Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-05325/USCOURTS-caDC-98-05325-0/pdf.json

Parties Involved:
County of Los Angeles
Appellant
Donna E. Shalala
Appellee

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 7, 1999 Decided October 1, 1999

No. 98-5254

County of Los Angeles, a political subdivision

of the State of California, owner and operator of

Los Angeles County/USC Medical Center,

Harbor/UCLA Medical Center,

Martin Luther King Jr./Drew Medical Center,

Olive View Medical Center and High Desert Hospital, et al.

Appellees/Cross-Appellants

v.

Donna E. Shalala, Secretary,

U.S. Department of Health and Human Services

Appellant/Cross-Appellee

Consolidated with

Nos. 98-5255, 98-5256, 98-5257, 98-5258, 98-5259,

98-5260, 98-5261, 98-5262, 98-5325, 98-5326,

98-5327, 98-5328, 98-5329, 98-5330, 98-5331,

98-5332, 98-5333

---------

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Appeals from the United States District Court

for the District of Columbia

(No. 93cv00146)

(No. 93cv00147)

(No. 93cv00479)

(No. 93cv00692)

(No. 93cv00836)

(No. 93cv00837)

(No. 93cv01188)

(No. 93cv02069)

(No. 94cv01485)

Peter R. Maier, Attorney, United States Department of

Justice, argued the cause for appellant/cross-appellee. With

him on the briefs were Frank W. Hunger, Assistant Attorney

General, Wilma A. Lewis, United States Attorney, and Barbara C. Biddle, Attorney, United States Department of Justice.

Lloyd A. Bookman argued the cause for appellees/crossappellants. With him on the briefs were David H. Eisenstat,

Byron J. Gross, John R. Hellow, Michael G. Hercz, John R.

Jacob, and David B. Palmer.

Before: Wald, Silberman, and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Wald.

Wald, Circuit Judge: Brought by the owners of Medicareprovider hospitals ("Hospitals") and the Secretary of Health

and Human Services ("Secretary"), these cross-appeals present two issues. First, under the Medicare statute, must the

Secretary provide hospitals with retroactive reimbursements

to ensure that aggregate outlier payments during any given

fiscal year meet minimum statutory targets? And second,

has the Secretary adequately explained why, when calculating

outlier thresholds for fiscal years 1985-1986, she relied on a

1981 database instead of more contemporaneous records from

1984 Medicare discharges? Finding that Congress had spoken directly and unambiguously to the first question, the

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district court granted partial summary judgment to the Hospitals. With respect to the second issue, however, the court

perceived nothing unreasonable in the Secretary's choice of

data, and entered judgment accordingly for the Secretary.

Because we disagree with the district court on both points, we

now reverse.

I. Background

Through a "complex statutory and regulatory regime,"

Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993),

the Medicare program reimburses qualifying hospitals for the

services that they provide to eligible patients. See Social

Security Act, Pub. L. No. 89-97, tit. XVIII, 79 Stat. 286, 291

(1965) (codified as amended at 42 U.S.C. ss 1395-1395ggg

(1994 & Supp. III 1997)). From its inception in 1965 until

October 1983, Medicare compensated hospitals for the "reasonable costs" of the inpatient services that they furnished.

See 42 U.S.C. s 1395f(b). Experience proved, however, that

this system bred "little incentive for hospitals to keep costs

down" because "[t]he more they spent, the more they were

reimbursed." Tucson Med. Ctr. v. Sullivan, 947 F.2d 971,

974 (D.C. Cir. 1991).

To stem the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare

reimbursement methodology in 1983. See Social Security

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

149. Since then, this new regime, known as the Prospective

Payment System ("PPS"), has reimbursed qualifying hospitals at prospectively fixed rates. By establishing predetermined reimbursement rates that remain static regardless of the costs incurred by a hospital, Congress sought "to

reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost/effective

hospital practices." H.R. Rep. No. 98-25, at 132 (1983),

reprinted in 1983 U.S.C.C.A.N. 219, 351.

Calculating prospective-payment rates begins with determining the "federal rate," a standard nationwide cost rate

based on the average operating costs of inpatient hospital

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services. See 42 U.S.C. s 1395ww(d)(2)(A)-(B); 49 Fed. Reg.

234, 251 (1984). To account for regional variations in labor

costs, the Secretary then establishes a wage index that augments the adjusted standardized payment depending on the

location of a qualifying hospital. s 1395ww(d)(2)(H),

(d)(3)(E). The final variable is an additional weighting factor

that reflects the disparate hospital resources required to treat

major and minor illnesses. s 1395ww(d)(4). For each of 470

medical conditions--known as diagnosis related groups or

"DRGs"--the Secretary assigns particular weights by which

the federal rate is to be multiplied. The more complicated

and costlier the treatment is, the greater the weight assigned

to that particular DRG will be. To calculate the final "DRG

prospective payment rate" for a patient discharge, the Secretary takes the federal rate, adjusts it according to the wage

index, and then multiplies it by the weight assigned to the

patient's DRG. By statutory mandate, the Secretary must

publish the weights and values that she will factor into the

prospective-payment calculus before the start of each fiscal

year. s 1395ww(d)(6).

Despite the anticipated virtues of PPS, Congress recognized that health-care providers would inevitably care for

some patients whose hospitalization would be extraordinarily

costly or lengthy. To insulate hospitals from bearing a

disproportionate share of these atypical costs, Congress authorized the Secretary to make supplemental "outlier payments." During the years at issue in these cross-appeals, the

outlier-payment provisions were set forth in four clauses of

the Medicare statute. 42 U.S.C. s 1395ww(d)(5)(A)(i)-(iv)

(Supp. IV 1986). With the first two clauses, Congress established two classes of outlier payments: day outliers and cost

outliers. s 1395ww(d)(5)(A)(i)-(ii). A hospital could qualify

for a day-outlier payment if the patient's length of stay

exceeded the mean length of stay for that particular DRG by

a fixed number of days or standard deviations.

s 1395ww(d)(5)(A)(i). Along the same lines, the Secretary

would make cost-outlier payments when a hospital's costadjusted charges surpassed either a fixed multiple of the

applicable DRG prospective-payment rate or such other fixed

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dollar amount that the Secretary established.

s 1395ww(d)(5)(A)(ii). In the third clause, Congress provided

that outlier payments "shall be determined by the Secretary

and shall approximate the marginal cost of care beyond the

cutoff point applicable" to the day or cost outlier.

s 1395ww(d)(5)(A)(iii).

It is the fourth and final clause, however, that forms the

textual nub of the present controversy.

s 1395ww(d)(5)(A)(iv). During 1985 and 1986, paragraph

(5)(A)(iv) provided:

The total amount of the additional payments made under

this subparagraph for discharges in a fiscal year may not

be less than 5 percent nor more than 6 percent of the

total payments projected or estimated to be made based

on DRG prospective payment rates for discharges in that

year.

