (Pet. Br. 20-21 n.18) that such regula-

tions should now be thought to rest exclusively on

42 U.S.C. 1395g comes far too late in the history of the

program.

In any event, there is no merit to petitioner’s conten-

tion that 42 U.S.C. 1395g fully addressed the subject of

annual book-balancing, so that the Secretary’s interpreta-

tion of clause (ii) would render it redundant. Then as

now, 42 U.S.C. 1395g provided for periodic interim pay-

ments “prior to audit or settlement,” including “necessary

adjustments on account of previously made overpayments

or underpayments.” 79 Stat. 297; 42 U.S.C. 1395gia).

That language is fully reflected in both the original and

the current reasonable cost regulations, which repeatedly

provide for adjustments to the amount of the numerous

interim payments made during the course of the fiscal

year, based on estimated costs. See 20 C.F.R. 405.405

(d); 405.454(c) (4), (d)(2), (e), (f) (1) (1967) (now

codified at 42 C.F.R. 413.64(c) (4), (d)(2), (e), (f) (1)0.°

It contrasts with the “retroactive corrective adjustments”

4 Indeed, the statutory authority cited by the Secretary for the

initial cost reimbursement regulations as a whole included only

Social Security Act Section 1814(b) (the general requirement for

reasonable cost reimbursement) and Section 1861/v) (the reasonable

cost provision that includes clause (ii) )—in addition to the genera!

rulemaking provisions in Sections 1102 and 1871 of the Act, 42

U.S.C. 1302 and 1395hh. See 31 Fed. Reg. 14,808 (1966). There

was no mention of Section 1815 of the Act, 42 U.S.C. 1395g.

S For example, Section 405.454(e) of the original regulations, now

42 C.F.R. 413.64(e), provided that the “interim rate of payment

may be adjusted by the intermediary during an accounting period

if the provider submits appropriate evidence that its actual costs

are or will be significantly higher than the computed rate. Likewise,

the intermediary may adjust the interim rate of payment if it has

evidence that actual costs may fall significantly below the computed

rate.”

language taken from clause (ii), which also occurs

repeatedly in the regulations, and which refers to a

comparison of the aggregate reimbursement produced

by the interim payments and the aggregate post-audit

reimbursement w!timately determined to be due, produc-

ing one final yesr-end adjustment. See, e.g., 20 C.F.R.

405.451(b) (1), 405.454(f) (1967) (now codified at 42

C.F.R. 413.9(b)(1)). The different statutory provisions

thus speak to different phases of the reimbursement proc-

ess; neither is “mere surplusage.” See Pet. Br. 23."

‘It is possible that if clause (ii) had not been enacted, the

authority for some similar year-end mechanism might have been

inferred under the Act as a whole, including 42 U.S.C. 1395¢g. But

the fact that Congress made clear what might have been inferred

hardly renders the clarification “surplusage.”

Furthermore, the interim and annual adjustment provisions serve

different legislative purposes, which explains their different statu-

tory placement. As the initial regulations explained, the interim

payments prescribed by 42 U.S.C. 1395g are intended to protect

participating providers’ liquidity. See 20 C.F.R. 405.402(b)(1)

(1967). In order to serve that goal without unduly burdening the

fise or subsidizing providers’ non-program costs, it made sense to

provide that whatever estimates were used for ir =» payments

should be adjusted periodically to ensure that they \ accurate

as possible. See 20 C.F.R. 405.454(b). It was also a gu: principle

of the Act and regulations, however, that payment would be made

“on the basis of current costs * * * rather than costs of a past

period or a fixed negotiated rate.” 20 C.F.R. 405.402(a). The year-

end “retroactive adjustment” was thought of primarily as a means

to ensure that reimbursed costs ultimately would exactly equal

the provider's actual costs (insofar as they were “reasonable”). See

id. § 405.402(b)(2). See also S. Rep. No. 404, supra, at 37 (“{i]n

paying reasonable costs it should be the policy of the insurance

program to so reimburse a hospital or other provider that an ac-

counting may be made at the end of each cost period for costs

actually incurred”). Because Congress thought of the year-end

retroactive “corrective” adjustments to aggregate reimbursement

primarily in terms of maintaining the integrity of the reasonable

cost reimbursement principle, it is not surprising that the clause

specifically requiring such adjustments was included in the statutory

provision that dealt most specifically with that principle (42 U.S.C.

