Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-13-05235/USCOURTS-caDC-13-05235-0/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 September 24, 2014 Decided June 12, 2015

No. 13-5235

COUNCIL FOR UROLOGICAL INTERESTS,

APPELLANT

v.

SYLVIA MATHEWS BURWELL, IN HER OFFICIAL CAPACITY AS 

SECRETARY OF THE DEPARTMENT OF HEALTH AND HUMAN 

SERVICES AND UNITED STATES OF AMERICA,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:09-cv-00546)

Gordon A. Coffee argued the cause for appellant. With 

him on the briefs were Thomas L. Mills, Steffen N. Johnson, 

and Erica E. Stauffer.

Jeffrey E. Sandberg, Attorney, U.S. Department of 

Justice, argued the cause for appellees. With him on the brief 

were Stuart F. Delery, Assistant Attorney General, Ronald C. 

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

Christine N. Kohl, Attorney, entered an appearance.

USCA Case #13-5235 Document #1557136 Filed: 06/12/2015 Page 1 of 45
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Before: HENDERSON, ROGERS, and GRIFFITH, Circuit 

Judges.

Opinion for the Court on Parts I, II.A, III, IV, and V filed 

by Circuit Judge GRIFFITH.

Opinion for the Court on Part II.B filed by Circuit Judge

HENDERSON.

Opinion dissenting from Part II.A filed by Circuit Judge

HENDERSON. 

Opinion dissenting from Part II.B filed by Circuit Judge

GRIFFITH.

I

The Secretary of Health and Human Services issued 

regulations that effectively prohibit physicians who lease 

medical equipment to hospitals from referring their Medicare 

patients to these same hospitals for outpatient care involving 

that equipment. The regulations accomplish this through two 

separate provisions. The first prohibits physicians from 

charging hospitals for leased equipment on a per-use basis 

when the physicians also refer patients to the hospital for 

procedures using that equipment. The second interprets the 

relevant statute to apply to physician-groups that perform 

procedures rather than only the entities that bill Medicare. 

Challenging the regulations here is an association of 

physicians who participate in leasing agreements with 

hospitals, under which they charge hospitals for equipment on 

a per-use basis and perform the procedures using the 

equipment. The association argues that the regulations exceed 

the Secretary’s statutory authority and violate both the 

Administrative Procedure Act and the Regulatory Flexibility 

Act. The district court granted the Secretary’s motion for 

summary judgment. Although one majority agrees with the 

USCA Case #13-5235 Document #1557136 Filed: 06/12/2015 Page 2 of 45
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district court that the statute is ambiguous as to the regulation 

of leases that charge on a per-use basis (Part II.A), a different 

majority concludes that the Secretary’s explanation for 

prohibiting these leases is unreasonable (Part II.B). The court 

unanimously concludes that the Secretary’s interpretation of 

the statute to apply to the physician-groups performing the 

procedures is reasonable (Part III), and that the Secretary 

complied with the Regulatory Flexibility Act (Part IV). We 

therefore affirm in part, reverse in part, and remand to the 

district court with instructions to remand the regulation 

relating to leases charging by use to the Secretary for further 

proceedings.

A

This case involves the interplay between complicated 

statutory provisions and regulations. Resolving the questions 

before us requires that we undertake a sometimes arduous 

journey through the tangled regime. We begin our slog with a 

look at the Medicare program.

Medicare provides federally funded health insurance to 

disabled persons and those aged 65 or older for various 

services, including the outpatient hospital procedures at issue 

here. 42 U.S.C. §§ 1395 et seq. In addition to paying the 

performing physician a fee that covers her services for the 

outpatient care, see generally 42 U.S.C. §§ 1395w-4, 

1395x(s)(1); 42 C.F.R. §§ 410.20, 414.32, Medicare also pays 

the hospital a fee that covers charges for space, equipment, 

supplies, diagnostic testing, and the services of any 

non-physician personnel, 42 U.S.C. § 1395l(t); 42 C.F.R. 

pt. 419. Typically a hospital will have an employee perform 

the outpatient procedures using its own equipment, but 

Medicare also permits hospitals to contract with third parties 

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to provide such outpatient services. See 42 U.S.C. 

§ 1395x(w)(1); 42 C.F.R. § 410.42(a). Under these 

agreements, the third party provides equipment and 

technicians for a procedure while the hospital provides space 

and support services, pays for the lease of the equipment, and 

bills Medicare. 

The members of the association challenging the 

regulations here have just this kind of relationship with 

hospitals. These arrangements are attractive to them because 

Medicare reimburses outpatient procedures that take place in 

hospitals at higher rates than if they were performed 

elsewhere.1 Compare 42 C.F.R. § 419.2(b) (listing eighteen 

categories of costs Medicare covers for outpatient hospital 

procedures), with 42 C.F.R. § 416.61(a) (listing eight 

 1 For example, in 2010, the base Medicare reimbursement rate 

for outpatient hospital prostate laser surgery was $3,138.81, 75 Fed. 

Reg. 45,988 (Aug. 3, 2010), whereas the same procedure in an 

ambulatory surgical center was reimbursed at $1,720.77, id. at 

45,843. According to the hospitals, the higher rates are necessary to 

subsidize their less profitable but necessary services, such as 

emergency departments and trauma care. See Keeping the Promise: 

Site-of-Service Medicare Payment Reforms: Hearing before the 

Subcomm. on Health of the H. Comm. on Energy and Commerce, 

113th Cong. 146-47 (2014) (statement of Reginald W. Coopwood, 

Chief Executive Officer, Regional One Health, on Behalf of the 

American Hospital Association). Even so, last year the Office of the 

Inspector General released a report recommending that Medicare 

eliminate this disparity by reducing outpatient payment rates. See

DEP’T OF HEALTH & HUMAN SERVS., OFFICE OF INSPECTOR GEN.,

MEDICARE AND BENEFICIARIES COULD SAVE BILLIONS IF CMS

REDUCES HOSPITAL OUTPATIENT DEPARTMENT PAYMENT RATES 

FOR AMBULATORY SURGICAL CENTER-APPROVED PROCEDURES 

TO AMBULATORY SURGICAL CENTER PAYMENT RATES 5, 7-8 

(2014), http://oig.hhs.gov/oas/reports/region5/51200020.pdf.

USCA Case #13-5235 Document #1557136 Filed: 06/12/2015 Page 4 of 45
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categories of costs Medicare covers in ambulatory surgical 

centers).

This disparity creates a financial incentive for physicians 

to make referrals based more on maximizing their income 

than on maximizing the Medicare patient’s well-being. For 

example, suppose a physician has an ownership interest in a

hospital laboratory that diagnoses various illnesses. The 

physician profits by sending his Medicare patient to that

hospital to undergo the diagnostic tests. The patient, by 

contrast, has little financial incentive to limit the cost of the 

tests, as Medicare covers most of the costs. This imbalance in 

interests can lead to a physician ordering a battery of 

unnecessary tests. In fact, a 1991 study showed this very

outcome where Florida physicians had ownership interests in 

diagnostic clinics. See Joint Ventures Among Health Care 

Providers in Florida: Hearing Before the H. Subcomm. on 

Health of the H. Comm. on Ways and Means, 102d Cong. 

(1991). To address this problem, Congress enacted the Stark 

Law (named for former Representative Pete Stark of 

California). See generally 42 U.S.C. § 1395nn; see also

Medicare and Medicaid Programs; Physician’s Referrals to 

Health Care Entities With Which They Have Financial 

Relationships, 63 Fed. Reg. 1659, 1718 (proposed Jan. 9, 

1998). The Stark Law places restrictions on both the referring 

physicians and the hospitals. It prohibits a physician who has 

a “financial relationship” with a hospital from referring 

Medicare patients to that hospital.

2 It also bars hospitals from 

 2 The Law lists twelve specific “designated health services” 

for which referrals are prohibited. These include clinical laboratory 

services, physical therapy services, occupational therapy services, 

radiology services, radiation therapy, durable medical equipment 

and supplies, parenteral and enteral nutrients, prosthetic devices and 

supplies, home health services, outpatient prescription drugs, 

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receiving Medicare payments based on these prohibited 

referrals. See 42 U.S.C. § 1395nn(a)(1)(A), (a)(1)(B), 

(h)(6)(K). For the Stark Law’s purposes, a physician has a 

“financial relationship” with a hospital if she owns or invests 

in it, or if she has a compensation agreement with the hospital 

covering services, equipment, and the like. Id.

§ 1395nn(a)(2)(A)-(B), (h)(1). 

Despite the general prohibition on potentially 

self-interested referrals, the Stark Law permits referrals by 

physicians to entities in which they have a financial interest in 

certain limited circumstances. It does so by excluding some 

forms of compensation agreements and ownership interests

from the definition of “financial relationship,” thus allowing

both the relationships and the referrals. See 42 U.S.C. 

§ 1395nn(b)-(e). The provision at issue here is the equipment 

rental exception, under which physicians may both lease 

equipment to a hospital and refer their Medicare patients to 

that hospital for procedures using the equipment so long as 

the leasing agreement meets certain conditions. The lease

must (1) be in writing; (2) assign use of the equipment 

exclusively to the hospital; (3) last for a term of at least one 

year; (4) set rental charges in advance that are consistent with 

fair market value and “not determined in a manner that takes 

into account the volume or value of any referrals or other 

business generated between the parties”; (5) satisfy the 

standard of commercial reasonableness even absent any 

referrals; and (6) meet “such other requirements as the 

Secretary may impose by regulation as needed to protect 

against program or patient abuse.” 42 U.S.C. 

