Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-93-09572/USCOURTS-ca10-93-09572-0/pdf.json

Parties Involved:
Department of Health and Human Services
Respondent
Department of Health and Human Services Health Care Financing Administration
Respondent
Donna E. Shalala
Respondent
State of Oklahoma
Petitioner
Bruce C. Vladeck
Respondent

Document Text:

PUBLISH FILED 

UNITED STATES COURT OF APPEALS 

lJIIItecl States Coart ol Appeals Tentb Circuit 

TENTH CIRCUIT 

STATE OF OKLAHOMA, 

Petitioner, 

v. 

DONNA E. SHALALA, as Secretary of 

the Department of Health and 

Human Services; DEPARTMENT OF 

HEALTH AND HUMAN SERVICES; 

BRUCE C. VLADECK, as 

Administrator of the Health Care 

Financing Administration; 

DEPARTMENT OF HEALTH AND HUMAN 

SERVICES HEALTH CARE FINANCING 

ADMINISTRATION, 

Respondents. 

DEC 081994 

PATRICK FISHER 

Clerk 

No. 93-9572 

PETITION FOR REVIEW OF A FINAL DECISION OF THE 

DEPARTMENT OF HEALTH AND HUMAN SERVICES, 

HEALTH CARE FINANCING ADMINISTRATION 

(DOCKET NO. 90-26) 

Charles A. Miller, Covington & Burling, Washington, D.C. 

(Howard J. Pallotta, Assistant General Counsel, Department of 

Human Services, Oklahoma City, Oklahoma; and Anna P. Engh, 

Covington & Burling, Washington, D.C., with him on the briefs), 

for Petitioner. 

Stuart I. Silverman, Office of General Counsel, Department of 

Health and Human Services (Harriet S. Rabb, General Counsel; 

Darrel J. Grinstead, Associate General Counsel, Health Care 

Financing Administration; Henry R. Goldberg, Deputy Associate 

General Counsel for Litigation, with him on the brief), 

Washington, D.C., for Respondents. 

Appellate Case: 93-9572 Document: 01019281496 Date Filed: 12/06/1994 Page: 1 
Before ANDERSON and LOGAN, Circuit Judges, and SAFFELS,* District 

Judge. 

ANDERSON, Circuit Judge. 

This case involves the applicability of public notice 

requirements to a state Medicaid plan amendment. Oklahoma 

petitions for review of a final decision of the Administrator of 

the Health Care Financing Administration ("HCFA"), an agency 

within the Department of Health and Human Services, affirming the 

agency's disapproval of the effective date of Oklahoma Medicaid 

state plan amendment 89-18. Petitioner State of Oklahoma argues 

that HCFA erroneously found (1) that an annual inflation increase 

in the State's Medicaid rates to hospitals was a change in methods 

and standards for setting payment rates to providers; (2) that the 

change was significant, thus triggering a requirement for prior 

public notice under 42 C.F.R. §§ 447.205 and 447.253; and (3) that 

actual notice provided to hospital providers and the public nature 

of the rate-setting process did not obviate the need to satisfy 

the public notice requirement. We exercise jurisdiction over this 

petition for review under 42 U.S.C. § 1316(a) (3) and affirm the 

Administrator's decision. 

BACKGROUND 

Since 1983, Oklahoma has set its Medicaid reimbursement rates 

for hospitals prospectively, using historical costs adjusted for 

* The Honorable Dale E. Saffels, Senior Judge, United States 

District Court for the District of Kansas, sitting by designation. 

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inflation.l From November 1983 through December 1985, the State 

used the HCFA market basket index to determine its inflation 

adjustment. In 1986, the State adopted a new approach by which 

the Oklahoma Commission for Human Services ("Commission") approved 

an inflation adjustment after considering various state and 

national indices. HCFA advised the State that if it intended to 

adjust rates 

using a variety of criteria that cannot be precisely 

specified in advance, then we believe the plan should be 

amended to describe the general process and (1) 

periodically amended to reflect the actual adjustments 

recommended by the commission or (2) specify the HCFA 

market basket as an upper limit and address the 

reasonableness and adequacy of adjustments in the 

State's annual findings. 

