Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-05233/USCOURTS-caDC-98-05233-0/pdf.json

Parties Involved:
Presbyterian Medical Center
Appellant
Donna E. Shalala
Appellee

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 4, 1999 Decided April 2, 1999

No. 98-5233

Presbyterian Medical Center

of the University of Pennsylvania Health System,

Appellant

v.

Donna E. Shalala, Secretary,

United States Department of Health and Human Services,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 95cv01939)

Jennifer A. Stiller argued the cause for appellant. With

her on the briefs was L. Peter Farkas.

Carl E. Goldfarb, Attorney, U.S. Department of Justice,

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

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 1 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Frank W. Hunger, Assistant Attorney General, Wilma A.

Lewis, U.S. Attorney, and Scott R. McIntosh, Attorney.

Before: Ginsburg, Henderson and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: This case involves Medicare's

scheme for reimbursing teaching hospitals for the costs of

graduate medical education. After the Secretary of Health

and Human Services denied appellant teaching hospital's

petition for increased reimbursement of such costs, appellant

sued in federal district court, challenging the legality of an

interpretive rule requiring the requested increase to be supported by contemporaneous documentation, and alleging that

an error in the administrative proceedings prejudiced its

claims. Finding the interpretive rule consistent with the

Department's regulations, and finding no error in the administrative proceedings, we affirm the district court's grant of

summary judgment for the Secretary.

I

Medicare reimburses teaching hospitals for the cost of

graduate medical education ("GME"), including physician

time attributable to instruction and supervision of interns and

residents. See 42 U.S.C. s 1395ww(h) (1994). Prior to 1986,

teaching hospitals claimed GME reimbursement by preparing

annual cost reports showing the portions of physician time

attributable to research, patient care, and teaching and supervising interns and residents. To obtain approval of these

expenses, hospitals submitted cost reports to fiscal intermediaries, usually insurance companies under contract with the

Department of Health and Human Services. The Department required each hospital to support its claim for GME

reimbursement with "a written allocation agreement between

the [hospital] and the physician that specifies the respective

amounts of time the physician spends" on research, patient

care, and teaching and supervision. 42 C.F.R.

s 405.481(f)(1)(i) (1985). Each hospital also had to "[m]aintain the time records or other information it used to allocate

physician compensation in a form that permits the information to be validated by the intermediary," id. s 405.481(g)(1),

and to "[r]etain each physician compensation allocation, and

the information on which it is based, for at least four years

after the end of each cost reporting period to which the

allocation applies," id. s 405.481(g)(3).

In 1986, Congress created a new GME reimbursement

formula for cost reporting periods beginning on or after July

1, 1985. See Consolidated Omnibus Budget Reconciliation

Act of 1985, Pub. L. No. 99-272, 100 Stat. 82, 171-75 (1986)

(codified as amended at 42 U.S.C. s 1395ww(h) (1994))

("GME statute"). Under the new scheme, the Secretary

determines for each hospital "the average amount [of GME

costs] recognized as reasonable" per full-time resident during

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 2 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

a designated "base period," defined as "the hospital's cost

reporting period that began during fiscal year 1984." 42

U.S.C. s 1395ww(h)(2)(A). Applying a statutory formula to

each hospital's base-year per-resident amount, the Secretary

then calculates the hospital's GME reimbursement for subsequent cost-reporting periods. See id. s 1395ww(h)(2)-(3).

In 1989, the Department issued regulations establishing

procedures for determining the "reasonable" amount of baseyear GME costs for each hospital. See 54 Fed. Reg. 40,286

(1989) (codified at 42 C.F.R. s 413.86 (1998)). (From here on,

all "C.F.R." citations refer to current regulations unless

otherwise noted.) The GME regulations direct fiscal intermediaries to reexamine the cost reports that hospitals had

submitted for the base year and to reaudit "hospitals whose

base-period GME costs appear to include misclassified or

nonallowable costs or whose per resident amounts appear to

be unreasonably high or low." Id. at 40,288; see 42 C.F.R.

s 413.86(e)(1). To prevent over-reimbursement, the regulations instruct intermediaries to deduct from each reaudited

hospital's base-year GME amount any operating costs misclassified as GME costs. See id. s 413.86(e)(1)(ii)(B). To

prevent under-reimbursement--the issue in this case--the

regulations authorize intermediaries, "[u]pon a hospital's request," to include in the base-year GME amount any GME

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 3 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

costs misclassified as operating costs in the base-year cost

report. See id. s 413.86(e)(1)(ii)(C).

