In the

United States Court of Appeals

For the Seventh Circuit

No. 09-1665

LITTLE COMPANY OF MARY HOSPITAL,

Plaintiff-Appellant,

v.

KATHLEEN SEBELIUS, Secretary, U.S. Department of

Health and Human Services,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 06-C-6430—Wayne R. Andersen, Judge.

ARGUED SEPTEMBER 15, 2009—DECIDED NOVEMBER 24, 2009

Before POSNER, FLAUM, and ROVNER, Circuit Judges.

FLAUM, Circuit Judge. In 2003, plaintiff-appellant, Little

Company of Mary Hospital (Little Company), requested

that their assigned Medicare financial intermediary

(Intermediary) reopen and reconsider several issues

in Little Company’s cost report from 1998. When the

Intermediary reopened only one of the challenged issues,
2 No. 09-1665

The Medicaid Fraction is the number of hospital patient days 1

for patients eligible for medical assistance under a State

Medicaid plan but who are not entitled to Medicare Part I,

divided by the total number of hospital patient days. 42

U.S.C. § 1395ww(d)(5)(F)(vi)(II). 

Little Company appealed all of the challenged issues to

the Provider Reimbursement Board (PRRB). The PRRB

dismissed the appeal of the non-reopened issues. Little

Company appealed the PRRB’s dismissal to the district

court. The district court granted summary judgment in

favor of the defendant-appellee, the Secretary of Health

and Human Services (Secretary). This appeal follows. For

the reasons set forth below, we affirm the district

court’s grant of summary judgment.

I. Background

A. The Medicaid Reimbursement Process

Hospitals that participate in the Medicare program

must enter into a provider agreement with the U.S. Department of Health and Human Services to receive Medicare

reimbursement. Those hospitals participating in the

Medicare program that serve a disproportionate share

of low income patients are entitled to a Disproportionate

Share Hospital (DSH) payment adjustment. The DSH

payment adjustment requires the calculation of the disproportionate patient percentage. The disproportionate

patient percentage is the sum of the Medicaid Fraction1
No. 09-1665 3

The SSI Fraction is the number of hospital patient days for 2

patients entitled to benefits under both Medicare Part A and

the SSI program divided by the total number of hospital patient

days for patients entitled to Medicare Part A. 42 U.S.C.

§ 1395ww(d)(5)(F)(vi)(I).

In 2008 the Secretary substantively amended 42 C.F.R. 3

§ 405.1885. This amendment resulted in a significant change

to the appeals rights of a provider after a reopening. Therefore,

(continued...)

and the Supplemental Security Income (SSI) Fraction.2

See 42 U.S.C. § 1395ww(d)(5)(F)(vi).

When filing for reimbursement from the Medicare

program, the provider must first file an annual cost

report with an assigned Intermediary. The Intermediary

then conducts an audit, accounts for interim payments

to the provider, and issues an initial “notice of program

reimbursement” (NPR). The provider may appeal the

initial NPR to the PRRB within 180 days if at least

$10,000 is at issue. 42 U.S.C. § 1395oo(a). Upon appeal,

the Secretary’s delegate, the Administrator of the

Centers for Medicare and Medicaid Services (CMS),

may review the decision of the PRRB. If the provider is

dissatisfied with the decision of the PRRB and the CMS

Administrator, the provider may request that a federal

district court review the decision. 42 U.S.C. § 1395oo(f)(1).

When a provider does not file a timely appeal of the

initial NPR, the NPR is considered finalized. 42 C.F.R.

§ 405.1807 (2009). However, under 42 C.F.R. § 405.1885(a)

(2004) —a set of regulations separate from those governing 3
4 No. 09-1665

(...continued) 3

throughout this opinion all citations to 42 C.F.R. § 405.1885

reference the regulation as it was in 2004, the year relevant

to this case. All other references to the C.F.R. are to the current

version, which has remained substantively unchanged

since 2004.

the appeals process discussed above—the Intermediary

may reopen specific findings on matters at issue within

three years of the initial NPR based on a request by

the provider or on its own initiative. At the close of the

reopening, the Intermediary issues a revised NPR on the

specific issues reopened. The parts of the NPR that the

Intermediary did not reopen remain finalized in the

initial NPR. With regards to the specific issues reopened,

the provider has the rights of appeal discussed above.

