Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-09-35402/USCOURTS-ca9-09-35402-0/pdf.json

Parties Involved:
Deaconess-Billings Clinic Health System
Appellant
Charles E. Johnson
Appellee
Merle West Medical Center
Appellant
Providence Yakima Medical Center
Appellant
St. Vincent Hospital
Appellant
Yakima Valley Memorial Hospital
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PROVIDENCE YAKIMA MEDICAL 

CENTER, a Washington non-profit

corporation; ST. VINCENT HOSPITAL,

a Montana non-profit corporation;

YAKIMA VALLEY MEMORIAL

HOSPITAL, a Washington non-profit

corporation; MERLE WEST MEDICAL

CENTER, an Oregon non-profit Nos. 09-35266 and

corporation; DEACONESS-BILLINGS 09-35402

CLINIC HEALTH SYSTEM, a Montana  D.C. No.

non-profit corporation, 2:03-cv-03096-FVS

Plaintiffs-AppelleesCross-Appellants, OPINION

v.

KATHLEEN SEBELIUS,* Secretary,

United States Department of

Health and Human Services,

Defendant-AppellantCross-Appellee. 

Appeal from the United States District Court

for the Eastern District of Washington

Fred L. Van Sickle, District Judge, Presiding

Argued and Submitted

April 6, 2010—Seattle, Washington

Filed July 23, 2010

*Kathleen Sebelius is substituted for her predecessor, Charles E. Johnson, as Secretary of Health and Human Services. Fed. R. App. P. 43(c)(2).

10591

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 1 of 18
Before: Michael Daly Hawkins, Carlos F. Lucero,** and

N. Randy Smith, Circuit Judges.

Per Curiam Opinion

**Honorable Carlos F. Lucero, United States Circuit Judge for the

Tenth Circuit, sitting by designation. 

10592 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 2 of 18
COUNSEL

Sanford E. Pitler, Bennett, Bigelow & Leedom, P.S., Seattle,

Washington, for the plaintiffs-appellees-cross-appellants.

Jeffrey A. Clair, Civil Division, United States Department of

Justice, Washington, D.C., for the defendant-appellant-crossappellee.

OPINION

PER CURIAM:

Secretary of the Department of Health and Human Services

Kathleen Sebelius (“the Secretary”) appeals the adverse summary judgment grant in an action brought by five not-forprofit hospitals (“Hospitals”), each recipients of Medicare

direct graduate medical education (“DGME”) payments for

approved family medicine residency programs. The district

court found the Secretary’s methodology for calculating the

10594 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 3 of 18
Hospitals’ base-year per resident amounts (“PRAs”) under the

existing regulation 42 C.F.R. § 413.86(e)(4)(I) (1989) (“1989

regulation”), known as Sequential Geographic Methodology

(“SGM”), arbitrary and capricious. On appeal, the Secretary

argues the agency’s Provider Review Reimbursement Board

(“PRRB”) improperly granted expedited judicial review

(“EJR”) to the Hospitals’ challenge to SGM. The Hospitals

cross appeal, challenging, among other determinations, the

district court’s failure to find the 1989 regulation both substantively and procedurally invalid on its face. 

Finding a lack of subject matter jurisdiction based on the

PRRB’s incorrect granting of EJR, we vacate the district

court’s invalidation of SGM, and remand to the district court

with instructions to dismiss the Hospitals’ challenge and further remand to the agency for it to determine the validity of

the methodology. We affirm the district court’s determination

as to the validity of the 1989 regulation.

I. BACKGROUND

A. Factual Background

The Hospitals operate residency training programs in rural

family medicine, and include Yakima Medical Center and

Yakima Valley Memorial Hospital (“Yakima Medical”),

located in Yakima Valley, Washington, St. Vincent Hospital

and Deaconess-Billings Clinic Health System (“St. Vincent”),

located in Billings, Montana, and Merle West Medical Center

(“Merle West”), located in Klamath Falls, Oregon. The five

Hospitals were recipients of Medicare DGME payments,

which are based on a hospital-specific PRA and calculated

according to several formulas. These formulas included the

1989 regulation and SGM. 

The 1989 regulation based the PRA for the new graduate

medical education programs on “the lower of the following:

(A) The hospital’s actual costs . . . (B) The mean value of per

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10595

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 4 of 18
resident amounts of hospitals located in the same geographic

wage area.”

