United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 28, 2017 Decided November 17, 2017

No. 16-5314

GRANT MEDICAL CENTER, ET AL.,

APPELLANTS

v.

ERIC D. HARGAN, ACTING SECRETARY, UNITED STATES 

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:15-cv-00480)

Daniel C. Gibson argued the cause for appellants. With 

him on the briefs was James F. Flynn.

Weili J. Shaw, Attorney, U.S. Department of Justice, 

argued the cause for appellee. With him on the brief was 

Michael S. Raab, Attorney.

Before: GARLAND, Chief Judge, TATEL, Circuit Judge, and 

GINSBURG, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.
2

TATEL, Circuit Judge: One of our sister circuits, the Sixth, 

ruled that the Centers for Medicare and Medicaid Services’

(CMS) method for counting hospital beds conflicted with the 

plain language of the applicable regulation. CMS amended the 

regulation to permit its preferred counting method but—central 

to this case—applied the Sixth Circuit’s interpretation to 

hospitals located within that circuit until the revised regulation 

took effect. Appellants, hospitals in the Sixth Circuit, challenge 

CMS’ decision to acquiesce to the Sixth Circuit’s ruling. Given 

that obeying judicial decisions is usually what courts expect 

agencies to do, the hospitals face an uphill battle. The district 

court found that the agency acted reasonably, and we agree.

I.

Medicare reimburses hospitals for providing inpatient care 

through the Inpatient Prospective Payment System. 42 U.S.C. 

§ 1395ww(a), (d). Under that system, Medicare pays hospitals 

a fixed amount for each patient regardless of the actual costs 

incurred. 42 C.F.R. § 412.2(a). In order to account for certain 

differences among hospitals, the reimbursement formula

includes several supplemental adjustments. See 42 U.S.C. 

§ 1395ww(d). Two such adjustments are at issue here: the 

Indirect Medical Education (IME) adjustment, which

supplements payments to hospitals that train medical residents,

id. § 1395ww(d)(5)(B), and the Disproportionate Share 

Hospital (DSH) adjustment, which supplements payments to 

hospitals that serve a disproportionate share of low-income 

patients, id. § 1395ww(d)(5)(F). Both adjustments turn, in part, 

on the number of inpatient beds at the hospital. Also, due to the 

particularities of the formulas, hospitals claiming the IME 

adjustment generally benefit when the bed count is lower, see 

42 C.F.R. § 412.105, while hospitals claiming the DSH 

adjustment benefit when the bed count is higher, see id.

§ 412.106.
3

Under this “complex and highly technical regulatory 

program,” Thomas Jefferson University v. Shalala, 512 U.S. 

504, 512 (1994) (quoting Pauley v. BethEnergy Mines, Inc., 

501 U.S. 680, 697 (1991)), counting beds is no simple matter. 

A hospital’s bed count is calculated according to an intricate

formula set forth at 42 C.F.R. § 412.105(b). Prior to October 1, 

2003, that regulation provided: 

[T]he number of beds available 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 excluded 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) (2002).

At issue in this case are two types of beds occasionally 

used for inpatient care but unmentioned in section 412.105(b)’s 

express exclusions: “swing beds” and “observation beds.”

Swing beds, found primarily in small rural hospitals, change in 

reimbursement status depending on whether the facility is 

using the bed for acute care or skilled nursing care. See 

Medicare Program; Changes to the Hospital Inpatient 

Prospective Payment Systems and Fiscal Year 2004 Rates, 68 

Fed. Reg. 45,346, 45,418–19 (2003). Observation beds are 

short-term beds used for outpatient care when a patient has not 

been formally admitted to the hospital. See id. Even though 

section 412.105(b) did not expressly exclude swing or

observation beds, the “longstanding policy” of CMS, which 

administers Medicare on behalf of the United States 

Department of Health and Human Services (HHS), was to 
4

exclude these beds when calculating bed counts. See id.; Joint 

Stipulations ¶ 2. 

