Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-05156/USCOURTS-caDC-08-05156-0/pdf.json

Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 14, 2009 Decided July 17, 2009

No. 08-5156

SOUTHEAST ALABAMA MEDICAL CENTER, ET AL.,

APPELLANTS

v.

KATHLEEN SEBELIUS,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:04-cv-01143)

James F. Segroves argued the cause for appellants. With

him on the briefs was Malcolm J. Harkins III.

Henry C. Whitaker, Attorney, U.S. Department of Justice,

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

Gregory G. Katsas, Assistant Attorney General, Jeffrey A.

Taylor, U.S. Attorney, and Mark B. Stern, Attorney. R. Craig

Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: HENDERSON, TATEL, and GARLAND, Circuit

Judges.

Opinion for the Court filed by Circuit Judge GARLAND.

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GARLAND, Circuit Judge: Appellants are 113 inpatient

hospitals located in Alabama, Louisiana, and Mississippi. They

contend that the Department of Health and Human Services

(HHS) interpreted the Medicare reimbursement statute in a way

that improperly deprived them of millions of dollars. The

district court disagreed and granted summary judgment for the

Department. We affirm the district court’s judgment in all but

one respect.

I

In 1983, Congress revised the Medicare reimbursement

statute to move from a “reasonable cost” method of

retrospective compensation to the Prospective Payment System

(PPS). Social Security Amendments of 1983, Pub. L. No. 98-

21, § 601, 97 Stat. 65, 149; see Transitional Hosps. Corp. of La.

v. Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000); County of Los

Angeles v. Shalala, 192 F.3d 1005, 1008-09 (D.C. Cir. 1999).

Under this system, HHS reimburses hospitals that provide

inpatient care to eligible beneficiaries according to a

preestablished formula, regardless of the actual costs incurred.

42 U.S.C. § 1395ww(d). The payment rates are tied to the

national average cost of treating a patient in a particular

“diagnosis-related group” (DRG). Id. The statute mandates that

HHS adjust the standardized payment rates for area differences

in hospital costs, id. § 1395ww(d)(3)(E), which HHS

accomplishes through annual notice-and-comment rulemaking.

This case concerns the methodology that HHS used to make

these geographic adjustments in fiscal years (FY) 2003 and

2004.

During those years, the relevant statutory section, 42 U.S.C.

§ 1395ww(d)(3)(E), provided in relevant part:

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1

Unless otherwise indicated, citations to 42 U.S.C.

§ 1395ww(d)(3)(E) will refer to the version in effect during FY 2003

and 2004, as codified in the 2000 edition of the U.S. Code.

The Secretary shall adjust the proportion, (as estimated

by the Secretary from time to time) of hospitals’ costs

which are attributable to wages and wage-related costs,

of the DRG prospective payment rates computed under

subparagraph (D) for area differences in hospital wage

levels by a factor (established by the Secretary)

reflecting the relative hospital wage level in the

geographic area of the hospital compared to the

national average hospital wage level. Not later than

October 1, 1990, and October 1, 1993 (and at least

every 12 months thereafter), the Secretary shall update

the factor under the preceding sentence on the basis of

a survey conducted by the Secretary (and updated as

appropriate) of the wages and wage-related costs of

subsection (d) hospitals in the United States. Not less

often than once every 3 years the Secretary (through

such survey or otherwise) shall measure the earnings

and paid hours of employment by occupational

category and shall exclude data with respect to the

wages and wage-related costs incurred in furnishing

skilled nursing facility services.

42 U.S.C. § 1395ww(d)(3)(E) (2000) (emphases added).1

 HHS

has traditionally referred to the “proportion” described in

§ 1395ww(d)(3)(E)’s first sentence as the “labor-related share,”

and has referred to the “factor” described in the first two

sentences as the “wage index.” Following the district court, we

will instead refer to these constructs by their statutory names and

will capitalize “Proportion” and “Factor” for purposes of clarity.

The measurement of “the earnings and paid hours of

employment by occupational category” described in the third

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2

Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed.

Reg. 45,346, 45,468 (2003) [hereinafter FY 2004 Final Rule];

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2003 Rates, 67 Fed. Reg. 49,982,

50,042 (2002) [hereinafter FY 2003 Final Rule].