1

 54 Fed. Reg. 40286, 40317 (Sept. 29, 1989). In

areas with “fewer than three amounts in the wage area, . . . the

intermediary [was required to] write HCFA [Health Care

Financing Administration]2 Central Office for a determination

of the per resident amount to use.” 54 Fed. Reg. at 40291. 

HCFA described SGM in a June 1997 letter to the reimbursement manager of Blue Cross of Montana. The methodology was used in the mid-1990s by HCFA to calculate the

PRAs for hospitals with “fewer than three amounts in the

wage area.” See 54 Fed. Reg. at 40291. In its letter, HCFA

noted:

If there are at least three hospitals in the same geographic wage area, we determine the base year per

resident amount based on a weighted average of the

per resident amounts in the same geographic wage

area. If there are less than three teaching hospitals in

the same geographic wage area, we include all hospitals in contiguous wage areas. If we continue to

have fewer than three hospitals for this calculation,

we use a statewide average. In the case of St. Vincent’s and Deaconess, there are fewer than three hospitals with teaching programs in the entire state so

1The term “same geographic wage area” refers to an urban area (“a metropolitan statistical area” (“MSA”) as defined by the Office of Management and Budget, certain urban areas specified by the Social Security

Amendments) or rural area (any area outside an urban area), 42 C.F.R.

§ 412.62(f), in the hospital-specific wage index as calculated by the Secretary. 42 C.F.R. § 412.63(w). 

2The Health Care Financing Administration is a division of HHS that

administers Medicare payments. HCFA was renamed Centers for Medicare and Medicaid Services (“CMS”) in 2001. See Press Release, U.S.

Dept. of Health & Human Services, The New Centers for Medicare &

Medicaid Services (CMS) (June 14, 2001) (available at http://

www.hhs.gov/news/press/2001pres/20010614a.html). We use CMS and

HCFA interchangeably throughout this Opinion. 

10596 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 5 of 18
we calculated a weighted average among all hospitals with teaching programs in contiguous states.

However, in its final rule, issued in 1997, the Secretary ultimately declined to adopt SGM as its methodology, relying

instead on the “regional weighted average per resident

amounts determined for each of the nine census regions established by the Bureau of Census for statistical and reporting

purposes” for areas with fewer than three hospitals in a given

geographic wage area. 62 Fed. Reg. 45966, 46004 (Aug. 29,

1997). 

Here, the Secretary calculated the Hospitals’ PRAs via

SGM, based on the weighted average of PRAs of teaching

hospitals in each state (for Merle West, Yakima Medical, the

PRAs of Oregon and Washington, respectively), or the

weighted average of PRAs of teaching hospitals in contiguous

states (St. Vincent). The Hospitals appealed these PRA determinations to the PRRB, contending their allowed Medicare

DGME costs exceeded these determinations.

B. Procedural Background

The Hospitals’ district court action challenged both the

Secretary’s 1989 regulation and “its prior ad-hoc methodology,” or SGM, as “inconsistent with the plain and unambiguous wording of the governing Medicare statute, inconsistent

with clear congressional intent, patently unreasonable, arbitrary and capricious, and otherwise contrary to law.” 

In 2005, the PRRB, which had granted EJR as to the validity of the Secretary’s 1989 regulation, granted EJR “over the

issue of whether 42 C.F.R. § 413.86(e)(4)(I) [(1989 regulation)], as applied by the Intermediaries [(via SGM)] to each

of the Providers in this appeal, violates 42 U.S.C.

§ 1395ww(h)(2)(F).” EJR permits a party to seek judicial

review in federal court, without the issuance of a final decision of the PRRB, of an action “which involves a question of

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10597

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 6 of 18
law or regulations relevant to the matters in controversy

whenever the Board determines . . . that it is without authority

to decide the question.” 42 U.S.C. § 1395oo(f)(1). 