Soon after the reauditing process began in 1989, it became

clear that many hospitals no longer had contemporaneous

physician time records to support GME costs claimed in the

base year. Applicable regulations had required hospitals to

keep such records for only four years after the relevant costreporting period. See 42 C.F.R. s 405.481(g) (1985). The

Department therefore issued a special GME documentation

policy for reaudits, first as an official instruction to fiscal

intermediaries, see Health Care Financing Admin., Graduate

Medical Education: Documentation to Support the Physician

Cost/Time Allocation (1990) ("HCFA Instruction"), and then

as a published notice in the Federal Register, see 55 Fed.

Reg. 35,990, 36,063-64 (1990). The parties agree that this

documentation policy is an interpretive rule. See 5 U.S.C.

s 553(b)(A).

The interpretive rule provides the following "exception to

the established record-keeping policy":

As an equitable solution to the problem of the nonexistence of physician allocation agreements, time records,

and other information, we are allowing providers to

furnish documentation from cost reporting periods subsequent to the base period in support of the allocation of

physician compensation costs in the GME based period.... It is only in the absence of base period documentation that subsequent documentation should be considered as a proxy for base period documentation....

55 Fed. Reg. at 36,063-64. Where a hospital legitimately

explains the absence of base-year documentation, the intermediary must advise the hospital that "it may request the

special exception described above." Id. at 36,064 col.1. Hospitals requesting the exception must submit "the documentation from the subsequent cost reporting period closest to the

direct GME base period." Id. If such records are also

unavailable, the hospital may support its base-year GME

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 4 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

costs by "perform[ing] a 3-week time study of all physicians'

time for a period to be specified by the intermediary." Id.

Of particular importance to this case, the interpretive rule

states as follows: "In no event will the results obtained from

the use of the records from a cost reporting period later than

the base period serve to increase or add physician compensation costs to the costs used to determine the per resident

amounts." Id. The rule concludes:

We would stress that the use of documentation from

the current year or a subsequent year is, at best, persuasive evidence rather than conclusive evidence [of baseyear GME costs]. Accordingly, if the intermediary believes that any of the changes or modifications distort the

reliability of the data, it will make whatever adjustments

are necessary to ensure an accurate cost allocation. In

addition, the intermediary will prepare a written statement documenting the facts and its conclusions concerning how the information distorts the realiability [sic] of

the data and why the data should not be relied upon.

Also, the intermediary will explain why its adjustments

are appropriate. This statement will become part of the

record as it may be used to support any action taken in

subsequent reviews and appeals.

55 Fed. Reg. at 36,064 col.2.

Appellant Presbyterian Medical Center is a teaching hospital whose GME base period is the fiscal year that ended on

June 30, 1985. Presbyterian received notice of reimbursement for that cost-reporting period in September 1988. The

notice stated that the Department could re-examine the 1984-

85 cost-reporting period at any time up to three years after

the date of the notice (i.e., until September 1991).

Acting pursuant to the GME statute and regulations, Presbyterian's fiscal intermediary, Aetna Life Insurance Co.,

reaudited the hospital's 1984-85 cost report in 1990. Aetna

mailed Presbyterian a copy of the HCFA Instruction. Shortly thereafter, Aetna sent Presbyterian a progress report,

noting that the hospital failed to provide any documentation

supporting its 1984-85 cost report. Attaching a second copy

of the HCFA Instruction, Aetna warned that without documentation, it would remove all physician compensation from

Presbyterian's base-year GME costs. This time Presbyterian

responded. It sent Aetna two types of non-contemporaneous

documentation: physician time records for fiscal years 1986-

88 and a three-week physician time study for the period from

October 1 to October 21, 1990.

After completing the reaudit, Aetna set Presbyterian's

base-year GME reimbursement rate at the level the hospital

originally claimed in its 1984-85 cost report. In doing so it

rejected, without written explanation, Presbyterian's request

for an additional $828,000 in GME costs that had allegedly

been misclassified as operating costs in the base-year cost

report. Beyond the 1986-88 time records and the 1990 time

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 5 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

study, the hospital failed to submit any documentation to

support its request.

The Provider Reimbursement Review Board reversed Aetna's determination. See Presbyterian Med. Ctr., 95-D41,

Docket No. 91-2779M (PRRB 1995). Holding that the interpretive rule violates the GME statute and regulations, the

Board refused to enforce the prohibition on using noncontemporaneous records during reaudit to support GME

costs exceeding those originally claimed in the base year.

See id. at 8-9. According to the Board, Presbyterian's "later

period proxy data"--in particular, the 1990 time study--

adequately supported the GME increase. Id. at 9.

The Health Care Financing Administration, acting on behalf of the Secretary, reversed the Board. See Presbyterian

Med. Ctr., Review of PRRB Decision No. 95-D41 (HCFA

1995). Reaffirming the policy that additional base-year GME

costs claimed during reaudit must be supported by contemporaneous documentation, and finding no such documentation in

the record, HCFA denied Presbyterian's requested GME

increase. See id. at 11-12.