1395x(v)(1)(A)), not in the section dealing with interim payments

of estimated and unaudited costs (42 U.S.C. 1395g).

2. The 1972 Cost Limit Amendments

The early history of clause (ii), just discussed, demon-

strates that while that clause serves an important func-

tion in implementing the general principle of reimbursing

providers for their actual (as opposed to estimated) rea-

sonable costs, it does not speak to the question of what

costs are to be recognized as ‘ reasonable.” That question

must be answered instead by reference to principles and

methods set forth elsewhere, including in the remainder

of 42 U.S.C. 1395x(v) (1) (A) and the regulations there-

under. Congress itself has from time to time altered

those principles, or directed changes in the applicable

methods. It did so for the first time in 1972, when it

adopted the cost limit principle at issue in this case.

Those amendments further undermine petitioners’ re-

liance on clause (ii) to avoid the cost limits.

a. The original Medicare Act had contemplated—and

the initial regulations had confirmed—that providers’

reimbursable costs might vary widely, and that, within

broad limits, each provider should be compensated for its

“actual costs of providing quality care.” 20 C.F.R.

405.451(¢c) (1967). See. e.g., S. Rep. No. 404, supra, at

35-36. By 1971, however, Congress had become concerned

that “reasonable cost” reimbursement under the 1965 Act

essentially permitted providers to recover whatever costs

they might incur, even when those costs resulted from

inefficiency or inappropriate expenditures. See H.R. Rep.

No. 231, supra, at 82-85; S. Rep. No. 1230, supra, at 188-

189.'7 As the Committee reports concluded,

17 Although under the 1965 Act the Secretary had “authority to

disallow incurred costs that are not reasonable,” Congress recognized

that this system presented problems for both the Secretary and

providers. See H.R. Rep. No. 231, supra, at 83. Because the Secre-

tary could disallow costs only on a case-by-case basis, it was often

difficult to establish that a particular provider's costs were out of

line. On the other hand, disallowance of costs already incurred by

a provider “create[d] financial uncertainty for the provider” since

ee ee eee ee ee

Health care institutions, like other entities in our

economy, should be encouraged to perform efficiently

and when they fail to do so should expect to suffer

the financial consequences. Unfortunately, a reim-

bursement mechanism that responds to whatever costs

a particular institution incurs presents obstacles to

the achievement of these objectives. It is believed that

they can only be accomplished by reimbursement

mechanisms that limit reimbursement to the costs

that would be incurred by a reasonably prudent and

cost-conscious management.

H.R. Rep. No. 231, supra, at 83; S. Rep. No. 1230, supra,

at 187."

In 1972, therefore, Congress toughened the governing

principles of cost reimbursement. The new law added to

the first sentence of 42 U.S.C. 1395x(v)(1)(A) a new

statutory definition of “reasonable cost”: “the cost actu-

ally incurred. excluding therefrom any part of incurred

cost found to be unnecessary in the efficient delivery of

needed health services.” Pub. L. No. 92-603, § 223(a),

86 Stat. 1393. It then authorized the Secretary to promul-

gate regulations establishing “limits on the * * * incurred

it “ha{d] no way of knowing until sometime after it incur[red]

expenses” whether they would be comparable to those of other

providers in the same period and, therefore, “allowable” under the

Secretary’s regulations. hid.

1S Congress’s concern with controlling improper costs disposes of

petitioners’ argument (Pet. Br. 16) that the “inevitable consequence”

of the Secretary’s position will be to shift part of the cost of treat-

ing Medicare patients to non-Medicare patients, in violation of

clause (i) of 42 U.S.C. 1395x(v)(1)(A). Because a provider could

always be expected to claim that it would be “forced” to shift costs

in excess of the Secretary’s limits to non-Medicare patients, peti-

tioners’ argument would vitiate the cost limit concept. But Congress

clearly did not intend the Medicare program to be held to account

for a provider’s decision to foist onto its other patients costs that

Congress and the Secretary had concluded were not otherwise

reimbursable.

costs * * * to be recognized as reasonable” for Medicare

purposes, “based on estimates of the costs necessary in the

efficient delivery of needed health services” to covered

individuals. Ibid. The new limits were expected to be

imposed prospectively, so that providers “would know in

advance the limits to Government recognition of incurred

costs and have the opportunity to act to avoid having

costs that are not reimbursable.” S. Rep. No. 92-1230,

supra, at 188.

