F or e a se of re fe re nc e , th e Cou

rt wi ll r e fe r t o th e Do y

ne Ho sp ita l' s me mor and

um i n 1 su pp or t of its mot ion

fo r s umm ary

jud g me nt a s " Pl. ' s Me m., " and de fe nd ant' s me mor and

um i n support of its cross-motion for summary judgme nt as " Def

.' s Mem." Citations to the administrative re cord w ill be indicated by "A R," followe d by

the re cord pa g e number
. UNITED STAT ES DIS TRICT COURT F OR THE D ISTRIC T OF CO LU M BIA
JOHN L. DOYNE HOS P ITAL, P la in t if f, v. Ci vilAc ti on N o. 07 -1 59 2 ( JD B) CH ARLES E. JOH NSO N, Ac ti ng Secre tary, U nited States Depart m ent of He alt h and H um an Se r vic e s, Defendan t.
M EM OR AN DU M OP IN ION The Sec reta

ry of the De partment of H ealth and H uman Service s, throug h the Centers f or Medica re a nd Medica id Services ( "CMS") , is responsible for de termining whether , and to what
e xtent, M e dic are pr ov ide rs are e nti tle d to re imb ur se me nt o f t he c os ts o f p ro vid ingse rv ic e s to Me dic are be ne fi c iari e s. Th is c a se inv olv e s a dis pute ov e r t

he fi na l c os t r e po rt

su bmi tte d to CMS by the John L . D oy ne Ho sp ita l ( " the Do y

ne Ho sp ita l" or

" Ho sp ita l" ) f

oll ow ingits c los ur e in Dec ember

1995. As part of

its final cost repor

t, the Hospital sought r eimbursement f or the p o s tre t i re m en th ea l thi n s ura n ce b en ef i tco s t s o f qu al i fy i n g em p l o y ee s fo r t h e p er i o d 1 9 9 6 th ro u gh 2044, which it considere d a re asonable cost of havingprovided Medic are service s throug h the date of its closure. The Sec reta

ry disallowed the c laim, and the Hospital now see ks judicial
re vie w o f t

hat f ina l a g e nc y

a c tio n. Th e pa

rt ie s h ave fi le d c ro ss- mot ion s f or summa ry jud g me nt, and the c ase is now r eady for de cision. For

the re asons explained below, the Court will deny the 1-2-

Hospital' s motion for summary judgme nt, gr ant in part a nd deny in part the Sec reta

ry ' s motion for
summa ry jud g me nt, and

re mand the c a se to t

he Se c re tary

fo r f ur the r p ro c e e din g s. BACK GR OUND I. St at ut or y a nd R e gul at or y Ba c kgr ound A. The M e dic ar e P r og r amG e ne r all y This action ar ises under Title XV I I Iof the Social Sec urity Act, 42 U.S.C. § 1395 et seq.,
c omm on ly

re fe rr e d to a s th e Me dic are Ac t, whic h e sta bli sh e s a fe de ra lly fu nd e d h e a lth insurance prog ram for

the elderly

and disabled. See g ener ally County of L os Ang eles v. Shalala , 192 F.3d 1005, 1008 ( D.C. Cir. 1999). Part A of the Me dicar e Ac t ty pically cover s "inpatient hospital service s" f

urnished by

participating pr oviders. 42 U.S.C. § 1395d. Part A servic es ar e fu rn ish e d b y

a " pr ov ide r o f s e rv ic e s, " su c h a s a ho sp ita l, whic h mu st e nte r i nto an a g re e me nt w ith the Secr etar

y in order to pa

rticipate in a

nd obtain pay

ment from the Me dicar e program. I d. §§ 1395g , 1395cc, 1395x(u). The Secre tary has dele g ated a

uthority to administer the Medica re prog ram to the Center s for Medic are & Me dicaid Servic es. See 42 U .S.C. §§ 1395h, 1395u. Private insuranc e compa

nies, known as " fiscal inter mediarie s," a ctingas ag ents of the Secre tary , proce ss reimburseme nts to providers. 42 U.S.C. § 1395h. At the close of e ach f iscal y ear , a provide r is require d to file a Medic are cost repor t with its intermediar

y . 42 C.F.R. §§ 405.1801(b), 413.24( f). The intermediar y then audits the cost re port and make s a final deter mination of the total amount of re imbursement owed by Medica re. That final deter

mination is set forth in a " notice of pr og ram re imbursement" or " NPR." 42 C.F.R. § 405.1803. A provider

dissatisfied with the amount of the a war d is entitled to request a he aringbefor e the Provider Reimburse ment Review B oard ( "PRRB" or " Boa rd" ), an a dminist rative body
c omp os e d o f f

ive me mbe rs a

pp ointe d b y

the Se c re tary

wh o mu st b e " kn ow le dg e a ble in t he fi e ldSince 1983, Medica re r eimbursement ha s been ba sed primar ily on the Prospective 2 Pay ment Sy stem, under whic h providers a re r eimbursed ba sed on prospe ctively fix ed rates for eac h discharg e, base d on the patient' s diag nosis, reg ardle ss of ac tual costs. See County of L os Ang eles,192 F .3d at 1008. Howe ver, c erta in Medicar e costs ar e still determined on a r etrospec tive rea sonable c ost basis. See Ba ttle Creek He alth Sy s. v. L eavitt, 498 F.3d 401, 403 ( 6th Cir. 2007). The pa rties have ag ree d that the re asonable cost standar d g overns r esolution of this matter. All citations to the reasona ble cost re g ulations are to the 1995 ve rsion of the Code of Fe dera l Reg ulations, the version in eff ect at the time of the Hospital' s final cost re porting period. -3- of pa y me nt o f p ro vid e rs of

