Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-93-05148/USCOURTS-caDC-93-05148-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 13, 1994 Decided November 25, 1994

No. 93-5148

METHODIST HOSPITAL OF SACRAMENTO, ET AL.,

APPELLANTS,

v.

DONNA E. SHALALA, SECRETARY OF

HEALTH AND HUMAN SERVICES,

APPELLEE.

On Appeal from the United States District Court

for the District of Columbia

(No. 91cv02425)

Cary M. Adams argued the cause and filed the briefs for appellants.

John P. Schnitker, Attorney, United States Department of Justice, argued the cause for appellee.

With him on the brief were Frank W. Hunger, Assistant Attorney General, Eric H. Holder, Jr.,

United States Attorney, Anthony J. Steinmeyer, Attorney, United States Department of Justice and

Lawrence J. Harder and Gerard Keating, Counsel, United States Department of Health and Human

Services.

Before: SILBERMAN, SENTELLE, and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge: This appeal challenges a policy that denies retroactive effect to a

revisedwage indexused indeterminingMedicare reimbursementrates undertheProspectivePayment

System. In August 1984, the Secretary of Health and Human Services corrected an erroneous

regional wage index for the Sacramento area, but refused to apply the new index retroactively to

January 1984. Appellants, a group of eight non-profit hospitals affected by the erroneous index,

unsuccessfully challenged this policy in the district court. On appeal, the hospitals contend that (1)

the Medicare statute requires the Secretary to give retroactive effect to wage index corrections; (2)

the Secretary's policy is arbitrary and capricious because it isinconsistent with the regulatory history

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1

In 1972, in an early effort to contain Medicare costs, Congress authorized the Secretary to

establish cost limits, beyond which hospitals would generally not be reimbursed. See 42 U.S.C. §

1395x(v)(1)(A) (1988). 

and produces absurd results; and (3) the policy is invalid for lack of adequate notice and comment

under the Administrative Procedures Act. Consistent with our deferential standard of review, we

conclude that the Secretary's choice was permissible. We also conclude that the policy is not

procedurally invalid. Accordingly, we affirm.

I.

A. Statutory Framework. The Medicare program, established in 1965, provides federally

funded health insurance for the elderly and disabled. See Title XVIII of the Social Security Act, 79

Stat. 291, as amended, 42 U.S.C. § 1395 et seq. (1988). Under an extremely "complex statutory and

regulatory regime," Good Samaritan Hospital v. Shalala, 113 S. Ct. 2151, 2154 (1993), health care

providers are reimbursed for certain costs that they incur in treating Medicare beneficiaries. Prior to

October 1983, Medicare reimbursements were based on the "reasonable costs" of inpatient services

furnished to Medicare patients. 42 U.S.C. § 1395f(b) (1988). Under this regime, providers were

reimbursed for the actual coststhat they incurred, provided they fell within certain cost limits.1 Thus,

as hospital costs increased, so too did Medicare reimbursements.

Concerned about escalating Medicare expenditures, Congressin 1983 completely revised the

scheme for reimbursing Medicare hospitals. See Social Security Amendments of 1983, Pub. L. No.

98-21, § 601, 97 Stat. 65, 149 ("1983 Amendments"). The new regime, known as the Prospective

Payment System("PPS"), relies on prospectively fixed ratesfor each category oftreatment rendered.

In contrast to hospital reimbursements under the reasonable-cost method, PPS rates do not vary in

individual cases. Hospitals instead receive advance notice of the rates at which their services will be

reimbursed, regardless of costs actually incurred. Congress designed this system to encourage health

care providers to improve efficiency and reduce operating costs. Indeed, this link between

prospectivity and efficiency lay at the heart of Congress' purpose when it created the PPS system:

The bill is intended to improve the medicare program's ability to act as a prudent

purchaser ofservices, and to provide predictibility [sic ] regarding payment amounts

for both the Government and hospitals. More important, it is intended to reform the

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2The Secretary employed a similar wage index under the previous reasonable cost

reimbursement regime. Beginning in 1979, a wage index was used to make regional adjustments

to standard cost limits. See 42 CFR § 413.30 (1993). 

financial incentives hospitalsface, promoting efficiency in the provision ofservices by

rewarding cost/effective hospital practices.

H. REP. No. 25, 98th Cong., 1st Sess. 1, 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351

("House Report"); see also S. REP. No. 23, 98th Cong., 1st Sess. 1, 53 (1983), reprinted in 1983

U.S.C.C.A.N. 143, 193 ("Senate Report") ("[PPS amendments] are intended to create incentivesfor

hospitals to operate in a more efficient manner, since hospitals would be allowed to keep payment

amounts in excess of their costs and would be required to absorb any costs in excess of the DRG

rates.").

Under PPS, Medicare authoritiesfirst construct a standard nationwide cost ratethe "federal

rate"based on the average operating costs ofinpatient hospitalservices. See 49 Fed. Reg. 234, 251

(Jan. 3, 1984). They then assign a weight to each category of inpatient treatment, or

"diagnosis-related group" ("DRG"). Finally, they calculate a "wage index" to adjust reimbursement

ratesto reflect regional variationsin hospitalwage costs. For each patient discharge, a hospital's final

reimbursement is calculated by taking the federal rate, adjusting it for wage variations, and

multiplying it by the weight assigned to the patient's DRG. See generally 42 U.S.C. § 1395ww(d)(2)

(1988).

