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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 May 8, 2009 Decided September 11, 2009 

No. 08-5407 

ANNA JAQUES HOSPITAL, ET AL., 

APPELLEES

v. 

KATHLEEN SEBELIUS, IN HER OFFICIAL CAPACITY AS 

SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH 

AND HUMAN SERVICES, 

APPELLANT

Consolidated with 08-5529 

Appeals from the United States District Court 

for the District of Columbia 

(No. 1:05-cv-00625) 

Stephanie R. Marcus, Attorney, U.S. Department of 

Justice, argued the cause for appellant. With her on the briefs 

were Michael F. Hertz, Acting Assistant Attorney General, 

Jeffrey A. Taylor, U.S. Attorney, and Mark B. Stern, Attorney. 

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

appearance. 

USCA Case #08-5407 Document #1205673 Filed: 09/11/2009 Page 1 of 13
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Ankur J. Goel argued the cause for appellees. With him 

on the brief were M. Miller Baker and Kelly M. Falls. 

Before: HENDERSON, TATEL, and GRIFFITH, Circuit 

Judges. 

 Opinion for the Court filed by Circuit Judge GRIFFITH. 

GRIFFITH, Circuit Judge: The Secretary of the 

Department of Health and Human Services appeals the 

decision of the district court that she improperly excluded the 

labor costs of certain types of hospitals from her calculation 

of Medicare reimbursements due to appellees. Because we 

conclude that the Secretary’s exclusion of these costs was 

based on a reasonable interpretation of her statutory authority, 

we reverse the judgment of the district court. 

I. 

In 1983, Congress created the Prospective Payment 

System (PPS) as a new means to provide Medicare 

reimbursements to hospitals for medical care requiring at least 

one night’s stay. See Social Security Amendments of 1983, 

Pub. L. No. 98-21, § 601, 97 Stat. 65, 149; see also Se. Ala. 

Med. Ctr. v. Sebelius, 572 F.3d 912, 914–15 (D.C. Cir. 2009) 

(describing how the PPS works); Transitional Hosps. Corp. of 

La. v. Shalala, 222 F.3d 1019, 1020–21 (D.C. Cir. 2000) 

(same). Hospitals that participate in the PPS are called 

“subsection (d) hospitals,” named after the statutory provision 

that identifies them. See 42 U.S.C. § 1395ww(d)(1)(B) 

(2006). These facilities are best described as “short-term acute 

care general hospitals.” Transitional Hosps., 222 F.3d at 1021 

(quoting S. REP. NO. 98-23, at 54 (1983), reprinted in 1983 

U.S.C.C.A.N. 143, 194). Of relevance to this appeal, critical 

access hospitals, which are usually located in rural areas and 

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have fewer than twenty-five beds, are excluded from 

subsection (d) and receive Medicare reimbursements under a 

payment scheme different from the PPS. See 42 U.S.C. 

§ 1395x(e), (mm); Proposed Changes to the Hospital Inpatient 

Prospective Payment Systems and Fiscal Year 2004 Rates, 68 

Fed. Reg. 27,154, 27,190 (May 19, 2003) [hereinafter 

Proposed FY 2004 Rates]. 

Under the PPS, a significant component of the Medicare 

payment subsection (d) hospitals receive is reimbursement for 

their “wages and wage-related costs.” 42 U.S.C. 

§ 1395ww(d)(3)(E)(i). Because these costs vary widely across 

the country, Congress requires the Secretary to adjust 

Medicare reimbursements according to “area differences in 

hospital wage[s].” Id. To do so, the Secretary calculates a 

wage index for each area (employing the area classification 

system used by the Office of Management and Budget) by 

dividing the area’s average hourly hospital wage by the 

national average. See id.; Changes to the Hospital Inpatient 

Prospective Systems and Fiscal Year 2004 Rates, 68 Fed. 

Reg. 45,346, 45,398–99 (Aug. 1, 2003) [hereinafter Final FY 

2004 Rates]. She uses the wage index—referred to as the 

“factor” by the statute—to adjust the labor cost component of 

Medicare reimbursements. 

Congress requires the Secretary “at least every 12 

months . . . [to] update the factor . . . 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.” 42 U.S.C. § 1395ww(d)(3)(E)(i). The 

Secretary conducts this survey by compiling wage data from 

cost reports submitted annually by hospitals. See Changes to 

the Hospital Inpatient Prospective Payment Systems and 

Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916, 49,049 (Aug. 

