PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

______________

No. 17-2088

______________

COMMONWEALTH OF PENNSYLVANIA

DEPARTMENT OF HUMAN SERVICES,

Appellant

v.

UNITED STATES OF AMERICA;

UNITED STATES DEPARTMENT OF HEALTH

AND HUMAN SERVICES; SECRETARY UNITED 

STATES DEPARTMENT OF

HEALTH AND HUMAN SERVICES

______________

On Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. Civ. No. 1-15-cv-01169)

Honorable Christopher C. Conner, District Judge

______________

Argued on March 12, 2018
2

BEFORE: JORDAN, KRAUSE, and GREENBERG, Circuit

Judges

(Opinion Filed: July 25, 2018)

______________

W. Scott Foster, Esq. [Argued]

Commonwealth of Pennsylvania

Department of Human Services

Office of General Counsel 

3rf Floor, Health & Welfare Building

Harrisburg, PA 171207

Jason W. Manne, Esq.

Manne Law Office

P.O. Box 81860

Pittsburgh, PA 15217

 Counsel for Appellant

Melissa A. Swauger, Esq.

Office of United States Attorney

228 Walnut Street, P.O. Box 11754

220 Federal Building and Courthouse

Harrisburg, PA 17108

Suzanne Yurk, Esq. [Argued]

United States Department of 

Health and Human Services

Office of the General Counsel

150 South Independence Mall West

The Public Ledger Building, Suite 418
3

Philadelphia, PA 19106

 Counsel for Appellees

______________

OPINION

______________

GREENBERG, Circuit Judge. 

I. INTRODUCTION

The Commonwealth of Pennsylvania Department of 

Human Services (“Pennsylvania”) appeals from a decision and

order of the District Court for the Middle District of 

Pennsylvania entered March 13, 2017, affirming a decision of 

the United States Department of Health and Human Services 

Departmental Appeals Board (“Appeals Board” or “Board”). 

For the following reasons, we will affirm the District Court’s 

order and thus will affirm the Board’s decision.

II. BACKGROUND

This case involves a reimbursement dispute between 

Pennsylvania and the Centers for Medicare & Medicaid Services 

(“CMS”) over the cost of a provider training program. From 

1996 to 2011 Pennsylvania claimed the costs of the training 

program as administrative costs under its Medicaid program. 

CMS reimbursed Pennsylvania for about $3 million of those 
4

costs, but, after an audit of Pennsylvania’s charges, it sought a 

return of the money on the ground that funds Pennsylvania spent 

on training programs were not reimbursable to the 

Commonwealth from the federal government as administrative 

costs under Medicaid. In reaching its decision, CMS relied 

heavily on a 1994 State Medicaid Director Letter (“1994 

SMDL” or “the Letter”), which explained that training program 

costs are excluded from the definition of reimbursable 

administrative costs under the Medicaid statute. The Appeals 

Board sustained CMS’s decision. Our review of the agency’s 

final decision is narrow. We limit our determination to deciding 

whether the Appeals Board’s decision complies with the 

Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701 et seq.1

A. Medicaid Statutory and Regulatory Framework

To begin, we set forth some background of the Medicaid 

program and its reimbursement provisions for state 

administrative costs. With the passage of Title XIX of the 

Social Security Act, Congress authorized the creation of the 

Medicaid program, 42 U.S.C. §§ 1396 et seq., “a cooperative 

federal-state program that provides medical care to needy 

individuals.” Douglas v. Indep. Living Ctr. of S. Cal., Inc., 565 

U.S. 606, 610, 132 S.Ct. 1204, 1208 (2012). States such as 

Pennsylvania that opt into the program must submit a plan that 

complies with the Medicaid statute and the Secretary of Health 

and Human Services’ (“HHS”) implementing regulations. 42 

 1 Of course, the appeal to us is from the order of the District 

Court but we state the question as if the appeal is from the 

Appeals Board’s decision because our review of the District 

Court summary judgment is de novo.
5

U.S.C. §§ 1396, 1396a; 42 C.F.R. § 430.15(a). Within HHS, 

CMS oversees state compliance with Medicaid requirements. 

42 C.F.R. § 430.15(b).

Under this cooperative program, the federal government 

reimburses a state for a portion of its expenditures for both 

“medical assistance” (i.e., medical care and services) and 

“administration” of the Medicaid program. 42 U.S.C. §§ 

1396b(a), 1396d(a). There is a statute establishing the amount 

of federal funding available to a state for such expenditures, 

known as Federal Financial Participation (“FFP”). See 42 

U.S.C. § 1396b(a). 

Section 1396b(a)(7) governs the administrative costs at 

issue in this case. Id. § 1396b(a)(7).2

 Specifically, § 

1396b(a)(7) sets the usual amount of FFP at 50 percent for costs 

that are “found necessary by the Secretary for the proper and 

efficient administration of the State plan.” That is, states can 

receive 50 cents on the dollar for costs claimed under their plans 

that meet the definition of administrative costs in § 1396b(a)(7). 

To implement this provision, HHS promulgated 42 C.F.R § 

433.15(b)(7), which included the statutory FFP percentage for 

reimbursement and a summary explanation of administrative 

costs. See 42 C.F.R. § 433.15(b)(7) (“All other activities the 

Secretary finds necessary for proper and efficient administration 

of the State plan: 50 percent.”). But neither the statute nor the 

implementing regulation defines “administration” or 

“necessary.”

 2 This case only involves claims for administrative costs under § 

1396b(a)(7). Pennsylvania does not claim that the training costs 

were allowable under other provisions of the Medicaid statute.
6

B. The 1994 SMDL

In 1994 the Health Care Financing Administration 

(“HCFA”), CMS’s predecessor, published the 1994 SMDL. 

After an influx of inappropriately claimed administrative 

activities, HCFA issued the Letter to “reiterate [its] longstanding policy on allowable administrative costs.” JA 109. 

The 1994 SMDL quotes § 1396b(a)(7)’s requirement that FFP is 

permitted only for amounts “found necessary by the Secretary 

for the proper and efficient administration of the State Plan.” JA

109. It then interprets that language to mean that “allowable 

claims . . . must be directly related to the administration of the 

Medicaid program.” JA 109. 

The 1994 SMDL gives examples of administrative costs 

that HCFA has allowed in the past. Among other items those 

costs include Medicaid eligibility determinations, Medicaid 

outreach, prior authorization for Medicaid services, and 

Medicaid Management Information System development and

operation.