3

Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 2004 Rates; Correction,

68 Fed. Reg. 57,732, 57,736-43 (2003).

sentence of § 1395ww(d)(3)(E) has traditionally been known as

the “occupational mix,” a term we will retain.

Although § 1395ww(d)(3)(E) is hardly a paragon of clarity,

the bottom line is as follows: The statute first requires HHS to

determine the Proportion of the DRG reimbursement that is

attributable to wages and wage-related costs. HHS must then

adjust that Proportion by a Factor reflecting the relative hospital

wage level in the hospital’s geographic area as compared to the

national average hospital wage level; the rest of the

reimbursement amount -- the share not attributable to wages or

wage-related costs -- is not adjusted. In addition, HHS must

adjust the Factor itself for occupational mix. But see infra Part

II.C (explaining that this last requirement is not applicable to the

fiscal years at issue on this appeal).

For FY 2003 and 2004, HHS determined the Proportion to

be 71.066 percent.2

 The Factor varied significantly across

geographic areas, ranging in FY 2004 from a high of 1.51 in the

Oakland, California area to a low of 0.42 in northwest Puerto

Rico.3 As the mathematics worked out, hospitals in geographic

areas with Factors less than 1 -- i.e., hospitals in low-wage

regions -- wanted the Proportion to be as low as possible,

whereas hospitals in areas with Factors greater than 1 wanted the

Proportion to be as high as possible. In addition, every hospital

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4

The government provides an example to illustrate how

reimbursement payments would have been calculated “for treatment

in a diagnostic category with a payment level of $10,000”:

The part of that payment attributable to wage-related costs

[the Proportion] would be subject to adjustment. For FY

2004, the [Proportion] was approximately 71 percent;

accordingly, $7,100 was subject to adjustment. That $7,100

would be multiplied by the relevant [Factor]. In Oakland,

where the FY 2004 [Factor] was 1.51, the [Proportion]-related

payment would thus be adjusted upward to $10,721[,] with a

total payment of $13,621 [i.e., $10,721 plus the non-wagerelated share of $2,900, calculated by subtracting $7,100 from

$10,000]. In rural Louisiana, where the wage index was .75,

the calculation would result in a total payment of $8,225 [i.e.,

($7,100 x .75) + $2,900] for the same diagnostic category.

HHS Br. 4 n.1. Hence, as a consequence of the Proportion and Factor,

a hospital in Oakland would be reimbursed $5,396 more than a

hospital in rural Louisiana for providing the same type of treatment.

wanted its own area’s Factor to be as high as possible. The

hospitals bringing this case are all from areas that were assigned

Factors less than 1.4

The appellant hospitals challenged HHS’s final rules for FY

2003 and 2004 before the Department’s Provider

Reimbursement Review Board, see 42 U.S.C. § 1395oo(b),

which granted their request for expedited judicial review in the

United States District Court for the District of Columbia, see 42

U.S.C. § 1395oo(f)(1). The hospitals raised four main

arguments before the district court. First, they contended that

during the fiscal years in question, HHS violated

§ 1395ww(d)(3)(E) by including in the Proportion hospital

expenses that were not “attributable to wages and wage-related

costs” and that did not vary on a local basis. Second, they

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argued that the Department’s decision to include certain cost

items in the Proportion but not in the Factor violated the plain

language of the statute and was arbitrary and capricious. Third,

they argued that HHS also violated the statute and acted

arbitrarily and capriciously by failing to adjust the Factor for

occupational mix. Finally, they maintained that HHS violated

the statute by failing to account for interstate employment when

calculating the Factor.

The district court rejected all of these arguments and

granted summary judgment for the government. Se. Ala. Med.

Ctr. v. Leavitt, 539 F. Supp. 2d 352 (D.D.C. 2008). The court

found that HHS’s interpretation of “wages and wage-related

costs” in the Proportion was consistent with the words’ ordinary

meaning, id. at 357-58; that the statute permitted HHS to use

different cost items in the Proportion as compared to the Factor,

id. at 359; that there was “no basis on [the] record on which to

conclude that the Secretary’s choice to not collect [data on

occupational mix] in time . . . to be applied in [FY 2003 and

2004] was unambiguously forbidden by the statute” or otherwise

unreasonable, id.; and that the hospitals’ failure to raise their

interstate employment argument before the Provider

Reimbursement Review Board barred them from raising it in

court, id. at 360.

