Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-10-05201/USCOURTS-caDC-10-05201-0/pdf.json

Parties Involved:
Memorial Sloan-Kettering Cancer Center
Amicus Curiae for Appellant
Kathleen Sebelius
Appellee
University Of Texas M.D. Anderson Cancer Center
Appellant

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 22, 2011 Decided June 17, 2011

No. 10-5201

UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER,

APPELLANT

v.

KATHLEEN SEBELIUS,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:08-cv-00946)

Christopher L. Keough argued the cause for appellant. 

With him on the briefs were Daniel J. Hettich, Paul D. 

Clement, Ashley C. Parrish, and Erin E. Murphy.

Jorge Lopez, Jr. and Patricia A. Millett were on the brief 

for amicus curiae Memorial Sloan-Kettering Cancer Center in 

support of appellant.

Mark D. Polston, Deputy Associate General Counsel for 

Litigation, U.S. Department of Health & Human Services, 

argued the cause for appellee. With him on the brief were 

Ronald C. Machen, Jr., U.S. Attorney, and R. Craig 

Lawrence and Mitchell P. Zeff, Assistant U.S. Attorneys.

USCA Case #10-5201 Document #1313695 Filed: 06/17/2011 Page 1 of 12
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Before: SENTELLE, Chief Judge, BROWN and 

KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge

KAVANAUGH.

KAVANAUGH, Circuit Judge: In 1965, Congress passed 

and President Johnson signed the Act creating Medicare. 

Medicare was primarily designed to ensure adequate health 

care for Americans who are 65 or older. 

Paying for Medicare has posed a massive challenge for 

the U.S. Government, as the costs of Medicare have grown 

significantly over time. For several decades now, Congress 

has intermittently attempted to rein in Medicare costs. 

This case involves cost-saving tools that Congress has 

devised for Medicare payments to cancer hospitals. The case 

specifically concerns Medicare reimbursements paid to one 

cancer hospital – M.D. Anderson in Texas – in 2000 and 2001 

for inpatient and outpatient costs. 

The first issue on appeal relates to cancer hospitals’ 

inpatient costs. Medicare reimburses cancer hospitals for the 

reasonable costs of inpatient services for Medicare patients up 

to a target amount. If a cancer hospital proves that its actual 

costs exceeded the target amount because of “events beyond 

the hospital’s control,” the target amount is increased, and 

Medicare reimburses the cancer hospital for costs attributable 

to those events. In this case, M.D. Anderson requested an 

increase to its target amount in 2000 and 2001 due to the high 

cost of certain new cancer drugs. The Department of Health 

and Human Services denied that request, and the District 

Court affirmed HHS’s decision. 

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On appeal, the Hospital claims that HHS, after an

administrative hearing on the Hospital’s claim, imposed a 

new requirement that the Hospital expressly prove the net

financial impact of the new drugs – as opposed to its simply 

showing the gross cost of the new drugs. The Hospital argues 

that it did not receive proper notice of the new net financial 

impact requirement and thus did not have a fair opportunity to 

satisfy the requirement at the administrative hearing. We 

agree. The Hospital did not receive timely notice of the 

requirement and, on remand to HHS, must be given an 

opportunity to satisfy it.

The second issue concerns cancer hospitals’ outpatient 

costs. Since 2000, Medicare has typically reimbursed cancer 

hospitals for outpatient care based on a statutory formula that 

provides the hospitals a fraction of their reasonable costs. 

One component of that formula is the reasonable cost of the 

hospital’s outpatient care in 1996. The overarching idea is to 

ensure that cancer hospitals can receive Medicare 

reimbursement for at least the same proportion of their actual 

costs that the hospitals received in 1996. In this case, the 

Hospital contends that HHS misapplied the formula and 

undercompensated the Hospital. The problem for the 

Hospital is that its interpretation of the statute would actually 

give cancer hospitals higher reimbursements in 2000 and later 

years than they would have received in 1996 for the same 

actual costs. We do not believe that the statute 

unambiguously says that, or that the Secretary’s interpretation 

of ambiguous language is unreasonable. The Hospital, of 

course, must show one or the other in order to overcome 

HHS’s interpretation. See Chevron, U.S.A., Inc. v. Natural 

Res. Def. Council, 467 U.S. 837 (1984). The District Court 

granted summary judgment to HHS on this issue, and we 

affirm the District Court’s decision.