The wage index reflects a requirement in the 1983 Amendments that the federal rate be

adjusted to reflect geographic variations in labor costs.2See 42 U.S.C. § 1395ww(d)(2)(H). The

area wage indexes for each region are based on wage-cost data periodically submitted by Medicare

hospitals across the country. The indexes are used at two points in the prospective payment rate

calculation. First, regional wage indexes are used (along with other factors, such as inflation and

hospital case-mix ratios) to modify and standardize the data used to establish the nationwide "federal

rate." See 42 U.S.C. § 1395ww(d)(2)(C)(ii). Second, once the federal rate has been set, the wage

indexes are used to make regional adjustments to the labor-related portion of the federal rate. See

42 U.S.C. § 1395ww(d)(2)(H). Because each wage index is used to develop the base national rate

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3The latter component of the transition formula is known as the "hospital-specific" rate, and

was designed to reflect a hospital's historic costs. The hospital-specific rate was based upon a

hospital's "allowable operating costs" during a base year, as calculated under the prior system,

with several adjustments relevant to the PPS amendments. See 42 U.S.C. § 1395ww(b)(3)(A)

(1988); see also Georgetown Univ. Hosp. v. Bowen, 862 F.2d 323, 324 (D.C. Cir. 1988)

(Georgetown II ). During the transition period, a hospital's "blended payment rate" therefore

consisted of the hospital-specific rate added to the federal rate. 

as well as to adjust that rate by region, a change in any single wage index can affect the

reimbursement rate of each hospital in the country.

Recognizing that PPS dramaticallychanged the financing ofthe country's health-care delivery

system, Congress provided a transition period in order "to minimize disruption that might otherwise

occur because ofsudden changesin reimbursement levels." Senate Report at 53, 1983 U.S.C.C.A.N.

at 193. During the four-year transition period, an increasing proportion (25 percent each year) of the

final reimbursement rate was based on the standardized "federalrate," while a decreasing proportion

was based on the previous reasonable cost regime.3 Thus, at the end of the transition period,

reimbursement is based solely on the federal rate. 42 U.S.C. § 1395ww(d)(1)(A)(iii). This appeal

concernsthe calculation ofthe federalrate component, based on the new PPS system, during the first

transition year.

B. History of Proceedings. The error that led to this appeal occurred prior to the creation

of the PPS system. A large Sacramento-area hospital (not a party to this appeal) supplied inaccurate

1981 wage data to the California state authorities. (The hospital provided accurate total wage and

employee data, butsubmitted an incorrect "estimate" ofthe salaryallocation between educational and

hospital employees.) The state sent the data to the federal Bureau of Labor Statistics ("BLS"). The

BLS provided the Secretary with the wage and employment data that was eventually used to

construct the wage indexes published on September 1, 1983, applicable during the first (transition)

year of PPS. As a result, the Sacramento wage index understated the actual labor costs faced by

Sacramento hospitals relative to the national average in 1984.

The other Sacramento hospitals recognized the error upon publication of the index, which

showed a drop in the Sacramento index compared to previous years. After investigation revealed the

source of the incorrect data, the hospitals persuaded the errant provider to submit corrected wage

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4According to the Provider Reimbursement Review Board, the corrected wage data was

submitted to the State of California on April 13, 1984, and the state sent it to BLS after July 10,

1984. The Secretary published a revised wage index on August 10, 1984, changing 60 of the 314

previously published wage indexes for urban areas. 

5The Deputy Administrator's decision constitutes the final agency action in this case. See St.

Mary of Nazareth Hosp. v. Schweiker, 718 F.2d 459, 466 (D.C. Cir. 1983); Sun Towers Inc. v. 

Heckler, 725 F.2d 315, 326 (5th Cir.), cert. denied, 469 U.S. 823 (1984). 

6Although the district court initially ruled that the Secretary's policy was nonetheless invalid for

failure to meet the notice and comment requirements of the APA, the court subsequently rejected

data. The state and the BLS processed the new data and transmitted it to the Secretary, who

recalculated the Sacramento wage index and issued a corrected index on August 10, 1984.4

Nevertheless, because the wage index published in September 1983 remained in effect from January

1, 1984, throughAugust 10, 1984, appellant-hospitalslost $730,600 inMedicare reimbursementsthat

they otherwise would have received had the correct salary data been originally submitted.

When the hospitals sought to recover their losses after discovering the error, the Secretary's

intermediariesrefused to apply the recalculated wage index retroactively. The hospitals successfully

appealed to the Provider Reimbursement Review Board (the "Board"). A Board majority ruled that

this court's decision in Georgetown Univ. Hosp. v. Bowen, 862 F.2d 323 (D.C. Cir. 1988)

(Georgetown II ), combined with the need to correct errors to make disadvantaged parties whole,

required the Secretary to apply wage index corrections retroactively.

Acting on behalf of the Secretary, the Health Care Financing Administration ("HCFA")

reversed the Board. The HCFA Deputy Administrator concluded that the PPS regime depends on

prospectivity, and that retroactive corrections would undermine the statutory purpose to base

Medicare reimbursements on predetermined rates. The hospitals then sought review of the Deputy

Administrator's decision in federal district court.5See 42 U.S.C. § 1395oo(f)(1) (1988). On

cross-motions for summary judgment, the district court upheld the HCFA Administrator's decision.

The district court concluded that because Congress had not explicitly addressed how errors were to

be corrected, the Secretary's prospective-corrections policyreasonablyfurthered the goals ofthe PPS

system and reduced the administrative burden on the agency, albeit at the occasional expense of

accuracy.6 The hospitals appeal.

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the procedural challenge in response to cross-motions to amend or alter the judgment. 