Id. Traditionally, the Secretary has read paragraph

(5)(A)(iv) to mean that at the start of each fiscal year, she

must establish the fixed thresholds beyond which hospitals

will qualify for outlier payments at levels likely to result in

outlier payments totaling between five and six percent of

projected DRG payments for that year. In making this

estimation, the Secretary first settles on the per-diem outlier

payment, which pursuant to s 1395ww(d)(5)(A)(iii), must approximate the marginal cost of care. She then examines

historical Medicare-discharge data to determine which thresholds, when multiplied by the per-diem payment rate, would

probably yield total outlier payments falling within the fiveto-six-percent range in paragraph (5)(A)(iv). As the Secretary observed during the rulemaking, however, "given the

data available, forecasts of probable future outlier payments

are inexact." 50 Fed. Reg. 35,646, 35,710 (1985). If it turns

out that the Secretary overestimated the mean length of stay

for DRGs, the actual total outlier payments at the end of the

year may amount to less than five percent of estimated DRGrelated payments. Conversely, underestimating the mean

length of stay might produce outlier payments in excess of six

percent of estimated total DRG payments.

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Whether the Secretary's projections prove to be correct

will depend, in large part, on the predictive value of the

historical data on which she bases her calculations. For fiscal

year 1984, the Secretary relied on data culled from the 1981

Medicare Provider Analysis and Review ("1981 MEDPAR")

file, a database containing 1.6 million Medicare discharges

from 1981. As a product of the old reasonable-cost system,

however, the 1981 MEDPAR file obviously did not reflect one

of "[t]he most commonly accepted expectation[s] about the

PPS at the time of its inception[:] that it would result in

shorter stays for Medicare patients." Office of Research &

Demonstrations, Health Care Fin. Admin., U.S. Dep't of

Health & Human Servs., Pub. No. 03231, Report to Congress:

Impact of the Medicare Hospital Prospective Payment System

6-13 (1984). By 1984, however, preliminary data indicated

that the mean length of stay for virtually all DRGs had, as

anticipated, declined dramatically under PPS. The Secretary, nevertheless, chose to rely again on the 1981 MEDPAR

file in setting outlier thresholds for fiscal years 1985-1986.

During those years, though the Secretary set thresholds at a

level projected to result in outlier payments at or above

paragraph (5)(A)(iv)'s five-percent floor, actual outlier payments in 1985 constituted only 3.0 percent of estimated DRGrelated payments and in 1986 they amounted to 4.4 percent.1

Given the enormity of the Medicare program, these seemingly

modest percentage differences represent substantial sums of

money: $241 million for fiscal year 1985 and $101 million for

fiscal year 1986.

Because actual outlier payments for fiscal years 1985-1986

amounted to less than five percent of projected DRG-related

payments, the Hospitals petitioned the Secretary for retroactive reimbursements to satisfy the difference. According to

the Hospitals, paragraph (5)(A)(iv) does more than instruct

the Secretary about where she should set outlier thresholds

__________

1 Note that these percentages were derived from the actual total

DRG prospective payments in 1985 and 1986, not the projected

payments as set forth in the statute. Both parties have agreed that

this is the only practical method of calculating shortfalls at this

point. See Br. of Sec'y at 13 & n.4; Br. of Hosps. at 4 & n.3.

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at the beginning of each fiscal year; it affirmatively commands her to recalibrate retroactively the outlier thresholds

if, after the fiscal year concludes, actual outlier payments do

not equal at least the five-percent statutory target. Moreover, the Hospitals claimed that the Secretary had acted

arbitrarily and capriciously by relying on the 1981 MEDPAR

file when she forecast outlier thresholds for fiscal years 1985-

1986. The Secretary rejected both claims, and the Provider

Reimbursement Review Board authorized the Hospitals to

seek expedited judicial review pursuant to 42 U.S.C.

s 1395oo(f).

In an opinion and order dated January 20, 1998, the district

court granted in part and denied in part both the Secretary's

and the Hospitals' cross-motions for summary judgment. In

granting a portion of the Hospitals' motion, the court proceeded no further than the first step of Chevron U.S.A. Inc.

v. Natural Resources Defense Council, Inc., 467 U.S. 837,

842-43 (1984), concluding that paragraph (5)(A)(iv) unambiguously requires the Secretary to adjust outlier payments retroactively to ensure that total actual outlier payments fall

within the statute's five-to-six-percent range. County of Los

Angeles v. Shalala, 992 F. Supp. 26, 31-33 (D.D.C. 1998).

Holding, however, that the Secretary's decision to favor the

1981 MEDPAR file over the more recent, though preliminary,

1984 data when determining outlier thresholds was "a rational

choice between two imperfect databases," the district court

granted the Secretary's motion for summary judgment on the

Hospitals' claim of arbitrary and capricious agency action.

Id. at 34-36.

Having determined that paragraph (5)(A)(iv) required the

Secretary to make retroactive outlier payments to the Hospitals, the district court instructed the parties to meet and

confer on how to structure the final remedy. On April 30,

1998, based largely on a joint stipulation filed by the parties,

the district court entered an order granting judgment to the

parties on each of the claims on which they respectively

prevailed. While the April 30 order also instructed the

Secretary to tender retroactive outlier payments to the Hospitals, it did not specify a sum certain to be paid; rather, the

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court left it to the Secretary to calculate the amount owed.

Thereafter, the Secretary noted a timely appeal and the

Hospitals noted timely cross-appeals.

II. Analysis

A. Jurisdiction

Before reaching the merits, it is necessary to examine our

jurisdiction to entertain these cross-appeals. Section 1291 of

the Judicial Code provides that the courts of appeals may

review "all final decisions of the district courts of the United

States." 28 U.S.C. s 1291 (1994). In the proceedings below,

the district court, managing this case as it would any gardenvariety civil suit, adjudicated not only the respective legal

rights of the parties but also took steps toward decreeing a

proper remedy. Thus in its January 20, 1998 order, the court

resolved the merits of the Hospitals' claims, and with its April

30, 1998 order, directed the Secretary to calculate the amount

of outlier payments due to the Hospitals and to make payment accordingly. This latter order has spawned some confusion about our jurisdiction because of the general rule applicable to civil actions that "where assessment of damages or

awarding of other relief remains to be resolved," a district

court's judgment is not " 'final' within the meaning of 28

U.S.C. s 1291." Liberty Mut. Ins. Co. v. Wetzel, 424 U.S.

737, 744 (1976); see also A & S Council Oil Co. v. Lader, 56

F.3d 234, 238 (D.C. Cir. 1995) (holding that an order establishing liability but referring the issue of damages to arbitration is not final). For it is clear that neither of the district

court's orders resolved the precise quantum of payments to

be made to the Hospitals.

This rule of finality does not apply here, however, because

this is not an appeal from an ordinary civil judgment rendered by the district court. With both of their claims, the

Hospitals challenged the Secretary's actions under section

10(e) of the Administrative Procedure Act, 5 U.S.C. s 706(2).

As we have often observed, "[w]hen a final agency action is

challenged under the APA in district court, if the relevant

substantive statute does not provide for direct review in the

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court of appeals, the district court does not perform its

normal role" but instead "sits as an appellate tribunal." PPG

Indus., Inc. v. United States, 52 F.3d 363, 365 (D.C. Cir.

1995) (quoting Marshall County Health Care Auth. v. Shalala, 988 F.2d 1221, 1225 (D.C. Cir. 1993)); accord James

Madison Ltd. v. Ludwig, 82 F.3d 1085, 1096 (D.C. Cir. 1996)

("Generally speaking, district courts reviewing agency action

under the APA's arbitrary and capricious standard do not

resolve factual issues, but operate instead as appellate courts

resolving legal questions."), cert. denied, 519 U.S. 1077 (1997).

