Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-03905/USCOURTS-ca8-03-03905-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 

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1

Michael O. Leavitt has been appointed United States Secretary of Health and

Human Services and is substituted as appellee under Federal Rule of Appellate

Procedure 43(c).

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3905

___________

St. Mary's Hospital of Rochester, *

Minnesota; Rochester Methodist *

Hospital, *

*

Appellants, *

* Appeal from the United States

v. * District Court for the District

* of Minnesota.

Michael O. Leavitt,1

 in his official *

capacity as United States Secretary *

of Health and Human Services, *

*

Appellee. *

___________

Submitted: November 19, 2004

Filed: July 28, 2005

___________

Before SMITH, BEAM, and BENTON, Circuit Judges.

___________

BEAM, Circuit Judge.

St. Mary's Hospital and the Rochester Memorial Hospital filed suit in the

district court against the Secretary of Health and Human Services. The suit sought

review of the Secretary's denial of the hospitals' claim for approximately $4.1 million

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in Medicare reimbursements. The district court granted the Secretary's motion for

summary judgment. The hospitals appeal and we affirm.

I. BACKGROUND

A. The Medicare Scheme

1. DRG Payments and Bundling

Medicare is health insurance funded by the federal government for the aged

and disabled. Before 1983, the government reimbursed hospitals for the actual costs

of treating Medicare patients, subject to a reasonable-cost limitation. In 1983, the

government changed its method of reimbursement to a prospective payment system.

Social Security Amendments of 1983, Pub. L. No. 98-21, Title VI, 97 Stat. 65, 149-

72. That change instituted a set of flat-rate reimbursements for hospitals treating

Medicare patients. The reimbursement rates were set according to historic costs in

a given region and applied on a prospective basis to the hospitals during the

upcoming fiscal year. These new payments were made according to patients'

diagnoses. Thus, with regard to a Medicare patient, treating hospitals would get a

payment that was tied to the patient's diagnosis related group (DRG).

For some hospitals, outside entities provided ancillary services to the hospitals'

patients—e.g., laboratory, radiology, and physical therapy services. Before 1983,

Medicare allowed such ancillary providers to bill Medicare directly, under Part B, for

the reasonable costs those providers incurred in providing their services. The

hospitals would bill their own charges to Medicare separately, under Part A. In 1983,

as part of instituting the prospective payment system and its DRG-based

reimbursement scheme, Congress required hospitals to bundle (or refrain from

unbundling) the expenses associated with patient care, including the costs of services

furnished by outside providers. 42 U.S.C. §§ 1395y(a)(14), 1395cc(a)(1)(H).

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Keeping costs together, however, posed significant problems to hospitals that

had followed a practice of having ancillary providers furnish services and seek

reimbursement from Medicare separately because their accounting and billing

systems would have to be changed. So Congress provided a waiver of the bundling

requirements for hospitals that needed time to change. The waiver

provision—section 602(k) of Pub. L. No. 98-21, 97 Stat. at 165-66, which was later

included in the U.S. Code as a note to 42 U.S.C. § 1395y (Supp. I 1982)—gave the

Secretary the power to allow such hospitals and their ancillary providers to continue

their practice of separately billing unbundled charges "for any cost reporting period

beginning prior to October 1, 1986." 97 Stat. at 165. According to the section

602(k)-waiver provision, "Any such waiver shall provide that [the ancillary

providers'] billing may continue to be made under part B of such title but that the

payments to such hospital under part A of such title shall be reduced by the amount

of the billings for such services under part B of such title." Id. at 165-66. The part

B payments to the ancillary providers were not calculated according to the patient's

DRG. Rather, those payments were calculated on a reasonable-cost basis. Thus,

Medicare would reimburse ancillary providers according to what it cost the ancillary

provider to provide the services. Under the waiver provision, then, a waiver

hospital's DRG payment was reduced by the reasonable costs of ancillary services

billed by and paid to the ancillary provider.