The hospitals now appeal, making the same four arguments.

We address each of them below. We note, however, that

although resolution of these arguments has financial significance

for the appellants’ FY 2003 and 2004 claims, the significance of

the arguments for any subsequent-year claims is extremely

limited. See Oral Arg. Recording at 7:57-8:05 (acknowledgment

by counsel for appellants that their primary arguments in this

case “do not affect [them] for the future”). The import of the

first two arguments was greatly diminished if not negated by a

statutory amendment, effective in FY 2005, which directs HHS

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to “substitute ‘62 percent’ for the [P]roportion” unless doing so

“would result in lower payments to a hospital than would

otherwise be made.” Medicare Prescription Drug, Improvement,

and Modernization Act of 2003, Pub. L. No. 108-173,

§ 403(a)(1), 117 Stat. 2066, 2265 (codified at 42 U.S.C.

§ 1395ww(d)(3)(E)(ii)). And as explained in Part II.C below,

appellants’ third argument was mooted by statutory amendments

to the provision regarding occupational mix.

II

In reviewing HHS’s actions on appeal from the district

court, this “court addresses the issue de novo, without deference

to the decision of the district court.” Methodist Hosp. of

Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C. Cir. 1994).

We review the Department’s interpretation of provisions of the

Medicare statute under the two-step framework of Chevron

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

837 (1984). Under that framework, “[i]f the intent of Congress

is clear, . . . [a court] must give effect to the unambiguously

expressed intent of Congress.” Id. at 842-43. But “if the statute

is silent or ambiguous with respect to the specific issue,” the

court must uphold the agency’s interpretation as long as it is

reasonable. Id. at 843. We review other aspects of HHS’s

actions under the Administrative Procedure Act (APA), pursuant

to which we will uphold them unless they are “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C. § 706(2)(A); see 42 U.S.C.

§ 1395oo(f)(1).

A

The hospitals’ primary target on appeal is the Proportion --

that is, “the proportion . . . of hospitals’ costs which are

attributable to wages and wage-related costs.” 42 U.S.C.

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§ 1395ww(d)(3)(E). For the fiscal years in question, HHS

interpreted the phrase “costs which are attributable to wages and

wage-related costs” to include “wages[,] salaries, [and] fringe

benefits,” as well as “professional fees, contract labor, postage,

business services, and labor-intensive services.” FY 2003 Final

Rule, 67 Fed. Reg. at 50,041; see FY 2004 Final Rule, 68 Fed.

Reg. at 45,467-68. “Each of these categories,” HHS has said,

“is classified as labor-related because it consists of direct

payments to labor inputs by the hospital or hospital payments for

services that are very labor intensive.” Medicare Program;

Changes to the Inpatient Hospital Prospective Payment System

and Fiscal Year 1991 Rates, 55 Fed. Reg. 35,990, 36,046 (1990)

[hereinafter FY 1991 Final Rule]. The hospitals object to three

cost items that HHS included in its calculation of the Proportion.

1. First and foremost, the hospitals maintain that HHS

should not have included payments made for hospital

employees’ health insurance, worker’s compensation insurance,

pension plans, and other fringe benefits because they are not

“wages” or “wage-related.” But the Medicare statute defines

neither “wages” nor “wage-related,” and there is nothing

unreasonable about HHS’s determination that these cost items

fit within common definitions. As the district court noted, some

dictionaries define the term “wage,” itself, to include fringe

benefits. See, e.g., WEBSTER’S THIRD NEW INTERNATIONAL

DICTIONARY OF THE ENGLISH LANGUAGE UNABRIDGED 2568

(1976) (defining a “wage” as “a pledge or payment of usually

monetary remuneration by an employer especially for labor or

services usually according to contract and on an hourly, daily,

or piecework basis and often including bonuses, commissions,

and amounts paid by the employer for insurance, pension,

hospitalization, and other benefits” (emphases added)

