FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ALASKA DEPARTMENT OF 

HEALTH AND SOCIAL SERVICES,

Petitioner,

v.

No. 04-74204

CENTERS FOR MEDICARE AND

M HHS No. EDICAID SERVICES, MARK B. 

M CMS 2003-14 CCLELLAN IN HIS OFFICIAL

CAPACITY AS ADMINISTRATOR OF THE OPINION

CENTERS FOR MEDICARE AND

MEDICAID SERVICES; MICHAEL O.

LEAVITT,* Secretary,

Respondents. 

On Petition for Review of an Order of the

Department of Health and Human Services

Argued and Submitted

July 12, 2005—Anchorage, Alaska

Filed September 12, 2005

Before: Alfred T. Goodwin, Melvin Brunetti, and

William A. Fletcher, Circuit Judges.

Opinion by Judge Brunetti

*Michael O. Leavitt is substituted for his predecessor, Tommy G.

Thompson, as Secretary of Health and Human Services of the United

States, pursuant to Fed. R. App. P. 43(c)(2). 

13025
COUNSEL

Charles A. Miller, Covington & Burling, Washington, DC, for

the petitioner. 

Gerard Keating, Office of the General Counsel, United States

Department of Health and Human Services, Washington, DC,

for the respondents. 

OPINION

BRUNETTI, Circuit Judge: 

The Alaska Department of Health and Social Services

(hereinafter the “State”) petitions for review of a final determination by the Administrator of the Centers for Medicare

and Medicaid Services (“CMS” or “Agency”) disapproving a

proposed Medicaid state plan amendment that would alter the

rate at which the federal government reimburses State expenditures on behalf of patients at Indian tribal health facilities.

The Administrator rejected the proposed amendment on two

alternative grounds: (1) that it was inconsistent with the statutory requirement of efficiency, economy, and quality of care;

and (2) that it failed to comply with a regulation governing

payment ceilings. The State challenges the Administrator’s

decision as arbitrary and capricious under the Administrative

Procedure Act. We conclude that the Administrator’s interpretations of the statute and regulation were permissible and

deny the petition for review. 

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13029
I. BACKGROUND

A. Statutory Framework

Medicaid is a cooperative federal-state program through

which the federal government reimburses states for certain

medical expenses incurred on behalf of needy persons. Wilder

v. Va. Hosp. Ass’n, 496 U.S. 498, 502 (1990). Participation by

states is voluntary, but those that choose to participate must

comply both with statutory requirements imposed by the

Medicaid Act and with regulations promulgated by the Secretary of Health and Human Services. Id.; see also Orthopaedic

Hosp. v. Belshe, 103 F.3d 1491, 1493 (9th Cir. 1997). 

To qualify for federal assistance, participating states must

submit to the Secretary, and have approved, a “plan for medical assistance” that describes the nature and scope of the state

program. Wilder, 496 U.S. at 502. The Medicaid Act prescribes a laundry list of requirements that this state plan

“must” satisfy, 42 U.S.C. § 1396a(a), and an extensive body

of regulations implements these requirements. The Secretary

“shall approve” any state plan (or amendment) that fulfills

these statutory and regulatory conditions, 42 U.S.C.

§ 1396a(b), and has delegated this authority to the CMS

Administrator. 42 C.F.R. § 430.15(b). 

Under normal circumstances, if the Administrator approves

the state plan, the federal government reimburses the state for

a fixed percentage of certain expenses that the state incurs on

behalf of Medicaid-eligible individuals. This percentage,

known as the Federal Medical Assistance Percentage

(“FMAP”), varies from state to state. Health care providers

bill the state, the state pays the providers, and the federal government reimburses the state at the FMAP rate—which, for

Alaska in 2004, was 57.58%. The state is responsible for the

balance. In theory, this arrangement incentivizes states to

keep rates at efficient levels, because they share financial

responsibility for Medicaid costs with the federal government.

