United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 23, 2015 Decided April 10, 2015

No. 14-5122

ADIRONDACK MEDICAL CENTER, ET AL.,

APPELLANTS

v.

SYLVIA MATHEWS BURWELL, IN HER OFFICIAL CAPACITY AS 

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. 1:11-cv-00313)

Ankur J. Goel argued the cause for appellants. With him 

on the briefs was Johnny H. Walker.

Daniel J. Hettich was on the brief for amici curiae Knox 

Community Hospital, et al., in support of appellants.

Abby C. Wright, Attorney, U.S. Department of Justice, 

argued the cause for appellee. With her on the brief were 

Ronald C. Machen Jr., U.S. Attorney at the time the brief was 

filed, and Michael S. Raab, Attorney.
2

Before: TATEL, Circuit Judge, PILLARD, Circuit Judge, 

and EDWARDS, Senior Circuit Judge.

Opinion for the court filed PER CURIAM.

PER CURIAM: The Medicare program provides federally 

funded healthcare to the elderly and the disabled. See Title 

XVIII of the Social Security Act, Pub. L. No. 89-97, 79 Stat. 

291 (1965), as amended, 42 U.S.C. § 1395 et seq. Under a 

“complex statutory and regulatory regime” called Medicare 

Part A, the Government reimburses participating hospitals for 

care that they provide to inpatient Medicare beneficiaries. 

Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993).

“[T]he labyrinthine world of Medicare has two types of 

hospitals that enjoy different reimbursement schemes.” 

Adirondack Med. Ctr. v. Sebelius, 740 F.3d 692, 694 (D.C. 

Cir. 2014). Most hospitals are reimbursed for inpatient 

hospital services pursuant to a standardized rate under 42 

U.S.C. § 1395ww(d). However, the Social Security Act also 

provides a method for calculating reimbursement rates for 

certain rural hospitals: those that qualify as “sole community 

hospital[s]” (“SCHs”), see id. § 1395ww(d)(5)(D), and those 

that qualify as “medicare-dependent small rural hospital[s]”

(“MDHs”), see id. § 1395ww(d)(5)(G).

Appellants in this case are MDHs and SCHs. They

challenge revisions made by the Secretary of the Department 

of Health and Human Services (“Secretary”) to the rules 

covering their Medicare reimbursements for inpatient hospital 

services. The District Court rejected Appellants’ claims, 

Adirondack Med. Ctr. v. Sebelius, 29 F. Supp. 3d 25 (D.D.C. 

2014); Adirondack Med. Ctr. v. Sebelius, 935 F. Supp. 2d 121 

(D.D.C. 2013), holding, inter alia, that the Secretary acted 

within her authority and reasonably in adjusting the disputed 

reimbursement requirements under the statute. Appellants 
3

now urge this court to reverse the judgments of the District 

Court in favor of the Secretary, grant their motions for 

summary judgment, and remand the case with instructions to 

the District Court to enter judgment in favor of Appellants. 

After careful review of the record, we hold that the 

Secretary’s actions were neither “arbitrary, capricious, [nor]

manifestly contrary to the statute.” Chevron U.S.A., Inc. v. 

Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984). 

We therefore affirm the judgment of the District Court.

* * * *

When an SCH or MDH discharges a patient insured by 

Medicare, it receives reimbursement based on either the 

standard federal rate or a hospital-specific rate derived from 

its actual costs of treatment in one of the base years specified 

in the statute, whichever is higher. 42 U.S.C. 

§ 1395ww(d)(5)(D), (G); 42 C.F.R. §§ 412.92, 412.108. The 

Secretary determines an MDH or SCH’s hospital-specific 

reimbursement rate using the most favorable base year 

available.

To calculate reimbursement for a particular patient, the 

Secretary multiplies the hospital’s base rate by the appropriate 

group weight – a number representing how resource-intensive 

the patient’s condition was to treat. See 42 C.F.R. 

§§ 412.78(f), 412.79(e). Each year, the Secretary is required 

to revise group weights based on changes in technology and 

medical best practices. 42 U.S.C. § 1395ww(d)(4)(C)(i). The 

statute also requires that these revisions have no effect on 

aggregate Medicare payments – in other words, that they be 

budget neutral. Id. § 1395ww(d)(4)(C)(iii). The Secretary

eliminates any variation in aggregate payments by applying a 

uniform “budget neutrality adjustment” to all reimbursement 

rates throughout the Medicare system. See, e.g., Medicare 
4

Program; Changes to the Hospital Inpatient Prospective 

Payment Systems and Fiscal Year 1994 Rates, 58 Fed. Reg. 

30,222, 30,269 (May 26, 1993). The budget adjustments are 

cumulative, meaning that the Secretary does not remove the 

previous year’s adjustment from the database before 

calculating the next year’s adjustment. Id.

Prior to 2006, the budget neutrality adjustments applied 

to the hospital-specific MDH and SCH rates in a 

straightforward way: once a base year was chosen and the rate 

was calculated, the Secretary applied every budget neutrality 

adjustment from 1993 (when Congress began requiring 

adjustments) to the present. In 2006, Congress added 2002 as 

a new base year for MDHs. The Secretary issued instructions 

to fiscal intermediaries (contractors who process and make 

claims for Medicare payments) stating that when 2002 was 

used as the base year, only adjustments from 2003 forward 

would apply. The Secretary inadvertently failed to instruct 

that adjustments before 2003 should also be included in the 

calculation, as they had been before Congress added the new 

base year. In 2008, Congress added 2006 as a new base year 

for SCHs, and the Secretary issued similar guidance to fiscal 

intermediaries, instructing them to apply only adjustments 

from 2007 forward to that base year. 