(abbreviations in original replaced with whole words)). In any

event, fringe benefits -- which are part of the compensation an

employee receives for his or her services -- fit comfortably

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within the broad meaning of the term “wage-related.” See id. at

1916 (defining “related” as “having relationship: connected by

reason of an established or discoverable relation”); see also

Morales v. Trans World Airlines, Inc., 504 U.S. 374, 383 (1992)

(“The ordinary meaning of [‘relating to’] is a broad one[,] . . .

and the words thus express a broad [statutory] purpose.”);

Moshea v. NTSB, No. 08-1218, --- F.3d ---, --- (D.C. Cir. June

30, 2009) (“Without getting into a metaphysical discussion of

the meaning of the phrase ‘related to,’ it suffices here to say that

the words ‘related to’ are broad.”). 

The hospitals also maintain that HHS wrongly included the

cost of payments for insurance premiums, pensions, and other

fringe benefits because such costs do not vary based on local

labor markets. It is true that the Secretary has found it relevant,

in determining whether a cost item is wage-related, to examine

whether the item varies with the local labor market. For

example, the 2004 final rule stated that “[w]e define the

[Proportion] to include all costs that are likely related to,

influenced by, or vary with local labor markets, even if they

could be purchased in a national market.” FY 2004 Final Rule,

68 Fed. Reg. at 45,468 (emphasis added). But although HHS’s

statements on this issue are not crystal clear, we do not read

them as declaring that only costs that vary with local labor

markets may be included in the Proportion.

 Nor does the statute itself impose such a requirement. The

statute provides only that the Secretary must, first, estimate the

Proportion of hospitals’ costs “which are attributable to wages

and wage-related costs,” 42 U.S.C. § 1395ww(d)(3)(E), and,

second, adjust that Proportion “for area differences in hospital

wage levels by [the] [F]actor,” id. The geographic element

enters at step two -- in the calculation of the Factor -- and not at

step one’s calculation of the Proportion. As counsel for HHS

correctly noted at oral argument, the Proportion and the Factor

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are “two different moving parts that work together” to

accomplish the purpose of adjusting PPS payments for area

wage differences, and the role of the Proportion is to define the

“universe” of costs that the Factor adjusts on this basis. Oral

Arg. Recording at 21:01-26.

Accordingly, while it might have been reasonable for HHS

to restrict the Proportion to cost items that vary on a local basis,

it was not unreasonable for the agency to decline to do so. See

Entergy Corp. v. Riverkeeper, Inc., 129 S. Ct. 1498, 1505 (2009)

(holding that an agency’s “view governs if it is a reasonable

interpretation of the statute -- not necessarily the only possible

interpretation, nor even the interpretation deemed most

reasonable by the courts”). Even if the hospitals are correct that

the costs of fringe-benefit items used to calculate the Proportion

do not vary with local labor markets -- a proposition that is not

obvious and certainly not proven -- it would not establish a

violation of the Medicare statute or the APA.

2. The hospitals also contend that the agency erred by

including in the Proportion payments to independent contractors

for certain nonmedical services. These include the services of

landscapers, accountants, and lawyers. In the district court, the

hospitals asserted that only amounts “paid directly by the

hospital to the individual providing the service to the hospital,

whether that individual is an independent contractor or a

hospital employee,” were appropriately included. Se. Ala. Med.

Ctr., 539 F. Supp. 2d at 357. Although this, too, might have

been a reasonable line to draw, it is not the only reasonable line.

As the district court found, “[t]he statute does not expressly limit

the wages and wage-related costs to those paid by the hospital

directly to an individual, as opposed to some third-party

employer of individuals providing hospital services.” Id.

Rather, the statute simply directs HHS to include costs that are

“attributable to wages and wage-related costs,” 42 U.S.C.