The Letter also lists examples of expenses that are not 

regarded as administrative costs. Importantly for our purposes, 

it states that allowable costs do not include “the overhead costs 

of operating a provider facility, such as the supervision and 

training of providers.” JA 113. Besides such training costs, the 

Letter also excludes costs for medical services. It recites that 

administrative costs cannot be “the cost of providing a direct 

medical or remedial service,” or “an integral part or extension of 

a direct medical or remedial service. . . .” Id. It states that 

“[s]uch services are properly paid for as part of the payment for 
7

the medical or remedial service. Because Medicaid providers 

have agreed to accept service payment as payment in full, such 

providers may not claim an additional cost as [an] administrative 

cost under the State plan.” Id.

With this background in mind, we turn to this case.

C. Pennsylvania’s Restraint Reduction Initiative

In 1987 Congress amended Title XIX of the Social 

Security Act to include nursing home reforms. The amended 

Act provided that nursing home facilities could no longer use 

physical and chemical restraints on their residents for discipline 

or convenience reasons. 42 U.S.C. § 1396r(c)(1)(A)(ii). The 

regulations required nursing facilities to train their staff on these 

new care standards. 42 C.F.R. §§ 483.12(b)(3), 483.95(c). 

 

In response to these reforms, Pennsylvania created the 

Pennsylvania Restraint Reduction Initiative (“PARRI”). The 

stated objective of the program which began in 1996 was “to 

train long term care facility staff in the use of alternative 

measures to physical and chemical restraints.” JA 275, 298. 

Pennsylvania contracted with Kendal Outreach LLC (“Kendal”) 

to supply the provider training. Kendal began by training 

nursing home staff at four training sites but expanded the 

number of sites to twenty six across the state over the next few 

years. 

At all relevant times Pennsylvania paid for the Kendal 

contract through various funding methods and made claims to 

CMS to reimburse it for the cost of the contract. Pennsylvania 

consistently claimed the contract costs as Medicaid program 
8

administrative expenses. But it did so without expressly 

advising CMS of what it was doing for when it completed the 

CMS form to report administrative costs, it did not specifically 

itemize the PARRI payments. Instead, it lumped those 

payments into a larger amount that it claimed as “Other 

Financial Participation.” JA 249. From 1996 to 2011, CMS 

reimbursed Pennsylvania a total of $3,001,536 for the PARRI 

program. 

Pennsylvania’s claims for administrative costs eventually 

came to the attention of the HHS Office of Inspector General 

(“OIG”). From 2011 to 2012 the OIG conducted an audit of 

Pennsylvania’s claims for Medicaid administrative costs for 

provider training under PARRI. According to OIG, the audit 

was initiated because Pennsylvania relied on the CMS form’s 

“Other Financial Participation” section to claim large sums of 

FFP. For example, from 2010 to 2011, the OIG audit notes that 

Pennsylvania claimed $924 million in administrative costs, of 

which $654 million were unidentified costs lumped together as 

“Other Financial Participation.” JA 265. OIG also noted that it 

previously identified two other Pennsylvania programs that 

failed to comply with the administrative cost requirements under 

the Medicaid program. In the audit, OIG concluded that the 

PARRI costs were not administrative costs, but rather “were for 

training nursing home provider staff to improve the condition of 

nursing home residents.” JA 266. The audit report stated that 

“CMS explicitly prohibits claiming costs for provider training, 

such as that supplied by Kendal for the Initiative, as 

administrative costs, because they are not for the proper and 

efficient administration of the [Medicaid] State plan.” Id. 

(quotation marks omitted). The OIG audit thus recommended 

that CMS require Pennsylvania to refund the $3,001,536 and 
9

discontinue all future claims for PARRI costs. 

 

In June 2014 CMS sent a letter to Pennsylvania notifying 

it of its decision to disallow the $3,001,536 in FFP. CMS 

explained the administrative cost requirements under § 

1396b(a)(7) and the 1994 SMDL and adopted the OIG’s 

findings. CMS concluded that “the costs of the Initiative do not 

constitute general administrative costs of the Medicaid program. 

Rather, these costs constitute nursing facility overhead costs 

[because] the training was intended to support and augment the 

in-service training for nursing facilities and to enhance the 

quality of service delivery at nursing facilities.” JA 76.

D. Procedural Background

Pennsylvania appealed CMS’s disallowance decision to 

the HHS Appeals Board, which affirmed the decision in a 

written opinion. At the outset, the Appeals Board noted that 

Pennsylvania made two key factual concessions material to this 

dispute which thus are material to this appeal: Pennsylvania did 

not dispute receiving the 1994 SMDL before it created PARRI, 

and did “not deny that the disallowed claims were for the costs 

of training nursing facility staff. . . .” JA 26.

 

The Appeals Board then found that the PARRI costs 

were disallowable. The Board determined that the 1994 SMDL 

expressly prohibits states from claiming provider training as a 

cost of administering the plan. The Board also stated that “the 

prohibition in the 1994 SMDL on states claiming provider 

training and other medical assistance costs as costs of 

administering their Medicaid state plans was not a new policy.” 

JA 27. In support of this observation, the Board cited two of its 
10

pre-1994-SMDL decisions, New York State Department of 

Social Services, DAB No. 1146 (1990), and New York State 

Department of Social Services, DAB No. 1252 (1991), in which 

the Board held that provider training costs were not 

administrative costs under § 1396b.

The Appeals Board further stated that although states 

cannot claim training costs as administrative costs, CMS may be 

able to reimburse states for training costs in other ways. 

Specifically, the Board noted that states can recover provider 

training costs through provider reimbursements rates for medical 

assistance. The Board explained that there is a twofold rationale 

for this authorization. First, when the state claims training costs 

through the rate system, it must ensure that such costs are 

reasonable and adequate under the relevant regulations. Second, 

the prohibition on classifying direct services as administrative 

costs “is necessary to prevent duplicate program payment for the 

same activities.” JA 30 (internal citations omitted). Thus, the 

Board stated that Pennsylvania may have been able to use the 

rate system for reimbursement of the training costs, but it had 

not done so; and it could not circumvent that treatment by 

separately claiming training costs as administrative expenses.

 

Finally, the Appeals Board rejected Pennsylvania’s 

arguments that (1) the 1994 SMDL is an invalid substantive 

rule, (2) PARRI training cannot be disallowed on the basis of 

the 1994 SMDL because the training costs were not overhead 

costs, (3) Pennsylvania is entitled to discovery from CMS on 

whether it previously agreed to reimburse the PARRI costs as 

administrative costs, and (4) the HHS Grants Administration 
11

Manual (“GAM”) limits the disallowance period to three years.3

In 2015 Pennsylvania challenged the Appeals Board’s 

decision in the District Court, asserting that the disallowance 

violated the APA. On the defendants’ motion the Court granted 

summary judgment against Pennsylvania, holding that the 

administrative record supported the agency action and was 

consistent with the APA standard of review. Pennsylvania 

Dep’t of Human Servs. v. U.S. Dep’t of Health & Human 

Servs., 241 F. Supp. 3d 506, 517 (M.D. Pa. 2017). Specifically, 

the Court found that (1) the 1994 SMDL was not a substantive 

rule subject to APA public notice and comment but rather was 

an interpretive rule not so subject; (2) Skidmore v. Swift & Co., 

323 U.S. 134, 65 S.Ct. 161 (1944) required the Court to give the 

Letter judicial deference; and (3) there was no basis under the 

APA to overturn the Board’s conclusions that (a) the 1994 

SMDL barred reimbursement of PARRI costs, (b) the 

disallowance period was not limited to three years, and (c) 

Pennsylvania was not entitled to additional discovery. 

