### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 13

- 3285

R USH U NIVERSITY M EDICAL C ENTER , Plaintiff

- Appellee
,

v.

S YLVIA M ATHEWS B URWELL , Secretary of Health and Human Services
, Defendant

- Appellant

.

____________________ Appeal from the United States District Court for the Northern District of Illinois
, Eastern Division. No s. 12 C 4672 & 12 C 4673

— Joan H. Lefkow
, Judge

.

____________________
A RGUED A PRIL 14, 2014

— D ECIDED A UGUST 1 8
, 2014

____________________

Before W OOD , Chief Judge , and P OSNER and F LAUM , Circuit Judges

. W OOD , Chief Judge

. Teaching hospitals provide a valuable service to the public by training the next generation of do ctors and medi cal professionals, but that benefit comes at a price: such hospitals experience significantly higher per

patient care costs than their non

- teaching counterparts. To2 No. 13

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compensate them for taking on this extra financial burden, the federal Medicare program pro vides additional rei mbursement for expenses beyond the immediate costs of p atient care. One such adjustment is for “indirect medical ed uca tion” (IME) costs. It is designed to account for the time medical interns and residents ( collectively “residents”) spend in ways that enhance their ability to provide pa tient

care but that are not connected to the treatment of any pa rticular patient. The question before us is whether residents’ time spent in research activities wholly unrelated to the d iagnosis or tre atment of patients may be counted as part of this indirect

- education time. (We refer to that as “pure r esearch” time .) Rush University Medical Cen ter , the plaintiff in this case, asserts that the answer is yes
, and it seeks Med icare reimbursements for thes e activities between the years 1983 and 2001. Importantly, we do n ot write on a blank slate . The Secr etary of Health and Human Services (Secretary) has interpre ted the Medicare Act consistently since 1983 to exclude pure research activities from compensabl e IME costs. Congress codified this exclusion for F is cal Y ears 2001 onward in the Patient Protection and Affordable Care Act of 2010 ( the A ffordable Care Act or ACA ), but it explicitly declined to lay down a rule for the years 1983 to 2001

. The Secretary h as

now promulgated a regulation excluding pure research from the IME cost calculation for all years since 1983. Before that regulation was on the books but after the passage of the ACA, th e question whether pure research was compensable reached our court. W e held that the relevant portion of the statute should be interpreted to include pure research in compensable IME costs for the 1983 to 2001 period . See Univ

. of Chi. Med. Ctr. v. Sebelius
, 618 F.3d 739 ( 7th Cir. 2010).No. 13

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Rush operates a teaching hospital in Chicago . It sought to include its residents’ pure research time in its IME cost calc ulation f or Fiscal Y ears 1993, 1994, and 1996. The fiscal inte rmediary charged with administering Rush’s Medicare rei mbursements denied its request be cause of the regulation , and that de nial was affirmed on administrative appeal . Rush then filed suit challenging that decision in the district court, and the court held that our University of Chicago decision compelled reimbursement of residents’ time spen t in pure research during the years at issue. It thus granted summary judgment in Rush’s favor. We must now decide whether University of Chicago continues to control in light of the changed regulatory landscape.

I

In 1983 the Medicare program shifted from using a rei mbursement system to a prospective payment system, under which hospitals are pai d for patient care based on specified rates and formulae for activities and procedures, regardless of the actual dollars and cents involved in th e care

. IME costs are calculated pursuant to a formula
, under which one i mportant input is the number of “full

- time equivalent interns and residents” at the hospital. 42 U.S.C. § 1395ww(d)(5)(B)(ii). T he latter figure is computed based on the number of hours residents spend conducting both “p atient care activities” and qualifying “non

- patient care activ ities.” Id. § 139 5ww(d)(5)(B)(iv), (d)(5)(B)(x).

The IME regulation in place when the switch in rei mbursement methodologies occurred was sil ent about whet her pure research time was included within the definition of “non

- patient care activiti es.” B efore any statute or regulation spoke directly to the issue, the Secretary interpreted the sta t-4 No. 13

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ute in administrative adjudica tion to exclude pure res earch time from the IME formula. See R.I. Hosp. v. Leavitt , 548 F.3d 29, 34 , 38 (1st Cir. 2008) (upholding that interpretation).