Presbyterian filed suit in the United States District Court

for the District of Columbia, arguing (1) that the interpretive

rule violates the GME statute and regulations; (2) that the

administrative proceedings were tainted by prejudicial error

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 6 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

due to Aetna's failure to provide Presbyterian a written

report explaining why it denied the requested GME increase;

and (3) that the decision was arbitrary and capricious because

no statute or regulation required the hospital to keep its 1984

records more than four years. The district court rejected

each claim and granted summary judgment for the Secretary.

See Presbyterian Med. Ctr. v. Shalala, No. 95-1939 (D.D.C.

Apr. 21, 1998) (memorandum opinion & order) ("Mem. Op.").

Applying Chevron deference, the district court concluded that

the interpretive rule conflicts with neither the GME statute

nor the GME regulation. See id. at 7-12. Although "somewhat troubled by the intermediary's failure to provide the

hospital with a written report" explaining its denial of Presbyterian's requested increase, the court determined that the

hospital "ha[d] not demonstrated any way in which it was

harmed" by the alleged error. Id. at 7. The court also said

that Presbyterian "logically should have kept its 1984 records

until at least September 1991," pointing out that in September 1988 the hospital had received a reimbursement notice for

the base-year cost-reporting period which stated that the

Department could reopen this period for review at any time

within the next three years. Id. at 12.

On appeal, Presbyterian challenges the district court's ruling that the interpretive rule does not violate the GME

regulations, as well as its determination that Aetna's failure

to issue a written report was not prejudicial. Reviewing the

district court's decision de novo, see Independent Bankers

Ass'n of America v. Farm Credit Admin., 164 F.3d 661, 666

(D.C. Cir. 1999), we consider each claim in turn.

II

In evaluating whether an agency has permissibly interpreted its own regulation, we owe the agency "substantial deference." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512

(1994). We give the agency's interpretation "controlling

weight unless it is plainly erroneous or inconsistent with the

regulation." Bowles v. Seminole Rock & Sand Co., 325 U.S.

410, 414 (1945).

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 7 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

The regulations nowhere specify what documentation is

required to support a requested increase in base-year GME

costs. Although the Department asserts that section

413.86(j)(2)(ii) (now codified at 42 C.F.R. s 413.86(k)(2)(ii))

requires "sufficient documentation" to support a GME increase in the reaudited base year, that requirement actually

applies to requests for adjustments in reimbursement rates

for "the rate-of-increase ceiling base year or prospective

payment base year." 42 C.F.R. s 413.86(k)(2)(i). Presbyterian claims that the interpretive rule, by allowing noncontemporaneous records to support GME costs claimed in

the base-year cost report, while requiring contemporaneous

records to support GME costs misclassified as operating

costs, frustrates the regulatory goal of ensuring "an 'accurate'

determination of providers' 1984 GME costs." Regions Hosp.

v. Shalala, 118 S. Ct. 909, 914 (1998) (citing Department's

proposed rule).

We disagree. GME costs claimed in the base year have

already gone through a verification process requiring contemporaneous documentation. See 42 C.F.R. s 405.481(f)(1)(i)

(1985). Additional GME costs claimed during reaudit have

not. Because "later year records [are] inherently less reliable," and because "hospitals ha[ve] significant incentives to

inflate their GME costs in the base year," Mem. Op. at 10;

see 55 Fed. Reg. at 35,064 col.2 (non-contemporaneous records are, "at best, persuasive evidence rather than conclusive

evidence"), we think the interpretive rule, by prohibiting noncontemporaneous records from supporting GME costs never

supported by contemporaneous records, reasonably furthers--not frustrates--" 'accurate' determination" of GME

costs. Regions Hosp., 118 S. Ct. at 914. Because nothing in

"the regulation's plain language or ... the Secretary's intent

at the time of the regulation's promulgation" compels an

alternative reading, we defer to the agency's interpretation.

Thomas Jefferson, 512 U.S. at 512; see id. ("This broad

deference is all the more warranted when, as here, the

regulation concerns 'a complex and highly technical regulatory program,' in which the identification and classification of

relevant 'criteria necessarily require significant expertise and

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 8 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

entail the exercise of judgment grounded in policy concerns.' ") (citations omitted).