Pennsylvania Dep’t of Human Servs., 241 F. Supp. 3d at 514-

17. The Court also denied Pennsylvania’s request to take 

judicial notice of a 2015 CMS Question and Answer document 

published online after the Board issued its decision. Id. at 511-

12.

Pennsylvania timely appealed from the District Court’s 

final order. See Fed. R. App. P. 4(a)(1)(B). 

 3 Pennsylvania also argued unsuccessfully that other CMS 

issuances and regulations permit FFP for provider training costs 

contrary to the 1994 SMDL, but with limited exception 

Pennsylvania does not raise those arguments before us now.
12

III. STATEMENT OF JURISDICTION AND STANDARD 

OF REVIEW

The District Court had jurisdiction to review the decision 

under 42 U.S.C. § 1316(e)(2)(C), 5 U.S.C. §§ 701-706, and 28 

U.S.C. 1331. We have appellate jurisdiction under 28 U.S.C. § 

1291. 

“We apply de novo review to a district court’s grant of 

summary judgment in a case brought under the APA, and in turn 

apply the applicable standard of review to the underlying agency 

decision.” Pennsylvania, Dep’t of Pub. Welfare v. Sebelius, 674 

F.3d 139, 146 (3d Cir. 2012) (internal quotations omitted). 

Under the APA, courts must set aside agency action that is 

“arbitrary, capricious, an abuse of discretion or otherwise not in 

accordance with law,” or is conducted “without observance of 

procedure required by law. . . .” 5 U.S.C. § 706(2)(A) & (D).

Under “this narrow standard of review, we insist that an 

agency examine the relevant data and articulate a satisfactory 

explanation for its action.” F.C.C. v. Fox Television Stations, 

Inc., 556 U.S. 502, 513, 129 S.Ct. 1800, 1810 (2009) (internal 

citation and quotation marks omitted). Agency action will be 

arbitrary and capricious “if the agency has relied on factors 

which Congress has not intended it to consider, entirely failed to 

consider an important aspect of the problem, offered an 

explanation for its decision that runs counter to the evidence 

before the agency, or is so implausible that it could not be 

ascribed to a difference in view or the product of agency 

expertise.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State 
13

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2867 

(1983).4

IV. DISCUSSION

Pennsylvania makes six challenges to the disallowance 

decision and thus to the summary judgment. It argues that (1) 

the 1994 SMDL is an invalid substantive rule, (2) the 1994 

SMDL’s text does not exclude PARRI training costs from 

reimbursement, (3) the 1994 SMDL imposes an ambiguous 

condition on a federal grant, (4) the Appeals Board abused its 

discretion in denying discovery, (5) the HHS Grants 

Administration Manual limits the disallowance period to three 

years, and (6) the District Court should have taken judicial 

notice of the 2015 CMS Question and Answer document. We 

will address each argument in turn and explain why we find 

none persuasive.

A. The 1994 SMDL Is an Interpretive Rule, Not a 

 Legislative Rule

Pennsylvania’s first argument can be regarded as 

procedural. Pennsylvania challenges the use of the 1994 SMDL, 

 4 Pennsylvania incorrectly asserts that our review of many of its 

arguments is plenary, citing Beta Spawn, Inc. v. FFE 

Transportation Services, Inc., 250 F.3d 218, 223 (3d Cir. 2001), 

but that case did not involve an agency action or the APA. As 

such, even though our review of the summary judgment is de 

novo, the standard APA judicial review standards which are 

more deferential govern this case.
14

arguing that the agency’s reliance on the Letter violated the 

APA because the Letter was not adopted after compliance with 

the notice and comment procedures for the adoption of a rule 

under the APA. See 5 U.S.C. § 553(b), (c). Appellees respond 

that the 1994 SMDL is an interpretive rule, not subject to a 

requirement for public notice and comment. See id. § 

553(b)(A). Though we have determined that other HCFA state 

Medicaid director letters were interpretive rules, see Elizabeth 

Blackwell Health Ctr. for Women v. Knoll, 61 F.3d 170, 181 

(3d Cir. 1995), we never have determined whether the 1994 

SMDL is an interpretive rule. Now, however, in this matter of 

first impression on this point, we conclude that the 1994 SMDL 

is interpretive and is not a substantive or legislative rule. 

The APA requirement that an agency rule go through 

notice and comment procedures applies only to so-called 

“legislative” or “substantive” rules, not to “interpretive” rules. 5 

U.S.C. § 553(b), (c). Though it is not always easy to distinguish 

between the two types of rules, we have developed guiding 

principles to aid in distinguishing them. Legislative rules, which 

have the force of law, “impose new duties upon the regulated 

party.” Chao v. Rothermel, 327 F.3d 223, 227 (3d Cir. 2003). 

‘“Interpretive’ rules, on the other hand, seek only to interpret 

language already in properly issued regulations.” Id. (citation 

omitted); Elizabeth Blackwell, 61 F.3d at 181 (deeming HCFA’s 

letter to state Medicaid directors that interpreted Medicaid 

statute to be interpretive guidance because it “clarifies and 

explains existing law”). Interpretive rules do not add language 

to or amend language in the statute, Chao, 327 F.3d at 227, but 

“simply state[] what the administrative agency thinks the statute 

means, and only remind[] affected parties of existing duties,” 

SBC Inc. v. F.C.C., 414 F.3d 486, 498 (3d Cir. 2005) (quoting 
15

Fertilizer Inst. v. U.S. E.P.A., 935 F.2d 1303, 1307 (D.C. Cir. 

1991)). 

Based on these principles, the 1994 SMDL is an 

interpretive rule. As stated above, the Letter explains § 

1396b(a)(7)’s statutory requirement that costs must be 

“necessary . . . for the proper and efficient administration of the 

State plan.” JA 109, 112 (emphasis removed). It “reiterates” 

that CMS interprets the statutory requirement to mean the costs 

“must be directly related to the administration of the Medicaid 

program.” JA 109, 112. It then explains how that policy works 

“in several particular situations,” JA 112, providing a nonexhaustive list of costs that do and do not meet CMS’s 

interpretation of the statute including the exclusion of training 

costs.

