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Parties Involved:
Appalachian Regional Healthcare, Inc.
Appellant
Donna E. Shalala
Appellee

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 14, 1997 Decided December 23, 1997 

No. 96-5215

APPALACHIAN REGIONAL HEALTHCARE, INC.,

APPELLANT

v.

DONNA E. SHALALA, SECRETARY OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court 

for the District of Columbia 

(94cv1365)

Joe W. Fleming, II argued the cause and filed the briefs 

for appellant.

Jeffrey G. Micklos, Attorney, United States Department of 

Health and Human Services, argued the cause for appellee, 

with whom Frank W. Hunger, Assistant Attorney General, 

United States Department of Justice, Mary Lou Leary, United States Attorney, Harriet S. Rabb, General Counsel, United 

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States Department of Health and Human Services, Robert P. 

Jaye, Acting Associate General Counsel, and Henry R. 

Goldberg, Deputy Associate General Counsel, were on the 

brief.

Before: SILBERMAN, SENTELLE, and GARLAND, Circuit 

Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Dissenting opinion filed by Circuit Judge SENTELLE.

SILBERMAN, Circuit Judge: Appalachian Regional Healthcare contends that the Provider Reimbursement Review 

Board unreasonably interpreted the Medicare as Secondary 

Payer provisions of the Social Security Act, 42 U.S.C. 

' 1395y(b) (1994), in approving the reduction of Appalachian's 

Medicare reimbursements for the fiscal years ending 1985 

through 1991. The district court disagreed, and entered 

summary judgment in favor of the Secretary of Health and 

Human Services. We affirm the judgment.

I.

Appalachian Regional Healthcare, Inc., a nonprofit Kentucky corporation, owns and/or operates 10 hospitals in Kentucky, Virginia, and West Virginia. It has entered into 

Medicare provider agreements with the Secretary of Health 

and Human Services and its hospitals thus are qualified to 

receive Part A reimbursement for the inpatient health care 

services they provide to covered beneficiaries. Appalachian 

is reimbursed under the Prospective Payment System (PPS) 

created by section 601 of the Social Security Amendments of 

1983, codified at 42 U.S.C. ' 1395ww(d) (1994). Although a 

detailed explanation of this rather complex system is not 

required here, roughly, PPS requires the Secretary to classify 

a covered beneficiary's discharge into one of approximately 

500 Diagnosis Related Groups (DRG), "based on essential 

data abstracted from the inpatient bill for that discharge." 

42 C.F.R. ' 412.60(c) (1996). Reimbursement depends on the 

DRG to which a patient is assigned and the average cost of 

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treating such a diagnosis, "regardless of the [actual] number 

of conditions treated or services furnished during the patient's stay." 42 C.F.R. ' 412.60(c)(2) (1996). A provider, 

therefore, is reimbursed the same amount for each similarly 

classified patient discharge, even if the actual cost of caring 

for patients in that DRG varies.1 Until PPS was enacted, 

providers were reimbursed under a cost-based system, 

whereby Medicare paid either a hospital's customary charge 

for or the reasonable cost of a particular item or service, 

whichever was lower. See Methodist Hosp. of Sacramento v. 

Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994).

Appellant's annual reimbursement is calculated based on 

the annual cost report it must submit to its so-called "fiscal 

intermediary," Blue Cross/Blue Shield of Kentucky, which is 

authorized, as the Secretary's agent, to audit and, if necessary, adjust Appalachian's report. The intermediary thought 

Appalachian's cost reports for fiscal years ending 1985, 1986, 

1987, 1988, 1989, 1990, and 1991 reflected a misreading of 

section 1862(b) of the Social Security Act, 42 U.S.C. 

' 1395y(b) (1994), known as the Medicare as Secondary Payer (MSP) provisions, and reduced Appalachian's reimbursement by $1,010,414.2

It is the Secretary's reading of these 

provisions, in light of the statutory change in method of 

reimbursement, that gives rise to the parties' dispute.

Section 1862(b)(2) of the MSP provisions forbids the Secretary from making payment under Part A "with respect to any 

item or service" to the extent that payment has been or 

__________

1 The effect of PPS is that if a hospital can treat a particular 

diagnosis more efficiently than the average hospital, it will make 

money, as it may keep the difference between its actual cost and the 

PPS payment for a particular DRG. Conversely, if its costs are 

above average, the hospital must accept a shortfall.