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In sum, we reverse the District Court’s decision regarding

the Hospital’s request to raise the target amount for inpatient 

costs. The District Court should remand the matter to HHS. 

On remand, HHS must provide the Hospital an opportunity to 

show the net financial impact of the new cancer drugs. We 

affirm the District Court’s decision granting summary 

judgment to HHS with respect to cancer hospitals’ outpatient 

costs.

I

We first analyze M.D. Anderson’s argument concerning 

its Medicare reimbursements for inpatient costs in 2000 and 

2001. We review the statutory and regulatory framework, and 

we then address the merits of the Hospital’s challenge to its 

Medicare reimbursement for inpatient services.

A

Congress has repeatedly attempted to slow the increase in

Medicare costs for hospitals’ inpatient services. In 1982, 

Congress set a ceiling – known as the “target amount” – on 

the annual reimbursement that Medicare would permit for 

hospitals’ inpatient costs. See 42 U.S.C. § 1395ww(b)(3). 

Although most hospitals are now subject to a different

Medicare system, the regime created in 1982 continues to 

apply to cancer hospitals – that is, hospitals such as M.D. 

Anderson that integrate cancer research with patient care. See

42 U.S.C. § 1395ww(d)(1)(B)(v)(I). 

The target amount is usually based on the previous year’s 

reasonable inpatient costs plus an inflation-based rate of 

increase. But there is an exception: HHS must increase the

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target amount by more than the inflation-based rate when 

there are “events beyond the hospital’s control.” 

Under HHS regulations, to obtain an increase to the 

target amount greater than the standard inflation-based bump

for events beyond a hospital’s control, the hospital must show 

that the increase is “reasonable, attributable to the 

circumstances specified separately, identified by the hospital, 

and verified by” an intermediary. 42 C.F.R. 

§ 413.40(g)(1)(ii).

B

The University of Texas operates a cancer hospital, the 

M.D. Anderson Cancer Center in Houston, Texas. For 2000 

and 2001, the Hospital requested an adjustment to its inpatient 

target amount to cover the costs of using new cancer drugs. It 

requested an extra $4.8 million for 2000 and an additional 

$4.18 million for 2001. 

The Hospital submitted its request to a component of 

HHS called the Provider Reimbursement Review Board, 

which issued the final HHS decision in this case. After 

holding an administrative hearing, the Board issued an 

opinion rejecting the Hospital’s request. In that opinion, the 

Board said that the Hospital had failed to show the net

financial impact of the new drugs, but rather had shown only

the gross cost of the new drugs. 

Although neither the statute nor the HHS regulation 

explicitly requires the Hospital to prove the net financial 

impact of using a new cancer drug, we agree with HHS that 

such a requirement is a reasonable application of the statute 

and regulation. If a new drug costs $1000, but saves $1000 

that the hospital would have spent on the old cancer 

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treatment, then the net financial impact for the hospital – that 

is, the increase that is attributable to the new drug – is $0. Of 

course, the analysis is rarely so straightforward. And the 

problem in this particular case is that the Board held its 

administrative hearing with regard to M.D. Anderson before

the Board announced (in its later opinion in this case) that a 

hospital must show the net financial impact of new drugs in 

order to raise the target amount. In prior proceedings with 

other hospitals, moreover, the Board had not required an 

express showing of the net financial impact of the different 

drugs. See Belmont Hills Hospital v. Blue Cross & Blue 

Shield Ass’n/Blue Cross of California, PRRB Dec. No. 99-

D39 (Apr. 21, 1999). In essence, therefore, the Board sprung 

this requirement on the Hospital after the hearing – when it 

was too late for the Hospital to put forward evidence to satisfy 

the requirement. 

That won’t do. To use the terms of our precedents, the 

“regulated party” here was “not on notice of the agency’s 

ultimate interpretation.” General Electric Co. v. EPA, 53 

F.3d 1324, 1334 (D.C. Cir. 1995) (internal quotation marks 

omitted). The Hospital did not have notice that it had to show

the net financial impact of the new cancer drugs. 

