# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Ar gued February 12, 2018 Decided June 29, 2018

No. 17

- 5098

S AINT F RANCIS M EDICAL C ENTER

, ET AL

., A PPELLANTS

v.

A LEX M

. A ZAR II, S ECRETARY OF H EALTH AND H UMAN

S ERVICES

, A PPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1 : 15

- cv

- 01659)

Edgar C. Morrison

, Jr. argued the cause for appellants.

With him on the briefs were Stephen A. Calhoun

, Tim S.

Leonard , and Barron P. Bogatto

.

Melissa N. Pat terson , Attorney, U.S. Department of

Justice, argued the cause for appellee. With her on the brief

were Chad A. Readler , Acting Assistant Attorney General,

Jessie K. Liu , U.S. Attorney, and Michael S. Raab , Attorney.

Before : G ARLAND

, Chief Judge , and K AVANAUGH and

K ATSAS

, Circuit Judges

.

Opinion for the Court filed by Circuit Judge K ATSAS

.2

Concurring opinion filed by Circuit Judge K AVANAUGH

.

K ATSAS

, Circuit Judge : In 2013, the Secretary of Health

and Human Services promulgated a regulation that bars

hospitals from seeking additional Medicare payment s by

challenging factual determinations that are relevant to the

payment year at issue, but that were made many years earlier

. B y its terms, the 2013 regulation applies only to reopening s

, which are proceedings through which various administrative

actors within HHS may reconsider their own prior decisions.

We consider whether th e regulation also applies to appeals

from one set of administrative actors to another

.

I

A

The Medicare program provides federally

- funded health

insurance to qualifying elderly and disabled individuals. 42

U.S.C. § 1395 et seq. As originally enacted, Medicare paid

hospitals for any “reasonable costs” of providing covered

services to beneficiar ies

. See Methodist Hosp. of Sacramento

v. Shalala

, 38 F.3d 1225, 1227 (D.C. Cir. 1994). In 1983,

however, Congress created a new Prospective Payment

System

, under which hospitals are paid a fixed amount for each

beneficiary treated, regardless of their a ctual costs. See id.

Prospective payment amounts are determined annually

, under a statutory formula that depends in part on base rate s

known as “standardized amount s

. ” See 42 U.S.C.

§ 1395ww(d)(2) (C)

. In turn, th e standardized amount s

depend in part on the “allowable operating costs per discharge

of inpatient hospital services

. ” See id. § 1395ww(d)(2)(A).

Although prospective payment amounts are adjusted over time

in various ways

, the standardized amount s themselves are not

.3

See id. § 1395ww(d)(3). Th ose amount s were calculated in

1983, based on hospital s’ cost

- reporting data from 1981. See

Prospective Payments for Medicare Inpatient Hospital

Services, 48 Fed. Reg. 39

, 752, 39

, 76 3

– 67 (Sept. 1, 1983)

. To

this day, therefore, Medicar e payments for inpatient services

depend in part on factual determinations derived from 1981

data and embedded in 1983 calculation s

, including the

calculation of “allowable operating costs per discharge.”

In the first instance, decisions about how much to pay

individual hospitals are made by fiscal intermediaries (now

called “Medicare administrative contractors”) acting on behalf

of the Centers for Medicare & Medicaid Services (“CMS”)

, the

component within HHS that administers Medicare for the

Secretary

. See 42 U.S.C. § 1395h; Sebelius v. Auburn Reg ’l

Med. Ctr.

, 568 U.S. 145, 150 (2013). At the end of every year

, participating hospitals submit a cost report to a n i ntermediary

, which reviews the report, determines appropriate payments for

the services rendered, and then issues a Notice of Program

Reimbursement

. See id.

A dissatisfied hospital has two ways to challenge such an

annual reimbursement decision

. First, under the Medicare

Act, the hospital may appeal as of right to the P rovider

Reimbursement Review Board (“ PRRB ” or “Board” )

, an

administrative tribunal appointed by the Secretary, within 180

days of receiving notice of the fiscal intermediary’s final

decision

. 42 U.S.C. § 1395 oo (a)(3). After an adverse PRRB

decision, a hospital may seek further review by the Secretary

and then by a federal district court. See id. § 1 395 oo (f) (1)

. Second, under HHS regulations, a hospital may request the

“reopening” of a “Secretary determination

, a contractor

determination, or a decision by a reviewing entity

. ” 42 C.F.R.

