# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

A rgued October 27, 2016 Decided December 9, 2016

No. 13

- 5330

B ORGESS M EDICAL C ENTER

, A M ICHIGAN NONPROFIT

CORPORATION

, AND B RONSON M ETHODIST H OSPITAL

, A

M ICHIGAN NONPROFIT CO RPORATION

, A PPELLANTS

v.

S YLVIA M ATHEWS B URWELL

, S ECRETARY OF THE U NITED
S TATES D EPARTMENT OF H EALTH AND H UMAN S ERVICES

, A PPELLEE

Appeal from the United States District Court

for the District of Columbia (No. 1:12

- cv

- 00144)

Geoffrey M. Raux argued the cause for appellants . With

him on the briefs was Lori A. Rubin

.

Samantha L. Chaifetz , Attorney, U.S. Department of Justice, argued the cause for appellee. On the brief were Benjamin C. Mizer , Principal Deputy Assistant Attorney General, and Michael S. Raab and Henry C. Whitaker

, Attorney s

.2

Before: T ATEL

, B ROWN and K AVANAUGH

, Circuit Judges

.

Opinion for the Court filed by B ROWN

, Circuit Judge

.

B ROWN

, Circuit Judge: Appellants are two hospitals challenging the denial of reimbursement s for the offsite training expenses of their medical residents for several cost reporting periods between 2000 and 2004 by the Secretary of the Department of Health and Human Services (“Secretary”). They argue the Secretary erroneously held they failed to comply with the Secretary’s reimbursement regulations requir ing that they incur all or substantially all of the costs of

their offsite residency training programs and that they have a written agreement detailing the financing of their offsite programs. The district court granted summary judgment in favor of the Secretary on the grounds that appellants failed to comply with eithe r of these requirements. Because we hold appellants failed to comply with the Secretary’s “written agreement” requirement, we affirm.

I

A

Under the Medicare Act, Congress created a system to provide health insurance benefits to the elderly and disable d. 42 U.S.C. §§ 1395 et seq. This system is administered by the Centers for Medicare and Medicaid Services (“CMS”) under the authority of the Secretary. Id. § 1395kk; 42 C.F.R. §§ 400.200 et seq.3

Medicare is divided into several parts; the most relevant of those parts here is Part A, which relates to hospital

insurance benefits. Under the Medicare statute, CMS is empowered to reimburse inpatient hospitals for costs associated with “graduate medical education.” 42 U.S.C. § 1395ww(h). The amount reimbursed is determin ed based

on the number of “full

- time

- equivalent” (“FTE”) medical residents in the hospital’s residency prog ram each year

. Id. § 1395ww(h)(2). For the time period relevant to this case , a hospital’s FTE count is calculated based on the time residents spend providing patient care activities “under an approved medical residency training program . . . without reg ard to the setting in which the activities are performed.” Id. § 1395ww(h)(4)(E)(i) ; see i d. § 1395ww(d)(5)(B)(iv)(I). Thus, a hospital is eligible to count time its residents spend performing patient care activities in nonhospital settings

towards its F TE count. Id. However, in order for this time to count towards a hospital’s FTE, it must incur “all, or substantially all, of the costs for the training program in that setting.” Id.

For the relevant years here

— 2000 through 2004

— CMS

enforced these r equirements through regulations stating:

[T]he time residents spend in nonprovider settings . . . may be included in determining the

number of FTE residents in the calculation of a hospital’s resident count if the following

conditions are met

—

(i ) The r esident spends his or her time in patient care activities.

(ii ) The written agreement between the hospital and the nonhospital site must4

indicate that the hospital will incur the cost of the resident’s salary and fringe

benefits while the resident is trai ning in the nonhospital site and the hospital is providing reasonable compensation to the nonhospital site for supervisory teaching activities. The agreement must indicate the compensation the hospital is providing to the nonhospital

site for supervisory teaching activities.

(iii ) The hospital must incur all or substantially all of the costs for the training program in the nonhospital setting . . . .