We thus reverse the District Court’s decision with regard 

to the Hospital’s inpatient costs. The District Court should

remand the case to HHS, and HHS in turn should provide the 

Hospital an opportunity to show the net financial impact of 

the new cancer drugs it used in 2000 and 2001. 

II

We next address the Hospital’s Medicare reimbursements 

for 2000 and 2001 outpatient costs. We review the statutory 

and regulatory framework, and we then address the merits of 

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the Hospital’s challenge to its Medicare reimbursement for

outpatient services.

A

As with Medicare inpatient costs, Congress has 

repeatedly attempted to slow the rapid increases in Medicare

outpatient costs. Under the old system, hospitals treated 

outpatients, and then informed Medicare of the cost of the

treatment, and then received money to cover costs that were 

“reasonable.” Not surprisingly, costs exploded under this 

system because there was little check on the services and 

costs for which hospitals received reimbursement. In 1990, 

Congress instructed HHS to implement a new system for 

reimbursing those outpatient costs. Under this new approach, 

Medicare would pay hospitals fixed amounts set in advance of 

the patients’ treatment. The new system – designed “to 

encourage health care providers to improve efficiency and 

reduce operating costs” – is called the Prospective Payment 

System. Methodist Hospital of Sacramento v. Shalala, 38 

F.3d 1225, 1227 (D.C. Cir. 1994).

Recognizing that the Prospective Payment System would 

be implemented slowly, Congress in 1990 instituted an 

interim policy to lower Medicare payments immediately. 

That interim policy took effect in 1991. See Pub. L. No. 101-

508, § 4151, 104 Stat. 1388-71, 71-72 (1990). The interim 

policy reduced payments to hospitals for their outpatient 

costs. It did so by imposing various cost reduction factors. 

For example, if a hospital had $10 million in reasonable 

outpatient costs, and if the applicable cost reduction factor 

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was 10%, the hospital would receive $9 million in payments

from Medicare.1

In 1997, with the Prospective Payment System for 

outpatients still not implemented by HHS, Congress passed 

and President Clinton signed the Balanced Budget Act of 

1997. Pub. L. No. 105-33, 111 Stat. 251. That law set 

January 1999 as the initial date by which HHS was required 

to implement the Prospective Payment System for outpatients. 

But HHS missed the deadline.

In 1999, Congress then passed and President Clinton 

signed the Balanced Budget Refinement Act of 1999. Pub. L. 

No. 106-113, 113 Stat. 1501. Under the 1999 Act, two things 

relevant to this case were to happen after HHS implemented 

the Prospective Payment System for outpatients. First, the 

interim cost reduction factors that had existed since 1991 

would expire. Second, a “transitional adjustment to limit 

decline in payment” for hospitals would begin. 42 U.S.C. 

§ 1395l(t)(7) (capitalization altered). 

Congress created the “transitional adjustment” because

some hospitals would receive significantly less money under 

the new Prospective Payment System than they had 

previously been receiving. To ease those hospitals into the 

new system, they were allowed for the first few years to 

obtain the amount they would have received before the 

Balanced Budget Act of 1997 – referred to in the statute as the

“pre-BBA amount” – rather than the lower amount they 

would receive under the Prospective Payment System. 

 1 The cost reduction factor for capital-related costs began at 

15% in 1991 and declined to 10% for the years after that. Pub. L. 

No. 101-508, § 4151, 104 Stat. 1388-71, 71-72 (1990). The cost 

reduction factor for non-capital-related costs began at 5.8% in 1991 

and remained at that level. Id.

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Of importance here, the transitional adjustment also 

permanently guaranteed cancer hospitals – such as M.D. 

Anderson – at least their “pre-BBA amount.” 

The “pre-BBA amount” is defined by the statute as “the 

reasonable cost of the hospital” for the current year multiplied 

by a fraction. Id. § 1395l(t)(7)(F). The fraction’s numerator 

is the Medicare payment that the Hospital received for

outpatient “services furnished during the cost reporting period 

ending in 1996.” Id. The fraction’s denominator is “the 

reasonable cost of such services for such period.” Id. Thus, 

the “pre-BBA amount” equals:

 (1996 Medicare Payment)

 (Current Year Reasonable Cost) X -------------------------------

 (1996 Reasonable Cost) 

It may help to put aside those somewhat confusing details

of the formula and focus momentarily on the big picture. A 

key point of this statutory formula was to ensure that cancer 

hospitals would generally receive reimbursement for at least 

the same percentage of their actual costs that they had 

received in 1996. For example, suppose a hospital’s 

outpatient costs in 1996 were $10 million and it received $9 

million from Medicare. If the hospital in 2000 again had the 

same outpatient costs of $10 million, it again would receive 

$9 million in reimbursement. In other words, a cancer 

hospital that had the same outpatient costs in 2000 that it had 

in 1996 would receive the same reimbursement in 2000 that it 

had received in 1996. 