§ 405.1885(a)(1)

. Such a request must be received “no later

than 3 years after the date of the determination or decision that4

is the subject of the requested reopening.” Id.

§ 405.1885(b) (2) (i)

. Reopenings are considered by the entity

whose decision is at issue

. See id. § 405.1885(a)(1). The

decision whether to reopen is purely discretionary, and it thus

“is not subject to further administrative review or judicial

review.” Id. § 405.18 85(a)(6).

B

A recurring issue under this scheme has been whether a

hospital, in the course of pursuing a timely

- filed reopening or

PRRB appeal, may contest so

- called “predicate facts”

— factua l

determinations that are relevant to the payment year at issue,

but that were made in earlier years

. The Secretary has argued

that the three

- year limitations period in the reopening

regulation bars hospitals from challenging

— in either

reopenings or appeals to the PRRB

— any predicate facts

determined mor e than three years before the reopening or the

appeal was begun

.

We addressed such a contention i n Kaiser Foundation

Hosp itals v. Sebelius

, 708 F.3d 226 (D.C. Cir. 2013)

. Although Kaiser involved a n appeal to the PRRB

, we rejected

the Secretary’s argumen t under the plain terms of the reopening

regulations in effect at the time

. W e reasoned tha t the

“determination of an intermediary” subject to reopening was

the bottom

- line “determination of the amount of total

reimbursement

. ” I d. at 230

– 31 (quoting 42 C.F.R.

§ § 405.1801(a )

, .1885(a) (2001))

. We further reasoned that

reopenings examined only “ findings on matters at issue

, ” a

term that we construed to mean findings as relevant to the

payment year for which the hospital was seeking additional

reimbursement

. I d. at 231

– 32 (quoting 42 C.F.R.

§ 405.1885(a) (2001))

. We therefore held that “the reopening

regulation allows for modification of predicate facts in closed5

years provided that the change will only impact the total

rei mbursement determination in open years.” Id. at 232

– 33.

In response to Kaiser

, the Secretary promulgated the 2013

amendments to the reopening regulation directly at issue here.

Provider Reimbursement Determinations and Appeals

, 78 Fed.

Reg. 7 4,826

, 75,162

– 69 (Dec. 10, 2013). The amended

regulation provides that a decision may be reopened “with

respect to specific findings on matters at issue”

— a term now

defined to “include a predicate fact ” that was “first determined

for a cost reporting p eriod that predates the period at issue

. ”

42 C.F.R. § 405.1885(a)(1)

, (a)(1)(iii). Moreover, the

regulation now provides that the three

- year limitations period

for seeking a reopening “applies to, and is calculated separately

for

, each specific finding on a matter at issue.” I d.

§ 405.1885(b)(2)(iv). Thus, in the context of reopenings, a

predicate fact now must be challenged within three years of

when it is first determined

.

C

Appellants in this case are 277 hospitals seeking to

challenge various payment decisions spanning the last two

decades. The hospitals contend that these decisions rest on

errors in the 1981 cost

- reporting data that were used to

calculate the standardized amount s in 1983. Specifically, they

argue that this data erroneously characte rized transfers of

patients from one hospital to another as patient discharges, th us

overstating the number of discharges and understating the

allowable operating costs per discharge

. Because that

determination was embedded in the standardized amount in

1983, it has affected payment decisions ever since.

The hospitals pursued this issue in various appeals to the

PRRB filed as early as 2005. As permitted by Kaiser

, the6

hospitals so ught to challenge the predicate determination of

allowable operating costs per discharge

, as relevant to open

cost years for which they had filed timely administrative

appeals. The PRRB consolidated the various appeals and

dismissed them in light of the 2 013 amendments to the

reopening regulation. According to the PRRB, the 2013

amendments applied to these pending appeals and barred the

hospitals’ challenge s to the much

- earlier determination of

allowable operating costs per discharge.