R. at 331. 

Either way, HCFA said, such amendments would be a 

"significant change" in rate-setting methods and standards. Id. 

Significant changes require public notice before their effective 

date. See 42 C.F.R. §§ 447.205, 447.253(f) (1989) .2 

For State Plan Amendment ("SPA") 86-1, which established a 

three percent inflation factor, and SPA 87-2, which set a zero 

percent inflation factor, the State published notice and provided 

1 Medicaid is a cooperative federal-state program to cover 

certain costs of medical treatment, including hospital care, for 

the poor. For a general description of the Medicaid program, 

under 42 U.S.C. § 1396-1396(v), see Kansas Health Care Ass'n. Inc. 

v. Kansas Dept. of Social and Rehabilitation Servs., 31 F.3d 1536, 

1538-40 (lOth Cir. 1994). In Oklahoma, the federal government 

covers 70.39 percent of the State's payments to eligible 

individuals. See Petitioner's Br. at 3 (citing State Medicaid 

Manual § 2501) . 

2 Section 447.253(f) was recodified without change in 1992 as 

447.253(h). See 57 Fed. Reg. 43,921 (Sept. 23, 1992). 

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assurances to HCFA of compliance with section 447.205. SeeR. at 

305, 307, 311, 313, 316-17, 320-21, 366. 

Effective July 1, 1987, however, the State claims that it 

changed approaches again. In its transmittal to HCFA of SPA 

87-13, it said the Commission had determined its 3.7 percent 

proposed inflation adjustment "[b]ased upon a review of Oklahoma 

hospital cost report factors as reflected in the two most recently 

submitted cost reports." R. at 298. In its written assurances 

filed in conjunction with SPA 87-13, the State said it had 

"complied with the public notice requirements of 42 CFR 447.205," 

R. at 301, but it does not appear to have published a complying 

notice. See R. at 366.3 

To set the FY 1989 inflation adjustment of four percent, the 

State filed another plan amendment, SPA 88-3, with the identical 

explanation quoted above. R. at 293, 298. HCFA approved 

Oklahoma's inflation adjustment without receiving any written 

assurances regarding public notice. See R. at 292-95. The agency 

later asserted that the approval had been inadvertent. 

Respondents' Br. at 6, n.6. 

The same methodology used in SPA 87-13 and SPA 88-3 was again 

referenced in SPA 89-18, the plan amendment at issue in this case, 

which set a FY 1990 inflation rate of 5.9 percent. SeeR. at 280. 

Oklahoma submitted SPA 89-18 to HCFA on December 7, 1989, with a 

proposed retroactive effective date of July 1, 1989. R. at 279. 

3 The State maintains that it is proper for a state to file 

assurances of compliance without publishing notice where the state 

has determined that notice is not required. See Petitioner's 

Reply Br. at 7, n.1. 

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In a December 21, 1989, letter, the State Director of Human 

Services assured HCFA that the department had complied with public 

notice requirements of 42 C.F.R. § 447.205, R. at 282, but the 

State at that time had not published a complying notice. See R. 

at 366. The State completed publication of notice on June 24, 

1990. On July 27, 1990, HCFA's Administrator approved the 

inflation adjustment but disapproved the July 1, 1989, effective 

date because, among other things, SPA 89-18 was a significant 

change in methods and standards, requiring prior public notice. 

See R. at 286-88. 

On September 24, 1990, the State requested reconsideration of 

the partial disapproval. On March 31, 1992, HCFA notified the 

State it was disallowing $5,601,512 in federal funds based on the 

disapproval. An appeal of that disallowance is stayed pending the 

outcome of this appeal. On January 15, 1993, a hearing officer 

recommended affirmance of the disapproval of the effective date. 

The State submitted exceptions. The Administrator affirmed on 

July 28, 1993. R. at 1-10. 

STANDARDS OF REVIEW 

We review the disapproval of a state Medicaid plan under 

Administrative Procedure Act standards and affirm unless we find 

the agency's action to be arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with law. 5 U.S.C. 

§ 706(2) (A); New Mexico Dept. of Human Servs. v. Health & Human 

Servs. Health Care Fin. Admin., 4 F.3d 882, 884 (lOth Cir. 1993). 