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B

HHS has interpreted the statute in exactly that

commonsense fashion. But the Hospital objects, arguing that 

the statutory text doesn’t actually support that seemingly 

commonsense result. The Hospital focuses on the 

denominator of the fraction used in the pre-BBA definition –

the “reasonable cost” for 1996. The Hospital argues that this 

term does not mean the reasonable costs actually incurred by 

the Hospital in 1996, but rather means the reasonable costs as 

discounted by the statutory cost reduction factors that reduced 

the Hospital’s actual reimbursement in 1996. See M.D. 

Anderson Opening Br. at 35-55; M.D. Anderson Reply Br. at 

2-24.

Importantly, by plugging the Hospital’s interpretation 

into the statutory formula, cancer hospitals would be entitled 

to receive more in 2000 than they received in 1996 even if 

their actual costs in 2000 were exactly the same as in 1996. 

Needless to say, if you have followed along this far, it seems 

extremely unlikely that Congress enacted such a windfall 

provision. 

Keep in mind that the Hospital’s burden is to show that 

the statute unambiguously supports its interpretation. See 

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

837 (1984). It cannot do so. The Hospital’s interpretation 

runs into several textual and contextual roadblocks. To begin 

with, the premise of the Hospital’s argument is that the cost 

reduction factors in 1996 actually reduced a hospital’s costs, 

not just its Medicare payments. But the statute at least in 

some places refers to reduction in “payments” to hospitals 

when describing the effect of the 1996 cost reduction factors. 

See 42 U.S.C. §§ 1395x(v)(1)(S)(ii)(I)-(II). That alone makes 

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it near impossible for the Hospital to say that the statute 

unambiguously supports its interpretation. 

As a matter of common parlance, moreover, the interim 

outpatient cost reduction factors that began in 1991 caused

reductions in the reimbursements or payments to the Hospital, 

not reductions in the Hospital’s actual costs. The fact that a 

cost-reduction statute that took effect in 1991 lowered

Medicare’s reimbursements to the Hospital in 1996 obviously 

does not mean that the Hospital’s actual costs were somehow 

magically lower in 1996. 

In addition, to reiterate a point made above, the effect of 

the Hospital’s interpretation would be rather bizarre. The

Hospital’s interpretation of the key statutory term “pre-BBA 

amount” would give the Hospital higher payments in 2000 

than it received pre-BBA in 1996 – even if the Hospital’s 

actual costs were exactly the same in 2000 as in 1996. In 

light of the statutory text, context, and purpose, that result

makes no sense at all and highlights the serious flaw in the 

Hospital’s suggested approach.

The Hospital’s interpretation would not give hospitals 

just a “pre-BBA amount,” which is what the statutory text 

requires. Its interpretation would give hospitals a pre-1991 

amount – meaning the amount hospitals received back before 

Congress initially imposed any cost reduction factors on 

reimbursements to hospitals for outpatient costs. The 

Hospital’s interpretation, in other words, would give cancer 

hospitals a tremendous windfall that Congress in 1999 plainly 

did not intend – and did not write into the statute’s text. 

We need not decide whether the statute unambiguously 

supports HHS’s interpretation. All we need to decide – and 

do decide – is that the statute does not unambiguously support 

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the Hospital’s interpretation and that HHS’s contrary 

interpretation is reasonable. See Chevron, 467 U.S. 837.

* * *

We reverse the judgment of the District Court with 

respect to the Hospital’s inpatient costs. The District Court 

should remand the case to HHS, and HHS should give the 

Hospital an opportunity to show the net financial impact of 

the new cancer drugs it used in 2000 and 2001. We affirm the 

judgment of the District Court with respect to the Hospital’s 

outpatient costs. 

So ordered.

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