FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

COUNTY OF LOS ANGELES, 

Plaintiff-Appellant, No. 06-55222

v. D.C. No.

MICHAEL O. LEAVITT, Secretary of  CV-04-04236-TJH

the United States Department of OPINION Health and Human Services,

Defendant-Appellee. 

Appeal from the United States District Court

for the Central District of California

Terry J. Hatter, Chief District Judge, Presiding

Argued and Submitted

November 6, 2007—Pasadena, California

Filed March 31, 2008

Before: Betty B. Fletcher, Stephen Reinhardt, and

Pamela Ann Rymer, Circuit Judges.

Opinion by Judge Rymer;

Dissent by Judge Reinhardt

3217
COUNSEL

Tami S. Smason, Foley & Lardner LLP, Los Angeles, California, for the plaintiff-appellant. 

John S. Koppel, United States Department of Justice, Civil

Division, Washington, D.C., for the defendant-appellee.

OPINION

RYMER, Circuit Judge: 

This appeal, which involves Medicare reimbursement of

indirect medical education expenses (IME) incurred by a public teaching hospital with an approved intern and resident program, presents two questions: first, whether it was arbitrary

and capricious for the Secretary of Health and Human Services to interpret the Medicare statute and regulations providing for IME payment on the basis of “available beds” as

presumptively meaning physical beds, when the hospital’s fiscal intermediary had previously accepted a calculation based

on budgeted beds; and second, whether the Secretary’s findings in this case were supported by substantial evidence. 

Los Angeles County/University of Southern California

Medical Center (County/USC or Med Center) appeals the district court’s judgment upholding a final determination by the

Provider Reimbursement Review Board (PRRB) that County/

USC’s intermediary, Blue Cross and Blue Shield Association

(Blue Cross), properly used a physical bed count in the formula for calculating the hospital’s IME adjustment for fiscal

year ending (FYE) June 30, 1994. We conclude that the Sec3220 COUNTY OF LOS ANGELES v. LEAVITT
retary had discretion to presume that “available beds” means

actual beds, rather than budgeted beds. We owe deference to

this interpretation. Applying it, we conclude that the PRRB

could find, based on the record, that County/USC failed to

carry its burden of proving that beds in excess of the budgeted

bed figure should be excluded from the physical count. Substantial evidence supports the PRRB’s decision because the

actual number of beds at County/USC that were physically

ready to be occupied was not in dispute, and there was evidence that all beds at the hospital — whether budgeted or not

— were maintained and could be used at any time for patient

care. Accordingly, the Secretary’s determination was not arbitrary and capricious. 

I

All hospitals with a provider agreement receive predetermined payments for discharged patients under the “prospective payment system” (PPS).1

 As a teaching hospital subject

to PPS, County/USC is entitled to an additional payment to

cover the added, indirect costs of medical education. 42

U.S.C. § 1395ww(d)(5)(B) (2006). The amount of the IME

adjustment is based on a hospital’s ratio of full-time equivalent interns and residents to available beds. 

The calculation is complicated, but the bottom line is that

the higher the number of beds, the lower the eventual payment and vice versa. See Little Co. of Mary Hosp. & Health

Care Ctrs. v. Shalala, 165 F.3d 1162, 1164 (7th Cir. 1999).2

1Congress established a “prospective payment system” for operating

costs of inpatient hospital services for reporting periods beginning on or

after October 1, 1983. 42 U.S.C. § 1395ww(d); 42 C.F.R. § 412.6 (2007).

Under the PPS, a hospital is paid a predetermined amount for each discharged patient that is intended to cover the cost of all inpatient hospital

services furnished to that patient. 

2As Judge Posner explained: 

The government has found that the higher the ratio of [the number of interns and residents] to the number of beds (and the fewer

COUNTY OF LOS ANGELES v. LEAVITT 3221
The Social Security Act caps this ratio at the ratio of interns

and residents to “available beds (as defined by the Secretary)”

during the hospital’s most recent cost reporting period. 42

U.S.C. § 1395ww(d)(5)(B)(vi). 

The implementing regulation provides, in pertinent part: 

For purposes of this section, the number of beds in

a hospital is determined by counting the number of

available bed days during the cost reporting period,

not including beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in distinct

part hospital units, and dividing that number by the

number of days in the cost reporting period.

42 C.F.R. 412.105(b) (1993).3

the number of beds, holding number of interns and residents

constant, the higher that ratio will be), the more teaching the hospital will be doing. For if the hospital has fewer beds, it probably

has a smaller medical staff, and hence a higher ratio of interns

and residents to fully trained doctors—the teachers. The higher

that ratio, the more training the fully trained doctors must do.

Suppose Hospital A has 300 beds, 75 interns and residents, and

25 fully trained doctors, and Hospital B has 600 beds, 75 interns

and residents, and 125 fully trained doctors (so that in both hospitals there is one doctor for every three beds). The fully trained

doctors in Hospital A will have much heavier teaching loads than

the fully trained doctors in B because the ratio of interns and residents to fully trained doctors is so much higher in A (3:1) than

in B (3:5). 

Little Co. Of Mary Hosp., 165 F.3d at 1164. 