As explained above, the Secretary first published cost

limit regulations in 1974, and has issued a series of imple-

menting announcements annually since that time.”” See

pages 4-5, supra. The regulations establish the basic

principle that costs in excess of the applicable limits

are not reimbursable under Medicare. See 20 C.F.R.

405.460(a) (1975); 42 C.F.R. 413.30(a). The regula-

tions also provide, however, for limited exceptions to and

exemptions from the limits in particular situations in

which reasonable costs might be expected or shown to

exceed the limits. See 20 C.F.R. 405.460(f) (1975), re-

designated as 42 C.F.R. 413.30(e) and (f). Since 1974,

the Secretary has acted to expand these regulatory excep-

tions in the light of program experience. See, ¢.g., 44

Fed. Reg. 31,802 (1979).

Petitioners concede (Pet. Br. 22 n.19) that they do not

qualify for any regulatory exception to or exemption from

the applicable cost limits. They contend instead that

clause (ii) confers on them a substantive right to indi-

pores cost limits promulgated by the Secretary have never covered

all costs reimbursable under the general “reasonable cost” standard.

The first set of limits, for example, applied only to hospital in-

patient general routine service costs, 39 Fed. Reg. 20,168-20,169

(1974). Thus, in periods when costs jimits applied, most providers

would be expected to have some costs which were subject to limita-

tion and other costs subject only to the original “substantially out

of line” standard of 20 C.F.R. 405.451(c)(2) (1967) (now codified

at 42 C.F.R. 413.9(c)(2)).

vidual, ad hoe adjudications of their claims that certain

of their costs were “reasonable,” and hence reimbursable

without regard to any other standard. That contention is

untenable.

Petitioners argue (Pet. Br. 17) that the 1972 amend-

ments “left clause (ii) intact.” We agree. There is noth-

ing to suggest that the 1972 Congress intended to change

the annual book-balancing system established by the regu-

lations under clause (ii). Indeed, the fact that Congress

declined to alter the text of clause (ii)—even though it

substantially revised 42 U.S.C. 1395x(v) (1) (A) in other

respects—strongly supports the soundness of the Secre-

tary’s implementation of clause (ii) through the book-

balancing regulations that were in effect from 1967

onwards.

It does not follow, however, as petitioners contend

(Pet. Br. 16-17), that the 1972 amendments did not

change the principles of reasonable cost reimbursement.

On the contrary, the natural reading of the amendments

(and their legislative history) is that they did exactly

what the term “cost limits” would imply: they author-

ized the “establishment of limits” on the costs that would

be “recognized as reasonable” for Medicare purposes. 86

Stat. 1393. It is that straightforward change that peti-

tioners seek to avoid through their misinterpretation of

clause (ii).

b. Petitioners stress selected phrases from the legis-

lative history of the 1972 amendments, including that the

limits would be imposed on a “presumptive” basis and

that providers would have “the right to obtain reconsid-

eration of their classification for purposes of the cost

limits applied to them and to obtain relief from the ef-

fect of the cost limits on the basis of evidence of the need

for such an exception.” S. Rep. No. 1230, supra, at 188-

189. Those comments suggest noting more than an inten-

tion that the Secretary should make some provision for

exemptions or exceptions from the cost limits in appro-

priate cases.” This the Secretary has done. See 42

C.F.R. 413.30(c)-(f) (“Provider requests regarding ap-

plicability of cost limits’”—“Reclassification,” ‘“‘Exemp-

tions” and “Exceptions”’).

In fact, petitioners are merely trying to press clause

(ii) into service to fight again a battle that they have

already lost. In the courts below, petitioners directly

challenged the reasonableness of the cost limits applica-

ble to them, and sought an order declaring those limits

invalid. Pet. App. 14a-15a; J.A. 13-15, 18-19. The court

of appeals rejected petitioners’ arguments, concluding

that “[t]here is nothing arbitrary or capricious about

the cost limit methodology used by the Secretary.” Pet.