se rv ic e s. " 42 U. S.C. § 1 39 5o o( a ), (h ). Th e B oa rd ha s th e a uth or ity to affi rm , m od if

y , o r rev ers e th e fi nal det erm in ati on of t he i nt erm edi ary . I d. § 1 39 5o o(d ). By reque st, or on its own moti on, a dec ision by the B oard is subjec t to review by the Secr etar

y ’s deleg ate, the A dminist rator of CMS. 42 U.S .C. § 1395oo(f)( 1); 42 C.F.R. § 405.1875. Once a fi na l de c isi on

is r e nd e re d, the pr ov ide r m ay se e k ju dic ia l r e vie w o f t

he fi na l a g e nc y

de c isi on in fede ral district cour

t within 60 day s. 42 U.S.C. § 1395oo(f)(1)
. B. The "Reasonab le Cost" Standard Th e pr inc ipl e s o f r e imb ur se me nt f or the c os ts at is su e he re are se t out in the re a so na

ble cost provision codified at 42 U.S.C. § 1395x (v)( 1)(A) and its implementing re g ulations at 42 C.F.R. § 413.100 (1995). Congr ess def ined " rea sonable c ost" a s "the cost ac tually incurre d, 2 excluding ther efr om any

part of inc urre d cost found to be unne cessa ry in the eff icient deliver

y of neede d health ser

vices" and author ized the Secre tary to issue regulations establishing the me thods to be used in dete rmining r easona ble costs. 42 U.S.C. § 1395x (v)( 1)(A) . Congr ess furthe r provided that " [s] uch re g ulations . . . may provide for

using diff

ere nt methods in differe nt circ umstances, may

provide for

the use of e stimates of costs of par ticular items or ser

vices, may provide for

the establishment of limits on the direct or indire ct over all incurre d costs or incurr ed costs of spec ific items or ser vices . . . , a

nd may provide for

the use of c harg es or a

perc entag e of char g es whe re this method re asonably ref lects the c osts." I d. Reasonable cost includes items such-4-

as " administrative costs, maintenanc e costs, and pr emium pay ments for e mploy ee he alth and pension plans." 42 C.F.R. § 413.9(c) (3). Pursuant to § 1395x (v)( 1)(A) , the Secr etar y has adopte d the " acc rual" method of
acc ounting to ca lculate r eimbursement of "r easona ble costs." See 42 C.F.R. § 413.24(b) (2), ( e). Under the ac crua l method, "r evenue is reporte d in the period in which it is ear ned, re g ardle ss of when it is collecte d; and an e x pense is re ported in the pe riod in which it is incurred, r eg ardle ss of when it is paid." I d. § 413.24(b)( 2). The Sec reta ry has dete rmined, howe ver, that some liabilit ies associate d with acc rued c osts may never be fully liquidated throug h an ac tual expenditure of funds, which may

result in the Medica

re pr og ram pa

ying f or costs that a pr ovider ne ver pa y s. 60 Fe d. Reg . 33126, 33126 (June 27, 1995). He c ited as an e x ample employ ee sic k leave day s that
are subject to forf

eiture if the employ ee is discha rg ed for cause , noting that some pr oviders have
so ug ht M e dic are pa

y me nt f or e mpl oye e sic k le ave da

y s f or wh ic h th e pr ov ide r n e ve r b e c ame liable. I d. To minimi ze the unwar rante d pay

ment of fe dera l funds in such ca ses, the Secr etar y issued regulations requiringthe timely liquidation of liabili ties associate d with cer tain ty pes of
acc rued c ost, including va cation pay , sick leave , and most importantly for this ca se, def

err ed compensation. I d. 33134-135. These regulations are c odified, in rele vant par t, at § 413.100. Se c tio n 4 13 .1 00 me mor ia lize s th e se pr inc ipl e s a s f oll ow s: (a) Pr inc iple . . . . In the ca se of a ccr ued costs desc ribed in this section, for Me dicar e pay ment purposes the c osts are a llowable in the y ear in which the costs ar e ac crue d and c la ime d f or Me dic are pa

y me nt o nly un de r t he c on dit ion s se t f

or th i n p ara g ra

ph(c ) o f t his section.

. . . . (c) Re c og nit ion of a c c ru e d c os ts . (1) Ge ne ra l. Although Me dicar e re cog nizes in t he y ear of ac crua l, the acc rual of c osts for which a provider ha s not actually expended funds duringthe cur

rent c ost reportingperiod, for purposes of pa

y ment Medica

re doe s not r e c o g n i z e th e a c c r

u a l o f c o s t s un l e s s th e r e l at e d

l i a b i l i t i e s ar e l i qu i d at e d

t i m e l y. One of the eig ht ty

pes of liabilities subject to the timely liquidation requirement of § 413.100(c) is "de fer

red c ompensation." As to defe rre d compensation, the regulation providesTh e fa c tua l ba c kg ro un d is dr awn pr ima ri ly fr om t he Cor re c te d Joint Sti pu latio n o f F a c ts 3 submitt ed by

the Hospital and the inter mediary to the Provider Reimburseme nt Review B oard. AR 76 8- 74 . A lth ou g h n ot a

pa rt y to t he sti pu latio n, the Se c re tary do e s n ot d isp ute the c or

re c tne ss of the sti pu latio ns on

thi s a pp e a l. -5- that "[r]easonable provider pa y ments made unde r unfunde d defe rre d compensation plans are included in allowable costs only duringthe cost re porting period in which a ctual pay ment is made to the participating e mploy ee." § 413.100(c) (2)( vii)(A) ( emphasis adde d). It expressly provides that "[p]ost retire ment benef it plans" c onstitut e def