In 2007, the court granted summary judgment in favor of

the Hospitals, and found SGM lacked the force of law and

that under the appropriate Skidmore level of deference,3 SGM

is arbitrary and capricious. In the same order, the court

accorded the 1989 regulation Chevron deference,4 upheld the

regulation, and declined to find the regulation arbitrary and

capricious. The court then ordered the Secretary in 2008 to

“calculate a weighted average PRA based on Plaintiffs’

Medicare-allowable base-year costs, and set each Plaintiff’s

PRA at the lesser of: (a) Each Plaintiff’s actual average cost

per resident; or (b) The average weighted cost per resident of

the five Plaintiffs.” The order required the Secretary to submit

the new figures to the court and allowed the court to retain

jurisdiction over the matter. The Secretary ultimately submitted those calculations, and the court awarded these amounts

and entered judgment for the Hospitals.

The Secretary filed a timely notice of appeal challenging

the subject matter jurisdiction of the district court under the

2005 EJR, the court’s reversal of the PRRB’s determination,

3

Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). Skidmore deference requires that “[t]he weight of such a judgment in a particular case

will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements,

and all those factors which give it power to persuade, if lacking power to

control.” Id.; see also Gonzales v. Oregon, 546 U.S. 243, 268-69 (2006).

4Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,

842-43 (1984). Chevron’s two-part analysis requires the court to ask, first,

“whether Congress has directly spoken to the precise question at issue.”

Id. at 842. If Congressional intent is clear, the court and the agency “must

give effect to the unambiguously expressed intent of Congress.” Id. at 843.

However, if the “statute is silent or ambiguous with respect to the specific

issue, the question for the court is whether the agency’s answer is based

on a permissible construction of the statute.” Id.; see also Edwards v.

McMahon, 834 F.2d 796, 799 (9th Cir. 1987). 

10598 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 7 of 18
via SGM, of the DGME amounts due to the Hospitals, and the

court’s limitation of the Secretary’s discretion to reaudit the

Hospitals’ base DGME costs. 

The Hospitals filed a timely cross appeal challenging the

court’s failure to invalidate SGM on procedural grounds, failure to find the 1989 regulation substantively and procedurally

invalid on its face, failure to specify, in the alternative, that its

remedy was based on the 1989 regulation itself, and the

exclusion of evidence of the Secretary’s comparable programs

under Fed. R. Evid. 408.

II. STANDARD OF REVIEW

We review de novo both the district court’s subject matter

jurisdiction and the district court’s grant of summary judgment. See Schnabel v. Lui, 302 F.3d 1023, 1029 (9th Cir.

2002) (subject matter jurisdiction); Rene v. MGM Grand

Hotel, Inc., 305 F.3d 1061, 1064 (9th Cir. 2002) (grant of

summary judgment), cert. denied, 123 S. Ct. 1573 (2003)

(same). Our review is not of the Secretary’s/PRRB’s reimbursement determination itself, but the district court’s determinations.

III. DISCUSSION

A. 2005 EJR Grant

The Secretary challenges the district court’s jurisdiction,

contending because reimbursement determinations under

SGM “do not turn on a question of law or regulation that the

PRRB cannot review, . . . they consequently are not amenable

to expedited judicial review” under 42 U.S.C. § 1395oo(f)(1).

Because SGM is an “ad hoc” methodology and does not meet

the requirements of § 1395oo(f)(1), we agree that the PRRB’s

2005 grant of EJR was in error, and the district court should

not have determined it had jurisdiction.

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10599

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 8 of 18
1. PRRB’s decision

[1] Section 1395oo(f) gives providers the right to obtain

judicial review of any action of the fiscal intermediary involving a question of law or regulations whenever the Board

determines that it is without authority to decide the question.

See Bethesda Hosp. Ass’n v. Bowen, 485 U.S. 399, 406 (1988)

(“Subsection (f)(1) grants providers the right to obtain judicial

review of an action of the fiscal intermediary, but the predicate is that the Board must first make a determination that it

is without authority to decide the matter because the provider’s claim involves a question of law or regulations.”).5