In 2001, two Kentucky hospitals that fell short of the bed 

count needed to qualify for the DSH adjustment challenged

CMS’ interpretation of section 412.105(b). See Clark Regional 

Medical Center v. HHS, 314 F.3d 241, 242 (6th Cir. 2002). The 

hospitals argued that excluding swing and observation beds 

conflicted with section 412.105(b)’s plain text. In Clark 

Regional Medical Center v. HHS, the Sixth Circuit agreed, 

explaining that “[b]ecause the regulation specifically lists 

certain types of beds that are excluded from the bed count, but 

does not list swing or observation beds, the plain meaning of 

the regulation suggests that it is permissible to count swing and 

observation beds.” Id. at 247.

In response to the Sixth Circuit’s decision in Clark, CMS

amended section 412.105(b) through notice-and-comment 

rulemaking to expressly exclude swing and observation beds. 

See Medicare Program; Proposed Changes to the Hospital 

Inpatient Prospective Payment Systems and Fiscal Year 2004 

Rates, 68 Fed. Reg. 27,154, 27,205–06, 27,229 (May 19, 2003) 

(notice of proposed rulemaking); 68 Fed. Reg. at 45,470 (final 

rule). CMS explained that, despite its longstanding policy of 

excluding swing and observation beds, “courts have applied 

our current rules in a manner that is inconsistent with our 

current policy and that would result in inconsistent treatment.”

68 Fed. Reg. at 45,416 (discussing Clark). The effective date 

of the revised regulation was October 1, 2003. Id. at 45,346. 

CMS has taken two additional actions relevant to the issue 

before us. First, to address reimbursement claims for patients 

discharged prior to the effective date of the revised regulation, 

the agency issued Joint Signature Memorandum 109 (JSM-
5

109). For hospitals located within the Sixth Circuit, CMS stated 

that it would comply with Clark and include swing and 

observation beds in the total bed count. But for hospitals 

located outside the Sixth Circuit, CMS maintained its policy of 

excluding swing and observation beds from the total bed count.

Second, in St. Vincent Mercy Medical Center v. Blue Cross 

Blue Shield Association, CMS Adm’r Dec., 2008 WL 6468508 

(Nov. 17, 2008), CMS affirmed its commitment to follow 

Clark and JSM-109 for pre-October 2003 reimbursement 

claims at hospitals within the Sixth Circuit. In that case, an 

Ohio hospital challenged CMS’ decision to comply with Clark 

and include observation beds when calculating total beds for 

purposes of the DSH adjustment. The Administrator rejected 

the claim, reasoning that “[g]enerally, when a court determines 

that an agency’s interpretation is inconsistent with the language 

of the regulation, an agency may recognize that court’s 

interpretation and apply the court’s interpretation uniformly, 

thereafter, within the jurisdictional bounds of the interpreting 

court.” Id. at *9. This approach, the Administrator explained, 

ensured that “all similarly situated providers are treated the 

same for the applicable cost reporting periods” and facilitated 

“the orderly administration of a complex and time sensitive 

program.” Id. at *10. In the years following St. Vincent, CMS 

has continued to apply Clark to reimbursement claims for preOctober 2003 discharges filed by hospitals within the Sixth

Circuit. See, e.g., Clinton Memorial Hospital v. Blue Cross 

Blue Shield Association, CMS Adm’r Dec., 2010 WL 5570983, 

at *9 (July 26, 2010). 