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5

The hospitals make three further arguments that also fail to

persuade. First, they suggest that HHS’s habit of referring to the

Proportion as the “labor-related share,” rather than the “wage-related

share,” betrays a lack of fidelity to the statutory text. Yet while the

term “labor-related share” may be an infelicitous shorthand, it carries

no legal force. Second, they cite the Internal Revenue Code for a

more restrictive definition of “wages” than the one used by HHS. The

tax code, however, is not germane to this unrelated area of law;

indeed, the Supreme Court has “pointed out that the word ‘wages’ has

different meanings under different statutes.” United States v. Davis,

154 F.2d 314, 317 (D.C. Cir. 1946) (citing Williams v. Jacksonville

§ 1395ww(d)(3)(E) (emphasis added), and payments to third

parties to provide workers reasonably fall within that category.

Indeed, when a hospital hires an outside entity to provide

individuals to perform services for which it might otherwise

have used or hired its own employees, the hospital incurs costs

that it would otherwise have spent directly on wages. See

Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 2003 Rates, 67

Fed. Reg. 31,404, 31,447 (2002) [hereinafter FY 2003 Proposed

Rule] (“By capturing more than just the direct labor costs[,] . . .

our definition captures the ‘buy-versus-hire’ decisions hospitals

make in the purchase of their inputs.”).

On appeal, the hospitals take a somewhat different tack,

suggesting that the line should be drawn against including fees

paid for “non-health-care-related” or “nonmedical” services,

while permitting the inclusion of payments to “non-employee

independent contractors such as physicians.” Appellants’ Br.

20; see id. at 22-23, 34-37. Again, this might have been a

reasonable line to draw. But the statute merely requires the

inclusion of “costs which are attributable to wages and wagerelated costs,” 42 U.S.C. § 1395ww(d)(3)(E), and HHS did not

act unreasonably in interpreting that phrase to include

nonmedical costs.5

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Terminal Co., 315 U.S. 386 (1942)). Finally, the hospitals claim that

HHS’s definition of the Proportion is inconsistent with its own costreporting worksheet. See Addendum to HHS Br. at 56 (reproducing

the worksheet). The worksheet, however, is not inconsistent with the

agency’s definition. See, e.g., id. at line 9 (directing hospitals to report

fees paid to certain independent contractors as “Other Wages &

Related Costs”).

6

The HHS brief states that the Secretary “decided not to make

that and other revisionsto the [Proportion] because he was concerned

that the proposed revisions resulted in a net increase in the

3. Finally, the hospitals challenge HHS’s decision to

include postage costs in calculating the Proportion, and with this

they strike a heavier blow. HHS initially proposed to exclude

postage from the Proportion in FY 2003, see FY 2003 Proposed

Rule, 67 Fed. Reg. at 31,447, but ultimately declined to do so in

that year and in both of the next two. In its FY 2006

rulemaking, however, HHS changed its mind, concluding:

We do not believe that we should continue to include

postage costs in the [Proportion] as postage fees are set

at nationally uniform rates and are not affected by local

purchasing power of hospitals. The cost of postage is

primarily influenced by weight of the package and the

distance the package is traveling.

Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 2006 Rates, 70

Fed. Reg. 47,278, 47,395-96 (2005) (citation omitted). The

question is whether there was any reasonable ground for

including postage costs in the fiscal years under challenge here.

In its FY 2003 and 2004 final rules, HHS gave no reason at

all for deciding against its initial proposal to revise the

Proportion by excluding postage.6

 HHS’s briefs offer one

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[Proportion], which would have harmed rural hospitals like plaintiffs.”

HHS Br. 25-26 (citing FY 2003 Final Rule, 67 Fed. Reg. at 50,042

(first emphasis added)). But neither the brief nor the final rules

suggest that excluding postage alone would have had that harmful

result (and no doubt it would not have), or that there was any need to

tie postage to the other proposed revisions.

somewhat opaque rationale, citing the Department’s 1990

statement that it includes “very labor-intensive” services in the

Proportion. FY 1991 Final Rule, 55 Fed. Reg. at 36,046 (quoted

in HHS Br. at 26). Yet even assuming that postage (or mail

delivery) is very labor-intensive, HHS does not argue that

postage is materially more labor-intensive than other excluded

services or explain why postage was included while other very

labor-intensive services were not. Cf. Oral Arg. Recording at

30:38-59 (acknowledgment by HHS that “we have no position

on what kind of detailed analysis might support [the

determination] that postage is or is not labor-intensive”).