2 The precise amounts in issue for each fiscal year are: FY 

ending 1985: $49,112; FY ending 1986: $159,206; FY ending 1987: 

$127,803; FY ending 1988: $79,853; FY ending 1989: $147,157; FY 

ending 1990: $225,229; FY ending 1991: $222,054. Appalachian 

seeks judgment in the total amount, plus interest on the judgment 

as allowed by 42 U.S.C. ' 1395oo(f)(2) (1994).

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reasonably can be expected to be made by a primary payerC

other health insurance, such as worker's compensation, an 

employer group health plan, or liability insurance. During 

the fiscal years at issue, Appalachian's hospitals provided 

services to Medicare beneficiaries who were also covered 

under other health insuranceCprimarily coal miners covered 

under the black lung benefits program administered by the 

Division of Coal Mine Workers Compensation of the United 

States Department of Labor. The black lung program, however, only pays for those medical services related to pneumoconiosis. Thus, the payments Appalachian received from 

LaborCwhich included a markup over costCwere in full 

satisfaction of the hospitals' charges for only certain items of 

care, such as pulmonary x-rays or the use of a respirator. 

Section 1862(b)(2), then, prohibited the Secretary from making payment for those items or services paid for by the black 

lung program, but was ambiguous as to how the Secretary 

could keep from doing so under the PPS system.

Appellant thought it was entitled to keep its profit margin 

on the payments received from the black lung program (and 

other primary payers); it therefore offset only the portion of 

those payments representing a hospital's costs against Medicare's PPS reimbursement. Blue Cross/Blue Shield interpreted the MSP provisions to require instead that the entire

primary payment be deducted from the total PPS reimbursement that otherwise would have been due the provider. The 

following example illustrates the difference. Assume that 

Medicare's PPS reimbursement to Appalachian for having 

provided six services to a covered beneficiary during an 

inpatient stay was $20. Assume further that two of those 

services fell within the coverage of the black lung program, 

for which Labor paid $15. The intermediary would subtract 

the full $15 primary payer payment from the $20 PPS 

payment that would have been made had there been no other 

insurance, leaving a PPS reimbursement of $5 to be made. 

Appalachian, however, would offset only that portion of the 

$15 payment attributable to the hospital's costs against the 

$20 PPS payment. Using the fiscal year 1987 cost to charge 

ratio (a number representing a hospital's average markup as 

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determined by the intermediary) for one of Appalachian's 10 

hospitalsC.658CAppalachian would have multiplied the $15 

primary payer payment by the .658 cost to charge ratio, and 

would deduct the productC$9.87Cfrom the $20 PPS payment, leaving a PPS payment of $10.13 to be made. Under 

its method, then, Appalachian would be reimbursed $10.13 + 

$15 = $25.13, placing them in "substantially the same position" with respect to primary payer payments as it was prior 

to the enactment of PPS. Under the intermediary's approach, by contrast, the provider could never receive more in 

combined payments than it would have received from Medicare in the absence of other insurance coverage.

Appalachian sought review of the intermediary's adjustments by the Provider Reimbursement Review Board. The 

Board issued five separate decisions, which were, Appalachian 

informs us, identical in all material respects, affirming Blue 

Cross/Blue Shield's adjustments in each fiscal year. The 

Secretary's delegate, the Administrator of the Health Care 

Financing Administration, declined to review the Board's 

decision. Left undisturbed, the Board's decision constituted 

final agency action reviewable by statute in the district court 

for the District of Columbia. See 42 U.S.C. ' 1395oo(f)(1) 

(1994).

II.

We note at the outset the limited nature of appellant's 

claim. Recognizing the statute's ambiguities, Appalachian 

does not assert that its cost exclusion method is the only 

permissible way to construe the MSP provisions in this 

context.3 Rather, it argues that the Board's reading (in 

effect, the Secretary's) of those provisions is unreasonable. 