In 2001 the Department of Health and Human Services amended the relevant regulation. In its new form, the regul ation provided t hat “[t]he time spent by a resident in research that is not associated with the treatment or diagnosis of a particular patient is not countable.” 42 C.F.R. § 412.105(f)(1)(iii)(B) (2001). The regulation was further amended in 2006 to clarify that “[i]n ord er to be counted, a resident must be spending time in patient care activities

... .” 42 C.F.R. § 412.105(f)(1)(iii)(C) (2006). A separate regulation defined “patient care activities” as “the care and treatment of particular patients, including services for w hich a physician or other practitioner may bill.” 42 C.F.R. § 413.75 (b) (2006).

In 2010 Congress passed the Affordable Care Act . Part of that complex statute addressed whether pure research costs were within the scope of the IME calculation. It provided, i n relevant part: In determining the hospital’ s number of full

- time equivalent residents for purposes of this subpar agraph, all the time spent by an intern or resident in an approved medical residency training program in r esearch activities that are not ass ociated with the treatment or diagnosis of a particular patient, as such time and activities are defined by the Secretary, shall not be counted toward the determination of full

- time equivalency.No. 13

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42 U.S.C. § 1395ww(d)(5)(B) (x)(III)

. In contrast, Congress
pr ovided that certain didactic activities (such as conferences and seminars) would be included: In determining the hospital’ s number of full

- time equivalent residents for purposes of this subpar agraph, all the time spent by an intern or resident in an
approv ed medical residency training program in non

patient care activities, such as didactic conferences and seminars, as such time and activities are defined by the Secretary, that occurs in the hospital shall be counted toward the determination of full

- time eq uiv alency ... .

Id

. § 1395 ww (d)(5)(B)(x)(II). The statute also speaks to the extent to which these provisions are retroactive. On a ge neral level, it states that “[e]xcept as otherwise provided, the Secretary of Health and Human Services shall implement the amendment made by this section in a manner so as to apply to cost reporting periods beginning on or after January 1, 1983.” See Patie nt Protection and Affordable Care Act, Pub. L. No. 111

- 148, § 5505(c)(1), 124 Stat. 119, 661 (2010). A more targeted provision provides that “[the IME amendments] shall apply to cost reporting periods beginning on or after October 1, 2001. Such section, as so added, shall not give rise to any inference as to how the law in effect prior to such date should be interpreted.” Id. § 5505(c)(3), 124 Stat. 119, 661.
On November 24, 2010, after notice and comment, the Secretary promulgated a rule amending her previ ous IME regulation in light of the Affordable Care Act. The new reg ulation provides, in relevant part:6 No. 13

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Effective for cost reporting periods beginning on or after January 1, 1983, except for research activities d escribed in paragraph (f)(1)(iii)(B) of this section, the time a resident is training in an approved medical re sidency program in a hospital setting ... must be spent in either patient care activities, as defined in § 413.75(b) of this subchapter, or in nonpatient care activities, such as didactic conf erences and seminars, to be counted.
42 C.F.R. § 412.105(f)(1)(iii)(C). The research activities r eferred to in the f irst line are described in the 2001 amen dment to the regulation, which said that “ [t]he time spent by a resident in research that is not ass ociated with the treatment or diagnosis of a particular patient is not countable.” 42 C.F.R. § 412.105(f)(1)(iii)(B).

We decided University of Chicago in the brief period b etween the enactment of the Affordable Care Act and the Se cretary’s promulgation of the amended regulation. See 618 F.3d 739 ( 7th Cir. 2010). Without a regulation authoritatively interpreting the Affordable Care Act’s retroactivity prov isions, we held that “[t]he hospital has the stronger position regarding the effect of the [ACA] on the present appeal b ecause Congress spoke clearly when it retroactively allowed reimbursement for non

- patient care activities starting in 1983.” Id. at 745. We found the provision of the Affordable Care Act directing that no inference should be drawn r egar d ing the retroactivity for the period between 1983 and 2001 to be “unclear at best” and insufficient to “contradict the clear meaning of the earlier language allowing rei mbursement for non

- patient care activities during the [rel evant] time period.” Id.No. 13

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This wa s our most recent word on the subject when Rush filed for IME cost reimbursements that included its res idents’ pure research time

. If that time was properly inclu ded, the number of full

- time equivalent residents for the pu rpose of calculating Rush’s non

- pa tient care activities would increase by 17.05 in Fiscal Year 1993, 19.29 in Fiscal Year 1994, and 18.47 in Fiscal Y ear 1996. All of the residents’ r esearch took place either on