11, 2004) [hereinafter Final FY 2005 Rates]. The Secretary 

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removes data from this survey that fail to meet certain criteria 

for reasonableness, including data that are “incomplete[,] 

inaccurate . . . , or otherwise aberrant.” Id. at 49,049–50; see 

also Final FY 2004 Rates, 68 Fed. Reg. at 45,397. From this 

scrubbed survey, the Secretary calculates each area’s 

proposed wage index. Before putting the wage index in final 

form, she solicits comments from the public. See Publication 

of Schedules for Determining Prospective Payment Rates, 42 

C.F.R. § 412.8 (2008). Because of the time required to scrub 

the data, the Secretary calculates each year’s wage index 

using data from the survey conducted three years earlier. See

Final FY 2005 Rates, 69 Fed. Reg. at 49,049; Final FY 2004 

Rates, 68 Fed. Reg. at 45,397. 

Prior to 2003, the Secretary included wage data for 

facilities that were subsection (d) hospitals during the survey 

year but were no longer classified as such by the time she 

calculated the wage index. In May 2003, the Secretary 

proposed a revision to this approach that would exclude wage 

data for hospitals that were subsection (d) hospitals during the 

survey year but became critical access hospitals before the 

year the index was actually calculated. See Proposed FY 2004 

Rates, 68 Fed. Reg. at 27,190. Commenters generally 

supported removing data for critical access hospitals from the 

wage index, and the Secretary implemented the proposal. 

Final FY 2004 Rates, 68 Fed. Reg. at 45,397. One commenter 

raised the issue that is now the centerpiece of this appeal, 

arguing that the wage index should include data for facilities 

that qualified as subsection (d) hospitals at the time of the 

survey, including those later reclassified as critical access 

hospitals. Id. The Secretary concluded, however, that 

inclusion of data for these critical access hospitals has a 

“substantial negative impact” on the wage index for 

subsection (d) hospitals because they have “significantly 

different labor costs.” Id. Specifically, “in 89 percent of all 

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labor market areas with hospitals that converted to [critical 

access] status some time after FY 2000, the average hourly 

wage for [critical access hospitals] is lower than the average 

hourly wage for other [subsection (d)] hospitals in the area.” 

Id. The Secretary continued to include wage data for other 

facilities that converted to non-subsection (d) status, as long 

as their data met her criteria for reasonableness. Id. She 

explained, “[W]age data for these hospitals, unlike CAHs, are 

not necessarily unique compared to other short-term hospitals, 

and these terminating or converting hospitals provide an 

accurate reflection of the labor market area.” Id. at 45,398. 

The Secretary first applied this policy when calculating 

the FY 2005 wage index. See Final FY 2005 Rates, 69 Fed. 

Reg. at 49,049. In calculating the wage index for 

Massachusetts, she excluded labor cost data from two 

facilities that had become critical access hospitals after 2001, 

the survey year: Nantucket Cottage Hospital and Martha’s 

Vineyard Hospital. The Secretary also excluded the labor 

costs of these hospitals from the FY 2006 wage index. See

Changes to the Hospital Inpatient Prospective Systems and 

Fiscal Year 2006 Rates, 70 Fed. Reg. 47,278 (Aug. 12, 2005). 

On March 25, 2005, a group of subsection (d) hospitals in 

Massachusetts filed suit in the district court seeking, among 

other things, injunctive relief requiring the Secretary to 

recalculate the FY 2005 wage index using data from facilities 

that qualified as subsection (d) hospitals in 2001, including 

Nantucket Cottage Hospital, and to adjust Medicare 

reimbursements to the Massachusetts hospitals accordingly. 

The parties filed cross-motions for summary judgment. On 

February 27, 2008, the district court granted appellees’ 

motion, concluding that the Secretary’s interpretation of 

§ 1395ww(d)(3)(E)(i) failed at Chevron step one because the 

statute requires that the wage index reflect the labor costs of 

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all subsection (d) hospitals whose cost reports were used to 

conduct the annual survey, regardless of their status at the 

time the index is calculated. See Anna Jaques Hosp. v. 