The operative portion of the Board's decision interpreting the 

statute is as follows:

The Board finds that ' 1862(b)(2) of the Act provides 

that payment may not be made with respect to any item 

__________

3 Appellant in fact concedes that the Secretary has discretion to 

adopt a reasonable method of excluding primary payer payments 

for items or services from the PPS payment.

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or service to the extent payment has been made or can 

reasonably be made from a primary payer. Section 

1862(b)(4) of the Act makes provision for coordination of 

benefits when the payment by a primary payer for an 

item or service is less than the full charge. The Board 

finds this permits payment by the Medicare program for 

the remainder of such charge, but may not exceed the 

amount Medicare would pay if there were no primary 

payer. Therefore, the Board concludes the amount 

Medicare would pay ... was properly reduced by primary payer payments.

Appalachian asserts that in this passage, the Secretary has 

taken the position perforce that all items and services provided during an inpatient stay constitute a single item or service 

for purposes of the MSP provisions. This construction, Appalachian contends, is plainly contrary to the statute, or alternatively, is unreasonable, because the statute defines the term 

"inpatient hospital services" as something composed of the 

several individual items and services furnished to a hospital 

inpatient during a particular hospital stay. See 42 U.S.C. 

' 1395x(b) (1994). All the items and services provided during 

a hospital admission, therefore, may not be considered one 

single item or service.4

The district court agreed that the Secretary had interpreted "item or service" to mean the entire inpatient hospital 

admission. Nevertheless, the judge thought that the Secretary's construction, although awkward, was not unreasonable 

__________

4 As additional support, Appalachian points to this statement by 

counsel for Blue Cross/Blue Shield made before the Board: "The 

approach that ... the Intermediary uses, and we believe the statute 

really contemplates, is that the hospital admission, that's a service." 

Of course, the intermediary's position is not the Secretary'sCit is 

the Board's interpretation that matters. In any event, we think it 

plain that a statement by intermediary's counsel in the course of an 

internal quasi-adjudicatory proceeding "is not the sort of 'fair and 

considered judgment' that can be thought of as an authoritative 

departmental position." Paralyzed Veterans of Am. v. D.C. Arena 

L.P., 117 F.3d 579, 587 (D.C. Cir. 1997) (quoting Auer v. Robbins,

117 S. Ct. 905, 912 (1997)).

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in light of the enactment of PPS and the design of the statute 

as a whole, and therefore was entitled to Chevron 5deference. 

We think the district judge was correct in concluding that the 

statute is ambiguous and that Chevron governed, although we 

are not sure the Board's decision actually construed the 

phrase "item or service."

The Board recognized that ' 1862(b)(2) prohibits Medicare 

from duplicating payments made by a primary payer. But 

the truth of the matter is that when PPS replaced the costbased reimbursement system, ' 1862(b)(2) became ambiguous as applied to this sort of situation. It is easy to see how 

this provision operated when Medicare's payment directly 

corresponded to charges for particular items or services, as it 

did under the cost-based system. If a primary payer paid for 

a particular item or service, Medicare did not. A PPS 

payment is instead in full satisfaction of the bundle of covered 

items and services provided during a single inpatient hospital 

stay. It is certainly in some sense payment for each of the 

individual items or services that compose the bundle. But 

because a PPS payment is calculated without regard to a 

hospital's actual cost, it cannot be easily separated and allocated to particular items or services. The Secretary, then, 

had to figure out a way not to make "payment ... with 

respect to any item or service" covered by a primary payer 

given that its PPS reimbursement payment is not cost-based 

and not directly connected to items or services.

Faced with this ambiguity, the Board understandably 

looked to the MSP provisions as a whole for guidance. The 

Board derived the general principle that the sum of all 

payments should not exceed the amount Medicare would pay 

if it were the only insurer from the (b)(4) coordination of 

benefits provision. We think it entirely reasonable in interpreting the statute for the Board to have done so. As the 

government points out, we have said that the MSP provisions 

were enacted as a cost-cutting measure, Health Ins. Ass'n of 

Am. v. Shalala, 23 F.3d 412, 414 (D.C. Cir. 1994), and the 

__________

5 Chevron U.S.A. Inc. v. Natural Resources Defense Council, 

Inc., 467 U.S. 837 (1984).