To make this finding we consider whether the Administrator based 

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his decision on a consideration of the relevant factors and 

whether he made a clear error of judgment. Motor Vehicle Mfrs. 

Ass'n of United States. Inc. v. State Farm Mut. Auto. Ins. Co., 

463 U.S. 29, 43 (1983) (citations omitted). We may not supply a 

reasoned basis for the Administrator's action that the 

Administrator himself has not given, but we will uphold a decision 

of less than ideal clarity if the Administrator's path may 

reasonably be discerned. Id. 

The Administrator's findings of fact are conclusive if 

supported by substantial evidence. 42 U.S.C. § 1316(a) (4); see 

also 5 U.S.C. § 706(2) (E). The HCFA's interpretation of its own 

regulations is of controlling weight unless plainly erroneous or 

inconsistent with the regulation. Valley Camp of Utah, Inc. v. 

Babbitt, 24 F.3d 1263, 1267 (lOth Cir. 1994); City of Aurora v. 

Hunt, 749 F.2d 1457, 1461-62 (lOth Cir. 1984). 

DISCUSSION 

I. Change in Rate-Setting Methods and Standards. 

Oklahoma argues that it set its inflation factor in the same 

way for three years in a row, and therefore SPA 89-18 made no 

change in methods and standards. See Petitioner's Br. at 5, 6, 

16; Petitioner's Reply Br. at 8. But the Administrator found that 

the inflation adjustment described in SPA 89-18 was a change in 

amount, the methodology for which was not described in either SPA 

89-18 or the state plan. R. at 6. Therefore, he said, the new 

inflation factor altered the equation used to calculate payment 

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rates and constituted a change in the methods or standards for 

setting rates. Id. 

The Administrator relied on Missouri Dept. of Social Servs. 

v. Sullivan, 957 F.2d 542, 544 (8th Cir. 1992): When an 

unexplained inflation adjustment operates as a sort of "black 

box," HCFA may reasonably view the new adjustment "as an 

alteration of [the state's] methodology, not as new data plugged 

into an unchanged equation." Missouri Dept., 957 F.2d at 544. 

Oklahoma does not quarrel with this principle, but rather attempts 

to distinguish its circumstances from those in Missouri Dept. The 

State argues that the 5.9 percent inflation adjustment in SPA 

89-18 is not an unexplained number, because the methodology 

underlying it had previously been described in SPA 88-3. The 

description to which the State points in SPA 88-3 is identical to 

that contained in SPA 87-13 and SPA 89-18. It states briefly that 

the inflation adjustment was "[b]ased upon a review of Oklahoma 

cost report factors as reflected in the two most recently 

submitted cost reports."4 We must review, then, the 

4 A more complete description of the methodology was given in 

an assurances letter apparently sent in conjunction with the 

transmittal of SPA 87-13: 

The rate adjustment is based on a comprehensive and 

detailed review of all Oklahoma hospital cost reports 

for the two most recent cost reporting years of State FY 

85 and FY 86. The review focused upon percentage 

increases from FY 85 to FY 86 in terms of actual 

increase of operating expenditures, occupancy changes, 

average length of stay changes, proportion of patient 

days to full-time employees and changes in patient days. 

This analysis resulted in a range of percentage changes. 

The median point of that range was 3.7%. Through a 

public hearing and later approved by the Commission for 

Human Services, it was determined that this rate of 

(continued on next page) 

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Administrator's implicit finding that this language did not 

constitute a description of methods or standards. 

The applicable statute, 42 U.S.C. § 1396a(a) (13) (A), refers 

to "methods" and "standards" for determining reimbursement rates, 

but neither the statute nor HCFA regulations define the two terms. 

HCFA has required by rule, though, that a state plan "specify 

comprehensively the methods and standards used by the agency to 

set payment rates in a manner consistent with § 430.10 of this 

chapter." 42 C.F.R. § 447.252(b) (1993). A plan must be 

"comprehensive" and contain "all information necessary for HCFA to 

determine whether the plan can be approved to serve as a basis for 

Federal financial participation (FFP) in the State program." 42 

C.F.R. § 430.10 (1993). 

