Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-14-05330/USCOURTS-caDC-14-05330-0/pdf.json

Parties Involved:
Sylvia Mathews Burwell
Appellee
Washington Regional Medicorp
Appellant

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 7, 2015 Decided December 29, 2015

No. 14-5330

WASHINGTON REGIONAL MEDICORP, DOING BUSINESS AS 

FAYETTEVILLE CITY HOSPITAL,

APPELLANT

v.

SYLVIA MATHEWS BURWELL, SECRETARY, U.S. DEPARTMENT 

OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:13-cv-00622)

Dan M. Peterson argued the cause and filed the briefs for 

appellant. 

Karen A. Schoen, Attorney, U.S. Department of Justice, 

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

Benjamin C. Mizer, Principal Deputy Assistant Attorney 

General, Vincent H. Cohen, Jr., Acting U.S. Attorney 

General, Michael S. Raab, Attorney, William B. Schultz, 

General, Counsel, U.S. Department of Health and Human 

USCA Case #14-5330 Document #1590892 Filed: 12/29/2015 Page 1 of 15
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Services, Janice L. Hoffman, Associate General Counsel,

Susan Maxson Lyons, Deputy Associate General Counsel for 

Litigation, and Bridgette Kaiser, Attorney. R. Craig 

Lawrence and Peter C. Pfaffenroth, Assistant U.S. Attorneys, 

entered appearances.

Before: GARLAND, Chief Judge, GRIFFITH, Circuit Judge, 

and SENTELLE, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

SENTELLE.

SENTELLE, Senior Circuit Judge: Appellant Fayetteville 

City Hospital is an inpatient psychiatric hospital that provides 

services to Medicare patients. Fayetteville challenges the 

method used by the Secretary of Health and Human Services 

(HHS) to calculate the hospital’s reimbursement for services 

it provided during 2003 and 2004—the two years after 

statutory caps on reimbursements for psychiatric hospitals 

expired but before psychiatric hospitals were moved to a 

prospective-payment system. Because we conclude that 

HHS’s interpretation was not only reasonable but also the best 

interpretation of the controlling statute, 42 U.S.C. § 1395ww, 

and regulation, 42 C.F.R. § 413.40, we affirm the decision of 

the district court denying Fayetteville’s motion for summary 

judgment and granting HHS’s cross-motion for summary 

judgment.

I. BACKGROUND

A. Statutory Background

The Center for Medicare and Medicaid Services 

(CMS)—the component of HHS that administers the 

Medicare Program—reimburses hospitals for services 

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provided to Medicare patients. Initially, reimbursement was 

based on a hospital’s reasonable, actual costs. In 1982, 

concern regarding the rapidly rising costs of Medicare 

reimbursements prompted Congress to direct the Secretary of 

HHS to develop a legislative proposal for a prospectivepayment system (PPS), whereby hospitals would receive a 

fixed amount for services rendered. See Tax Equity and 

Fiscal Responsibility Act (TEFRA) of 1982, Pub. L. No. 97-

248, § 101(b)(3), 96 Stat. 324, 335; see S. Rep. No. 97-494, 

pt. 1, at 24 (1982) (“Hospital spending has been increasing at 

double-digit rates for over a decade and much faster than the 

rates of inflation in the economy as a whole. Hospital 

spending accounts for over 70 percent of Medicare program 

expenditures . . . .”). In the interim, Congress established 

limits on the annual rates of increase of a hospital’s 

reimbursable reasonable costs. See TEFRA, § 101(a)(1), 96 

Stat. at 331-35 (codified at 42 U.S.C. § 1395ww(b)). 

Pursuant to TEFRA, hospitals were reimbursed for their 

reasonable costs not exceeding a ceiling based on the 

hospital’s “target amount” for the relevant cost year. 42 

U.S.C. § 1395ww(b)(1)(A). For the first year that a hospital 

reported its costs under TEFRA, the hospital’s target amount 

was equal to “the allowable operating costs of inpatient 

hospital services . . . for such hospital for the preceding 12-

month cost reporting period” plus an applicable percentage 

increase. Id. § 1395ww(b)(3)(A)(i). For all subsequent fiscal 

years, the target amount was “the target amount for the 

preceding 12-month cost reporting period” plus an applicable 

percentage increase. Id. § 1395ww(b)(3)(A)(ii).

A PPS was put in place for most hospitals in 1983. See

Social Security Amendments of 1983, Pub L. No. 98-21, 

§ 601, 97 Stat. 65, 153-62 (codified as amended at 42 U.S.C. 