§ 1395(e)(1)(B)(i)-(vi). 

 

inpatient and outpatient hospital services, and outpatient 

speech-language pathology services. 42 U.S.C. § 1395nn(h)(6).

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In 1998, the Secretary proposed a rule that would prevent 

a physician with an ownership interest in a group that leased 

equipment and performed procedures under contract with a 

hospital from referring Medicare patients to the hospital for 

those procedures. The proposed rule accomplished this by 

adopting a broader interpretation of the statutory language

that prevents physicians from referring Medicare patients to 

an entity “for the furnishing of designated health services” 

when the physician and the entity have a financial 

relationship. 42 U.S.C. § 1395nn(a)(1)(A). Specifically, the 

proposed rule expanded the definition of an entity 

“furnishing” such services. The previous definition included 

only the party billing Medicare, usually the hospital where the 

procedures were performed. The new rule would extend to the 

party performing the procedures, including the third parties 

that contracted to perform outpatient procedures in hospital 

facilities. 63 Fed. Reg. at 1706. The proposed rule also altered 

the equipment rental exception by banning leases that charged 

the hospital for each use of the equipment—also referred to as 

leases with “per-click” payments—for patients referred by the 

physician-lessor. Id. at 1714.

To give an example of the regulatory scheme at work, 

prior to the proposed regulations, a single doctor could own 

laser equipment that she leased to a hospital, refer patients to 

that hospital for laser procedures, and profit each time the 

laser equipment was used. Because Medicare gives greater 

reimbursements for procedures performed at hospitals than 

for those same procedures performed in physicians’ offices, it 

would be more profitable for a doctor to enter into such 

arrangements with a hospital than it would be for the doctor to 

purchase the laser for use in her own office. The Secretary’s 

proposal forbade this practice. While a doctor could still own 

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laser equipment and lease it to the hospital to which she 

referred her patients, she would only be permitted to receive

time-based payments from the hospital, such as yearly or 

monthly charges. The frequency of laser usage would have no 

bearing on the doctor’s profit, so she would no longer have a

financial incentive to refer patients to the hospital for laser 

procedures. By the same token, a physician with an ownership 

interest in a group that leased laser equipment and performed 

laser procedures under contract with a hospital could no 

longer refer patients to the hospital for such procedures.

3

After considering comments, the Secretary decided 

against including either of these proposed alterations in the 

rule promulgated in 2001. Instead, the final rule provided that 

an entity is “furnishing designated health services” only if it is 

the entity that actually bills Medicare for the services. See 

Medicare and Medicaid Programs; Physicians’ Referrals to 

Health Care Entities With Which They Have Relationships, 

66 Fed. Reg. 856, 943 (Jan. 4, 2001). Physicians with an 

ownership interest in a group that contracted with a hospital 

could continue to refer patients to the hospital because any 

such groups performing the procedures and supplying the 

equipment were not billing Medicare. The 2001 rule also 

continued to allow leases with per-click payment terms. Id. at 

876. Even so, the preamble to the regulation explained that 

the Secretary continued to be concerned that contractual 

arrangements between physician-owned groups and hospitals 

“could be used to circumvent” the Stark Law, id. at 942, and 

also recognized the “obvious potential for abuse” in per-click 

payments, id. at 878. In both cases, the Secretary advised that 

 3 That is, unless an ownership exception applies. See 42 

U.S.C. § 1395nn(d). 

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she would monitor the arrangements and reconsider the 

decision if necessary. Id. at 942, 860.

That reconsideration came in 2007 with another notice of 

proposed rulemaking. The Secretary again proposed banning

per-click leases and forbidding physicians from making 

referrals to hospitals for procedures to be performed by a 

group practice in which the physician has an ownership 

interest. See Medicare Program; Proposed Revisions to 

Payment Policies, 72 Fed. Reg. 38,122 (proposed July 12, 

2007). This time, the Secretary adopted both proposed 

regulations with minimal changes in 2008. See Medicare 

Program; Changes to Disclosure of Physician Ownership in 

Hospitals and Physician Self-Referral Rules, 73 Fed. Reg. 

48,434 (Aug. 19, 2008). According to the new rule, an entity 

that either performs or bills for designated health services is 

considered to be “furnishing” such services, meaning that 

physicians with ownership interests in groups that perform 

outpatient services in hospitals cannot refer patients for the 

procedures. See 42 C.F.R. § 411.351. With respect to the 

equipment rental exception, the rule states that the lease may 

not use per-click rates. 42 C.F.R. § 411.357(b)(4)(ii)(B). 

Thus, under the regulations challenged here, a 

physician-owned group that contracts to lease equipment to a 

hospital cannot do so on a per-click basis while referring 

patients to that hospital for procedures using the equipment. 

Nor can a physician with an ownership interest in the group 

refer patients for outpatient procedures in a hospital where the 

group performs the procedures, unless she qualifies for one of 

the narrow ownership exceptions. See, e.g., 42 U.S.C. 

§ 1395nn(d)(2) (exempting rural providers). 

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B

The Council for Urological Interests is made up of a 

group of joint ventures principally owned by urologists. These 

joint ventures lease laser technology to hospitals. Urologists 

generally prefer to furnish their services in a hospital because 

of the higher reimbursement rate available there. The Council 

contends that the lower rate paid for its members’ services 

outside a hospital is insufficient to cover the cost of the 

equipment. Thus, to make the purchase of laser equipment

economically viable, the urologists enter into agreements with 

a hospital, where the hospital pays the joint venture for the 

equipment on a per-click basis. The new regulation the 

Council challenges prohibits these arrangements. 

C

The Council filed this action in March 2009, alleging that 

the 2008 rule exceeded the Secretary’s authority under the 

Administrative Procedure Act (APA) and violated the 

procedural requirements of the Regulatory Flexibility Act

(RFA). The Secretary moved to dismiss the complaint for lack 

of subject-matter jurisdiction, arguing that challenges to the 

regulation must be raised through the agency’s administrative 

procedures before they can be raised in court. The district 

court granted the motion, but this court reversed. Because the

statute only permits Medicare “providers” who bill Medicare 

to seek administrative review, the Council and other affected 

parties who provided services but did not bill Medicare lacked 

access to administrative review. Under these circumstances,

we held that requiring the use of administrative procedures 

would result in the “complete preclusion of judicial review.”

See Council for Urological Interests v. Sebelius, 668 F.3d 

704, 713-14 (D.C. Cir. 2011) (quoting Shalala v. Ill. Council 

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on Long Term Care, Inc., 529 U.S. 1, 22-23 (2000)). On 

remand, the parties filed cross-motions for summary 

judgment. The district court granted the government’s motion, 

concluding that the agency regulations were entitled to

Chevron deference and that the agency’s construction of the 

statute was a reasonable one. See Council for Urological 

Interests v. Sebelius, 946 F. Supp. 2d 91, 112 (D.D.C. 2013).

The district court also rejected the Council’s claims under the 

RFA, finding that the Council had conceded a crucial portion 

of the Secretary’s argument by failing to provide a response. 

See id. The Council timely appealed both the APA and RFA 

claims. On appeal, the Council argues that the text and 

legislative history of the Stark Law preclude the Secretary 

from banning physicians who refer patients to a hospital from 

leasing equipment to that hospital on a per-click basis. The 

Council also argues that the Secretary unreasonably 

interpreted the statute to forbid physicians from referring 

patients to a hospital for procedures performed by a group in 

which the physician has an ownership interest. Finally, the 

Council argues that the Secretary failed to complete the 

requisite regulatory flexibility analysis called for by the RFA.

We have jurisdiction under 28 U.S.C. § 1291. 

“We review a grant of summary judgment de novo

applying the same standards as those that govern the district 

court’s determination.” Troy Corp. v. Browner, 120 F.3d 277, 

281 (D.C. Cir. 1997).

II

When Congress gives an agency authority to interpret a 

statute, we review the agency’s interpretation under the 

deferential two-step test set forth in Chevron U.S.A. Inc. v. 

Natural Resources Defense Council, Inc., 467 U.S. 837 

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(1984). See Troy Corp., 120 F.3d at 283. At step one, to 

determine whether Congress has directly spoken to the precise 

question at issue, we use “the traditional tools of statutory 

interpretation.” Consumer Elecs. Ass’n v. FCC, 347 F.3d 291, 

297 (D.C. Cir. 2003) (internal quotation marks omitted). If it 

is clear that Congress has addressed the issue, we give effect 

to congressional intent. If the statute is silent or ambiguous on 

the matter, we move to a second step that asks whether the 

agency’s interpretation is “based on a permissible

construction of the statute.” Chevron, 467 U.S. at 843. An 

interpretation is permissible if it is a “reasonable explanation 

of how an agency’s interpretation serves the statute’s 

objectives.” Northpoint Tech., Ltd. v. FCC, 412 F.3d 145, 151 

(D.C. Cir. 2005). If the agency’s construction is reasonable, 

we defer. See Chevron, 467 U.S. at 842-43. 