In making the finding that no methodology was set forth in 

SPA 89-18 or the state plan, the Administrator implicitly 

interpreted the regulations as requiring that a comprehensive 

description contain something more than the single sentence in 

question, which does not specify what cost report factors were 

used, how they were used, or whether they were the only factors 

considered. This interpretation is not plainly erroneous. "The 

plain meaning of the term 'specify comprehensively' implies both 

(continued from previous page) 

increase (3.7%) carried forward to the FY 88 rate year 

would be reasonable and adequate reimbursement. 

R. at 299. 

Neither party, however, cites to this language as being 

incorporated into the state plan by amendment, so we do not 

consider whether it might have sufficed as a comprehensive 

description of the methodology. 

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some degree of detail and some sense of thoroughness or 

completeness in the description of the methods and standards used 

to set the rates." Oklahoma Nursing Home Ass'n v. Demps, 816 F. 

Supp. 688, 698 (W.D. Okla. 1992), appeal dismissed, 9 F.3d 117 

(1993), vacated by district court order March 3. 1994.5 

Substantial evidence supports the finding that neither SPA 

89-18 nor the state plan contained any legally sufficient 

description of the methods and standards used to derive the 5.9 

percent inflation factor. The State's own post hoc description of 

its methodology, submitted during the administrative appeal, 

demonstrates the incompleteness of the one-sentence description 

included in the various plan amendment transmittals. The later, 

more comprehensive description shows that the cost report numbers 

were not the only data considered in the rate-setting process; the 

Division of Medical Services also considered unspecified other 

economic indices. See R. at 85, 91. HCFA had previously made 

clear to the State that if it relied on indices to set its 

adjustment, those indices must be identified and their use 

explained, or the resulting number would be considered a change in 

methods and standards. See R. at 215, 331. In addition, it 

appears that deriving the median of the percentage changes in five 

cost factor categories from the hospital cost reports was only the 

beginning, not the end, of a discretionary decision-making process 

that culminated in the Commission's final selection of a number. 

5 Although the district court vacated this December 9, 1992, 

order, together with a September 28, 1993, order, upon settlement 

of the case, we find the court's reasoning on this point 

persuasive. 

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SeeR. at 85-87, 91-93. By almost any definition of methods and 

standards, the single-sentence description of the methodology 

included in SPA 87-13, SPA 88-3 and SPA 89-18, is not a 

comprehensive description of what Oklahoma was doing.6 The 

Administrator reasonably determined that the 5.9 percent figure 

was an inadequately explained number that should be treated as a 

change in the State's methods and standards for setting 

reimbursement rates. 

II. Significant Change in Rate-Setting Methods and Standards. 

Oklahoma argues first that HCFA arbitrarily failed to follow 

its stated policy of deferring to a state's reasonable 

determination of the significance of a change in methods and 

standards. Petitioner's Br. at 21-23.7 Oklahoma maintains that 

6 We also note a serious contradiction in Oklahoma's own 

representations as to whether it changed methods and standards 

with SPA 87-13 and then followed the same fixed equation 

thereafter. The State argues now that "[t]he methodology was 

changed in 1987" to adopt the five-factor analysis for the FY 1988 

rate-setting. See Petitioner's Br. at 4-5. In answers to HCFA 

requests for admissions during the administrative proceedings, 

however, Oklahoma stated that SPA 87-13 "was not a change in the 

methods and standards of the State plan." R. at 339. This 

earlier statement is incomprehensible to us. Either the state did 

change from its open-ended review of State and national inflation 

indices used in SPA 87-2 and SPA 86-1, R. at 305, 311, to a more 

constrained approach, in which case SPA 87-13 was a change in 

methods or standards for that reason, or it continued to use the 

same open-ended approach in SPA 87-13 as it had in SPA 87-2 and 

SPA 86-1, which Oklahoma has acknowledged would itself constitute 

an annual change in methods or standards. 