It cannot be the case that every service purchased by a

hospital that is very labor-intensive is therefore “attributable to”

the hospital’s “wages and wage-related costs.” 42 U.S.C.

§ 1395ww(d)(3)(E). Although much labor surely goes into the

manufacture of ambulances, HHS does not contend that the

entire purchase price of an ambulance can be counted toward the

Proportion. HHS must explain why the cost of the stamps on a

hospital’s letters is wage-related while the cost of the ambulance

in its garage or the grapes in its cafeteria is not. “Until the

Secretary provides such an explanation,” this court “cannot

evaluate whether the Secretary’s interpretation of the statute is

reasonable within the meaning of Chevron step two.” Kidney

Ctr. of Hollywood v. Shalala, 133 F.3d 78, 88 (D.C. Cir. 1998).

In the previous section, we concluded that HHS reasonably

classified payments to certain independent contractors as “wages

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7

At oral argument, HHS contended for the first time that the

hospitals’ postage argument was waived because they did not raise it

or wage-related” where the contractors provided workers whom

the hospital might otherwise have hired directly. Such

payments, the Department reasonably explained, “capture[] the

‘buy-versus-hire’ decisions hospitals make in the purchase of

their inputs.” FY 2003 Proposed Rule, 67 Fed. Reg. at 31,447.

But that rationale cannot justify including postage costs as

wages or wage-related, as there is no realistic possibility that a

hospital would hire its own employees to deliver any significant

fraction of its mail.

HHS does point out that it has counted postage costs toward

the Proportion since the PPS system was first established. But

that is history, not explanation. No matter how consistent its

past practice, an agency must still explain why that practice

comports with the governing statute and reasoned

decisionmaking. Although it does motivate us to give the

agency another chance to provide an adequate explanation, no

amount of historical consistency can transmute an unreasoned

statutory interpretation into a reasoned one. Cf. Smiley v.

Citibank (S.D.), N.A., 517 U.S. 735, 740 (1996) (“To be sure,

agency interpretations that are of long standing come before us

with a certain credential of reasonableness, since it is rare that

error would long persist. But neither antiquity nor

contemporaneity with the statute is a condition of validity.”).

In sum, although HHS has reasonably explained why two

of the three cost categories that appellants challenge come

within the statutory Proportion, it has failed to provide such an

explanation for postage. We therefore remand this issue for

HHS to provide an adequate explanation, if it can. See

Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm’n, 988

F.2d 146, 150-51 (D.C. Cir. 1993).7

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with the agency at the appropriate time. This contention is itself

waived because HHS did not raise it with this court at the appropriate

time. See Ark Las Vegas Rest. Corp. v. NLRB, 334 F.3d 99, 108 n.4

(D.C. Cir. 2003) (holding that points raised for the first time at oral

argument are waived); Belton v. Washington Metro. Area Transit

Auth., 20 F.3d 1197, 1202 (D.C. Cir. 1994) (holding that a party may

waive its own waiver argument by not raising it in a timely fashion on

appeal). In any event, the hospitals did raise the argument before the

agency. See Appellants’ Additional Excerpts from the Administrative

Record 269a-70a, 418a.

B

The hospitals’ next contention is that HHS’s decision to

include certain contract labor cost items in the Proportion, but

not in the Factor, conflicts with the Medicare statute and the

APA. The hospitals reject the explanation that HHS provided in

its rulemaking: although the agency possessed adequate data to

include nonmedical professional fees and certain other laborintensive services in the Proportion, it lacked adequate data to

include them in the Factor. See FY 2004 Final Rule, 68 Fed.

Reg. at 45,399; FY 2003 Final Rule, 67 Fed. Reg. at 50,022-23.

If the data were not good enough for the Factor, the hospitals

contend, then they cannot have been good enough for the

Proportion. 

The hospitals’ argument overlooks the textual and

functional differences between the Proportion and the Factor.

Whereas the statute provides that the Proportion shall be

“estimated by the Secretary,” it states that the Factor shall be

updated “on the basis of a survey conducted by the Secretary.”

