Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-05166/USCOURTS-caDC-99-05166-0/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 February 24, 2000 Decided August 22, 2000

No. 99-5166

Transitional Hospitals Corporation of Louisiana,

Incorporated,

and

Transitional Hospitals Corporation of Texas, Incorporated,

Appellees

v.

Donna E. Shalala, Secretary,

Department of Health and Human Services,

Appellant

Appeal from the United States District Court

for the District of Columbia

(No. 97cv01351)

Anne M. Murphy, Attorney, U.S. Department of Justice,

argued the cause for appellant. With her on the brief were

David W. Ogden, Acting Assistant Attorney General, AnthoUSCA Case #99-5166 Document #538109 Filed: 08/22/2000 Page 1 of 19
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ny J. Steinmeyer, Assistant Director, and Wilma A. Lewis,

U.S. Attorney.

Eugene Tillman argued the cause for appellees. With him

on the brief was Tamara V. Scoville.

Before: Williams, Rogers, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Garland.

Garland, Circuit Judge: The Medicare program reimburses certain categories of hospitals on a "reasonable cost"

basis, rather than under the generally applicable, and less

remunerative, "Prospective Payment System." Long-term

care hospitals are one such category. Plaintiffs own two new

facilities for which they sought classification as long-term care

hospitals before they began admitting patients. The Department of Health and Human Services (HHS) rejected plaintiffs' request, citing regulations that require new hospitals to

have six months of experience before they can qualify as

"long-term." In enacting those regulations, the Secretary of

HHS took the position that an initial data-collection period is

statutorily required. Plaintiffs, challenging the regulations in

the district court, took the opposite position: that the Medicare statute does not mandate an initial data-collection period

and in fact manifestly requires HHS to reimburse them as

long-term hospitals from the first day of operation. The

district court agreed with plaintiffs and declared HHS' regulations invalid.

We do not find the statute as clear as either side suggests,

but rather conclude that Congress intended the Secretary to

exercise discretion in determining the manner in which a

hospital qualifies as a long-term care facility. We therefore

reverse the decision of the district court. However, because

the Secretary mistakenly believed that she lacked such discretion, we remand the case to permit her to determine

whether she wishes to retain the existing regulations knowing

that other options are permissible.

I

Medicare is a federal health insurance program for the

aged and disabled that is administered by the Health Care

Financing Administration (HCFA) of HHS. See 42 U.S.C.

ss 1395 et seq. Under Medicare Part A, institutional health

care providers are reimbursed for their services to eligible

patients. See id. ss 1395c to 1395i-5. From its inception

until 1983, Medicare reimbursed hospitals for the "reasonable

cost" of providing inpatient care, subject to certain limitations. Id. s 1395f(b) (1982); see also id. s 1395x(v).

By 1983, Congress had become concerned that hospitals

reimbursed on a reasonable cost basis lacked incentives to

operate efficiently. This concern led to the revision of the

Medicare payment system in that year. See Social Security

Amendments of 1983, Pub. L. No. 98-21, s 601, 97 Stat. 65,

149. See generally County of Los Angeles v. Shalala, 192

F.3d 1005, 1008-09 (D.C. Cir. 1999). In place of the reasonable cost method, Congress enacted the Prospective Payment

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System (PPS) as the principal method of compensating hospitals for inpatient care provided to eligible patients. Under

PPS, hospitals are reimbursed according to flat rates established in advance for the various categories of patient diagnoses (known as "diagnosis-related groups" or "DRGs"). 42

U.S.C. s 1395ww(d). The rates reflect the average cost

associated with treating a patient for a specific condition, and

encourage hospitals to keep costs within the anticipated reimbursement levels. For the care of patients whose hospitalizations are extraordinarily costly or lengthy, the statute authorizes the Secretary to make "outlier payments" to supplement

the standard PPS disbursement. Id. s 1395ww(d)(5)(A)(i)-

(vi); see County of Los Angeles, 192 F.3d at 1009.

Because PPS was "developed for short-term acute care

general hospitals," Congress acknowledged that it did not

"adequately take into account special circumstances of diagnoses requiring long stays." S. Rep. No. 98-23, at 54 (1983).