§ 1395ww(d)). However, Congress chose to exclude certain 

types of hospitals, including psychiatric hospitals, from the 

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PPS. See Pub L. No. 98-21, § 601(e), 97 Stat. at 153

(codified as amended at 42 U.S.C. § 1395ww(d)(1)(B)). 

Instead, HHS continued to reimburse these hospitals for their 

reasonable costs as long as those costs did not exceed the 

limits set by TEFRA. The calculation of TEFRA limits 

resulted in “significant variation” in the amount of 

reimbursement across PPS-exempt hospitals. H.R. Rep. No. 

105-149, at 1336 (1997). In an effort to reduce this variation, 

Congress imposed an additional cap on target amounts for 

PPS-exempt hospitals for fiscal years 1998-2002. See

Balanced Budget Act (BBA) of 1997, Pub. L. No. 105-33, 

§ 4414, 111 Stat. 251, 405 (codified as amended at 42 U.S.C. 

§ 1395ww(b)(3)(H)). Under the BBA, target amounts for 

fiscal years 1998-2002 could not exceed the 75th percentile of 

target amounts for all hospitals in the same class for cost 

reporting periods ending during fiscal year 1996, adjusted as 

applicable for each year of the five year period. See 42 

U.S.C. § 1395ww(b)(3)(H).

Finally, in 1999, Congress directed the Secretary to 

develop a PPS for psychiatric hospitals and move the 

hospitals to that system beginning on or after October 1, 2002. 

See Medicare, Medicaid, and SCHIP Balanced Budget 

Refinement Act (BBRA) of 1999, Pub. L. No. 106-113, 

Appendix F, § 124, 113 Stat. 1501, 1501A-332.

B. Regulatory Background

After Congress enacted TEFRA in 1982, the Secretary 

promulgated regulations to implement the act. These 

regulations mirrored the statutory provisions. Under the 

regulations, a hospital’s target amount for the first cost 

reporting period after TEFRA’s enactment was equal to “the 

hospital’s allowable net inpatient operating costs per case for 

the hospital’s base period increased by the update factor for 

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the subject period.” 42 C.F.R. § 405.463(c)(4)(i) (1982). For 

all subsequent cost reporting periods, a hospital’s target 

amount was equal to “the hospital’s target amount for the 

previous cost reporting period increased by the update factor 

for the subject cost reporting period.” Id. § 405.463(c)(4)(ii); 

see also 47 Fed. Reg. 43,282, 43,292 (Sept. 30, 1982). In 

1986, HHS redesignated the relevant sections of 42 C.F.R. 

Part 405 into new Part 413. See 51 Fed. Reg. 34,790 (Sept. 

30, 1986).

Following the passage of the BBA, the Secretary 

amended 42 C.F.R. Part 413 to reflect the new cap scheme. 

The Secretary made paragraphs (c)(4)(i) and (c)(4)(ii) subject 

to newly added paragraph (c)(4)(iii). See 42 C.F.R. 

§ 413.40(c)(4)(i)-(ii) (2003). Under paragraph (c)(4)(iii), the 

hospital’s target amount was to be “the lower of the amounts 

specified in paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) . . . .” Id.

§ 413.40(c)(4)(iii). Paragraph (c)(4)(iii)(A) was a “hospitalspecific target amount,” which equaled “the net allowable 

costs in a base period increased by the applicable update 

factors.” Id. § 413.40(c)(4)(iii)(A)(I). Paragraph (c)(4)(iii)(B) 

outlined the BBA cap amount for each year 1998-2002. Id.

§ 413.40(c)(4)(iii)(B).

Finally, in 2005, in response to inquiries from provider 

hospitals, HHS amended § 413.40(c)(4)(iii) by adding an 

introductory clause specifying that the paragraph applied only 

“[f]or cost reporting periods beginning on or after October 1,

1997 through September 30, 2002 . . . .” 70 Fed. Reg. 47,278, 

47,464-65, 47,487 (Aug. 12, 2005); see also 42 C.F.R. 

§ 413.40(c)(4)(iii) (2005).

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C. Factual and Procedural Background

Although Congress directed HHS to move psychiatric 

hospitals to a PPS beginning in 2002, HHS was not able to 

begin the transition until January 1, 2005. See 69 Fed. Reg. 