The hospitals sought further review in the d istrict c ourt

. They raised three arguments : (1) the reopening regulation does

not cover administrative appeals to the PRRB; (2) the 2013

amendment s w ere arbitrary and capricious because they

require the perpetual use of even demonstrably erroneous

predicate factual determinations ; and (3) application of the

amendment s to appeals pending on their effective date would

be impermissibly retroactive.

The d istrict c ourt rejected all of the se contentions and

granted summary judgme nt to the Secretary

. S t. Francis Med.

Ctr. v. Price

, 239 F. Supp. 3d 237 (D.D.C. 2017)

. On the first

question, the court reas oned that although the hospitals had

filed timely appeals to the PRRB, they nonetheless “sought to

challenge a predicate fact that was established much earlier

than 180 days (or 3 years) before the ir filing.” Id. at 247.

According to the court, the PRRB appeals therefore involved

“‘reopening’ a ‘matter at issue,’ which is subject to the time

limitation of § 405.1885

. ” Id.

I I

On summary judgment, the district court held that the

regulation governing challenges to predicate fact s in

reopenings also governs challenges to predicate facts in7

administrative appeals to the PRRB. We review that legal

conclusion de novo

. See Methodist Hosp.

, 38 F.3d at 1229.

In Kaiser

, we held that the re was no untimely reopening

when a hospital challenged predicate facts as relevant to

payments for the open years at issue

. Our decision turned on

what constituted the “determination of an int ermediary,” and

what constituted “findings on matters at issue,” under the terms

of the reopening regulation then in effect

. See 708 F.3d at

230

– 33. Accordingly, we had no occasion to address the

distinct question whether the reopening regulation applies to

administrative appeals in the first place

. We now hold that it

does not.

A

In common legal usage, nobody would confuse an appeal

, which involves one entity reviewing the decision of another,

with a reconsideration or reopening by the same entity that

made the decision at issue. That basic distinction resolves this

case : The reopening regulation applies only to

reconsideration by the entity that made the decision at issue

. It does not apply to a dministrative a ppeals

.

As amended in 2013, the reopening regulation

, titled

“[r]eopening of a contractor determination or reviewing entity

decision” (42 C.F.R. § 405.1885), begins as follows :

A Secretary determination, a contractor

determination, or a decision by a reviewing

entity (as described in § 405.1801(a)) may be

reopened

, with respect to specific findings on

matters at issue in a determination or decision,

by CMS (with respect to Secretary

determinations), by the contractor (with respect8

to contractor determinations), or by the

reviewing entit y that made the decision (as

described in paragraph (c) of this section).

Id. § 405.1885(a)(1). The regulation thus contemplates three

kinds of possible reopening s

. First, a Medicare administrative

“contractor” ( i.e.

, a fiscal intermediary) may reopen its own

prior decision

. Second, a “reviewing entity that made the

decision” (including the PRRB, see id. § 405.1801(a)) may

reopen th at decision. Th ird, “CMS” may reopen a “Secretary

determination,” consistent with its role of administering t he

Medicare program for the Secretary. To be sure, CMS and the

Secretary of HHS are distinct administrative actors. But

b ecause CMS reports to the Secretary

, and “administers

Medicare on the Secr e tary’s behalf

, ” St. Elizabeth’s Med. Ctr.

v. Thompson

, 396 F.3d 1228, 12 30 (D.C. Cir. 2005), this kind

of reopening cannot fairly be described as an appeal from the

Secretary to CMS

— and certainly not as an appeal from a fiscal

intermediary to the PRRB.

Paragraph (c) of the reopening regulation

, referenced in

the opening provision quoted above, reinforces this analysis

. It provides :

Jurisdiction for reopening a contractor

determination or contractor hearing decision

rests exclusively with the contractor or

contractor hearing officer(s) that rendered the

determination or decision (or, when applicable,

with the successor contractor), subject to a

directive from CMS to reopen or not reopen the

determination or decision. Jurisdiction for

reopening a Secretary determination, CMS

reviewing official decision

, a Board decision, or

an Administrator decision rests exclusively with9

CMS, the CMS reviewing official, Board or

Administrator, respectively.