13030 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
66 Fed. Reg. 3148, 3175 (2001). The tribal facilities at issue

in this case are unique, however, and by statute receive 100%

FMAP. See 42 U.S.C. § 1396d(b).1 There are seven such

facilities—one in Anchorage and six in rural areas. 

Assuming that its plan meets federal requirements, a state

has considerable discretion in administering its Medicaid program, including setting reimbursement rates. See Lewis v.

Hegstrom, 767 F.2d 1371, 1373 (9th Cir. 1985). The statutory

requirement at issue here provides that a state plan must

provide such methods and procedures relating to the

utilization of, and the payment for, care and services

available under the plan . . . as may be necessary to

safeguard against unnecessary utilization of such

care and services and to assure that payments are

consistent with efficiency, economy, and quality of

care[.] 

42 U.S.C. § 1396a(a)(30)(A) [hereinafter “§ 30(A)”]. Neither

the Medicaid Act, nor its implementing regulations, define the

terms “efficiency,” “economy,” or “quality of care.” However, since 1997, § 30(A) has been the principal statutory

authority for a series of upper payment limit (“UPL”) regulations that cap state reimbursement rates to “promote economy

and efficiency.” 66 Fed. Reg. at 3148. These regulations have

1Historically, Indian Health Service (“IHS”) facilities were funded

directly and entirely by the federal government and did not participate in

Medicaid reimbursement. To improve services, Congress in 1976

amended the Medicaid Act to permit reimbursement of state expenditures

on behalf of eligible Native Americans at IHS facilities. Pub. L. No. 94-

437, 90 Stat. 1400 (1976). But, because services at these facilities previously were funded wholly by the federal government, this amendment provided for 100% FMAP so that no additional burden would fall on the

states. In 1996, the Agency broadened its definition of “Indian Health Service facilities” to include not only IHS facilities (which are federally

owned and operated) but also tribal facilities (which are owned and operated by tribes but receive funding from the IHS). 

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13031
been modified several times in recent years to respond to concerns about states’ inappropriate use of intergovernmental

transfers to fund their Medicaid programs. 

B. Regulatory Framework

An intergovernmental transfer (“IGT”) is a mechanism by

which states use local, rather than state, dollars to fund the

state share of Medicare expenditures. Such transfers—which

typically require that public entities at the city or county level

transfer funds to the state—are specifically sanctioned by the

Medicare Act, which grants states the flexibility to fund up to

60% of their share of Medicare expenditures with local dollars. 66 Fed. Reg. at 3148. Although the Agency recognizes

that the use of IGTs is protected by statute, in its view “that

flexibility has been used in recent years to establish funding

arrangements that are excessive and abusive and do not assure

that federal Medicaid funding is spent for Medicaid covered

services provided to Medicaid eligible individuals.” Id. at

3164. 

In 2001, audits by the Office of the Inspector General and

the General Accounting Office revealed a relationship

between IGT misuse and excessive federal Medicaid spending. The Agency, concluding that its UPL regulations created

a financial incentive for IGT abuse, modified them by rule. Id.

at 3148. In short, the then-existing UPLs placed a single upper

limit on aggregate payments made to several categories of

providers, including (i) state government-owned facilities, (ii)

non-state (i.e., city and county) government-owned facilities,

and (iii) private facilities. 65 Fed. Reg. 60151, 60151-52

(2000). This allowed states to set reimbursement rates for city

and county facilities at relatively high levels, and other facilities at relatively low levels, while still complying with the

overall aggregate UPL. 66 Fed. Reg. at 3149-50. Because the

federal government reimburses states for a fixed percentage of

their Medicaid expenses, the higher rates at local facilities led

to higher federal matching payments. Id. at 3150. And, as

13032 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
these local facilities are public entities, the majority of excess

federal matching payments could be returned, via IGTs, from

local providers to the states. The states ultimately used the

excess federal dollars to fund their own share of Medicaid

expenses—and sometimes for wholly unrelated purposes. Id.