42 C.F.R. § 405.1889 (2009).

B. The Medicaid Reimbursement Process In This Case

Little Company is a hospital that participates in the

Medicare program and is entitled to a DSH payment

adjustment. On September 12, 2000, Little Company’s

assigned Intermediary issued an initial NPR for Little

Company’s cost reporting period ending June 20, 1998.

The NPR was finalized when Little Company failed to

appeal to the PRRB or the CMS Administrator within

180 days. On September 5, 2003, Little Company submitted a request for reopening of the finalized 1998 NPR

regarding the calculation of the Medicaid Fraction and

the SSI Fraction. Shortly after this request, on November 3,
No. 09-1665 5

2003, an email exchange occurred between two employees of the Intermediary regarding Little Company’s

1998 cost report. The email stated, “Chris, I just realized

that there are only Primary, Secondary and HMO supports. Can you please send supports for the SSI Eligible

Days as well? Thank you, Mark K.”

Almost exactly a year after this email exchange, on

November 11, 2004, the Intermediary issued a Notice

of Reopening. The Notice of Reopening stated:

In accordance with this Regulation, we have determined that your cost report will be reopened for the

following reason(s): The Intermediary notes that the

Provider has requested a reopening to include

Medicaid Additional Eligible Days (757) and Baby

Additional Days (82) for the DSH computation.

The Notice of Reopening made no mention of reopening

the SSI Fraction and the Intermediary did not issue a

separate Notice of Reopening regarding the SSI Fraction.

On November 17, 2004, the Intermediary issued a

revised NPR with an adjusted Medicaid Fraction.

On January 26, 2005, Little Company appealed the

revised NPR to the PRRB. Specifically, Little Company

appealed the revised Medicaid Fraction and the failure

to revise the SSI Fraction. On March 3, 2005, the Intermediary filed a jurisdictional challenge to Little Company’s

appeal of the failure to adjust the SSI Fraction. The Intermediary claimed the SSI Fraction was not reopened

and therefore remained finalized from the NPR issued

in 2000. On February 15, 2006, the PRRB sustained the

Intermediary’s challenge to Little Company’s appeal of

the SSI Fraction and dismissed the issue.
6 No. 09-1665

On November 27, 2006, Little Company filed suit in

the Northern District of Illinois challenging the PRRB’s

jurisdictional decision. On October 18, 2007, Little Company filed a motion to permit discovery of decisions by

the PRRB and CMS Administrator in similar administrative appeals. The district court denied this discovery

motion, finding that judicial review of the PRRB’s final

decision on Little Company’s appeal should be based

solely on the certified administrative record.

Both parties filed for summary judgment. The district

court granted summary judgment in favor of the Secretary. The district court found that the evidence in

the record supported the PRRB’s finding that the Intermediary did not reopen the SSI Fraction, and therefore,

the PRRB properly dismissed that issue.

On appeal, Little Company challenges the district

court’s grant of summary judgment in favor of the Secretary and the district court’s denial of the motion for

discovery outside of the administrative record.

II. Discussion

A. Summary Judgment

We review a district court’s grant of summary judgment de novo. Argyropoulous v. City of Alton, 539 F.3d

724, 732 (7th Cir. 2008). Summary judgment is proper

where “there is no genuine issue of material fact and

the moving party is entitled to a judgment as a matter

of law.” Fed. R. Civ. P. 56(c).
No. 09-1665 7

As a preliminary matter, Little Company challenges

the district court’s grant of summary judgment by

arguing that the district court granted too much

deference to the PRRB’s decision below. The district court

indicated that it reviewed the PRRB’s decision under

the standard of review set forth in the Administrative

Procedure Act (APA). The APA requires that an agency’s

decision be set aside only if it is arbitrary, capricious,

an abuse of discretion, unsupported by substantial evidence in the case, or not in accordance with the law. See

Edgewater v. Bowen, 857 F.3d 1123, 1129 (7th Cir. 1989).