err ed compe nsation arr ang ements and, he nce,
are subject to the re g ulation. I d. § 413.100(c) (2)( vii)(C). II. F ac tu al B ac kgr ound 3 The Doy ne Hospital wa s a g ener al ac ute ca re hospital in Milwaukee , Wis consin, pr ov idi ngse rv ic e s to Me dic are be ne fi c iari e s p ur su ant t o a Me dic are pr ov ide r a g re e me nt f or ne arl y 30 y ear s, until i t voluntarily terminated its oper ations and ce ased pa rticipation in the Medica

re prog ram on De cembe r 22, 1995. AR 22, 770. As a r esult of the Hospital' s closure, some H ospital employ ees r etired, some tr ansfe rre d to other County depar tments, and others we re te rminated from employ

ment with the County . I d. at 771. Milwaukee County , the owner and oper ator of the Hospital, is obligated by local law a

nd union contrac ts to provide postretireme nt health insuranc e bene fits to Count y employ ees unde r
cer tain circ umstances. AR 771. Unde r the Milwauke e County Code, employ ees of

the Hospital hired be fore J anuar

y 1, 1994 who worke d for the H ospital and other County ag encie s for a minimum of 15 y ear s have a vested right to postretirement hea lth insurance be nefits, with the be ne fi ts e xten din gto s po us e s and e lig ibl e de pe nd e nts . I d. Th e Ho sp ita l' s p os tr e tir e me nt h e a lth benef it plan, however , was " unfunded," which mea ns that the Hospital had not set aside f unds in a
c us tod ia l ba

nk a c c ount, tr

us t a c c ount, or

wi th a n in sura nc e c omp any

to c ov e r t

he c os t. P l.' s Me m.The Provider Reimbursement Manua l is CM S Publ ication 15-1, available at 4 htt p:/ /w ww .c ms. hh s. g ov/Ma

nu a l/PB M. This amount was base d on a total of $139,961,673 in net pre sent value c osts for re tiree 5 health bene fits, subject to the applica ble Medica

re r ecove ry

perc entag e of 5.816 pe rce nt. AR 772. The ne t present va lue, in turn was ba sed on the amount paid by the County

for r etiree s in 1996 and 1997 -- $13,392,120 - - and a future year s projection of $126,569,553. I d.

-6- at 12; Def

.' s Mem. at 9; Provider Reimburseme nt Manual § 2140.3.B .1. Prior to its closure, the 4 Hospital made postre tirement hea lth benefit pay ments to eligible r etiree s. AR 771. I n acc ordanc e with the acc ounting pr inciples set forth in 42 C.F.R. § 413.24(a ), the County rec orded e x penses for the postre tirement hea lth benefits on a c ash basis and r eporte d related costs to the Medica re prog ram in the year

in which the expenses we re pa id. I d. The County has continued to make pay ments to retiree s after

the Hospital' s closure. I d. The County

submitt ed its cost repor

t for the pe riod endingDec ember 22, 1995, in May 1996 -- its final cost re port -- a nd included ther ein a c laim for re imbursement base d on liabiliti es that had bee n incurre d throug h the date the County terminated its par

ticipation in the Medicar e pr og ra m. I d. at 77 2. Th is c os t r e po rt inc lud e d a

c la im f or pa y me nts of po str e tir e me nt h e a lth benef its ithad made throug h the date of closure, which the interme diary ag ree d wer e allowa

ble. I d. at 47 9, 64 6. On

July 31 , 1 99 8, the County

su bmi tte d a n ame ndme nt t o th e fi na l c os t r e po rt to the intermedia

ry claiming , inter alia, " additional postretireme nt health bene fit costs" in the a mount of $8,140,171. I d. at 772. This amount was ba sed on the amounts the County had paid to re tirees 5 in 1996 and 1997 and its projec ted costs through the y ear 2044. I d. at 772-73. On J anuar

y 18, 2000, the intermedia

ry issued an NPR to the County disallowing the amende d claim for postre tirement hea lth benefit costs. I d. at 773. The County then filed a

notice
o f ap p ea l wi thth e P R R B. I d
. By l et t er d at edAp ri l 2 6 , 2 0 0 4 , wh i l e t h e a p p ea l wa s s t i l l p en d i n g,B y 20 04 , th e County

ha d a c tua l c os t data

fo r t he pe ri od 19 96 -2 00 2, sh ow ingit h a d p a id 6 po str e tir e me nt h e a lthbe ne fi t c os ts i n th e amou nt o f $ 44 ,3 31 ,6 23 ; it

a lso ha d in c re a se d it s pr oje c te d f

utu re c os ts thr ou g h 2 04 4 to be $3 93 ,6 92 ,8 26 . A R 77 3- 74 . T he tot a l r e tir e e he a lth costs of $438,024,449, discounted to its net prese nt value in 1997 dollars, ca me to $208,170,377, which wa s then subject to the Medic are rec overy perc entag e of 5.816 pe rce nt. I d. -7- the County

submitt ed an updated claim to the interme diary ref lectingthe ac tual costs of re tiree he a lthbe ne fi ts f

ro m 19 96 thr ou g h 2 00 2 a nd " re fi ne me nts " to t

he a ssumpt ion s u se d in

its calc ulations for the year s 2003 throug h 2044. I d. The updated claim re quested pa y ment for postretireme nt health bene fit costs in the amount of $12,107,189, an incr ease of nea rly 50 perc ent. I d. at 773-74.