2. Teaching Hospitals

When Congress implemented the DRG system, it was concerned that those

payments would not adequately reimburse teaching hospitals because such hospitals

typically have higher costs per patient than non-teaching hospitals. S. Rep. No. 98-

23, at 52 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 192; H.R. Rep. No. 98-25, at

140 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 359. Thus, the DRG

payment—calculated on average per-patient costs in a particular region—would not

reflect teaching hospitals' increased expenses. The prior reimbursement system also

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had this problem because the reasonable-cost limitations it used were similarly

calculated, though not on a prospective basis. Under the prior system, Congress had

allowed adjustments to the reasonable-cost limitations if a provider could show its

increased costs were due to its educational activities. Under the new system,

Congress carried forward the policy of paying teaching hospitals more, allowing their

increased expenses to be separately reimbursed by Medicare. Three types of

increased costs were identified: direct medical education (DME) expenses, capital

expenses, and indirect medical education (IME) expenses. DME expenses are

expenses like residents' salaries—quantifiable expenses directly related to teaching.

Capital expenses are those expenses like depreciation and rents. And IME expenses

reflect the general inefficiencies associated with patient care provided by residents

and interns, including "the additional tests and procedures ordered by residents as

well as the extra demands placed on other staff as they participate in the educational

process." Id.

IME expenses are not easily quantified. So the Secretary created a formula to

calculate how much money teaching hospitals would get for IME expenses. That

formula—derived from a statistical analysis of teaching hospitals' costs compared to

non-teaching hospitals' costs that takes into account the ratio of residents and interns

to beds, 45 Fed. Reg. 21,584 (Apr. 1, 1980)—basically allows teaching hospitals to

get a payment that represents a fraction of their DRG revenue. For example, if the

Secretary's formula—which is now codified in 42 U.S.C. § 1395ww(d)(5)(B)—yields

an "indirect teaching adjustment factor" of .10, then a teaching hospital that has

$10,000 of DRG revenue in a given cost reporting period (i.e., fiscal year) would get

an additional payment of $1,000 as reimbursement for IME expenses.

B. The Mayo System and the Hospitals' IME Reimbursements

St. Mary's, Rochester, and the Mayo Clinic are all teaching facilities. The two

hospitals house patients who are treated by the Mayo Clinic's physicians, residents,

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St. Mary's disputes its reimbursement for the cost reporting periods beginning

on July 1, 1984, and July 1, 1985. Rochester disputes its reimbursement for the cost

reporting periods beginning on January 1, 1984, and January 1, 1985.

3

The HCFA is now known as the Centers for Medicare and Medicaid Services.

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and interns. The Mayo Clinic also provided ancillary services to the hospitals'

patients. Before the 1983 changes took effect, the Mayo Clinic billed Medicare

separately for the ancillary services that it provided to the hospitals' patients. Under

the bundling provisions, however, those charges would need to be billed by the

hospitals, who would then pay the Mayo Clinic for its services. But St. Mary's and

Rochester were given a section 602(k) waiver. Thus, during the cost reporting

periods at issue2

 the Mayo Clinic billed Medicare for the reasonable cost of the

ancillary services it provided to the hospitals' patients. And these payments reduced

the hospitals' DRG payments.

St. Mary's and Rochester disputed their Medicare reimbursements for the

relevant cost reporting periods with their fiscal intermediary, Blue Cross and Blue

Shield of Minnesota, claiming that they had been deprived of reimbursement for

DME, capital, and IME expenses that they had incurred. Blue Cross sought advice

from the Health Care Financing Administration (HCFA).3

 The HCFA responded on

August 24, 1984, with a letter from Michael J. Angellotti, the Chief of the

Reimbursement and Recovery Branch of the Division of Financial Operations.

Mr. Angellotti dealt with two issues that Blue Cross had apparently raised, both

of which questioned the extent to which the Mayo Clinic's charges should reduce the

hospitals' DRG payments. The first dealt with DME and capital expenses. Mr.

Angellotti reasoned that the Mayo Clinic's payments, the amount of which was

determined on a reasonable-cost basis, included some amount of capital and DME

costs that the Mayo Clinic had incurred and billed to Medicare as reasonable costs.

"[I]n the interest of equity," Mr. Angellotti concluded that the hospitals should not be

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It appears that this case was pending before the PRRB for more than ten years.

No explanation for the delay appears in the record or the parties' briefs.