The Agency determined that this practice, which effectively

replaced state Medicaid dollars with federal Medicaid dollars,

was “not consistent with the statutory requirements that Medicaid payments be economical and efficient.” Id. To remedy

this problem, and to reduce the incentive for abuse, the

Agency revised the UPL regulations. Specifically, it retained

the upper limit on overall aggregate payments to all facilities,

and implemented separate aggregate limits for both state

government-owned facilities and non-state governmentowned facilities. Id.; 42 C.F.R. § 447.272; 42 C.F.R.

§ 447.321. 

However, “Indian Health Services facilities and tribal facilities” were specifically excepted from the scope of these new

regulations. Instead, these facilities were made subject to a

separate UPL for “other” facilities, which provides:

The [state] agency may pay the customary charges of

the provider but must not pay more than the prevailing charges in the locality for comparable services

under comparable circumstances. 

42 C.F.R. § 447.325; see 66 Fed. Reg. at 3159. In proposing

this exception, the Agency explained that “we excluded IHS

facilities because we believe there is little incentive for States

to pay enhanced rates to these facilities. Rates to these facilities are generally set by the State in accordance with rates

published by the Federal government.” 65 Fed. Reg. at 60153.

Its concern, rather, was that categorizing them as “public

facilities within the UPLs may enable States to set lower payments for the IHS and tribal facilities, and set payments for

government operated providers at higher levels and still comALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13033
ply with the aggregate UPLs.” 66 Fed. Reg. at 3159. Therefore, “to avoid these types of incentives, [the Agency]

excluded IHS facilities from the UPLs.” Id.

C. The State Plan Amendment

Shortly after the 2001 amendments to the UPLs, Alaska

submitted state plan amendment 01-009 to the Agency. It provided:

Under agreement with a Tribal Health Facility provider the [Alaska] Department [of Health and Social

Services] may pay the customary charges of the provider but must not pay more than the prevailing

charges in the locality for comparable services under

comparable circumstances. Such a payment . . . is

subject to the payment limits at 42 CFR 447.325. 

The text of the proposed amendment thus tracks verbatim the

UPL that the 2001 amendments made applicable to the tribal

facilities at issue. In response to the Agency’s request for clarification, the State explained that, to receive the additional

federal revenue generated by the amendment, the tribal facilities “will be expected” to enter into an IGT with the State,

under which the facilities would retain just 10% of the additional federal monies. Finally, the State indicated that, should

the proposed amendment take effect, additional federal payments would amount to nearly $50 million a year. 

The Agency disapproved the proposed amendment as

inconsistent with § 30(A), primarily because the “proposed

rates would substantially exceed the IHS published rates” on

which federal payments have historically been based. It further explained that the IHS rates are “based on an analysis of

statewide costs of the Alaska IHS facilities” and that, while

it “might consider a request for a higher rate if supported by

data showing costs that were not considered by IHS in setting

the published rates, Alaska provided no such data to substanti13034 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
ate its proposed rates.” The Agency concluded that, absent

such data, the proposed rates “are not consistent with efficiency, economy, and quality of care” under § 30(A). 

The State petitioned for reconsideration and, after briefing

and a formal hearing, the hearing officer recommended that

the disapproval of the proposed amendment be affirmed

because it was not consistent with either § 30(A) or 42 C.F.R.

§ 447.325. The Administrator agreed and, in a reasoned opinion, affirmed disapproval of the amendment. In re The Disapproval of the Alaska State Plan Amendment No. 01-009, No.

2003-14 (CMS Administrator June 22, 2004).

II. STANDARD OF REVIEW

Under the Administrative Procedure Act, we may set aside

formal agency action only if “arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law.” 5

U.S.C. § 706(2)(A); Wilderness Soc’y v. United States Fish &

Wildlife Serv., 353 F.3d 1051, 1059 (9th Cir. 2003) (en banc),

amended by 360 F.3d 1374 (9th Cir. 2004). Factual findings

are reviewed for substantial evidence. Bear Lake Watch, Inc.

v. FERC, 324 F.3d 1071, 1076-77 & n.8 (9th Cir. 2003).