42 U.S.C. § 1395ww(d)(3)(E). Whereas the Proportion need

only be estimated “from time to time,” the Factor must be

updated “at least every 12 months.” Id. And whereas the

Proportion measures “hospitals’ costs which are attributable to

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wages and wage-related costs,” Congress intended the Factor to

“reflect[] the relative hospital wage level in the geographic area

of the hospital compared to the national average hospital wage

level.” Id. The statute thus makes clear that the Proportion and

the Factor are not identical constructs. Accordingly, the

Secretary has some discretion to construct them in non-identical

ways.

A point of particular significance is that an “estimate[]” is

not the same thing as a determination based on a “survey.” To

estimate the national total costs of any category of hospital

expenditure for the Proportion, HHS only had to possess

sufficiently valid and reliable aggregate data -- from whatever

source -- on which to base its figures. For this purpose, HHS

found, statistics developed by outside entities like the

Department of Commerce were appropriate. By contrast, the

statute limits the Factor to expenditures that can be measured

“on the basis of a survey” that reflects relative hospital wage

levels by geographic area. For that purpose, HHS collected

wage-and-hour information from hospitals. Those surveys

asked for data on wages and hours of hospital employees and of

contractors that provided direct patient-care services. But HHS

did not believe that hospitals could reliably report the wages and

hours associated with other contractors that provided services

that affected patient care indirectly, often at off-site facilities.

See, e.g., Medicare Program; Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 1997 Rates, 61

Fed. Reg. 46,166, 46,182 (1996).

The hospitals do not challenge HHS’s assessment of these

collection difficulties, nor do they explain why the data HHS

relied upon for the Proportion were deficient for its purpose.

Even if it would have been preferable for the Department to use

identical cost items in the Proportion and the Factor, we cannot

say that the limited deviations it permitted were unreasonable.

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Cf. Methodist Hosp. of Sacramento, 38 F.3d at 1230 (“The

statute does not specify how the Secretary should construct the

[Factor], nor how often she must revise it, although these

methodological issues both bear significantly on the accuracy of

the Secretary’s adjustments. Rather, Congress through its

silence delegated these decisions to the Secretary.”).

C

The hospitals’ third contention is that HHS violated the

Medicare statute by failing to adjust the Factor to account for

occupational mix, notwithstanding “Congress’s unambiguous

instruction that he do so unless it was not ‘feasible.’”

Appellants’ Br. 14. This claim fails because the congressional

instruction cited by the hospitals did not apply to the fiscal years

at issue in this case.

For many years, § 1395ww(d)(3)(E) provided that the

survey on which the Factor is based “shall measure”

occupational mix “[t]o the extent determined feasible by the

Secretary.” See, e.g., 42 U.S.C. § 1395ww(d)(3)(E) (1994). It

is undisputed that, until 2004, HHS had never taken such

measurements. On December 21, 2000, however, Congress

repealed this discretionary language and replaced it with the

following new language: “Not less often than once every three

years the Secretary (through such survey or otherwise) shall

measure” data on occupational mix. Medicare, Medicaid, and

SCHIP Benefits Improvement and Protection Act of 2000, Pub.

L. No. 106-554 App. F, § 304(c), 114 Stat. 2763A-463, 2763A495 (codified in part at 42 U.S.C. § 1395ww(d)(3)(E)). An

uncodified provision of that legislation further instructed the

Secretary to “first complete” the collection and measurement of

occupational mix data “[b]y not later than September 30, 2003,

for application beginning October 1, 2004” -- that is, for

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8

Section 109, entitled “Repeal of statutes as affecting existing

liabilities,” states in pertinent part:

The repeal of any statute shall not have the effect to release or

extinguish any . . . liability incurred under such statute, unless

the repealing Act shall so expressly provide, and such statute

shall be treated as still remaining in force for the purpose of

sustaining any proper action or prosecution for the

enforcement of such . . . liability.

1 U.S.C. § 109.

application beginning in FY 2005. Id. § 304(c)(3), 114 Stat. at

2763A-495.