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charged with the Mayo Clinic's capital and DME costs through a reduction in the

hospitals' DRG payments. In other words, Mr. Angellotti concluded that the offset

that the section 602(k) waiver required had to be reduced. To make that reduction,

he concluded that Blue Cross should determine what portion of the Mayo Clinic's

total ancillary-services charges were attributed to DME and capital costs. This was

to be done by multiplying the total nonphysician charges by the "ratio of capital and

direct medical education cost to total cost of the [Mayo Clinic]." The resulting

amount was not to be included in the reduction of the hospitals' DRG payments.

Thus, he told Blue Cross to reduce the 602(k)-waiver offset by the amount of the

charges that were attributed to the Mayo Clinic's DME and capital costs.

The second issue that Mr. Angellotti dealt with was whether the hospitals were

entitled to an "indirect teaching adjustment" based on an unreduced DRG

payment—i.e., an IME payment calculated from the DRG payment before the 602(k)-

waiver offset for the Mayo Clinic's payments. Mr. Angellotti concluded that 

[the hospitals] do not incur indirect medical education costs in the

ancillary departments where the ancillary services are provided by the

Mayo Clinic. Therefore, the indirect teaching adjustment factor should

be applied to the . . . [hospitals'] Medicare payments . . . net of the . . .

billings of the Mayo Clinic, after the reduction of the . . . billing offset

to reflect capital and direct medical education costs incurred by the

Mayo Clinic.

St. Mary's and Rochester appealed that decision to the Provider Reimbursement

Review Board (PRRB), claiming they were owed over $4.1 million in IME

reimbursements. The PRRB affirmed the HCFA's decision.4

 It concluded that a 1986

amendment to the 602(k)-waiver provision showed a congressional intent to leave in

place the Secretary's interpretation of how the 602(k) waiver affects the IME

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The Honorable Donovan W. Frank, United States District Judge for the

District of Minnesota.

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reimbursement scheme for the cost reporting periods beginning before January 1,

1986—the effective date of the amendment. Consolidated Omnibus Budget

Reconciliation Act of 1985, Pub. L. No. 99-272, § 9112, 100 Stat. 82, 163 (1986).

After exhausting their administrative remedies, St. Mary's and Rochester

sought review in the district court. The district court5

 affirmed the PRRB's decision,

and so do we.

II. DISCUSSION

We review the district court's decision de novo. Shalala v. St. Paul-Ramsey

Med. Ctr., 50 F.3d 522, 527 (8th Cir. 1995). 

A. Congressional Intent

Under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837

(1984), the question we must first address, "always, is . . . whether Congress has

directly spoken to the precise question at issue." Id. at 842. So we look to the

statute's plain language. And if we, "employing traditional tools of statutory

construction, ascertain[] that Congress had an intention on the precise question at

issue, that intention is the law and must be given effect." Id. at 843 n.9.

St. Mary's and Rochester argue that the decision not to calculate their IME

reimbursement from an unreduced DRG payment was contrary to Congress's

unambiguously expressed intent. We disagree. We have reviewed the legislative

history accompanying the original 1983 version of section 602(k) and the IMEreimbursement provisions. We conclude that neither the statutes' plain language nor

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any discernible congressional intent on the precise question at issue resolves this

case. The hospitals' arguments, however, are premised primarily on the 1986

amendment to the 602(k)-waiver provision. That amendment, among other things,

added a new subsection (2) to 602(k):

In the case of a hospital which is receiving payments pursuant to a

waiver under paragraph (1), payment of the adjustment for indirect costs

of approved educational activities shall be made as if the hospital were

receiving under part A of title XVIII of the Social Security Act all the

payments which are made under part B of such title solely by reason of

such waiver.

Pub. L. No. 99-272, § 9112, 100 Stat. at 163. The amendment also included effective

dates for both the new subsection (2), and the new subsection (3)(a):

(b) Effective Dates.—(1) Section 602(k)(2) of the Social Security

Amendments of 1983 (as added by subsection (a)) shall apply to cost

reporting periods beginning on or after January 1, 1986.

(2) Section 602(k)(3) of the Social Security Amendments of 1983

(as added by subsection (a)) shall apply to items and services furnished

after the end of the 10-day period beginning on the date of the enactment

of this Act.