3

In the course of making changes to the IME regulation that are not at

issue here, the Secretary stated in the preamble to the final rule for “Medicare Program: Changes to the Inpatient Hospital Prospective Payment System”: 

For purposes of the prospective payment system, “available

beds” are generally defined as adult or pediatric beds (exclusive

of newborn bassinets, beds in excluded units, and custodial beds

that are clearly identifiable) maintained for lodging inpatients.

3222 COUNTY OF LOS ANGELES v. LEAVITT
The Provider Reimbursement Manual (PRM) issued by the

Health Care Financing Administration (HCFA),4 which

administers the medicare program for the Secretary, defines

“available beds” for purposes of the IME adjustment:

A bed is defined for this purpose as an adult or pediatric bed (exclusive of beds assigned to newborns

which are not in intensive care areas, custodial beds,

and beds in excluded units) maintained for lodging

inpatients, including beds in intensive care units,

coronary care units, neonatal intensive care units,

and other special care inpatient hospital units. Beds

in the following locations are excluded from the definition: hospital-based skilled nursing facilities or in

any inpatient area(s) of the facility not certified as an

acute care hospital, labor rooms, PPS excluded units

such as psychiatric or rehabilitation units, post

anaesthesia or postoperative recovery rooms, outpatient areas, emergency rooms, ancillary departments,

nurses’ and other staff residences, and other such

areas as are regularly maintained and utilized for

only a portion of the stay of patients or for purposes

other than inpatient lodging. 

To be considered an available bed, a bed must be

permanently maintained for lodging inpatients. It

must be available for use and housed in patient

Beds used for purposes other than inpatient lodgings, beds certified as long-term, and temporary beds are not counted. If some

of the hospital’s wings or rooms on a floor are temporarily unoccupied, the beds in these areas are counted if they can be immediately opened and occupied. 

50 Fed.Reg. 35,646, 35,683 (September 3, 1985). 

4HCFA is now known as the Centers for Medicare and Medicaid Services (CMS), but the parties and the PRRB continue to refer to the agency

as HCFA, as shall we. 

COUNTY OF LOS ANGELES v. LEAVITT 3223
rooms or wards (i.e., not in corridors or temporary

beds). Thus, beds in a completely or partially closed

wing of the facility are considered available only if

the hospital put [sic] the beds into use when they are

needed. The term “available beds” as used for the

purpose of counting beds is not intended to capture

the day-to-day fluctuations in patient rooms and

wards being used. Rather, the count is intended to

capture changes in the size of a facility as beds are

added to or taken out of service.

HCFA Pub. 15-1 § 2405.3G (Rev. 345); PRM, § 2405.3G

(Adjustment for the Indirect Cost of Medical Education)

(August 1988).5

Blue Cross also published an Administrative Bulletin

which pertains to the IME adjustment. It indicates how to

treat areas of a hospital that are temporarily or permanently

closed: 

In a situation where rooms or floors are temporarily

unoccupied, the beds in these areas must be counted,

provided the area in which the beds are contained is

included in the hospital’s depreciable plant assets,

and the beds can be adequately covered by either

employed nurses or nurses from a nurse registry. In

this situation, the beds are considered “available”

and must be counted even though it may take 24-48

hours to get nurses on duty from the registry. 

Administrative Bulletin No.1841, 88.01 (November 18, 1988).

Against this backdrop, a provider of covered care such as

5The Supreme Court described another section of the PRM as a “prototypical example” of an interpretative rule “ ‘issued by an agency to advise

the public of the agency’s construction of the statutes and rules which it

administers.’ ” Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995).

3224 COUNTY OF LOS ANGELES v. LEAVITT
County/USC submits a cost report to its fiscal intermediary

each year. An intermediary — in this case, Blue Cross — is

a private entity with whom the Secretary contracts to determine the amount of Medicare payments to be made to a provider based on the cost report. The report shows the costs

incurred during the fiscal year and what proportion is to be

allocated to Medicare. A provider that is dissatisfied with the

intermediary’s determination may request a hearing before the

PRRB. 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835. 

County/USC is one of six acute care hospitals owned and

operated by Los Angeles County. It is a major teaching hospital. The maximum amount of services available each year is

based on a budget approved by the Los Angeles County

Board of Supervisors. The number of “budgeted beds” for a

given fiscal year is an estimate of how far the budget will

stretch, or how many beds the hospital can afford to supply

with all the necessary services and goods for patient care. 

County/USC had used budgeted beds for calculating its

IME payment since 1986. For FYE June 30, 1994, however,

Blue Cross determined that the cost report understated the

number of beds physically available in the hospital’s inpatient

areas, and therefore increased the count. County/USC

appealed to the PRRB. Prior to the evidentiary hearing, the

parties stipulated that the number of beds physically located

in the hospital during the FYE June 30, 1994 was 1,320 and

that the number of budgeted beds was 1,197. Thus, 123 beds

are at issue. 

The PRRB concluded that Blue Cross properly used the

number of physical beds located within County/USC’s facility

as a measure of the available beds. It found that the number

of budgeted beds was not an absolute cap on bed utility

because on any given day the budgeted cap of 1,197 may have

COUNTY OF LOS ANGELES v. LEAVITT 3225
been exceeded. Finally, the Board found no evidence that

County/USC closed floors or areas of the hospital.6

County/USC appealed to the Secretary, who declined

review. The PRRB’s decision thus became the final administrative action for purposes of federal jurisdiction. 42 U.S.C.