42 C.F.R. § 405.1885( c ). Thus, only a Medicare

administrative contractor may reopen its own decision s

(subject to direction from superiors within CMS ); only CMS

(acting on behalf of the Secretary) may reopen determinations

of the Secretary; only a CMS reviewing official may reop en his

or her own decision s ; only the PRRB may reopen its own

deci sion s ; and only the Administrator of CMS may reopen her

prior decision s

. None of these options covers appeals from a

Medicare administrative contractor to the PRRB.

Section 405. 1885 also repeatedly distinguishes reopenings

from appeals. It provides that “[a] request to reopen does not

toll the time in which to appeal an otherwise appealable

determination or decision.” 42 C.F.R. § 405.1885(b)(2)(ii).

Moreover, “[i]f a matter is reopened and a revised

determination or decision is made, [the] revised determination

or decision is appealable

. ” I d. § 405.1885(a)(5 ). Finally, a

Medicare administrative contractor may “ reopen ” one of its

own decisions “that is currently pending on appeal before the

Board.” Id. § 405. 188 5 (c)(3). This would make little sense

if an appeal from the decision of a Medicare administrative

contractor to the PRRB were simply a species of reopening.

N othing in the limitations provisions of the reopening

regulation changes this analysis. Before and after the 2013

amendments, the limitations rule stated that “[a] reopening

made upon request is timely only if the request to reopen is

received

... no later than 3 years after the date of the

determination or decision that is the subject of the requested

reopening .” 42 C.F.R. § 405.1885(b)(2) (i) (emphas e s added)

. The 2013 amendments made this limitations period run

separately for each “specific finding on a matter at issue,” id.10

§ 405. 1885(b)(2)(iv), and they defined “specific finding on a

matter at issue” to include any “predicate fact,” id.

§ 405. 1885(a)(1)(iii). These changes impact how the

limitations period applies to predicate

- f act challenges in

reopenings, but they do not extend the limitations period

beyond any “reopening.” Accordingly, the limitations period

does not apply to PRRB administrative appeals

.

B

Just as the regulations governing reopenings do not extend

to appeals, the statutes and regulations governing appeals do

not incorporate the rules for reopenings. The governing

statute states that “[a]ny provider of services” to Medicare

beneficiaries may “obtain a hearing” before the PRRB if it is

“dissatisfied with a final determination of the organization

serving as its fiscal intermediary

... as to the amount of total

program reimbursement due the provider.” 42 U.S.C.

§ 1395 oo (a), (a)(1) (A)(i)

. To obtain such a review, the

provider must have timely filed with the fiscal intermediary the

“required cost report” for the year at issue, id. § 1395 oo (a); the

amount in controversy must be at least $10,000 for individual

appeals, id. § 1395 oo (a)(2), or $50,000 for group appeals, id.

§ 1395 oo (b); and the provider must “file[] a request for a

hearing within 180 days after notice of the intermediary’s final

determination,” id. §1395 oo (a)( 3 ). If those requirements are

met, the PRRB “shall have the power to affirm, modify, or

reverse a final determination of the fiscal intermediary with

respect to a cost report.” Id. § 1395 oo (d). Implementing

regulations track and build upon these provisions. 42 C.F.R.

§ 405.1835 (“Right to Board hearing”); id. § 405.1837 (“Group

appeals”). The se statutes and regulations neither reference the

limitations rules that apply to reopenings nor otherwise limit

the kind s of arguments that a provider may make in challenging11

the fiscal intermediary’s “final determination” regarding the

“amount

... due” for the year at issue

.

One provision in the statute governing PRRB appeals

makes “[c]ertain findings not reviewable ”

— those determined

under two separate sections of the Medicare Act

. 42 U.S.C.

§ 1395 oo (g). Neither of those sections addresses predicate

facts. See id. § 1395y; id. § 1395ww(d)(7). Accordingly,

§ 1395 oo (g) provides no support for barring predicate

- fact

challenge s in administrative appeals

. 1

The implementing regulations governing PRRB appeals

contain one reference to reopenings, and it supports our

analysis. In 2016, th ose regulation s were revised to clarify

that “[i]f a final contractor determination is reopened under

§ 405.1885, any review by t he Board must be limited solely to

those matters that are specifically revised in the contractor’s

revised final determination.” See 42 C.F.R. § 405.1835(a)(1).