Thus, Congress altogether excluded from PPS certain types

of hospitals that treat atypical patient populations. These

hospitals instead receive reimbursement for inpatient care

under the reasonable cost system. See 42 U.S.C.

s 1395ww(d)(1)(B). One type of hospital subject to the statutory exclusion is a long-term care hospital, which the statute

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describes as "a hospital which has an average inpatient length

of stay (as determined by the Secretary) of greater than 25

days." Id. s 1395ww(d)(1)(B)(iv)(I).1 The availability of this

exclusion is the central issue in the case before us.

A

HHS implemented the new PPS reimbursement scheme by

enacting regulations in 1984. In issuing its final rule, although not in the rule itself, HHS announced that it intended

to apply the statutory exclusions prospectively only: any

change in a hospital's status (i.e., whether it was subject to or

excluded from PPS) that occurred during one cost reporting

period would generally take effect only at the start of the

next period, with each period typically lasting one year. See

Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. 234, 243 (1984).

Thus, a new hospital would not qualify for the exclusion at

least until the initial reporting period was over. To accommodate new hospitals, HHS permitted an abbreviated initial

cost reporting period of six months, rather than the usual one

year. See 42 C.F.R. s 405.471(c)(5)(i), (c)(5)(ii)(B) (1983),

__________

1 The statute lists the following types of excluded hospitals:

(i) a psychiatric hospital (as defined in section 1395x(f) of

this title),

(ii) a rehabilitation hospital (as defined by the Secretary),

(iii) a hospital whose inpatients are predominantly individuals under 18 years of age,

(iv)(I) a hospital which has an average inpatient length

of stay (as determined by the Secretary) of greater than 25

days ...

...

(v)(I) a hospital that the Secretary has classified ... for

purposes of applying exceptions and adjustments to payment

amounts under this subsection, as a hospital involved extensively in treatment for or research on cancer....

42 U.S.C. s 1395ww(d)(1)(B).

now codified at 42 C.F.R. s 412.23(e)(1), (e)(3)(ii).2

In 1992, HHS formalized its prospective approach to exclusions by proposing and then adopting the following rule:

For purposes of exclusion from the prospective payment

systems ..., the status of each currently participating

hospital ... is determined at the beginning of each cost

reporting period and is effective for the entire cost

reporting period. Any changes in the status of the

hospital are made only at the start of a cost reporting

period.

42 C.F.R. s 412.22(d). Thus, a hospital that qualifies for the

exclusion in the middle of a reporting period will not benefit

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until the next reporting period. By the same token, a

hospital that ceases to qualify in the midst of a cost reporting

period will nevertheless be compensated as though it were

exempt for the entire period. See Medicare Program;

Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1993 Rates, 57 Fed. Reg. 23,618, 23,657

(1992). For a new hospital, HHS' rule confirmed that the

exclusion does not begin until the first six months of data

collection have passed.

In response to the notice of proposed rulemaking, the

National Association of Long Term Hospitals (NALTH) suggested that HHS permit new long-term care hospitals to selfcertify their average length of stay from the start. See

Letter from NALTH to HCFA at 2 (July 31, 1992) (J.A. at

__________

2 The regulations permit hospitals that experience a change in

their average length of stay to establish exclusion eligibility by

having an average length of stay greater than 25 days for the

immediately preceding six month period. See 42 C.F.R.

s 405.471(c)(5)(i), (c)(5)(ii)(B) (1983), now codified at 42 C.F.R.

s 412.23(e)(1), (e)(3)(ii). According to HHS, a new hospital that

treats patients with an average length of stay greater than 25 days

"will always experience [a] change in length of stay because its

initial length of stay is zero inpatient days." HHS Br. at 9 n.5.

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53) [hereinafter NALTH Ltr.].3 HHS, however, concluded

that it did not have the discretion to permit self-certification

by long-term care hospitals. "We do not believe that the

statute permits us," the Department said, "to extend the

exclusion for long-term care hospitals to a hospital which has

not demonstrated actual compliance with the statutory requirement." Medicare Program; Changes to the Hospital

Inpatient Prospective Payment Systems and Fiscal Year

1993 Rates, 57 Fed. Reg. 39,746, 39,800-01 (1992) [hereinafter

Final Rule]. The "criterion for exclusion as a long-term care

hospital (average inpatient length of stay greater than 25

days) can be assessed only over a period of time. Thus, a

hospital cannot qualify as a long-term care hospital until it

has been in operation for some period of time." Id. at 38,801.