[A]n agency rule [is] arbitrary and capricious if the

agency has relied on factors which Congress has not

intended it to consider, entirely failed to consider an

important aspect of the problem, offered an explanation for its decision that runs counter to the evidence

before the agency, or is so implausible that it could

not be ascribed to a difference in view or the product

of agency expertise. 

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29, 43 (1983).

III. DISCUSSION

The Administrator rejected the proposed amendment on

two alternative grounds: (1) that it was inconsistent with the

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13035
statutory requirement of efficiency, economy, and quality of

care under § 30(A); and (2) that it failed to comply with the

UPL set forth in 42 C.F.R. § 447.325. Examining each ground

in turn, we conclude that either is independently adequate to

support disapproval. 

A. Section 30(A)

In concluding that the amendment was inconsistent with

§ 30(A), the Administrator first determined that the UPL regulations promulgated pursuant to that section are not that section’s sole requirement; rather, the statute requires that rates

be consistent with efficiency and economy notwithstanding

compliance with the UPL regulations. She found that the State

failed to meet the statutory standard because it submitted no

data—let alone an assertion—that the current IHS rates were

inadequate. Moreover, she viewed the State’s insistence that

tribal facilities return to the State 90% of the increased federal

payments, via IGTs, as an “implicit acknowledgment” that the

current IHS rates are sufficient. 

The State argues that § 30(A) cannot be an independent

basis for disapproval of an amendment that complies with

UPL regulations promulgated pursuant to that section.

Instead, it urges that compliance with UPL regulations conclusively establishes that rates meet the statutory mandate of

efficiency and economy.2 It argues that there is no basis whatsoever for cost-based review of state rate setting, and therefore that case-by-case review of rates is an encroachment on

state discretion. Accordingly, it suggests that it was inappropriate for the Administrator to request cost data justifying the

rate increase. Finally, it emphasizes that IGTs are protected

by statute and fit within current regulations. 

2As discussed in Part B, infra, the Agency disagrees, as do we, that the

State has complied with the UPL regulation at 42 C.F.R. § 447.325. For

the purposes of the discussion in Part A, however, we accept arguendo

that it has so complied. 

13036 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
1. Chevron Deference

The parties initially disagree about the degree of deference

owed to the Administrator’s interpretation of the statutory text

—namely, the terms “efficiency” and “economy.” Although

we generally afford Chevron deference to the Agency’s interpretations of the Medicaid Act, see, e.g., Folden v. Wash.

State Dep’t of Social & Health Servs., 981 F.2d 1054, 1058

(9th Cir. 1992), the State contends that Skidmore deference is

instead appropriate because the Agency’s interpretation is

contrary to existing regulations and “does not . . . bespeak the

legislative type of activity that would naturally bind more

than the parties to the ruling.” United States v. Mead Corp.,

533 U.S. 218, 226-27 (2001). Compare Chevron U.S.A. Inc.

v. Nat. Res. Defense Council Inc., 467 U.S. 837, 842-45

(1984), with Skidmore v. Swift & Co., 323 U.S. 134, 139-40

(1944). 

[1] We disagree. Chevron deference is required “when it

appears that Congress delegated authority to the agency generally to make rules carrying the force of law.” Mead, 533

U.S. at 226-27. Mead recognized that “Congress contemplates

administrative action with the effect of law when it provides

for a relatively formal administrative procedure tending to

foster the fairness and deliberation that should underlie a pronouncement of such force,” and noted that the “fruits of

notice-and-comment rulemaking or formal adjudication”

receive Chevron deference. Id. at 230; see also INS v.

Aguirre-Aguirre, 526 U.S. 415, 425 (1999) (giving Chevron

deference to the BIA’s construction, through case-by-case

adjudication, of ambiguous statutory terms). Here, the formal

administrative process afforded the State included the opportunities to petition for reconsideration, brief its arguments, be

heard at a formal hearing, receive reasoned decisions at multiple levels of review, and submit exceptions to those decisions.