[2] The PRRB granted EJR for SGM in its 2005 proceeding “over the issue of whether [the 1989 regulation], as

applied by the Intermediaries to each of the Providers in this

appeal, violates 42 U.S.C. § 1395ww(h)(2)(F) by failing to

base the Providers’ average per-resident amounts on the

‘approved [full-time equivalent] resident amounts of comparable residency programs.” The PRRB found jurisdiction to

address the issue in a hearing,6 and then “conclude[d] it lack-

[ed] the authority to grant relief sought by the Providers[,]

using the Providers’ audited, Medicare allowable costs as the

basis for PRAs” because the remedy was not prescribed by

the 1989 regulation. It also stated it was unable to invalidate

“a method of reimbursement that is solely within the discretion of the Secretary to administer, as is the case here.” Here,

we evaluate the PRRB’s determination that it lacked the

authority to review SGM. If, as the Secretary contends, the

PRRB had the authority to decide the question of SGM’s

validity, then its grant of EJR was incorrect, and the district

court lacked subject matter jurisdiction to evaluate SGM’s

validity.

5The EJR statute also has an amount in controversy requirement, which

is not disputed here as having been met. See § 1395oo(f)(2). 

6Neither party here challenges the PRRB’s determination that it had

jurisdiction to conduct the hearing. 

10600 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 9 of 18
[3] The PRRB reviewed the decision of a fiscal

intermediary—CMS—as to the PRA for each hospital, which

was used to calculate the DGME funds. Per the statute, the

hospital had the “right to obtain judicial review of any action

of the fiscal intermediary”—here, the PRA determination by

the CMS using SGM—“which involves a question of law or

regulations relevant to the matters in controversy whenever

the Board determines . . . that it is without authority to decide

the question.” § 1395oo(f)(1). Our task is to determine

whether SGM is a “question of law or regulations relevant to

the matters in controversy.” See id.

2. Ad hoc policy or regulation

The Secretary argues that SGM was an “ad hoc” policy and

not a regulation under the statute. We agree.7 The district

7Anticipating the argument that the PRRB’s lack-of-authority determination under § 1395oo(f) is not subject to review by the federal courts, our

review evaluates the PRRB’s lack-of-authority determination, as distinct

from its jurisdictional determination. While the authority of the federal

courts to review the final decision of the PRRB that it lacks jurisdiction

has been subject to much debate in the courts, see Edgewater Hosp., Inc.

v. Bowen, 857 F.2d 1123, 1130-32 (7th Cir. 1988), there has not been

much debate surrounding the PRRB’s determination that it lacks the

authority to address an issue. See id. at 1130 (“As a consequence, jurisdiction over the Board’s determination that it does not have authority is

clear.”) (citing Hosp. Ass’n of R.I. v. Sec’y of Health & Human Servs., 820

F.2d 533, 537 (1st Cir. 1987)). The Seventh Circuit, the only circuit to

address the issue directly, has stated, “the statute itself establishes a right

to judicial review of the Board’s determination that it lacks the authority

to decide a question of law or regulations by designating that determination a ‘final decision.’ ” Bowen, 857 F.2d at 1130. The First Circuit has

not addressed the jurisdiction of the federal courts over the Board’s lackof-authority determination; rather, it addressed whether the Board is

required to consider a particular regulation or policy itself before granting

EJR. See Hosp. Ass’n of R.I., 820 F.2d at 537-38. The First Circuit merely

concluded that the PRRB’s grant of EJR creates a right to judicial review,

and did not address the propriety of, or challenges to, the Board’s lack of

authority determination. See id. In fact, the Seventh Circuit’s citation of

Hospital Association of R.I. suggests that the First Circuit case supports

the federal courts’ review of the PRRB’s lack-of-authority determination.

See Edgewater Hosp., at 1130.

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10601

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 10 of 18
court lacked jurisdiction to review SGM because SGM was

not a regulation; no rule was promulgated as this was a caseby-case adjudication, and did not involve rulemaking of any

kind.

[4] We distinguish rulemaking from adjudication:

A rule is: The whole or a part of an agency statement

of general or particular applicability and future effect

designed to implement, interpret, or prescribe law or

policy or describing the organization, procedure, or

practice requirements of an agency. . . . An adjudication (which results in an order) is virtually any

agency action that is not rulemaking. 5 U.S.C.

§ 551(6)-(7). Two principal characteristics distinguish rulemaking from adjudication. First, adjudications resolve disputes among specific individuals in

specific cases, whereas rulemaking affects the rights

of broad classes of unspecified individuals. Second,

because adjudications involve concrete disputes,

they have an immediate effect on specific individuals (those involved in the dispute). Rulemaking, in

contrast, is prospective, and has a definitive effect on

individuals only after the rule subsequently is

applied.