Six weeks after issuing the 2008 instructions for SCHs, 

the Secretary determined that they were erroneous and 

rescinded them. In 2009, she changed the 2006 instructions 

for MDHs through notice and comment rulemaking. 

Medicare Program; Changes to the Hospital Inpatient 

Prospective Payment Systems for Acute Care Hospitals and 

Fiscal Year 2010 Rates; and Changes to the Long-Term Care 

Hospital Prospective Payment System and Rate Years 2010 

and 2009 Rates, 74 Fed. Reg. 43,754, 43,896 (Aug. 27, 2009).

Reimbursements to both types of hospitals now incorporate 
5

all adjustments from 1993 forward, as they did under the pre2006 status quo. The principal thrust of Appellants’ challenge 

is that the Medicare statute forbids the Secretary from 

modifying the hospitals’ reimbursements with budget 

neutrality adjustments from years prior to the base year. We 

disagree.

* * * *

In support of their position, Appellants make four 

arguments, all of which lack merit. First, Appellants claim 

that 42 U.S.C. § 1395ww(b)(3)(C) and (D) bar the Secretary 

from applying budget neutrality adjustments from years 

preceding the base year. Second, Appellants argue that 

Section 1395ww(d)(4)(C)(iii) requires the Secretary to apply 

the entire budget neutrality adjustment directly to the group 

weights rather than, as the Secretary currently does, to the 

overall reimbursement rate. Third, Appellants argue that the 

Secretary’s failure to apply the budget neutrality adjustment 

directly to the group weight arbitrarily reduces their 

reimbursement. Fourth, Appellants argue that the Secretary 

was barred from revoking her 2008 instructions without first 

pursuing notice and comment rulemaking. 

Appellants’ first argument fails because 42 U.S.C. 

§ 1395ww(b)(3)(C) and (D) are irrelevant with respect to the 

application of budget neutrality adjustments. The reference to 

“applicable percentage increases” in those sections refers 

specifically to an inflation adjustment defined at 42 U.S.C. 

§ 1395ww(b)(3)(B)(iv). It has no bearing on other aspects of

the reimbursement formula, such as the budget neutrality 

adjustment.

Appellants’ second argument also lacks merit. The clear 

command of 42 U.S.C. § 1395ww(d)(4)(C)(iii) requires the 
6

Secretary to “assure[] that the aggregate payments . . . are not 

greater or less than those that would have been made for 

discharges in the year without” the annual group weight 

adjustments. Id. In other words, the Secretary must maintain 

budget neutrality when recalibrating reimbursements under 

the statute. Appellants do not dispute that the Secretary’s 

adjustments successfully achieve the goal of budget 

neutrality. Appellants instead object to the precise 

methodology used by the Secretary. Appellants’ arguments, 

however, fail to take into account the wide discretion afforded 

the Secretary to implement the Medicare reimbursement 

formula, including determining how to meet Medicare’s 

budget neutrality requirements. See id. (requiring the 

Secretary to make adjustments “in a manner that assures” 

budget neutrality); id. § 1395ww(d)(5)(I)(i) (authorizing the 

Secretary to make “other exceptions and adjustments to such 

payment amounts under this subsection as the Secretary 

deems appropriate”); Adirondack, 740 F.3d at 694 (describing 

the Secretary’s “broad-spectrum grant of authority”). There is 

little doubt here that the Secretary’s chosen method of 

achieving budget neutrality lies within her broad discretion.

Appellants’ third argument fares no better. In adjusting 

the hospital-specific rates as she did, the Secretary reasonably 

chose to achieve budget neutrality pursuant to a method that 

spreads the cost of budget neutrality fairly between MDHs, 

SCHs, and other hospitals. Appellants have failed to show 

that the Secretary’s method requires them to absorb a 

disproportionate or unfair share of the budget neutrality 

adjustment.

Finally, Appellants’ last argument – that the Secretary 

was required to use notice and comment rulemaking to 

rescind the 2008 instructions – has no legal basis in the wake 

of the Supreme Court’s decision in Perez v. Mortgage 
7

Bankers Association, 135 S. Ct. 1199 (2015). The Court’s 

decision in Perez issued after Appellants had submitted their 

briefs to this court. In light of this intervening development, 

Appellants’ counsel readily withdrew the last claim during 

oral argument. The court appreciates Appellants’ forthright 

treatment of this matter.

* * * *

The Secretary acted pursuant to express delegations of 

authority under the Medicare Act in adjusting the disputed 

reimbursement requirements. The determinations made by the 

Secretary are neither “arbitrary or capricious in substance, 

[n]or manifestly contrary to the statute.” Mayo Found. for 

Med. Educ. and Research v. United States, 562 U.S. 44, 53 

(2011) (internal quotation marks omitted). They thus “warrant 

the Court’s approbation.” Astrue v. Capato ex rel. BNC, 132 

S. Ct. 2021, 2034 (2012).