This is the proper standard of review for district courts

reviewing decision of the PRRB regarding reimbursement.

Little Company challenges this degree of deference

based on this court’s statement in Edgewater that “a

lesser degree of deference is required when reviewing the

secretary’s actions under the Medicare Act’s reimbursement provisions.” 857 F.2d at 1130. However, reliance

on this statement is misplaced. This statement in

Edgewater references a series of cases where we found

that the “Medicare statute specifically circumscribes

the Secretary’s discretion to define ‘reasonable cost’.” See

St. James Hospital v. Heckler, 760 F.2d 1460 (7th Cir. 1985);

St. Francis Hospital Center v. Heckler, 714 F.2d 872 (7th Cir.

1983); Northwest Hospital, Inc. v. Hospital Services Corp., 687

F.2d 985 (7th Cir. 1982); St. John’s Hickey Memorial Hospital,

Inc. v. Califano, 599 F.2d 803 (7th Cir. 1979). These cases

reason that the highly specific language in the Medicare

Act regarding “reasonable cost” limits the amount of

deference courts should grant to the Secretary’s interpretation of that term. However, this court has never
8 No. 09-1665

disavowed the APA standard of review for Medicare

provider reimbursement decisions more broadly. See

Edgewater, 857 F.2d at 1129 (“We defer to the decision of

the Secretary (acting through the PRRB) unless it is

found to be arbitrary, capricious, or not in accordance

with the law.”). As is true of deference to any decision by

an administrative agency, this deference is limited by

the clear meaning of the statute as revealed by its

language, purpose, and history. Id. However, Little Company does not advance any argument that the plain

language of the statute and regulations mandate an

outcome different from what occurred in the district court.

The parties agree that whether the district court

properly granted summary judgment hinges on whether

the Intermediary reopened the SSI Fraction when it

reopened the Medicaid Fraction. An Intermediary’s

decision to reopen an annual report is issue-specific. 42

C.F.R. § 405.1885(a) (2004) (“A determination of an Intermediary officer . . . may be reopened with respect to

findings on matters at issue in such determination or

decision”). The Secretary argues, and the district court

agreed, that the Intermediary did not reopen the SSI

Fraction and therefore the PRRB, and subsequently

the district court, did not have jurisdiction to review

the lack of adjustment of the SSI Fraction. Based on

Your Home Visiting Nurse Services v. Shalala, 525 U.S. 449

(1999), if the Intermediary chose not to reopen the SSI

Fraction, that decision is not appealable and the initial

SSI Fraction determination must stand unchallenged. In

Your Home, the Supreme Court upheld the Secretary’s

interpretation of the Medicare regulations: “A refusal by
No. 09-1665 9

the Intermediary to grant a reopening request by the

provider is not appealable to the Board, pursuant to 42

C.F.R. § 405.1885(c).” 525 U.S. at 452. The Court found it

instructive that “42 C.F.R. § 405.1889 says that an Intermediary’s affirmative decision to reopen and revise a

reimbursement determination ‘shall be considered a

separate and distinct determination’ to which regulations

authorizing appeal to the Board are applicable; but it

says nothing about appeal of a refusal to reopen.” Id.

at 453. Therefore, based on the regulations and settled

Supreme Court precedent, the PRRB, and subsequently

the district court, do not have jurisdiction to hear an

appeal of the SSI Fraction if the Intermediary did not

reopen it.