Yesler Terrace Community Council v. Cisneros, 37 F.3d 442,

448 (9th Cir. 1994) (internal citations omitted) (alterations in

original). A regulation is defined as a “rule or order, having

legal force, usually issued by an administrative agency.” See

Black’s Law Dictionary (8th ed. 2004). Here, SGM was promulgated not through notice and comment rulemaking, formal

adjudication, or formal rulemaking, but rather came in a letter

to the Hospitals, which stated it would be applied on a caseby-case basis. SGM likewise “did not affect the rights of a

‘broad class’ of people, and so no notice and comment was

required,” as it was not rulemaking. See MacLean v. Dep’t of

Homeland Security, 543 F.3d 1145, 1152 (9th Cir. 2008). It

10602 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 11 of 18
was applied to “specific individuals in specific cases,” namely

each of the Hospitals, and involved the “concrete dispute[ ]”

of the calculation of a PRA for hospitals with less than three

comparable hospitals in the area. See Yesler Terrace, 37 F.3d

at 448. 

The effect was immediate; once the Hospitals received the

letter, they knew their PRA and therefore their subsequent

DGME reimbursement. See id.; see also RLC Indus. Co. v.

Commissioner, 58 F.3d 413, 417 (9th Cir. 1995)

(“Rulemaking, the quasi-legislative power, is intended to add

substance to the Acts of Congress, to complete absent but

necessary details . . . Adjudication, the quasi-judicial power,

is intended to provide for the enforcement of agency . . . regulations on a case-by-case basis.”) (citations omitted); Portland

Audubon Soc’y v. Endangered Species Comm., 984 F.2d

1534, 1540 (9th Cir. 1993) (“Where an agency’s task is to

adjudicate disputed facts in particular cases, an administrative

determination is quasi-judicial. By contrast, rulemaking concerns policy judgments to be applied generally in cases that

may arise in the future.”) (citations omitted). 

[5] “Interpretations such as those in opinion letters—like

interpretations contained in policy statements, agency manuals, and enforcement guidelines, all . . . lack the force of law”

Christensen v. Harris County, 529 U.S. 576, 587 (2000). The

PRRB, therefore, had the authority to decide the question at

issue because it did not involve a question of law or regulations. See § 1395oo(f)(1). The Board incorrectly determined

that it lacked authority to decide the issue, and, as a result,

incorrectly granted EJR. Therefore, the district court lacked

jurisdiction over the validity of SGM. We vacate the district

court’s invalidation of SGM, and remand to the district court

with instructions to dismiss the Hospitals’ challenge and further remand to the agency for it to determine the validity of

the methodology.8

8Because we find the district court lacked subject matter jurisdiction,

and remand to the agency to consider the validity of SGM, we do not

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10603

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 12 of 18
B. The 1989 Regulation

The remaining issue before us, from the Hospitals’ cross

appeal, is whether the district court erred in concluding the

1989 regulation was both substantively and procedurally valid

on its face. The Hospitals argue the district court erred in failing to invalidate, under Chevron, 467 U.S. at 842-43, the portion of the 1989 regulation applicable to hospitals in

geographic wage areas with less than three teaching hospitals,

because the regulation deviated from the mandate of 42

U.S.C. § 1395ww(h)(2) by “impermissibly differentiat[ing] a

subset of new teaching programs from all others.”

9

 They also

argue the 1989 regulation was arbitrary and capricious under

5 U.S.C. § 706(2)(A) due to the Secretary’s failure to provide

notice of or rationale of the methodology to be applied by the

HCFA with respect to Hospitals in a geographic wage area

with less than three hospitals.

The district court did not err in upholding the validity of the

regulation under Chevron, nor did it err in declining to find

the 1989 regulation arbitrary and capricious.10

1. Chevron step one

[6] We ask first “whether Congress has directly spoken to

address the Hospitals’ appeal of the district court’s exclusion of evidence

of comparable programs in its remedy determination following its invalidation of SGM, and the Hospitals’ challenge to the district court’s failure

to specify that its remedy was based on the 1989 regulation itself. 

9The Hospitals do not otherwise challenge the substance of the 1989

regulation. 