The consequence of these amendments was that, by the end

of the 2000 calendar year, § 1395ww(d)(3)(E) no longer

required the Secretary to measure data on occupational mix if he

determined it was feasible -- just that he do so in time for

application in FY 2005. In short, for the fiscal years relevant to

this case (2003 and 2004), § 1395ww(d)(3)(E) gave the

Secretary a pass with respect to occupational mix. The

Medicare statute therefore provides no support for the hospitals’

claim.

Recognizing the obstacle that the 2000 amendments pose

for their argument, the hospitals cite the general savings statute,

1 U.S.C. § 109,8

 for the proposition that Congress’s “subsequent

. . . imposition of a firm deadline to fix a problem that the

Secretary had created and continued for years” -- the failure to

adjust the Factor for occupational mix -- “does not absolve the

Secretary of liability for his past misconduct.” Appellants’ Br.

55. The hospitals’ reliance on § 109 is misplaced. Even if

HHS’s longstanding failure to measure data regarding

occupational mix constituted a violation of the prior version of

§ 1395ww(d)(3)(E) -- a point we need not decide -- § 109 would

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at most suggest that the 2000 amendments did not “release or

extinguish any . . . liability incurred under” that prior version.

1 U.S.C. § 109. But the hospitals do not claim that they are

owed anything on account of liabilities incurred by HHS prior

to December 2000. Their claim is that HHS violated

§ 1395ww(d)(3)(E) by failing to adjust the Factor for

occupational mix in FY 2003 and 2004. And that is a claim as

to which both the pre-amendment Medicare provision and the

savings statute are irrelevant.

D

Finally, the hospitals allege that HHS impermissibly failed

to account for interstate employment, particularly “nurse

migration,” in calculating the Factor. The inputs to the Factor,

they note, “do not take into account the fact that hospitals in

neighboring . . . areas often compete with each other for the

same employee pool.” Appellants’ Br. 56. As a consequence,

HHS “established reimbursement rates that are too low to permit

hospitals in low-[Factor] states . . . to effectively compete for

employees with neighboring states that have higher [Factors].”

Id. This, the hospitals maintain, violates the statutory command

that the Factor “reflect[] the relative hospital wage level in the

geographic area of the hospital compared to the national

average hospital wage level.” 42 U.S.C. § 1395ww(d)(3)(E)

(emphasis added).

The government contends that we should not reach this

claim because the hospitals failed to raise it before the Provider

Reimbursement Review Board. The hospitals insist that they

did raise it. Although the record is not entirely clear, it contains

at least one submission that in our view did raise the nurse

migration argument specifically with respect to FY 2004. See

Supp. J.A. 110a.

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In any event, the argument fails on its merits. Section

1395ww(d)(3)(E) provides only that the Factor should “reflect[]

the relative hospital wage level in the geographic area of the

hospital compared to the national average hospital wage level.”

42 U.S.C. § 1395ww(d)(3)(E). As the Second Circuit has found,

“the statute leaves considerable ambiguity as to the term

‘geographic area,’ which, based only on the literal language of

the provision, could be as large as a several-state region or as

small as a city block.” Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d

163, 175 (2d Cir. 2006). As that court further found, HHS’s

longstanding policy of using Metropolitan Statistical Areas

(MSAs) -- which can be interstate -- to define those “geographic

areas” is a reasonable response to this ambiguity. Id. at 167,

175-78. If it was reasonable for HHS to define “geographic

area” in the Factor by reference to the MSA classifications, it

was likewise reasonable for the agency to decline to complicate

matters by layering in a dynamic model of migratory and

commuting patterns. The statute does not define “geographic

area,” much less require HHS to take into account the movement

of workers across such areas.

The hospitals do not seriously dispute any of this, nor

suggest any mechanism by which HHS could have measured

inter-area effects, nor explain why such an effort would have led

to a sounder result. Whether or not it would have been desirable

for the Department to adjust the Factor on the basis of inter-area

employment, it was reasonable for it to decline to do so.

III

For the foregoing reasons, we affirm the judgment of the

district court in part, reversing solely with respect to HHS’s

decision to include postage costs in the Proportion. We remand

the case to the district court with instructions to remand it to

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HHS for further consideration on that issue consistent with this

opinion.

So ordered.

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