Appellants in this case are ten Ohio hospitals (“Hospitals”) 

operating within the Sixth Circuit. For reasons we need not 

probe, the Hospitals would like swing and observation beds 

excluded from their total bed count when calculating 
6

reimbursements for discharges prior to October 1, 2003. The

Provider Reimbursement Review Board (PRRB)—the body 

responsible for initially hearing Medicare reimbursement 

disputes—rejected the Hospitals’ claim. See OhioHealth 2004 

Clark Bed Days Group v. BlueCross BlueShield Association, 

PRRB Dec. No. 2015-D1, 2015 WL 10739301, at *9 (Jan. 29, 

2015). The PRRB explained that the “inclusion of observation 

bed days and swing bed days” for discharges prior to October 

2003 “was correct . . . as all the providers are located within the 

Sixth Circuit and the Clark decision is controlling legal 

precedent.” Id. The PRRB also noted that it “concurs with the 

Administrator in St. Vincent that the ‘separation of powers 

doctrine requires administrative agencies to follow the law of 

the circuit whose courts have jurisdiction over the cause of 

action.[’]” Id. at *8 (quoting St. Vincent, 2008 WL 6468508, at 

*9).

The Administrator declined to review the PRRB’s 

decision, and it became final. See 42 U.S.C. § 1395oo(f)(1). 

Exercising their prerogative under a venue-choice provision, 

the Hospitals challenged the decision in the United States 

District Court for the District of Columbia. Id. (providing that 

an appeal “shall be brought in the district court of the United 

States for the judicial district in which the provider is located 

. . . or in the District Court for the District of Columbia”). The 

district court granted summary judgment in favor of the 

Secretary, see Grant Medical Center v. Burwell, 204 F. Supp. 

3d 68, 71 (D.D.C. 2016), and this appeal followed.

“Because we apply the same standard of review as the 

district court, we proceed de novo, as if [the plaintiff] had 

brought the case here on direct appeal.” Tenet HealthSystems 

HealthCorp. v. Thompson, 254 F.3d 238, 244 (D.C. Cir. 2001). 

Thus, we review CMS’ decision under the Administrative 
7

Procedure Act to determine whether it is “arbitrary, capricious, 

an abuse of discretion, or otherwise not in accordance with 

law.” 5 U.S.C. § 706(2)(A). 

II.

The Hospitals believe that we can disregard the 

acquiescence issue because CMS erred when it calculated bed 

counts under the pre-2003 version of section 412.105(b) rather 

than the revised version promulgated after Clark. Because the

parties agree that the revised regulation would require 

excluding swing and observation beds—the Hospitals’

preferred outcome—the Hospitals see this as the simplest path 

to relief. Unfortunately for the Hospitals, this simple solution 

runs into a simple problem: their case concerns reimbursement 

claims for discharges made prior to October 1, 2003, while the 

revised regulation applies only to “discharges occurring on or 

after October 1, 2003.” 68 Fed. Reg. at 45,346 (emphasis 

added). 

Undaunted, the Hospitals advance two arguments to 

circumvent this clear effective-date provision. Neither is

convincing. 

First, invoking the general rule that a “court is to apply the 

law in effect at the time it renders its decision,” Bradley v. 

School Board of City of Richmond, 416 U.S. 696, 711 (1974), 

the Hospitals argue that the PRRB should have applied the 

revised regulation because it was the law “in effect” when the 

Board rendered its 2015 decision. See Appellants’ Br. 29. But 

under a contrary presumption, “congressional enactments and 

administrative rules will not be construed to have retroactive 

effect unless their language requires this result.” Bowen v. 

Georgetown University Hospital, 488 U.S. 204, 208 (1988).

Although our court has grappled with this “apparent 
8

inconsistency in presumptions,” Gersman v. Group Health 

Association, Inc., 975 F.2d 886, 889 (D.C. Cir. 1992), this 

ambiguity exists “only in the absence of statutory terms clearly 

directing the choice between retroactive and prospective 

application,” id. at 888. Given that we apply a statute 

prospectively when “congressional intent is clear,” Kaiser 

Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 837 

(1990), we see no reason why the principle should be any 

different when the agency’s intent is clear in a regulation. 