The 1994 SMDL thus qualifies as an interpretive rule on 

several levels. The Letter represents what the Secretary “thinks 

[§ 1396b(a)(7)] means,” see SBC Inc., 414 F.3d at 498, i.e., that 

costs are “necessary” for plan administration when they are 

“directly related” to plan administration. The Letter also 

“clarifies and explains” the statute, Elizabeth Blackwell, 61 F.3d 

at 181, by describing types of costs that are not “directly 

related,” such as the cost of providing direct medical services, 

see JA 112-13. These features indicate the 1994 SMDL is an 

interpretive rule. 

The Letter’s discussion of training costs, the particular 

portion of the Letter that Pennsylvania challenges, reinforces 

this conclusion. This discussion about training costs provides an 

example of how the agency applies its rule in practice, a 

treatment which we have held is indicative of an interpretive 
16

rule. See Bailey v. Sullivan, 885 F.2d 52, 62 (3d Cir. 1989) 

(holding social security administration publication that “contains 

merely examples of the application of the [at-issue] regulations” 

was interpretive rule); see also L.A. Closeout, Inc. v. Dep’t of 

Homeland Sec., 513 F.3d 940, 942 (9th Cir. 2008) (per curiam) 

(holding agency memo “simply provided the agency’s 

construction of the regulation in a particular factual 

circumstance. As such, notice and comment procedures were 

not required”). Finally, inasmuch as the purpose of the Letter is 

to reiterate the agency position, the Letter expressly “reminds 

affected parties” of these interpretations in light of states’ past 

misapplication of the rule. See SBC Inc., 414 F.3d at 498. 

Accordingly, the 1994 SMDL is an interpretive rule not subject 

to the APA’s notice and comment procedures.5

 5

The Appeals Board did not address the question of whether the 

1994 SMDL is an interpretive or substantive rule. Instead, it 

held that “the 1994 SMDL was binding on Pennsylvania in any 

event.” JA 32. The Board explained that the 1994 SMDL is 

entitled to deference because it is a reasonable interpretation of 

the ambiguous definition of administrative costs in § 

1396b(a)(7) and Pennsylvania was on notice of that 

interpretation. JA 32. We question the Board’s reasoning. If 

the 1994 SMDL Letter were an improperly promulgated 

legislative rule, the Letter would be invalid—thus the agency 

could not have based the disallowance on it. See State of 

Alaska v. U.S. Dep’t of Transp., 868 F.2d 441, 445 (D.C. Cir. 

1989) (deeming legislative rule “invalid by virtue of the 

[agency’s] failure to employ notice-and-comment procedures”); 

see also Elizabeth Blackwell, 61 F.3d at 188 (Nygaard, J., 

dissenting) (Legislative rules promulgated without notice and 

comment “are not true legislative rules at all, but rather 
17

We realize that Pennsylvania contends that our reading of 

the Letter contradicts our prior case law. Pennsylvania argues 

that Federal Labor Relations Authority v. United States 

Department of the Navy, 966 F.2d 747 (3d Cir. 1992) (en banc) 

(hereafter “FLRA”) is “closely on point” and supports its claim 

that the Letter is a legislative rule. Pennsylvania Br. 17. But 

FLRA does not offer support for its contention. Pennsylvania 

 

examples of invalid spurious rules. . . .”). Nonetheless, because 

we conclude that the 1994 SMDL is an interpretive rule, and 

because we agree with the Board’s conclusion that the 1994 

SMDL reiterated longstanding agency policy, we may affirm its 

decision.

We note that, while we question the agency’s reasoning, 

our decision to affirm comports with the Supreme Court’s 

Chenery doctrine. Under the Chenery doctrine, “a reviewing 

court, in dealing with a determination or judgment which an 

administrative agency alone is authorized to make, must judge 

the propriety of such action solely by the grounds invoked by the 

agency.” S.E.C. v. Chenery Corp., 332 U.S. 194, 196, 67 S.Ct. 

1575, 1577 (1947). But the issue here falls under a recognized 

exception to the doctrine. “Chenery reversal is not necessary 

where, as here, the agency has come to a conclusion to which it 

was bound to come as a matter of law, albeit for the wrong 

reason, and where, as here, the agency’s incorrect reasoning was 

confined to that discrete question of law and played no part in its 

discretionary determination.” United Video, Inc. v. F.C.C., 890 

F.2d 1173, 1190 (D.C. Cir. 1989). We therefore may uphold the 

agency’s correct conclusion without endorsing its reasoning.
18

misreads that case, suggesting that in FLRA we invalidated an 

Office of Personnel Management (“OPM”) interpretation of the 

word “necessary” because it was a legislative rule that was 

designed to have a measurable impact. Pennsylvania then likens 

the circumstances in FLRA to those here, because the agencies 

in both situations interpreted the word “necessary.” Our holding 

in FLRA was quite different, however, because in that case we 

assumed, without deciding, that OPM’s interpretation was an 

interpretive rule because the parties and “[o]ther courts of 

appeals to consider the issue [had] also cast the rule as 

interpretive.” Id. at 762. We then rejected the agency’s 

interpretation for a reason unrelated to this case: because the 

OPM failed to publish it in a meaningful way. Id. at 764. 

FLRA accordingly does not support Pennsylvania’s erroneous 

argument that the 1994 SMDL is an invalid substantive rule.

In reaching our result, we have taken into account the 

recent decision of the United States Court of Appeals for the 

First Circuit in New Hampshire Hospital Ass’n v. Azar, 887 

F.3d 62 (1st Cir. 2018), that was decided after the argument in 

this case and on which Pennsylvania relies. There, the court 

held that a CMS answer in a Frequently-Asked-Questions 

(“FAQ”) document was an invalid legislative rule. The FAQ 

stated, in essence, that hospitals which serve Medicaid patients 

must reduce their reimbursement claims for those services by 

any amount they already received from Medicare and private 

insurance. Two main features led the court to find the FAQ a 

legislative rule: the absence of a statutory standard for the 

Secretary’s action and the FAQ’s bare language. Neither feature 

appears in our case. 
19

 First, the statutes underlying the 1994 SMDL and the 

FAQ are different. New Hampshire Hospital does not concern § 

1396b(a)(7) or administrative costs. Rather it involves 42 

U.S.C. § 1396r-4(g)(1), which deals with caps on 

reimbursements to hospitals for medical services to Medicaid 

patients. Specifically, that statute provides that reimbursements 

to hospitals for Medicaid services cannot exceed the hospital’s 

“costs incurred” in furnishing those services. But the statute 

leaves it to the Secretary to decide what payments must be offset 

from “costs incurred.” 42 U.S.C. § 1396r-4(g)(1)(A) (“A 

payment adjustment during a fiscal year shall not . . . exceed[ ] 

the costs incurred during the year of furnishing hospital services 

[]as determined by the Secretary. . . .”). The court found it 

significant that the statute lacked any standard for what “costs 

incurred” means and left it to the Secretary to fill that gap. It 

stated that this “textual silence” suggests that any agency rule 

implementing the statute is likely substantive, reasoning that, 

“[w]here Congress has specifically declined to create a standard, 

the [agency] cannot claim its implementing rule is an 

interpretation of the statute.” New Hampshire Hosp., 887 F.3d 

at 71 (alteration in original) (quoting Mendoza v. Perez, 754 

F.3d 1002, 1022 (D.C. Cir. 2014)).