Id. In sum, Congress's implemented the very construction of the statutes that the

hospitals now champion. But Congress didn't go all the way back to 1984. Instead,

it chose to use specific effective dates for the provisions it was adding. And, with

regard to subsection (2), Congress chose cost reporting periods that began over four

months before the law's enactment on April 7, 1986.

Both the district court and the PRRB hung their hats on the statute's effective

date. We agree that the amendment plainly states how 602(k)-waiver offsets affect

a hospital's IME reimbursements for cost reporting periods beginning on or after

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January 1, 1986. But, as we explain below, that does little to settle the question

presented here—whether or not the Secretary could reach a different conclusion for

cost reporting periods beginning before January 1, 1986. So we disagree with the

district court and the PRRB insofar as they ruled that Congress's 1986 amendment

closed the door on the hospitals' claim. 

Congress, when it made the 602(k)-waiver amendment in 1986, did not speak

to those prior years in the statute. It neither expressly endorsed nor prohibited the

Secretary's construction of the statute by spelling out how IME reimbursements

should be calculated for the cost reporting periods at issue in this case. See Red Lion

Broad. Co. v. FCC, 395 U.S. 367, 380-81 (1969) ("Subsequent legislation declaring

the intent of an earlier statute is entitled to great weight in statutory construction."

(emphasis added)); Consumer Prod. Safety Comm'n v. GTE Sylvania, 447 U.S. 102,

118 n.13 (1980) (distinguishing between subsequent legislation and statements made

in hearings and committee reports); Johnson v. United States Dep't of Hous. and

Urban Dev., 911 F.2d 1302, 1310 (8th Cir. 1990).

The legislative history to the 1986 amendment is similarly unavailing. The

amendment was part of budget-reconciliation legislation that took a storied path in

the 99th Congress. The legislation originated in separate bills. In the House of

Representatives, H.R. 3128 began with no provision regarding the interaction of IME

reimbursements and the section 602(k) waiver. In the Senate, S. 1730 had such a

provision, but in a much sparser form than was eventually passed:

SEC. 710. INDIRECT TEACHING ADJUSTMENT FOR CERTAIN

CLINICS.

In the case of a hospital which is receiving payments under title

XVIII of the Social Security Act pursuant to a waiver under section

602(k) of the Social Security Amendments of 1983, payment of the

adjustment for indirect costs of approved educational activities shall be

made as if such hospital were receiving under part A of such title all the

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The House initially rejected the conference's report, but it is still indicative of

the legislative intent regarding the 602(k) amendment for our purposes because

Congress later passed the suggested amendment to 602(k) as it appeared in the

conference committee's amended bill.

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payments which are made under part B of such titles solely by reason of

such waiver.

S. 1730, at 164, reprinted in 131 Cong. Rec. at 27,490. 

H.R. 3128 passed the House. The Senate struck the entirety of the House's

version, substituted the text of S. 1730, including section 710, and sent the amended

bill back to the House. 131 Cong. Rec. at 31,974-75. The House, in turn, struck the

entirety of the Senate's amendment to H.R. 3128, and substituted the original text of

H.R. 3128. 131 Cong. Rec. at 34,511-12. The bill then went to a joint conference

committee. The conference committee reported an amended bill, H.R. Rep. No. 99-

453, reprinted in 131 Cong. Rec. at 38,124, along with a joint explanatory statement,

131 Cong. Rec. at 38,234. The conference committee's amended bill included the

language of H.R. 3128 that eventually became the 602(k)-waiver amendment at issue

here, 131 Cong. Rec. at 38,151-52, and the effective dates appeared for the first time

in that amended bill. The explanatory statement is the only indicia we have of why

Congress included the effective date in the ultimate legislation.6

We need go no deeper into the legislative history to evaluate the parties'

arguments. The hospitals argue that the 602(k)-waiver amendment was a "clarifying"

amendment, geared at overruling the Secretary's construction of the statute under the

rubric of declaring Congress's original intent. The Secretary, on the other hand,

argues that the 602(k)-waiver amendment was a "changing" amendment, geared at

changing the way in which the statute dealt with IME reimbursement from the

effective date on.