42 C.F.R. § 413.86(f)(4) (2000 ) ; see also 42 C.F.R. § 413.78(d) (2014)

. Thus, independent contractors evaluating a hospital’s eligibility for, and level of, reimbursement had to assess (1) the residents’ patient care activities, (2) the existence of a written agreement between the hospital and the nonhospital site, and (3) whether the hospital is responsib le for “all or substantially all” of the costs of training. 42 C.F.R. § 413.86(f)(4) (2000 )

. While not ex pressly required by the

Medicare statute, CMS determined the “written agreement” requirement was necessary “in order to provide an

administrative too l . . . to assist in determining whether hospitals would incur all or substantially all of the costs of the training in the nonhospital setting in accordance with Congressional intent.” Medicare Program; Changes to the Hospital Inpatient Prospective Payme nt Systems and Fiscal

Year 2005 Rates , 69 Fed. Reg. 48,916, 49,179 (Aug. 11, 2004). CMS defined the “all or substantially all” requirement to include “the residents’ salaries and fringe benefits (including travel and lodging where applicable) and the5

port ion of the cost of teaching physicians’ salaries and fringe benefits attributable to direct graduate medical education.” 42 C.F.R. § 413.75(b)(1) (2014)

.

In order to expediently process reimbursement payments

,

a h ospital must submit a cost report to it s contractor each year in order to claim any Medicare reimbursements for residency programs in nonhospital settings. See 42 C.F.R. §§ 413.20(b),

413.24. The contractor then reviews these reports to determine the amount a hospital should be reimbursed und er Medicare and issues a Notice of Program Reimbursement (“NPR”) to inform the hospital of the contractor’s

determination. Id. § 405.1803. This determination i s not necessarily final because the contractor has the option to reopen a final cost report for up to three years. Id. § 405.1885

.

If a hospital disagrees with either the contractor’s initial determination or the determination made upon the reopening of a prior decision, it can chal lenge the NPR before the Provider Reimbursement Review Board (“PRRB”). See 42 U.S.C. § 1395oo(a). The PRRB’s decision is then subject to review by the CMS Administrator. See i d. § 1395oo(f)(1); 42 C.F.R. § 405.1875(a). The CMS Administrator’s decision constitutes final agency action subject to judicial review. See 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877(a).

B

Appellants Borgess Medical Center (“Borgess”) and Bronson Methodist Hospital (“Bronson

, ” collectively “ the Hospitals”) are inpatient hospitals located in Kalamazoo, Michigan. In 1973, the Hospitals entered into an agreement to form a consortium to manage their health education programs and to train their interns and residents. In this6

agreement, the Hospitals agreed to provide annual financing

to carry out the consortium’s purpose

. The H ospitals then joined Michigan St ate University in the late 1980 s to
restructure this consortium into its current form as the Michigan State University Kalamazoo Center for Medical Studies (“KCMS”).

KCMS administered graduate medical programs for various residency programs for the hospitals, including a psychiatry p rogram, a pediatrics program , and an infectious

disease program. In order to en sure KCMS would receive the financial support necessary to operate, the Hospitals entered into various Affiliation Agreements with KCMS in which the Hospitals agreed to incur “ joint and equal responsibility for providing [KCMS] with sufficient financing to carry out its programs as negotiated on a yearly basis.” See, e.g. , JA 67. However, this was not the only source of funding for KCMS,

as it also received millions of dollars of revenue from other sources, such as revenue from patient care, support from Michigan State University, and funds from contracts and grants. Thus, the arrangement required the Hospitals to equally divide a lump

- sum payment to cover any of KCMS’s

expens es exceeding what was available from other sources.

The Hospitals sought reimbursement on their Medicare cost reports during fiscal years 2000

– 2004 for costs incurred for residents’ training at KCMS’s nonhospital clinics. The Hospitals’ Medicare contra ctor initially determined Borgess’s

claims from the cost reporting periods ending in June 2001

and June 2002 along with Bronson’s claims from 2000 and 2001 to be eligible for reimbursement, but

, after reopen ing

these initial determinations

, it ultimately d enied them in 2007. Additionally, the contractor denied the initial reimbursement claim from Borgess for the cost reporting period ending in7

June 2003 and the initial reimbursement claims from Bronson for 2002, 2003, and 2004.