 Unlike § 1396r-4(g)(1), which does not provide a 

standard to guide the Secretary in implementing the “costs 

incurred” rule, § 1396b(a)(7) does provide a meaningful 

standard for the administrative expenses rule. It instructs the 

Secretary that administrative expenses are amounts “found 

necessary by the Secretary for the proper and efficient 

administration of the State plan.” So, Congress has not granted 

the Secretary carte blanche authority to fill in a statutory gap as 

it did in the statute involved in New Hampshire Hospital; rather, 
20

it gave the Secretary a rule (administrative costs under § 

1396b(a)(7) are reimbursed at 50%) and provided a standard 

(administrative costs are costs “necessary . . . for the proper and 

efficient administration of the State plan”) to help the Secretary 

apply that rule in practice. Thus, because § 1396b(a)(7) contains

a meaningful standard, the Secretary here can claim that the 

1994 SMDL is an interpretation of the statute.

 The second feature of New Hampshire Hospital, the bare 

language, is also absent from our case. There, the court 

expressed concern with the language used in the 

FAQ. Specifically, the FAQ stated that “costs incurred” must

exclude payments hospitals receive from Medicare and private 

insurance. In reaching this conclusion, however, the FAQ 

provided no interpretation of the statute or regulation, and did 

not explain how the new set-offs flowed from those 

authorities. The Secretary merely noted the statute’s textual 

silence and asserted the new rule. The court noted that “such an 

announcement, without reasoned interpretive explanation, looks 

to us more as if the Secretary is using delegated power to 

announce a new policy out of whole cloth, rather than engaging 

in an interpretive exercise.” 887 F.3d at 72. Here, however, the 

1994 SMDL does link its rule to the statutory and regulatory 

language. It charts the statutory and regulatory standards, 

discusses how states have misinterpreted § 1396b(a)(7) in the 

past, and explains why various expenditures like training costs 

are more like medical services and overhead than administrative 

work and thus cannot be “necessary . . . for the proper and 

efficient administration of the State plan.” As such, the 

Secretary did engage in an interpretive exercise when crafting 

the 1994 SMDL.
21

As a side note, we see some irony in Pennsylvania’s 

reliance on New Hampshire Hospital. If anything, the decision 

cautions us to look out for substantive rules masquerading as 

agency interpretations in online question-and-answer 

documents. Yet, as we will see later, Pennsylvania contends 

that we give a similar CMS document from 2015 controlling 

weight over the 1994 SMDL. While we take no position on the 

validity of the 2015 CMS document, we note that New 

Hampshire Hospital offers no aid to Pennsylvania on that point 

either.

In sum, New Hampshire Hospital does not change our 

conclusion that the 1994 SMDL is a valid interpretive rule.

B. The 1994 SMDL’s Application to PARRI Training

 Costs

Second, Pennsylvania challenges the agency’s application 

of the 1994 SMDL to exclude reimbursement for PARRI 

training costs as overhead expenses.6

 The 1994 SMDL 

 6 Pennsylvania does not make a substantial challenge to the 

District Court’s grant of Skidmore deference to the 1994 SMDL. 

The Court granted Skidmore deference to the Letter because the 

terms “necessary” and “administration” were undefined in the 

statute and were ambiguous; Congress delegated the 

interpretation of those words to the Secretary; and although 

interpretive guidelines like the 1994 SMDL do not carry the 

force of law, the 1994 SMDL was persuasive because it 

“reflect[ed] a reasonable and considered interpretation” of the 

statute. Pennsylvania Dep’t of Human Servs., 241 F. Supp. 3d 

at 513-14. In response, Pennsylvania argues only that the Court 
22

excluded from administrative costs all “overhead costs of 

operating a provider facility such as the supervision and training 

of providers.” JA 113. 

Pennsylvania claims that PARRI training costs cannot be 

overhead costs. Specifically, Pennsylvania argues that overhead 

costs are defined as “necessary costs incurred by a company in 

its operations which cannot be easily identified with any 

individual product,” relying on a definition of “overhead” from 

an out-of-circuit case about a union dispute published over sixty 

years ago. Pennsylvania Br. 18 (quoting United Elec., Radio. & 

Mach. Workers of Am. v. Oliver Corp., 205 F.2d 376, 387 (8th 

Cir. 1953)). Based on that definition, Pennsylvania claims that 

the PARRI training costs cannot be regarded as overhead 

expenditures because PARRI training is not a cost nursing home 

providers “must incur to operate their facilities,” and nursing 

home providers did not pay for the training. Pennsylvania Br. 

18-19.

 

As a threshold matter on this overhead issue, we note that 

we question whether we need to decide whether the Letter’s 

discussion of overhead captures PARRI costs because the 

Appeals Board provided separate support for its disallowance. 

The Board stated that provider training is disallowable under 

other portions of the 1994 SMDL, even without the overhead 

 

should not have granted any deference because the 1994 SMDL 

does permit reimbursement of training costs as administrative 

costs. Pennsylvania Br. 18. As we will explain in this section, 

that argument is meritless, the 1994 SMDL does apply to 

PARRI costs, and there is no reason to disturb the Court’s 

application of Skidmore deference to the Letter.
23

costs language. Given the language of § 1396b, 42 C.F.R. § 

433.15, and the prior Board decisions, the Board found that 

“exclusion of provider training from Medicaid administration 

reflects the longstanding principle . . . that a state may not claim 

costs of medical assistance rendered by providers as the state 

agency’s Medicaid administrative cost.” JA 31. Thus, the 

finding that provider training is related to medical assistance and 

therefore cannot be an administrative cost is a sufficient basis 

for us to uphold the decision. 