10The district court’s reasoning for declining to reach the § 706(2)(A)

analysis was, however, incorrect. The replacement of the 1989 regulation

by the 1997 regulation did not render the Hospitals’ claim moot. Despite

the replacement regulation, the Hospitals suffered losses to their allotted

DGME payments under the calculation of their PRAs during the 1990s

under the carveout provision of the 1989 regulation. 

10604 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 13 of 18
the precise question at issue.” Chevron, 467 U.S. at 842. Here,

the statute is ambiguous with respect to the Secretary’s

responsibility of establishing PRAs for post-1984 DGME programs. The plain language of the statute is based in the

ambiguous term “comparable programs”: “the Secretary shall

. . . provide for such approved FTE [full-time equivalent] resident amounts as the Secretary determines to be appropriate,

based on approved FTE resident amounts for comparable programs.” 42 U.S.C. § 1395ww(h)(2). Congress, however, provided no criteria to determine program compatibility. 

The Hospitals cite to the Federal Register, and the Secretary’s “inten[t] to establish reasonable base-year DGME costs

in a manner that would not disadvantage new programs.”

However, in that same text of the regulation, the Secretary

also notes, “If there are fewer than three amounts in the wage

area, we are proposing that the intermediary write HCFA

Central Office for a determination of the per resident amount

to use. The per resident amount used for the first year would

be updated in future years without regard to actual costs.” 53

Fed. Reg. at 36595 (emphasis added). Simply indicating that

the Secretary did not want hospitals to be disadvantaged is not

an indication of the meaning of “comparable,” and certainly

does not preclude this portion of the 1989 regulation, particularly when the Secretary notes that updates in future years will

be without regard to actual costs.

The Hospitals also contend the “comparable programs”

requirement is rendered superfluous by the portion of the Secretary’s regulation here, and that the Secretary’s interpretation

“adds new language to the statute not contained therein,”

thereby creating two different classes of new teaching programs. Nothing in the statute, however, attempts to define

“comparable programs,” or exclude any possible definitions;

the regulation merely defines what is ambiguous within the

statute.

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10605

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 14 of 18
2. Chevron step two

[7] Under Chevron step two, if congressional intent is

ambiguous, a reviewing court must defer to the agency’s

interpretation of the statute unless it is “contrary to clear congressional intent or frustrates the policy Congress sought to

implement.” Schneider v. Chertoff, 450 F.3d 944, 960 (9th

Cir. 2006). The Hospitals argue nothing in the statute implies

the Secretary may treat hospitals in wage areas with less than

three teaching hospitals different from all other new programs. However, nowhere does the statute itself forbid the

Secretary from making such an exception. The district court

correctly noted that “[g]iven the absence of clear congressional intent to the contrary, it was permissible for the Secretary

to provide for the exceptional situation presented by hospitals

with new GME programs located in areas where a meaningful

average could not be calculated.” Therefore, the challenged

regulation was correctly deemed valid and accorded Chevron

deference.

3. Arbitrary and capricious challenge

The 1989 regulation was promulgated via informal rulemaking under 5 U.S.C. § 553, and such action may be set

aside if found “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with the law.” 5 U.S.C.

§ 706(2)(A); see Motor Vehicle Mfrs. Ass’n v. State Farm

Mut. Auto. Ins. Co., 463 U.S. 29, 41 (1983). An arbitrary and

capricious challenge requires us to adhere to a narrow scope

of review, wherein we are “not to substitute [our] judgment

for that of the agency.” State Farm, 463 U.S. at 43. The

agency, however, is required to “examine the relevant data

and articulate a satisfactory explanation for its action including a rational connection between the facts found and the

choices made,” id. (internal quotation marks and citation

omitted), and we in turn must review that explanation, considering “whether the decision was based on a consideration of

the relevant factors and whether there has been a clear error

10606 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 15 of 18
of judgment.” Id. (internal quotation marks and citation omitted). A rule is arbitrary and capricious “if the agency has

relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the

problem, offered an explanation for its decision that runs

counter to the evidence before the agency, or is so implausible

that it could not be ascribed to a difference in view or the

product of agency expertise.” Id. 

In our analysis of whether an agency’s action was arbitrary

or capricious, we are required to be “highly deferential, presuming the agency action to be valid.” J & G Sales Ltd. v.