App. 14a-15a. That ruling was clearly correct,” and in

any event petitioners have not challenged it in this

Court. Instead, they now seek to attack the cost limits

in a different way, by claiming that although they are

20 The Committee reports themselves suggested one such exemp-

tion, for sole community hospitals. See S. Rep. No. 1230, supra, at

188; 42 C.F.R. 413.30(e) (1).

21 The courts have recognized that Medicare regulation “cannot

be accomplished on a hospital-by-hospital basis,” and that the Sec-

retary “must make generalizations in achieving [the | overall regula-

tory goals” of the Medicare program. City of Austin V. Heckler,

753 F.2d 1316, 1317-1318 (5th Cir. 1985). Accord, Fairfax Hosp.

Ass'n, Inc. v. Califano, 585 F.2d 602, 606 (4th Cir. 1978). The fact

that the Secretary’s cost limit regulations provide relief for only

“some” providers, and not for petitioners (see Pet. Br. 22), hardly

impugns the rationality of the Medicare reimbursement system. The

Secretary was certainly justified in not accounting for part-time

employees in his wage index, given the paucity of accurate in-

formation available at the time. Indeed, when Congress directed

the Secretary to develop the necessary data, it explicitly made the

revised wage index applicable only to costs for patients discharged

on or after May 1, 1986. Medicare and Medicaid Budget Reconcilia-

tion Amendments of 1985, Pub. L. No. 99-272, § 9103(a), 100 Stat.

156 (1986). Similarly, the Secretary’s use of location in or outside

an SMSA to classify hospitals for reimbursement purposes may be

imperfect, but is certainly rational.

1 ee eR ae

valid in general, clause (ii) allows them to be circum-

vented In particular. But even if clause (ii) might have

been given a more expansive role when cost limits did not

apply, the Secretary surely could determine after 1972

that it would not be “suitable” to make “retroactive

corrective adjustments” under that clause where the only

rationale for doing so would be to permit a provider to

avoid the cost limits that were validly promulgated pur-

suant to the 1972 amendments to 42 U.S.C.

yyy S.C. 13895x(v)

C. Petitioners’ Reliance On Clause (ii) In This Case Is

Foreclosed By This Court’s Decision In Bowen v.

Georgetown University Hospital

. The result that petitioners seek in this case is also

inconsistent with this Court’s construction of clause (ii)

and the cost limits in Bowen v. Georgetown University

Hospital, supra. In Georgetown the Secretary, relying on

expansive readings of clause (ii) by some lower courts

in cases brought by providers, see pp. 38-39, infra

argued that the clause provided statutory authority for

the promulgation in 1984 of regulations applicable retro-

actively as of July 1, 1981. See 488 U.S. at 209. The

Court, however, rejected this interpretation. Indeed, the

Court cited the book-balancing regulations discussed

above, 20 C.F.R. 405.451(b) (1), 405.454(a) and (f)

(1967), as indicative of the Secretary’s prior—and, im-

plicitly, correct—implementation of clause (ii). 488 U S

at 211-212 & n.2; see also id. at 212-213. a

The Court commented in Georgetown that the statu-

tory language “suggests that clause (ii), rather than

permitting modifications to the cost-method rules in their

yo It is of course axiomatic that revised statutory provisions pre-

vail over prior law as “the latest declaration of the legislative will.”

N. Singer, Sutherland Statutory Construction §§ 22.34 (at 293 )

51.02 (at 121) (1985). See also, e.g., Clark v. Uebersee Finens-

Korporation, 332 U.S. 480, 489 (1947).

general formulation, is intended to authorize case-by-

case inquiry into the accuracy of reimbursement deter-

minations for individual providers.” 488 U.S. at 210.

Moreover, the Court observed that the cost limit rules

are one of the “methods of determining costs” referred

to in the language of clause (ii), and that “nothing in

clause (ii) suggests that it permits changes in the

methods used to compute costs; rather, it expressly con-

templates corrective adjustments to the aggregate

amounts of reimbursement: produced pursuant to those

methods.” Jd. at 211 (emphasis in original). Finally,

the Court expressed its view that “clause (ii) directs the

Secretary to establish a procedure for making case-by-

case adjustments to reimbursement payments where the

regulations prescribing computation methods do not reach

the correct result in individual cases.” Jd. at 209.