66,922, 66,922-24 (Nov. 15, 2004) (explaining that 

developing a PPS for psychiatric hospitals was more complex 

and time consuming than for other types of hospitals). In the 

interim, the Secretary calculated psychiatric hospital target 

amounts under 42 U.S.C. § 1395ww(b)(3)(A)(ii) and 42 

C.F.R. § 413.40(c)(4)(ii). See 67 Fed. Reg. 49,982, 50,103 

(Aug. 1, 2002). Thus, the 2003 target amount was calculated 

by adding an applicable percentage increase to the 2002 target 

amount, which had been subject to the BBA caps, and by 

extension, the 2004 target amount was calculated by adding 

an applicable percentage increase to the 2003 target amount. 

Id.

As a psychiatric hospital that provided inpatient services 

to Medicare patients in 2003 and 2004, Fayetteville’s 

reimbursement depended on how the Secretary calculated its 

target amounts for those years. Initially, a fiscal intermediary 

informed Fayetteville that it would be reimbursed based on its 

hospital-specific target amount under 42 C.F.R. 

§ 413.40(c)(4)(iii)(A). However, the intermediary

subsequently revised its calculation and informed Fayetteville 

that its 2003 and 2004 target amounts would be calculated 

under 42 C.F.R. § 413.40(c)(4)(ii). The revised calculation 

resulted in Fayetteville receiving significantly reduced 

reimbursement for both years. Fayetteville appealed its 

reimbursements for 2003 and 2004 to the Provider 

Reimbursement Review Board (PRRB), arguing that the 

Secretary’s method for calculating the 2003 and 2004 target 

amounts improperly extended the BBA caps past their 

expiration. The PRRB found that it lacked the authority to 

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decide the appeal because it involved a challenge to the 

validity of HHS’s regulations, but certified the dispute for 

expedited judicial review in accordance with 42 U.S.C. 

§ 1395oo(f)(1). 

Fayetteville subsequently filed this action in the U.S. 

District Court for the District of Columbia. Both Fayetteville 

and HHS filed motions for summary judgment with the 

district court. Fayetteville argued that HHS’s decision to 

calculate the hospital’s 2003 and 2004 target amounts under 

42 U.S.C. § 1395ww(b)(3)(A)(ii)—updating its 2002 target 

amount, which was subject to the BBA cap scheme, by an 

adjustment factor—impermissibly extended the BBA caps 

beyond 2002, contrary to the plain language of 

§ 1395ww(b)(3)(H). Pl.’s Mot. Summ. J. at 12. According to 

Fayetteville, HHS should have calculated its 2003 and 2004 

target amounts under 42 C.F.R. § 413.40(c)(4)(iii) and 

reimbursed Fayetteville based on the hospital-specific target 

amount, which relies on the net allowable costs for the 

hospital’s base period, not the previous year’s target amount. 

Id. at 16. Fayetteville went on to contend that when the 

Secretary amended paragraph (c)(4)(iii) in 2005 by adding 

language that explicitly limited the provision’s application to 

October 1, 1997 through September 30, 2002, the Secretary 

made a substantive change to the regulatory text that 

amounted to a retroactive revision. Id. at 26-29. HHS argued 

the Secretary’s amendment was not a retroactive rule because 

42 C.F.R. § 413.40(c)(4)(iii) had never applied beyond 2002, 

and, therefore, it was inapplicable when calculating the target 

amounts for 2003 and 2004. Def.’s Mot. Summ. J. at 14, 16. 

Instead, according to HHS, 42 U.S.C. § 1395ww(b)(3)(A)(ii) 

unambiguously required HHS to calculate Fayetteville’s 2003 

target amount by updating the hospital’s capped 2002 target 

amount and, by extension, to calculate the hospital’s 2004 

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target amount by updating the hospital’s 2003 target amount. 

Id. at 10-11.

The district court denied Fayetteville’s motion for 

summary judgment and granted HHS’s cross-motion for 

summary judgment. See Wash. Reg’l Medicorp v. Burwell, 

72 F. Supp. 3d 159, 160 (D.D.C. 2014). Applying Chevron, 

the court found that the relevant provisions of the Medicare 

statute unambiguously required the Secretary to calculate the 

reimbursement as she had. Id. at 164-65. In the alternative, 

the court found that, even if the statute was ambiguous, the 

Secretary’s method was a reasonable interpretation of the 

statute and its implementing regulations. Id. at 165-67. The 

district court also found that the 2005 amendment to 42 

C.F.R. § 413.40(c)(4)(iii) was not an improper retroactive 

change because HHS did not alter its method of calculating 

target amounts when it made the amendment. Id. at 167-68.