These hallmarks of “fairness and deliberation” are clear evidence that Congress intended the Administrator’s final determination to “carry[ ] the force of law.” Mead, 533 U.S. at

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13037
226-27; see Pharm. Rsch. Mfrs. of Am. v. Thompson, 362 F.3d

817, 821-22 (D.C. Cir. 2004) (holding that the Secretary’s

duty to “ensur[e] that each state plan complies with a vast network of specific statutory requirements” constitutes an “express delegation of specific interpretative authority” that

evidences Congress’s intent to imbue the “Secretary’s determinations [with] the force of law”); see also Texas v. United

States Dep’t of Health & Human Servs., 61 F.3d 438 (5th Cir.

1995) (applying Chevron deference in the context of the disapproval of a Medicaid state plan amendment); Georgia v.

Shalala, 8 F.3d 1565 (11th Cir. 1993) (same). 

[2] Accordingly, to the extent that the State challenges the

Administrator’s interpretation of ambiguities in § 30(A), we

apply the familiar Chevron framework. Under Chevron, “ ‘[i]f

the intent of Congress is clear, that is the end of the matter;

for the court, as well as the agency, must give effect to the

unambiguously expressed intent of Congress.’ ” Wilderness

Soc’y, 353 F.3d at 1059 (quoting Chevron, 467 U.S. at 842-

43). But, if the statute is silent or ambiguous with respect to

the issue at hand, then the reviewing court must defer to the

agency so long as “ ‘the agency’s answer is based on a permissible construction of the statute.’ ” Id. (quoting Chevron,

467 U.S. at 843). 

2. Construction of § 30(A)

[3] Before reaching the propriety of the Administrator’s

interpretation of § 30(A), we first conclude that she permissibly relied on that section as an independent basis for disapproval of the proposed amendment, notwithstanding its

compliance with the applicable UPL. The statutory text makes

clear that the Secretary has the authority—indeed, the

obligation—to ensure that each of the statutory prerequisites

is satisfied before approving a Medicaid state plan amendment. 42 U.S.C. § 1396a(b) provides: “The Secretary shall

approve any plan which fulfills the conditions specified in

subsection (a) . . . .” One such condition is: “A State plan for

13038 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
medical assistance must” “provide such methods and procedures . . . as may be necessary . . . to assure that payments are

consistent with efficiency, economy, and quality of care.” 42

U.S.C. § 1396a(a)(30)(A). Because the Secretary is charged

with ensuring that the State complies with this statutory mandate, it follows that he cannot approve a state plan that does

not provide such methods and procedures—even if it complies with other regulations. 

[4] Contrary to the State’s argument that the UPL regulations leave “no gap to fill,” and thus that there is no role here

for Chevron deference, it is, in fact, possible to violate the

broad statute while complying with the UPL regulations.

Although the UPL regulations are clearly grounded in economic concerns, in that they proscribe payment levels that

exceed certain limits, the terms “efficiency” and “economy”

are nowhere defined in the Medicaid Act or its implementing

regulations. Thus, we cannot equate mere compliance with the

UPL regulations as conclusive proof of compliance with the

broader statutory requirement. 

In her decision, the Administrator concluded that the proposed amendment—which, by all accounts, would at least

double payments to the facilities at issue, while the facilities

would retain only 10% of the additional payments—is not

consistent with efficiency and economy. The authority to elucidate the meaning of the statute in this manner, via case-bycase adjudication, is well within the Secretary’s mandate. See

Pharm. Rsch., 362 F.3d at 821-22; see also Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 96 (1995) (“[There is no] basis

for suggesting that the Secretary has a statutory duty to promulgate regulations that . . . address every conceivable question in the process of determining equitable reimbursement.”).

[5] Thus, the undefined terms “efficiency” and “economy”

leave a gap that the Administrator permissibly filled via caseby-case adjudication. We have no doubt that her interpretation

is “based on a permissible construction of the statute.” WilALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13039
derness Soc’y, 353 F.3d at 1059 (internal quotation omitted);

see also Penn. Pharm. Ass’n v. Houston, 283 F.3d 531, 537

(3rd Cir. 2002) (en banc) (“What sort of payments would

make a program inefficient and uneconomical? Payments that

are too high.”). Therefore, we must defer to it. 