Nonetheless we will reach Pennsylvania’s argument. We 

conclude that the Appeals Board considered Pennsylvania’s 

arguments and rendered a plausible decision rejecting them. See

Motor Vehicle Mfrs. Ass’n of U.S., 463 U.S. at 43, 103 S.Ct. at 

2867. The Board gave no weight to Pennsylvania’s narrow 

definition of overhead. We, too, see no reason to read 

“overhead” to mean costs a company “must” incur. Indeed, as 

the term is generally understood, “overhead” can include all

kinds of costs, both necessary and permissive. See

OVERHEAD, Black’s Law Dictionary (10th ed. 2014) (making 

no mention of costs that must be incurred). Further, were we to 

agree that Pennsylvania’s definition was more on point than the 

Secretary’s, we still would side with the Secretary because the 

Secretary bears responsibility for making the overhead 

determination. See Elizabeth Blackwell, 61 F.3d at 181 

(“[p]erhaps appreciating the complexity of what it had wrought, 

Congress conferred on the Secretary exceptionally broad 

authority to prescribe standards for applying certain sections of 

the [Medicaid] Act.”) (quoting Schweiker v. Gray Panthers, 453 

U.S. 34, 43, 101 S.Ct. 2633, 2640 (1981)) (alterations in 

original). Thus, because the Board gave a plausible reason to 

reject Pennsylvania’s narrow definition of overhead, and 
24

because the Secretary has broad authority to define overhead, we 

reject Pennsylvania’s argument that the 1994 SMDL excludes 

only provider training that a company must incur.

We also reject Pennsylvania’s argument that PARRI 

training costs are allowable because nursing home providers did 

not pay for them. The argument goes as follows: providers pay 

for overhead costs, but the state, not the provider, paid for the 

training, so the cost of the training cannot be an overhead cost. 

But that argument misses the point. Had Pennsylvania 

structured the PARRI payments correctly, the providers would 

have paid for the training. And CMS could have reimbursed 

Pennsylvania for those costs if Pennsylvania factored the 

amount into its rate-setting scheme instead of claiming the 

amount as administrative costs.

The 1994 SMDL and the Appeals Board explained why 

this is the case. The Letter explains that “[s]uch services are 

properly paid for as part of the payment made for the medical or 

remedial service.” JA 113. It states that “[b]ecause Medicaid 

providers have agreed to accept service payment as payment in 

full, such providers may not claim an additional cost as [an] 

administrative cost under the State plan.” Id. The Board further 

explained, as noted above, that this payment scheme forces 

states to ensure that the costs are reasonable and adequate, and 

prevents duplicative payments to states and providers for the 

same activity. So, even accepting Pennsylvania’s claim that 

overhead must be paid by the provider, its argument still fails 

because the provider should have paid the costs for the PARRI 

training. 

But Pennsylvania contends that CMS encouraged 
25

Pennsylvania to create the PARRI program, so it argues that 

CMS cannot now say that Pennsylvania should not have paid for 

the program. We disagree. CMS may well have encouraged 

Pennsylvania to create the training program. Indeed, it makes 

sense that CMS would have done so. The program ensured 

faster and smoother rolling-out of the nursing home reforms. 

But it is wrong to say that CMS’s support for the program 

conflicts with its opposition to the state paying for the program 

directly. Those issues are different and reconcilable. In other 

words, CMS did encourage Pennsylvania to create the PARRI 

program, but there is no evidence that CMS encouraged 

Pennsylvania to pay for the training program directly and then 

claim those payments as administrative costs. Rather, based on 

the record, CMS showed no support for the kind of payment 

scheme Pennsylvania employed. It instead showed support for 

the rate-setting scheme where providers paid for the training 

themselves and then the states factored those payments into the 

rate-setting calculation. Thus, the fact that CMS encouraged 

Pennsylvania to create the training program does not make its 

disallowance of the PARRI costs arbitrary and capricious.

In fact, the Appeals Board’s position that Pennsylvania 

should have used the rate-setting scheme to have obtained 

reimbursement is consistent with its prior treatment of training 

costs. For example, in New York State Department of Social 

Services, DAB No. 1146 (1990), the state, like Pennsylvania 

here, claimed FFP for the cost of contracts to train nursing home 

employees. HCFA, like CMS here, disallowed the payments 

because they were not necessary for the proper and efficient 

administration of the state plan. On appeal the Board affirmed, 

finding that the costs were related to the services provided by 

provider facilities, and explained why the rate-setting 
26

methodology was the best way, in the agency’s view, to 

reimburse such costs. It further rejected the state’s argument 

that “as a practical matter, it had no other way to recover these 

costs,” reasoning that the state’s failure to structure its scheme 

properly does not allow the state to “change the character of the 

expenditure from a services cost to an administrative cost.” Id. 

at 6-7. This prior decision reinforces the Board’s decision in 

this case that providers must pay for their own training costs.

Pennsylvania argues that we should not give these prior 

decisions any weight. It asserts that the Appeals Board does not 

have authority to create formal policy for the Secretary, so we 

should not consider those prior decisions. But even if the 

Board’s decisions do not constitute formal policy, they are 

helpful because they show that the agency had a consistent 

position on training costs. Cf. Nazareth Hosp. v. Sec’y U.S. 

Dep’t of Health & Human Servs., 747 F.3d 172, 179 (3d Cir. 

2014) (“Agency action is arbitrary and capricious if the agency 

offers insufficient reasons for treating similar situations 

differently.”).

In sum, under our narrow review, we will not disturb the 

agency’s finding that PARRI costs are not reimbursable as 

administrative costs. The Appeals Board determined that 

PARRI training costs are excludable provider training costs 

under the Medicaid statute as reflected in the Letter; that such 

training costs should be paid by providers and factored into the 

state’s rate-setting calculations; that two reasons exist for the 

rate-setting payment calculations; that those reasons comport 

with the Board’s prior treatment of the same issue; and 

Pennsylvania gave no reason why those bases are unsound. As 

such, the APA counsels us to defer to the agency’s decision.
27

C. The 1994 SMDL Is Not an Ambiguous Condition 

 on a Federal Grant

Pennsylvania next argues that, even if we read the 1994 

SMDL to disallow PARRI costs, the disallowance violates 

constitutional spending clause principles. Pennsylvania asserts 

that the 1994 SMDL’s discussion of training costs and overhead 

costs is ambiguous, and therefore the Letter failed to provide 

sufficient notice that training expenses were disallowable. 

Consequently, Pennsylvania claims, the disallowance is invalid. 

In support, Pennsylvania cites Pennhurst State School & 

Hosp. v. Halderman, 451 U.S. 1, 101 S.Ct. 1531 (1981) and its 

progeny, which upheld Congress’ power to attach conditions to

federal grants to states so long as the conditions are stated 

unambiguously. Id. at 17, 101 S.Ct. at 1540. To determine 

whether a statute satisfies this clarity requirement, courts “ask 

whether . . . a state official would clearly understand . . . the 

obligations” of the law, and “whether the [statute] furnishes 

clear notice regarding the liability at issue in [the] case.” 

Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 

291, 296, 126 S.Ct. 2455, 2458 (2006). Because a conditional 

grant is akin to a contract, recipients of federal funds should 

accept the attached conditions “voluntarily and knowingly.” 