Whether it is a court of appeals or a district court, "[u]nder

settled principles of administrative law, when a court reviewing agency action determines that an agency made an error of

law, the court's inquiry is at an end: the case must be

remanded to the agency for further action consistent with the

corrected legal standards." PPG Indus., 52 F.3d at 365; see

also South Prairie Constr. Co. v. Local No. 627, Int'l Union

of Operating Eng'rs, 425 U.S. 800, 806 (1976); SEC v. Chenery Corp., 318 U.S. 80, 94-95 (1943). Once, therefore, the

district court held that the Secretary had misinterpreted

s 1395ww(d)(5)(A)(iv), it should have remanded to the Secretary for further proceedings consistent with its conception of

the statute. Not only was it unnecessary for the court to

retain jurisdiction to devise a specific remedy for the Secretary to follow, but it was error to do so. See Ommaya v.

National Insts. of Health, 726 F.2d 827, 830 (D.C. Cir. 1984)

("If MSPB relied on incorrect legal grounds, it would be error

for this court to enforce without first remanding for agency

examination of the evidence and proper fact-finding.") (quoting White v. United States Dep't of the Army, 720 F.2d 209,

210 (D.C. Cir. 1983)). Accordingly, because that was all that

the district court had the power to do, we construe its

January 20, 1998 order as a remand to the Secretary, and

ignore, for jurisdictional purposes, its later order on specific

relief.

Of course, properly characterizing the district court's order

as a remand does not, without more, resolve our jurisdictional

quandary, for a "remand order usually is not a final decision."

NAACP v. United States Sugar Corp., 84 F.3d 1432, 1436

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(D.C. Cir. 1996). We have recognized "an exception to this

general rule, however, where the agency to which the case is

remanded seeks to appeal and it would have no opportunity to

appeal after the proceedings on remand." Occidental Petroleum Corp. v. SEC, 873 F.2d 325, 330 (D.C. Cir. 1989).

Animating this principle is a pragmatic concern. Because an

agency must conduct its proceedings and render its decision

pursuant to the legal standard that the district court articulates in its remand order, "[u]nless another party appeals [the

agency's subsequent] decision, the correctness of the district

court's legal ruling will never be reviewed by the court of

appeals, notwithstanding the agency's conviction that the

ruling is erroneous." Id. Here, were the Secretary unable

to appeal the district court's decision at this point, on remand

she would have to interpret paragraph (5)(A)(iv) as the district court has construed it, and disburse millions of dollars in

retroactive outlier payments to various Medicare-provider

hospitals. Absent an appeal from that decision by one of the

Hospitals, the Secretary would have no opportunity to challenge the legal basis for the disbursements. Our jurisdiction

is therefore proper because the Secretary's appeal falls within

the exception recognized in Occidental Petroleum. Additionally, vested with jurisdiction to review the Secretary's appeal

under s 1291, we may also consider the Hospitals' crossappeal of the district court's grant of summary judgment to

the Secretary on their arbitrary and capricious agency-action

claim. See United States Sugar Corp., 84 F.3d at 1436.

B. The Secretary's Appeal

Turning first to the Secretary's challenge, we face a question of statutory interpretation that the district court resolved

in the affirmative: whether, under s 1395ww(d)(5)(A)(iv), the

Secretary must make retroactive reimbursements to ensure

that aggregate outlier payments during any given fiscal year

constitute at least five percent of estimated or projected

DRG-related payments. Because we may set aside agency

action only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C.

s 706(2)(A), we accord no particular deference to the judgment of the district court when conducting our review. See

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HCA Health Servs. v. Shalala, 27 F.3d 614, 616 (D.C. Cir.

1994); Hennepin County v. Sullivan, 883 F.2d 85, 91 (D.C.

Cir. 1989) ("Our review proceeds as if this case were an

immediate appeal from a decision reached after an administrative hearing on the record."); Biloxi Reg'l Med. Ctr. v.

Bowen, 835 F.2d 345, 348-49 (D.C. Cir. 1987).

We initiate statutory analyses of the sort presented here by

first asking whether "Congress has directly spoken to the

precise question at issue." Chevron U.S.A. Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).

For if after "exhaust[ing] the traditional tools of statutory

construction," Natural Resources Defense Council, Inc. v.

Browner, 57 F.3d 1122, 1125 (D.C. Cir. 1995) (quoting Chevron, 467 U.S. at 843 n.9), we ascertain that Congress's intent

is clear, "that is the end of the matter." Chevron, 467 U.S. at

842. But "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. at 843. Where judicial review is refracted

through this analytic prism, the "view of the agency charged

with administering the statute is entitled to considerable

deference; and to sustain it, we need not find that it is the

only permissible construction that [the agency] might have

adopted." Chemical Mfrs. Ass'n v. Natural Resources Defense Council, Inc., 470 U.S. 116, 125 (1985).

Contending that the statutory language boasts an ambiguity, the Secretary maintains that she has reasonably construed

paragraph (5)(A)(iv) as prescribing a specific methodology

that she must follow when setting outlier thresholds at the

beginning of each fiscal year. Under the Secretary's interpretation, paragraph (5)(A)(iv) mandates that she must select

outlier thresholds which, when tested against historical data,

will likely produce aggregate outlier payments totaling between five and six percent of projected or estimated DRGrelated payments. Because, under the Secretary's construction, paragraph (5)(A)(iv) speaks only to how she is to calculate outlier thresholds for the forthcoming year, the Secretary

posits that she has no obligation to ensure that actual outlier

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payments for the year total five percent of projected DRGrelated payments.

Advocating a results-oriented approach, however, the Hospitals argue, and the district court agreed, that the Secretary's interpretation contradicts the unambiguous meaning of

paragraph (5)(A)(iv). The textual lodestar guiding their

plain-meaning critique is the single phrase "payments made."

According to the Hospitals, by indicating in paragraph

(5)(A)(iv) that "the total amount of the additional payments

made ... may not be less than 5 percent" of total DRGrelated payments "estimated or projected to be made," 42

U.S.C. s 1395ww(d)(5)(A)(iv) (Supp. IV 1986) (emphasis added), Congress unmistakably meant that the total amount of

additional payments actually made during a fiscal year must

meet the five-percent target. During years in which the

Secretary's chosen thresholds yield outlier payments that fall

short of the statutory mark, the Hospitals' interpretation

would require the Secretary to bridge the difference by

recalibrating outlier variables and making retroactive payments accordingly.

Standing alone, however, the phrase "payments made"

hardly conveys a single meaning, much less the one that the

Hospitals advance. As it is employed in paragraph (5)(A)(iv),

"payments made" is "simply an adjectival phrase, not a

verbial phrase indicating the past tense, and hence allows

alternative temporal readings." United States Dep't of the

Treasury v. FLRA, 960 F.2d 1068, 1072 (D.C. Cir. 1992). It

is not unlike the phrase "recognized as reasonable," which the

Supreme Court, quoting favorably from our decision in Administrators of the Tulane Educational Fund v. Shalala, 987

F.2d 790 (D.C. Cir. 1993), held "does not tell us whether

Congress means to refer the Secretary to action already

taken or to give directions on actions about to be taken."

Regions Hosp. v. Shalala, 522 U.S. 448, ---, 118 S. Ct. 909,

916 (1998) (quoting Tulane Educ. Fund, 987 F.2d at 796).