II. DISCUSSION

Fayetteville has timely appealed the district court’s 

decision granting HHS’s cross-motion for summary 

judgment. See 42 U.S.C. § 1395oo(f)(1) (“Providers shall . . . 

have the right to obtain judicial review of any action of the 

fiscal intermediary which involves a question of law or 

regulations relevant to the matters in controversy whenever 

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

the question, by a civil action commenced within sixty days 

of the date on which notification of such determination is 

received.”). We review a district court’s grant of summary 

judgment de novo. Defs. of Wildlife v. Gutierrez, 532 F.3d 

913, 918 (D.C. Cir. 2008). Here, the material facts are not in 

dispute. Therefore, we proceed to determine whether HHS 

was “entitled to [summary] judgment as a matter of law.” 

Fed. R. Civ. P. 56(a). Under de novo review, we “may affirm 

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on a different theory than that relied upon by the district 

court.” McCormick v. District of Columbia, 752 F.3d 980, 

986 (D.C. Cir. 2014).

A. The Statute

In examining HHS’s interpretation of the statute, this 

Court applies the familiar two-pronged test set forth in 

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

837 (1984). “When a court reviews an agency’s construction 

of the statute which it administers, it is confronted with two 

questions.” Id. at 842. First, the court must determine 

“whether Congress has directly spoken to the precise question 

at issue. If the intent of Congress is clear, that is the end of 

the matter; for the court, as well as the agency, must give 

effect to the unambiguously expressed intent of Congress.” 

Id. at 842–43. 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. We also note that 

“[t]he Supreme Court has made clear that courts must give 

heightened deference to [an agency’s] interpretation of a 

‘complex and highly technical regulatory program’ such as 

Medicare.” Methodist Hosp. of Sacramento v. Shalala, 38 

F.3d 1225, 1229 (D.C. Cir. 1994) (quoting Thomas Jefferson 

Univ. v. Shalala, 512 U.S. 504, 512 (1994)). We agree with 

HHS that Fayetteville’s 2003 and 2004 target amounts are 

properly calculated under 42 U.S.C. § 1395ww(b)(3)(A)(ii). 

Insofar as there is any ambiguity in the statute, we would 

uphold HHS’s interpretation with or without Chevron

deference because HHS’s interpretation is not only reasonable 

but also the best interpretation of the statute.

When Congress passed the BBRA, it provided that the 

PPS for psychiatric hospitals would be implemented 

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immediately after the expiration of the BBA caps. See 42 

U.S.C. § 1395ww(b)(3)(H)(i) (imposing caps for fiscal years 

1998-2002); BBRA, Pub. L. No. 106-113, Appendix F, 

§ 124(c), 113 Stat. at 1501A-332 (directing the Secretary to 

move psychiatric hospitals to a PPS “beginning on or after

October 1, 2002”). Congress did not anticipate the gap 

between the two systems of reimbursement and, therefore, did 

not directly speak to how HHS should calculate target 

amounts during that gap. Thus, HHS was left to interpret 

§ 1395ww with little direction. We agree with HHS that, 

under the best interpretation of the statute, Fayetteville’s 2003 

target amount is properly calculated under 42 U.S.C. 

§ 1395ww(b)(3)(A)(ii) by adding an applicable percentage 

increase to the hospital’s 2002 target amount, even if that 

target amount was capped by § 1395ww(b)(3)(H). By 

extension, we also agree that Fayetteville’s 2004 target 

amount was properly calculated by adding an applicable 

percentage increase to the 2003 target amount.

Two provisions of § 1395ww are relevant for calculating 

Fayetteville’s 2003 target amount: paragraph (b)(3)(A) and 

paragraph (b)(3)(H). Paragraph (b)(3)(A) sets out how to 

calculate a psychiatric hospital’s target amount for its first 

cost reporting period, see 42 U.S.C. § 1395ww(b)(3)(A)(i), 

and for all subsequent cost reporting periods, see id.

§ 1395ww(b)(3)(A)(ii). Only the latter method applies here 

because 2003 was not Fayetteville’s first cost reporting 

period. Under § 1395ww(b)(3)(A)(ii), a psychiatric hospital’s 

target amount equals “the target amount for the preceding 12-

month cost reporting period, increased by the applicable 

percentage increase . . . .” For 2003, the preceding 12-month 

cost reporting period is 2002. Pursuant to § 1395ww(b)(3)(H), 

the target amount for 2002 “may not exceed” the “75th 

percentile of the target amounts for such hospitals within such 

class for cost reporting periods during fiscal year 1996,” as 

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updated by “a factor equal to the market basket percentage 

increase.” Id. § 1395ww(b)(3)(H)(i), (ii)(I), (III). The most 

straightforward reading of these provisions instructs HHS to 

use the capped 2002 target amount to calculate the 2003 target 

amount under § 1395ww(b)(3)(A)(ii).