6 The PRRB held an e videntiary hear ing on Ma

rch 9, 2006, a

nd issued its decision on May 10, 2007. The B oard a ffirme d the intermedia ry ' s decision disallowing the Hospital' s claim for postretireme nt health bene fit costs, finding that 42 C.F.R. § 413.100(c)( 2)(vii) dictated the disallowance -- that is, " [r] easona ble provider

pay ments made unde r unfunde d defe rre d compensation plans are inc luded in allowable c osts only duringthe cost re porting period in which actua l pay

ment is made to the par

ticipating e mploy ee." AR 18 (quoting § 413.100( c)( 2)(vii)(A )). Although not plainly

stated on the fa ce of

the dec ision, itis appare nt that the Boa rd disallowed the postretireme nt health bene fit costs actua lly paid by the Hospital from 1996-2002 dur ing the pendenc y of the a ppeal be cause those pay

ments were made a fter the cost repor ting pe riod under revie w -- that is, the cost reportingperiod e nding D ece mber 22, 1995. I d. at 17-18. The Boa rd did not address the va lidity of the Hospital' s methodology for pr ojectingfuture c osts, having cate g orica lly

disallowed the c laim for costs. I d. On J u l y 9 , 2 0 0 7 , th e C M S Ad m i n i s tra t o r i s s u eda n o t i ce d ec l i n i n g t o re v i ew th e B o ar d 's decision, and he nce, the Boa rd dec ision became the Secr etar y ' s final dec ision. AR 1. TheT h e H o s p i t al b as edth i s re v i s edes t i m at e o nac tu al co s td at a f o r t h e p er i o d

1 9 9 7 th ro u gh 7 2007 and a r evised proje ction for the pe riod 2008 throug h 2044, based on the assessment of a cer tified ac tuary

who applied the sa

me ac tuarial a ssumptions orig inally used bef ore the PRR B. See Pl.'s Me m. at 7-8. -8- Hospital filed its complaint seekingjudicial revie w of this decision on September 9, 2007, reque sting that the Court va cate the Secr etar y ' s decision and issue a

n order compellingthe Secre tary to reimburse the Hospital for a ll retiree health bene fits paid to date and f or all estimated future c osts of those benef its. Com pl. at 13-14. Duringthe cour se of this litigation, the Hospital submitt ed a r evised e stimate of the costs of the postretireme nt health bene fits in the amount of $11,049,847, and re quested a n order for that amount. Pl.'s Mem. at 7- 8. 7 STA ND AR

D O F RE VI EW Under Fe d. R. Civ. P . 56(c) , summary judgme nt is appropriate when the ple ading s and the evidenc e demonstrate that " there is no ge nuine issue as to any materia l fac t and that the moving party is entitled to judgment as a matter of la

w." In a ca se involving r eview of a fina l ag ency
a c tio n und e r t

he Ad min istrativ e Pr oc e dure Ac t, 5 U. S.C. § 7 06 , h ow e ve r, the sta nd ard se t f or th i n Rule 56(c) does not apply beca use of the limited role of

a cour t in reviewingthe administrative
re c or d. Se e Sie rr a

Clu b v . M a ine lla , 4 59 F . Su

pp . 2 d 7 6, 89 -9 0 ( D. D. C. 2 00 6) ; F un d f or An ima ls v. Ba bbitt, 903 F. Supp. 96, 105 (D.D.C. 1995), ame nded on other g rounds, 967 F. Supp. 6 (D.D.C. 1997). Summary judgme nt serves a s the mecha nism for dec iding, a s a matter of law, wh e the r t he a g e nc y a c tio n is su

pp or te d b y the a dmi nis tr ativ e re c or d a nd oth e rw ise c on sis te nt w ith the APA standar d of re view. See Richa rds v. I NS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977), cited in B loch v. Powell, 227 F. Supp. 2d 25, 31 (D.D .C. 2002), aff ' d, 348 F.3d 1060 ( D.C. Cir. 2003). Under

the APA, the Administrator' s decision ca n be set a side only

if it is "unsupported by-9-

su bs tanti a l e vid e nc e ," or

" arb itr ary , c a

pr ic iou s, an a

bu se of dis c re tio n, or

oth e rw ise no t in
acc ordanc e with law." 5 U.S.C. § 706(2)(A) and (E) ; see 42 U.S.C. § 1395oo(f) (1) ( providing that judicial revie w of Medic are reimburse ment decisions shall be made under A PA standards); St. Eli zabeth' s Med. Ctr. of B oston v. Thompson, 396 F.3d 1228, 1233 (D.C. Cir. 2005). The

" sc op e of re vie w und e r t

he ' arb itr ary

and c a pr ic iou s' sta

nd ard is n arr owand

a c ourt is n ot t o
su bs tit ute its jud g me nt f

or that of the a g e nc y ." Mo tor

Ve hic le Mf

rs . A ss’ n o f U .S. , Inc . v . St ate Fa rm Mut. Auto. I ns. Co., 463 U.S. 29, 43 (1983). That is, it is notenoug h for the a g ency de c isi on to b e inc or

re c t - - a s lo nga s th e a g e nc y de c isi on ha s a ratio na l ba sis , th e c ourt

is b ound to uphold it. C itiz ens to Preser ve Ove rton Park, Inc. v. Volpe, 401 U .S. 402, 416 (1971). The c ourt may only revie w the ag ency

action to deter

mine "whether

the dec ision was based on a consideration of the rele vant fa ctors and whether there has bee n a cle ar e rror of judg ment." I d. A cour t should review a

n ag ency' s interpre tation of a statute unde r the fa miliar two-step
ana ly sis outli ne d in