Evincing the same syntactical equivalence, the phrase "payments made" in paragraph (5)(A)(iv), though certainly capable

of accommodating the Hospitals' interpretation, can just as

easily be read to reflect Congress's intent to "give directions

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on actions about to be taken." Id. In other words, instead of

embodying a retrospective inquiry into the amount of outlier

payments that have been made, the phrase "payments made

under this subparagraph" might just as plausibly reflect a

prospective command to the Secretary about how to structure

outlier thresholds for payments to be made in advance of each

fiscal year. Cf. Regions Hosp., 522 U.S. at ---, 118 S. Ct. at

916 ("[T]he phrase 'recognized as reasonable' might mean

costs the Secretary (1) has recognized as reasonable ..., or

(2) will recognize as reasonable...."). Ultimately, whether

the phrase is "recognized as reasonable," "adversely affected," or "payments made," it is difficult to divine with much

confidence the pellucid intent of Congress because "[t]he

language, in short, is ambiguous." United States Dep't of the

Treasury, 960 F.2d at 1072 (describing as ambiguous the

phrase "adversely affected"); accord Tulane Educ. Fund, 987

F.2d at 796.

Hoping to stave off judicial review under Chevron's deferential second step, the Hospitals attempt to resuscitate their

plain-meaning interpretation by contrasting the two ways in

which Congress modified the word "made" in paragraph

(5)(A)(iv). When it first appears, "made" is used without

modifiers to describe the "total amount of the additional

payments made under this subparagraph"; later, the word

materializes to indicate that the total amount of outlier payments just described may not be less than five percent "of the

total payments projected or estimated to be made" for DRGrelated payments. 42 U.S.C. s 1395ww(d)(5)(A)(iv). Because, the Hospitals reason, Congress employed words of

estimation and projection to modify the total amount of DRGrelated payments "to be made" but neglected to do so when

describing the total amount of outlier payments "made," it

must have intended that total outlier payments actually made

during a fiscal year would equal at least five percent of

estimated or projected DRG-related payments.2

__________

2 The Hospitals cite only to this court's decision in Washington

Hospital Center v. Bowen, 795 F.2d 139 (D.C. Cir. 1986), to buttress

their argument that the plain meaning of "made" can be inferred

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Whatever logic this internal construction of paragraph

(5)(A)(iv) enjoys, to prevent statutory interpretation from

degenerating into an exercise in solipsism, "we must not be

guided by a single sentence or member of a sentence, but

look to the provisions of the whole law." United States Nat'l

Bank v. Independent Ins. Agents of Am., Inc., 508 U.S. 439,

455 (1993) (quoting United States v. Heirs of Boisdore, 49

U.S. (8 How.) 113, 122 (1849)). Under Chevron step one, "we

consider not only the language of the particular statutory

provision under scrutiny, but also the structure and context of

the statutory scheme of which it is a part." Illinois Pub.

Tele. Ass'n v. FCC, 117 F.3d 555, 568 (D.C. Cir. ), modified,

123 F.3d 693 (1997), cert. denied, --- U.S. ----, 118 S. Ct.

1361 (1998); accord Conroy v. Aniskoff, 507 U.S. 511, 515

(1993) ("[T]he meaning of statutory language, plain or not,

depends on context."); Davis v. Michigan Dep't of Treasury,

489 U.S. 803, 809 (1989) ("[W]ords of a statute must be read

in their context and with a view to their place in the overall

statutory scheme."). By examining paragraph (5)(A)(iv) in its

immediate statutory context, any putative clarity that that

__________

from the different language that Congress used to modify that word

in paragraph (5)(A)(iv). That decision misses the mark, however.

In Washington Hospital Center, we presumed that when Congress

amended a pre-existing section of the Medicare statute by adding

and deleting certain words, it must have intended the amended

provision to have a different meaning from its predecessor provision. Id. at 146. More on point for the Hospitals, though they did

not cite it, would be the canon of construction that posits that

"where Congress includes particular language in one section of a

statute but omits it in another section of the same Act, it is

generally presumed that Congress acts intentionally and purposely

in the disparate inclusion or exclusion." Russello v. United States,

464 U.S. 16, 23 (1983); accord Independent Bankers Ass'n of Am. v.

Farm Credit Admin., 164 F.3d 661, 667 (D.C. Cir. 1999). Of

course, "[c]anons of construction are, after all, only aids in the

process of statutory construction, nothing more, nothing less."

Eagle-Picher Indus. v. United States EPA, 759 F.2d 922, 927 n.6

(D.C. Cir. 1985). As we demonstrate, infra, this canon does not

resolve the ambiguity in paragraph (5)(A)(iv).

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provision might arguably have quickly recedes to ambiguity

once again.

Preceding paragraph (5)(A)(iv) by two paragraphs,

s 1395ww(d)(3)(B) provided during the time relevant to this

litigation:

The Secretary shall reduce each of the average standardized amounts under subparagraph (A) ... by a proportion equal to the proportion (estimated by the Secretary)

of the amount of payments under this subsection based

on DRG prospective payment amounts which are additional payments described in paragraph (5)(A) (relating

to outlier payments)....

42 U.S.C. s 1395ww(d)(3)(B) (Supp. IV 1986) (emphasis added). Not only does this provision expressly indicate that total

outlier payments are to be estimated by the Secretary, but it

also employs language that closely parallels the language that

later appears in paragraph (5)(A)(iv). In our endeavor to

determine whether the "total amount of the additional payments made under this subparagraph" contemplates outlier

payments actually made or those estimated to be made, we

find it significant that in paragraph (3)(B) Congress provided

that the "amount of payments ... which are additional payments described in paragraph (5)(A)" are to be "estimated by

the Secretary." s 1395ww(d)(3)(B). Given that in paragraph

(3)(B) it had already indicated that the Secretary would

estimate the amount of outlier payments described in subparagraph (5)(A), Congress could have reasonably concluded that

there was no need to provide expressly in paragraph

(5)(A)(iv) that the phrase "payments made" referred to payments estimated to be made. Thus, whatever can be said for

Congress's disparate modification of the word "made" in

paragraph (5)(A)(iv), when we open the analytic aperture to

examine that clause in its proper statutory context, the

inherently ambiguous phrase "payments made" becomes no

clearer.

Nor does a passing observation in the Conference Report

that "the Secretary would be required to provide additional

payments for outlier cases amounting to not less than 5

percent, and not more than 6 percent, of total projected or

estimated DRG related payments," compel us to adopt the

Hospitals' construction of the statute under Chevron step one.

H.R. Conf. Rep. No. 98-47, at 189 (1983), reprinted in 1983

U.S.C.C.A.N. 404, 479 (emphasis added). Ambiguous in its

own right, this passage, if given the gloss that the Hospitals

advance, would chafe against the commentary in the Senate

Report. Suggesting that paragraph (5)(A)(iv) reflects the

prospective inquiry that the Secretary advocates, the Senate

Report provides that the "[t]otal expected payments resulting

from this policy will be not less than 5 percent, nor more than

6 percent, of total medicare payments to hospitals." S. Rep.

No. 98-23, at 51, reprinted in 1983 U.S.C.C.A.N. 143, 191

(emphasis added). The only conclusion that we can safely

draw from these seemingly contradictory passages is that

"the little legislative history that exists for [paragraph

(5)(A)(iv)] is as ambiguous as the statute itself." Deaf Smith

County Grain Processors, Inc. v. Glickman, 162 F.3d 1206,

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1212 (D.C. Cir. 1998).