§ 1395oo(f) (1993). The Med Center sought review in the district court, which granted summary judgment in favor of the

Secretary. This timely appeal followed. 

II

Judicial review of a decision of the PRRB is pursuant to the

Administrative Procedures Act (APA). For this reason, we

may not set aside its findings or conclusions unless they are

“unsupported by substantial evidence,” 5 U.S.C. § 706(2)(E)

(1966), or are “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law.” Id. § 706(2)(A);

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).

Courts must defer to an administrative agency’s reasonable

construction of a statute unless Congress has spoken unambiguously. Chevron U.S.A., Inc. v. Natural Res. Def. Council,

Inc., 467 U.S. 837, 842-45 (1984). “[A]n agency violates the

APA if it 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.’ ” Ranchers Cattlemen Action Legal Fund United Stockgrowers of America v. U.

S. Dept. of Agric., 499 F.3d 1108, 1115 (9th Cir. 2007) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto.

6The PRRB also noted that County/USC was reimbursed for the capital

costs of all 1,320 physical beds and concluded that it would be inconsistent for the provider to be reimbursed the capital costs of those beds but

for them not to be included in computing the IME adjustment. 

3226 COUNTY OF LOS ANGELES v. LEAVITT
Ins. Co., 463 U.S. 29, 43 (1983)). “Our task is not to decide

which among several competing interpretations best serves

the regulatory purpose.” Thomas Jefferson Univ., 512 U.S. at

512. 

III

[1] County/USC’s principal argument is that it was arbitrary and capricious for the Secretary to move from using

budgeted beds to using physical beds without an explanation.

An agency is not precluded from changing its mind, Good

Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993), but

“an agency changing its course must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored . . . .” Nw. Envtl. Def.

Ctr. v. Bonneville Power Admin., 477 F.3d 668, 687 (9th Cir.

2007) (citations omitted). This rule has no application here,

however, because it was Blue Cross that had approved

County/USC’s claims for IME reimbursement based on budgeted beds.7

 County/USC points to no decision by the PRRB

or the Secretary that embraces a budgeted-bed approach, nor

does it suggest that the Secretary has taken inconsistent litigation or rule-making positions on this issue. While a fiscal

intermediary is the Secretary’s agent for purposes of reviewing cost reports and making final determinations with respect

to the total reimbursement due to a provider absent an appeal

to the PRRB, see Kaiser v. Blue Cross of Cal., 347 F.3d 1107,

1117 (9th Cir. 2003), intermediary interpretations are not

binding on the Secretary, who alone makes policy. See Loma

Linda Univ. Med. Ctr. v. Leavitt, 492 F.3d 1065, 1074 (9th

Cir. 2007). 

Recognizing that the Secretary has never explicitly taken a

position that “available beds” may be measured by budgeted

7A Blue Cross representative testified at the PRRB hearing that Blue

Cross had previously taken the budgeted bed number to be based on a

physical survey of the hospital. 

COUNTY OF LOS ANGELES v. LEAVITT 3227
beds instead of physical beds, County/USC posits that he

implicitly acceded to use of budgeted beds by virtue of Blue

Cross’ Bulletin. It reasons that since the Secretary knew that

Blue Cross deemed beds to be “available” only when they

could adequately be covered by nurses, it must have been a

change in position to count the 123 beds at issue for FYE

1994 because nurses could not be hired over budget. No such

inference arises, however, because the Bulletin’s discussion

about staffing pertains only to beds that are in rooms or floors

that are temporarily unoccupied. 

[2] Consequently, prior Blue Cross approvals based on a

budgeted beds calculation did not make the Secretary’s determination that the intermediary properly used a physical bed

count for FYE 1994 arbitrary and capricious. Therefore, the

Secretary’s interpretation is entitled to no less deference on

this account.8

IV

County/USC alternatively argues that, even if it were not

arbitrary and capricious to change course, still it is arbitrary

and capricious for the Secretary to reject budgeted beds in

favor of a physical bed count. Med Center emphasizes that it

is a publicly-funded hospital and submits that physical beds

for which there is no budget for staffing, linen, dietary, pharmaceutical, and other resources should not be part of the measure of a hospital’s routine inpatient operations for IME

reimbursement purposes because such beds do not affect the

teaching intensity. In addition, it contends that the Provider

Reimbursement Manual contemplates day-to-day fluctuations

8

In any event, as we have observed, “the consistency of the Secretary’s

position is one ‘factor’ in determining whether to accord deference . . . .

‘[W]here the agency’s interpretation of a statute is at least as plausible as

competing ones, there is little, if any, reason not to defer to its construction.’ ” Queen of Angels/Hollywood Presbyterian Med. Ctr., 65 F.3d 1472,

1481 (9th Cir. 1995) (quoting Good Samaritan, 508 US at 417). 