Fayetteville argues that this method of calculating a 

psychiatric hospital’s 2003 and 2004 target amounts is 

contrary to the statute because it effectively extends the BBA 

caps beyond 2002, and Congress plainly did not intend for the 

Secretary to take a cap that was explicitly limited to five years 

and extend it to cover seven years. We disagree.

A BBA cap was not imposed on the 2003 or 2004 target 

amount. Only the 2002 target amount was capped. As the 

district court noted, “[t]here is no doubt that reverting to the 

pre-BBA method of calculating reimbursement perpetuated 

the effect of the BBA caps.” Wash. Reg’l Medicorp, 72 F. 

Supp. 3d at 164. But, as other circuits have noted, this “echo 

effect” is not contrary to the statute. See Mich. Dep’t of Cmty. 

Health v. Sec’y of Health & Human Servs., 496 F. App’x 526, 

536 (6th Cir. 2012); Ancora Psychiatric Hosp. v. Sec’y of the 

U.S. Dep’t of Health & Human Servs., 417 F. App’x 171, 

175-76 (3d Cir. 2011). That a cap imposed on one cost 

reporting period might affect the subsequent cost reporting 

period is unsurprising given that TEFRA, which was neither 

repealed nor replaced by the BBA or the BBRA, established a 

system in which a psychiatric hospital’s target amount could 

only increase by a certain percentage each cost reporting 

period. See 42 U.S.C. § 1395ww(b)(3)(A); see also Ancora

Psychiatric Hosp., 417 F. App’x at 176.

Moreover, using § 1395ww(b)(3)(A)(ii) to calculate the 

target amounts for 2003 and 2004 is consistent with 

Congress’s “progressive effort” to move hospitals from an 

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actual cost reimbursement system to a system “based on 

objective patient characteristics and consistent national 

standards, and to rein in disproportionately expensive 

treatment provided by certain hospitals.” Mich. Dep’t of 

Cmty. Health, 496 F. App’x at 534; see also Univ. of Tex. 

M.D. Anderson Cancer Ctr. v. Sebelius, 650 F.3d 685, 687 

(D.C. Cir. 2011) (“Congress has repeatedly attempted to slow 

the increase in Medicare costs for hospitals’ inpatient 

services.”). There is no indication that Congress intended to 

reverse this trend and have HHS go back to calculating target 

amounts by simply increasing the hospital’s reasonable, actual 

costs from the base year.

We conclude that the best interpretation of 42 U.S.C. 

§ 1395ww, which is the interpretation adopted by HHS, 

provides for the calculation of Fayetteville’s 2003 and 2004 

target amounts using § 1395ww(b)(3)(A)(ii).

B. The Regulation

According to Fayetteville, calculating the 2003 and 2004 

target amounts based on the 2002 capped target amount also 

ran afoul of the Secretary’s own regulations. Fayetteville 

argues that 42 C.F.R. § 413.40(c)(4)(iii) was still in effect 

during 2003 and 2004 and required HHS to reimburse 

Fayetteville for both years using the hospital-specific target 

amount under subparagraph (A). Nothing in § 413.40 

compels this Court to adopt Fayetteville’s reading. With or 

without deference, we conclude that HHS’s interpretation is 

the better one, not least of all because it is consistent with the 

best reading of the statute. See Auer v. Robbins, 519 U.S. 

452, 461 (1997).

As relevant here, the regulation states that, “[s]ubject to 

the provisions of paragraph (c)(4)(iii) of this section, for []

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cost reporting periods [after the initial period], the target 

amount equals the hospital’s target amount for the previous 

cost reporting period increased by the update factor for the 

subject cost reporting period . . . .” 42 C.F.R. 

§§ 413.40(c)(4)(ii). We agree with HHS that paragraph 

(c)(4)(iii) was added to implement the BBA caps and is best 

read as only applying from 1998-2002, when the BBA caps 

were in effect. See 62 Fed. Reg. 45,966, 45,969, 46,018-19 

(Aug. 29, 1997) (rule is implementing, among other 

provisions of the BBA, the caps on target amounts for 

psychiatric hospitals by amending § 413.40(c)(4)); 63 Fed. 