B

Plaintiffs Transitional Hospitals Corporation of Louisiana

and Transitional Hospitals Corporation of Texas (hereinafter

"the THC plaintiffs") opened two new hospitals at the end of

1992. Both were intended to treat patients with medically

complex conditions requiring extended inpatient stays, thereby qualifying for the long-term care hospital exclusion from

PPS. Before commencing operations, the THC plaintiffs

wrote HCFA stating that they "only expect to admit patients

whose medical conditions will result in lengths of stay in

excess of 25 days." Letter from Counsel for THC to HCFA

at 2 (Nov. 12, 1992) (J.A. at 57) [hereinafter THC Ltr.]. They

asked HCFA to exclude them from PPS from the starting

date of their Medicare provider agreements, rather than

reimburse them under PPS during their first six months of

operation. See id. at 4 (J.A. at 59).

Kathleen Buto, the Director of HCFA's Bureau of Policy

Development, wrote back denying plaintiffs' request. Buto

said that the statute mandates exclusion only for "a hospital

__________

3 NALTH noted that HHS permits new rehabilitation hospitals

to self-certify that their inpatient populations meet the exclusion

criteria for that category. See NALTH Ltr. at 1-2 (J.A. at 52-53);

discussion infra Part III.

which has [emphasis added] an average length of stay (as

determined by the Secretary) of greater than 25 days."

Letter from HCFA to Counsel for THC at 2 (Dec. 24, 1992)

(J.A. at 63) (alteration and emphasis in original) [hereinafter

Buto Ltr.]. Noting that HHS regulations implement that

mandate by "examining [a hospital's] actual operating experience in a past period, rather than by relying on its admission

criteria or other formalized statements of how the hospital is

intended or expected to operate," Buto concluded that the

THC plaintiffs could not qualify for the exclusion in advance.

Id. at 2-3 (J.A. at 63-64).

Having had their request turned down, the THC plaintiffs

proceeded with the six-month cost reporting period. During

that time, they were reimbursed under PPS, supplemented by

outlier payments. At the end of the six-month period, both

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hospitals demonstrated average inpatient lengths of stay exceeding 25 days, thereby qualifying for exclusion from PPS--

and entitling them to payment for "reasonable costs"--during

the next cost reporting period. See Linville Aff. pp 7, 8, 13

(J.A. at 35, 37). Plaintiffs estimate that their PPS reimbursement during the initial six-month period was approximately

$1.2 million per hospital less than it would have been under

the reasonable cost standard. See id. pp 11, 12 (J.A. at 36).

The THC plaintiffs requested a hearing before the Provider

Reimbursement Review Board, which is authorized by statute

to hear the complaints of providers dissatisfied with the

compensation they have received. See 42 U.S.C. s 1395oo(a),

(d). Plaintiffs challenged the validity of the regulations that

denied them compensation for reasonable costs during their

first months of operation. The Board, however, concluded

that it lacked authority to determine the validity of HHS

regulations.

Plaintiffs then brought suit in the United States District

Court for the District of Columbia. Ruling on the parties'

cross motions for summary judgment, the court concluded

that the Medicare statute was neither silent nor ambiguous

on the question. Rather, the court concluded that the statute

unambiguously requires HHS to provide a PPS exclusion

from the beginning of a new long-term care hospital's participation in the Medicare program. The court further held that

even if the statute were ambiguous, the Secretary's regulations did not constitute a permissible interpretation of the

legislative language. The court therefore declared the regulations invalid insofar as they preclude new long-term care

hospitals from securing immediate exclusion from PPS. See

Transitional Hosps. Corp. v. Shalala, 40 F. Supp. 2d 6, 15

(D.D.C. 1999). This appeal by the Secretary followed.

II

We review de novo the district court's ruling on the motions for summary judgment. See United Seniors Ass'n v.

Shalala, 182 F.3d 965, 969 (D.C. Cir. 1999). In judging the

validity of the Secretary's regulations, we apply the familiar

two-step framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984).