- site at the portion of the hospital covered by Medicare’s prospective payment s ystem, or in one of Rush’ s outpatient depart ments. The fiscal intermed iary’s sole reason for denying reimbursement of these costs was that residents’ time spent in pure research activities could not be counted

. Rush took an administrative appeal to the Provider Reimbursement Review Board, which affirmed the intermediary’ s decision. The Administrator of the Ce nters for Medicare & Medicaid Services, to whom the Secr etary has delegated her authority to review the B oard’s dec isions, affi rmed

. Rush filed this suit under 42 U.S.C. § 1395oo(f)(1), which gives providers the right to obtain judicial review of the agency’s reimbursement decisions. Though the initial cha llenge involved several aspects of the Secretary’s rei mburs ement decision, this appeal is limited to the denial of rei mbursement for pure research in the IME cost calculation. On that question , the district court held that it was bound by our decision in University of Chicago even though it proved i nconsisten t with the Secretary’s later

- promulgated regulation
, be cause it understood our holding to be based on the una mbiguous terms of the statute

— terms that could not be di sturbed by a contrary regulation.8 No. 13

- 3285

II The problem of deciding whether a subsequent admin i strative regulation should be applied in spite of a contrary earlier judicial interpretation of a statute is not new. In Nat ional Cable & Telecommunications Ass ’n v. Brand X Internet Serv ices , the Supreme Court explained that “[a] court’s prior judicial construction of a statute trumps an agency constru ction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the stat ut e and thus leaves no r oom for agency discretion.” 54 5 U.S. 967, 982 (2005). This leaves considerable leeway for the agency : “Only a judicial prec edent holding that the statute unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction.” Id. at 982

– 83 (emphasis added).

Brand X reflects one application of the traditional analysis used to evaluate agency interpretations of ambiguous sta tutes under Chevron U.S.A., Inc. v. Natural Resources D efense Council, Inc. , 467 U.S. 837 (1984). As the Supreme Court said there , “First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the

co urt, as well as the agency, must give effect to the una mbiguously expressed intent of Congress.” Id. at 842

– 43. U nder Brand X , a court must review its earlier interpretation of the statute at issue to see if i ts holding was compelled by u nambiguous statuto ry language. If it was, then it would not have mattered if the agency interpretation were already in place because that interpretation would not have been ent i-No. 13

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tled to deference under the first step of Chevron . Presumably, a court evaluating its earlier opi nion under Brand X should reach the same conclusion as it would if it were conducting a Chevron step

- one analysis in the first instance.

Brand X thus directs us to return to our University of Ch icago decision to determine whether it was, in essence, a Che vron step

- one decision. In University of Chicago , we held that the IME cost calculation could include residents’ pure r esearch time based on our interpretation of the Affordable Care Act. After recognizing that the regulation in place b efore the Act’s passage create d a “muddle” surrounding the adjustment, we said that the Act “ provided us with a clear, statutory answer.” 618 F.3d at 744. We contrasted the 1983 start date for counting “all the time spent by an intern or resident in an approved medical

r esidency training program in non

- patient care activities” with the portion of the statu t e providing that pure research would not be counted beginning with fiscal year 2001. Id. at 745. We also compared Congress’s treatment of these e xpenses with its provis ion governing the teaching

- hospital adjustment for “direct graduate medical expenses.” The A ffordable Care Act provides that such expenses are reimbur sable for residents who engage in “non

- patient care activities, such as didactic conferences and seminars, but not including research not associated with the treatment or diagnosis of a particular patient.” Id. at 744 (quoting 42 U.S.C. § 1395ww(h)(4)(J)). We reasoned that C ongress would have included the explicit exclusion for pure research without qualificat ion if it had wanted pure research excluded from the IME calculation be fore 2001. We found ambiguous the statement that the decision to require the exclusion only10 No. 13

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p ost

- 2001 “shall not give rise to any inference as to how the law in effect prior to such dat e should be interpret ed.” Id. at 745. Finally, we explained that “ordinary parlance” would put research activities within the category of non