7 As evidence of this policy, the State cites Regional Medicaid 

Manual § 6302 ("A State's determination of the significance or 

insignificance of plan changes must be based on a test of 

reasonableness."), R. at 370; a November 5, 1991, document sent by 

HCFA Regional Administrator George R. Holland to state agencies in 

eight states explaining the public notice requirements under 42 

(continued on next page) 

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• 

Appellate Case: 93-9572 Document: 01019281496 Date Filed: 12/06/1994 Page: 10 
instead of finding that the State's determination of 

insignificance was unreasonable, the Administrator merely found 

that HCFA's own determination of significance was reasonable. The 

State argues that this error prejudices it, because the State's 

determination of insignificance clearly was reasonable. It cites 

the fact that the State had made an inflation adjustment to 

hospital rates every year since 1983, that the providers expected 

the adjustment, that the adjustment was "in the same range" as 

previous adjustments, and that the State had not issued public 

notice for the adjustment in the previous year and HCFA approved 

it anyway. Petitioner's Reply Br. at 7, 13. 

HCFA does not appear to dispute that a state is to make the 

initial determination of significance: "We submit that 

ultimately, HCFA must judge the reasonableness of a state's 

characterizations of amendments to its plan, and HCFA's 

determination should be sustained if it is neither arbitrary nor 

capricious." Respondents' Br. at 26.8 

(continued from previous page) 

C.F.R. § 447.205 ("It has been HCFA policy that each State may 

determine what it considers to be significant. However, the 

State's determination that an amendment is not significant is 

subject to review by HCFA."), R. at 162; and California Dept. of 

Health Servs., Departmental Appeals Board Decision No. 1352 at 10 

(1992) (Addendum B to Petitioner's Br.) (remanding case to HCFA to 

consider whether state could reasonably have viewed its plan 

amendment as not being a significant change) . 

8 The Administrator himself cited the preamble to final regulations published December 19, 1983, stating that where a state 

submits a plan amendment that it terms insignificant but which 

others may believe is significant, "we expect that a State's 

determination of significant or insignificant changes to its 

payment methods and standards is based on a test of reasonableness." R. at 7 (citing 48 Fed. Reg. 56,046, 56,052 (emphasis 

added)). See also id. at 8 (citing Section 6002 of the State 

(continued on next page) 

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It is possible to read the Administrator's decision, as 

Oklahoma did, as a finding with regard to HCFA's determination, 

rather than with regard to the State's. SeeR. at 8 ("[T]he 

Administrator finds that the Hearing Officer properly decided that 

HCFA reasonably determined that the proposed amendment constitutes 

a significant change in the methods or standards used to set 

Medicaid payments."). 

We must determine, then, whether the Administrator merely 

wrote unclearly or actually applied a standard different from the 

one he purports to recognize. Upon examination we find that, 

whether or not he was bound to do so, the Administrator did 

implicitly review the reasonableness of the State's determination; 

he found it to be unreasonable and therefore gave it no deference. 

The Administrator found that the 5.9 percent inflation adjustment 

"represents a substantial increase in the inflation adjustment 

over prior years," R. at 8, implicitly rejecting as unreasonable 

the State's argument that the adjustment was "in the same range" 

as previous ones. The inflation factor in SPA 86-1 was 3 percent; 

SPA 87-2, zero percent; SPA 87-13, 3.7 percent; SPA 88-3, 4 

percent; SPA 89-18, 5.9 percent. The Administrator could 

reasonably find that an inflation adjustment nearly half again as 

large in percentage terms as the next highest adjustment in the 

previous four amendments was a substantial increase in that 

factor. 

(continued from previous page) 

Medicaid Manual: a "State's determination of the significance or 

insignificance of plan changes must be based on a test of 

reasonableness"). 

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The Administrator also found that the State was advised as 

early as 1986 that HCFA would consider the proposed annual 

inflation changes significant as long as the State used various 

measures of inflation without formally committing itself to the 

use of any one or any combination of indices.9 This finding 

implicitly rejects as unreasonable any reliance on the fact of 

annual inflation adjustments since 1983 or on providers' 

expectations as a basis for calling this particular adjustment 

insignificant. We further note that SPA 86-1 and SPA 87-2 also 

were annual adjustments, and there was no showing that they were 

less anticipated than SPA 89-18, yet Oklahoma does not dispute 

their significance. The Administrator was correct to deem these 

two premises an unreasonable basis for the State's determination 

that SPA 89-18 was insignificant. 