A

“We begin, as always, with the plain language of the 

statute in question.” Citizens Coal Council v. Norton, 330 

F.3d 478, 482 (D.C. Cir. 2003). The Council argues that the 

Stark Law expressly permits per-click rates for equipment 

rentals and that the Secretary thus lacked authority to ban 

per-click leases. The Council points to language in a clause of 

the equipment rental exception that permits equipment lease 

arrangements when “rental charges over the term of the lease 

are set in advance, are consistent with fair market value, and 

are not determined in a manner that takes into account the 

volume or value of any referrals or other business generated 

between the parties.” 42 U.S.C. § 1395nn(e)(1)(B)(iv). This 

rental-charge clause, the Council argues, means that per-click 

rates are necessarily permissible so long as they meet these 

requirements. Per-click charges pass muster, according to the 

Council, because a charge based on use can be set in advance 

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and be consistent with fair market value, and the charge 

would not take into account volume or value of referrals when

the per-use charge is stable across the leasing period, rather 

than increasing after a certain number of uses. The Council is 

wrong. Its argument ignores the remaining requirements of 

the equipment rental exception. Importantly, the final clause

states that the lease must also “meet[] such other requirements 

as the Secretary may impose by regulation as needed to 

protect against program or patient abuse.” 42 U.S.C. 

§ 1395nn(e)(1)(B)(vi). The Secretary explicitly relied on this 

authority in promulgating the regulation forbidding per-click 

payments. See 42 C.F.R. § 411.357(b)(4)(ii)(B). Because any 

lease must comply with the listed rental charge requirements 

and any further requirements the Secretary adds, the fact that 

per-click leases comply with the rental charge requirements 

alone is insufficient. The text of the statute does not 

unambiguously preclude the Secretary from using her 

authority to add a requirement that bans per-click leases. See 

42 U.S.C. § 1395nn(e)(1)(B). To the contrary, the statutory 

text of the exception clearly provides the Secretary with the 

discretion to impose any additional requirements that she 

deems necessary “to protect against program or patient 

abuse.” See id. § 1395nn(e)(1)(B)(vi).

Nevertheless, the Council argues that because the 

statute’s text already lists specific requirements for rental 

charges, the Secretary cannot add further requirements related 

to rental charges because these cannot properly qualify as 

“other” requirements under the final clause of the exception. 

The Council relies on Financial Planning Ass’n v. SEC, 482 

F.3d 481 (D.C. Cir. 2007), which involved a statute regulating 

investment advisers. The statute defined the category of 

regulated investment advisers broadly to include any person 

who is paid to advise others regarding securities. 15 U.S.C. 

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§ 80b-2(a)(11). The statute then exempted several categories 

of persons from regulation and gave the SEC authority to 

exclude “such other persons not within the intent of this 

paragraph, as the Commission may designate.” Id. 

§ 80b-2(a)(11)(H).4 One of the statutory exemptions applied 

to broker-dealers who gave investment advice incidental to 

their normal business activities and “receive[d] no special 

compensation therefor.” Id. § 80b-2(a)(11)(C). The SEC 

issued a final rule that broadened the exemption for 

broker-dealers to apply even when they did receive special 

compensation. We held that this rule violated both limitations 

on the SEC’s rulemaking authority: The rule was outside the 

intent of the statute because the text already provided an 

exemption for broker-dealers and there was no intent that the 

exemption’s reach should be broadened. Moreover, because 

broker-dealers were already specifically addressed in the 

statutory text, they did not constitute “other persons.” See 

Financial Planning, 482 F.3d at 488. The Council argues that 

the outcome should be the same here. We disagree. The 

Secretary does not face the same limitations on her 

rulemaking authority as did the SEC in Financial Planning. 

The Stark Law gives the Secretary power to add requirements 

“as needed to protect against program or patient abuse,” even

if Congress did not anticipate such abuses at the time of 

enactment. While Congress may not have originally intended 

the ban of per-click leases, it empowered the Secretary to 

make her own assessment of the needs of the Medicare

program and regulate accordingly. And, as distinct from the 

statute in Financial Planning, the text of the Stark Law makes 

no reference to per-click rates. In other words, the statute 

 4 At the time we decided Financial Planning, this portion of 

the statute appeared at 15 U.S.C. § 80b-2(a)(11)(F). It has since 

been amended. 

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explicitly permits the Secretary to impose additional 

conditions on equipment rental agreements and nowhere

expressly states that per-click rates are permitted. Thus, the 

Secretary’s regulation can properly be classified as an “other” 

requirement.

The Secretary’s freedom to ban per-click leases is all the 

more clear when the equipment rental exception is compared 

to other provisions within the Stark Law. For example, the

statute elsewhere expressly permits charging per-click fees in 

other contexts, showing that Congress knew how to authorize 

such payment terms when it wanted to. In 42 U.S.C. 

§ 1395nn(e)(7)(A) Congress created an exception to the Stark 

Law that allows the continuation of certain group practice 

arrangements with a hospital. Under the Law, a group practice 

is defined to include a group of physicians who join together 

to perform the full range of medical services in one office, 

billing Medicare under one provider number. See 42 U.S.C. 

§ 1395nn(h)(4).

5 The provision states that “[a]n arrangement 

between a hospital and a group under which designated health 

services are provided by the group but are billed by the 

hospital” is excepted from the ban on referrals if, among other 

things, “the compensation paid over the term of the agreement 

is consistent with fair market value and the compensation per 

unit of services is fixed in advance and is not determined in a 

manner that takes into account the volume or value of any 

referrals or other business generated between the parties.” Id. 

 5 As the Council acknowledges, the kinds of joint ventures its 

members form do not qualify as group practices. These joint 

ventures are formed solely to purchase and lease equipment and 

cannot bill Medicare on their own. Physicians forming group 

practices actually perform substantially all of their medical services 

within that group and have their own provider number. 42 U.S.C. 

§ 1395nn(h)(4).

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§ 1395nn(e)(7)(A)(v) (emphasis added). Comparing this 

provision to the equipment rental exception shows that 

Congress knew how to permit per-click payments explicitly, 

suggesting that the omission in this particular context was 

deliberate. Cf. Central Bank of Denver v. First Interstate 

Bank, N.A., 511 U.S. 164, 176-77 (1994). In other words, 

Congress’s decision not to include similar language in the

equipment rental exception supports our conclusion that the 

statute is silent regarding the permissibility of per-click leases

for equipment rentals. 

Yet another provision of the Stark Law shows that 

Congress knew how to limit the Secretary’s authority to 

impose additional requirements to the various exceptions. In 

42 U.S.C. § 1395nn(e)(2), Congress excludes bona fide 

employment relationships from the definition of 

compensation arrangements. This provision states that the 

employment relationship must comply with various 

requirements, including that the pay not be determined “in a 

manner that takes into account (directly or indirectly) the 

volume or value of any referrals by the referring physician.”

This employment exception also allows the Secretary to 

impose “other requirements,” just as the equipment rental 

exception. Id. But the statute then goes on to say that the 

listed requirements “shall not prohibit the payment of 

remuneration in the form of a productivity bonus based on 

services performed personally by the physician.” Id. This 

language shows that Congress knew how to cabin the 

Secretary’s authority to impose “other” requirements and that 

it knew how to further clarify what it meant by compensation 

that does not take into account the volume of business 

generated between parties. That Congress employed neither of 

these tools with reference to the equipment rental exception 

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again supports reading the statute as giving the Secretary 

broad discretion as she regulates in this area. 

The Council next argues that even if the text is 

ambiguous, the legislative history makes plain that the 

Secretary must allow per-click leases. The Council points to a 

portion of the House Conference Report which explains, in 

reference to the rental-charge clause of the equipment rental 

exception, that “[t]he conferees intend that charges for space 

and equipment leases may be based on . . . time-based rates or 

rates based on units of service furnished, so long as the 

amount of time-based or units of service rates does not 

fluctuate during the contract period.” H.R. REP. NO. 103-213, 

at 814 (1993). This expression of congressional intent should, 

the Council thinks, bind the Secretary’s hands here and forbid 

the new regulation. 

In Catawba County, N.C. v. EPA, we stated that “a statute 

may foreclose an agency’s preferred interpretation despite 

such textual ambiguities if its structure, legislative history, or 

purpose makes clear what its text leaves opaque.” 571 F.3d 

20, 35 (D.C. Cir. 2009). But we then went on to hold that the 

legislative history at issue there did not even come close to 

providing the clarity necessary to decide the case at step one. 

See id. So too here. The conference report the Council points 

to states only that rental charges “may” be based on units of 

service. The language is not obligatory.

6 Instead, it simply 

 6 Judge Henderson argues that Congress is not required to use 

obligatory language to limit an agency’s discretion. It is true that 

courts should not presume a delegation of power anytime such 

power is not withheld. But we make no such presumption here. 

Congress has expressly delegated to the Secretary the authority to 

promulgate additional requirements, as she has done here, and the 

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indicates that, as written, the rental-charge clause does not 

preclude per-click leases. But, as we have already explained,

there is more to the statute than this clause, and to qualify for 

the exception, a rental agreement must comply with all six 

clauses, not merely the rental-charge clause alone. The final 

clause gives the Secretary the authority to add further

requirements. Nothing in the legislative history suggests a 

limit on this authority. We conclude that the statute does not 

unambiguously forbid the Secretary from banning per-click 

leases as she evaluates the needs of the Medicare system and 

its patients.7

B

The per-click ban falters, however, at Chevron step two. 