We first ask "whether Congress has directly spoken to the

precise question at issue," in which case we "must give effect

to the unambiguously expressed intent of Congress." Id. If

the "statute is silent or ambiguous with respect to the specific

issue," we move to the second step and defer to the agency's

interpretation as long as it is "based on a permissible construction of the statute." Id. at 843. However, deference is

"only appropriate when the agency has exercised its own

judgment." Phillips Petroleum Co. v. FERC, 792 F.2d 1165,

1169 (D.C. Cir. 1986). "When, instead, the agency's decision

is based on an erroneous view of the law, its decision cannot

stand." Id.

A

We begin with Chevron step one, and with the Secretary's

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contention that Congress unambiguously expressed its intent

to bar the relief plaintiffs request.

The statutory provision at issue is quite brief. It excludes

from PPS any "hospital which has an average inpatient length

of stay (as determined by the Secretary) of greater than 25

days." 42 U.S.C. s 1395ww(d)(1)(B)(iv).4 When the Secre-

__________

4 Neither side makes an argument based on legislative history.

The PPS exclusion was passed as part of a large bill enacting

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tary adopted her implementing regulations, she took the

position that the statute does not permit her to certify a

hospital as long-term in advance because the criterion for

exclusion, an average inpatient length of stay greater than 25

days, "can be assessed only over a period of time." Final

Rule, 57 Fed. Reg. at 39,801. "Thus," she said, "a hospital

cannot qualify as a long-term care hospital until it has been in

operation for some period of time." Id. Similarly, when

HCFA turned down plaintiffs' request for self-certification, it

stressed that, because under the statute only a hospital that

"has" the requisite length of stay is eligible, a hospital cannot

qualify until it makes the requisite showing that it "has" that

average length of stay. See Buto Ltr. at 2 (J.A. at 63).

The statute seems neither so clear, nor so dictatorial, to us.

Although it does establish a criterion based on average length

of stay, the statute is silent as to how and when that length

should be calculated. Nothing in the language precludes the

Secretary from determining length of stay based on a prediction drawn, as plaintiffs suggest here, from a hospital's policy

of admitting only "patients whose medical conditions will

result in lengths of stay in excess of 25 days." THC Ltr. at 2

(J.A. at 57); cf. County of Los Angeles, 192 F.2d at 1013-15

(affirming HHS' use of predictions to determine statutorilymandated range of outlier payments).

Nor does the statute's use of the present tense verb "has"

definitively resolve the question. Although to qualify it must

be true that a hospital "has" the requisite length of stay, that

word does not tell us how to determine whether that state of

being exists. The agency has implicitly recognized as much

by adopting a policy of determining a hospital's status at the

beginning of a cost reporting period, and then permitting it to

retain that status for the entire period--even if conditions

change in the interim. See 42 C.F.R. s 412.22(d). Under

__________

wholesale changes in the Medicare program, and specific references

to the long-term care exclusion occur only in general passages

explaining the need for a reasonable costs alternative to PPS for

certain types of hospitals. See, e.g., H.R. Conf. Rep. No. 98-47, at

192-93 (1983); S. Rep. No. 98-23, at 53-55 (1983); H.R. Rep. No.

98-25, at 8-9, 141-42 (1983).

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this policy, HHS excludes a hospital for the next period based

on data derived from the prior period, regardless of whether

the hospital actually "has" the requisite average on each day

of the next period. See id.

Moreover, nothing in the statutory language precludes an

alternative form of relief requested by plaintiffs: retroactive

reimbursement for reasonable costs incurred during the first

six months if, at the end of that period, the hospital shows

that it had a 25-day average during that period. Again, the

word "has" does not unambiguously decide this question.

Each of plaintiffs' hospitals could have accurately said on its

six-month anniversary that today it "has" a greater than 25-

day average--referring to the entire period from day one

through and including day 180. It would therefore have been

consistent with the literal language to reimburse the hospital

on that day for all of its reasonable costs incurred to date.

