United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 27, 2016 Decided December 9, 2016

No. 13-5330

BORGESS MEDICAL CENTER, A MICHIGAN NONPROFIT 

CORPORATION, AND BRONSON METHODIST HOSPITAL, A

MICHIGAN NONPROFIT CORPORATION,

APPELLANTS

v.

SYLVIA MATHEWS BURWELL, SECRETARY OF THE UNITED 

STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

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, 

Attorneys.
2

Before: TATEL, BROWN and KAVANAUGH, Circuit 

Judges.

Opinion for the Court filed by BROWN, Circuit Judge.

BROWN, Circuit Judge: Appellants are two hospitals 

challenging the denial of reimbursements 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 

requiring 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 either 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 disabled. 

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 determined based 

on the number of “full-time-equivalent” (“FTE”) medical 

residents in the hospital’s residency program 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 regard to the 

setting in which the activities are performed.” Id.

§ 1395ww(h)(4)(E)(i); see id. § 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 FTE 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 requirements 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 resident spends his or her time 

in patient care activities.

(ii) The written agreement between the 

hospital and the nonhospital site must 
4

indicate that the hospital will incur the 

cost of the resident’s salary and fringe 

benefits while the resident is training 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 responsible 

for “all or substantially all” of the costs of training. 42 C.F.R. 

§ 413.86(f)(4) (2000). While not expressly required by the 

Medicare statute, CMS determined the “written agreement” 

requirement was necessary “in order to provide an 

administrative tool . . . 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 Payment 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 the 
5

portion 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 hospital must submit a cost report to its 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 under 

Medicare and issues a Notice of Program Reimbursement 

(“NPR”) to inform the hospital of the contractor’s

determination. Id. § 405.1803. This determination is 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 challenge 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 id. § 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 this 
6

agreement, the Hospitals agreed to provide annual financing 

to carry out the consortium’s purpose. The Hospitals then 

joined Michigan State University in the late 1980s 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 program, a pediatrics program, and an infectiousdisease program. In order to ensure 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 

expenses 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 contractor 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 reopening

these initial determinations, it ultimately denied them in 2007. 

Additionally, the contractor denied the initial reimbursement 

claim from Borgess for the cost reporting period ending in 
7

June 2003 and the initial reimbursement claims from Bronson 

for 2002, 2003, and 2004. 

The Hospitals appealed these 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 incurred 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 Administrator’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 Administrative Procedure Act (“APA”). See

42 U.S.C. § 1395oo(f)(1). This 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 own 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 

regulatory 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’s 
8

plain language or by other indications of the Secretary’s intent 

at the time of the regulation’s promulgation.” Id. 

First, we address the Secretary’s “written agreement” 

requirement. The 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 for supervisory teaching 

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

The Hospitals argue the “written agreement” requirement 

is an improper basis for denying reimbursement because the 

contractor did not specifically identify it as a reason for 

reopening their cost report. To support this view, they rely on 

42 C.F.R. § 405.1887(a), which requires the reviewing entity 

to “provide written notice to all parties to the determination or 

decision that is the subject of the reopening.” Because the 

notice for 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 “remove the 

[residency] rotations 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 “written 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 KCMS’s predecessor, the 

Hospitals’ and 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. Appellants’ 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 create 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 “written 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 

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

(2000). The only thing the 1973 Agreement 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 specify 
10

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 the 

governing regulation. 

The Affiliation Agreements are similarly inadequate. 

While these annual agreements are between the Hospitals and 

KCMS—and are therefore between a hospital and 

nonhospital—they too lack specificity. The Affiliation 

Agreements simply 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 support 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 them 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 “written 

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 and 
11

the amounts the Hospitals will actually pay for these 

activities.” Borgess, 966 F. Supp. 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 option 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 Affiliation Agreements, 

these financial records lack the required specificity. While 

these records do show the total support given 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 Hospitals incurring the costs 

for their residents’ salaries and fringe benefits while working 

at KCMS or of the compensation KCMS received 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 

Hospitals’ 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

Affirmed.