Che vr on , U .S. A. , Inc . v . N atur a l Re so ur c e s D e fe ns e Counc il, Inc ., 46 7 U .S. 83 7 ( 19 84 ). Th e fi rs t st e p is de te rm ini ngwh e the r C on g re ss h a s sp ok e n d ir e c tly to t he " pr e c ise question at issue," for if it has, " the cour t, as well as the a g ency , must give e ffe ct to the unambig uously

expressed intent of Cong ress." I d. at 842-43. I f, howe ver, the statute is silent or
ambi g uo us on

the sp e c if

ic iss ue , " the qu e sti on

fo r t he c ourt is whe the r t

he a g e nc y ' s a

ns we r i s based on a

permissible construc tion of the statute." I d. at 843. When the ag ency' s construction of a statute is cha lleng ed, its "inter pretation need not be the be st or most natural one by g rammatica l or other sta

ndards . . . . Rathe r [it] need be only rea sonable to wa

rra nt defe renc e." Pauley

v. Be thEnergy

Mines, Inc., 501 U.S. 680, 702 (1991) ( citations omitt ed). Fur thermore , an ag ency' s interpre tation of its own regulation is entitl ed to substantial defe renc e. Thomas Jeffe rson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (" We must give-10-

su bs tanti a l de fe re nc e to a

n a g e nc y ' s inte rp re tatio n o f i ts o wn re g ulatio n. " ). He nc e , c ourt s " mus t d ef er t o th e a gen cy 's i n t er

p re t at i o nun l es s 'an al t ern at i v e r ea d i n g i s co mp el l edb y th e r egu l at i o n 's plain languag e.' " Ca

rus Chem. Co. v. EPA, 395 F.3d 434, 439 (D.C. Cir. 2005) ( quoting Thoma s J eff erson Univ., 512 U.S. at 512)
. DI SCU SSIO N Th e Ho sp ita l c on te nd s th at pa y me nt i s r e qu ir e d und e r t

he Me dic are re a so na

ble c os t provision, 42 U.S.C. § 1395x (v)( 1)(A) , beca use the County ' s obligation to pay the postretire ment he a lthbe ne fi ts w a s a

c os t of se rv ic e s p ro vid e d to Me dic are be ne fi c iari e s w hil e the Ho sp ita l w a s a Medica re pa rticipatingprovider. T he Hospital foc uses on its right to pay ment, first, under the defe rre d compensation regulation, 42 C.F.R. § 413.100(c)( 2)(vii)(A ), re cog nizi ngthe costs of such plans as a llowable, and ne x t, under the Provider Reimbursement Manua l provision
re co gn i z i n g th atth i s ty

p e o f c o s ti s al l o wab l e a s p arto f ap ro v i d er 's t erm i n at i o nco s t s . S ee P l
. 's Mem. at 14-20, 21- 22. In response , the Secr etar y contends that he has ac ted within his discretion in applying the principles of r easona ble cost re imbursement set out in the regulations at § 413.100 to the Hospital to disallow unfunded post-termination costs. In his view, disallowing the speculative costs associate d with postretirement he alth benef its absent timely

liquidation of the
acc rued c osts furthers the policy of ensur ing a ccur acy

in reimburseme nt. See Def .' s Mem. at 22- 26. Th e Court

c on c lud e s th at th e Se c re tary ha s r e a so na

bly a pp lie d 4 2 C. F .R. § 4 13 .1 00 to disallow pay

ment for the H ospital's postre tirement hea lth benefit costs af ter its termination and that th is a pp lic atio n is c on sis te nt w iththe statut e . A s a thr e sh old matte r, the Court

ob se rv e s th at, to the extent the Hospital relies on the text of § 1395x (v)( 1)(A) standing alone a s mandating pa y me nt f or the se c os ts, that r e lia

nc e is m isp la c e d. Se c tio n 1 39 5x(v )( 1) (A ) d ir e c ts that r e a so na ble-11-

cost " shall be dete rmined in ac corda nce w ith regulations establishing the me thod or methods to be used," and fur

ther provide s that the ag ency "ma y provide for

using diff

ere nt methods in differe nt
c ir c ums tanc e s, " and

" may pr ov ide fo r t

he e sta bli sh me nt o f l imi ts o n th e dir e c t or ind ir e c t ov e ra ll incurre d costs." T he def

err ed compe nsation regulation, 42 C.F.R. § 413.100(c)( 2)(vii), is one
su c h r e g ulatio n li mit ingre imb ur se me nt o f i nd ir e c t c os ts, and the Ho sp ita l' s a lle g e d e nti tle me nt t o pay ment must be viewed through the lens of this regulation. Section 413.100(c) (2)( vii)(A) pla inly permits defe rre d compensation to be claimed as a n allowable c ost "only

duringthe cost re porting period in which a ctual pay ment is made to the pa rt ic ipatin ge mpl oye e ," to e ns ur e that su c h c os ts a re re imb ur se d o nly

to t he e xtent a c tua lly incurre d. I d. The Hospital has not mounted a challeng e to § 413.100; ironically , the Hospital actua lly relies on the r egulation to support its claim that the costs ar e allowa ble. See Pl.' s Mem. at 14 . B ut a n im po rt ant c omp on e nt o f t

he Ho sp ita l' s a

rgume nt i s th at, t o th e e xtent th at th e tim e ly liq uid atio n r e qu ir e me nt - - " a c tua l pa y me nt" duri ngthe c os t r e po rt ingpe ri od -- is a pp lie d to pr ov ide rs that ha

ve te rm inate d o pe ratio ns , th e re g ulatio n is c on tr ary to § 13 95 x(v) (1 )( A) and

is ir ratio na l. S e e Pl. ' s Me m. at 17 -1 8, 20 -2 1. Th e Court , h e nc e , tu rn s to that argume nt. Th e Se c re tary

ha s b ro a d d isc re tio n to de ve lop re g ulatio ns imp le me nti ngthe re a so na ble cost conc ept set for

th in § 1395x (v)( 1)(A) . See Villa View Communi ty

Hosp. v. Hec kler, 728 F .2 d 5 39 , 5 40 (D .C. Cir . 1 98 4) (" Con g re ss h a s g ive n th e Se c re tary c on sid e ra

ble dis c re tio n to promulg ate c ost-reimburse ment regulations that give meaningto the term ' rea sonable c osts.'" ); Battle Creek He alth Sy s., 498 F.3d at 410 (" the Medica re A ct g rants the Sec reta

ry broad discr etion to d e te rm ine wh ic h ' re a so na ble c os ts' may

be re imb ur se d" ); Vi sit ingNurs e As s' n G re g or ia Auffa nt, I nc. v. Thompson, 447 F.3d 68, 77 ( 1st Cir. 2006) (same) . Wit h respe ct to "indire ct
c os ts, " su c h a s e mpl oye e he a lthbe ne fi t pl ans , th e statut e e xplic itl y a uth or ize s th e Se c re tary

to-12-

"pr ovide for the establishment of limits on t he . . . indirec t" c osts that may be re cog nized as "r easona ble." Way ne County