The Court’s observations in Georgetown are fully con-

sistent with the “narrow view,” 488 U.S. at 212-213,

which the Secretary originally espoused and to which he

has returned in light of this Court’s decision in that case.

Clause (ii) speaks of corrective adjustments to the ag-

gregate reimbursement produced by the “methods of de-

termining costs” prescribed under 42 U.S.C. 1395x

(vy) (1) (A)—ie., standards of allowability, methods of

apportionment, and cost limits. These methods are first

applied in the process of estimating the appropriate in-

terim reimbursement rates required by 42 U.S.C. 1395g

and the regulations. See, e.g., 42 C.F.R. 413.60, 413.64.

Cf. id. §413.5(b)(1) (emphasis added) (stating that

“the methods of reimbursement should result in current

payment”—under the interim payment system—to pre-

serve provider liquidity). The interim application of the

cost determination methods, and the payments calculated

thereunder, will always be based on estimates. Thus,

in practice, the “aggregate reimbursement produced” by

applying the prescribed “computation methods”—2.e., the

total of all of the interim payments made during the

year—will always require a “suitable retroactive correc-

tive adjustment” of some sort. Clause (ii) thus speaks

only to correcting the results of the necessary inaccura-

cies involved in the interim cost estimation process. It

does not authorize a post hoc revision of the substantive

methods applied both in generating those estimates and

~ sence _ gene aggregate provisional reim-

rsement wi e amount i

at iii finally determined, after

Petitioners nevertheless rely on Georgetown. ,

14-15, 20-21 n.18, 27-28. They a that the he

there drew a distinction between retroactive rulemaking

and “case-by-case adjustments,” invalidating only the

former.” Petitioners argue that they seek only a “case-

by-case” retroactive change in the Secretary’s methods

where those methods “produce inadequate reimbursement

of [their] reasonable costs.” Pet. Br. 15; see also id. at

22, 27-28. But petitioners’ approach would permit pro-

viders—or the Secretary—to seek retroactive modifica-

tions having the same practical effect as the retroactive

— barred by this Court in Georgetown.

_The istrict judge in Mt. Diablo Hospital, supra, -

nized this consequence, noting that sm ili) is a “tee

way street” in that it “applies to adjustments where the

* We agree that clause (ii) requires “case-by-case adjustments.”

But they must be “adjustments” to the provider's “aggregate reim-

bursement” within the framework of the Secretary's reimburse-

ment regulations—not, as petitioners seek here, ad hoc adjustments

designed to circumvent the Secretary’s lawful regulations.

= Petitioners ask this Court to remand their case to the Provi

Reimbursement Review Board for “the opportunity to ees

that their costs in excess of the cost limits are reasonable.” Pet. Br.

29. In the court of appeals, they argued for an across-the-board ad-

justment to their wage index, regardless of their actual costs or

percentage of part-time employees. Pet. C.A. Rep. Br. 16 n.8; Gov't

C.A. Reply Br. 6. The court of appeals recognized that this

amounted to a request for a “retroactive rule chang[e],” and rejected

the argument. Pet. App. 13a.

aggregate reimbursement is shown to be‘. . . either

inadequate or excessive.” Mt. Diablo Hospital Medical

Center v. Sullivan, No. C-89-2714-DLJ (N.D. Cal. May

24, 1990), slip op. 13, rev’d, 963 F.2d 1175 (9th Cir.

1992), petition for cert. pending, No. 92-720. As the

judge explained,

Under [the provider’s] interpretation of clause (ii),

the Secretary in the Georgetown Univ. Hospital

scenario could have determined the claimed expenses

to be unreasonable and retroactively adjusted such

“excessive” payouts on a hospital-by-hospital basis,

even after the Supreme Court held that the Secretary

was without rule-making authority under clause (ii).

Such a result could not have been within the con-

templation of the Supreme Court. Case-by-case retro-

active adjudication ultimately has the same practical

effect as across-the-board retroactive rule-making.

Slip op. 13-14, The court of appeals in this case agreed,

stating that petitioners’ request for a court order re-

quiring the Secretary “to retroactively adjust cost limits

for the number of part-time workers * * * amount(s] to

a retroactive change in the methods that, after George-

town, is invalid.” Pet. App. 13a. See also Hennepin

County v. Sullivan, 883 F.2d 85, 86-87, 92-93 (D.C. Cir.