Although Chevron’s second step largely “overlaps” with 

arbitrary-and-capricious review under the APA, Nat’l Ass’n of 

Reg. Util. Comm’rs v. ICC, 41 F.3d 721, 726 (D.C. Cir. 1994), 

the overlap is not complete. We primarily assess the agency’s 

 

legislative history does not clearly impose a constraint on that 

power.

7 Judge Henderson likewise errs in equating Congress’s intent 

for the original rental-charge clause to allow per-click leases with 

an intent to preclude the Secretary from creating an additional 

requirement banning them. But the rental-charge clause, read with 

the legislative history, states only that rental charges for equipment 

leases must not be “determined in a manner that takes into account 

the volume or value of any referrals” and that per-click leases do 

not “take[] into account the volume” of patient referrals. See 42 

U.S.C. § 1395nn(e)(1)(B)(iv); H.R. REP. NO. 103-213, at 814. A 

statement that per-click charges are not precluded by the statutory 

clause as it is written is not equivalent to a statement that the 

Secretary must continue to permit such charges as she reevaluates, 

in light of experience, the operation of the statute. 

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19

statutory interpretation to determine whether it is a 

“permissible” and “reasonable” view of the Congress’s intent. 

Chevron, 467 U.S. at 843–44; see also Cont’l Air Lines, Inc. v. 

DOT, 843 F.2d 1444, 1449 (D.C. Cir. 1988) (Chevron step two 

is determined “by reference both to the agency’s textual 

analysis (broadly defined, including where appropriate resort 

to legislative history) and to the compatibility of that 

interpretation with the Congressional purposes informing the 

measure”); Nat’l Ass’n of Reg. Util. Comm’rs, 41 F.3d at 727 

(“although Chevron’s second step sounds closely akin to plain 

vanilla arbitrary-and-capricious style review, interpreting a 

statute is quite a different enterprise than policy-making” 

(quotation marks and ellipsis omitted)). In making this 

assessment, we look to what the agency said at the time of the 

rulemaking—not to its lawyers’ post-hoc rationalizations. 

See SEC v. Chenery Corp., 332 U.S. 194, 196 (1947) (“[A] 

reviewing court . . . must judge the propriety of [agency] action

solely by the grounds invoked by the agency. If those grounds 

are inadequate or improper, the court is powerless to affirm the 

administrative action by substituting what it considers to be a 

more adequate or proper basis.”); see also Bus. Roundtable v. 

SEC, 905 F.2d 406, 417 (D.C. Cir. 1990) (Chenery principle 

applies to Chevron statutory analysis).

In the preamble to the per-click ban, the Secretary 

identified the 1993 Conference Report as an important locus of 

statutory interpretation. See 73 Fed. Reg. at 48,715. This is 

unsurprising as the Secretary felt completely bound by the 

Conference Report in 2001. See 66 Fed. Reg. at 878 (“given 

the clearly expressed congressional intent in the legislative 

history, we are permitting ‘per use’ payments”). The

Secretary now believes the Conference Report is ambiguous 

but her explanation in the 2008 rulemaking borders on the 

incomprehensible. According to the Secretary:

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Where the total amount of rent (that is, the rental charges) 

over the term of the lease is directly affected by the 

number of patients referred by one party to the other, those 

rental charges can arguably be said to . . . “fluctuate during 

the contract period based on” the volume or value of 

referrals between the parties. Thus, . . . the Conference 

Report can reasonably be interpreted to exclude from the 

space and lease exceptions leases that include per-click 

payments for services provided to patients referred from 

one party to the other.

73 Fed. Reg. at 48,716 (emphasis added) (quoting H.R. REP.

NO. 103-213, at 814). This jargon is plainly not a reasonable 

attempt to grapple with the Conference Report; it belongs 

instead to the cross-your-fingers-and-hope-it-goes-away 

school of statutory interpretation. The Conference Report 

makes clear that the “units of service rates” are what cannot 

“fluctuate during the contract period,” not the lessor’s total 

rental income. H.R. REP. NO. 103-213, at 814 (emphasis 

added). The Secretary’s interpretation reads the word “rates” 

out of the Conference Report entirely. If a “reasonable” 

explanation is “the stuff of which a ‘permissible’ construction 

is made,” Northpoint, 412 F.3d at 151, the Secretary’s tortured 

reading of the Conference Report is the stuff of caprice.

On appeal, counsel for the Secretary minimizes the 

Conference Report, noting that its language does not appear in 

the statutory text and does not limit the Secretary’s “other 

requirements” authority. See Appellee’s Br. 28–29. We 

cannot consider this argument, however, because the Secretary 

did not articulate it during the 2008 rulemaking and, in fact, 

contradicted it by treating the Conference Report as a key 

interpretive roadblock. See 73 Fed. Reg. at 48,715. What is 

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left is the Secretary’s bewildering statutory exegesis—one we 

cannot affirm even under Chevron’s deferential standard of 

review. See Burlington Truck Lines, Inc. v. United States, 371 

U.S. 156, 168–69 (1962) (“Chenery requires that an agency’s 

discretionary order be upheld, if at all, on the same basis 

articulated in the order by the agency itself . . . . For the courts 

to substitute their or counsel’s discretion for that of the 

[agency] is incompatible with the orderly functioning of the 

process of judicial review.”); Inv. Co. Inst. v. Camp, 401 U.S. 

617, 628 (1971) (“Congress has delegated to the administrative 

official and not to appellate counsel the responsibility for 

elaborating and enforcing statutory commands.”).8

On this record, the per-click ban fails at Chevron step two. 

We remand 42 C.F.R. § 411.357(b)(4)(ii)(B) to the district 

court with instructions to remand to the Secretary for further 

proceedings consistent with this opinion. On remand, the 

Secretary should consider—with more care than she exercised 

here—whether a per-click ban on equipment leases is 

consistent with the 1993 Conference Report.

 8 Judge Griffith believes the Council failed to make a Chenery 

challenge to the per-click ban. The Council’s reply brief, 

however, argues that “the government makes no effort to defend 

HHS’s position [articulated during the rulemaking process] on 

appeal.” Appellant’s Reply Br. 10. This assertion “implicitly 

raise[s] the Chenery issue,” Mitchell v. Christopher, 996 F.2d 375, 

378 n.2 (D.C. Cir. 1993), and is sufficient for us to consider it. 

See id. at 379; accord Utah Envtl. Cong. v. Troyer, 479 F.3d 1269, 

1287–88 (10th Cir. 2007) (majority op.). Plainly, the Council did 

not need to raise a Chenery argument preemptively in its opening 

brief, before it knew whether the Secretary’s litigation strategy 

would deviate from the reasoning she used during the rulemaking.

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III

The Council also challenges the Secretary’s new 

definition of an “entity furnishing designated health services,”

which expands the regulation to apply to joint ventures, like 

those the Council members participate in, that lease 

equipment and perform outpatient procedures under contract 

with hospitals. Under the 2008 regulations, physicians cannot 

have an ownership interest in a joint venture that leases 

equipment to a hospital and simultaneously refer patients to 

the hospital for procedures the physician performs using the 

leased equipment. 9 The Council concedes that there is 

sufficient ambiguity in this part of the statute to move to 

Chevron step two. The Council argues that the Secretary’s 

definition nonetheless violates the APA because her definition 

renders another provision of the Stark Law superfluous, is not 

necessary to protect against abuse, and is impermissibly 

vague. We disagree.

As before, our deferential analysis under Chevron step 

two is limited to determining whether the regulation is 

rationally related to the goals of the Stark Law. See 

Northpoint, 412 F.3d at 151. Here, defining the “entity 

furnishing designated health services” to include the entity 

providing the services is a permissible construction of the 

statute. This is apparent from a simple reading of the statute 

 9 There is an ownership exception. As explained previously, 

the statute provides exceptions applicable to compensation 

agreements, ownership interests, or both. The equipment rental 

exception is an exception for a compensation agreement created by 

an equipment lease. A physician with an ownership interest in a 

joint venture that contracts to perform services in a hospital would 

need to qualify for an ownership exception, like the one exempting 

rural providers. See 42 U.S.C. § 1395nn(d)(2). 

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itself: the terms “provide” and “furnish” are used 

interchangeably. Compare 42 U.S.C. § 1395nn(a)(2) (stating 

that an ownership or investment interest subject to the referral 

prohibition includes “an interest in an entity that holds an 

ownership or investment interest in any entity providing the 

designated health service”), with id. § 1395nn(b)(3) (referring 

to “services furnished by an organization” under a prepaid 

plan); see also id. § 1395nn(e)(7)(A) (using “provided” and 

“furnished” to describe services rendered by a physician 

group practice operating under contract with a hospital).

Moreover, this definition furthers the purpose of the statute by 

closing a loophole otherwise available to physician-owned 

entities that would allow circumvention of the purpose of the 

Stark Law merely by having the hospital bill Medicare for the 

services. See 73 Fed. Reg. at 48,724. 

Despite the apparent reasonableness of defining a term by 

use of its synonym, the Council advances several arguments 

in an attempt to show that the regulation is arbitrary and 

capricious and therefore fails at Chevron step two. See 

Northpoint, 412 F.3d at 151. None is persuasive.