II.

The hospitals present three principal challenges to the Secretary's prospective-only policy

toward error corrections. They contend that: (1) the policy is inconsistent with the Medicare statute

and subsequent legislative and regulatory action; (2) the policy is not rational because it provides no

incentives for accurate reporting and could yield absurd results, while a policy of retroactive

correction would present no jeopardy to the prospective nature of PPS; and (3) the policy is invalid

for failure to comply with the notice and comment provisions of the Administrative Procedure Act

("APA").

A. Standard of Review. In reviewing the agency's final action, see supra note 5, the court

addressesthe issue de novo, without deference to the decision of the district court. See HCA Health

Serv. of Okla., Inc. v. Shalala, 27 F.3d 614, 616 (1994) (D.C. Cir. 1994). The court therefore will

set aside the agency's decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law." 5 U.S.C. § 706(2)(A); see 42 U.S.C. § 1395oo(f)(1). In examining

the Secretary's interpretation of a statute that she administers, the court applies the familiar

methodology of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984). The court first determines whether Congress has "directly spoken to the precise question at

issue." 467 U.S. at 842 ("If the intent of Congress is clear, that is the end of the matter...."). If it has

not, then the court must defer to the Secretary's "permissible construction" of the statute. Id. at 842-

43.

Furthermore, in framing the scope of review, the court takes special note of the tremendous

complexity of the Medicare statute. That complexity adds to the deference which is due to the

Secretary's decision. The Supreme Court has made clear that courts must give heightened deference

to the Secretary's interpretation of a "complex and highly technical regulatory program" such as

Medicare. Thomas Jefferson Univ. v. Shalala, 114 S. Ct. 2381, 2387 (1994) (citations omitted); cf.

Schweiker v. Gray Panthers, 453 U.S. 34, 43 (1981) ("The Social Security Act is among the most

intricate ever drafted by Congress.").

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B. Statutory Language and Congressional Intent. The hospitals contend that the 1983

Amendments, together withcertain subsequent legislative enactments, reveal Congress' intent to favor

the retroactive application of wage index corrections. Nevertheless, they fail to demonstrate that

Congress spoke to the "precise question at issue," namely, whether subsequently discovered errors

in the area wage indexes must be corrected retroactively. Chevron, 467 U.S. at 842.

The relevant provision in the 1983 Amendments requires that after calculating the standard

DRG prospective payment rates:

[t]he Secretary shall adjust the [wage-related portion of the federal rates] for area

differencesin hospitalwage levels by a factor (established by the Secretary) reflecting

the relative hospitalwage level in the geographic area of the hospital compared to the

national average hospital wage level.

42 U.S.C. § 1395ww(d)(2)(h). According to the hospitals, this section must be read to require the

retroactive application of all corrections to erroneous wage data. They contend that the mandatory

language ("The Secretary shall adjust ") necessarily implies a retroactive component. Otherwise,

they argue, the Secretary would be employing an "incorrect" wage index until the correction became

effective, thus violating the statute's mandate that the DRG rates reflect different wage costs in

different regions. We disagree.

The parties do not dispute that the wage index published in September 1983 made use of the

most reliable data available to the Secretary at the time of publication. See 48 Fed. Reg. 39,752,

39,765 (Sept. 1, 1983). Because the index is based on available wage data from past years, at any

given time the wage index must reflect the Secretary's best approximation of relative regional wage

variations. But the hospitals' reading of the statute, taken literally, would not permit such reasonable

approximations. Rather, their argument would require the Secretary to make virtually continuous

adjustmentsin the wage index in order to incorporate changing regional wage levels. Such a scheme

is not suggested in the 1983 Amendments, which merely requires the Secretary to develop a

mechanism to remove the effects of local wage differences. The statute does not specify how the

Secretaryshould construct the index, nor how often she must revise it, although these methodological

issues both bear significantly on the accuracy of the Secretary's adjustments. Rather, Congress

through its silence delegated these decisions to the Secretary.

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7

See 42 U.S.C. § 1395ww(d)(7); House Report at 142-43, 1983 U.S.C.C.A.N at 361-62

(stating that "the same procedures for administrative and judicial review of payments under [the

PPS] [will be available] as [are] currently provided for cost-based payments"). 

The hospitals nonetheless contend that the statute's administrative and judicial review

proceduresindicate that Congressintended wage index correctionsto apply retroactively. With two

exceptions not relevant to this appeal, Congress carried over to the PPS the same procedures for

judicial review that applied under the previous cost-based regime.7 According to the hospitals,

Congressretained these proceduresinthe expectationthat administrative and judicialdecisionswould

have the same retroactive effect asthey did under the previous "reasonable cost" system. Moreover,

the hospitals maintain that "the right to appeal necessarily assumes the right to have corrections

implemented retroactively." This position is untenable.

First, Congress' decision to retain certain appellate review procedures from a prior

reimbursement regime does not necessarily imply congressional intent to maintain identicalremedies.

In PPS, Congress created "a radically new method for determining Medicare reimbursement,"

Georgetown II, 862 F.2d at 329, as well as a new method for handling reimbursement payments. See

Washington Hosp. Center v. Bowen, 795 F.2d 139, 146 (D.C. Cir. 1986). Here, the Secretary

decided to alter the retroactive effect of appellate proceedings, a decision that Congress left open in

the 1983 Amendments. This choice does not limit the availability of judicial or administrative review

itself.