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Secretary's interpretation is consistent with this cost-cutting 

objective. While the Board's interpretation of ' 1862(b)(2) 

may have had the same effect as if it had explicitly interpreted 

"item or service" in the way that Appalachian suggests, the 

Board did not explicitly adopt that rationale. Even if it had 

done so we do not think it much matters. The statutory 

amendment authorizing the PPS reimbursement method created inevitable tension with the concept of payment for items 

and services, and the Secretary's general resolution of the 

resulting ambiguity is a permissible interpretation of the 

statute. To be sure, this case would be easier had the Board 

provided a more thorough explanation for its decision. But 

the Board's decision is nevertheless "tolerably terse," Greater 

Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 

1970), and a reading which we can accept, especially in light 

of the particular deference we afford the Secretary given the 

tremendous complexity of the Medicare statute. See Methodist Hosp., 38 F.3d at 1229.

Appellant nevertheless asserts that the Secretary's position 

is merely a litigating one and therefore is not entitled to 

deference. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 

204 (1988). First, the hospital claims that the Secretary's 

position is unsupported by regulations, rulings, or administrative practice. We do not understand this since we do have 

the Board's adjudicatory decision, and we have already concluded that its statutory interpretations are entitled to deference. Marymount Hosp. v. Shalala, 19 F.3d 658, 661 (D.C. 

Cir. 1994). Appellant also claims that the Secretary's counsel's interpretation of the Board's decision is not entitled to 

deference in this litigation. We agree that the Board's 

decision must stand on its ownCcounsel cannot justify the 

Board's decision before us with an explanation that the Board 

itself did not rely upon. But the fact that we think the 

Secretary's explanation is the better reading of the Board's 

brief opinion does not, of course, mean that we are deferring 

to government counsel's explanation.

The district court's judgment is affirmed.

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SENTELLE, Circuit Judge, dissenting: As the majority 

makes clear, the validity of the Secretary's action in this case, 

and therefore of the district court decision upholding it, 

depends upon the validity of the interpretation of ' 1862(b) of 

the Social Security Act, 42 U.S.C. ' 1395y(b) (1994), by the 

Provider Reimbursement Review Board. The relevant portion of that statute provides that

payment under this subchapter may not be made ... 

with respect to any item or service to the extent that ... 

payment has been made or can reasonably be expected to 

be made promptly ... under a workmen's compensation 

law or plan of the United States or a State....

42 U.S.C. ' 1395y(b)(2)(A). The administration of this section may have been fairly straightforward before the 1983 

amendments to the Social Security Act, which switched the 

reimbursement system from a cost-based system in which the 

troublesome phrase "item or service" had an evident meaning 

and relevance, to the present Prospective Payment System 

("PPS") described in the majority opinion in which the meaning and relevance of that phrase is, as the majority establishes, not at all apparent. We are all in agreement that to 

survive the two-step analysis drawn from Chevron U.S.A. Inc. 

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

(1984), the Board's ruling (as applied by the Secretary) need 

not be perfect, or even the best, but only reasonable. The 

Secretary's counsel, the district court, and the majority have 

all done yeoman's work in demonstrating the possible reasonableness of an interpretation of a statute whose critical 

wording is probably the result of a congressional oversight in 

failing to amend by deletion a no longer sensible operative 

phrase. My difficulty lies in the fact that neither the Board 

nor the Secretary did the same yeoman's work.

Our review at the second step of Chevron partakes of a 

nature similar to the arbitrary and capricious review under 

the Administrative Procedure Act, 5 U.S.C. ' 706(2)(A). Independent Petroleum Ass'n of America v. Babbitt, 92 F.3d 

1248, 1258 (D.C. Cir. 1996). Therefore, even under our 

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ous statute must at least be a reasoned one in order for us to 

determine if it is reasonable. Again, the majority and I are 

not in disagreement as to the standard employed. The 

majority expressly upholds the Board's (and therefore the 

Secretary's) decision because it finds the Board's recorded 

reasoning to be "tolerably terse," a styling drawn, quite 

properly, from Greater Boston Television Corp. v. FCC, 444 

F.2d 841, 852 (D.C. Cir. 1970). That decision, pre-dating 

Chevron, recognized in the context of administrative procedure review that "reasoned decision-making remains a requirement of our law." Id. My disagreement with the 

majority is a narrow one. That is, although I believe the 

majority is correct in the framework of its review, I part 

company with it only at the point of whether the agency 

action has "cross[ed] the line from the tolerably terse to the 

intolerably mute." Id.