Ultimately, neither the text, structure, nor legislative history of paragraph (5)(A)(iv) illuminates Congress's unambiguous intent. Although the Hospitals' interpretation, and the

one that the district court adopted, is plausible, it is not the

"only possible interpretation," Sullivan v. Everhart, 494 U.S.

83, 89 (1990), and it certainly is not "an inevitable one."

Regions Hosp., 522 U.S. at ----, 118 S. Ct. at 917. Because

we find the statute ambiguous, we proceed to assess whether

the Secretary's interpretation of paragraph (5)(A)(iv) is "reasonable and consistent with the statutory scheme and legislative history." Cleveland v. United States Nuclear Regulatory

Comm'n, 68 F.3d 1361, 1367 (D.C. Cir. 1995).

In marking off the metes and bounds of our review under

the second step of Chevron, we accord particular deference to

the Secretary's interpretation of paragraph (5)(A)(iv) "given

the tremendous complexity of the Medicare statute." Appalachian Reg'l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1054

(D.C. Cir. 1997); accord Methodist Hosp. v. Shalala, 38 F.3d

1225, 1229 (D.C. Cir. 1994). The Hospitals, however, urge us

not to defer in any way to the Secretary's interpretation of

paragraph (5)(A)(iv) because, they contend, that provision

does not delegate interpretative authority to the Secretary

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but explicitly limits her discretion. The problem with this

argument, of course, is that it assumes the truth of the

proposition that we just rejected. Were paragraph (5)(A)(iv)

truly "an explicit limitation on the Secretary's discretion," Br.

of Hosps. at 40, there would be no need to analyze the

provision under Chevron step two. While paragraph

(5)(A)(iv) is certainly designed to regulate the Secretary's

discretion to some extent, as we have already concluded, the

precise contours of that provision are hardly explicit but are

instead ambiguous. Nor is it problematic, as the Hospitals

suggest, that Congress did not expressly delegate interpretative authority to the Secretary in paragraph (5)(A)(iv). Deference to agency interpretation is warranted "when Congress

has left a gap for the agency to fill pursuant to an express or

implied delegation of authority to the agency." Chevron, 467

U.S. at 843-44 (internal quotations omitted). Where, as here,

Congress enacts an ambiguous provision within a statute

entrusted to the agency's expertise, it has "implicitly delegated to the agency the power to fill those gaps." National Fuel

Gas Supply Corp. v. FERC, 811 F.2d 1563, 1569 (D.C. Cir.

1987); see also Chevron, 467 U.S. at 843-44.

Equally untenable is the Hospitals' argument that the

Secretary's interpretation is not entitled to deference because

she did not adopt it through either formal rulemaking or

adjudication. But as our precedents make clear, "an agency

need not promulgate a legislative rule setting forth its interpretation of a statutory term for that term to be entitled to

deference." Association of Bituminous Contractors, Inc. v.

Apfel, 156 F.3d 1246, 1251-52 (D.C. Cir. 1998). In fact,

"[e]ven if the legal briefs contained the first expression of the

agency's views, under the appropriate circumstances we

would still accord them deference so long as they represented

the agency's 'fair and considered judgment on the matter.' "

United Seniors Ass'n v. Shalala, 182 F.3d 965, 971 (D.C. Cir.

1999) (quoting Auer v. Robbins, 519 U.S. 452, ----, 117 S. Ct.

905, 912 (1997)); see National Wildlife Fed'n v. Browner, 127

F.3d 1126, 1129 (D.C. Cir. 1997) ("The mere fact that an

agency offers its interpretation in the course of litigation does

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not automatically preclude deference to the agency."); Tax

Analysts v. IRS, 117 F.3d 607, 613 (D.C. Cir. 1997).

There is no reason to suspect that the Secretary's interpretation of paragraph (5)(A)(iv) embodies anything other than

her fair and considered opinion. In a final rule published on

January 3, 1984, the Secretary articulated the same interpretation of paragraph (5)(A)(iv) that she has pressed before

both us and the district court. See 49 Fed. Reg. 234, 265

(1984). With that rule, she not only observed that under her

interpretation "there is no necessary connection between the

amount of estimated outlier payments and the actual payments made to hospitals for cases that actually meet the

outlier criteria," id., but she also admonished Medicare providers that, in the event she overestimated the amount of

outlier payments, she would "not adjust the DRG rates to

compensate hospitals for funds that were not actually paid for

outlier cases." Id. at 266. Even if, as the Hospitals complain, the final rule failed to provide a "cogent explanation" of

the policies undergirding the Secretary's interpretation, the

fact remains that for the past fifteen years, the Secretary has

never wavered from that interpretation. We are confident

that the interpretation of paragraph (5)(A)(iv) under review

embodies the Secretary's "fair and considered judgment on

the matter." Auer, 519 U.S. at ----, 117 S. Ct. at 912. It,

accordingly, demands deference from the judiciary.

Having settled on the scope of our review, we have no

difficulty concluding that the Secretary has advanced a reasonable interpretation of paragraph (5)(A)(iv). Congress established outlier payments because it recognized that "there

will be cases within each [DRG] that will be extraordinarily

costly to treat ... because of severity of illness or complicating conditions, and [will] not [be] adequately compensated for

under the DRG payment methodology." S. Rep. No. 98-23, at

51 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 191. But as

the term "outlier" suggests, these payments were not intended to subsidize hospitals simply for treatments, which in

absolute terms, were extraordinarily costly or lengthy. Rather, Congress directed the Secretary to provide "additional

payments for cases which are extraordinarily costly to treat,

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relative to other cases within the DRG." Id. (emphasis

added); accord H.R. Rep. No. 98-25, at 134-35 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 353-54 ("Your Committee is

concerned that under the prospective payment system, there

will be cases within each [DRG] that will be extraordinarily

costly to treat, relative to other cases within that DRG....").

Thus the House version would have required the Secretary to

tender outlier payments only when a patient's length of stay

exceeded by thirty days the average length of stay for cases

in that same DRG, see H.R. Rep. No. 98-25, at 135, reprinted

in 1983 U.S.C.C.A.N. at 354, while the Senate bill, which the

Conference Committee adopted, authorized outlier payments

for cases in which a patient's length of stay eclipsed the mean

length of stay for discharges within that same DRG by a fixed

number of days or standard deviations. See 42 U.S.C.

s 1395ww(d)(5)(A)(i) (Supp. IV 1986); S. Rep. No. 98-23, at

51, reprinted in 1983 U.S.C.C.A.N. at 191; H.R. Conf. Rep.

No. 98-47, at 188 (1983), reprinted in 1983 U.S.C.C.A.N. 404,

478.

The Secretary's interpretation of paragraph (5)(A)(iv)

evinces far greater fidelity to Congress's conception of outlier

payments than does the view espoused by the Hospitals.

Under the Secretary's reading of the statute, if it turns out

that actual outlier payments do not meet the five-percent

target at the end of the fiscal year, it is because the lengths of

stay for DRGs in that year proved to be shorter than the

historical averages reflected in the data on which the Secretary based her threshold calculations. Whether it is because

hospitals became more efficient or a miracle drug was introduced during the year, the shorter lengths of stay mean that

there were fewer extraordinarily costly cases during the year.

In other words, there were fewer outliers--and therefore,

fewer outlier payments needed to be made.