Second, contrary to the hospitals' assertion, the availability of appeal does not necessarily

imply the availability of retroactive remedies. Administrative proceedings and judicial review could

still provide a meaningful corrective remedy if, for example, the Secretary refused to make any

revision to an erroneous wage index. The hospitals contend that non-retroactive relief would in

practice be meaningless because "an appeal cannot generally be initiated ... until a cost report isfiled

and audited for a fiscal period that has ended, and the intermediary has issued its Notice of Program

Reimbursement...." But the hospitals cite no authorityin the statute, regulations, or case lawto

support this proposition, and we find it unpersuasive. Cf. Washington Hosp. Center v. Bowen, 795

F.2d at 146 ("[T]he appeals provision applicable to PPS recipients cannot be read to require hospitals

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8DEFRA's retroactivity provision was never implemented due to the subsequent passage of

legislation which functionally revoked § 2316(b) by making any revisions to the wage index

arising under DEFRA effective only "for discharges occurring on or after May 1, 1986." See

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Pub. L. No. 99-272, §

9103(a)(1)-(2), 100 Stat. 82, 156. 

to file cost reports and await NPRs prior to filing a PRRB appeal.").

As a final element in their congressional intent argument, appellants rely on two subsequent

legislative enactments in which Congress appeared to endorse retroactive wage index corrections.

In the first, Congress directed the Secretary to develop an improved wage index that would account

for wage differences between full- and part-time workers, and for those indexes that would change

under the new methodology, to make retroactive adjustments to amounts paid under the previous

indexes. See Deficit Reduction Act of 1984 ("DEFRA"), Pub. L. No. 98-369, § 2316(a)-(b), 98 Stat.

494, 1081.8In 1989, Congress passed a second statute that required the Secretary to give retroactive

effect to certainwage index errors. See OmnibusBudget ReconciliationAct of 1989 ("OBRA"), Pub.

L. No. 101-239, § 6003(h)(5), 103 Stat. 2106, 2157 (1989). OBRA is not directly applicable to the

wage index at issue in this appeal because its reach was limited to erroneous wage data submitted in

response to the Secretary's 1984 wage survey; this appeal involves 1981 wage data submitted to the

BLS.

Although Congress revoked the retroactivity provision in the first statute and limited its

application in the second statute to a year not relevant here, the hospitals maintain that the

retroactivity provisions in both DEFRA and OBRA indicate that Congress saw no inconsistency

between the purposes underlying the PPS scheme and retroactive error correction. While this may

be true, it does not demonstrate the congressional intent that is critical to the hospitals' position. As

the Supreme Court has pointed out, " "the views of a subsequent Congress form a hazardous basis

for inferring the intent of an earlier one.' " Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608, 2619

(1992) (quoting United States v. Price, 361 U.S. 304, 313 (1960)). The most relevant congressional

intent for purposes of Chevron step one analysisisthe intent at the time Congress passed the original

PPS statute, and Congress did not address the retroactivity question in the 1983 Amendments.

Indeed, the specific retroactivity language in later statutes highlights the absence of such language

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9For the same reason, the hospitals' reliance on Corpus Christi Osteopathic Hosp. v. Blue

Cross & Blue Shield of Texas, 1989-1 Medicare & Medicaid Guide (CCH) ¶ 37,672 (1989), is

misplaced. 

in the original PPS statute.

Finally, notwithstanding the hospitals' suggestion, our conclusion that the statute's wage

adjustment provision does not require retroactive corrections is not in conflict with the holding in

Georgetown II. In that case, the court invalidated a policy that gave only prospective effect to

changes in "allowable costs" under the "hospital-specific" portion of the PPS transition rate. See

supra note 3. Examining the statute's language and legislative history, the court identified a clear

congressional intent to provide retroactive adjustments to "allowable costs" because the

hospital-specific provision retained and incorporated the previous reasonable-cost regime into the

PPS rate during the transition period. 862 F.2d at 326-27 & n.9. Because Georgetown II focused

only on the hospital-specific portion of the PPS transition rate, its reasoning does not extend to the

instant appeal.9Indeed, the Georgetown II court expressly recognized the distinction between the

analysis of provisions under the hospital-specific component and those under PPS:

[W]e note that when the PPS statute instructs the Secretary to determine "allowable

operating costs per discharge" under the newprospective payment methodology, see

42 U.S.C. § 1395ww(d)(2)(A), it invokes an entirely different sense of the term:

costs that are allowable under the new system may not be subject to subsequent

retrospective revision, but that certainly does not mean that the same must be true

when the statute refers to costs that were "allowable" under an entirely different

payment methodology.

Georgetown II, 862 F.2d at 327 n.11. Here, where the court must focus on procedures to implement

the "entirelydifferent payment methodology" ofPPS, id., the hospitals have pointed to no comparable

intent on the part of Congress.

C. Reasonableness of the Policy. We therefore turn to the hospitals' contention that even

if Congress was silent on the question of retroactive wage-index revisions, the Secretary's policy of

prospectivity was arbitrary and capricious. In evaluating the policy, the court looks first at whether

the Secretary has provided a reasonable rationale for her policy choice. See Motor Vehicle

Manufacturers Ass'n v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 43 (1983). In

the preamble to the final PPS rules, the Secretary explained the prospective-policy decision as

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follows:

We considered retroactively adjusting the prospective payment rates for corrections

in the wage index. However, for a number of reasons we did not adopt this approach.

Application of a retroactive adjustment to the rates would erode the basis of the

prospective payment system that payment will be made at a predetermined, specified

rate. We also believe hospitals will have less incentive to report accurate ES 202 data

if we guarantee a retroactive correction to the wage index.