3228 COUNTY OF LOS ANGELES v. LEAVITT
in usage, and that the legislative history and commentary to

different Medicare adjustments that also depend on “available

beds” — disproportionate share hospital (DSH) payments,

and payments for rural referral centers — further indicate that

beds must be staffed in order to qualify.9 The PRRB considered each of these arguments, but concluded that while budgeted beds may be an appropriate vehicle to establish staffing

levels and related ancillary and administrative activity, the

number of budgeted beds cannot identify which beds were or

were not available. 

[3] The parties’ disagreement boils down to whether the

IME calculation must be staff-driven or may be size-driven.

Said differently, the dispute turns on whether beds are a proxy

for the number of patients (as County/USC would have it), or

may stand-in for the number of physicians. The Secretary’s

judgment is that a facility’s size is what relates to teaching

load and that the best measure of this is the number of beds

maintained for patient use. His rationale is that hospitals generally do not maintain beds they are unable to use. See Little

Co. of Mary, 165 F.3d at 1164 (citing Medicare Program: Fiscal Year 1986 Changes to the Inpatient Hospital Prospective

Payment System, 51 Fed. Reg. 16772, 16775 (May 6, 1986)).

The Med Center counters that budgeted resources, particularly

for nursing support, are the appropriate measure for publiclyfunded hospitals, and that beds should be a proxy for the

patients served. 

9

See 53 Fed.Reg. 38476, 38514 (stating for purposes of the rural referral

center adjustment that the agency “will count only licensed beds actually

available for use, that is, beds in place, staffed and available to receive

patients for inpatient lodging.”); S. Rep. No. 98-23 at 140, reprinted in

1983 U.S.C.C.A.N. 143, 359 (Mar. 11, 1983) (stating that the purpose of

the IME payment is to compensate hospitals for increased demands on

staff); 42 U.S.C. § 1395ww(d)(5)(F)(i)(II) (directing the Secretary to provide disproportionate share payments based on the number of “beds”); H.

Rep. No. 99-241, Part I (July 31, 1985), reprinted in 1985 U.S.C.C.A.N.

579, 596 (indicating that beds should be staffed and available for purposes

of calculating disproportionate share payments). 

COUNTY OF LOS ANGELES v. LEAVITT 3229
[4] No doubt the Secretary could have decided to measure

“available beds” by counting nurses or patients had he

thought this was sounder policy. However, if both his and

County/USC’s views are plausible, the Secretary’s will prevail. Thomas Jefferson, 512 U.S. at 512. His view is reasonably grounded in the statutory scheme. All hospitals are

subject to the PPS, and all teaching hospitals are eligible for

the IME adjustment that Congress provides to hospitals with

a graduate medical education program to account for greater

costs per case. The assumption is that, across the universe of

teaching hospitals (public as well as private), additional tests

will be ordered to train residents and more nursing and medical teaching staff will be necessary to support the program.

Congress chose to gauge the extra cost of the teaching load

by reference to available beds rather than available staffing,

so we cannot say that the Secretary unreasonably pegged the

formula to an actual bed count rather than a budgeted bed

count that turns on staffing.10

10Two other circuits (in addition to the Seventh Circuit’s analysis) have

concluded that beds are not to be counted as a proxy for patients, but as

a proxy for size and doctors. See Clark Reg’l Med. Ctr. v. U.S. Dept. of

Health and Human Servs., 314 F.3d 241, 248-49 (6th Cir. 2002) (considering the regulation that provides a supplemental payment to “disproportionate share” hospitals based in part on bed size calculated in accordance with

the IME payment scheme, and noting that the “day-to-day, or perhaps

even hour-to-hour, change in the occupancy of these beds does not reflect

the overall size of the Plaintiff hospitals, which is what the bed count is

intended to capture.”); Altoona Hosp. v. Thompson, 131 Fed. Appx. 355,

359 (3rd Cir. 2005) (noting that “Congress contemplated that the agency

would count beds as a proxy not for the number of patients, as the Hospital suggests, but rather for the number of doctors at a given facility . . . .

Presumably, Congress chose to tie the amount of reimbursement to the

number of beds in a facility because a simple counting of the beds maintained for patient use would be less burdensome for the agency and, in all

likelihood, less susceptible to manipulation by the hospitals. Given this

understanding, it seems reasonable to do as the agency has done and

decline to engraft staffing concerns onto the definition of ‘available

beds.’ ”) (emphasis in original). 

3230 COUNTY OF LOS ANGELES v. LEAVITT
[5] The Secretary’s approach is consistent with the purpose

of the IME adjustment, and with the Manual. Congress recognized that increased patient care costs associated with graduate medical education programs include “the additional tests

and procedures ordered by residents as well as the extra

demands placed on other staff as they participate in the education process,” H.R. Rep. No. 98-25, pt. 1, at 132 (1983),

reprinted in 1983 U.S.C.C.A.N. 219, 359, but left the task of

defining “available beds” in “the ratio of the number of

interns and residents . . . to the hospital’s available beds” to

the Secretary. The regulation promulgated by the Secretary

opted to count the number of available bed days (excluding

certain types of beds) and divide that number by 365 (for

most years). The PRM added the refinement that, to be considered “available,” a bed must be “permanently maintained

for lodging inpatients,” and that all such beds, i.e, all beds that

are physically present in the hospital and permanently maintained for use in treating patients at any time during the year,

are treated as presumptively available for the entire period for

purposes of calculating the IME payment. (Hospitals may

show that some of their beds are not in fact available and

should be excluded.) With the presumption that a bed available once is available always, the number of available bed

days is equal to 365 times the number of physical beds. Dividing this product by the number of days in the accounting

period gets back to the number of physical beds. In this way,

the Manual links the count of available bed days specified in

the regulation and the physical count that the Secretary condoned in this case. 