Under the Hospitals' interpretation, however, regardless of

actual costs or inpatient lengths of stay during a fiscal year,

Medicare providers are guaranteed a substantial and fixed

sum of outlier payments. As they read the statute, even

during a fiscal year in which the length of stay for every

inpatient discharge in every DRG in every hospital equaled or

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exceeded by just a day the mean length of stay for each

respective DRG, the Secretary would nonetheless have to

reward hospitals with additional "outlier" payments totaling

five percent of the entire DRG budget. One need not be well

versed in the discipline of statistics to recognize that such

insignificant deviations from the mean do not constitute outliers. To sanction the Hospitals' interpretation of paragraph

(5)(A)(iv) would not only require us to assume that Congress

did not appreciate the meaning of outlier--a term, it should

be noted, that appears throughout both the legislative history

and the text of the Medicare statute--but it would also

transform the character of the outlier-payment regime from a

system intended to insulate hospitals from aberrational and

extraordinary costs into nothing more than an entitlement

program for Medicare providers. Such was hardly Congress's intent, for if anything, Congress indicated that it was

"equally concerned that adjustments may be required for

cases which have an unusually short length of stay or which

are significantly less costly than the DRG payment." H.R.

Conf. Rep. No. 98-47, at 478, reprinted in 1983 U.S.C.C.A.N.

at 478 (emphasis added); see also H.R. Rep. No. 98-25, at 135,

reprinted in 1983 U.S.C.C.A.N. at 354 ("The Secretary would

be required to study ... the appropriateness of, and necessity for, adjustments in payment rates for extremely short

lengths of stay within a DRG...."). Proposals like these

reflect a reluctance to reimburse Medicare providers at rates

grossly disproportionate to the cost of treatment. We find it

unlikely that Congress nevertheless would have wanted hospitals to reap additional compensation over and above the

standard DRG payment where treatment costs for a particular discharge were not extraordinarily costly relative to the

mean costs for that DRG.

Moreover, compared to the Hospitals' interpretation of

paragraph (5)(A)(iv), the Secretary's reading better harmonizes each of the four clauses in paragraph (5)(A). As did the

district court, the Hospitals struggle to reconcile their conception of the fourth clause with the language of the third,

which provides that the amount of each outlier payment "shall

approximate the marginal cost of care beyond the cutoff point

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applicable" for each DRG. 42 U.S.C. s 1395ww(d)(5)(A)(iii)

(Supp. IV 1986). Under the Hospitals' construction of the

statute, outlier payments might bear little relationship to the

marginal cost of care. At the end of each fiscal year, if actual

outlier payments fell short of the five-percent target, the

Secretary would be required retroactively to supplement

those payments to satisfy the difference. Depending on how

great that initial disparity was, by the time that these curative outlays were made, the newly computed outlier payments

might not approximate anything close to the marginal cost of

care as paragraph (5)(A)(iii) mandates. By contrast, outlier

payments under the Secretary's interpretation will always

approximate the marginal cost of care because when determining where to set outlier thresholds for DRGs at the

beginning of each fiscal year, she directly factors the marginal cost of care into her calculus.

Echoing the district court's holding, the Hospitals discount

paragraph (5)(A)(iii) as merely a "guideline" while contending

that paragraph (5)(A)(iv) operates "as a limitation on the

Secretary's discretion." County of Los Angeles, 992 F. Supp.

at 32. Based on this view, the Secretary is supposed to set

outlier thresholds at the beginning of each year "at marginal

cost and then, when actual outlier data is known, adjust[ ] the

final payments to ensure that the Secretary has met her

statutory obligation to the providers." Id. at 31. Why this

parsing of the statutory language is more reasonable than

that of the Secretary's--much less compelled as an unambiguously plain reading of the provision, as the Hospitals have

urged--is not at all clear. After all, paragraph (5)(A)(iii)

employs mandatory language of the sort not normally used if

all that Congress intended to do was to offer a discretionary

guideline for the Secretary to follow. See

s 1395ww(d)(5)(A)(iii) ("The amount of such additional payment under clauses (i) and (ii) shall be determined by the

Secretary and shall approximate the marginal cost of

care....") (emphasis added). Nevertheless, even were the

Hospitals' synthesis of the third clause into the remainder of

paragraph (5)(A) plausible, it would not be enough to impugn

the otherwise reasonable interpretation that the Secretary

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has advanced since "we need not find that it is the only

permissible construction that [the Secretary] might have

adopted but only that [her] understanding of this very 'complex statute' is a sufficiently rational one to preclude a court

from substituting its judgment for that of [the Secretary]."

Young v. Community Nutrition Inst., 476 U.S. 974, 981

(1986) (internal quotation omitted).

Moreover, the Secretary's interpretation avoids the substantial administrative burden attendant with the Hospitals'

vision of paragraph (5)(A)(iv). It strains credulity to assume

that Congress would have directed the Secretary to establish

outlier thresholds in advance of each fiscal year, see

s 1395ww(d)(3)(B), (d)(6), and process millions of bills based

on those figures, only to have her at the end of the year

recalibrate those calculations, reevaluate anew each of the

millions of inpatient discharges under the revised figures, and

disburse a second round of payments. As we have held in an

analogous context, "[u]nder these circumstances, retroactive

corrections would cause a significant, if not debilitating, disruption to the Secretary's administration of the alreadycomplex Medicare program." Methodist Hosp., 38 F.3d at

1233. Nor is this administrative process rendered less awkward and unwieldy if, as the Hospitals suggest, the Secretary

actively monitors outlier payments and adjusts the thresholds

as the fiscal year unfolds. Apart from the tremendous resources that would be required to maintain such a vigilant

watch over a program as expansive as Medicare, intermittently modifying outlier thresholds at various times during the

year would mean that different hospitals would likely receive

different outlier reimbursements for the same treatments

based on nothing more than the fortuity of when they treated

a patient.

By the same token, this uncertainty and fluidity in outlierpayment amounts under the Hospitals' interpretation lead us

to the final virtue of the Secretary's construction. One of the

touchstones of the Prospective Payment System, as its name

suggests, is prospectively determined reimbursement rates

that remain constant during the fiscal year. In setting, prior

to each fiscal year, fixed outlier thresholds and per-diem

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reimbursement rates that are not later subject to retroactive

correction, the Secretary promotes certainty and predictability of payment for not only hospitals but the federal government--concerns that played a prominent role in Congress's

decision to adopt PPS. See H.R. Rep. No. 98-25, at 132,

reprinted in 1983 U.S.C.C.A.N. at 351 ("The bill is intended

to improve the medicare program's ability to act as a prudent

purchaser of services, and to provide predictibility [sic] regarding payment amounts for both the Government and

hospitals."). To be sure, we have previously speculated that

"the 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 does in

providing services will lead to a higher reimbursement level."

Georgetown Univ. Hosp. v. Bowen, 862 F.2d 323, 330 (D.C.

Cir. 1988) (Georgetown II). Yet while we, therefore, have

recognized that retroactive corrections may not ultimately

undermine PPS, we have emphasized that that "does not

establish that a prospective-only policy is unreasonable."

Methodist Hosp., 38 F.3d at 1232.

In Methodist Hospital, we found the Secretary's decision

not to recalculate retroactively the DRG wage index to be

reasonable, in part, because the Secretary's prospective policy

advanced the principles of PPS.3 With language applicable to

the present case, we held:

__________

3 The Hospitals cannot successfully distinguish Methodist Hospital. Admittedly, unlike the DRG wage index at issue in Methodist

Hospital, outlier payments do not factor directly into every inpatient discharge. But outlier payments do influence indirectly the

overall DRG payment rate that governs all discharges. As already

discussed, pursuant to s 1395ww(d)(3)(B), the Secretary must reduce the standard DRG payment rate by a factor equal to the

outlier payments that she predicts she will have to disburse during

the forthcoming year. Nor is it accurate to claim, as the Hospitals

do, that outlier payments are entirely divorced from PPS. As an

initial matter, the provisions relating to outliers are contained in the

same subsection of s 1395ww as those establishing the PPS regime.