49 Fed. Reg. at 258.

The hospitals challenge the Secretary's assertion that a retroactive correction policy would

"erode" the prospectivity that lies at the heart of PPS. They point to Georgetown II, where the

Secretary unsuccessfully argued that retroactive adjustments would undermine the incentives at the

heart of the prospective system because hospitals would no longer know with certainty what their

prospective payment rates will be. The court dismissed that position and observed that:

[T]he real linchpin of the [PPS] system may not be that the exact reimbursement

figure is known in advance, but rather may be that the hospital knows that nothing it

doesin providing services will lead to a higher reimbursement level.... The incentives

faced by hospitalsto keep costs down under PPS should therefore remain unaffected

by the government's willingness to make the [retroactive] adjustments at issue here:

so long as payments are not tied to hospitals' behavior while PPS is in effect, the

government sends no message that profligacy will result in larger payments.

Georgetown II, 862 F.2d at 330.

Following Georgetown II, we agree that retroactive corrections to inaccurate wage data are

not necessarily inconsistent with the PPS system. Yet this agreement does not establish that a

prospective-only policy is unreasonable. Indeed, the hospitals fail to demonstrate that the purpose

of the PPS system could not reasonably tolerate either a prospective or retroactive correction policy.

While retroactive adjustments might leave the "linchpin" of PPS intact, that does not mean that a

prospective-only policywould not further, to some degree, the overall goals of PPS. A hospital does

not know in advance the total reimbursement that it will receive in a forthcoming fiscal year, due to

inevitable variations in its case-mix and case-load. But hospitals, like other businesses, do make

projections about future costs and service levels based on their experience and historical patterns.

To the extent that the Secretary's prospectivity policy permits hospitals to rely with certainty on one

additionalelement inthePPS calculationratethewage index valuethe Secretary could reasonably

conclude that it will promote efficient and realistic cost-saving targets.

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10On the same day that the Secretary published Sacramento's corrected wage index, for

example, the Secretary also issued revisions for 59 other regions. Of the 60 corrections released

that day, 32 (including Sacramento) involved increases to the wage index, while 28 indexes were

decreased. The amounts for several regions were lowered by a degree comparable to the increase

in Sacramento's index. 

11We are unpersuaded by the hospitals' argument that this "administrative burden" argument

constitutes an impermissible post hoc rationalization by counsel. While the Secretary could have

placed a finer point on this issue in announcing her rationale, we accept her position that the

concerns about administrative burden were encompassed in the general claim that retroactivity

would "erode" the PPS system. See 49 Fed. Reg. at 258. In any event, our conclusion in this

appeal is not based solely on the administrative burden rationale. 

The Secretary refers to this as the "finality" rationale, and we cannot conclude under our

deferentialstandard of review that it is arbitrary and capricious. In addition to promoting efficiency,

the Secretary's emphasis on finality protects Medicare providers as well as the Secretary from

unexpected shifts in basic reimbursement rates. Although in the instant case the hospitals would

benefit from a retroactive correction, Medicare providers might just as likely face adverse

consequencesfrom a retroactivity policywhere corrections would reduce the reimbursement rates.10

The prospective-only policy bindsthe Secretary as well asthe providers, as counselfor the Secretary

acknowledged at oral argument. As the Secretary expressly stated in adopting the prospective only

policy: "[S]ince a correction to the wage index could decrease as well as increase a hospital's

prospective payment rate, we believe we should maintain the prospectivity of the system when

making any revisions to the payment rates." 49 Fed. Reg. at 259. The hospitals' claim that the

Secretary's policy is not rational thus fails to the extent that a prospective-only policy preserves the

expectations of all parties in the PPS system and facilitates the economic incentives that Congress

intended. See House Report at 132, 1983 U.S.C.C.A.N. at 351 (referring to Congress' coordinate

policies of predictability and finality in prospective reimbursements).

Moreover, the Secretary's rationale is not limited to invoking the sanctity of "prospectivity"

for its own sake. The Secretary also points to the concrete purpose of avoiding the administrative

burden that a retroactive correction policy would entail.11 Because each regional wage index is a

component of the national wage index, which is used to determine the base federal payment rate, a

change in a single wage index could affect the payment rates applicable for each hospital discharge

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12In the final PPS rule, the Secretary adopted such an approach toward prospective

corrections. See 49 Fed. Reg. at 258 ("[A]ny revisions in wage indexes will only apply to the area

wage adjustment to the standardized amounts. We will not recalculate the standardized amounts

themselves based on revised wage indexes."). 

under PPS that year. Under these circumstances, retroactive corrections would cause a significant,

if not debilitating, disruption to the Secretary's administration of the already-complex Medicare

program. Even if she limits this disruption by choosing not to recalculate the federal rate when she

adjusts an individual area wage index,12 the Secretary might still face a significant burden merely in

responding to error correctionsfor each regionalwage index. See supra note 10. We therefore agree

with the district court that, based on the arguments advanced by the hospitals, "[i]t was not arbitrary

and capricious of the Secretary to decide that the administrative burden of recalculating the

reimbursement rate for every hospital in a metropolitan area every time any hospital in that area

makes an error in reporting wage data outweighs the increase in accuracy that would result."