Pennhurst, 451 U.S. at 17, 101 S.Ct. at 1540. “[W]e must view 

the [Medicaid statute] from the perspective of a state official 

who is engaged in the process of deciding whether the State 

should accept [Medicaid] funds and the obligations that go with 

those funds.” Arlington, 548 U.S. at 296, 126 S.Ct. at 2459.

We reject Pennsylvania’s argument. We note first that 

the argument is narrow. Pennsylvania does not claim that the 
28

Medicaid statute—§ 1396b(a)(7)—or the implementing 

regulations set forth ambiguous conditions of a federal grant. It 

levels that claim against only the 1994 SMDL. With that narrow 

scope in mind, Pennsylvania’s theory is shaky. Pennsylvania 

provides no case—nor are we aware of one—where a court 

invalidated a spending condition based on an agency’s position 

in interpretive guidance. Nor do we know of such an 

invalidation where the plaintiff challenges the guidance but 

takes no issue with the controlling statute and regulations. 

In any event, even if Pennsylvania had case law support, 

its theory would fail. We must consider Pennsylvania’s claim 

from the perspective of a state official. Arlington, 548 U.S. at 

296, 126 S.Ct. at 2459. Pennsylvania does not challenge either 

the statute or the regulation. Consequently, Pennsylvania does 

not dispute the circumstance that the official knew the state 

could claim administrative costs that are necessary for the 

proper administration of the plan, 42 U.S.C. § 1396b(a)(7), and 

also knew that determination was left to the sole discretion of 

the Secretary of HHS, id.; 42 C.F.R. § 433.15(b)(7). 

Nonetheless, Pennsylvania claims that the Letter is an 

ambiguous condition on a grant because the official would not 

have known that the Secretary could deem training costs to be 

disallowable overhead costs in the 1994 SMDL. But that 

argument makes little sense. If the official knew the applicable 

test and knew the Secretary had discretion to apply the test; and 

the Secretary applied the test reasonably, as we conclude the 

Secretary did here, then the official cannot claim not to have 

been on notice that the disallowance was possible. 

At bottom, Pennsylvania’s position is merely that it did 

not know for sure that the Secretary would deny the PARRI 
29

costs until it received CMS’s disallowance letter. But that 

circumstance does not make the Secretary’s decision to exclude 

the training costs an ambiguous condition of funding. Rather, as 

is true when an agency reasonably exercises discretion, there 

always was a possibility that the Secretary would make the 

decision reached here. And Pennsylvania was on notice of that 

possibility when it accepted the Medicaid funds. As such, we 

reject Pennsylvania’s argument that it lacked notice of a 

condition of receiving the Medicaid funds. 

D. The Denial of Discovery Was Not Abuse of 

 Discretion

Fourth, Pennsylvania claims that the Appeals Board 

abused its discretion when it denied it the opportunity for 

discovery. Under HHS regulations, the Board may authorize 

discovery when it determines that it is appropriate to do so. 45 

C.F.R. § 16.9 (“The Board may, at the time it acknowledges an 

appeal or at any appropriate later point, request additional 

documents or information . . . and take such other steps as the 

Board determines appropriate to develop a prompt, sound 

decision.”). Here, Pennsylvania requested the opportunity for 

discovery to determine if CMS had promised to pay the state for 

the PARRI costs. Pennsylvania claimed that it has purged any 

such documents, if they existed, pursuant to its record retention 

policy. The Board denied the motion as speculative and lacking 

any factual basis. We agree because Pennsylvania did not 

provide a reason to believe CMS made that promise. 

Pennsylvania claims that it should have been allowed the 

opportunity for discovery for two reasons. First, it notes that 

CMS had been paying for the PARRI costs since 1996 but then 
30

abruptly changed course. Pennsylvania claims that this abrupt 

change raised enough suspicions to warrant discovery. 

However, the OIG audit explains the reason for the change in 

course. The audit recites that Pennsylvania claimed the PARRI 

costs as “Other Financial Participation” without further detail 

for years until the payments came to OIG’s attention due to 

previous payment issues. Then Pennsylvania states that a CMS 

representative was on the PARRI task force and might have 

information about any payment agreement. But Pennsylvania 

does not state what this representative’s role was vis-à-vis CMS 

and the task force or explain the representative’s function on the 

PARRI task force or how the representative was involved in 

Pennsylvania’s reimbursement scheme. Consequently we 

uphold the Board’s decision to deny discovery.

E. HHS Grants Administration Manual

Pennsylvania’s penultimate argument seeks to limit the 

lookback period for CMS’s disallowance decision to three years. 

The HHS Grants Administration Manual (“GAM” or “the 

Manual”) then in effect, set a time period for computing 

disallowances. JA 191; GAM § 1-105-60(C)(3)(a)(1). The 

Manual states that the disallowance period “will cover” the 

time-period the organization was required to retain records. JA 

191.7 The parties agree that the applicable regulations required 

 7 The relevant language in the GAM provides:

3. Time Period for Computing Disallowances

a. If the Action Official determines that certain 

costs should be disallowed, the computation of 
31

Pennsylvania to keep the records for three years from the date 

Pennsylvania sent the expenditure reports to CMS, though the 

parties also agree that Pennsylvania retained its records for the 

full period for which reimbursement was disallowed. Because 

OIG told Pennsylvania about its audit in July 2011, 

Pennsylvania argues that the GAM limits CMS’s disallowance 

to 2008, three years earlier. 

The Appeals Board disagreed. Citing prior Board 

decisions, it held that “the GAM provision does not state that for 

all disallowances, the computation will only cover the period of 

time records are required to be retained.” JA 35 (internal 

quotation marks omitted) (emphasis in original). The Board 

further held, based on prior Board precedent, that “the GAM 

provision [does] not bar the disallowance where records in fact 

exist to support the computation of the disallowance, so the 

grantee is not prejudiced by the passage of time.” Id. Because 

Pennsylvania did not claim that the records had been destroyed, 

and because there were sufficient records to calculate accurately 

the disallowance back to 1996, the Board affirmed the full 

fifteen-year disallowance period. 

Pennsylvania argues that the Appeals Board was wrong 

 

the disallowance will cover the following periods. 

(1) If the costs can be identified to specific 

awards, the computation will cover the period the 

organization is required to retain records under 

applicable records retention requirements. 

GAM § 1-105-60(C)(3)(a)(1). JA 191.
32

because the GAM permits only a three-year disallowance period. 

We disagree, though we resolve the issue without weighing in 

on the agency’s reading of the GAM. No matter the 

interpretation of the GAM, the agency was not bound by the 

three-year time limit. The GAM was not binding because it 

“satisf[ies] none of the criteria which have been developed by 

the courts to determine whether agency regulations have the 

force of law.” Gatter v. Nimmo, 672 F.2d 343, 347 (3d Cir. 