Finally, and perhaps most important, this is not a statute

as to which we can only infer, from Congress' silence, an

implicit intent to delegate to the Secretary the authority to

reasonably interpret the statutory terms. See Chevron, 467

U.S. at 844. Rather, in this case the statute excludes a

hospital that has an average length of stay of greater than 25

days, "as determined by the Secretary." 42 U.S.C.

s 1395ww(d)(1)(B)(iv). Thus, Congress has provided "an express delegation of authority to the agency to elucidate a

specific provision of the statute by regulation." Chevron, 467

U.S. at 843-44; see also 42 U.S.C. ss 1302(a), 1395hh(a)

(granting HHS authority to issue regulations to administer

Medicare program). This means that the Secretary has

discretion to determine how to calculate the qualifying length

of stay, and that we are bound to uphold her determination as

long as she exercises that discretion in a reasonable way. See

Chevron, 467 U.S. at 843-44.

B

The THC plaintiffs also see the statute as clear and unambiguous--although in precisely the opposite way as that perceived by HHS. In their view, and in the view of the district

court, the use of the present tense "has" requires that if

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during any given period the hospital "has" a 25-day average,

it must be considered exempt for the entire period. See THC

Br. at 22-23. The use of the present tense, plaintiffs contend,

requires that the exclusion "be applied on a current basis,"

and "allows no alternative temporal reading." Id. Or, as the

district court put it, "the plain language of the statute indicates that a long-term care hospital may obtain an exemption

from the Prospective Payment System whenever it 'has' an

average inpatient length of stay greater than 25 days."

Transitional Hosps., 40 F. Supp. 2d at 10.5

Again we disagree, this time for the mirror image of our

reasoning with respect to HHS' interpretation. Because the

statute does not tell us how to determine whether a hospital

"has" the required average length of stay, it cannot be read

as requiring the agency to make that determination constantly and instantaneously--any more than it can be read (as

HHS would have it) as requiring the agency to make that

determination prospectively only. In Methodist Hospital v.

Shalala, 38 F.3d 1225 (D.C. Cir. 1994), we considered a

similar argument regarding the wage index used to determine

reimbursement rates under PPS. In that case, the plaintiff

hospitals contended that the Medicare statute required retroactive application of corrections made to the index to ensure

that the Secretary was not employing an incorrect index in

the period prior to the next correction. We rejected that

claim, noting that it "would require the Secretary to make

virtually continuous adjustments in the wage index." Id. at

1230. "The statute," we said, "does not specify how the

Secretary should construct the index, nor how often she must

revise it.... Congress through its silence delegated these

decisions to the Secretary." Id. The same is true here.

__________

5 Plaintiffs also proffer an argument they describe as based on

statutory purpose, contending that they are entitled to an exemption from their first day of operation because Congress' exclusion of

long-term care hospitals from PPS demonstrates its recognition

that PPS is an inadequate method for reimbursing such hospitals.

But this simply begs the question discussed in the text: were

plaintiffs' hospitals "long-term," within the meaning of the statute,

from that first day?

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But, plaintiffs argue, if Congress had intended the exclusion to apply prospectively, it could have drafted the statute

to provide a PPS exclusion for a hospital that "had" an

average inpatient length of stay greater than 25 days "during

its most recent cost reporting period." Transitional Hosps.,

40 F. Supp. 2d at 11 (quoting Pls.' Mot. for Summ. J. at 15)

(emphasis omitted). Frankly, we do not see such a revised

statute as particularly less ambiguous. Indeed, we do not see

why HHS could not have proffered the same editorial suggestion and then made the opposite argument: If Congress had

intended hospitals to receive retroactive reimbursement as

plaintiffs contend, wouldn't it have defined the exclusion as

covering hospitals that "had" the requisite average during

their "most recent cost reporting period"? In any event,

while positing a "clearer" way to write a statute may suggest

that an existing statute is ambiguous, it surely does not

establish that it is unambiguous. And if the statute is not

unambiguous, Chevron requires us to defer to a reasonable

reading by the Secretary.

We also must take care to read the word "has" in the

context of the entire phrase of which it is a part. Two

elements of that context are important here. First, the

statutory exclusion is for a hospital that has "an average"

inpatient length of stay of greater than 25 days. The criterion of "an average" strongly militates against plaintiffs' view

that a hospital's status must be measured at every moment in

time. As HHS correctly points out, an average is a criterion

that can only be assessed over a period of time. Moreover,

the statute refers not to an average "over" a period of 25

days, but to an average "of" 25 days--necessarily indicating

that the period of measurement must be more than 25 days in

order reasonably to determine whether the "average" during

that period was at least 25 days. Hence, the use of the word

"has" in conjunction with the word "average" would not

preclude waiting until six months have passed to determine

whether, at that point, the hospital "has" an average of 25

days over a 180-day period.