Truscott, 473 F.3d 1043, 1051 (9th Cir. 2007) (citing Irvine

Med. Ctr. v. Thompson, 275 F.3d 823, 830-31 (9th Cir.

2002)). “Where [an] agency’s line-drawing does not appear

irrational and the party challenging the agency action has not

shown that the consequences of the line-drawing are in any

respect dire, courts will leave that line-drawing to the agency’s discretion.” Id. at 1052 (citing Leather Indus. of Am. v.

EPA, 40 F.3d 392, 409 (D.C. Cir. 1994) (internal modifications and quotation marks omitted)). And while an agency

should provide a reasoned basis for its actions, State Farm,

463 U.S. at 43, we “will uphold a decision of less than ideal

clarity if the agency’s path may be reasonably discerned.”

McFarland v. Kempthorne, 545 F.3d 1106, 1113 (9th Cir.

2008) (citing State Farm, 463 U.S. at 43) (internal modifications and quotation marks omitted).

[8] The Hospitals argue the 1989 regulation was arbitrary

and capricious, first because the Secretary did not articulate

any justification for treating a subset of new teaching programs differently from all others when she permitted HCFA

to make the PRA determination of hospitals with fewer than

three hospitals in a given wage area. The Secretary’s assumption in creating this “carveout” exception appears to be that

the resulting mean value of PRAs for hospitals with less than

three hospitals in a given wage area is inaccurate. On its face,

the assumption does not appear unreasonable or arbitrary; calPROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10607

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 16 of 18
culating a mean from a larger pool results in a more accurate

number than an average of two numbers (two hospitals in a

given wage area) or the reliance on one number alone. And

while the failure to provide an explanation for the choice of

the carveout is troubling, see State Farm, 463 U.S. at 50-51,

it does not appear to rise to the level of “rel[ying] on factors

which Congress has not intended it to consider, entirely fail-

[ing] to consider an important aspect of the problem, offer-

[ing] an explanation for its decision that runs counter to the

evidence before the agency, or [being] so implausible that it

could not be ascribed to a difference in view or the product

of agency expertise.” See State Farm, 463 U.S. at 43; cf. id.

at 46 (rescission of a regulatory provision by NHSTA arbitrary and capricious where the agency “gave no consideration

whatever to modifying the standard” to require the use of airbag technology) (emphasis added); see also J & G Sales Ltd.,

473 F.3d at 1052 (agency’s demand letter with reliance on

absolute number of firearms traces was not arbitrary and

capricious because “[t]he agency need not craft the perfect

threshold in order to survive review, but merely demonstrate

that its threshold stems from reasoned decision making . . .

[which] the agency has done”). The carveout provision does

not appear to be a product of irrational line-drawing, and the

Hospitals, while they have shown a loss of funds from the

provision, have not “shown that the consequences of the linedrawing are in any respect dire.” See J & G Sales Ltd., 473

F.3d at 1052 (internal quotation marks and citation omitted).

[9] Alternatively, according to the Hospitals, the 1989 regulation was arbitrary and capricious because the Secretary

“failed to consider key aspects of the issue, or to provide a

plausible explanation for this decision” when she did not

modify the final rule based on comments she received, and

did not explain how criteria reported in the rule “would ensure

that PRAs were set based on reasonable costs and truly comparable programs.” However, the comments cited by the Hospitals do not address the perceived inappropriateness of

treating hospitals with less than three in a wage area differ10608 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 17 of 18
ently from other hospitals. The district court, therefore, did

not err in failing to find the 1989 regulation arbitrary and

capricious.

IV. CONCLUSION

The district court lacked subject matter jurisdiction to consider the validity of SGM. We vacate the district court’s

invalidation of SGM, and remand to the district court with

instructions to dismiss the Hospitals’ challenge and further

remand to the agency for it to determine the validity of the

methodology. We affirm the district court’s determination that

the 1989 regulation was substantively and procedurally valid.

VACATED AND REMANDED IN PART; AFFIRMED

IN PART. Each party shall bear its own costs on appeal.

PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10609

Case: 09-35402 07/23/2010 ID: 7415116 DktEntry: 21-1 Page: 18 of 18