Finally, the Secretary defends the prospective-only policy on the grounds that it will create

incentives for accurate reporting. According to the Secretary, a policy that denies retroactive

corrections will encourage hospitals to submit carefully prepared data in the first instance because

they know that a subsequent correction will have only prospective effect. We agree. The origin of

the instant case strongly suggeststhat the Secretary's concerns about accurate reporting are justified,

and that the lack of retroactive corrections will induce more exacting practices. Given the serious

fiscal repercussions at stake, it is inconceivable that, as the hospitals suggested to the Secretary had

inadvertently occurred here, a hospital in the future would submit data based on guesses about the

allocation of their employees' reimbursable salaries.

The hospitals respond that Medicare providers already have sufficient incentives to report

accurate data, including penalties for tax and Medicare fraud. They also note that the wage index in

the instant case was derived from data submitted to a state agency for payroll tax purposes; in their

view, the risk that overreporting will lead to higher payroll taxes effectively counterbalances any

incentives to report inflated wage data. Finally, the hospitals argue that the prospective-only policy

might actually encourage those providers tempted to overestimate costs because providers would

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benefit from their fraudulent submissions until the errors could eventually be corrected.

But the hospitals miss the point of the Secretary's argument. It may well be true that

Medicare fraud provisions establish effective disincentives against purposeful misreporting, and that

a hospital might actually be encouraged by the prospective-only policy to misreport. Yet the

Secretary'srationale need not be justified only by reference to itsimpact on those providers engaging

in intentionalfraud. The shortsightedness of those hospitals is patent. And regardless of the response

ofill-intentioned providers, theSecretarycan stillreasonablydetermine that a prospective-onlypolicy

will encourage most hospital administrators to implement Medicare-specific reporting procedures

designed to improve wage-index accuracy. Indeed, record testimony indicated that Medicare

providers generally did not coordinate their wage data and Medicare reporting obligations at the time

the instant case arose. Because the Secretary must rely on wage information submitted by others, her

interest in the integrity and accuracy of such data is undeniable. The hospitals thus fail to show that

the Secretary's accurate reporting rationale is unreasonable.

The hospitals' contention that the Secretary has inconsistently applied the prospective-only

policy fares no better. They first rely on the Secretary's decision in Corpus Christi Osteopathic Hosp.

v. Blue Cross & Blue Shield of Texas, 1989-1 Medicare & Medicaid Guide (CCH) ¶ 37,672 (1989)

("Corpus Christi "). That case involved an overpayment to a Medicare hospital caused by an

intermediary's misreading ofthe provider's case-mix index as published in the Federal Register. (The

case-mix index is used to calculate the hospital-specific component during the PPS transition period.)

The HCFA Deputy Administrator concluded that the Secretary could retroactively correct the error

and recoup overpayments dating back to year one of the PPS transition. Citing Georgetown II, the

Deputy Administer stated that "PPS is not a rigidly prospective system and ... retrospective

adjustments should be made when payment rates were initially calculated on the basis of erroneous

information." Id. at p. 19,630.

Corpus Christi, like Georgetown II, supports the hospitals' position that retroactive

corrections are not necessarily inconsistent with the PPS system. But that consistency does not by

itself make the Secretary's policy unreasonable, and the Secretary's position in Corpus Christi is not

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13In three of the cited examples, the Secretary published revisions to previously published wage

indexes; in each case, the correct figure had been entered into the Medicare computer payment

program and applied prospectively from the original date of effectiveness. The published

correction served merely to conform the incorrect published figure with the correct figure actually

used in calculating hospital reimbursements. The hospitals were notified of the corrected index

value through payment notices issued by Medicare intermediaries. In another instance, the

Secretary's published revision never affected actual hospital payments because Congress delayed

the implementation of the originally published wage index until a date subsequent to the

publication of the revised figure. 

14Since discovering this error during preparations for this litigation in the district court, the

Secretary has taken steps to reverse that earlier action. The hospitals point to this correctiona

retroactive adjustment justified in the name of prospectivityas further evidence of the

Secretary's unreasonableness. However, the Secretary merely seeks to rectify an acknowledged

error in order to maintain consistency and predictability in her administration of the complex

Medicare regime. The existence of one inconsistent application does not demonstrate the

unreasonableness of an otherwise reasonable policy. 

15The hospitals suggest that under the Secretary's prospective-only policy toward wage index

corrections, the scope of possible error is unlimited and therefore absurd. They posit a

hypothetical case where a zero value is assigned to an area wage index, thus preventing hospitals

from receiving any compensation for their labor-related costs until the error could be corrected. 

Because the wage indexes are calculated by computer, and because each index is merely a

inconsistent with the Secretary's position in this appeal. As in Georgetown II, Corpus Christi

concerned the calculation of the hospital-specific rate during the PPS transition period. See supra

note 9. Although the Deputy Administrator's language favoring retroactivity in Corpus Christi can

be read broadly, so can the Secretary draw reasonable distinctions between hospital-specific policies

and those concerning the forward-looking PPS.

The hospitals also point to four occasions in which they claim the Secretary has made

retroactive adjustments to area wage indexes. While the hospitals apparently seek to portray these

revisions as inconsistent agency actions that make the policy under review arbitrary and capricious,

the Secretary has adequately demonstrated that no retroactive application actually occurred in these

cases.13 In none of these cases did the Secretary's action change the date of effectiveness of the

correct wage index values. In one instance where retroactive correction did occuran instance

discovered by the Secretary in the course of thislitigationthe Secretary has acknowledged that the

earlier action was contrary to agency policy.14

Finally, the absurd results hypothesized by the hospitals do not, on balance, demonstrate that

the Secretary's policy is arbitrary or capricious.15 As the district court concluded, the Secretary's

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variation on an average national labor cost represented by the numeral "1," however, the

likelihood of such absurd errors would appear to be exceedingly low. 

prospective-only policy was a reasonable choice between the competing values of finality and

accuracy. See Chevron, 467 U.S. at 865 (concluding that an agency deserves deference where its

policy "represents a reasonable accommodation of manifestly competing interests"). On one hand,

the prospective-only policywill on occasion result in a wage index ofimperfect accuracy in any given

fiscal year. On the other hand, a policy of retroactive corrections would erode the predictability and

finality that underlie the PPS scheme. It would also add to the Secretary's burden in administering

the vast Medicare system. Confronted with this choice, the Secretary decided as a matter of policy

that the interestsin finality and administrative efficiency outweighed the value ofincreased accuracy.