3. Statutory Context 

[6] The Administrator’s interpretation of § 30(A) is also

consistent with the broader statutory scheme. See Wilderness

Soc’y, 353 F.3d at 1060-61 (noting that the court, in discerning congressional intent, may also look to the overall purpose

and structure of the statutory scheme). Specifically, we find

no merit in the State’s claim that there is no basis for costbased review of state ratesetting. To the contrary, our precedent plainly requires a state to set reimbursement rates “that

bear a reasonable relationship to efficient and economical

hospitals’ costs of providing quality services, unless the

[state] shows some justification for rates that substantially

deviate from such costs.” Orthopaedic Hosp., 103 F.3d at

1496. Thus, we reject the contention, urged by the State, that

the Secretary no longer plays any role in overseeing the reasonableness of the relationship between costs and reimbursement rates. 

The State questions the continuing vitality of our opinion

in Orthopaedic Hospital, suggesting that subsequent amendments to the Medicaid Act—specifically, the repeal of the

Boren Amendment—have rendered it inapplicable. We are

not persuaded. As discussed at length in Orthopaedic Hospital, in 1981 Congress deleted from § 30(A) the requirement

that Medicaid payments not be “in excess of reasonable

charges,” but left intact the separate mandate that they be

“consistent with efficiency, economy, and quality of care.”

Orthopaedic Hosp., 103 F.3d at 1497; Pub. L. No. 97-35,

§ 2174, 95 Stat. 357, 809 (1981). As part of the same bill, in

a provision dubbed the Boren Amendment, it amended 42

U.S.C. § 1396a(a)(13)(A) [“§ 13(A)”] to require states to

13040 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
reimburse hospitals at rates that are “reasonable and adequate

to meet the costs which must be incurred by efficiently and

economically operated facilities.” Orthopaedic Hosp., 103

F.3d at 1498 n.2 (quoting Boren Amendment); see also S.

Rep. No. 97-139, at 431 (1981), reprinted in 1981

U.S.C.C.A.N. 396, 697. 

As we noted in Orthopaedic Hospital, this change was

intended to ameliorate states’ administrative burdens and to

allow them “more flexibility in devising ways to make services available, while at the same time containing costs.” 103

F.3d at 1497. Over time, however, it became clear that it had

quite the opposite effect. Specifically, the Supreme Court’s

recognition in Wilder, 496 U.S. at 524, that the Boren Amendment was enforceable in a § 1983 action by health care providers against states, led to a great deal of litigation over the

reasonableness of state rate setting. See Evergreen Presbyterian Ministries Inc. v. Hood, 235 F.3d 908, 919 n.12 (5th Cir.

2000) (noting problem). In response to this unintended consequence, in 1997 Congress repealed the Boren Amendment,

and replaced it with the notice-and-comment rulemaking

requirements in place today. Pub. L. No. 105-33, 111 Stat.

251, 507 (1997). In doing so, Congress intended that there be

no “cause of action for [providers] relative to the adequacy of

the rates they receive.” Evergreen, 235 F.3d at 919 n.12 (citing H.R. Rep. No. 105-149, at 1230 (1997)). 

[7] The State attaches great significance to the repeal of the

Boren Amendment, suggesting that Congress thereby

intended “to terminate . . . judicial oversight” of reimbursement rates and “to remove any basis for cost-based review of

provider reimbursement.” While we agree that in repealing

the Boren Amendment, as in enacting it, Congress sought to

increase states’ flexibility in ratesetting, this change did not

eviscerate the Secretary’s oversight role. During the Boren

era, courts recognized that “the Secretary is obliged to ensure

that each state complies with the statute by requesting data

justifying an individual state’s assurances when those assurALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13041
ances are suspect.” Erie County Geriatric Ctr. v. Sullivan, 952

F.2d 71, 79 (3rd Cir. 1991). Though we recognize that such

assurances are no longer part of the regulatory scheme, nothing in the statutory history convinces us that the Secretary’s

oversight authority has changed, or that more flexibility than

was originally intended under the Boren Amendment was

intended by its repeal. In any event, its repeal, like its enactment, modified § 13(A) alone; it effected no change to

§ 30(A). Moreover, the relevant language of § 30(A) remains

unchanged since Orthopaedic Hospital, and thus our interpretation of its purpose, and the State’s obligations thereunder,

still holds.3See Orthopaedic Hosp., 103 F.3d at 1496-98

(describing these obligations). 