The Hospitals appealed th ese decisions to the PRRB, which concluded the contractors erroneously denied reimbursement for the Hospitals’ claims. Subsequently, the

CMS Administrator reviewed the PRRB’s decision and reversed it on the grounds that the Hospitals failed to show they i ncurred all or substantially all of the costs of their residency programs and that they failed to comply with the Secretary’s “written agreement” requirement. In response to the Administrator’s decision, the Hospitals sought judicial

review of the Adminis trator’s denial of reimbursements

before the United States District Court for the District of Columbia. Both parties cross

- motioned for summary judgment, and the district court ultimately ruled in favor of the Secretary on both motions. The Hospitals now appeal

.

II

We review de novo the district court’s grant of summary judgment. Dist. Hosp. Partners, L.P. v. Burwell , 786 F.3d 46,

54 (D.C. Cir. 2015). The Medicare Act authorizes judicial

review under the Admin istrative Procedure Act (“APA”)

. S ee 42 U.S.C. § 1395oo(f)(1). T his Court can only set aside the Secretary’s action if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). When reviewing an agency’s interpretation of its o wn regulation, we give substantial

deference to the agency. Thomas Jefferson Univ. v. Shalala

, 512 U.S. 504, 512 (1994). This is especially true when the regulation concerns “a complex and highly technical

r egulatory program” like Medicare

. Id. Thus, this Court “must defer to the Secretary’s interpretation [of a regulation] unless an alternative reading is compelled by the regulation’s8

plain language or by other indications of the Secretary’s intent at the time of the regulation’s promulgation.” Id.

F irst

, we address the Secretary’s “written agreement” requirement. T he Secretary’s regulations require a written agreement between the hospital and nonhospital showing the hospital will incur the cost of the resident’s salary and fringe benefits while working offsite along with reasonable compensation to the nonhospital fo r supervisory teaching

activities. 42 C.F.R. § 413.86(f)(4)(ii) (2000 )

.

T he Hospitals argue the “written agreement” requirement

is an im proper basis for denying reimbursement because the

contractor did not specifically identify it as a reason for

reope ning their cost report

. To support this view, they rely on 42 C.F.R. § 405.1887(a), which requires t he reviewing entity to “provide written notice to all parties to the determination or decision that is the subject of the reopening.” Because the

notice f or reopening did not cite 42 C.F.R. § 413.86(f)(4) (ii) (2000)

, pertaining to the “written agreement” requirement, they claim they did not receive adequate notice.

We disagree . The reopening notices indicate the

reimbursement claims were reopened to “re move the [residency] rot ations which occur[ed] at [ KCMS] in

accordance with 42 CFR [§] 413.86(f)(4) as the hospital did not incur all or substantially all of the cost of training in that setting.” See JA 179, 181, 183, 185. Thus, the provision

cited for reopening the reimbursement claims was not limited to just 42 C.F.R. § 413.86(f)(4)(iii) (2000) , which directly addresses the “all or substantially all” requirement, but also encompassed all subparts of 42 C.F.R. § 413.86(f)(4) (2000)

, including the “writt en agreement” requirement. Because the contractor cited to a provision encompassing both the “written agreement” requirement and the “all or substantially all”9

requirement, the Hospitals were put on notice that either of these requirements could serve as a basis for denying

reimbursement.

Turning now to the merits, the Hospitals argue the “written agreement” requirement is satisfied by a collection of

documents executed over the years, including a 1973 Agreement between the Hospitals establishing a non

- profit organization that served as KCM S’s predecessor , the Hospitals’ an d KCMS’s Affiliation Agreements

, and KCMS’s

financial statements . The Hospitals argue these documents, taken together, show they were “contractually obligated to provide all financing necessary” for the managing and operating of resident training at KCMS. Appellant s ’ Opening Br. 31. However, the record clearly shows that none of these

documents meet the regulatory criteria for written agreements.