Indeed, were we to read the statute as literally as plaintiffs

and the district court suggest, plaintiffs' own contention--that

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they "met the 25-day requirement at all times during their

operation" and so were entitled to payment from the first

day--would be plainly incorrect. THC Br. at 4. On day one,

the hospitals could not have had a 25-day average because 25

days had not yet passed. If a hospital must be, and may only

be, paid for days on which it "has" a 25-day average, plaintiffs could not have qualified earlier than the 25th day. Even

then, they could have done so only if every patient present on

day one were still at the hospital 25 days later.

The second element of context that is important here is the

statute's parenthetical phrase, "as determined by the Secretary." As we have discussed above, by employing this phrase

Congress has made "an express delegation of authority to the

agency to elucidate [the] specific provision of the statute by

regulation." Chevron, 467 U.S. at 843-44. This further takes

the case out of the realm of Chevron step one's de novo

review, and into the realm of Chevron step two--which asks

only whether the agency's interpretation is reasonable. See

id. And that gives the agency considerable leeway to determine how "has" is to be defined, and whether to require

prospective, contemporaneous, or retrospective evaluation

and payment. See San Bernardino Mountains Community

Hosp. Dist. v. Secretary of Health & Human Servs., 63 F.3d

882, 886-87 (9th Cir. 1995) (holding that inclusion of phrase

"as determined by the Secretary" in Medicare Act's definition

of "sole community hospital" "make[s] clear that Congress

intended to delegate to the Secretary the task of outlining

and defining the criteria for attaining sole community hospital

status").

Plaintiffs resist the conclusion that Congress has delegated

definitional authority to HHS. They argue that the fact that

the parenthetical "as determined by the Secretary" follows

the phrase "an average inpatient length of stay," means that

Congress has only given the agency "discretion to determine

how the average length of stay will be calculated"--and not

whether the hospital "has" that average. THC Br. at 26.

This is far too sophistic a reading. First, the concession that

the agency has discretion to determine how to calculate the

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average necessarily means it has discretion to determine

whether a hospital "has" that average--since a hospital cannot have a qualifying average unless it satisfies the agency's

calculation methodology. Second, even if word placement

were decisive, it is as true that the delegating parenthetical

follows the phrase "has an average inpatient length of stay"

as that it follows the phrase "an average inpatient length of

stay." At most this renders the scope of Congress' delegation ambiguous, which again moves us to Chevron's second

step. See Chevron, 467 U.S. at 844.6

C

In reaching the conclusion that the statute unambiguously

requires retroactive reimbursement for the hospitals' initial

__________

6 Plaintiffs assert that Congress confirmed their reading of the

long-term care exclusion in its 1997 amendments to the Medicare

statute, which place payment limits on newly participating longterm care hospitals. Those amendments provide that:

in the case of a hospital or unit that is within a class of hospital

described in subparagraph (B) which first receives payments

under this section on or after October 1, 1997--

(i) for each of the first 2 cost reporting periods for which the

hospital has a settled cost report, the amount of the payment

with respect to operating costs ... [shall be] equal to the

lesser of ... [the amount of operating costs or a national

limit.]

42 U.S.C. s 1395ww(b)(7)(A). Plaintiffs contend that this language

indicates that Congress intended newly participating long-term care

hospitals to receive reimbursement for reasonable costs from the

date of their first reporting period. But as the Secretary points

out, this provision does not materially advance the analysis. By its

terms, it applies only to a "subparagraph (B)" hospital. A subparagraph (B) hospital, in turn, is defined as including a hospital that

comes within subsection (d)(1)(B)(iv)--the precise subsection that is

in dispute in this case. See id. s 1395ww(b)(7)(B); cf. Methodist

Hosp., 38 F.3d at 1231 (noting, in the context of the Medicare

statute, that "the views of a subsequent Congress form a hazardous

basis for inferring the intent of an earlier one") (internal quotation

omitted).