See s 1395ww(d). Moreover, Congress established outlier payments not as a distinct reimbursement methodology but as a

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While retroactive adjustments might leave the "linchpin"

of PPS intact, that does not mean that a prospective-only

policy would not further, to some degree, the overall

goals of PPS.... [H]ospitals, 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 additional

element in the PPS calculation rate ... the Secretary

could reasonably conclude that it will promote efficient

and realistic cost-saving targets.

Id. The same, quite reasonably, can be said of the Secretary's interpretation of paragraph (5)(A)(iv). Under her construction of the statute, at the outset of each fiscal year,

hospitals know the point beyond which a patient's length of

stay will trigger outlier payments and the corresponding rate

at which they will be reimbursed for each day beyond the

threshold. A less determinate policy would not only deprive

hospitals of the ability to make accurate projections about

outlier payments for the forthcoming year but also threaten

them at the end of each year with the prospect of actually

having to forfeit a portion of those payments to the Secretary;

for as the Hospitals concede, under their interpretation,

Medicare providers collectively would be bound to repay any

portion of outlier payments that exceeded six percent of

estimated DRG-related payments. See Br. of Hosps. at 31-

32. We conclude that the Secretary has advanced a reasonable interpretation of an ambiguous statutory provision, and,

therefore, reverse the judgment of the district court with

respect to the Secretary's appeal.

C. The Hospitals' Cross-Appeal

Because outlier thresholds are measured by their distance

from the mean length of stay, accurately forecasting outlier

__________

carefully crafted supplement to PPS. For that reason, Georgetown

II, which concerned retroactive adjustments under the pre-PPS

"reasonable cost" system--clearly a payment methodology lacking

any relationship to PPS--is inapposite.

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payments depends, in large part, on how closely the mean

length of stay reflected in the Secretary's historical data

reflects the actual average length of stay for that particular

DRG. When setting outlier thresholds for fiscal years 1985-

1986, the Secretary relied on the 1981 MEDPAR file, a

database containing patient-specific data for a random sample

of 20 percent of all Medicare-hospital discharges during 1981.

Compiled during an era when Medicare still reimbursed

hospitals under the reasonable-cost system, the 1981 MEDPAR file could not have predicted how, under PPS, the

average length of stay for virtually all DRGs would eventually

decline dramatically. The Hospitals observe, however, that

by July 27, 1984, the Secretary had already collected data

from 2.5 million discharges under PPS that indicated that the

average length of stay for all DRGs had declined from 9.5

days to 7.5 days under the new payment methodology. Pursuant to section 10(e) of the APA, 5 U.S.C. s 706(2)(A), the

Hospitals claim that the Secretary acted arbitrarily and capriciously when she calculated outlier thresholds for 1985-1986

based on the 1981 MEDPAR file instead of the preliminary

1984 data and failed to explain adequately her decision.

Rejecting the Hospitals' claim, the district court agreed with

the Secretary that her decision to use the 1981 MEDPAR file

over the more contemporaneous but preliminary 1984 data

"was a rational choice between two imperfect databases."

County of Los Angeles, 992 F. Supp. at 36.

Under the APA, we may set aside agency action found to

be "arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law." 5 U.S.C. s 706(2)(A). Foreclosed from substituting our judgment for that of the agency, we

do not set aside agency action lightly. See Motor Vehicles

Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,

43 (1983); Petroleum Communications, Inc. v. FCC, 22 F.3d

1164, 1172 (D.C. Cir. 1994). Nevertheless, we intervene to

ensure that the agency has "examine[d] the relevant data and

articulate[d] a satisfactory explanation for its action." State

Farm, 463 U.S. at 43. "Where the agency has failed to

provide a reasoned explanation, or where the record belies

the agency's conclusion, we must undo its action." BellSouth

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Corp. v. FCC, 162 F.3d 1215, 1222 (D.C. Cir. 1999) (citation

and quotation omitted).

The only contemporaneous explanation that the Secretary

offered for using the 1981 MEDPAR file consisted of two

sentences in the Federal Register: "Based upon outlier and

DRG payment data received through July 27, 1984, there is

no evidence to suggest that total outlier payments are below

the levels intended. Therefore, as discussed above, we are

continuing to set the outlier thresholds on the basis of the

1981 MEDPAR data." 49 Fed. Reg. 34,728, 34,769 (1984)

(emphasis added). We agree with the Ninth Circuit, which

recently considered this same issue, that the Secretary's

"explanation that there was no evidence of an outlier shortfall

was simply not supported by the record before her and did

not explain her failure to use the more recent data." Alvarado Community Hosp. v. Shalala, 155 F.3d 1115, 1122 (9th

Cir. 1998). Data that the Secretary possessed as late as July

27, 1984, indicated that the average length of stay for practically all DRGs had declined considerably under the nascent

PPS program. More concretely, at that point during the

fiscal year, outliers constituted only 1.9 percent of total PPS

discharges instead of 5.0 percent as predicted. And while

these conclusions were drawn from preliminary data, that

data reflected 2.5 million patient discharges under PPS; the

1981 MEDPAR file, by contrast, contained 1.6 million discharge records. Failure to account for this trend is all the

more perplexing insofar as the Secretary herself had anticipated that the average length of stay for DRGs would decline

under PPS. In 1984 she observed that "[t]he most commonly

accepted expectation about the PPS at the time of its inception was that it would result in shorter stays for Medicare

patients.... [R]educed length of stay was to be one of the

major vehicles through which hospital costs were to be controlled under the PPS." Office of Research & Demonstrations, Health Care Fin. Admin., U.S. Dep't of Health &

Human Servs., Pub. No. 03231, Report to Congress: Impact of

the Medicare Hospital Prospective Payment System 6-13

(1984). At bottom, for the Secretary to say that she had "no

evidence to suggest that total outlier payments [were] below

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the levels intended," 49 Fed. Reg. at 34,769, runs "counter to

the evidence before the agency" and "is so implausible that it

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

agency expertise." State Farm, 463 U.S. at 43.

In her brief, the Secretary now contends that what she

meant by "no evidence" was "no reliable evidence." To

bolster this specific claim and her broader argument that the

1984 data were too suspect and incomplete to make accurate

outlier projections, the Secretary appended to her summary

judgment motion in the district court an affidavit from Rose

Connerton, an official with the Health Care Financing Administration ("HCFA") who helped develop the outlier thresholds

for 1985-1986. Essentially, the Connerton affidavit claims

that the 1984 data were not complete and did not represent a

random sample of cases, that because they were based on a

partial year they would not reflect seasonal and regional

variances, and that any analysis drawn from them would be

skewed.4 See J.A. 90 (Aff. of Connerton pp 10, 12, 15). The

Hospitals contend that the Connerton affidavit, having surfaced for the first time during litigation, is an impermissible

post-hoc rationalization that the district court should have

stricken. See SEC v. Chenery Corp., 318 U.S. 80, 87-88

__________

4 Through the Connerton affidavit, the Secretary attempts to

dramatize the unreliability of the partial 1984 data. As of April 27,

1984, reported outliers constituted only 1.9 percent of total PPS

discharges. See J.A. 71. By the end of fiscal year 1984, however,

actual outlier payments ended up totaling 5.3 percent of total PPS

payments, suggesting, Connerton avers, that the preliminary data

were in fact unreliable. Although Connerton's calculations are

accurate, the conclusions that she draws from them are subject to

debate. During a portion of fiscal year 1984, the Secretary erroneously provided hospitals with additional outlier payments for nonPPS-covered treatments, but never sought to recoup these surplus

amounts. That outlier payments amounted to 5.3 percent that year

thus may say less about the reliability of the 1984 data and more

about the scope of the Secretary's clerical error. Whatever the

reason, this dispute underscores the wisdom of Benjamin Disraeli's

sardonic quip (attributed to him by Mark Twain) about the three

great falsehoods: "lies, damn lies, and statistics."