1989), cert. denied, 493 U.S. 1043 (1990) (clause (ii)

“is not a vehicle through which Medicare providers may

get a ‘second bite at the applie’ on claims for exceptions

to limitations on reimbursable costs”); Sierra Medical

Center v. Sullivan, 902 F.2d 388, 393 (5th Cir. 1990).

Neither Georgetown’s holding nor its discussion of

clause (ii) can be reconciled with petitioners’ position in

this case. However they may characterize their argument,

petitioners at bottom are attempting to use clause (ii) to

avoid the application to them of otherwise valid cost limits.

Yet Georgetown specifically states that the clause does

not permit changes in the methods, including cost limits,

used to compute reimbursable cost. 488 U.S. at 211.

Moreover, although the Court in Georgetown stressed the

individual, case-by-case nature of whatever adjustment

is required by clause (ii)—consistent with the provider-

specific details of a yearly reconciliation between esti-

mated payments and actual costs—the logic of petition-

er’s position would allow any similarly situated provider

to demand equal treatment, thus accomplishing in effect

a wholesale revision of the cost limit rules. See Pet. Br.

22, 27-28."

D. The Secretary’s Interpretation Of Clause (ii), Which

Is Consistent Both With Georgetown And With The

Original Construction Of The Statute, Is Entitled To

Deference From This Court

Petitioners argue (Br. 23-25) that any claim of defer-

ence to the Secretary’s construction of the Medicare Act

is undermined by variations in the government’s positions

over the years. While the Secretary’s position on the

25 Petitioners’ reliance (Br. 25-27) on Bethesda Hospital Ass'n

Vv. Bowen, 485 U.S. 399 (1988) as a basis for disregarding the

Secretary's cost limit regulations is similarly unavailing. That case

involved a procedural question of exhaustion of administrative

remedies—namely, whether a provider is required to raise a reim-

bursement issue before its fiscal intermediary in order to pre -erve

that claim for review by the PRRB. Relving on the text of a

statutory provision not at issue here, 42 U.S.C. 129500, the Court

held that the Act imposes no such exhaustion requirement. 485 U.S.

at 405-405. Nothing in the Court’s decision suggests that the PRRB

may ignore substantive limitations in the Secretary's regulations,

including those imposing cost limits. Indeed, the Court observed

that the PRRB cannot “declare regulations invalid” (485 U.S. at

496 (citing 42 U.S.C. 139500(f)(1)) and that the providers acknow!l-

edged that the PRRB lacked “authority” to disregard the Secretary’s

regulations and to give them “the relief they sought.” Fur-

thermore, the instances cited by petitioners where “the [PRRB}

has actually served as the mechanism for clause (ii) adjustments”

in disregard of the Secretary’s regulations have all occurred in

situations where the courts have specifically ordered such a result.

See cases cited at Pet. Br. 27.

meaning of clause (ii) did in fact vary at times between

the inception of the program and 1988, positions differ-

ing from that reflected in the original Medicare regula-

tions stemmed largely from the disarray that prevailed

for some time among the lower courts on this issue.

Furthermore, since this Court’s construction of clause (ii)

in Georgetown, the Secretary has returned to the “book-

balancing” interpretation reflected both in that decision

and in the initial Medicare regulations.

The federal courts, like the Secretary, initially adopted

the “book-balancing” interpretation. See, e.g., Mt. Sinai

Hospital of Greater Miami, Inc. v. Weinberger, 376 F.

Supp. 1099, 1127-1129 (S.D. Fla. 1974) ‘analyzing the

relationship between clause (ii) and 42 U.S.C. 1395gia)),

aff'd, 517 F.2d 329, 335 (5th Cir. 1975). In the mid-

1970's, however, the Second Circuit and the United States

Court of Claims rejected the Secretary’s arguments

that his “book-balancing” regulations fully implemented

clause (ii), finding instead that the clause required the

Secretary to retroactively change his reimbursement

methods “wherever a cost method produce[d] an in-

accurate reimbursement.” Whitecliff, Inc. v. United

States, 536 F.2d 347, 351-352 & n.11 (Ct. Cl. 1976)

(retroactive application of subsequently collected data) ;

Kingsbrook Jewish Medical Center v. Richardson, 486

F.2d 663, 669-671 (2d Cir. 1973) (retroactive application

of subsequently issued Medicare ruling to earlier cost

ears).