Reg. 26,318, 26,344, 26,358 (May 12, 1998) (opening 

discussion of modifications to § 413.40(c) with an 

explanation of the BBA caps). Therefore, the “subject to” 

clause of paragraph (c)(4)(ii) had no effect in 2003 and 2004, 

and the target amounts for those years are properly calculated 

by updating the previous year’s target amount.1

The conclusion that paragraph (c)(4)(iii) does not apply 

after 2002 is consistent with the fact that the regulatory 

preambles cited by both parties, which discuss how target 

amounts for 2003 and subsequent cost years would be 

calculated under § 413.40, refer only to paragraph (c)(4)(ii) 

and do not mention (c)(4)(iii) at all. See 67 Fed. Reg. 49,982, 

50,103-04 (Aug. 1, 2002) (“In accordance with existing 

§§ 413.40(c)(4)(ii) . . . [psychiatric hospitals will] continue to 

be paid on a reasonable cost basis, and payments are based on 

their Medicare inpatient operating costs, not to exceed the 

ceiling. The ceiling will be computed using the hospital’s . . . 

 1 We recognize that the 5th Circuit has reached the opposite 

conclusion. See Hardy Wilson Mem’l Hosp. v. Sebelius, 616 F.3d 

449, 457-61 (5th Cir. 2010) (42 C.F.R. § 413.40 unambiguously 

required HHS to calculate target amounts in the gap period under 

paragraph (c)(4)(iii)(A) because only subparagraph (B) no longer 

applied after 2002).

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target amount from the previous cost reporting period updated 

by the [applicable] rate-of-increase . . . .”); 67 Fed. Reg. 

31,404, 31,491 (May 9, 2002) (same).

Fayetteville further contends that using § 413.40(c)(4)(ii) 

to calculate the 2003 and 2004 target amounts is inconsistent 

with the general and somewhat ambiguous definition of target 

amount provided by § 413.40(a)(3): “Target amount is the 

per discharge (case) limitation, derived from the hospital’s 

allowable net Medicare inpatient operating costs in the 

hospital’s base year, and updated for each subsequent hospital 

cost reporting period by the appropriate annual rate-ofincrease percentage.” 42 C.F.R. § 413.40(a)(3). According to 

Fayetteville, because HHS’s target amount for 2003 was 

based on the capped 2002 target amount, the target amounts 

for both 2003 and 2004 are not “derived from” the hospital’s 

reasonable operating costs. Fayetteville’s position appears to 

be that the regulatory definition requires a hospital’s target 

amount to be its reasonable operating costs from its base year 

plus an update factor. But, saying that the target amount is 

“derived from” the hospital’s base year reasonable operating 

costs is not the same as saying that the target amount “is” the 

hospital’s base year reasonable operating costs. Even the 

target amounts for a psychiatric hospital during the BBA 

capped years were derived from the hospital’s reasonable 

operating costs in the base year. See 42 U.S.C. 

§ 1395ww(b)(3)(A), (H) (target amount equals “allowable 

operating costs” plus applicable increases unless that sum 

exceeds the 75th percentile cap for the cost reporting year); 42 

C.F.R. § 413.40(c)(4)(iii) (target amount equals “net 

allowable costs in a base period” plus update factors unless 

that sum exceeds the 75th percentile cap for the cost reporting 

year). The cap simply meant that the hospital’s Medicare 

reimbursements would not necessarily cover all the 

reasonable operating costs the hospital incurred. Thus, there 

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is no conflict between the definition in § 413.40(a)(3) and the 

method of calculation employed by HHS.

Finally, because § 413.40(c)(4)(iii), as it existed in 2003 

and 2004, is best read as applying only from 1998-2002 and 

HHS has consistently adhered to this interpretation, we 

conclude that the 2005 amendment, which simply clarifies 

this temporal limit, was not a substantive change to the rule 

and therefore does not present a retroactivity problem. See

Ne. Hosp. Corp. v. Sebelius, 657 F.3d 1, 13-14 (D.C. Cir. 

2011) (“To determine whether a rule is impermissibly 

retroactive, we first look to see whether it effects a 

substantive change from the agency’s prior regulation or 

practice.” (citation and internal quotation marks omitted)).

III. CONCLUSION

For the reasons set forth above, the district court’s 

decision denying Fayetteville’s motion for summary 

judgement and granting HHS’s cross-motion for summary 

judgment is affirmed.

So ordered.

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