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(1943); Reeve Aleutian Airways, Inc. v. United States, 889

F.2d 1139, 1144 (D.C. Cir. 1989). Indeed, faced with a similar

affidavit from Connerton, the Ninth Circuit held that the

district court erred in considering it. See Alvarado Community Hosp., 155 F.3d at 1124. Ultimately, we need not reach

this question, for even were we inclined to accept everything

in the Connerton affidavit, we would still remand to the

Secretary for a more adequate justification for her database

selection.

"A long line of precedent has established that an agency

action is arbitrary when the agency offer[s] insufficient reasons for treating similar situations differently." Transactive

Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir. 1996); see

also State Farm, 463 U.S. 29, 57 (1983); Airmark Corp. v.

FAA, 758 F.2d 685, 691-92 (D.C. Cir. 1985); Local 777,

Democratic Union Org. Comm. v. NLRB, 603 F.2d 862, 872

(D.C. Cir. 1978). Although maligning the 1984 data as too

unreliable to calculate outlier thresholds for fiscal years 1985-

1986, the Secretary nonetheless used those same data on

August 31, 1984, to reduce across-the-board all 470 DRG

weighting factors by 1.05 percent. See 49 Fed. Reg. 34,728,

34,770-71 (1984). Such an adjustment was necessary, the

Secretary noted at the time, because "[t]he emerging experience under the prospective payment system"--an experience

gleaned from the preliminary 1984 data--revealed that the

different incentives that hospitals faced under PPS were

producing unexpected distortions. See id. In making this

correction, the Secretary expressly endorsed the reliability of

the 1984 data: "To date, we have now analyzed 2.5 million

discharges under the prospective payment system, which fully

reflect the effect of those incentives, and we believe this

affords us a better measure of the effect of coding improvements in the average case mix." Id. at 34,771. Moreover, in

responding to a question about the legitimacy of the preliminary data during a 1984 congressional oversight hearing, the

HCFA Administrator responded that "[o]ur sample now is

based on approximately 50 percent of all of the claims or the

admissions that we had projected for this year. We think

that's a fairly representative sample." Adjustments in MediUSCA Case #98-5325 Document #467118 Filed: 10/01/1999 Page 28 of 30
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care's Prospective Payment System: Hearing Before the

Subcomm. on Health of the Comm. on Fin., 98th Cong. 62

(statement of Mr. Davis, Administrator, HCFA). In sum, the

Secretary has inadequately explained why the 1984 data were

suitable for one significant calculation but unreliable for

another. Her sole justification is that preliminary data may

be used to make across-the-board adjustments, as was done

to reduce all DRG weighting factors by 1.05 percent, but that

they may not be used for setting outlier thresholds because a

unique standard deviation must be calculated for each of the

470 DRGs. What renders this explanation inadequate is that

DRG weighting factors, like outlier thresholds, are ordinarily

determined on a DRG-by-DRG basis. Indeed, the very purpose of a DRG weighting factor is to reflect the different

costs of treating minor and major illnesses; to do so, each

DRG must be assigned its own unique weight based on the

cost and complexity of treatment peculiar to that DRG. The

Secretary's proffered distinction is thus not reasonable. She

may in her discretion, of course, rely on preliminary data to

make an across-the-board adjustment to variables that ordinarily are determined on a case-by-case basis. But when she

does so, she must be prepared to explain why she cannot also

use that data to make a similar adjustment to variables that

are also typically calculated on an individual basis. As broad

as her discretion is, it "is not a license to ... treat like cases

differently." Airmark Corp., 758 F.2d at 691; accord Teva

Pharms., USA, Inc. v. FDA, 182 F.3d 1003, 1010-11 (D.C.

Cir. 1999); Transactive Corp., 91 F.3d at 237; Local 777, 603

F.2d at 872.

This case must therefore be remanded to the Secretary to

allow her either to recalculate outlier thresholds for fiscal

years 1985-1986 or to offer a reasonable explanation for

refusing to use the 1984 data in setting outlier thresholds

during those years. In reaching this conclusion, we necessarily part ways with the Ninth Circuit, which, in Alvarado

Community Hospital, chose not to remand to the Secretary,

but instead ordered her to adjust outlier thresholds for fiscal

year 1985 based on final 1984 data. Alvarado Community

Hosp., 155 F.3d at 1125. As the Supreme Court has instructUSCA Case #98-5325 Document #467118 Filed: 10/01/1999 Page 29 of 30
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ed, however, where "the record before the agency does not

support the agency action, ... the proper course, except in

rare circumstances, is to remand to the agency for additional

investigation or explanation." Florida Power & Light Co. v.

Lorion, 470 U.S. 729, 744 (1985); see also Dunlop v. Bachowski, 421 U.S. 560, 574-75 (1975) ("Where the statement inadequately discloses his reasons, the Secretary may be afforded

opportunity to supplement his statement."), overruled on

other grounds by Furniture & Piano Moving v. Crowley, 467

U.S. 526, 549-50 n.22 (1984). We find no reason to depart

from that course here. While we have identified significant

inconsistencies and gaps in the Secretary's rationale for using

the 1981 MEDPAR file, bedrock principles of administrative

law preclude us from declaring definitively that her decision

was arbitrary and capricious without first affording her an

opportunity to articulate, if possible, a better explanation.

See Bechtel v. FCC, 10 F.3d 875, 887 (D.C. Cir. 1993);

Philadelphia Gas Works v. FERC, 989 F.2d 1246, 1251 (D.C.

Cir. 1993); Sullivan Indus. v. NLRB, 957 F.2d 890, 905 n.12

(D.C. Cir. 1992); Tex Tin Corp. v. EPA, 935 F.2d 1321, 1324

(D.C. Cir. 1991); see also Checkosky v. SEC, 23 F.3d 452, 463

(D.C. Cir. 1994) (Silberman, J., concurring) (citing some of the

"many instances where we have remanded to an agency for a

better explanation before finally deciding that the agency's

action was arbitrary and capricious"). Because we fail to

perceive any "rare circumstances" that would warrant a

break with established administrative practice, we adhere to

the proper course of remanding this matter to the Secretary.

III. Conclusion

For the foregoing reasons, we reverse the judgment of the

district court with respect to the Secretary's appeal, and

remand with instructions to enter judgment in the Secretary's

favor. As for the Hospitals' cross-appeal, we reverse the

judgment of the district court, and instruct it to remand the

case to the Secretary for further proceedings consistent with

this opinion.

So ordered.

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