Next, the Hospitals contend that the PRRB should have 

applied the revised regulation retroactively because it 

“clarified” rather than “changed” the law and because the 

clarification inures to their benefit. This misses the mark in two 

respects. First, even if the revised regulation merely reiterates 

the law outside the Sixth Circuit, it still marks a “change” from 

the interpretation of section 412.105(b) that CMS had 

acquiesced to after Clark within that circuit until the revised 

regulation took effect. Second, the Hospitals have this circuit’s

retroactivity law backwards: while we have prohibited

retroactive application of a rule that disadvantages a party by 

“effect[ing] a substantive change from the agency’s prior 

regulation,” National Mining Association v. Department of 

Labor, 292 F.3d 849, 860 (D.C. Cir. 2002), we never require

agencies to apply rules retroactively even where it would be 

permissible for them to do so. See Mountain Solutions, Ltd. v. 

F.C.C., 197 F.3d 512, 520 (D.C. Cir. 1999) (“Because 

rulemakings are generally prospective, there would appear to 

be no basis for the court to fault the Commission for failing to 

give [appellants] the benefit of its new rule.” (citations 

omitted)). Had CMS decided to apply the revised regulation 

retroactively, it might have sought to justify that decision by 

presenting arguments similar to those advanced here by the 

Hospitals. But CMS chose to apply the revised regulation only 
9

prospectively, and the Hospitals have given no reason to 

overturn that determination. 

Focusing on the original bed-counting regulation, the 

Hospitals argue that even if the old rule applies, the Sixth 

Circuit’s Clark decision can have no bearing on our analysis of

whether CMS’ interpretation of the regulation was arbitrary or

capricious. Instead, they argue, having brought their case in this 

circuit, they are entitled to a ruling based on this court’s 

independent review of the issue.

This mischaracterizes the question before us. To 

understand our task, we need look no further than the statute 

that gives us jurisdiction, 42 U.S.C. § 1395oo(f)(1), which 

states that “[p]roviders shall have the right to obtain judicial 

review of any final decision of the Board.” In this case, then, 

we must determine whether the PRRB’s final decision to 

follow Clark when calculating reimbursement claims for 

discharges prior to the revised regulation’s effective date was 

“arbitrary, capricious, an abuse of discretion, unsupported by 

substantial evidence, or otherwise not in accordance with the 

law.” Sentara-Hampton General Hospital v. Sullivan, 980 F.2d 

749, 755 (D.C. Cir. 1992) (citing 5 U.S.C. § 706(2)(A) and 

(E)). In doing so, of course, we evaluate the reasons CMS gave

for complying with Clark. But ignoring Clark altogether would 

require us to disregard the context and basis of the very 

decision we are reviewing. See Independent Petroleum 

Association of America v. Babbitt, 92 F.3d 1248, 1258 (D.C. 

Cir. 1996) (holding that Department of the Interior’s 

interpretation of a rule was unreasonable because it 

“constitute[d] an unexplained departure” from the agency’s 

prior adoption of a Fifth Circuit decision).
10

We turn, then, to the issue at the heart of this case: whether 

CMS acted arbitrarily or capriciously when it decided to follow 

Clark by excluding swing and observation beds when 

calculating bed counts at the Hospitals’ facilities.

The Hospitals argue that the PRRB’s decision to acquiesce 

in this case was arbitrary and capricious because it relied on the 

faulty premise that the agency was required to follow Clark. 

According to the Hospitals, the only rationale the PRRB gave

for following Clark was that “‘the separation of powers 

doctrine requires administrative agencies to follow the law of 

the circuit whose courts have jurisdiction over the cause of 

action.[’]” OhioHealth, 2015 WL 10739301, at *8 (quoting St.

Vincent, 2008 WL 6468508, at *9). 

Were this characterization of the PRRB’s decision correct, 

we would have to reverse because, in this circuit, an agency 

need not always acquiesce to an adverse ruling. See Johnson v. 

U.S. Railroad Retirement Board, 969 F.2d 1082, 1093 (D.C. 