That statement reinforces the conclusion that the reopening of

a “final contractor determinat ion” is different from its “review

by the Board.”

The provisions we have surveyed establish these basic

points : A fiscal intermediary reopening its own decision is

one thing, and the PRRB reviewing that decision on appeal is

quite another. Reopenings a nd administrative appeals are

conceptually different, are governed by different statutory and

regulatory provisions, and, most importantly here, are

governed by different limitations rules

. Accordingly

, there is

1 T he hospitals argue that any regulation barring such challenges

would be inconsistent with § 1395 oo (g)

, which enumerates only two

categories of “findings not reviewable” in PRRB appeals

. Because

we conclude that the reopening regulation does not bar such

challenges

, we need not a ddress th at broader contention.12

no basis for extending to PRRB appeals the limitations rules

that govern reopenings.

C

The countervailing arguments adopted by the district court

and advanced by the Secretary are unpersuasive.

The district court reasoned that “challenging a predicate

fact”

— even in an administrative appeal to the PRRB

— “ is

‘ reopening ’ a ‘matter at issue,’ which is subject to the time

limit ation s of § 405.1885.” 239 F. Supp. 3d at 247

. However, t he cited provision merely states that a “predicate

fact” may constitute a “specific finding on a matter at issue” in

a reopening, 42 C.F.R. § 405. 1885(a)(1)(iii), where the “3

- year

period” of limitations “separately” applies to each such finding

,

see id. § 405. 1885(b)(2)(iv). These provisions impact the

operation of a limitations rule that governs only the time for

fili ng a “reopening.” S ee id. § 405. 1885(b)(2)(i)

. They in no

way suggest that an appeal to the PRRB is such a reopening.

The Secretary attempt s to bridge the gap between appeals

and reopenings by highlighting a parallel reference to the two

kinds of proceedings in the regulation defining a “predicate

fact” as :

a finding of fact based on a factual matter that

first arose in or was first determined for a cost

reporting period that predates the period at issue

(in an appeal filed, or a reopeni ng requested by

a provider or initiated by a contractor, under this

subpart), and once determined, was used to

determine an aspect of the provider ’ s

reimbursement for one or more later cost

reporting periods.13

42 C.F.R. § 405.1885( a ) (1)(iii) (emphas e s added)

. However,

all this shows is that a predicate fact may have first been

determined in an earlier appeal or reopening. It does not show

that the limitations rules for reopenings also govern appeals.

To the contrary, it undercuts that conclusion, by suggesting yet

again that an “appeal” and a “reopening” are different.

T he district co urt and the Secretary also highlight excerpts

from the preamble to the 2013 amendment s

. At various points

in the preamble, the Secret ary assert ed or assume d that the

amendment s cover ed both reopenings and appeals. See

, e.g.

, 78 Fed. Reg. at 75

, 168 (“application of the revised rules

... to

appeals and reopenings (including requests for reopening) that

are pending on or after the same effe ctive date, is not

impermissibly retroactive”); id. at 75

, 169 ( “[a] predicate fact is

subject to change only through a timely appeal or reopening of

the [notice of program reimbursement] for the fiscal period in

which the predicate fact first arose or the fiscal period for which

such fact was first determined”). However, the preamble

contain ed no analysis explaining that assumption

. Moreover,

the preamble stated that although HHS had proposed and

considered making amendments to the regulations governing

“ appeals to the Board at [42 C.F.R.] § 405.1835,” it decided

not to do so. See id. at 75

, 165

, 75

, 169

. Because the

regulation itself is clear

, we need not evaluate these mixed

signals from the preamble

, which itself lacks the force and

effect of law. See

, e.g.

, Wyeth v. Levine

, 555 U.S. 555, 575

–

577 (2009) ; Nat. Res. Def. Council v. EPA

, 559 F.3d 561, 565

(D.C. Cir. 2009)

.

Finally, the Secretary asks us to defer to his interpretation

of the reopening regulation

. However, we do not defer when

an agency’s interpreta tion of its own regulations is “ plainly

erroneous or in consistent with the regulation. ” See

, e.g.

, Auer14

v. Robbins

, 519 U.S. 452, 461 (1997) ; Bowles v. Seminole Rock

& Sand Co.