First, the Council argues that the Secretary’s new 

definition of an “entity furnishing designated health services” 

is contrary to legislative intent because it deprives the 

exception for group practices of all effect. The Stark Law

defines group practices to include groups of physicians who 

provide a full range of medical services “through the joint use 

of shared office space, facilities, equipment and personnel.” 

42 U.S.C. § 1395nn(h)(4)(A)(i). The statute permits certain 

group practices that operated under contract with hospitals 

prior to the passage of the Law to continue to do so if specific

conditions are met. Id. § 1395nn(e)(7). However, this special 

consideration extended to group practices only excludes the 

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24

financial arrangement from being considered a compensation 

agreement. Under the new rule, a group practice will now be 

considered an entity “furnishing” the services it performs 

under contract with the hospital. This means that physicians 

with ownership interests in the group practice will not be 

permitted to refer patients to hospitals for these procedures 

unless an ownership exception also applies.

The Council argues that requiring group practices to meet 

an ownership exception would render the original

compensation exception meaningless. Not so. It is true that 

the new definition of “furnishes” significantly narrows the 

exception for group practices, but it hardly renders the group 

practice provision meaningless. For example, a group practice 

that qualifies as a rural provider can continue operating under 

contract with hospitals. See 42 U.S.C. § 1395nn(d)(2).

Although this will not apply to all group practices, nothing in 

the statute suggests that the Secretary may not require a group

to meet both an ownership exception and a compensation 

agreement exception. And even without an ownership 

exception, the group practice exception still allows employees 

with no ownership interest in the group practice to refer 

patients to a hospital where the group performs the 

procedures. Employees of a group practice are still involved 

in a compensation arrangement with a hospital, albeit an 

indirect one. See 42 U.S.C. § 1395nn(h)(1)(A) (defining a 

compensation arrangement as including “any arrangement 

involving any remuneration between a physician . . . and an 

entity”); 42 C.F.R. § 411.354(a)(2) (defining a financial 

relationship to include direct or indirect relationships). 

Because of this, absent an exception, the Stark Law would 

preclude the employees of a group practice from referring 

patients to the hospital. The group practice exception permits 

such employees to refer patients, rendering the exception 

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meaningful. The Council claims that there are already 

regulations providing exceptions for indirect compensation 

arrangements, resulting in a redundancy. See 42 C.F.R.

§ 411.357(p). But the principle of statutory interpretation 

advising courts to avoid surplusage only speaks to statutory 

language, not the content of regulations. Cf. United States v. 

Menasche, 348 U.S. 528, 538-39 (1955) (“It is our duty to 

give effect, if possible, to every clause and word of a statute.”

(internal quotation marks omitted)).

Next, the Council argues that the new definition is not 

needed to prevent urologists from evading the Stark Law. The 

Council claims that the regulation of urological procedures is 

not within the purpose of the Stark Law because they are 

regulated only when they are performed as outpatient 

procedures in hospitals. The Council argues that this shows 

that Congress did not consider urological procedures 

susceptible to abuse. However, this argument misapprehends 

the purpose of the statute. The Stark Law is intended to 

prevent physicians’ financial interests from affecting whether 

they refer patients for outpatient procedures and where the 

patient is referred. See 144 Cong. Rec. E4-03 (daily ed. Jan. 

27, 1998) (statement of Rep. Stark) (noting that the Stark Law 

was “designed to reduce or eliminate the incentives for 

doctors to over-refer patients to services in which the doctor 

has a financial relationship”). That purpose is fulfilled by 

regulating third-party relationships with hospitals regardless 

of whether the underlying procedure itself would be 

categorized as a designated health service if performed 

elsewhere. Urologists who participate in joint ventures receive 

a greater financial benefit from Medicare when they perform 

the procedure in a hospital and they are therefore given an 

incentive to refer patients there. The extra compensation

might deter the urologists from treating the patients elsewhere

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26

or prescribing different treatments altogether. This incentive

brings the procedures within the scope of the purpose of the 

Stark Law. The Secretary determined that defining 

“furnishes” to include only the entity billing Medicare would 

allow abusive practices to evade regulation. We find this 

determination reasonable. 

Finally, the Council argues that defining “furnishes” to 

include an entity that “performs” the services is impermissibly 

vague. We disagree. The Secretary provided guidance on the 

meaning of the regulation within the preamble and gave 

examples as to where it would apply. See 73 Fed. Reg. at 

48,726 (explaining that a physician performs a service “if the 

physician or physician organization does the medical work for 

the service and could bill for the service,” but not where an 

entity merely “leases or sells space or equipment used for the 

performance of the service”); see also Howmet Corp. v. EPA, 

614 F.3d 553-54 (D.C. Cir. 2010) (recognizing that an agency 

may provide “fair notice” of its interpretation through 

“published agency guidance”). Moreover, even if the precise 

contours of the definition are not clear, the Secretary “has 

authority to flesh out its rules through adjudications and 

advisory opinions.” Shays v. Fed. Election Comm’n, 528 F.3d 

914, 930 (D.C. Cir. 2008). 

We therefore conclude that the Secretary’s regulation 

redefining an “entity furnishing designated health services” is 

a reasonable construction of the statute that is entitled to 

deference.

IV

The Council argues that the promulgation of the 2008 

rule violated the Regulatory Flexibility Act. Congress enacted 

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27

the Act in response to concerns with the burdens of federal 

regulation, especially on small businesses. See Paul R. 

Verkuil, A Critical Guide to the Regulatory Flexibility Act,

1982 DUKE L.J. 213. Although the Act does not require rules 

that are less burdensome for small businesses, agencies must 

explain why any such alternatives were rejected. 5 U.S.C. 

§ 604(a)(6). This process is aimed at “assur[ing] that such 

proposals are given serious consideration.” 5 U.S.C. § 601 

app. at 124 (Supp. IV 1980). An agency implementing policy 

changes through rulemaking must complete an 

analysis—referred to as a regulatory flexibility analysis—of

the rule’s impact and publish it in the Federal Register along 

with the final rule. See 5 U.S.C. § 604(a). The analysis must 

contain several components, including a statement of the need 

for the rule, the agency’s response to any significant 

comments, an estimate of the number of small entities to 

which the rule will apply, a description of the rule’s 

compliance requirements, and a description of the steps the 

agency has taken to minimize the economic impact on small 

entities. Id. § 604(a)(1)-(6). Alternatively, an agency can 

forego this analysis “if the head of the agency certifies that 

the rule will not, if promulgated, have a significant economic 

impact on a substantial number of small entities.” Id.

§ 605(b). The Secretary must publish the certification and its

factual basis in the Federal Register. Id. The Secretary 

acknowledges that HHS did not perform a regulatory 

flexibility analysis of the 2008 rule; however, she argues that 

she properly certified that it will not have a significant impact 

on small businesses. 

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We agree that the Secretary’s certification satisfied the 

RFA.

10 In the appendix to the larger rule that included the 

changes at issue here, the Secretary discussed each portion of 

the rule and stated that “the analysis discussed throughout the 

preamble of this final rule constitutes our final regulatory 

flexibility analysis.” 73 Fed. Reg. at 49,063. In explaining the 

changes in regulating per-click charges and physicians’ 

agreements to operate within hospitals, the Secretary stated 

that “[w]e do not anticipate these final policies will have a 

significant impact on physicians, other health care providers 

and suppliers, or the Medicare or Medicaid programs and 

their beneficiaries.” Id. at 49,077. Although this statement 

nowhere uses the word “certify,” that omission alone does not 

constitute a violation of the RFA. See Motor & Equip. Mfrs. 

Ass’n v. Nichols, 142 F.3d 449, 467 (D.C. Cir. 1998) 

(upholding a certification as sufficient where the EPA stated 

only that the rule would “not have a significant adverse 

economic impact on a substantial number of small 

businesses”). And the preamble to the rule, which the 

Secretary incorporated as part of the analysis, fulfills the 

RFA’s requirement that the Secretary include a statement 

providing a factual basis for her certification. The Secretary 

stated her belief that existing arrangements “can be 

restructured” to comply with new requirements. See 73 Fed. 

Reg. at 48,717, 48,733. Indeed, the Secretary delayed the 

effective date of the regulations “to afford parties adequate 

time to restructure arrangements.” Id. at 48,714; see also id. at 

48,721, 48,729. The Secretary’s belief that entities could 

 10 The district court held that the Council conceded the 

adequacy of the certification by failing to challenge the Secretary’s 

argument at summary judgment. See Council for Urological 

Interests, 946 F. Supp. 2d at 112. We need not consider whether 

this treatment was appropriate because we hold that the certification 

was adequate in any event. 

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restructure and the provision of additional time to allow them 

to do so provides a factual basis for the certification. 

The Council argues that the Secretary was incorrect in 

believing that existing arrangements could be “easily 

restructured.” So long as the procedural requirements of the 

certification are met, however, this court’s review is “highly 

deferential” as to the substance of the analysis, particularly 

where an agency is predicting the likely economic effects of a 

rule. See Helicopter Ass’n Int’l, Inc. v. FAA, 722 F.3d 430, 

438 (D.C. Cir. 2013). Because we find that the Secretary 

demonstrated a “reasonable, good-faith effort” to comply with 

the RFA’s “[p]urely procedural” requirements, we uphold the

certification as satisfactory. U.S. Cellular Corp. v. FCC, 254 

F.3d 78, 88 (D.C. Cir. 2001) (internal quotation marks 

omitted). 