For these reasons we conclude, inasmuch as Congress delegated that choice to the Secretary,

that the hospitals have failed to demonstrate that the Secretary's policychoice isimpermissible. While

her choice was not the only one permissible under the statute, the court has no occasion to second

guess the Secretary based on the arguments presented by the hospitals. Cf. Hennepin County v.

Sullivan, 883 F.2d 85, 91 (D.C. Cir. 1989) ("[T]here is nothing inherently arbitrary or capricious

about an agency's decision to apply new data prospectively only."), cert. denied, 493 U.S. 1043

(1990). Our deference is heightened where, as here, "the agency's current view ... so closely fits the

design of the statute as a whole and ... its object and policy." Good Samaritan Hosp., 113 S. Ct. at

2161 (citing Crandon v. United States, 494 U.S. 152, 158 (1990)).

D. The Administrative Procedure Act ("APA"). Finally, the hospitals contend that the

prospective-only policy is procedurally invalid because it was not adopted in compliance with APA

notice and comment requirements. The hospitals contend that interested parties had no meaningful

opportunity to comment on the policy or its rationale, and that the new policy represented a material

change from the previous policy toward retroactive adjustments under the reasonable-cost regime.

The Secretary defends the decision to bypass APA procedures on the grounds that the normal APA

requirements did not apply to her adoption of the PPS rules, and that even if they did, the "good

cause" exception to notice and comment rulemaking should apply. See 5 U.S.C. § 553(b)(B) (1988).

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16See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149 (April

20, 1983). 

17House Report at 158, 1983 U.S.C.C.A.N. at 377. 

18Section 604(c) provides:

(1) The Secretary shall cause to be published in the Federal Register a

notice of the interim final DRG prospective payment rates ... no later than

September 1, 1983, and allow for a period of public comment thereon. Payment

on the basis of prospective rates shall become effective on October 1, 1983,

without the necessity for consideration of comments received, but the Secretary

shall, by notice published in the Federal Register, affirm or modify the amounts by

December 31, 1983, after considering those comments.

(2) A modification under paragraph (1) that reduces a prospective payment

rate shall apply only to discharges occurring after 30 days after the date the notice

of the modification is published in the Federal Register.

(3) Rules to implement [PPS] shall be established in accordance with the

procedure described in this subsection.

97 Stat. 168-69. 

19See 48 Fed. Reg. 39,752 (Sept. 1, 1983). 

Congress enacted the PPS statute in April 1983.16In order to accelerate the Secretary's

implementation ofthe new system, the statute provided an"expedited regulatoryprocess" for the new

PPS regulations.17 Accordingly, § 604(c) of the 1983 Amendments required the Secretary to publish

the interim final rules and rates by September 1, 1983, five months from the date of the statute's

enactment. The interim final rules were to take effect October 1, 1983. The Secretary was to publish

final rules, after allowing for "a period of public comment," by December 31, 1983.18

The Secretary published the interim finalrules on September 1, 1983.19 Although suggesting

that erroneous indexes would be corrected, the interim finalrules were silent about the timing of any

corrections. They stated:

If we discover that we, or BLS, have made any error that results in an incorrect wage

index for an area, we will direct the Medicare intermediaries to recalculate the

payment rates.

48 Fed. Reg. at 39,765. Following the September 1 publication, the Secretary received comments

from at least two large health care provider organizations, which identified the ambiguity in the

interim final rules and urged retroactive application of wage index corrections (at least with respect

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20The Secretary submits, and we accept, that the four-day delay between the statutory deadline

of December 31 and the January 3 publication dateover a holiday weekendconstitutes a "de

minimis" violation of the statute with no effect on the validity of the final rules. The hospitals

point to no evidence that they were prejudiced by this minor delay. 

21See 5 U.S.C. § 553(b). 

22The Secretary invoked the "good cause" exception in both the interim final PPS rules, see 48

Fed. Reg. at 39,902 (waiver of notice and comment), and the final rules. See 49 Fed. Reg. at 311

(waiver of 30-day delay of effective dates). Although the district court relied in part on the "good

cause" exception to uphold the Secretary's policy and the Secretary's brief features this argument

prominently, the hospitals have not addressed it in their main or reply briefs. 

to those corrections that would benefit Medicare providers). The Secretary published the final rules

on January 3, 1984, four days after the statutory deadline.20 The preamble to the final rules presented

the prospective-only policy. See 49 Fed. Reg. 234, 258-59 (Jan. 3, 1984).

Because the Secretary did not promulgate the PPS regulations in accordance with the APA,

which requires advance notice of proposed rulemakings,21 but did invoke the "good cause" exception,

the court must decide whether the 1983 Amendments authorized specialrulemaking proceduresthat

provide sufficiently "good cause" for exempting this rulemaking from APA constraints.22 The court

has made clearthat exceptionsto APA procedures are to be "narrowly construed and only reluctantly

countenanced." New Jersey v. EPA, 626 F.2d 1038, 1045 (D.C. Cir. 1980).