4. IGTs

We acknowledge, as has the Agency, that the use of IGTs

has a statutory basis. See 42 U.S.C. § 1396b(w)(6)(A) (providing that, subject to certain exceptions, “the Secretary may

not restrict States’ use of funds where such funds are derived

from State or local taxes . . . transferred from . . . units of government within a State as the non-Federal share of expenditures”); see also 66 Fed. Reg. at 3148-49. Thus, there is

perhaps some tension, as the State suggests, between the

Agency’s recognition that IGTs are generally permissible and

“fit within the structure of . . . current regulations,” id. at

3164, and its conclusion that their “excessive and abusive”

use is “not consistent with the statutory requirements that

Medicaid payments be economical and efficient,” id. at 3150.

This does not, however, change our decision here. 

[8] In this case, the Administrator did not disapprove the

State’s use of IGTs as a financing mechanism; rather, she

concluded, based partly on the fact that tribal hospitals would

3Section § 30(A) was amended in 1989 to include what is known as the

“equal access to care” provision. Orthopaedic Hosp., 103 F.3d at 1498.

That amendment is not directly relevant to this case. 

13042 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
retain just 10% of the increased federal payments, that the

proposed amendment was not consistent with efficiency and

economy. See Louisiana v. United States Dep’t of Health &

Human Servs., 905 F.2d 877, 881 (5th Cir. 1990) (applying a

similar analysis to reject Louisiana’s contention that the

Administrator’s ruling was a “veiled attempt” to prohibit the

use of average wholesale price as a proxy for the estimated

acquisition cost of Medicaid-covered drugs). We note that,

following its investigation into financing schemes similar to

this one, the General Accounting Office testified before Congress that such uses of IGTs “violate the basic integrity of

Medicaid as a joint Federal/State program” and allow states

effectively “to replace State Medicaid dollars with Federal

Medicaid dollars.” 66 Fed. Reg. at 3150. Even assuming that

under these circumstances an IGT would fall within the protection of § 1396b(w)(6), the State is not relieved from complying with the numerous other requirements of the Medicaid

Act, such as those in § 30(A) that were the basis for disapproval here. 

[9] In sum, because the Administrator’s construction of

§ 30(A) is consistent with its text, context, and purpose, it

merits Chevron deference. She did not rely on inappropriate

factors or overlook an important aspect of the problem, and

her decision was not implausible or counter to the evidence.

See State Farm, 463 U.S. at 43. Thus, we hold that her disapproval of the State’s proposed amendment based on § 30(A)

was not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. See 5 U.S.C. § 706(2)(A). 

B. Section 447.325 

[10] The Administrator alternatively ruled that the State

failed to set prevailing charges consistent with 42 C.F.R.

§ 447.325, which provides: “The [state] agency may pay the

customary charges of the provider but must not pay more than

the prevailing charges in the locality for comparable services

under comparable circumstances.” Although the proposed

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13043
amendment tracks the regulatory language verbatim, it is not

the amendment’s text but its underlying ratesetting methodology to which the Agency objects. Specifically, the Administrator determined that the State violated § 447.325 because, in

calculating prevailing charges, (1) it based its rates for both

localities on a single hospital in Anchorage, and (2) its comparison of private facilities to tribal facilities, which historically are funded under a unique scheme, fails to account for

“comparable services under comparable circumstances.” 