Finally, the State argues that because it did not issue 

public notice of SPA 88-3 the previous year and HCFA approved the 

amendment anyway, the State acted reasonably in concluding that 

SPA 89-18 must not be a significant change in methods and 

standards. See Petitioner's Reply Br. at 7, 13. It does not 

appear that Oklahoma raised this argument before the 

Administrator, though, see R. at 68-70, so we do not consider it 

9 A May 12, 1986, letter from HCFA to the State, R. 215, gives 

the state an additional option, referring to the State's 

committing itself to "a given index, combination of indices, or a 

specific methodology for future periods." (Emphasis added.) The 

State asserts that it committed itself to a specific methodology 

in SPA 87-13, SPA 88-3 and SPA 89-18, but, as discussed above, the 

State's language amounted to far less than a comprehensive 

description of any methodology. 

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here. Rives v. ICC, 934 F.2d 1171, 1176 (lOth Cir. 1991), cert. 

denied, 112 S.Ct. 1559 (1992). 

Implicitly finding Oklahoma's determination of insignificance 

to be unreasonable and entitled to no deference, the Administrator 

made his own finding that SPA 89-18 was a significant change in 

rate-setting methods and standards. HCFA's regulations do not 

define "significant proposed change," and the agency has pointedly 

refused invitations to add a definition to the regulations. See 

preamble to Final Rule, 48 Fed. Reg. 56,046, 56,049-50. But the 

agency has instructed states that in determining the significance 

of a change in methods and standards, they should "consider the 

impact of the proposed change (e.g., the change in rates and the 

number of providers affected) .nlO Id. at 56,051. Here, the 

Administrator looked at both the magnitude and the breadth of 

impact of SPA 89-18. He found that the 5.9 percent inflation 

adjustment to Medicaid payment rates for inpatient hospital 

services "was the largest single determinant of all inpatient 

hospitals' year-to-year payment increase." R. at 7. "The 

10 The State argued below that under HCFA's own stated policy, 

the significance of state plan changes is to be assessed not by 

the change in payment amounts or number of facilities affected, 

but solely by the degree to which payment methods and standards 

have changed. See Supp. R. Vol. I at 22. The State does not 

pursue this argument on appeal, so we do not address it. 

On appeal, the State cites California Dept., supra n.7, at 10 

(Addendum to Petitioner's Br.), for the proposition that 

significance is to be determined by whether an amendment 

significantly changes the direction of the state's Medicaid 

program or its methodology. We do not dispute the importance of 

these considerations. We note, however, that the Board in 

California Dept. also considered the State's finding on the 

quantitative magnitude of the change at issue, which affected less 

than .007 of 1 percent of an annual $6 billion program. See id. 

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amendment represents a substantial increase in the inflation 

adjustment over prior years and will impact payment for all 

inpatient hospital services in the State of Oklahoma." R. at 8. 

Oklahoma suggests that the mere fact that an inflation factor 

determined the hospitals' annual payment increase says nothing 

about the factor's significance if the resultant annual payment 

increase itself was minuscule, and here the Administrator made no 

finding that the payment increase was significant. See 

Petitioner's Br. at 24. This logic might persuade us, had the 

State not already effectively conceded that the 5.9 percent 

increase was significant in magnitude. See ~ at 10 (disapproval 

of July 1, 1989, effective date is of "great significance to 

Oklahoma"--$5.6 million of scarce state funds and services valued 

at over $18 million are at stake) . We find that substantial 

evidence supports the Administrator's finding that SPA 89-18's 5.9 

percent inflation factor was a significant change in rate-setting 

methods and standards.11 

III. Notice Requirement. 

The State does not contend that it complied fully with the 

formal public notice requirements of 42 C.F.R. § 447.205 before 

June 24, 1990. It argues instead that its "lack of exact 

compliance" is excused "because the rate increase was established 

through a public process in which the State issued actual notice 

11 Although the State's concession of this point allows us to 

avoid the costly exercise of a remand for further factual 

findings, we can easily foresee future cases where we will not be 

able to sustain the Administrator's decisions without more 

carefully articulated findings than he has chosen to provide here. 

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of the increase to the affected providers." Petitioner's Br. at 

26. 