, 325 U.S. 410, 414 (1945)

. Here, for the reasons

given, the Secreta ry’s interpretation is i nconsistent with the

text of the reopening regulation, as well as with the separate

statut es and regulat ions governing administrative appeals

. Moreover, deference would be even more inappropriate

because the preamble fails to offer any reasoned explanation

about how the reopening regulations might extend to PRRB

appeals

. See

, e.g.

, AT&T Corp. v. FCC

, 841 F.3d 1047, 1049

(D.C. Cir. 2016) (declining to defer under Auer because

agency’s interpretation of its own order “d oes not disclo se the

Commission’ s reasoning with the requisite clarity to enable us

to sustain its conclusion ” ).

III

W e hold that 42 C.F.R. § 405.1885 does not apply to

appeals from a fiscal intermediary to the PRRB

. Accordingly,

we have no occasion to address whether the 2013 amendments

to that regulation were arbitrary and capricious or whether

applying the amendment s to proceedings pending on their

effective date would be impermissibly retroactive.

The judgment of the d istrict c ourt is reversed, and the case

is remanded for further proceedings consistent with this

opinion.

So ordered.K AVANAUGH

, Circuit Judge

, concurring: I join the

Court’s excellent opinion

. The Court agrees with the hospitals

that HHS’s 2013 regulation applies only to reopenings, not to

appeals. I add th is concurring opinion to also express my

agreement with the hospitals’ broader argument that the 2013

regulation is arbitrary and capricious

, and therefore should be

vacated

.

HHS calculates hospitals’ Medicare reimbursement s by

employing a formula predicated on statistics for hospital

discharg es in 1981 . The hospitals believe that the 1981

statistics are faulty. I n Kaiser Foundation Hospitals v.

Sebelius

, 708 F.3d 226 (D.C. Cir. 2013 ), we ruled that hospital s

could challenge erroneous predicate fact s used by HHS to

calculate hospitals ’ Medicare reimbursements for open cost

years

. In the wake of Kaiser , hospitals could not reopen closed

cost years, but they could challenge erroneous predicate fact s

– such as the 1981 statistics on hospital discharges

– used to

calculate their ongoing rei mbursements for open cost years.

In 2013, seeking to override the result in Kaiser

, HHS

promulgated t he rule at issue here to bar hospitals from

challenging the predicate fact s used to calculate Medicare

reimbursements for open cost years

. Even assuming that

HHS’s regulation does not contravene the Medicare statute, the

regulation is arbitrary and capricious. As the Supreme Court

stated in a related case

– where HHS was defending a different

rule allowing hospitals to challenge erroneous pr edicate facts

–

it is not reasonable for HHS to “ cement misclassifi ed ” costs

into “future reimbursements, thus perpetuating literally

million

- dollar mistakes.” Regions Hospital v. Shalala , 522

U.S. 448, 462 (199 8).

In the district c ourt ’s decision in K aiser

, Judge Boasberg

label ed HHS’s approach of barring challenges to erroneous

predicate facts as an “absurdity

. ” Kaiser Foundation Hospitals

v. Sebelius , 828 F. S upp. 2d 193, 203 (D.D.C. 2011). Sou nds2

about right. Indeed, i t would seem to be the very definition of

arbitrary and capricious for HHS to knowingly use false facts

when calculating hospital reimbursements

. That is particularly

so when tho se erroneous fact s cost hospitals hundreds of

millions of dollars

. That is real m oney.

HHS contends t hat its rule barri ng hospitals from

challenging erroneous predicate facts is reasonable because o f

the agency’s interest in finality

. That argument makes little

sense here . The hospitals are not seeking to reopen closed cost

years. If they were, then HH S’s finality argument would make

a good deal of sense . The hospitals are merely challenging the

factual inputs for the ongoing calculations of reimbursements

for open cost years. The finality defense is makeweight.

HHS’s apparent goal, as Judge Boasberg explained in Kaiser

, is to save money by paying out less in reimbursements to

hospitals

. Saving money is a laudable goal

, but not one that

may be pursued by using phony facts to shift costs onto the

backs of hospitals. The HHS re gulation i s arbitrary and

capricious

, and therefore should be vacated

.