However, Your Home offers no guidance on what

factors the PRRB, and subsequently the district court,

should consider when distinguishing between situations

where the Intermediary did not reopen a given issue

and where the Intermediary did reopen an issue but

simply did not adjust the challenged issue. Little

Company argues that Your Home is not applicable here

because the Intermediary did reopen both fractions but

only chose to adjust the Medicaid Fraction. They urge

this court to focus on Edgewater Hospital v. Bowen, 857

F.2d 1123 (7th Cir. 1989). In Edgewater we held that

simply because the Intermediary did not adjust an issue

does not mean that the Intermediary did not reopen

that issue. 857 F.2d at 1136-37. Little Company attempts

to extend Edgewater to stand for the proposition that a

court should consider all items challenged by the provider

to be reopened if the Intermediary reopens any issue
10 No. 09-1665

challenged by the provider. This reading of Edgewater

overstates its holding. In Edgewater we found, based on the

specific facts involved in that case, the reopening was a

reconsideration of all cost items challenged by the provider. However, Edgewater does not stand for a broad

standard requiring courts to look to the items challenged

to determine what issues the Intermediary reopened.

Rather, in Edgewater, we looked to the specific affirmative

actions the Intermediary took regarding the four challenged items to make the fact-specific determination that

the Intermediary did reopen all four items. Id. at 1135.

We reasoned that the following affirmative actions

amounted to a reopening: (1) the Intermediary reopened

the first NPR; (2) the Intermediary sent Edgewater a

letter on March 22, 1984 explaining that it would not

change three items but had been persuaded to allow the

fourth claim; and (3) the Intermediary sent the second

NPR with the revised cost reports incorporating the

adjustment. Id. We went on to explain, “the Intermediary

acknowledged that it decided not to change three of

the cost items. That decision itself was a reconsideration,

an affirmative action . . . to re-examine or question the

correctness of a determination or decision otherwise

final.” Id. at 1136.

In this case, the Intermediary did not take affirmative

actions that would demonstrate it reopened the SSI Fraction. The Intermediary took the affirmative step of

sending a reopening notice regarding the Medicaid Fraction, but did not take any sort of similar affirmative

action regarding the SSI Fraction. Little Company argues

that this silence regarding the SSI Fraction is not
No. 09-1665 11

dispositive because a lack of adjustment does not equate

to a lack of reopening. However, the reopening notice

was not a notice of adjustment on any issue. Instead, the

reopening notice was the formal statement of what issue

the Intermediary had agreed to reopen and reconsider

based upon Little Company’s request. Therefore, unlike

the Intermediary’s decision in Edgewater to reopen the

entire first NPR, the facts here indicate the Intermediary

decided to reopen the NPR only with respect to the

Medicaid Fraction. Furthermore, unlike the Intermediary

in Edgewater, which indicated that it examined all four

issues upon reopening but chose to adjust only one,

the Intermediary in this case made no representation

that they examined the SSI Fraction.

Little Company also argues that the district court

placed too much emphasis on the Intermediary’s silence

regarding the SSI Fraction in the written explanation of

the revised NPR. Little Company points to 42 C.F.R.

§ 405.1887, requiring the Intermediary to explain only

its decision to make revisions, not its reopening decisions, to support its argument that the Intermediary’s

silence is not determinative. However, in addition to

requiring the Intermediary to explain any revisions,

42 C.F.R. § 405.1887 explicitly states, “All parties to any

reopening described above shall be given written notice of

the reopening.” Little Company’s argument ignores this

requirement that the Intermediary provide written

notice of the reopening. In this case, the Intermediary

provided written notice of its intent to reopen the

Medicaid Fraction but did not provide written notice of

its intent to reopen the SSI Fraction. This silence in the
12 No. 09-1665

reopening notice indicates that the Intermediary did not

reopen the SSI Fraction.