We accord substantial deference to an agency’s interpretation of its own regulations. See Anaheim Mem’l Hosp. v. Shalala, 130 F.3d 845, 849-50 (9th Cir. 1997). As the Supreme

Court has instructed, “Our task is not to decide which among

several competing interpretations best serves the regulatory

purpose. Rather, the agency’s interpretation must be given

controlling weight unless it is plainly erroneous or inconsistent with the regulation.” Thomas Jefferson Univ. v. Shalala,

512 U.S. 504, 512 (1994) (citations and internal quotation

marks omitted). 

1. “Prevailing Charges” and “Locality”

In response to the Agency’s request for clarification, the

State explained that it would identify a tribal facility’s “customary charges” from the “charge schedule used by the facility for the regular rates for inpatient services that are charged

to both beneficiaries and other paying patients.” To determine

“prevailing charges,” the State would divide Alaska into two

localities: urban (Anchorage) and rural (everywhere else).

Then, for each locality, it would identify all hospitals offering

“a comparable array of services under comparable circumstances” to the tribal facilities. Using only those facilities, it

would divide the total charges by the total inpatient days to

arrive at the prevailing rate. 

Testimony at the evidentiary hearing indicated, however,

that the State used charges from a single private hospital in

13044 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE
Anchorage to determine the prevailing charges for all tribal

facilities in both localities. The hearing officer issued her recommended decision on this understanding, which the State, in

its exceptions to the hearing officer’s recommendations, in

fact reinforced. Admin. R. at 17 (“The State has provided evidence that due to the unique nature of health care services in

Alaska, there is only one hospital that provides services that

are comparable to those provided in the relevant tribal health

centers.”). 

Although the State now suggests that this finding is factually incorrect, it is nowhere contradicted in the record, and we

conclude that it is supported by substantial evidence. See Bear

Lake, 324 F.3d at 1076-77 & n.8 (explaining standard). Thus,

to the extent that the State calculated prevailing charges for

the rural locality based only on charge information from a

hospital in Anchorage, its methodology is inconsistent with

§ 447.325, which plainly requires that the State “must not pay

more than the prevailing charges in the locality” (emphasis

added). 

2. “Prevailing Charges” and “Comparable

Circumstances”

The Agency additionally objects to the State’s use of rates

from a private hospital to determine the prevailing charges at

tribal facilities, which currently are tied to IHS published

rates. The State argues that tribal facilities are not bound to

charge, nor must the State limit payment to, the IHS rates.

Moreover, noting that neither “customary charges” nor “prevailing charges” is defined within the Medicaid Act or its

implementing regulations, but that both are defined in Medicare regulations, it argues that its methodology for determining these charges is fully consistent with the Medicare

regulations. The Agency concedes that the IHS rates are not

mandatory, but argues that, in this context, “comparable circumstances” must mean other facilities that are federally

funded and receive 100% FMAP reimbursement. It stresses

ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13045
that tribal facilities operate under markedly different circumstances than private hospitals—namely, they are largely

funded by the federal government, and their Medicaid

expenses are reimbursed fully by the federal government. 

On this point, the Administrator’s construction is focused

not on the “locality” requirement, but rather on the distinct

requirement that, within each locality, prevailing charges

must be tuned to “comparable circumstances.” This distinction is fully supported by the regulatory text. Thus, we decline

to decide whether it is the Agency’s or the State’s interpretation that best serves the regulatory purpose; rather, under the

limited scope of our appellate review, we must give the Agency’s interpretation “controlling weight.” See Thomas Jefferson Univ., 512 U.S. at 512; Anaheim Mem’l Hosp., 130 F.3d

at 849-50. 

[11] Thus, we conclude that the State’s methodology for

determining prevailing charges is inconsistent with the applicable UPL, and hold that the Administrator’s disapproval of

the proposed amendment based on 42 C.F.R. § 447.325 was

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

not in accordance with law. See 5 U.S.C. § 706(2)(A).

CONCLUSION

For the foregoing reasons, the petition for review of the

Administrator’s disapproval of Alaska’s state plan amendment 01-009 is DENIED. 

13046 ALASKA DEP’T OF HEALTH v. CENTERS FOR MEDICARE