Leavitt, 537 F. Supp. 2d 24, 31 (D.D.C. 2008). The court also 

rejected as arbitrary and capricious the Secretary’s 

explanation that the wage data from critical access hospitals 

and subsection (d) hospitals were so different that they 

justified her new policy of excluding the former from the 

wage index. See id. at 34–35. As a remedy, the court ordered 

the Secretary to recalculate the FY 2005 wage index for 

Massachusetts using data from all facilities that qualified as 

subsection (d) hospitals in 2001, including data from 

Nantucket Cottage Hospital. See Anna Jaques Hosp. v. 

Leavitt, No. 05-625, at 2 (D.D.C. Feb. 27, 2008) (order 

accompanying opinion).1

 The Secretary filed a motion for 

reconsideration, which the district court denied. Anna Jaques 

Hosp. v. Leavitt, No. 05-625, at 4 (D.D.C. July 15, 2008). In a 

related lawsuit, appellees also challenged the Secretary’s 

calculation of the FY 2006 wage index for Massachusetts on 

the same grounds. On November 13, 2008, the district court 

granted summary judgment for the hospitals in light of its 

previous decision. Anna Jaques Hosp. v. Leavitt, No. 06-767 

(D.D.C. Nov. 13, 2008). The Secretary appealed each 

decision. 

We have jurisdiction to consider this consolidated appeal 

under 28 U.S.C. § 1291 (2006). “Because the district court 

entered a summary judgment, we review its decision de novo 

and therefore, in effect, review directly the decision of the 

Secretary.” St. Luke’s Hosp. v. Thompson, 355 F.3d 690, 693 

 

1

 Although appellees did not challenge the exclusion of wage data 

from Martha’s Vineyard Hospital, the Secretary included this data 

when recalculating the FY 2005 and FY 2006 wage indexes 

pursuant to the district court’s orders. 

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(D.C. Cir. 2004) (quoting Lozowski v. Mineta, 292 F.3d 840, 

845 (D.C. Cir. 2002)). 

II. 

This appeal turns on three issues raised by the Secretary: 

(1) whether her interpretation of § 1395ww(d)(3)(E)(i), the 

statutory provision requiring annual calculation of the wage 

index, is permissible under Chevron; (2) whether she acted 

arbitrarily by failing to adequately explain her approach to 

calculating the wage index; and (3) whether she acted 

arbitrarily by treating data from similarly situated facilities 

differently. The Secretary raises a fourth issue, which we need 

not reach because our resolution of the others renders it moot. 

We review the Secretary’s interpretation of 

§ 1395ww(d)(3)(E)(i) under Chevron’s two-step framework. 

When “Congress has directly spoken to the precise question at 

issue . . . , that is the end of the matter.” Chevron U.S.A. Inc. 

v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–43 

(1984). But if we determine the statute is “silent or ambiguous 

with respect to the specific issue,” we will uphold the 

Secretary’s interpretation so long as it is “based on a 

permissible construction of the statute.” Id. at 843. We begin 

with the statute’s plain language. Congress directs the 

Secretary to “update the [wage index] . . . on the basis of a 

survey . . . of the wages and wage-related costs of subsection 

(d) hospitals in the United States.” 42 U.S.C. 

§ 1395ww(d)(3)(E)(i). This command requires the Secretary 

to adjust the wage index using data collected from subsection 

(d) hospitals. There is no question that the Secretary 

conducted a survey that gathered data from all subsection (d) 

hospitals, including those that later became critical access 

hospitals. 

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The dispute is over which data from the survey she must 

use to update the wage index. Appellees argue that the phrase 

“on the basis of a survey . . . of subsection (d) hospitals” 

means that the wage index must be calculated using all the 

survey data. In their view, the statute requires both the survey 

and the wage index to account for all facilities classified as 

subsection (d) hospitals at the time of the data collection, 

including those that later became critical access hospitals. 

Discarding data for a category of hospitals after having 

gathered it, so the argument goes, is no different from failing 

to gather it in the first place. The Secretary reads the statute 

differently. Rather than directing the inclusion of data 

collected from every subsection (d) hospital in the survey, she 

argues that the phrase “on the basis of” is ambiguous and 

gives her the discretion to remove data found wanting to the 

calculation of a meaningful wage index. According to the 

Secretary, such a reading is permissible at Chevron step two. 