cost reporting period, the district court relied on another

district court opinion, County of Los Angeles v. Shalala, 992

F. Supp. 26 (D.D.C. 1998), which held that a provision of the

Medicare statute required HHS to make retroactive adjustments to outlier payments.7 County of Los Angeles held that

the provision, which set a range for the "total amount of the

additional payments made," 42 U.S.C. s 1395ww(d)(5)(A)(iv)

(emphasis added), unambiguously required the Secretary to

adjust the additional payments retroactively to ensure that

the total fell within the range. See County of Los Angeles,

992 F. Supp. at 36. It thus rejected the Secretary's interpretation of the provision as merely instructing her as to where

to set outlier thresholds for the coming year. The district

court in the instant case followed that line of reasoning, and

held that HHS could not use prior-period experience merely

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to determine how to reimburse the plaintiff hospitals in the

future, but rather had to reimburse the hospitals for their

reasonable costs from the first date of their operation. See

Transitional Hosps., 40 F. Supp. 2d at 12.

Although the district court's reliance on the opinion in

County of Los Angeles cannot be faulted, this court reversed

that decision seven months later. See County of Los Angeles

v. Shalala, 192 F.3d 1005 (D.C. Cir. 1999). Rejecting an

argument based on verb tense, we held that "instead of

embodying a retrospective inquiry into the amount of outlier

payments that have been made," "the phrase 'payments made

under this subparagraph' might just as plausibly reflect a

prospective command to the Secretary about how to structure

outlier thresholds for payments to be made in advance of each

fiscal year." Id. at 1013. In so holding, we cited the Supreme Court's decision in Regions Hospital v. Shalala, 118

S. Ct. 909 (1998). There, the Court held that the statutory

phrase, "recognized as reasonable," "by itself[ ] does not tell

us whether Congress means to refer the Secretary to action

already taken or to give directions on actions about to be

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7 As discussed in Part I above, outlier payments are a supplement to PPS reimbursement for hospitals with patients that stay

for unusually long periods. See 42 C.F.R. ss 412.80 et seq.

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taken." Id. at 916 (quoting Administrators of the Tulane

Educ. Fund v. Shalala, 987 F.2d 790, 796 (D.C. Cir. 1993)).

"In other words," the Court said, "the phrase 'recognized as

reasonable' might mean costs the Secretary (1) has recognized as reasonable for [prior reimbursement] purposes, or

(2) will recognize as reasonable as a base for future ...

calculations." Id. By the same token, we conclude that the

phrase at issue here--"has an average inpatient length of

stay (as determined by the Secretary) of greater than 25

days"--is ambiguous and may refer to the hospital's status at

the beginning of, during, or at the close of a cost reporting

period. Cf. United States Dep't of the Treasury v. FLRA, 960

F.2d 1068, 1072 (D.C. Cir. 1992) (holding that statutory

phrase "adversely affected" is ambiguous and permits "alternative temporal readings").

III

Having concluded that the analysis of Chevron step one

does not resolve the case, we would ordinarily move to step

two and ask whether the Secretary's interpretation of the

meaning of the statute is reasonable. Plaintiffs argue that

the Secretary's interpretation is not reasonable, contending

that HHS has no justification for not permitting selfcertification, for not utilizing the alternative of retroactive

reimbursement, and for denying both options to long-term

care hospitals while making them available to another category of PPS-excluded institutions: rehabilitation hospitals. See

42 C.F.R. s 412.23(b)(8), (b)(9).

HHS replies that it is perfectly reasonable to rely on actual

data regarding length of stay rather than on a hospital's selfinterested prediction. The Department explains that it permits self-certification by rehabilitation hospitals because the

criteria for qualification of such hospitals are based on the

"characteristics of the patients and the types of services that

the facility furnishes," Final Rule, 57 Fed. Reg. at 39,801,8

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8 The statute excludes from PPS "a rehabilitation hospital (as

defined by the Secretary)." 42 U.S.C. s 1395ww(d)(1)(B)(ii). The

Secretary's implementing regulation defines such a hospital as one

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criteria which--unlike length of stay--a hospital can "virtually guarantee[ ]" from the first day of operations, HHS Reply

Br. at 12. With respect to the alternative of retroactive

adjustment, HHS points out that no one suggested such an

option until after the district court litigation began in this

case.9 Moreover, HHS argues that retroactive adjustments

are as likely to hurt hospitals that slip below the average

during a period for which they have been prospectively

qualified, as it is to help them by providing reimbursement

for a prior period in which they became qualified along the

way. By setting reimbursement rates "that are not later

subject to retroactive correction," HHS contends, "the Secretary promotes certainty and predictability of payment for not

only hospitals but the federal government." HHS Br. at 41

(quoting County of Los Angeles, 192 F.3d at 1019).