County/USC relies on one statement in the PRM — “[t]he

term ‘available beds’ as used for the purpose of counting beds

is not intended to capture the day-to-day fluctuations in

patient rooms and wards” — to argue that it was irrational for

the Secretary to reject the use of budgeted beds on the basis

that the budgeted-bed cap could be exceeded on any given

day, because a single day’s fluctuation is not what the regulation is intended to do. But the statement upon which it relies

COUNTY OF LOS ANGELES v. LEAVITT 3231
in isolation carries no such weight, for the Manual goes on to

explain that the count is intended “to capture changes in the

size of a facility as beds are added to or taken out of service.”

This squares with the Secretary’s interpretation. 

Nor are we persuaded that the Secretary’s reasoning is

undermined by references to staffing in the legislative history.

For one thing, Congress explicitly delegated a definition of

“available beds” to the Secretary which, presumably, it would

not have done had it intended the concept to turn on “available staffing.” Beyond this, the Secretary could sensibly conclude that staffing concerns are effectively accounted for

within the adjustment itself. That teaching hospitals incur

more indirect costs than non-teaching hospitals — including

for staff support — is the reason for additional reimbursement

by way of the IME payment; it is not conversely a requirement that the reimbursement be further increased when some

of these costs are not in the budget of a particular hospital. 

Finally, neither Congressional direction in establishing

DSH payments nor commentary to the rural referral regulation casts doubt on the reasonableness of the Secretary’s decision to count physical beds for purposes of the IME payment.

Both the DSH regulation and the rural referral regulation

incorporate the IME definition of “available beds,” not the

other way around. See Clark Reg’l Med. Ctr., 314 F.3d at

246-47 (indicating that the definition of beds for purposes of

the IME adjustment in PRM § 2405.3(G) applies to the DSH

payment). 

[6] Given that the Secretary’s interpretation of “available

beds” for purposes of the IME payment is reasonable, the

remaining question is whether the PRRB’s application to

County/USC is arbitrary and capricious. The PRRB found

that County/USC’s budgeted beds calculus was a proxy for

services, not size; and that the budget did not establish a ceiling on bed availability, but was instead a proxy for the average number of beds available on a daily census that does not

3232 COUNTY OF LOS ANGELES v. LEAVITT
identify which beds were or were not available. County/USC

submits that, to the contrary, the budgeted beds figure is a

static figure representing the maximum amount of hospital

resources allocated to inpatient care. We conclude that substantial evidence supports the PRRB’s finding. 

[7] Med Center does not dispute that the 123 beds at issue

were used for patient care from time to time and could be so

used whenever needed. These beds were plugged in and ready

to go. They were not taken out of service, or located in an

area that was closed, temporarily or permanently. They were,

in short, “maintained for lodging inpatients.” 

[8] Testimony by county administrators indicates that the

budgeted-beds figure is used to monitor the hospital’s performance against the budget during the year; it is “a proxy for

the nursing care and the dietary and linen contract that we’d

have to spend out money on,” or put otherwise, “the number

of inpatient days that we can provide.” There was testimony,

as well, that County/USC cannot provide care beyond its

budgeted-bed figure, that its emergency rooms are frequently

saturated, and that if the hospital operates over budget during

one time period it must reduce spending later. However, the

evidence shows that “budgeted beds” does not mean that beds

are not available for patient care on any given day. As one

administrator testified, the budgeted bed total has nothing to

do with the physical capacity (number of mattresses) at Med

Center that can be pressed into service when needed. This

being so, the PRRB was not compelled to find that the nature

of Med Center’s budget limitations or its status as a public

hospital excluded any physical beds from being available at

any time during the cost reporting period. 

[9] As neither the Secretary’s interpretation of “available

beds” nor his application to County/USC’s proffered exclusion of beds in excess of those budgeted is arbitrary or capricious, we affirm. 

COUNTY OF LOS ANGELES v. LEAVITT 3233
AFFIRMED. 

REINHARDT, Circuit Judge, dissenting: 

I agree with the majority that the Secretary did not act arbitrarily and capriciously when he switched from using the

number of budgeted beds to using the number of physical

beds for calculating the Medicare IME adjustment. I also

agree that the Secretary’s interpretation of “available beds” as

presumptively meaning physical beds is entitled to deference

from this court and is reasonable as a general matter. However, because I believe that County/USC met its burden of

rebutting the presumption and showing that certain beds

should have been excluded from Med Center’s available bed

count in the fiscal year ending June 30, 1994 (“FY1994) —

namely the 123 beds that made up the difference between the

number of physical beds and the number of budgeted beds —

I would hold that the Provider Reimbursement Review

Board’s (“Board”) decision was arbitrary and capricious. 