V

The district court’s order granting summary judgment to 

the Secretary is affirmed in part and reversed in part. We 

remand the per-click regulation to the district court with 

instructions to remand to the Secretary.

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1

KAREN LECRAFT HENDERSON, Circuit Judge, dissenting 

in part: In my view, the Congress unambiguously intended 

to authorize per-click equipment leases. I therefore do not 

believe the per-click ban, 42 C.F.R. § 411.357(b)(4)(ii)(B),

satisfies the first step of Chevron and respectfully dissent

from Part II.A of the majority opinion.

The Stark Law broadly prohibits self-referrals: if a doctor 

has a financial interest in an entity, he cannot refer patients to 

that entity for designated health services. 42 U.S.C. 

§ 1395nn(a). Nevertheless, the Stark Law contains multiple 

exceptions. Id. § 1395nn(b)–(e). This case involves the 

equipment exception. Id. § 1395nn(e)(1)(B). A physician 

can lease equipment to an entity—and refer patients to it—if:

(i) the lease is set out in writing, signed by the 

parties, and specifies the equipment covered by 

the lease,

(ii) the equipment rented or leased does not exceed 

that which is reasonable and necessary for the 

legitimate business purposes of the lease or 

rental and is used exclusively by the lessee when 

being used by the lessee,

(iii) the lease provides for a term of rental or lease of 

at least 1 year,

(iv) the rental charges over the term of the lease are 

set in advance, are consistent with fair market 

value, and are not determined in a manner that 

takes into account the volume or value of any 

referrals or other business generated between 

the parties,

(v) the lease would be commercially reasonable 

even if no referrals were made between the 

parties, and

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2

(vi) the lease meets such other requirements as the 

Secretary may impose by regulation as needed 

to protect against program or patient abuse.

Id. (emphases added). The Centers for Medicare and 

Medicaid Services (CMS or Agency) relied on subsection (vi) 

to enact the per-click ban, which ban specifies that an

equipment lease can no longer utilize “[p]er-unit of service 

rental charges.” 42 C.F.R. § 411.357(b)(4)(ii)(B) (emphasis 

added). The question is whether the CMS can use its “other 

requirements” authority to ban per-click leases. I think not.

An agency cannot use its delegated authority in a way 

that contradicts the Congress’s unambiguous intent. See 

Maislin Indus., U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, 

134–35 (1990) (“Although the [agency] has both the authority 

and expertise generally to adopt new policies when faced with 

new developments in the industry, it does not have the power 

to adopt a policy that directly conflicts with its governing 

statute.” (citation omitted)); cf. AFL-CIO v. Chao, 409 F.3d 

377, 384 (D.C. Cir. 2005) (“Even when Congress has stated 

that the agency may do what is ‘necessary,’ ” the agency 

“cannot render nugatory restrictions that Congress has 

imposed.” (citation omitted)). As a matter of first principles, 

an agency is not entitled to Chevron deference unless the 

Congress “has left a gap for the agency to fill.” Am. Bar 

Ass’n v. FTC, 430 F.3d 457, 468 (D.C. Cir. 2005). If the 

Congress has “directly spoken” to the issue in question, there 

is no such gap. Ry. Labor Execs.’ Ass’n v. Nat’l Mediation 

Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (en banc) (quoting 

Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842 (1984)); 

see also Util. Air Reg. Grp. v. EPA, 134 S. Ct. 2427, 2445 

(2014) (“Agencies exercise discretion only in the interstices 

created by statutory silence or ambiguity; they must always 

give effect to the unambiguously expressed intent of 

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3

Congress.” (quotation marks omitted)). An agency crosses 

an impermissible line when it moves from interpreting a 

statute to rewriting it. See La. Pub. Serv. Comm’n v. FCC, 

476 U.S. 355, 376 (1986) (“As we so often admonish, only 

Congress can rewrite [a] statute.”); NRDC v. Adm’r, EPA, 902 

F.2d 962, 977 (D.C. Cir. 1990) (“It hardly bears noting that 

[the agency’s] discretion cannot include the power to rewrite 

a statute and reshape a policy judgment Congress itself has 

made.”), vacated in other part, 921 F.2d 326 (D.C. Cir. 1991). 

Even if the Congress wanted to authorize agency rewrites, the 

Constitution would stand in its way. See Util. Air Reg. Grp., 

134 S. Ct. at 2446 (“Under our system of government, 

Congress makes laws and the President, acting at times 

through agencies . . ., faithfully executes them.” If agencies 

could “modify unambiguous requirements imposed by a 

federal statute,” it “would deal a severe blow to the 

Constitution’s separation of powers.” (quotation marks and 

alteration omitted)); see also id. at n.8 (“[W]e shudder to 

contemplate the effect that such a principle would have on 

democratic governance.”).

The CMS contends that it can always use its “other

requirements” authority to narrow the scope of the equipment 

exception, prohibit more conduct and remain consistent with 

the Stark Law. But the Agency takes an overly simplistic 

view of congressional intent. Legislation is often the 

product of “compromise between groups with . . . divergent 

interests,” reflecting a “careful balance” between two 

extremes. Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 

81, 93–94 (2002). “[A]gencies must respect and give effect 

to these sorts of compromises.” Id. at 94. The Stark Law, 

for example, begins with a broad prohibition on physician 

self-referrals. See 42 U.S.C. § 1395nn(a). The bulk of the 

provision, however, consists of exceptions to that general ban. 

See id. § 1395nn(b)–(e); see also Steven D. Wales, The Stark 

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4

Law: Boon or Boondoggle? An Analysis of the Prohibition on 

Physician Self-Referrals, 27 LAW & PSYCHOL. REV. 1, 11 

(2003) (“What cannot be done [under the Stark Law] is 

explained in one sentence. . . . Exceptions, however, fill 

nearly nine pages of the statute.”). The exceptions reflect 

the Congress’s judgment that certain arrangements are net 

beneficial to patients, regardless of the risks associated with 

self-referrals. See United States ex rel. Kosenske v. Carlisle 

HMA, Inc., 554 F.3d 88, 96 (3d Cir. 2009). Thus, when the 

CMS circumscribes a statutory exception to the Stark Law, it 

can do as much violence to the Congress’s intent as when it 

broadens one. See Am. Bankers Ass’n v. SEC, 804 F.2d 739, 

754 (D.C. Cir. 1986) (agency cannot “change basic decisions 

made by Congress” (emphasis added)); Guardians Ass’n v. 

Civil Serv. Comm’n of N.Y., 463 U.S. 582, 615 (1983) 

(O’Connor, J., concurring in the judgment) (“[W]e would 

expand considerably the discretion and power of agencies 

were we . . . to permit [them] to proscribe conduct that 

Congress did not intend to prohibit.”).

Moreover, the text of subsection (vi)—authorizing the 

CMS to promulgate “other requirements”—contains its own 

limitation. The word “other” means “existing besides, or 

distinct from, that already mentioned or implied.” Fin. 

Planning Ass’n v. SEC, 482 F.3d 481, 489 (D.C. Cir. 2007) 

(quoting II THE SHORTER OXFORD ENGLISH DICTIONARY 1391 

(2d ed. 1936, republished 1939)). The CMS cannot use its 

“other requirements” authority to “redefine” or “override” the 

statutory conditions set out in the equipment exception. Id. 

For example, subsection (iii) requires equipment leases to be 

“at least 1 year” long. 42 U.S.C. § 1395nn(e)(1)(B)(iii). 

The CMS plainly could not change “1 year” to “6 months” 

because such a regulation would redefine a statutory 

requirement, instead of adding a new one. See Fin. Planning 

Ass’n, 482 F.3d at 489 (“[C]ourts have hesitated to allow 

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5

[agencies] to use language structurally similar to the ‘other 

[requirements]’ clause . . . to redefine . . . specific 

requirements in existing statutory exceptions.” (citing 

Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 

863 n.11 (1988)).

Applying these principles here, we first determine 

whether another provision of the equipment exception already 

addresses the propriety of per-click leases. Subsection (iv), 

which discusses rent, is the most natural candidate. Under 

subsection (iv), “the rental charges over the term of the lease” 

must not be “determined in a manner that takes into account 

the volume or value of any referrals or other business 

generated between the parties.” 42 U.S.C. 

§ 1395nn(e)(1)(B)(iv) (emphases added). The key inquiry, 

then, is whether the “rental charges” in a per-click lease 

“take[] into account the volume” of patient referrals. The 

per-click ban cannot stand unless the answer is “Yes” or “It’s 

ambiguous.”

Mathematically, a per-click lease can be expressed as Y = 

R∙X, with Y as the physician’s total rental income, R as the 

charge per patient and X as the number of patients served. 

The term “rental charges” in subsection (iv) can have two 

meanings. On the one hand, “rental charges” may refer to 

the variable Y. If “rental charges” means “rental income,” 

then per-click leases do not qualify for the equipment 

exception. A per-click lease would “take[] into account the 

volume” of referrals because the physician’s rental income 

would depend directly on the number of patients he refers. 

On the other hand, “rental charges” may refer to the variable 

R in the equation above (i.e., the per-patient rate). If a 

per-click lease charges a flat per-patient rate over the term of 

the lease, it does not “take into account the volume” of 

referrals and is therefore eligible for the equipment exception. 