: Whatever type of adjustments clause (ii) authorizes

apply to “excessive” as well as to “inadequate” prior

payments. In light of Whitecliff and Kingsbrook, there-

fore, the Secretary in the late 1970’s argued for a more

substantive role for clause (‘ii', principally to recoup

through “retroactive corrective adjustments” accelerated

depreciation that had been claimed in earlier years by

providers that subsequently left the Medicare program.

Fairfax Nursing Center v. Califano, 590 F.2d 1297 (4th

Cir. 1979); Springdale Convalescent Center v. Mathews,

545 F.2d 943, 954 (5th Cir. 1977); Hazelwood Chronic &

Convalescent Hospital, Ine. v. Weinberger, 543 F.2d 703

(9th Cir. 1976), vacated on other grounds, 430 U.S.

952 (1977); Humana of South Carolina v. Califano,

590 F.2d 1070. 1079 n.66 (D.C. Cir. 1978).2* But see

Daughters of Miriam Center for the Aged v. Mathews,

590 F.2d 1250 (3d Cir. 1978) (rejecting application of

accelerated depreciation regulations to pre-issuance con-

duct). Further, in the early 1980’s, when the cost limit

issues present in this case began to appear in litigation,

several lower courts initially adopted a similar reading of

clause (ii). Medical Center Hosp. v. Bowen, 839 F.2d

1504 (11th Cir 1988) ; St. Paul-Ramsey Medical Center v.

Fowen, 816 F.2d 417 (8th Cir. 1987); Regents of the

Univ. of California v. Heckler, 771 F.2d 1182 (9th Cir.

1985).

As is obvious from the discussion above, however, any

reading of clause (ii) that would permit retroactive

26 Mercy Community Hosp. v. Blue Cross Association/Blue Croes

of Florida, Inc., [1983-1 Transfer Binder| Medicare and Medienid

Pet. Br. 24, is a similar case.

Humana of Illinois, Inc. vy. Heckler, No. 84-1727 (7th Cir. Apr.

18, 1985), consolidated with St. James Hospital v. Heckler, 760

F.2d 1460, 1473 n.9 (7th Cir.), cert. denied, 474 U.S. 902 (1985),

is also similar. The brief filed by the Secretary in that case and

cited by petitioners here (Pet. Br. 13-14 n.13, 24) argued that the

regulations on reopening of determinations and decisions, 42 C.F_R.

405.1885(a) (1984), were authorized by clause (ii). Particularly

in light of the intervening decision in Georgetown, the Secretary

now believes that the reopening regulations are properly premised

not on clause (ii), but on the Secretary’s general rulemaking

authority. See 42 U.S.C. 12395hh. Lower courts have accepted that

position without comment. See Memorial Hospital v. Sullivan, 779

F. Supp. 1406, 1409 (D.D.C. 1991): Albert Finetein Medical Center

Vv. Sullivan, Civil No. 91-6119 (E.D. Pa. Nov. 24, 1992), slip op.

12.

changes in the Secretary’s methods of reimbursement

whenever they resulted in “inadequate” or “excessive”

payments was rejected by this Court in Georgetown. In-

deed, although the issue was not directly presented,

Georgetown appeared to adopt the Secretary’s original

“book-balancing” construction of clause (ii). See 488 U.S.

at 210-212 & n.2, 213.

Since Georgetown, the Secretary has returned to this

original construction. His position here takes into account

this Court’s authoritative construction of clause (ii), see

Lechmere, Inc. v. NLRB, 112 8S. Ct. 841, 847-848 (1992),

as well as his interpretation of other relevant statutory

provisions and his accumulated experience in adminis-

tering the Medicare program. See Pet. App. 10a-l4a;

Hennepin County v. Sullivan, 883 F.2d at 86-87, 92-93;

Sierra Medical Center v. Sullivan, 902 F.2d at 393.*" The

27 Sutter Community Hospitals v. Heckler, No. 8-82-204 (RAR)

(E.D. Cal. Feb. 16, 1984), aff'd, 765 F.2d 150 (9th Cir. 1985)