We agree with the Secretary. The statute is silent about 

whether she must use all of the survey data. It says only that 

her calculation of the wage index must be made “on the basis 

of” the survey. The dictionary defines “basis” to mean “the 

principal component of anything” or the “fundamental 

ingredient.” WEBSTER’S THIRD NEW INTERNATIONAL 

DICTIONARY 182 (2d ed. 1981). “Basis” does not mean 

“entire” or “only.” Calculation “on the basis of a survey” does 

not require use of all the data collected. Because it may mean 

less than all, “on the basis of” could reasonably be interpreted 

to permit a variety of methods for using the survey data to 

calculate the wage index—hence, the ambiguity. Under the 

statute, the Secretary has the discretion to remove some data 

from the survey so long as the remaining data constitute the 

principal component of the final wage index calculation. And 

that is what the Secretary did here. She scrubbed from the 

survey data she determined would not reasonably help 

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calculate a meaningful wage index. Applying her criteria for 

reasonableness, data that were “incomplete[,] inaccurate . . . , 

or otherwise aberrant” were not used to calculate the wage 

index. Final FY 2005 Rates, 69 Fed. Reg. at 49,049–50; see 

Final FY 2004 Rates, 68 Fed. Reg. at 45,397. 

We faced similar arguments in Sierra Club v. EPA, 356 

F.3d 296, 305–06 (D.C. Cir. 2004), in which we parsed the 

phrase, “based on,” and concluded it was ambiguous. Both 

phrases use a variant of the word “base,” which means in this 

context “to use as a base or basis for.” WEBSTER’S THIRD 

NEW INTERNATIONAL DICTIONARY 180 (2d ed. 1981). In 

Sierra Club, Congress had directed EPA to determine state 

compliance with national ambient air quality standards “based 

on photochemical grid modeling or any other analytical 

method determined . . . to be at least as effective.” 42 U.S.C. 

§ 7511a(c)(2)(A) (emphasis added). The agency argued that 

the phrase “based on” was ambiguous and did not require 

EPA to rely “solely on” environmental modeling results. 

Sierra Club, 356 F.3d at 305–06. Instead, the phrase gave 

EPA the discretion to correct the mandated model’s 

inaccurate projections of ozone levels by adjusting the results 

before making compliance decisions. The petitioners argued 

that “based on” required EPA to use only the results from the 

required environmental model. We agreed with EPA and held 

the agency’s compliance determinations could still be “based 

on” the required modeling so long as EPA did “not wholly 

abandon” the modeling. Id. at 306. Here, there is no question 

that the Secretary did “not wholly abandon” the survey data. 

She merely refined it to arrive at a more accurate wage index. 

Appellees next argue that the Secretary acted arbitrarily 

by failing to provide a reasoned explanation for her departure 

from the previous policy that used data for facilities that 

qualified as subsection (d) hospitals at the time of the survey. 

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But appellees’ argument is based on the flawed premise that it 

has been the Secretary’s policy to use all of the subsection (d) 

hospital data to calculate the wage index. The Secretary has 

never done that. She has maintained a longstanding policy of 

scrubbing data that fail to meet her criteria for reasonableness, 

particularly those found to be aberrant. See Changes to the 

Hospital Inpatient Prospective Payment Systems and Fiscal 

Year 2003 Rates, 67 Fed. Reg. 49,982, 50,023 (Aug. 1, 2002) 

(“As in past years, we performed an intensive review of the 

wage data, mostly through the use of edits designed to 

identify aberrant data.”). In 2004, the Secretary first removed 

critical access hospital data from the 2001 survey because she 

determined they have a “substantial negative impact” on the 

wage indexes for subsection (d) hospitals. Final FY 2004 

Rates, 68 Fed. Reg. at 45,397. This was not a change in 

policy. Rather, it was a new application of her policy to 

remove aberrant data. 

In any event, the Secretary has adequately explained her 

decision to exclude critical access hospital data from 

calculation of the wage index. “[A]n agency is free to change 

its mind so long as it supplies ‘a reasoned analysis.’” Nat’l 

Cable & Telecomms. Ass’n v. FCC, 567 F.3d 659, 667 (D.C. 

Cir. 2009) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm, 

463 U.S. 29, 57 (1983)). Explanation of a change in policy is 

not subject to a heightened standard of review. See FCC v. 

Fox Television Stations, Inc., 129 S.Ct. 1800, 1811 (2009). 