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But if a per-click lease adopts a tiered system—e.g., $1,000 

for the first 20 patients, $2,000 for the next 20 patients, 

$3,000 for the next 20 patients, and so on—it would not 

qualify. Because the text of the equipment exception is 

“reasonably susceptible” to either of these interpretations, it is 

ambiguous. McCreary v. Offner, 172 F.3d 76, 82 (D.C. Cir. 

1999).1

If the text is ambiguous, we do not automatically move to 

Chevron Step Two. Instead, “a statute may foreclose an 

agency’s preferred interpretation . . . if its structure, 

legislative history, or purpose makes clear what its text leaves 

opaque.” Catawba Cnty., NC v. EPA, 571 F.3d 20, 35 (D.C. 

Cir. 2009) (emphasis added); see also Sierra Club v. EPA, 

551 F.3d 1019, 1027 (D.C. Cir. 2008) (“Although Chevron

step one analysis begins with the statute’s text, the court must 

. . . exhaust the traditional tools of statutory construction, 

including examining the statute’s legislative history . . . .” 

(emphasis added) (quotation marks omitted)); Am. Bankers 

Ass’n v. NCUA, 271 F.3d 262, 268, 271 (D.C. Cir. 2001) 

(finding text ambiguous but resolving case at Chevron Step 

One due to “pellucid” legislative history). In Chevron itself, 

the Supreme Court did not stop once it found the text 

ambiguous; it marched on to consider the legislative history 

as well. See 467 U.S. at 862; see also FDA v. Brown & 

Williamson Tobacco Corp., 529 U.S. 120, 147 (2000) 

(legislative history is “certainly relevant” at Chevron Step 

 1 Nevertheless, the latter interpretation is plainly the stronger one. 

The word “charge” means “expense,” “cost,” or the “price required or 

demanded for service rendered.” Charge, III OXFORD ENGLISH 

DICTIONARY 36 (2d ed. 1989); see also MCGRAW–HILL ESSENTIAL 

DICTIONARY OF HEALTH CARE 159 (1988) (“charge” means the “price 

assigned to a unit of medical service”). It more naturally refers to the 

rental rate charged to the lessee, not the rental income earned by the 

lessor.

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One); PBGC v. LTV Corp., 496 U.S. 633, 649 (1990) 

(“legislative history” is one of the “traditional tools of 

statutory construction” at Chevron Step One).

Much ink has been spilled on the propriety of using 

legislative history to cloud a clear text under Chevron. See, 

e.g., Zuni Pub. Sch. Dist. No. 89 v. Dep’t of Educ., 550 U.S. 

81, 90 (2007); id. at 105–06 & n.2 (Stevens, J., concurring); 

id. at 108 (Scalia, J., dissenting); see also Halbig v. Burwell, 

758 F.3d 390, 406 (D.C. Cir. 2014) (identifying “a fork in our 

precedent” on this issue), reh’g en banc granted, judgment 

vacated, No. 14-5018, 2014 WL 4627181 (D.C. Cir. Sept. 4, 

2014). But the converse—consulting legislative history to 

clarify an ambiguous text—ought to be uncontroversial. The 

chief objection to legislative history is that it can be 

undemocratic: the Congress qua Congress approves only the 

text of a statute and the legislative history might reflect a 

distinctly minority view. See Exxon Mobil Corp. v. 

Allapattah Servs., Inc., 545 U.S. 546, 568 (2005). In the 

Chevron context, however, a failure to consult legislative 

history would leave the text ambiguous and thereby transfer 

authority to an administrative agency, whose democratic 

accountability is nil. See Free Enter. Fund v. PCAOB, 561 

U.S. 477, 499 (2010) (“The growth of the Executive Branch 

. . . heightens the concern that it may slip from the 

Executive’s control, and thus from that of the people.”). 

And at least some types of legislative history “shed a reliable 

light on” the views of a majority of the enacting Congress. 

Allapattah Servs., 545 U.S. at 568; see also Simpson v. United 

States, 435 U.S. 6, 17 (1978) (Rehnquist, J., dissenting) 

(“[S]ome types of legislative history are substantially more 

reliable than others. The report of a joint conference 

committee of both Houses of Congress, for example, . . . is 

accorded a good deal more weight than the remarks . . . on the 

floor of the chamber.”). Legislative history is also criticized 

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for being “murky, ambiguous, and contradictory,” an exercise 

of “looking over a crowd and picking out your friends.” 

Allapattah Servs., 545 U.S. at 568. But again, this criticism 

loses force under Chevron. If legislative history is 

“ambiguous”—i.e., if both the petitioner and the agency have 

“friends” they can pick out—then, by definition, the agency 

prevails under Chevron Step One. See, e.g., Catawba Cnty., 

571 F.3d at 38. Sometimes, however, the legislative history 

is clear, reliable and uncontroverted; if it is, we would be 

wrong to ignore it.

This is one such case. The Conference Report on the 

1993 amendments to the Stark Law resolves the textual 

ambiguity in the equipment exception. According to the 

Conference Report:

The conferees intend that charges for . . . equipment 

leases may be based on daily, monthly, or other 

time-based rates, or rates based on units of service 

furnished, so long as the amount of the time-based or 

units of service rates does not fluctuate during the 

contract period based on the volume or value of 

referrals between the parties to the lease or 

arrangement.

H.R. REP. NO. 103-213, at 814 (1993) (Conf. Rep.) (emphases 

added). This legislative history makes clear that the term 

“rental charges” in subsection (iv) refers to rental “rates,” not 

total rental income. Thus, so long as the per-patient rate is 

fixed over the course of the lease, a per-click lease qualifies 

for the equipment exception. The Conference Report could 

not have been clearer on this point and the CMS has identified 

nothing to controvert it. Conference reports, moreover, are 

the gold standard when it comes to legislative history. See

Moore v. Dist. of Columbia, 907 F.2d 165, 175 (D.C. Cir. 

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1990) (en banc) (unanimous) (“conference committee report 

is the most persuasive evidence of congressional intent after 

statutory text” (quotation marks omitted)); Planned 

Parenthood Fed’n of Am., Inc. v. Heckler, 712 F.2d 650, 657 

n.36 (D.C. Cir. 1983) (statements in conference reports are 

“particularly weighty indicators of congressional intent” 

because they “represent[] the final word on the final version 

of a statute” and “must be signed by a majority of both 

delegations from the House and Senate who have resolved the 

differences between the two chambers” (quotation marks 

omitted)).

In short, the Conference Report demonstrates that the 

“rental charges” in a per-click equipment lease do not “take[] 

into account the volume . . . of any referrals . . . between the 

parties.” 42 U.S.C. § 1395nn(e)(1)(B)(iv). Per-click leases 

are therefore eligible for the equipment exception and the 

CMS lacks the authority to say otherwise.

Contrary to my colleagues, I do not believe the physician 

group–practice exception reintroduces any ambiguity. That 

exception requires that a group’s “compensation per unit of 

services” not be “determined in a manner that takes into 

account the volume or value of any referrals or other business 

generated between the parties.” Id. § 1395nn(e)(7)(A)(v) 

(emphasis added). My colleagues contend that the 

emphasized language shows the Congress “knew how to 

permit per-click payments explicitly, suggesting that the 

omission in [the equipment exception] was deliberate.” Maj. 

Op. 15–16. But the group-practice exception speaks only to 

“compensation” and, thus, does nothing to illuminate the term 

“rental charges” in the equipment exception. The 

interpretative value of this wholly separate exception is 

therefore minimal. See Weaver v. U.S. Info. Agency, 87 F.3d 

1429, 1437 (D.C. Cir. 1996) (discounting this canon of 

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10

statutory construction when “the subject-matter to which the 

words refer is not the same” (quoting Atl. Cleaners & Dyers 

v. United States, 286 U.S. 427, 433 (1932))); see also United 

States v. Wells Fargo Bank, 485 U.S. 351, 357 (1988) (“We 

cannot attribute to Congress an intent . . . by comparing two 

unrelated provisions of the [statute].”). More importantly, 

the Conference Report speaks directly to the equipment 

exception and uses the exact language my colleagues believe 

is missing: “unit[] of service[s].” H.R. REP. NO. 103-213, at 

814. In my view, this crystalline legislative history 

supersedes whatever oblique inference is attempted to be 

teased out of a distinct exception in the Stark Law. See

United States v. Stauffer Chem. Co., 684 F.2d 1174, 1184 (6th 

Cir. 1982) (“conference report” can rebut “presumption” that 

“a difference in language reflects a difference in meaning” 

(citing Moore v. Harris, 623 F.2d 908, 914 (4th Cir. 1980)); 

see also Neuberger v. CIR, 311 U.S. 83, 88 (1940) (“The 

maxim ‘expressio unius est exclusio alterius’ . . . can never 

override clear and contrary evidences of Congressional 

intent.”). As this Court has explained before, the argument 

that the “Congress knows how to say thus and so, and would 

have written thus and so if that is what it really intended” is 

“weak.” Doris Day Animal League v. Veneman, 315 F.3d 

297, 299 (D.C. Cir. 2003). “It may be countered by arguing 

that if Congress wanted to exclude [per-click leases] from the 

[equipment exception] it easily could have said as much.” 

Id. (emphasis added). The text’s “failure to speak with 

clarity signifies only that there is room for disagreement,” 

id.—disagreement that, here, the legislative history resolves.