The Administrator disagreed that either a public ratemaking 

process or actual notice could substitute for "at least minimal 

compliance" with section 447.205. He said that even if all 

affected parties had actual notice, the State must publish "an 

appropriate public notice before the effective date of the 

proposed change."12 

In promulgating the public notice requirements, HCFA 

specifically decided that a federal rule was necessary, despite 

the existence of administrative procedures acts in most states 

that already provided for notice of the type of ratemaking process 

involved here. See preamble to Interim Final Rule, 46 Fed. Reg. 

47,964, 47,966-67 (Sept. 30, 1981) (modifying section 447.254 

notice requirements); preamble to Interim Final Rule, 46 Fed. Reg. 

58,677, 58,679 (Dec. 3, 1981) (revising section 447.205); preamble 

12 Here, the State has not claimed more than partial actual 

notice--to hospital providers. The rulemaking history of the 

public notice requirements manifests a concern that the public and 

patients, as well as providers, be apprised of significant changes 

in methods and standards. See Morabito v. Blum, 528 F. Supp. 252, 

270 (S.D.N.Y. 1981); preamble to Interim Final Rule, 46 Fed. Reg. 

47,964, 47,966-67 (Sept. 30, 1981) (modifying section 447.254 

notice requirements); preamble to Interim Final Rule, 46 Fed. Reg. 

58,677, 58,679 (Dec. 3, 1981) (revising section 447.205). What 

the public and patients received with respect to SPA 89-18 appears 

to have been, at best, constructive notice of their opportunity to 

participate in a public rate-setting process in which they could 

have obtained actual notice of the change in the inflation 

adjustment. 

The clear deficiency in actual notice itself would dispose of 

this issue, had the Administrator made a finding with respect to 

it. He did not, and we may not supply a reasoned basis for his 

decision that he himself did not give. Motor Vehicle Mfrs. Ass'n, 

463 U.S. at 43 (citing SEC v. Chenery CokP., 332 U.S. 194, 196 

(1947)). 

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to Final Rule, 48 Fed. Reg. 56,046, 56,050 (Dec. 19, 1983) 

(merging section 447.254 into section 447.205). We cannot say, 

therefore, that the Administrator erred in construing section 

447.205 as adding a separate requirement over and above whatever a 

particular state's public processes might already provide, as a 

procedural protection for providers and beneficiaries and "a 

reasonable method for ensuring that rate changes are equitable and 

conform to statutory mandates." R. at 9 (citing North Carolina 

Dept. of Human Resources v. United States Dept. of Health and 

Human Servs., 999 F.2d 767, 771 (4th Cir. 1993). 

The Administrator's decision clearly contemplates that actual 

notice does make a difference, potentially relaxing the notice 

requirement from full formal compliance to "at least minimal 

compliance" through publication of "an appropriate public notice 

before the effective date of the proposed change." R. at 9; see 

also State of Illinois v. Shalala, 4 F.3d 514, 517 (7th Cir. 1993) 

(where affected parties had actual notice of a legislatively 

mandated plan amendment, "at least minimal compliance with section 

447.205(d) 's requirement of publication before the proposed 

effective date" was still required). Cf. North Carolina Dept., 

999 F.2d at 771 (finding nothing in federal regulations that 

permits harmless error exception to section 447.205 notice 

requirements) . 

Were we to read the Administrator's decision as saying that 

less than total compliance with every requirement of section 

447.205(c) and (d) would always be a violation, no matter what 

actual notice had been given, we might find his interpretation to 

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be plainly erroneous. A strong argument could be made that such 

rigidity would conflict irreconcilably with the clear legislative 

and rulemaking intent that the states be given flexibility in 

determining rates and that federal reporting and other 

administrative requirements be kept to the minimum necessary to 

assure proper accountability. See. e.g., 48 Fed. Reg. 56,046, 

56,046-47 (discussing legislative history of Omnibus 

Reconciliation Act of 1980, Pub. L. 96-499, § 962, and Omnibus 

Budget Reconciliation Act of 1981, Pub. L. 97-35, § 2173). We do 

not understand the Administrator to be going that far. We do not 

find his interpretation to be erroneously rigid, even though by 

always requiring some advance publication it is arguably less 

flexible than a traditional actual notice/harmless error 

exception.13 

Substantial evidence supports the Administrator's inherent 

finding that in this case, the State did not comply even minimally 

with either the content or the publication requirements of section 

447.205.14 Publication was not made in the state register, nor 

13 Even a case heavily relied upon by the State as support for 

an actual notice exception, California Ass'n of Bioanalysts v. 