Cir 1992) (“Although the decision of one circuit deserves 

respect . . . ‘it need not be taken by the [agency] as the law of 

the land.’” (quoting Givens v. United States Railroad 

Retirement Board, 720 F.2d 196, 200 (D.C. Cir. 1983))). 

Nonacquiescence may be particularly justified where, as here, 

it occurs in the context of a “broad venue statute [that] often 

forces the agency to act without knowing which circuit court 

ultimately will review its actions.” Id. at 1091.

The Hospitals, however, take too narrow a view of the 

PRRB decision. Where “an agency merely implements prior 

policy,” as CMS did here by following St. Vincent, “an 

explanation that allows this court to discern ‘the agency’s path’

will suffice.” WLOS TV, Inc. v. F.C.C., 932 F.2d 993, 995 

(D.C. Cir. 1991) (quoting Hall v. McLaughlin, 864 F.2d 868, 
11

872–73 (D.C. Cir. 1989)). And here, the PRRB’s repeated 

references to St. Vincent make the agency’s path abundantly 

clear. See OhioHealth, 2015 WL 10739301, at *8 (noting the 

argument that “Providers here are situated similarly to . . . St. 

Vincent Mercy Medical Center and that the Board should rule 

consistently with . . . the Administrator’s decisions in St. 

Vincent”). Our task, then, is to determine whether CMS’

incorporation of St. Vincent demonstrates that the agency 

properly understood it had no obligation to acquiesce to Clark.

Reading the PRRB’s decision alongside the CMS 

Administrator’s ruling in St. Vincent, we think it evident that

CMS’ view is not simply that it was required to acquiesce. See 

Tourus Records, Inc. v. DEA, 259 F.3d 731, 738 (D.C. Cir. 

2001) (holding that, although a court may not accept appellate 

counsel’s post hoc rationalizations for agency actions, it may 

consider contemporaneous documents outlining the agency’s 

reasoning). To be sure, the Administrator did state that “the 

separation of powers doctrine requires administrative agencies 

to follow the law of the circuit whose courts have jurisdiction 

over the cause of action,” but the context reveals that the 

Administrator was merely describing the general disapproval 

of intracircuit nonacquiescence. See St. Vincent, 2008 WL 

6468508, at *9 n.21 (describing Johnson’s discussion of “true 

intra-circuit refusal of an agency to recognize adverse 

controlling case law” (citing Johnson, 969 F.2d at 1092)). 

Immediately after making this observation, the Administrator 

recognized that the principle of complying with adverse 

judicial rulings “is more problematic when an agency is faced 

with venue uncertainty.” Id. at *9. Nonetheless, the 

Administrator explained, CMS “decided to apply the JSM to 

ensure the orderly administration of a complex and time 

sensitive program and despite the venue uncertainty.” Id. at *10

(emphasis added). Considering both the PRRB’s decision here 

and the Administrator’s decision in St. Vincent that it relies 
12

upon, we think it clear that CMS recognized its discretion not 

to follow Clark but made a reasoned decision to do so.

The Hospitals also argue that the PRRB acted arbitrarily 

and capriciously because it failed to give a rational explanation

for treating hospitals in the Sixth Circuit differently from 

providers located elsewhere. Even if Clark constrained CMS’

options for counting beds in the Sixth Circuit, the Hospitals

believe that the better approach would have “treat[ed] 

[providers] similarly based on their common interests vis a vis 

the bed counting regulation (DSH versus IME).” Appellants’

Br. 64. The Hospitals style this argument as both an arbitraryand-capricious challenge and an equal-protection challenge. 

Appellants’ Br. 15, 17. As they acknowledged at oral 

argument, however, these two versions are “fundamentally 

indistinguishable.” Oral Arg. Rec. 14:17–:27. Accordingly, we 

consider these arguments together, reversing only if “‘the 

agency offers insufficient reasons for treating similar situations 

differently.’” Muwekma Ohlone Tribe v. Salazar, 708 F.3d 

209, 215 (D.C. Cir. 2013) (quoting County of Los Angeles v. 