My colleagues minimize the Conference Report because 

it “states only that rental charges ‘may’ be based on units of 

service.” Maj. Op. 17 (emphasis added). This Court has 

repeatedly held, however, that the Congress need not speak in 

obligatory terms to constrain an agency’s discretion. See Ry. 

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Labor Execs.’ Ass’n, 29 F.3d at 671 (“To suggest . . . that 

Chevron step two is implicated any time a statute does not 

expressly negate the existence of a claimed administrative 

power (i.e. when the statute is not written in ‘thou shalt not’

terms), is both flatly unfaithful to the principles of 

administrative law . . . and refuted by precedent.” (emphasis 

in original)); Ethyl Corp. v. EPA, 51 F.3d 1053, 1059–60 

(D.C. Cir. 1995) (rejecting argument that “Congress’s use of 

the word ‘may’ ” gives agency unbridled discretion and 

noting that “[w]e refuse . . . to presume a delegation of power 

merely because Congress has not expressly withheld such 

power”). Otherwise, “agencies would enjoy virtually 

limitless hegemony, a result plainly out of keeping with 

Chevron and quite likely with the Constitution as well.” 

Michigan v. EPA, 268 F.3d 1075, 1082 (D.C. Cir. 2001). 

Here, the Congress said that an equipment lease “may” charge 

a per-click rate; the CMS is therefore not free to say it “may 

not.”

My colleagues also note that “the text of the Stark Law 

makes no reference to per-click rates.” Maj. Op. 14 

(emphasis added). But this is just another way of saying that 

legislative history is irrelevant at Chevron Step One. It 

assumes that legislative history cannot disambiguate the 

meaning of the text itself—an assumption that runs contrary 

to precedent. See supra pp. 6–7; see also, e.g., Cohen v. 

United States, 650 F.3d 717, 730 (D.C. Cir. 2011) (en banc) 

(consulting “single paragraph” of “surprisingly 

straightforward” legislative history to determine meaning of 

“intrinsically ambiguous” text); Elec. Indus. Ass’n Consumer 

Elecs. Grp. v. FCC, 636 F.2d 689, 696 (D.C. Cir. 1980) 

(finding legislative history that “limited the [agency’s] 

power”). It also blinks reality. The Congress often uses 

legislative history, rather than the text, to restrain agencies in 

the exercise of their delegated authority. See Abbe R. Gluck 

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& Lisa Schultz Bressman, Statutory Interpretation from the 

Inside—An Empirical Study of Congressional Drafting, 

Delegation, and the Canons: Part I, 65 STAN. L. REV. 901, 

965–78 (2013). Here, for example, the CMS felt completely 

bound by the Conference Report in 2001, see Maj. Op. 19–20,

and viewed the Conference Report as a substantial hurdle to 

be overcome in 2008, see 73 Fed. Reg. at 48,715 (“we agree 

that Congress specifically intended to permit certain per-click 

leases”). This Court likewise consulted legislative history in 

Financial Planning Association, 482 F.3d at 488–90 & 

n.6—the case my colleagues cite for their text-only 

proposition. See Maj. Op. 14.

In sum, the Conference Report demonstrates that the 

Congress addressed per-click leases with a “level of 

specificity” that “effectively close[d] any gap the Agency 

s[ought] to find and fill.” Ethyl Corp., 51 F.3d at 1060. 

Because subsection (iv) sanctions per-click leases, the 

per-click ban is not an “other” requirement the CMS can 

promulgate under subsection (vi). “[A]gencies whose 

jurisdictional boundaries are defined in the statute [cannot] 

alter by administrative regulation those very jurisdictional 

boundaries. To suggest otherwise is to sanction 

administrative autonomy beyond the control of either 

Congress or the courts.” Am. Bankers Ass’n, 804 F.2d at 

754. The CMS’s ban on per-click equipment leases 

therefore fails at Chevron Step One. Because my colleagues 

hold otherwise, I respectfully dissent on this issue.

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GRIFFITH, Circuit Judge, dissenting in part: The majority 

holds that the per-click rule fails at Chevron step two because 

the Secretary’s discussion of the legislative history is 

unreasonable. The Conference Report states that “[t]he 

conferees intend that charges for space and equipment leases 

may be based on . . . rates based on units-of-service furnished, 

so long as the amount of the . . . units-of-service rates does 

not fluctuate during the contract period based on the volume 

or value of referrals between the parties to the lease or 

arrangement.” H.R. REP. NO. 103-213 at 814. In the 

rulemaking, the Secretary responded to comments that 

pointed to this legislative history and agreed that it showed 

that “Congress specifically intended to permit certain 

per-click leases,” however, she “disagree[d] that Congress 

intended an unqualified exception for per-click leases.” 73 

Fed. Reg. at 48,715. The Secretary reached this conclusion by 

adopting a reading of the legislative history that did not 

prohibit her from banning per-click leases: 

Where the total amount of rent (that is, the rental charges) 

over the term of the lease is directly affected by the 

number of patients referred by one party to the others, 

those rental charges can arguably be said to “take into 

account” or “fluctuate during the contract period based 

on” the volume or value of referrals between the parties. 

Id. at 48,716. Thus, under the Secretary’s reading during 

rulemaking, the legislative history could be read to preclude 

per-click leases because the total amount paid to the lessor 

depends on the number of uses of the equipment, even if the 

per-click rate itself does not. On appeal, however, the 

Secretary has pressed a different view of the legislative 

history. Here, she has argued that “the legislative history 

invoked by the Council does not speak at all to the scope of 

the Secretary’s . . . power to add ‘other requirements’ to the 

equipment rental exception. . . . It is thus beside the point 

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2

whatever light the legislative history might shed on [the 

rental-charge clause].” Appellee’s Br. 28. 

The majority insists that the Secretary cannot rely on the 

reasoning she has put forth on appeal because it was not set 

out in the rulemaking and Chenery therefore bars us from 

considering it now. Although the Council raised the Chenery

argument before the district court, see Pl.’s Rep. in Supp. of 

Mot. for Sum. J. (Dkt. 32) at 2-4, it has not pursued the point 

on appeal. The majority cites an excerpt from the Council’s 

reply brief that it argues “implicitly” raises the issue.

Generally, we do not consider arguments raised for the first 

time in a reply brief. See Russell v. Harman Int’l Indus., Inc., 

773 F.3d 253, 255 n.1 (D.C. Cir. 2014). The majority 

contends that looking to the reply brief here is not problematic 

because the Council did not need to raise Chenery in its 

opening brief before it knew the Secretary’s litigation 

strategy. But the majority ignores the fact that this appeal 

comes to us from the district court, where the Secretary relied 

on the same rationale she does here and the Council disputed 

her reasoning based on Chenery. The Council was therefore 

well aware of the Secretary’s litigating position and should 

have raised Chenery as a basis for overturning the district 

court in its opening brief. See Corson & Gruman Co. v. 

NLRB, 899 F.2d 47, 50 n.4 (D.C. Cir. 1990) (“We require 

petitioners and appellants to raise all of their arguments in the 

opening brief to prevent ‘sandbagging’ of appellees and 

respondents and to provide opposing counsel the chance to 

respond.”). 

In any event, the excerpted language does not raise a 

Chenery argument, implicitly or otherwise. It states only that 

the Secretary has not defended the interpretation of the 

legislative history that was set forth in the rulemaking. See 

Appellant’s Reply Br. 10. This is entirely different from an 

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3

argument that the Secretary’s current analysis was not raised 

in the rulemaking—the argument that “implicitly raised the 

Chenery issue” in the case on which the majority relies. 

Mitchell v. Christopher, 996 F.2d 375, 378 n.2 (D.C. Cir. 

1993). The majority’s strained reading of the brief is 

especially suspect given the clarity with which the Council 

raised the Chenery argument before the district court. See 

Pl.’s Rep. in Supp. of Mot. for Sum. J. (Dkt. 32) at 2-4. By 

sua sponte considering an argument the Council has elected to 

omit from either its opening or reply brief, the majority 

remands a federal regulation based on an argument not before 

this court—an action at odds with our precedent. See, e.g., 

Doe by Fein v. District of Columbia, 93 F.3d 861, 875 n.14

(D.C. Cir. 1996) (holding that the appellant waived an 

argument not raised on appeal). Cf. Byers v. C.I.R., 740 F.3d 

668, 681 (D.C. Cir. 2014) (refusing to consider a Chenery

argument where the appellant failed to pursue the claim in the 

court below); see also Utah Envtl. Cong. v. Troyer, 479 F.3d 

1269, 1288-92 (10th Cir. 2007) (McConnell, J. concurring in 

part and dissenting in part) (arguing that the majority’s 

consideration of Chenery claims not raised on appeal 

“violates well-established principles of appellate review”).

The Council is a sophisticated litigant, represented by 

attorneys familiar with the appellate process. We cannot know 

why it chose not to bring this particular challenge on appeal, 

and we should not address what is not before us. 

If the argument were properly before us, I would be 

inclined to agree that the Secretary’s interpretation of the 

legislative history in the rulemaking was unreasonable. But 

that approach is foreclosed because the Council has declined 

to raise the Chenery argument on appeal. I find the arguments 

the Council actually briefed at Chevron step two 

unpersuasive, and would thus uphold the per-click rule based 

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4

on the Secretary’s reasoning on appeal. On those grounds, I 

respectfully dissent. 

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