Finally, Little Company points to the email exchange

in late October and early November of 2003 as affirmative evidence that the Intermediary reopened the SSI

Fraction. Because this email discusses collecting the

data relied on for the SSI Fraction determination, this

email does raise some questions as to whether the Intermediary reconsidered the SSI Fraction. However, these

emails were sent more than a year before the Intermediary decided to reopen any part of the NPR. When

considered with the Intermediary’s Notice of Reopening,

which does not list the SSI Fraction as an issue to be

reopened, this email exchange does not amount to an

affirmative action sufficient to consider the issue reopened. This email exchange merely indicates that the

Intermediary gathered information to decide whether to

reopen the SSI Fraction. To consider such information

gathering a sign that the Intermediary reopened the SSI

Fraction would force Intermediaries to choose between

blindly making reopening decisions, refusing to reopen

any issue in a reopening request, or granting providers

a way to circumvent the 180-day statutory time limit to

appeal by requesting a reopening.

The Intermediary in this case followed the proper

procedure when dealing with Little Company’s

reopening request. First, the Intermediary considered

which, if any, issues should be reopened. Upon making

that decision, the Intermediary issued a Notice of Reopening specifically informing Little Company that the
No. 09-1665 13

Medicaid Fraction was being reopened. Finally, by not

informing Little Company that they intended to reopen

the SSI Fraction, the Intermediary effectively denied that

reopening request.

B. The District Court’s Denial of Little Company’s

Discovery Motion

In addition to challenging the district court’s grant of

summary judgment, Little Company claims that the

district court erred by not permitting discovery of the

PRRB’s precedent in similar cases and any affirmative

actions taken by the Intermediary to reconsider the SSI

Fraction. We review a district court’s denial of discovery

under an abuse of discretion standard. Walker v. Sheanhan,

526 F.3d 973, 977-78 (7th Cir. 2008). As a general rule,

under the APA, review of an agency’s decision is

confined to the administrative record to determine

whether, based on the information presented to the

administrative agency, the agency’s decision is arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with the law. Smith v. Office of Civilian Health

& Med. Program of the Uniformed Services, 97 F.3d 950, 954-

55 (7th Cir. 1996).

In denying Little Company’s request for discovery of

the PRRB’s decisions in similar cases, the district court

applied the general rule that discovery outside of the

administrative record is inappropriate. Additionally, the

district court reasoned that discovery of decisions in

similar cases would not be relevant to the case at hand and

would inject collateral issues into the case. Little Company
14 No. 09-1665

argues that their situation falls within an exception to the

general rule. We have recognized an exception to this

general rule when “discovery is . . . necessary to create a

record without which the challenge to the agency’s action

cannot be evaluated.” See USA Group Loan Service, Inc. v.

Riley, 82 F.3d 708, 715 (7th Cir. 1996). However, this

court has rarely found this exception to apply and has

generally upheld the rule that review of an administrative decision should be confined to the administrative

record. See id. (holding this exception inapplicable

despite the court’s recognition that the record was

lacking certain information because of the nature of the

underlying proceedings). The district court did not abuse

its discretion in finding that this exception did not

apply and rejecting Little Company’s discovery request.

With respect to the district court’s denial of Little Company’s second discovery request, plaintiff-appellant

never requested discovery of the Intermediary’s actions

regarding its reopening decision. Instead, Little Company

first raised this issue in their response to the Secretary’s

Motion for Summary Judgment. The district court made

no explicit finding on this request for discovery, but did

implicitly rule on this issue by granting summary judgment in favor of the Secretary. Little Company argues that

the record is incomplete because the record before the

PRRB, which is the record before the district court, lacks

any evidence of the affirmative actions the Intermediary

may have taken in making the reopening determination.

However, this argument fails to recognize that the

district court’s role is to review the decision of the PRRB

based on the evidence presented to the PRRB. See Smith,
No. 09-1665 15

97 F.3d at 955. Little Company admits that it is seeking

information that was not before the PRRB, and that it

did not seek to introduce before the PRRB, but does not

explain how obtaining this information would assist

the district court in evaluating the decision of the PRRB.

The district court did not abuse its discretion in

denying this request for discovery.

III. Conclusion

We agree with the district court that the evidence in

the record supports the PRRB’s dismissal of Little Company’s challenge to the SSI Fraction. For the foregoing

reasons, we AFFIRM the district court’s grant of summary judgment and denial of Little Company’s two

discovery motions.

11-24-09