- patient care activities, making them reimbursable. Id. We therefore held that the pure rese arch time must be reimb ursed. Both parties have been able to cull isolated language from University of Chicago to support their positions on whether th at holding was based on the “unambigu ous terms of the statute, ” in the sense Brand X used that term. See 545 U.S. at 982. On the one hand, we used terms such as “clear” and “dispositive” when describing the statute, and we said that our holding was based on the “p lain language.” On the other hand , we said that the Hospital had “the stronger pos ition” on the statute’s meaning, and that the statutory d irective not to draw inferences about retroactivity was “u nclear at best.” That back

- and

- forth language , and the a cknowledgment that the directive on retroactivity was “u nclear at best,” does not sound like the type of decision that Bra nd X contemplated. A quote here and a quote there are ultimately less i mportant than the core holding of the case. W hile the Univers ity of Chicago court took care to consider the statute in reac hing its opinion, it did so at a time when it was without the benefit of a regulation based on the statute that it could evaluate. A statutory answer was thus re quired. We explici tly recognized ambiguity in some of the statute’s terms, such as the no

- inferences provision. In light of that analysis, we cannot say tha t the University of Chicago opinion held the statute to be sufficiently unambiguous as to divest the Secr e-No. 13

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tary of all power to promulgate regulations contrary to its holding. Considering the regulation as if we were conducting the first step of the Chevron inquiry on a blank slate confirms this conclusion. Foremost in that analysis would be the statute’s express delegation to the Secretary of the power to define “research activities” that are not compensable: [A]ll the time spent by an intern or resident in an a pproved medical residency training program in r esearch activities that are not associated with the treatment or diagnosis of a particular patient, as such time and activities are defined by the Secretary , shall not be counted[.] 42 U.S.C. § 1395ww(d)( 5)(B) (x)(III) (emphasis added). The
statute also expressly delegates the power to define compe nsable “non

- patient care activities”: [A]ll the time spent by an intern or resident in an a pproved medical residency training program in non

patient care activiti es, such as didactic conferences and seminars, as such time and activities are defined by the Secretary , that occurs in the hospital shall be counted toward the determination of full

- time equiv alency

... . Id. § 1395ww(d)(5)(B)(x)(II) (emphasis added). When a sta tute spec ifically authorizes an agency to define a term, there is no need to consider whether the term is ambiguous and thus left to agency dele gation. The logical assumption is that Congress thought there was work for the agency to do

— namely, to defi ne the covered time and activities. See Women Involved in Farm Econ. v. U.S. Dep’t of Agric. , 876 F.2d 994,12 No. 13

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1000

– 01 (D.C. Cir. 1989); see also Chevron , 467 U.S. at 843

– 44

. In the face of this explicit delegation of the power to define the term at the heart of this appeal, we can not say that the Secretary’s regulation fails as a matter of Chevron ’s first i nquiry. We also cannot ignore the ACA’s “no

- inferences” prov ision . It would be perverse to say that this provision directs

us to draw a clear inference that Congress meant to include pure research in such costs. It does no such thing. When Congress said “no inference” it meant exactly that; it did not need to bold

- face and capitalize the word “no” to get the
message across.
Rush insists that the “ plain language ” of a law still co ntrols the meaning of a term even when Congress expressly delegates authority to define the supposedly “plain” term to
an agency. We cannot accept this argument . T he plain la nguage of the statute delegate s definitional authority to the Secre tary; to excise that portion would give the statute a new and unintended meaning. I t would also undermine Co ngress’s ability to delegate the power to define terms and thrust the courts into a role that Congress meant to reserve for the agency. As the Supreme Court has said, once there is a delegation of authority, “a court may not substitute its own construction of a statutory provision for a reasonable inte rpretation made by the administrator of an agency.” Chevron
, 467 U.S. at 844. This is true even if the court would have reached a different reading. Id. at 843 n.11. Rush is essentially taking the position that even if Co ngress delegated authority to the Secretary, the Secretary’s i nterpretation fails under the second step of the Chevron i nquiry: “whether the agen cy’ s answer is based on a permiss i-No. 13

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ble construction of the statute.” Id. at 843. This is the que stion to which we now turn.

III Once we determine that Congress intended to delegate authority to defi ne a statutory term to an agency, we will give the agency’s definition controlling weight u nless it is based on an “impermissible construction of the statute

. ” Id

. Rush contends that any definition of “non

- patient care acti vities” that excludes pure resear ch is impermissible on these grounds and that the Secretary’s regulation must therefore yield.