As the majority explains, the relevant interpretive regulation directs that “beds available at any time during the cost

reporting period are presumed to be available during the

entire cost reporting period.” PRM-1 § 2405.3; Maj. Op. at

3231. However the majority relegates to a parenthetical a crucial caveat: hospitals may provide “evidence to the contrary”

in order to “exclude beds from the count.” Id. In other words,

hospitals have the opportunity to prove that certain beds

should not be considered available and thus should be

excluded from the count. At a hearing before the Board,

County/USC presented evidence that the 123 physical beds

that were not included in the budget should be excluded from

the IME calculation because those beds were not actually

available for patient use during the year. Disregarding the

substantial evidence presented by County/USC, the Board

concluded that all 1,320 physical beds should be considered

3234 COUNTY OF LOS ANGELES v. LEAVITT
available beds and denied County/USC’s request to adjust the

figure. Thus, the issue in this case is not whether the Secretary’s interpretation of the term “available beds” as presumptively meaning physical beds instead of budgeted beds is

arbitrary and capricious, but rather whether the Board’s ruling

that County/USC did not meet its burden of showing that the

physical beds that were not budgeted for were not actually

available and thus should be excluded from the count.

I

At the hearing before the Board, County/USC presented

substantial evidence that in FY1994, Med Center did not actually use any of the extra physical beds that were not included

in the budgeted beds figure. According to the Chief Financial

Officer of Med Center, there was not a single day that the

hospital had the resources to staff all of the budgeted beds to

say nothing of the physical beds. He testified that the average

number of beds that were actually available in the relevant

year was 1,056, and that that number could vary on any given

day by 50. Therefore, on the busiest days of the year, Med

Center had only 1,106 beds available for patient care. If anything, the 1,197 budgeted beds that County/USC seeks to use

as the available bed figure is too high, not too low. If the budgeted beds figure is too high, then the 1,320 physical bed figure that the Secretary proposes is certainly too high. With this

testimony alone, County/USC more than met its burden of

proving that the 1,197 budgeted beds was a more accurate

count of available beds in FY1994 than the 1,320 physical

beds. 

Even counsel for the Secretary admitted during the hearing

that in the relevant year “there’s a fair cushion between the

amount that the hospital calls budgeted beds and what its census was.” He stated that the question of whether the hospital

could actually use the physical beds that were not included in

the budgeted bed count was “hypothetical” and “abstract”

COUNTY OF LOS ANGELES v. LEAVITT 3235
because actual data indicates that the hospital did not even use

all of the budgeted beds that year. 

The Board’s decision did not discuss or acknowledge the

strong testimony County/USC offered. Instead, it found that

“[t]he provider had 1,320 beds available, and on any given

day its budgeted cap of 1,197 may have been exceeded.” In

light of the CFO’s undisputed testimony and the admission of

the Secretary’s own lawyer that the budgeted cap was never

actually exceeded, it is apparent that the “ ‘explanation for

[the Board’s] decision runs counter to the evidence before the

agency.’ ” Ranchers Cattlemen Action Legal Fund United

Stockgrowers of America v. United States Dept. of Agric., 499

F.3d 1108, 1115 (9th Cir. 2007) (quoting Motor Vehicle Mfrs.

Ass’n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43

(1983)). On that basis, I would hold that the Board’s decision

was arbitrary and capricious under that APA.

II

In addition to holding that County/USC met its burden of

showing that the budgeted beds figure more accurately

reflected the actual number of available beds at Med Center

in FY1994 than the physical beds figure, I would also hold

that County/USC offered sufficient proof that budgeted beds

is the appropriate figure to use to measure available beds at

Med Center as a general rule. 

The Board’s findings and decision to use the physical bed

count to calculate Med Center’s IME adjustment ran counter

to the evidence presented by County/USC at the hearing.

First, the Board found that County/USC stipulated that Med

Center had 1,320 beds “available for patient care” and that

this was “the strongest argument that this number is appropriate for the IME calculation.” The Stipulation does not support

the Board’s finding. The Stipulation states: “For the fiscal

year ended June 30, 1994 . . . the Intermediary agrees to

revise the Provider’s indirect medical education (“IME”) pay3236 COUNTY OF LOS ANGELES v. LEAVITT
ment amount using 1320 beds in the ratio of interns and

residents-to-beds.” (emphasis added). The reason that it was

the Intermediary (Blue Cross) that stipulated to this number

— instead of County/USC, as the board claims — is that Blue

Cross originally sought to use the full count of licensed beds

at Med Center, which was 2,045, but later agreed to lower that

number to 1320 after County/USC demonstrated that some of

those licensed beds could not be considered for the purposes

of the IME calculation. The stipulation binds Blue Cross to a

lower bed count number than it originally proposed. It does

not represent, as the Board suggests, a concession on the part

of County/USC that 1,320 is the appropriate number of beds

to use for the IME calculation. In fact, the Stipulation clarifies

that it “only partially settles the IME bed count issue that is

still pending at the PRRB” — that is, the discrepancy between

physical beds and actual beds that is now before us. Additionally, there is nothing in the Stipulation that discusses whether

the beds were “available for patient care” and County/USC

certainly did not stipulate that they were, as the Board found.