Although we ordinarily would now proceed to evaluate

these various arguments under the standards of Chevron's

second step, we cannot do so in this case. While the Secretary has discretion to establish a reasonable mechanism for

determining whether a hospital has the requisite average

length of inpatient stay, that discretion must be exercised

through the eyes of one who realizes she possesses it. At

several points, the Department's briefs suggest that the

Secretary did realize that she had such discretion.10 At other

points, the briefs suggest quite the opposite.11 Most relevant,

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that, inter alia, serves an inpatient population of whom at least 75

percent require intensive rehabilitative services for the treatment of

specified conditions including stroke, spinal cord or brain injury,

major multiple trauma, and amputation. See 42 C.F.R.

s 412.23(b)(2).

9 Neither NALTH in its comments on the 1992 proposed rule,

nor the THC plaintiffs themselves in their 1992 request to HCFA,

proposed retroactive reimbursement. See HHS Reply Br. at 14 n.7.

10 See, e.g., HHS Br. at 25, 28.

11 See, e.g., HHS Br. at 12 (stating that in promulgating 1992

regulations, "HHS concluded that a self-certification procedure for

long-term care hospitals would violate its statutory mandate"); id.

at 15 (stating that in rejecting THC plaintiffs' request for selfhowever, is that the notice issued at the time the final rule

was promulgated makes it quite clear the Secretary did not

believe that she had the discretion to do what the plaintiffs

request. See, e.g., Final Rule, 57 Fed. Reg. at 39,800-01

("We do not believe that the statute permits us to extend the

exclusion for long-term care hospitals to a hospital which has

not demonstrated actual compliance with the statutory requirement.") (emphasis added); id. at 39,800 (declaring the

Secretary's doubt that "the law would support such a policy");

id. at 39,801 ("[T]he [statutory] criterion for exclusion ... can

be assessed only over a period of time. Thus, a hospital

cannot qualify as a long-term care hospital until it has been

in operation for some period of time.") (emphasis added).12

As the Supreme Court has instructed, an agency "order

may not stand if the agency has misconceived the law." SEC

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v. Chenery Corp., 318 U.S. 80, 94 (1943); see Phillips Petroleum, 792 F.2d at 1169-70. Applying that principle, this court

has held that "an agency regulation must be declared invalid,

even though the agency might be able to adopt the regulation

in the exercise of its discretion, if it was not based on the

[agency's] own judgment but rather on the unjustified assumption that it was Congress' judgment that such [a regulation is] desirable" or required. Prill v. NLRB, 755 F.2d 941,

948 (D.C. Cir. 1985) (internal quotations omitted) (alterations

in original). Because the Secretary evaluated the various

reimbursement alternatives on the assumption that "a hospital cannot qualify as a long-term care hospital until it has

been in operation for some period of time," Final Rule, 57

Fed. Reg. at 39,801, and because that assumption is incorrect,

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certification, HCFA explained "that nothing in the statute or regulations would allow it to grant the hospitals an immediate exclusion

from the PPS").

12 The Buto letter, although somewhat more equivocal, reflects

a similar understanding. See Buto Ltr. at 2 (J.A. at 63) (denying

plaintiffs' request because statute mandates exclusion only for "a

hospital which has [emphasis added] an average length of stay (as

determined by the Secretary) of greater than 25 days") (alteration

and emphasis in original).

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the Secretary must make a fresh determination as to whether

she wishes to adopt the self-certification or retroactive adjustment options.

IV

For the foregoing reasons, the judgment of the district

court is reversed. The case is remanded to that court with

instructions to remand it to HHS for further consideration

consistent with this opinion.

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