As Rush sees it, the Affordable Care Act divides all activities into two and only two mutually exclusive categories : “patient care activities” a nd “non

- patient care activities.” These categories , it continues, must encompass all activities a resident undertakes in the h ospi tal. S ince both are compensable in the IME cost formula, it concludes, the Secretary has exceeded her authority by placing “non

patient care a ctivities” into a non

- existent third catego ry of h ospital

- based activities that are non

- compensable. We have a number of problems with this line of reasoning. First, if a hospital is entitled to be reimbursed for both “patient

- care activities” and “non

- patient care activities,” why bother with the adjectives? The statute would say just “activities.” Second, it is hard to square Rush’s position with Congress’s decision to place pure research outside the realm of compensable activities for the period beginning in 2001, when § 1395ww(d)(5)(B) goes into effect under § 5505(c)(3) of the Affordable Care Act. Third, the ACA did not foreclose the possibility of pure research ’s falling outside the compensable categories of activity between 1983 and 2001

.14 No. 13

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To t he contrary, it directed that no inference should be drawn about that period based on its post

- 2001 directive

. Affordable Care Act § 5505(c)(3), 124 Stat. 119, 661.

In fact , there are good reasons to think that Congress a ffirmatively wanted to grant the S ecretary the power to e xclude pure research time from the IME costs calculation for periods before 2001. As the Secretary explained when pro mulgating the new regulations, her view on “non

- patient care activities” is that the concept of “care” remains impor tant; the activities must relate to the treatment of patient s . For e xample, she explained
, “didactic conferences and seminars” can include “administrative rotation[s], which would i nclude resident training in the administrative aspects of me dical care such as practice management,” and may also “i nvolve presentations or discussions related to the treatment of current patients.” 75 Fed. Reg. 71,800, 72,144, 72,146 (Nov. 24, 2010). Moreover, didactic non

- patient care activities tend to take place “when an inte rn or resident is otherwise a ssigned to a rotation primarily requiring the provision of p atient care,” whereas pure research is usually conducted in large blocks of time when a resident is not expected to re nder care to patients. Id. at 72,145

– 46

. We can a ssume that this under standing of “non

- patient care activities” is not r equired under the statute, but it is ration al and consistent with the distinc tion Congress drew and the scope of its del egation to the Secretary.

Nor are we convinced that the distincti on between the statutory definition s of Graduate Medical Expenses and IME
costs compels the reading given in University of Chicago . R ecall that the statute governing Graduate Medical Expenses explicitly excluded pure research from its definition of “non

-No. 13

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pa tient care activities.” See 42 U.S.C. § 1395ww(h)(4)(J) (“...

non

- patient care activities, such as didactic conferences and seminars, but not including research not associated with the treatment or diagnosis of a particular patient”). In University of Chicag o we found this a meaningful variation from the IME provision, which did not contain an explicit exclusion of research from the definition of non

- patient care activities. That observation may have supported a different outcome, but it does not require one. Congress’s silence on the matter in the IME provision is not enough to s uggest that it was impermissible for the Secretary , exercising her statutory a uthority, to interpret the same term

— non

- patient care activ ities

— consistently in the two different p arts of the statute.
In short, this case is one in which the responsible age ncy’s interpretation of a statute should be afforded deference under Chevron . Confronted with an express delegation of a uthority to the agency over a question that has long occupie d that agency’s attention, and an explicit disclaimer by Co ngress that it meant to send any signal about the correct i nterpretation of the matter, we are not willing to override the
agen cy’s position

. Our colleagues in the Sixth Circuit came to the same co nclusion in Henry Ford Health Systems v. Depar tment of Health and Human Services , 654 F.3d 660 (6th Cir. 2011). The y distinguished University of Chicago on the ground that the inter vening re gulation
, 42 C.F.R. § 412.105, “converted a run

- of

- the

- mine statut ory interpretation case into a Chevron case.” Id. at 666. We agree with them.

IV Congress delegated authority to the Secretary to dete rmine whether residents’ pure research activities should be compensable as part of the IME cost formul a for the period16 No. 13

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fr om 1983

- 2001. T he Secretary’s determination that they should not is reasonable and entitled to deference. Our dec ision in University of Chicago
, which at the time represented our best interpretation of the statute before the regulation was on the books, is no obstacle to affording the Secretary’s regulation the deference that it is due. We therefore R EVERSE the judgment of the district court. With no factual issues r emaining to be decided, we R EMAND for the entry of su mmary judgment in favor of the Secretary.