The majority does not discuss the Board’s finding on this

issue despite the fact that the Board considered it the “strongest argument” for using the number of physical beds instead

of the number of budgeted beds. Because the Board’s finding

clearly “runs counter to the evidence before [it],” I would

hold that it was arbitrary and capricious in violation of the

APA. See Ranchers Cattlemen Action Legal Fund United

Stockgrowers of America, 499 F.3d at 1115. 

Next, the Board found that the budgeted beds count was an

appropriate figure to use for planning staffing numbers and

other administrative purposes, but that it did not constitute “an

absolute cap on bed utility.” However, the evidence before the

Board proved that the budgeted beds figure did serve as a

limit to the number of beds available for use at Med Center.

According to testimony presented by County/USC, the term

“budgeted beds” connotes how much “staff, materials and

COUNTY OF LOS ANGELES v. LEAVITT 3237
supplies, pharmaceuticals, support is available to provide care

and . . . sets a ceiling for the operational capacity of the organization.” Plainly stated, the budgeted beds figure “sets a cap

on the capability of the organization to deliver safe, appropriate patient care.” Because the “budgeted beds” figure is “a

proxy for the nursing care and the dietary and linen contracts,” the number of budgeted beds represents “the number

of inpatient days” Med Center can provide. In fact, County/

USC monitors the bed count “every single day” and any deviations are immediately corrected. 

County/USC also presented testimony that, unlike a private

hospital in which the budget functions as a “floor” for planning purposes and can be expanded to accommodate

increased demand or emergencies, the budget for Med Center

“is really a ceiling.” Med Center’s budget is determined by

the Los Angeles County Board of Supervisors and cannot be

altered during the year. The section head of the Controller’s

Division responsible for the hospital’s budget team testified

that in his ten to fifteen years of experience, he did not recall

a hospital ever getting the number of budged beds adjusted

during the year. 

Ignoring the extensive testimony to the contrary, the majority nevertheless argues that the physical beds that were not

budgeted were available because they were “plugged in and

ready to go.” Maj. Op. at 3233. This is not so. They’re not

even “fired up and ready to go.” Med Center’s CFO testified

that a bed is only available when “there’s a physical bed that

meets the needs of the patient and there is staff to operate

them.” A bed that does not have staff, linens, or food is no

more available for use by a patient than the painting on the

wall. If there is an empty bed, “plugged in” or not, but no

nurses to staff it, a “patient would have to wait in the Emergency Room until such time as the bed became available to

transfer him or her.” Once the Emergency Room is saturated,

patients are turned away rather than put in the empty beds that

fall outside of the budgeted number. In other words, the phys3238 COUNTY OF LOS ANGELES v. LEAVITT
ical beds are not necessarily available. Only those beds that

are budgeted for can reasonably be considered available.

Thus, the budget serves as a fixed cap on bed utility. 

Although one hospital official testified that from a budgetary perspective, it was “marginally” possible to provide inpatient hospital care in more beds than the budget provides, such

a scenario would be almost impossible. If the hospital could

save money in another area, or if every patient who came to

the hospital required only a low cost service, or if there were

a sudden increase in paying patients, it might be possible to

“bump up” the number of beds by the end of the year to “operate a few more.” There are so many fixed variables in the

“budgeted beds” figure, however, that “it would be very difficult to increase the number of beds that [Med Center] operate[s] on the basis of those changes.” Additionally, on any

given day the number of available beds could theoretically

exceed the number of budgeted beds, but that increase would

have to be balanced out by a proportional decrease later in the

year. As discussed above, this did not actually happen on any

day in FY 1994 — and the figure for budgeted beds has never

been altered in the ten to fifteen years that the head of the

responsible Controller’s Division has been at County/USC. 

The majority characterizes the parties’ disagreement as

being whether the IME calculation should be based on the

staffing level of the hospital or the size of the hospital. Maj.

Op. at 3229-30. According to the majority, the Secretary reasonably chose to base the calculation on the size of the hospital, not, as County/USC advocated, on “a budgeted bed count

that turns on staffing.” Maj. Op at 3230. This analysis misses

the point. The budgeted bed count does not “turn[ ] on staffing.” Maj. Op. at 3230. Just the reverse — the level of staffing

turns on the number of budgeted beds. Similarly, the number

of beds available for patient care (i.e. the size or capacity of

the hospital) is at most the number of budgeted beds. 

COUNTY OF LOS ANGELES v. LEAVITT 3239
This is not true of all hospitals. The staffing levels of private hospitals are not limited by the number of budgeted beds.

When a private hospital experiences an unexpectedly busy

year, its revenues increase along with its patient census

because private hospitals treat many more paying and insured

patients. The hospital then uses those unanticipated revenues

to hire additional staff and provide the services necessary to

transform a physical bed into an available bed, thereby

increasing the capacity of the hospital. Thus, the number of

budgeted beds does not provide a limit on the staffing levels

or the number of available beds because both can be increased

during the year. The physical bed count is the only accurate

measure of a private hospital’s size. At Med Center, however,

the budget limits the staffing level and the size of the hospital

(the number of available beds). Consequently, at Med Center,

there is no meaningful distinction between the size or capacity

and the level of staffing because both are fixed by the same

figure — the number of budgeted beds. Distinguishing

between the size and the level of staffing or the number of

budgeted beds at Med Center was arbitrary and capricious.1

Furthermore, the Board found that “there was no evidence

1

Indeed, this crucial distinction between the function of Med Center’s

budget and that of a private hospital also explains why Altoona Hosp. v.