Relying on the Department's acknowledgment that "in

many cases ... [contemporaneous] records no longer exist

for the (GME) base period," HCFA Instruction at 1; see 55

Fed. Reg. at 36,063 col.3 (noting that 42 C.F.R. s 405.481(g)

(1985) "only require[d] the retention of [such records] for four

years after the end of each cost reporting period"), Presbyterian next argues that the interpretive rule effectively nullifies

the regulatory provision allowing hospitals to claim base-year

GME costs misclassified as operating costs, see 42 C.F.R.

s 413.86(e)(1)(ii)(C). We agree with the district court that on

the facts of this case, this argument is without merit. Presbyterian's September 1988 notice of reimbursement for the

base-year cost-reporting period clearly stated that the Department could re-examine this period at any time within the

next three years. The hospital "logically should have kept its

1984 records until at least September 1991." Mem. Op. at 12.

III

We turn to Presbyterian's claim of prejudicial error. It

argues that the Department's interpretive rule required Aetna to explain in writing why it denied the hospital's requested

GME increase. According to the hospital, had it known that

Aetna considered its 1990 time study and 1986-88 time records inadequate, it would have submitted physician time

allocation agreements, so-called "339s," from the base-year

cost-reporting period instead. The absence of a written

explanation, Presbyterian claims, caused it to forgo producing

the 339s during the administrative proceedings. Relying on

the rule of prejudicial error, see 5 U.S.C. s 706; Small

Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506,

521 (D.C. Cir. 1983) (requiring courts to reverse agency

actions if there is "a possibility that the error would have

resulted in some change in the final rule") (emphasis omitted), the hospital argues that the district court should have

reversed the Secretary's decision.

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 9 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Presbyterian's argument fails for several reasons. To begin with, we find nothing inappropriate in Aetna's failure to

issue a written explanation. The interpretive rule requires

intermediaries to prepare written statements when they determine that non-contemporaneous documentation submitted

in a particular case is inadequate due to specific defects that

"distort the reliability of the data." 55 Fed. Reg. at 36,064

col.2. According to the rule, the written statement "document[s] the facts and [the intermediary's] conclusions concerning how the information distorts the realiability [sic] of

the data and why the data should not be relied upon," and

"explain[s] why [the intermediary's] adjustments [to the data]

are appropriate." Id. As Presbyterian acknowledges,

Aetna denied its request for additional base-year GME

costs because the supporting documents were noncontemporaneous--not because they incorporated "changes

or modifications [that] distort the reliability of the data" or

because they needed "adjustments" to improve their accuracy. Id. We agree with the Department that the written

statement requirement is inapplicable where, as here, an

intermediary finds a set of records categorically inadequate

to support an increase in base-year GME costs.

Equally unpersuasive is Presbyterian's claim that without a

written explanation, it had no way of knowing that its failure

to produce contemporaneous base-year records was the reason Aetna denied its requested GME increase. As the district court pointed out, Aetna twice sent the hospital a copy of

the HCFA Instruction during the reaudit. See Mem. Op. at

4-5. That Instruction states, in the only underlined sentence

on the first page: "In no event will the results obtained from

the use of time studies or a subsequent year's data serve to

increase the amount of physicians' cost originally allocated to

the GME cost center." HCFA Instruction at 1. Moreover,

the district court found that "the reasons for the intermediary's decision were repeatedly explained to the hospital during the administrative process." Mem. Op. at 7.

In direct tension with its claim that it had no idea why

Aetna denied its requested GME increase, Presbyterian further argues that its failure to submit base-year 339s resulted

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 10 of 11
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

from Aetna's erroneous assertions that 339s are insufficient

contemporaneous documentation to support an increase in

base-year GME costs. But whether or not 339s are sufficient, if Presbyterian in fact believed during the reaudit that

339s could support base-year GME costs, then it should have

put those documents into the administrative record in order

to preserve its claim. In doing so it could have relied on

Abbott Northwestern Memorial Hospital v. Blue Cross &

Blue Shield Ass'n, Medicare & Medicaid Guide (CCH) p 43,-

136 (Feb. 2, 1995). Issued four months prior to the Provider

Reimbursement Review Board's decision in this case and

seven months prior to the Secretary's reversal, Abbott determined that 339s together with a later-year time study could

support a hospital's base-year GME costs that were misclassified as operating costs. See id. at 43,653. Presbyterian's

reliance on Abbott in this appeal is too little too late. Not

only does the hospital fail to cite the case until its reply brief,

see Doolin Sec. Sav. Bank v. Office of Thrift Supervision, 156

F.3d 190, 191 (D.C. Cir. 1998) (refusing to consider arguments

raised only in the reply brief), but Abbott establishes at most

only that Presbyterian was potentially harmed by its failure

to submit 339s, not that the harm flowed from anything other

than the hospital's own inaction.

IV

The district court's grant of summary judgment for the

Secretary is affirmed.

So 

ordered.

USCA Case #98-5233 Document #427034 Filed: 04/02/1999 Page 11 of 11