Gen. Hosp. v. L eavitt, 470 F. Supp. 2d 775 (E.D . Mich. 2007) (quoting § 1395x (v)( 1)(A) ). Consideringthe ambiguity inhere nt in "limits on t he . . . indirec t . . . costs that may

be re cog nized as rea sonable" and the br oad dele g ation of authority to issue regulations developingthe " rea sonable c ost" c oncept, the va lidity of the timely

liquidation
r e qu i r e m e n ti n§ 4 1 3
. 1 0 0 ( c ) ( 2 ) ( v i i ) ( A ) mu s tb e c o n s i d e r e d un d e r th e s e c o n d

s t e p o f C h e v r o n . In other wor ds, the Court must consider whethe r the a g ency ' s approa ch to unfunde d defe rre d compensation is "based on a permissible construc tion of the statute." Chevron, 467 U.S. at 843. The Sec reta

ry has re asonably

explained in the preamble to the reg ulations at issue that the timely liquidation requirement is nec essar y to ensure that the ag ency does not pay

expenses that
are never actua lly incurre d, explaining in one example that a pr ovider may otherwise r ece ive an
unwar rante d pay

ment from Medic are for e mploy ee be nefits that the employ ee later for feits. See 60 F e d. Re g . at 33 12 6, 33 12 9- 13 0. Th e Se c re tary ha s f ur the r e xpla ine d th at, a s a

re su lt, the c os ts of un fu nd e d d e fe rr e d c omp e ns atio n p lans , in pa rt ic ula r, wo uld be pa id " on ly

duri ngthe c os t repor ting pe riod duringwhich ac tual pay ment is made to the par

ticipating e mploy ee." I d. at 33133. The Sec reta

ry noted that this require ment is equally applicable when a

provider g oes out of business, for " it is st ill necessar y for the pr ovider to timely liquidate liabiliti es for

expenses paid by the Medica

re pr og ram." I d. at 33128-29. The Secre tary also single d out post-retireme nt health bene fit plans as beingone for m of defe rre d compensa

tion that is ex pressly

cover ed by

the regulation. 60 Fed. Re g . at 33134; 42 C.F.R. § 413.100(c) (2)( vii)(C). Althoug h unstated, the
rea son for subjec ting postre tirement bene fit plans, in particular , to a timely liquidation require ment is self-evide nt -- the c ost of such plans is particula rly speculative consideringthat such costs ar e depe ndent on, inter a lia, the long evity of the c overe d employ ees. See Pl.'s Mem. atThe Court re jects the Hospital' s contention that the intermedia ry ' s inconsistent treatment 8 of the Ho sp ita l' s r e qu e st t o b e re imb ur se d f or its e mpl oye e s' un fu

nd e d s ic k le ave be ne fi ts ( pa y a ble on retire ment) wa

rra nts a diffe rent re sult. S ee Pl.' s Mem. at 22-23. The rec ord cle arly establishes that the intermedia

ry believed that the employ ees' sick leave was funde d by the County

based on the text of certain r ecor ds, althoug h this turned out to a fac tual mistake. See AR 57, 129-30, 133- 34 (t e sti mony

fr om t he int e rm e dia

ry that, at th e tim e he a

pp ro ve d th e sic k le ave a s a n a llo wa ble cost, he " understood . . . that this was a f und that was set a side by

the County

to fund this sick and vacation accr

ual" ). Ther e is no basis in logic or the lawto require the Secr etar y to repe at the m i s t ak e w i thr e s p e c tt o th e un f un d e d p o s tr e t i r e m e n th e a l thb e n e f i tc o s t s ati s s u e . A d d i t i o n a l l y, since the matter of sick le ave w as not the subject of the appe al, there was no oc casion for the B oa rd to t ake c or

re c tiv e a c tio n o n th at a sp e c t of the NPR
. -13- 6 (ac knowledg ing that "a ctuar ial assumptions" must be made to de termine c osts at issue, including use of 2044 as the te rminating date) ; Def.' s Mem. at 24 (notingthat ultimate liquidation value of postretireme nt health bene fits will not be known until t he distant future ). Considering the substantial risk of over pay ment descr ibed by

the Secr etar

y , the Court
c on c lud e s th at he a c te d r e a so na bly and wi thi n h is a

uth or ity in d e te rm ini ngthat Me dic are wi ll o nly pa y fo r u nf un de d d e fe rr e d c omp e ns atio n a s a n a llo wa ble c os t f or the c os t r e po rt ingpe ri od in which ac tual pay

ment is made. Althoug h the Hospital posits alternative wa y s in which the Secre tary may addre ss the conce rn about ove rpay ment for spe culative f

uture c osts, it was not arbitra ry or ca pricious for the Secre tary to select the me thod he did. 8 The fa cts here demonstrate that the Secre tary ' s application of § 413.100 to the Doy ne Hospital, in particular , is reasona ble. As the Hospital ac knowledg es, its projecte d estimate of costs for the postre tirement hea lth benefit plan have fluc tuated substantially since it beg an the exercise of