Thompson, 131 Fed. Appx. 355 (3rd Cir. 2005), is not relevant to this

case. Altoona involved a private hospital that argued that some of its physical beds should not be included in the IME adjustment calculation

because they were not able to be staffed within 24-48 hours. Id. at 356.

However, the hospital admitted that it kept the beds because there was “a

potential for an increase in patient census” and it “hoped to gain market

share.” Id. Thus, staffing levels at Altoona Hospital did not determine the

size of the hospital. At Med Center, however, the size of the hospital and

the staffing level are coterminous. Clark Reg’l Med. Ctr. v. Dept. of

Health and Human Servs., 314 F.3d 241 (6th Cir. 2002), is also inapposite.

That case involved the question of whether beds that were used for two

purposes should be counted when the regulation excluded one of the purposes from the calculation. Unlike the unbudgeted physical beds in this

case, the beds in question at Clark Regional Medical Center were “always

staffed and available for acute case inpatients.” Id. at 248. 

3240 COUNTY OF LOS ANGELES v. LEAVITT
that the Provider closed off various floors or areas of the hospital.” The majority asserts the same. Maj. Op. at 3233. This

is true as a factual matter, but it should not have any effect on

the outcome of the case. The interpretive regulation refers to

closed wings as an example of one situation in which a bed

would not be considered “available for use and housed in

patient rooms or wards.” PRM, §2405.3G. The regulation

never directs that a bed will be considered available unless it

is kept in a closed wing. Although some hospitals may well

have to place unused beds in a closed ward in order to prove

that they are not available, Med Center presented substantial

evidence that the physical beds that were not included in the

budget were not available for patient care. Requiring the hospital to move those beds to a closed ward would be unreasonable as there are 123 physical beds that will necessarily

remain unused for the entire year, it is immaterial whether the

area in which they are placed is closed off physically. The

interpretive regulation does not mandate that the only way to

exclude physical beds from the count is to move them to a

closed ward and the Board’s determination that such a

requirement applied in all cases was arbitrary and capricious.

The Board and the majority also argue that the budgeted

beds figure did not indicate which beds were available and

which beds were not. Again, I fail to see how identifying

which particular beds are available and which are not makes

any difference in determining the size of the hospital for the

purpose of the IME adjustment. Neither the majority nor the

Board provide an explanation. 

Finally, the Board found that because Med Center “was

reimbursed capital costs” for the 1,320 physical beds, “it

would be inconsistent” for Med Center “not to include those

beds in computing the Provider’s IME adjustment.” The

Board does not specify which capital costs would be reimbursed based on the number of physical beds, nor does the

Board explain how capital cost reimbursement relates to bed

availability. 

COUNTY OF LOS ANGELES v. LEAVITT 3241
The Chairman of the Board questioned the CFO about the

issue of capital costs. According to the CFO, the hospital files

its cost reports based on the number of budgeted beds not the

number of physical beds. Even the Chairman acknowledged

that “the building cost is the same whether there’s [sic] 1300

or 1500” beds. The only other capital cost that the Board

could possibly be referring to that was discussed at the hearing was depreciation, but, as the CFO testified, “[d]epreciation is not based on the number of beds that’s [sic] in use.”

There is no evidence in the record that the hospital was

receiving extra reimbursement money for capital costs

because it had a number of physical beds that were not available for use. The Board’s finding on this issue is not supported by the evidence. 

Even if the unavailable physical beds did qualify Med Center for additional capital costs, this fact would be irrelevant to

the available bed count for the purpose of the IME adjustment. There are many beds that are not included in the available bed figure that presumably the hospital is reimbursed for,

including the bassinets and psychiatric beds that the regulations expressly exclude from the IME count. The purpose of

the IME adjustment is to reimburse hospitals for the costs

involved in treating patients while also teaching medical students. The number of available beds is relevant because it

reflects the workload of actual doctors working with actual

patients. Whether or not a physical bed entitles the hospital to

receive additional reimbursement for capital costs is irrelevant

to that calculation. I would hold that the Board’s finding on

this issue was arbitrary and capricious because it was not supported by the evidence and it was irrelevant to the question

before it. 

Conclusion

Although the Secretary’s adopted presumption about the

appropriate figure to use in calculating “available beds” is

entitled to deference from this court, the Board is not permit3242 COUNTY OF LOS ANGELES v. LEAVITT
ted to impose that presumption categorically without regard to

the evidence before it. Because I believe that County/USC

more than met its burden of proving that the physical beds at

Med Center that were not in the budget appropriation were

not available for the any portion of FY1994 and thus should

be excluded from the bed count used to determine the IME

adjustment, I would hold that the Board acted arbitrarily and

capriciously when it held the opposite. Therefore I respectfully dissent.

COUNTY OF LOS ANGELES v. LEAVITT 3243