Shalala, 192 F.3d 1005, 1022 (D.C. Cir. 1999)); cf. Ursack,

Inc. v. Sierra Interagency Black Bear Group, 639 F.3d 949, 

955 (9th Cir. 2011) (noting that where “no suspect class is 

involved” the “equal protection argument can be folded into the 

APA argument”).

The mere fact that the Hospitals suggest an alternate 

approach hardly means that CMS acted arbitrarily or 

capriciously in choosing the approach it did. To the contrary, 

the existence of different law in different circuits provides a

perfectly adequate reason for distinguishing between providers 

based on location. As this circuit’s nonacquiescence case law 

establishes, once a court rejects an agency’s interpretation of a 

regulation, the agency is not free to simply ignore the ruling 
13

within that court’s jurisdiction. Heartland Plymouth Court MI, 

LLC v. NLRB, 838 F.3d 16, 22 (D.C. Cir. 2016) (noting that 

intracircuit nonacquiescence may constitute bad faith if not

“clearly asserted and accompanied by a preservation of 

arguments for Supreme Court or en banc review”). Rather, the 

agency must choose between compliance or nonacquiescence 

and, if opting for the latter, it must “specify[] its arguments 

against adverse precedent” and seek further judicial review. Id.

Given that seeking en banc review or certiorari after Clark was 

unrealistic—after all, CMS could correct the problem simply 

by revising the regulation—it is hardly surprising that the 

agency chose the former: acquiescing to the Sixth Circuit and 

promptly revising the regulation. In explaining its decision, the 

agency stated that complying with Clark would ensure that “all 

similarly situated providers are treated the same for the 

applicable cost reporting periods” and maintain “the orderly 

administration of a complex and time sensitive program . . .

despite the venue uncertainty in PRRB cases.” St. Vincent, 

2008 WL 6468508, at *10. Perhaps there were more elegant 

solutions to CMS’ predicament, but our task is not to test 

whether the agency chose “the best solution, only a reasonable 

one.” Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695, 703 

(D.C. Cir. 2007).

As a final matter, although the Hospitals never squarely 

challenge the Sixth Circuit’s reading of section 412.105(b), we 

emphasize that CMS’ acquiescence would have been

unacceptable had it rested on an unreasonable interpretation of 

the regulation. See Holland v. National Mining Association, 

309 F.3d 808, 812, 819 (D.C. Cir. 2002) (rejecting agency’s 

contention that acquiescing nationwide to an interpretation 

compelled by court order “cannot violate that ‘not in 

accordance with law standard of the APA’”). We would be 

unable to sustain an administrative action that conflicted with 

the applicable statutory or regulatory text just because a sister 
14

circuit has approved the interpretation or because the agency 

acts out of “administrative concerns, such as the desirability of 

uniformity.” Id. at 818; see also Atchison, Topeka & Santa Fe 

Railway v. Peña, 44 F.3d 437, 446 (7th Cir. 1994) (cautioning 

against agency action seeking to ensure that the “applicable 

rule of law be settled [rather] than that it be settled right”

(quoting Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 

(1932) (Brandeis, J., dissenting))), aff’d sub nom. Brotherhood 

of Locomotive Engineers v. Atchison, Topeka & Santa Fe 

Railway, 516 U.S. 152 (1996). That, however, is not the case 

here. As CMS explained when it first articulated its 

acquiescence decision in JSM-109, “[t]he regulations’ text was 

silent” on the issue of counting swing and observation beds at 

the time of the Clark decision. Given this ambiguity, CMS 

believed that the Sixth Circuit’s interpretation was permissible, 

even if not required, and we do as well.

III.

For the foregoing reasons, we affirm the district court’s 

grant of summary judgment to CMS. 

So ordered.