As noted by the district court, the 1973 Agreement is not an agreement between a hospital and a nonhospital, as required by 42 C.F.R. § 413.86(f)(4)(ii) (2000) , but is rather an agreement between the Hospitals to c reate the predecessor

to KCMS. Borgess Med. Ctr. v. Sebelius , 966 F. Supp. 2d 1, 7 (D.D.C. 2013). This alone is grounds to exclude this document from consideration, but it is not the only reason for doing so. The 1973 Agreement also fails to contain the level of specificity required to meet the “writte n agreement” requirement’s standards. The regulation requires the

agreement to indicate the hospital will incur the cost of the resident’s salary and fringe benefits while working offsite along with reasonable compensation to the nonhospital for superviso ry teaching activities. 42 C.F.R. § 413.86(f)(4)(ii) (2000 ) . The only thing the 1973 Agre ement says about financing is “[t] he parties shall provide [ KCMS’s predecessor ] with financing to carry out its purpose as negotiated on a yearly basis.” JA 65. This fails to specify10

that either hospital will incur the cost of the resident’s salary, fringe benefits, or other required expenses under the regulation for any of the residency programs . Thus, it is insufficient to serve as a written agreement under t he governing regulation.

T he Affiliation Agreements are similarly inadequate

. While these annual agreements are between the Hospitals and

KCMS

— and are therefore between a hospit al and nonhospital

— they too lack specificity. The Affiliation Agreements s imply state the Hospitals will share “joint and equal responsibility for providing [KCMS] with sufficient financing to carry out its programs as negotiated on a yearly

basis.” See, e.g. , JA 112 . These Agreements obligate the Hospitals to provide lump

- sum payments to finance KCMS’s programs, but they fail to specify which programs the Hospitals are financing or how the funds will be used

. Because KCMS receives millions of dollars of suppo rt from

other sources , like revenue from patient care, support from Michigan State University, and revenue from contracts and grants, it is impossible to know which source is funding the residency programs. Our conclusion is buttressed by

decisions of our sister circuits who, after examining comparable agreements

, found t hem to be lacking

. See Covenant Med. Ctr., Inc. v. Sebelius , 424 F. App’x 434, 438 (6th Cir. 2011) (holding written agreements requiring two hospitals to “ mak [ e ] lump sum payments to cover [residency program costs] and other costs” did not satisfy the “wr itten agreement” requirement); Medcenter One Health Sys. v.

Sebelius , 635 F.3d 348, 350 (8th Cir. 2011) (holding a letter obligating two hospitals to cover the operating deficits of a nonhospital was not sufficient to meet the “written agreement” requirement). Thus, the district court correctly held these agreements “fail[ed] to sufficiently detail the compensation scheme for supervisory teaching activities and11

the amounts the Hospitals will actually pay for these

activities.” Borgess , 966 F. Sup p. 2d at 8

.

As a last ditch effort, the Hospitals claim either their understanding of the Agreements or their conduct should show they complied with the underlying purpose of the “written agreement” requirement. However, the regulation provides no opti on for satisfying the “written agreement” requirement through conduct

. See 42 C.F.R. § 413.86(f)(4)(ii) (2000)

.

Even if we did look to the Hospitals’ conduct , the record does not clearly indicate they complied. The Hospitals rely upon KCMS’s financial records from 2000

– 2004 to show they did pay for the expenses required under the Secretary’s regulation. However, much like the Affili ation Agreements

, these financial records lack the required specificity. While

these records do show the total support g iven to KCMS from the Hospitals along with KCMS’s total expenses for each year, they fail to provide any details regarding how the funds were allocated to the residency programs. Furthermore, the

records make no mention of the H ospital s incur ring the cost s for their resident s ’ salaries and fringe benefits while working

at KCMS or of the compensation K CMS receive d for supervisory teaching activities

.

The Hospitals’ failure to comply with the “written agreement” requirement alone is sufficient grounds to affirm

the district court. Therefore

, we need not decide whether the Hospital s ’ cost

- sharing arrangement complied with the “all or substantially all” requirement.12

III

For the foregoing reasons, the district court’s grant of summary judgment is

Aff irmed

.