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The hospitals garner support for their argument from the legislative history

accompanying the original Senate bill. The Senate Budget Committee issued a

comprehensive report, S. Rep. No. 99-146 (1985), incorporating various other

committee's analyses of the legislation. Id. at 19. The Finance Committee's portion

of the analysis explained the Senate's proposed amendment to section 602(k):

Current law.—For the first three years of the prospective payment

system (PPS), a special exception is applied to hospitals which had

traditionally allowed direct billing under Part B so extensively that it

would have been disruptive to immediately require them to bill for all

such services under Part A. . . . The Health Care Financing

Administration has ruled that in such split payment cases, the indirect

teaching adjustment would apply only to the portion of the Medicare

payment that is paid through Part A.

Explanation of provision.—The provision would clarify that the

split payment provisions was [sic] only intended to provide a temporary

billing accommodation for certain hospitals and that the indirect

teaching adjustment should be applied as if the entire PPS payment had

been made under Part A.

Effective date.—Enactment.

Id. at 294, reprinted in 1986 U.S.C.C.A.N. at 42 at 261. The conference report, which

included a substantially different version of the 602(k) amendment (the one that

eventually passed), included a joint explanatory statement. In that statement, the

conference committee recounted the current-law and explanation-of-provision

language from the Senate Report and explained the conference's agreement:

The conference agreement includes the Senate amendment [the language

of S. 1730 that was substituted for H.R. 3128's language], with the

following modifications. . . . Payment of the indirect teaching

adjustment as if all services were billed under the PPS payment methods

in part A, will be effective with the first hospital cost reporting period

beginning on or after January 1, 1986.

131 Cong. Rec. at 38,259.

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From this, all we can glean is that Congress intended the amendment to take

effect on January 1, 1986. The hospitals' citation of the word "clarify" from the

Senate Report, in conjunction with an expression of what the Senate thought the

earlier Congress intended—"was only intended to"—and the report's mention of the

HCFA's decision, are somewhat indicative of the Senate's intent to change what the

administration had done under the 1983 legislation. And it at least implies that the

Senate thought the HCFA had erred in its construction of the statute. But the

language that ultimately made it into the statute was derived from the conference

committee's amended bill in which the conference included the Senate's proposal with

modifications. One of those modifications was the effective date. This indicates that

Congress did not want to change the rules that far back. And the statements included

in the legislative history to the Senate's bill provide "'a hazardous basis for inferring

the intent of an earlier [Congress].'" United States v. Philadelphia Nat'l Bank, 374

U.S. 321, 349 (1963) (quoting United States v. Price, 361 U.S. 304, 313 (1960));

accord Consumer Prod. Safety Comm'n, 447 U.S. at 118 n.13.

Moreover, once we consider the context of the legislation—as part of a budget

reconciliation act geared at cutting costs—the hospitals' interpretation of the

amendment as being applicable to cost reporting periods starting before January 1,

1986, would surely frustrate the congressional intent evident in 1986. In sum, even

if the Senate wanted to "clarify" the statute, Congress appears to have decided that

it could not afford to make that adjustment retroactive to 1984.

Taken in this light, we know two things about the 1986 amendment: (1) Two

committees were aware of the HCFA's decision regarding IME reimbursement, and

(2) Congress clearly enunciated the way in which IME reimbursements were to be

calculated for cost reporting periods beginning on or after January 1, 1986. But we

do not take the 1986 amendment as far as the district court and the PRRB did; we do

not glean from the amendment an indication that Congress acquiesced in or validated

the Angellotti decision for the cost reporting periods beginning before January 1,

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Relying on the legislative history to the Senate bill, the hospitals' attempt to call into

doubt the phrase "cost reporting period" by arguing that the period should be calculated based

on repayment, which is triggered by the Notice of Program Reimbursement (NPR), and

apparently delayed a year or two after the actual "cost reporting period." The argument is

unpersuasive as we have already explained that the legislative history to the Senate bill is not

dispositive of Congressional intent. Furthermore, the statute clearly refers to "cost reporting

period" and makes no mention of repayment or the NPR.