Greater Boston establishes that in drawing the line between tolerable terseness and intolerable muteness the court 

will uphold an agency where its reasoning, "though of less 

than ideal clarity," is such that "the agency's path may 

reasonably be discerned." Id. at 851. Here, the Board's 

decision required it to interpret the concededly ambiguous 

statute governing payment for "any item or service to the 

extent that ... payment has been made or can reasonably be 

expected to be made," by a plan contemplated in the statute 

in a context in which items and services were no longer key to 

agency payment, but payment was being made by a covered 

plan where that collateral source might or might not cover all 

the costs of a patient's treatment depending upon whether 

the patient had medical needs supplied that were not directly 

encompassed within the pneumoconiosis diagnosis. In common with appellant, I do not see how the Board could have 

accomplished this task without construing the meaning of the 

term "any item or service" in the PPS context.

As the majority suggests, appellant understands the 

Board's decision as having construed the phrase to mean that 

"item or service" encompassed the entire inpatient hospital 

admission, an understanding shared by the district court. 

Although the question is not free from doubt, I also think that 

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is what the Board did. I understand the majority's disagreement with appellant, however, because I find it impossible to 

determine with any certainty from the "operative portion of 

the Board's decision interpreting the statute," Maj. op. at 5, 

precisely what the Board did. As the portion the Board's 

decision excerpted in the majority opinion reveals, the key 

sentence of the operative portion in construing ' 1862(b)(4) 

reads: "the Board finds this permits payment by the Medicare Program for the remainder of this charge, but may not 

exceed the amount Medicare would pay if there were no 

primary payer." (Emphasis in the original.) This is the 

whole of the Board's reasoning. Not only do I not know what 

it means, it doesn't even make grammatical or syntactical 

sense. Either the clause "but may not exceed the amount 

Medicare would pay if there were no primary payer," has no 

subject, or the subject of the subordinate clause is the same 

as the subject of the independent clause to which it is 

appended, to wit "this." The antecedent of the pronoun 

"this" comes from the immediately preceding sentence which 

reads: "' 1862(b)(4) of the Act makes provision for coordination of benefits when the payment by a primary payer for an 

item or charge is less than the full charge." Therefore, 

reading the questionable clause with "this" as its subject, 

makes it read "this may not exceed the amount Medicare 

would pay if there were no primary payer," where "this" is 

the entire preceding sentenceCa sentence which neither exceeds nor equals any payment. In short, I find the Board's 

statement of its reasons meaningless. A meaningless statement is intolerably mute, not tolerably terse.

I am further troubled that the Board's statement, whatever 

it means, does not provide reasoning supportive of the interpretation of the statute which it and the Secretary seem to 

have adopted. It is true that something "may not exceed the 

amount Medicare would pay if there were no primary payer." 

For example, the amount paid by Medicare may not exceed 

that amount. It does not necessarily follow that the sum of 

Medicare reimbursement for an "item or service" and the 

workmen's compensation primary payment for an admission 

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inclusive of that "item or service" cannot exceed the amount 

Medicare would pay if there were no primary payer. The 

latter formulation is not inconsistent with the Board's opinion; 

it is simply not supported by it. Thus, I find that the Board's 

reasoning is at best opaque and at worst a non sequitur.

I am not suggesting that the Board's interpretation, accepted by the Secretary, is inherently an impermissible one. 

Further, I agree with the majority that the Board was faced 

with an ambiguity that rendered it entirely reasonable for the 

Board to "look[ ] to the [Medicare as Secondary Payer] 

provisions as a whole for guidance." Maj. op. at 7. Further, 

I am prepared to join with the majority in deferring to a 

reasoned interpretation that does just that. However, on the 

present record, I do not find such a reasoned interpretation 

to which we can defer. Therefore, I would vacate and 

remand to the district court for further remand to the Secretary to provide a reasoned decision, lacking on the present 

record.

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