The APA permits an agency to waive the notice and comment procedure when it has good

cause to find such notice and comment "impracticable, unnecessary, or contrary to the public

interest." 5 U.S.C. § 553(b)(B). As a general matter, "strict congressionally imposed deadlines,

without more, by no means warrant invocation of the good cause exception." Petry v. Block, 737

F.2d 1193, 1203 (D.C. Cir. 1984). Nevertheless, deviation from APA requirements has been

permitted where congressional deadlines are very tight and where the statute is particularly

complicated. Thus, in Petry v. Block, 737 F.2d at 1200-02, the court concluded that the passage of

a complex and "extraordinary" statute (concerning changes in administrative reimbursements under

the Child Care Food Program) that imposed a 60-day deadline for the promulgation of interim rules

justified the agency's invocation of the "good cause" exception.

Although the time period between the enactment and implementation deadline was longer in

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the instant case than in Petry, the regulatory framework was equally if not more complex. Between

the April 20 enactment and the September 1 deadline, the Secretary faced the daunting task of

preparing regulations to implement a complete and radical overhaul of the Medicare reimbursement

system. Once published, the interim rules took up 133 pages in the Federal Register: 55 pages of

explanatory text, 37 pages of revised regulations, and 41 pages of new data tables. See 48 Fed. Reg.

39,752. Like Petry, then, this case is different from those where the agency "had a substantial period

of time within which to propose regulations, the promulgation of which it knew was both necessary

and forthcoming in the future." American Fed. of Gov't Emp. v. Block, 655 F.2d 1153, 1158 (D.C.

Cir. 1981) (citing Kollett v. Harris, 619 F.2d 134 (1st Cir. 1980)). Nor does this case raise the

specter of abuse, where "an agency unwilling to provide notice or an opportunity to comment could

simply wait until the eve of a statutory ... deadline, then raise up the "good cause' banner and

promulgate rules without following APA procedures." Council of Southern Mountains, Inc. v.

Donovan, 653 F.2d 573, 581 (D.C. Cir. 1981).

The Secretary's approach to the PPS regulatory process followed the rulemaking process

prescribed by Congress in § 604(c). In contrast to the procedure set by the APA, § 604(c) required

the Secretaryto issue interimfinalrulesimmediately, whichwould then be followed byan opportunity

for public comment. Thus, unlike those cases where the court has found strict deadlines alone

insufficient to establish good cause, see New Jersey v. EPA, 626 F.2d 1038, 1043-45 (D.C. Cir.

1980), here Congress has expressed its clear intent that APA notice and comment procedures need

not be followed. Cf. Air Transport Ass'n of America v. Dep't of Trans., 900 F.2d 369, 379 (D.C. Cir.

1990) (statutory deadline does not constitute good cause absent express Congressional intent to this

effect), remanded, 498 U.S. 1077 (1991), vacated as moot, 933 F.2d 1043 (D.C. Cir. 1991). Under

these circumstances, we conclude that the strict deadlines and special procedures imposed by the

1983 Amendments constituted sufficiently "good cause" under 5 U.S.C. § 553(b)(B) for bypassing

the APA's notice and comment requirement.

The question remains whether the Secretary's prospective- only policy was adopted in

compliance with § 604(c)'sspecial procedures. The hospitals contend that the special procedures do

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23The final rules state, for example, that the Secretary "considered retroactively adjusting the

prospective payment rates for corrections in the wage index .... [but] for a number of reasons ...

did not adopt this approach." 49 Fed. Reg. at 258. 

not apply because the Secretary did not publish the new policy in the September 1 interim final rule.

They emphasize that the interim final rules stated only that the Secretary would "recalculate"

erroneous wage indexes. Without notice that the Secretary might interpret "recalculate" to mean

"prospectively recalculate," the hospitals maintain that the prospective-only policy was not subject

to the subsequent comment period contemplated by § 604(c).

The Secretary's persuasive response is that the final policy statement merely "modified" the

policy articulated in the September 1 statement in the interim final rule. The special rulemaking

procedures in § 604(c)(1) specifically contemplated the possible modification of the interim final

rules. Accordingly, the Secretary maintains, the transformation of the initial statement (that

erroneous data would be recalculated) to the final prospective-only policy is analogousto the "logical

outgrowth" permitted for final rules promulgated under the APA. See Conn. Light and Power Co.

v. NRC, 673 F.2d 525, 533 (D.C. Cir. 1982), cert. denied, 459 U.S. 835.

In the context of a fundamental policyshift,such asthe change froma reasonable-cost regime

to a prospective payment regime, it was foreseeable that the Secretary might alter her methodology

with respect to error correction. Indeed, the ambiguity toward retroactivity in the interim final rules

did alert two major providers, which responded with comments. Although the Secretary adopted a

policy that differed from the one advocated by the commentators, she indicated in the finalrulesthat

attention had been paid to the alternatives.23 See Petry v. Block, 737 F.2d at 1203 (quoting Levesque

v. Block, 723 F.2d 175, 188 (1st Cir. 1983)). Under these circumstances, we conclude that a

prospective-only policy toward error correction constitutes a sufficiently "logical outgrowth" from

an initialstatement indicating that errors would be recalculated. Thus the changes from interim final

rules to the final rules fell within § 604(c)'s allowance for modifications following public comment.

Accordingly, we affirm the grant of summary judgment to the Secretary.

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