The Secretary found that critical access hospitals have 

significantly different labor costs from subsection (d) 

hospitals and concluded that including them in her 

calculations would skew wage indexes for subsection (d) 

hospitals. Such aberrational data fail to meet the Secretary’s 

criteria for reasonableness. See Final FY 2004 Rates, 68 Fed. 

Reg. at 45,397. Excluding them, in the expert view of the 

Secretary, would “improve[] the overall equity of the wage 

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index.” Id. at 45,398. We believe this explanation is 

sufficient. 

Among all the types of hospitals that lost their subsection 

(d) status, the Secretary excluded only the data from critical 

access hospitals. Appellees argue that singling out this data 

for exclusion was arbitrary because the Secretary treated data 

for similarly situated hospitals differently. To be consistent, 

they contend, the Secretary must treat the data from all 

hospitals that no longer qualify as subsection (d) hospitals the 

same. “Where an agency applies different standards to 

similarly situated entities and fails to support this disparate 

treatment with a reasoned explanation and substantial 

evidence in the record, its action is arbitrary and capricious 

and cannot be upheld.” Burlington N. & Santa Fe Ry. Co. v. 

Surface Transp. Bd., 403 F.3d 771, 777 (D.C. Cir. 2005); see 

also 5 U.S.C. § 706(2)(A) (2006) (requiring a reviewing court 

to set aside agency action that is “arbitrary” or “capricious”). 

But appellees have failed to provide any support for their 

argument that critical access hospitals are similarly situated to 

other hospitals that have recently lost their subsection (d) 

status. Instead, they simply assert that other non-subsection 

(d) hospitals may have significantly different labor costs than 

those of subsection (d) hospitals. Appellees made no showing 

that hospitals that lost their subsection (d) status are, by 

reason of that change, outliers like critical access hospitals. 

Put simply, they have not demonstrated that other new nonsubsection (d) hospitals are like the new critical access 

hospitals when it comes to labor costs. Unsupported 

allegations of arbitrary treatment are insufficient for us to 

render a judgment on the merits of such a claim. Federal Rule 

of Appellate Procedure 28(a)(9)(A) requires parties to provide 

“citations to the authorities and parts of the record on which 

[they] rel[y]” to bolster their arguments. We will not consider 

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“asserted but unanalyzed” arguments because “appellate 

courts do not sit as self-directed boards of legal inquiry and 

research, but essentially as arbiters of legal questions 

presented and argued by the parties before them.” Carducci v. 

Regan, 714 F.2d 171, 177 (D.C. Cir. 1983). In the absence of 

such a showing, we need not decide whether the Secretary 

acted arbitrarily by treating data from new non-subsection (d) 

hospitals differently. 

Finally, our resolution of the case makes it unnecessary 

to reach the last issue raised by the Secretary on appeal. 

Under section 4410 of the Balanced Budget Act of 1997, Pub. 

L. No. 105-33, § 4410, 111 Stat. 251, 402 (codified at 42 

U.S.C. § 1395ww note), the Secretary must calculate a “rural 

wage floor” for each state using data from its rural subsection 

(d) hospitals. The wage index for urban subsection (d) 

hospitals may not fall below the rural wage floor. See id. The 

Secretary has never read section 4410 as requiring her to 

calculate rural wage floors for states without rural subsection 

(d) hospitals. On appeal, the Secretary argues that even if we 

were to rule that she must include in the wage index called for 

by § 1395ww(d)(3)(E)(i) the labor costs of rural facilities that 

lost their subsection (d) status (Nantucket Cottage Hospital 

and Martha’s Vineyard Hospital), she would not be required 

to calculate a rural wage floor for Massachusetts. Because 

section 4410, unlike § 1395ww(d)(3)(E)(i), makes no 

reference to “a survey,” the Secretary maintains that she is 

free to use only data from facilities that are rural subsection 

(d) hospitals at the time she calculates the wage index. But the 

Secretary only raised this issue in anticipation of a holding 

that we have now decided against. Because we have ruled that 

the Secretary may exclude data from Nantucket Cottage 

Hospital and Martha’s Vineyard Hospital, we need not 

consider an issue addressing a contingency that never 

materialized. 

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III. 

For the foregoing reasons, the judgment of the district 

court is 

Reversed. 

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