trying to pr edict the total costs fr om its closure in 1995 to the projecte d last date of paying be nefits in the y ear 2044. In 1998, it estimated the costs for this 49-year period would total $8,140,171. AR 772. By 2004, the estimate wa s revised by almost 50 perce nt to $12,107,189. Id
. 7 7 3
- 7 4
. F o ur

y e ar s l at e r , th e nu mb e r

h a d d e c r e a s e d

t o $ 1 1 , 0 4 9 , 8 4 7
. S e e P l
. ' s M e m . at7
- 8
. ItThe unpublished district cour t opinion in S t. J oseph' s Hosp. is not in t he administrative 9 rec ord, nor ha s it been provided by plaintiff. Ther e is only

a brie f discussion of the de cision in a PRR B doc ument in the administrative re cord. See AR 410-12. Thus, the Court is constraine d from re lying on it in any

event. That provision states: " Such regulations shall (i) take into ac count both direc t and 10 indirect c osts of provider se rvice s . . . in order that, under the me thods of deter mining costs, the n e c e s s ar y c o s ts o f e f f ic ie n tl y d e li v e r in gc o v e r e d

s e r v ic e s to in d iv id

u a ls c o v e r e d

b y [M e d ic ar e ] . . . will not be borne by

individuals not so covered, a nd the costs with respe ct to individuals not so cover ed will not be borne by such insuranc e programs [i.e., Medicar e]." § 1395x(v)(1)( A)(i)
.

-14- is just s uch spec ulative cost projec tions that the Secreta ry has re asonably

conclude d should not be reimburse d. Th e Ho sp ita l c on te nd s th at tw o c a se s d e mon str ate that Me dic are is n on e the le ss r e qu ir e d to pay a provide r for

the post-termination costs of e mploy ee be nefits wher e those c osts were
attr ibuta ble to p ri or

se rv ic e s r e nd e re d to Me dic are be ne fi c iari e s, c iti ngSist e rs of St. F ra nc is He a lthSe rv s. v. Sc hw e ike r, 51 4 F . Su pp . 6 07 (D .D .C. 19 81 ), and St. Jose ph ' s H os p. v. B lue Cr os s and B lue Shield Ass'n of

California, C-83-4041- MHP (N.D. Cal. Sept. 4, 1984). But ther e is no 9 ind ic atio n in

tho se de c isi on s th at " un fu nd e d" de fe rr e d c omp e ns atio n w a s invo lve d, no r w e re tho se courts pre sented with the issue of how § 413.100 should be weig hed. Thus, those c ases she d no light on whe ther the H ospital is entitl ed to the costs at issue. The Hospital cha

rac terizes the Secr etar

y ' s ref usal to pay

for the c osts at issue as
e ff e c tuatin gan im

pe rm iss ibl e sh if

tin gof Me dic are c os ts t o n on -M e dic are ind ivi du a ls ( the County taxpay ers) in contrave ntion of the anti-cost shiftingprovision of § 1395x (v)( 1)(A) (i). But that 10 argument ignor es the portion of the same subsec tion providing that the Sec reta ry "ma y provide for the establishment of limits on the . . . indirect" costs that may be re cog nized as "r easona ble." See Way ne County

Gen. Hosp., 470 F . Supp. 2d at 780 (holding that ag ency methodology

reduc ing the amount of provide r' s reimburseme nt did not "forc e the c osts associated with . . . Medic areThe Hospital also make s the argument that the Secr etar y ' s ref usal to pay

the costs at 11 issue is inequitable bec ause c urre nt participatingproviders c ontinue to ge t reimbursed f or the ve ry same ty pe of c osts. See Pl.'s Reply at 7-8. This ar g ument circ les bac k to its allege d entitlement under § 2176, which it calls " the only available proce ss" f

or a te rminated provide r to seek reimburse ment of the c osts at issue. See Pl.'s Mem. at 21-22. -15- patients" onto non-Medica re patients beca

use § 1395x(v)(1)(A ) authorizes re asonable "limits" on

" ind ir e c t c os ts" ). Whe re the Se c re tary re a so na bly lim its ind ir e c t c os ts, no imp e rm iss ibl e c os tshifting ha s occur

red. See also Good Samaritan H osp. v. Shalala, 508 U.S. 402, 418 (1993) (r e c og nizi ngthat r e a so na ble c os t li mit s " by

vir tue of the ir be ingg e ne ra lizatio ns . . . n e c e ssa ri ly will fail to yield exact numbers -- to the detriment of he alth car e provide rs at times . . . " ). In light of the Court' s determination that the limits on reimbursement of unf unded def err ed compe nsation
are rea sonable, it nec essar ily follows that no impermissible cost-shifting ha s occur red. Th e Ho sp ita l argue s, in t

he a lte rn ativ e , th at it

is e nti tle d to pa

y me nt f or the c os ts o f i ts postretireme nt health bene fits plan as a " termination cost" under § 2176 of the Provider Reimbursement Manua l and that the PRRB ac ted inconsistently with § 2176. The Hospital contends that the c osts at issue are of the same nature as the e x amples listed in § 2176 -- " salarie s and those c osts associated with such sa laries, i.e., f ring e bene fits, workmen' s compensation insurance , and pay

roll tax es . . . ," which the Sec reta ry treats as allowable c osts even thoug h they
are paid af

ter the pr ovider c loses. I d. § 2176. 11 In response , the Secr etar

y , throug h litigation counse l, now contends that the H ospital may not seek re imbursement of those c osts under § 2176 bec ause the costs "do not f all within the ambit of that section," which it char acte rizes as " perta in[ ing] to costs that result from c losure, not costs for be nefits that vested inde pendently of and pr ior to closure." See De f.' s Mem. at 30. Ne i th er th e P R R B n o r t h e S ec re t ary m ad e t h i s s t at em en td