Rank, 577 F. Supp. 1342, 1349-51 (C.D. Cal. 1983), holds only that 

where a state provides inadequate formal notice--as opposed to no 

notice at all--an aggrieved party with actual notice essentially 

lacks standing to complain of technical defects. See id. at 1350, 

n.10. The court in Rank does not disagree that notice must be 

given in advance of the effective date. See id. at 1350-51. 

Another case relied on by the State, Himes v. Sullivan, 779 

F. Supp. 258, 270-71 (W.D.N.Y. 1991), aff'd without published 

opinion, 956 F.2d. 1159 (2d Cir. 1992), also is, at bottom, just a 

holding that plaintiffs with actual notice lack standing to 

complain of formal notice defects, because they were not 

prejudiced by them. See id. 

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were legal notices placed in newspapers of appropriate 

circulation. The notice of the May 15, 1989, public hearing of 

the Committee on Rates and Standards to review and set hospital 

payment rates did not mention the inflation adjustment at all, did 

not include any dollar or percentage numbers, and did not refer to 

14 (c) Content of notice. The notice must--

(1) Describe the proposed change in methods and 

standards; 

(2) Give an estimate of any expected increase or 

decrease in annual aggregate expenditures; 

(3) Explain why the agency is changing its methods and 

standards; 

(4) Identify a local agency in each county (such as the 

social services agency or health department) where copies of 

the proposed changes are available for public review; 

(5) Give an address where written comments may be sent 

and reviewed by the public; and 

(6) If there are public hearings, give the location, 

date and time for hearings or tell how this information may 

be obtained. 

(d) Publication of notice. The notice must--

(1) Be published before the proposed effective date of 

the change; and 

(2) Appear as a public announcement in one of the 

following publications: 

(i) A State register similar to the Federal 

Register. 

(ii) The newspaper of widest circulation in each 

city with a population of 50,000 or more. 

(iii) The newspaper of widest circulation in the 

State, if there is no city with a population of 

50,000 or more. 

42 C.F.R. § 447.205(c) and (d). 

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methods and standards or reasons for the change. See R. at 106-

08. We can find no copy in the record of the notice of the 

June 26, 1989, public meeting at which the Commission adopted the 

adjustment, so we cannot evaluate its content. SeeR. at 87. Of 

the two June 27, 1989, news articles cited by the State that 

mentioned the rate increase, one listed the inflation adjustment 

as 5.7 percent, the other did not give any number, and both 

mentioned the increase in a single paragraph low in the story 

without any discussion of methods and standards or of locations 

where copies of the proposed changes could be obtained and where 

comments could be sent. R. at 120, 122. It borders on the 

ridiculous for Mr. Brodt to have stated in his affidavit for the 

State that "the amount of the rate adjustment was published" in 

these two articles. See R. at 87-88. Moreover, the issue brief, 

R. at 103-04, that was made available to those attending the May 

15, 1989, public hearing, and the June 26, 1989, Commission public 

meeting, see R. at 86, is irrelevant if notice of the gatherings 

themselves was inadequate to attract public attendance. 

IV. Administrator's Disapproval of Proposed Effective Date. 

We find that the Administrator, in deciding to disapprove the 

proposed July 1, 1989, effective date for SPA 89-18, considered 

the relevant factors and reasonably found that the amendment was a 

significant change in methods or standards for setting reimbursement rates, that publication requirements were not met until 

June 24, 1990, that no actual notice exception applied, and that 

therefore the amendment could not take effect before June 25, 

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1990. The State argues that enfo~cing the law as written would be 

a clear error in judgment, essentially because the cost to the 

State would be high. The cost could have been much lower, 

however, had the State not chosen to wait five months after the 

proposed effective date even to file the amendment with HCFA. The 

State surely knows how long it takes to get an amendment approved 

and the risk it takes by waiting so long. 

Discerning no clear error in judgment on the Administrator's 

part, we find that his decision was not arbitrary, capricious, an 

abuse of discretion or otherwise not in accordance with the law. 

The Administrator's decision is therefore AFFIRMED. 

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