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1986. See S.E.C. v. Sloane, 436 U.S. 103, 121 (1978) (questioning acquiescence in

a case where it was "based only upon a few isolated statements in the thousands of

pages of legislative documents"). Congress's intent with regard to how the waiver

provision and the IME reimbursement mechanism should interact was unclear in 1983

when it enacted the statutes that govern the cost reporting periods at issue. And

Congress's 1983 intent remained as unclear after the 1986 amendment.7

B. The Secretary's Interpretation

With the 1983 congressional intent in doubt, and with no clarification of that

original intent in the subsequent amendment, we turn to the Secretary's interpretation

of the 1983 legislation. In 1983, Congress did not address the precise issue presented

here: whether or not the 602(k) waiver should reduce the hospitals' DRG

reimbursement for purposes of calculating the hospitals' IME reimbursements. So the

Secretary was left with little or no statutory guidance. When such a gap is filled by

regulation or formal agency adjudication, we will hold such a construction

impermissible only if the agency acted unreasonably. Chevron, 467 U.S. at 843-44.

The formal adjudication of this matter—the PRRB decision—did not reach the

question presented here because it viewed the 1986 amendment as dispositive.

However, the Angellotti letter interpreted the statutes as they applied to the hospitals'

reimbursements. That letter is not entitled to Chevron-type deference because it does

not appear to have "the force of law." Christensen v. Harris County, 529 U.S. 576,

587 (2000). Indeed, the PRRB regarded Mr. Angellotti's letter as "more interpretive

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in nature than authoritative." However, the Angellotti letter does represent the

HCFA's, and therefore the Secretary's, interpretation of the statute. Thus it is

"'entitled to respect'" to the extent it has the "power to persuade." Christensen, 529

U.S. at 587 (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). Under that

standard, an agency interpretation may stand if it is persuasive. Kai v. Ross, 336 F.3d

650, 655 (8th Cir. 2003). We are persuaded by the Secretary's interpretation.

The IME reimbursements in this case were calculated based on the amount of

money each hospital received. The waiver, by the express terms of the statute,

reduced the amount of money each hospital received. Thus, the waiver had the

incidental effect of reducing the IME reimbursement. The 1983 statute does not

require or prohibit this effect of the waiver provision, and the legislative history of

the 1983 legislation does not reveal a congressional intent that it should or should not

occur. But the incidental reduction to IME reimbursement makes sense. The IME

reimbursement is meant to compensate hospitals for the inherent shortfalls that arise

from the DRG payment system. Because DRG's are calculated on a region-wide basis

that includes non-teaching hospitals, teaching hospitals likely would not be

adequately compensated because it costs them more to provide the same services as

non-teaching hospitals. But when a portion of the services associated with a patient's

care are not provided by the teaching hospital, then it makes little sense to reimburse

the non-providing teaching hospital for its inefficiencies. Because the hospitals did

not deliver the services for which the Mayo Clinic was paid, the inefficiencies that

arise from the hospitals' teaching activities had no discernable effect on the total cost

of the patient's care. In other words, the hospitals could not have inefficiently

delivered services that they did not deliver. And the hospitals have offered no

evidence to the contrary.

Given the statutory provision that requires a reduction in the waiver hospitals'

DRG payments by the ancillary providers' reasonable costs, and the statutes' failure

to address how that offset should affect IME reimbursements calculated from DRG

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The hospitals finally make due-process and equal-protection arguments. We

reject these claims because neither of them were raised below. The hospitals, in their

reply brief, cite their Memorandum in Support of Summary Judgment as raising the

issue before the district court. That document has not been included in the appendix,

but according to the brief it says, "the Angellotti letter's interpretation results in an

arguably unconstitutional distinction among similarly situated hospitals." App. Reply

Br. at 18. That statement did not present the issue to the district court. See Larken,

Inc. v. Wray, 189 F.3d 729, 735 (8th Cir. 1999). And we see no plain error.

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payments, the Secretary had a gap to fill. The Secretary's interpretation of the statute

was logical because it fully reimbursed the hospitals for their costs, including

whatever inefficiencies may have arisen because of their teaching activities.8

III. CONCLUSION

Accordingly, we affirm.

______________________________

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