(Table), cited by petitioners, Pet. Br. 24-25, is not to the contrary

In that case, the Secretary was under a final, non-appealable judg-

ment, entered prior to Georgetown, requiring “reimbursement of

any costs the providers could establish were reasonable, even if

total routine costs exceeded the limitations.” Eskaton American

River Hosp. v. Aetna Life Ins. Co., [1990 Transfer Binder) Medicare

and Medicaid Guide (CCH) { 38,279, at 21,549 (Nov. 27, 1989),

citing Sutter Community Hospitals v. Heckler, supra. The fact that

the Secretary, after Georgetown, chose not to attempt to apply

Georgetown’s holding in such a pending case surely does not indicate

any relevant inconsistency. See United States v. Mendoza, 464

U.S. 154, 160-161 (1984). Indeed, petitioners appear to suggest

that in order to avoid any embarrassing “inconsistency” the Secre-

tary should have taken a position that would have led to litigation

in a circuit that had already ruled against the government's position

on the issue. See Regents v. Heckler, supra.

The HCFA Ruling cited by petitioners (Br. 25 n.21) is similar.

HCFA Ruling No. 89-2, [1990 Transfer Binder) Medicare and

Medicaid Guide (CCH) { 38,236, at 21,297 (Oct. 31, 1989). It dealt

with the reimbursement of costs incurred by health maintenance

organizations and competitive medical plans, which at the time were

subject to absolute cost limits similar to those at issue here, but

fact that the Secretary once took a somewhat broader

view of clause (ii) does not excuse the courts from accord-

ing deference to the Secretary’s current interpretation,

especially since that interpretation is identical to the Sec-

retary’s interpretation of clause (ii) immediately after

its enactment, and has been incorporated in book-

balancing regulations that have remained in effect ever

since. That interpretation accords clause (ii) its proper

and accustomed role in the complex system of Medicare

reimbursement, and preserves the integrity of the cost

limits that Congress authorized to promote efficiency and

fairness among providers and to facilitate administration

of the program through rules of general applicability. By

contrast, petitioners’ expansive view of clause (ii) would

undermine the cost limits, require ad hoc decisionmaking

concerning the amount of reimbursement owed to thou-

sands of providers annually (see note 3, supra), and

with no provision for exceptions such as those available under 42

C.F.R. 413.30(f). The ruling announced (1) that in light of

Medical Center Hospital v. Bowen, supra, and Regents vy. Heckler,

supra, the relevant regulations would be revised to provide appro-

priate exceptions, and (2) that although, in light of Georgetown's

disapproval of retroactive cost-limit regulations, the new regula-

tions would not be retroactive, as a matter of enforcement policy

the absolute limits would not be applied pending revision of the

regulations. The ruling did not consider the continuing validity of

Medical Center Hospital and Regents in light of Georgetown’s con-

struction of clause (ii). Moreover, the ruling relates to clause (ii)

solely because of the similar language adopted by Congress in 1972

in 42 U.S.C. 1395mm(h)(3), governing “reasonable cost” reimburse-

ment to >«alth maintenance organizations. If anything, that Sec-

tion’s language (providing for “suitable retroactive corrective ad-

justments at the end of each contract year” (emphasis added) ) and

structure (as an alternative to an incentive payment system prem-

ised on year-end accounting) support the Secretary's construction

of the same phrase as used in clause (ii). In any event, the ruling

is consistent with the proposition that any obligation to provide

appropriate adjustments to cost limits of general applicability is

satisfied by the exemptions and exceptions provided by the cost-limit

regulations. See pages 31-32, supra.

thereby undermine the statutory goals of efficiency, fair-

ness, and ease of administration.

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

STUART M. GERSON

Assistant Attorney General

EDWIN S. KNEEDLER

Assistant to the Solicitor General

EDWARD C. DUMONT

Assistant to the Solicitor General

SUSAN K. ZAGAME ANTHONY J. STEINMEYER

Acting General JOHN P. SCHNITKER

Counsel Attorneys

DARREL J. GRINSTEAD -

Associate General

Counsel

HENRY R. GOLDBERG

Deputy Associate

General Counsel

GERARD KEATING

Attorney

Department of Health

& Human Services

DECEMBER 1992

ov. 8. Coveenment peiwrine orrice, 1992 342479 60126

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