1982); see also Schweiker v. Hansen, 450 U.S. 785, 789-90, 101 

S.Ct. 1468, 1471-72 (1981) (“[T]here is no doubt that [the 

agency employee] failed to follow the Claims Manual. . . . But 

the Claims Manual is not a regulation. It has no legal force, and 

it does not bind the [agency].”). The GAM sets out audit 

policies and procedures for internal use by HHS employees or 

auditors acting on HHS’s behalf;8 it was not published in the 

 8

JA 188 (explaining applicability of GAM to audit procedures); 

see also U.S. Dep’t of Health and Human Servs., Grants Policy 

Statement ii (Jan. 1, 2007) (“Recipients are not directly subject 

to the requirements of HHS Grants Policy Directives and 

implementing HHS Grants Administration Manuals (or any 

predecessor OPDIV manuals), which are internal documents 

guiding HHS operations.”), 

https://www.hhs.gov/sites/default/files/grants/grants/policiesregulations/hhsgps107.pdf.

 

Pennsylvania claims, however, that the Secretary has 

cited the Manual in the Code of Federal Regulations, meaning it 

is not merely a guiding document. That is incorrect. While the 

Secretary has promulgated regulations that require compliance 

with unrelated GAM policies, see, e.g., 42 C.F.R. §§ 86.19, 

86.33 (requiring compliance with GAM section concerning 
33

federal register or promulgated with public notice and comment; 

and there is no other evidence the agency meant to give the 

GAM binding force. Accordingly, the GAM was promulgated 

to assist the agency in running its audits rather than to set forth a 

binding legal mandate. See Gatter, 672 F.2d at 347; Concerned 

Residents of Buck Hill Falls v. Grant, 537 F.2d 29, 38 (3d Cir. 

1976) (“[S]ince the Guide and the Handbook are merely internal 

operating procedures, rather than regulations officially 

promulgated under the APA or otherwise, they do not prescribe 

any rule of law binding on the agency.”). And consequently, 

because the agency has shown that the disallowance decision 

captures every year for which accurate records of 

Pennsylvania’s erroneous claims exist, the decision is not 

arbitrary and capricious. 

F. Judicial Notice of CMS’s Post-Disallowance 

 Statement

Finally, Pennsylvania claims that the District Court erred 

in not taking judicial notice of a CMS statement about training 

costs issued in July 2015, three months after the Appeals Board 

issued its final decision in this case and thus long after the 

events involved in this case.

In July 2015 CMS issued a “Questions and Answers” 

document addressing administrative claims for training costs. 

One of the three questions reads as follows:

 

animal welfare), there is no regulation requiring compliance

with the GAM’s policy for computing the disallowance time 

period.
34

Q: Is federal Medicaid administrative match 

available for provider training activities?

A: Yes. Provider training provided by the 

Medicaid agency or its contracted designee 

regarding the scope or the benefits of Medicaid 

covered services, or that is aimed at improving the 

delivery of Medicaid services, is reimbursable as 

a Medicaid administrative expenditure. This 

could include, for example, training for case 

managers, individuals who develop and 

coordinate person-centered care planning, primary 

care practitioners, or hospital discharge planners.

JA 53. 

After the District Court denied Pennsylvania’s motion to 

supplement the administrative record with this document on the 

ground that it was published after the agency rendered its 

decision, Pennsylvania asked the Court to take judicial notice of 

the document. The Court declined to do so because it regarded 

the request as an “end around the restrictions on record 

supplementation” and the parties disputed what the CMS 

document meant. Pennsylvania Dep’t of Human Servs., 241 F. 

Supp. 3d at 511-12. Pennsylvania challenges the decision not to 

take judicial notice of the statement, and we review the Court’s 

decision on the point for abuse of discretion. In re NAHC, Inc. 

Sec. Litig., 306 F.3d 1314, 1323 (3d Cir. 2002). 

A court may take judicial notice of an adjudicative fact if 

that fact is not subject to reasonable dispute. Fed. R. Evid. 

201(b). “A judicially noticed fact must either be generally 
35

known within the jurisdiction of the trial court, or be capable of 

accurate and ready determination by resort to sources whose 

accuracy cannot reasonably be questioned.” Werner v. Werner,

267 F.3d 288, 295 (3d Cir. 2001). 

Here, the District Court did not abuse its discretion in 

declining to take judicial notice of the CMS Question and 

Answer document. Although the document appears to provide 

some support for Pennsylvania’s contention that PARRI costs 

are now allowable, such a conclusion is not indisputable. In 

order to reach that conclusion, several related questions which 

the document does not address must be answered as well. For 

example, it is unclear if this rule reverses the 1994 SMDL or 

clarifies a requirement that the Letter already states. It is also 

unclear without more information how the answer can be 

squared with 42 C.F.R. § 433.15(b)(7)’s requirement that the 

training must be “necessary for proper and efficient 

administration of the State plan” because arguably training for 

medical services is distinct from the administration of a 

Medicaid plan. We take no position on these questions, but note 

that they open up the CMS document to reasonable dispute.

Furthermore, even if we agreed with Pennsylvania that 

the document clearly contradicts the 1994 SMDL, we still would 

not conclude that the District Court erred in declining to

judicially notice it. Just as the Secretary had authority to 

interpret the Medicaid statute in the 1994 SMDL, so, too, does 

the Secretary have the right to change the CMS interpretation 

over the course of years. See Pennsylvania Fed’n of 

Sportsmen’s Clubs, Inc. v. Kempthorne, 497 F.3d 337, 350-51 

(3d Cir. 2007) (“[A]n administrative agency is not disqualified 

from changing its mind. . . .”) (quoting Good Samaritan Hosp. v. 
36

Shalala, 508 U.S. 402, 417, 113 S.Ct. 2151, 2161 (1993)). And 

if the Question and Answer document is in fact an about face on 

the issue of training costs, as Pennsylvania suggests, that 

circumstance would call into question the new policy change, 

not CMS’s original position from 1994. See Revak v. Nat’l 

Mines Corp., 808 F.2d 996, 1002 (3d Cir. 1986) (“We do not 

believe that we should defer to the [agency’s] change of policy 

in the absence of [a reasoned analysis by the agency].”), 

abrogated on other grounds by Mullins Coal Co. of Va. v. Dir., 

Office of Workers’ Comp. Programs, U.S. Dep’t of Labor, 484 

U.S. 135, 159 & n.34, 108 S.Ct. 427, 440 & n.34 (1987). 

Consequently, we cannot say that the District Court erred in 

declining to take judicial notice of the document. 

V. CONCLUSION

For the foregoing reasons, we will affirm the order of the 

District Court entered March 13, 2017, affirming the decision of 

the Appeals Board.