uri n g th e a dm i n i s tra t i v e p ro ce ed i n gs-16-

be low or oth e rw ise a dd

re sse d th e Ho sp ita l' s a

rgume nt u

nd e r § 21 76 , whic h th e Ho sp ita l c le arl y raised in its administrative appe al. See AR 18-19; AR 484-86 ( Provider' s Final Position P aper) (" the Provider Reimburse ment Manual a llows reimbursement f or costs incurr ed af

ter a provider terminates its participation in the Medicare prog ram," including " salarie s, fring e bene fits, and other e x penses a ssociated with the c ollection of amounts due the H ospital for ser vices it rende red while it participate d in the Medica re pr og ram" ); see a lso A.R. 27-28 (Provider' s Post-Hearing Br ief) ( "Milwa

ukee County

complied with Section 2176") . Nor ha s the Court found in the administrative re cord the limit ations delineate d by counsel. The re viewingcourt " must judge the propriety of [ag ency] action solely by the g rounds i n v o k e d b y th e a g e n c y, " an d

m ay n o tc o n s i d e r

c o un s e l ' s p o s th o c e x p l an at i o n s . C l ar k C o un ty, Neva da v. F AA, 522 F .3d 437, 448 (D.C. Cir. 2008) (quotingSEC v. C hener y , 332 U.S. 194, 196 (1947)) . The Court is thus preclude d from conside ringcounsel' s assertion that § 2176 has no
a pp lic a bil ity to p os tr e tir e me nt h e a lthbe ne fi t c os ts. Ins te a d, a re mand fo r f ur the r e xplanatio n is the appr opriate r emedy

in this si tuation. See Flor ida Power & L ight Co. v. L orion, 470 U.S. 729, 744 (1985) ( "if

the re viewingcourt simply cannot e valuate the challeng ed ag ency action on the basis of the re cord be fore it, the proper c ourse . . . is to rema nd to the ag ency

for a dditional . . . explanation"); Tour

us Records, Inc. v. DEA , 259 F.3d 731, 737 ( D.C.Cir. 2001) (same)
. The Court empha siz es that the Sec reta ry ' s silence on § 2176 is sig nificant be cause a postretireme nt health bene fit plan is, in lay terms, commonly

understood as a

"f ring e bene fit" - - a term used in § 2176 -- raisinga substantial question as to why at least some of

these c osts are not considere d allowable te rmination costs. Furthe rmore, the re a re some c ursory

ref ere nces in the
a dmi nis tr ativ e re c or d to oth e r P RRB de c isi on s th at ha ve a pp are ntl y a llo we d p os tr e tir e me nt h e a lth be ne fi t pl ans to b e pa id a s p art of te rm inatio n c os ts - - c on fl ic tin gwi th t he br ig ht- lin e pe r s e ru leTh e B oa rd ' s d e c isi on

in Wa y ne County

Ho sp . f oc us e d o n whic h ye ars the c os ts s ho uld 12 be attributable to -- the issue a ppeale d -- a

nd held in favor

of the provide r. The Sec reta ry overturne d this aspect of the Boa rd' s decision, and wa s aff irmed by the district court. See Way ne County Hosp., 470 F. Supp. 2d at 778. One possible outcome on r emand is that the Sec reta ry will offer the same e x planation 13 on re mand that hi s c ou

ns e l of fe rs in t his lit ig atio n. I f s o, the Se c re tary sh ou ld, at a

min imum, explain whether he has consistently disallowed postretire ment health bene fit plan costs as termination costs under § 2176 a nd also explain how the Boa rd dec isions refer ence d here in are rec onciled with that disallowanc e. -17- that is argue d b y

the Se c re tary' s c ouns e l no w. Se e AR 36 5- 68 (Wa

y ne County

Ho sp . v . B lue Cr os s and B lue Shield Ass'n, PRRB De cision No. 2004-D44 ( Sept. 24, 2004), observingthat the intermediar

y rea ched a

n "a dminist rative r esolution" with a te rminated provide r to pay , inter alia, "$11,026,444 of

retire es' health and life insurance costs' and nea rly $5 milli on in additional retire ment costs, and that the inter mediary believed the se we re te rmination costs under § 2176) ; 12 AR 410-12 (St. J oseph' s Hosp. v. Blue Cross and B lue Shield Ass'n, PRRB De cision No. 83- D104R (J uly

1, 1986), leaving unr esolved on re mand from district cour t whether pension plan costs may be re g arde d as " costs unique to closing ," a nd hence termination costs). The ref ore, the Court wi ll r e mand

thi s a c tio n to the Se c re tary to a dd re ss t he Ho sp ita l' s c la im that it is e nti tle d to
rec over the costs at issue as " termination costs" under § 2176 of the Provider Reimburse ment Ma nu a l. 13 CO NC LU SION For the fore g oing r easons, the Court will deny the Doy ne Hospital' s motion for summary judgme nt and will gr ant in part a nd deny in part the Sec reta

ry ' s motion for summary

judgme nt. The Sec reta

ry is entitled to summ ary

judgme nt on his decision to disallow the costs of the Hospital' s postretirement he alth benef it plan paid afte r the c ost reportingperiod e nding D ece mber 22, 1995, pursuant to 42 C.F.R. § 413.100(c )(2) (vii)(A) . This action is remande d to the Secre tary-18-

fo r f ur the r p ro c e e din g s o n th e Ho sp ita l' s r e qu e st f or pa y me nt o f t he se c os ts a s te rm inatio n c os ts
un de r § 21 76 of

the Pr ov ide r R e imb ur se me nt M anu a l. Ase pa ra te Or de r a c c omp anie s th is Memorandum Opinion.
/ s / J OHN D. B ATES Un i t edS t at es Di s tri ctJ u d ge Dated: Ma

rch 30, 2009