United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 13, 2009 Decided August 4, 2009

No. 08-5120

ABINGTON CREST NURSING AND REHABILITATION CENTER, ET

AL.,

APPELLANTS

v.

KATHLEEN SEBELIUS, SECRETARY, UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:06-cv-01932-RJL)

Daniel F. Miller argued the cause for appellants. With him

on the briefs were Barbara J. Janaszek and John R. Jacob.

Christopher Fonzone, Attorney, U.S. Department of Justice,

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

Gregory G. Katsas, Assistant Attorney General, Jeffrey A.

Taylor, U.S. Attorney, and Barbara C. Biddle and Jeffrica

Jenkins Lee, Attorneys. R. Craig Lawrence, Assistant U.S.

Attorney, entered an appearance.

Before: GARLAND and GRIFFITH, Circuit Judges, and

EDWARDS, Senior Circuit Judge.
2

Opinion for the Court filed by Circuit Judge GARLAND. 

GARLAND, Circuit Judge: The appellants in this case are

skilled nursing facilities that challenge a decision by the

Secretary of the Department of Health and Human Services to

deny them reimbursement for certain bad debt costs. The

facilities contend that the Secretary’s denial violates both the

Medicare statute and agency regulations. The district court

granted the Secretary’s motion for summary judgment, and we

affirm.

I

Appellants are Medicare-certified skilled nursing facilities

(SNFs) that provide therapy services to, among others, SNF

residents who are eligible for both Medicare and Medicaid

benefits (“dual eligible” beneficiaries). The Medicare program

is made up of two principal parts: Part A, which provides

reimbursement for inpatient hospital stays and related services,

42 U.S.C. §§ 1395c–1395i-5; and Part B, which covers hospital

outpatient services, physician services, and other services not

covered by Part A, id. §§ 1395j–1395w-4. The therapy services

that SNFs provide are covered under Part B of the Medicare

program. 

Prior to 1997, Medicare reimbursed SNFs based on their

“reasonable costs.” See generally 42 U.S.C. §§ 1395f(b)(1),

1395x(v)(1)(A); 42 C.F.R. § 410.152(b)(1). That methodology

permitted the facilities to claim uncollectible Medicare

deductibles and coinsurance payments -- amounts owed to the

SNFs but uncollectible from either the patient or the patient’s

state Medicaid program -- as bad debts on their Medicare cost

reports. Medicare then reimbursed the providers for the
3

1

This regulation is now found at 42 C.F.R. § 413.89. See

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916,

49,254 (Aug. 11, 2004). For consistency with the filings of the

parties, we refer to it throughout as 42 C.F.R. § 413.80. See also infra

note 5.

2

The changes applied to cost reporting periods beginning on or

after July 1, 1998. Pub. L. No. 105-33, § 4432(d), 111 Stat. at 422.

uncollectible amounts pursuant to a Medicare regulation, 42

C.F.R. § 413.80.1

 

In the Balanced Budget Act of 1997, Congress changed the

payment scheme for SNF services in two respects. Pub. L. No.

105-33, § 4432(a)-(b)(3), 111 Stat. 251, 414-21 (1997).2

 It

changed the reimbursement methodology for SNF services

covered under Part A from a reasonable cost system to a

prospective payment system (PPS) based on a per diem rate. 42

U.S.C. § 1395yy(e). And it changed the methodology for the

SNFs’ therapy services -- the services at issue in this case --

from reimbursement based on reasonable costs to

reimbursement based on a preexisting Medicare Part B fee

schedule applicable to physicians. Id. § 1395yy(e)(9); see id.

§§ 1395l(a)(8)(A)(i), 1395m(k), 1395w-4. 

Consistent with their practice prior to enactment of the

Balanced Budget Act, appellants listed their uncollectible

deductibles and coinsurance payments as bad debts on the fiscal

year 1999 cost reports they submitted to their “fiscal

intermediary” -- a private insurance company that processes

reimbursements to providers while acting as an agent of the

Secretary of the Department of Health and Human Services

(HHS). 42 U.S.C. § 1395h (2000); 42 C.F.R. § 413.24(f). The

appellants’ fiscal intermediary reviewed the 1999 cost reports
4

and disallowed the bad debt claims for uncollectible deductibles

and coinsurance payments. The intermediary disallowed the

claims on the ground that Medicare’s bad debt reimbursement

policy “applies only to the reasonable cost payment system” --

the system applicable to SNFs prior to the change to a fee

schedule system in the Balanced Budget Act. Intermediary’s

Position Paper at 4.

The SNFs appealed the intermediary’s decision to HHS’

Provider Reimbursement Review Board (PRRB). See 42 U.S.C.

§ 1395oo(b). On July 21, 2006, a majority of the PRRB

disagreed with the intermediary’s decision, concluding that,

although Congress had changed the payment system, it had not

altered the bad debt policy contained in 42 C.F.R. § 413.80.

Extendicare 99 Uncollect Co-In Dual Elig Group v. BlueCross

BlueShield Ass’n/United Gov’t Servs., LLC-WI, PRRB Decision

No. 2006-D36, at 4-5 (July 21, 2006). On September 12,

however, the Secretary, acting through the Deputy

Administrator of the Centers for Medicare and Medicaid

Services, reversed the PRRB’s decision and ruled that the SNFs’

bad debts were nonreimbursable under the new fee schedule

system. “Medicare’s longstanding policy has been not to pay

for bad debts for any services paid under a reasonable charge or

fee schedule methodology,” the Secretary said, and “the bad

debt provisions found at 42 C.F.R. 413.80(e) do not apply to

services for which Medicare payment is based on reasonable

charges or a fee schedule methodology.” Decision of the

Administrator, Ctrs. for Medicare & Medicaid Servs.,

Extendicare 99 Uncollect Co-In Dual Elig Group v. Blue

Cross/Blue Shield Ass’n, United Gov’t Servs., LLC-WI, at 11

(Sept. 12, 2006) [hereinafter Secretary’s Decision].

The appellants next filed suit in the United States District

Court for the District of Columbia pursuant to 42 U.S.C.

§ 1395oo(f), which provides for judicial review of final PRRB
5

decisions. On March 28, 2008, the court granted the Secretary’s

motion for summary judgment. Abington Crest Nursing &

Rehab. Ctr. v. Leavitt, 541 F. Supp. 2d 99, 101 (D.D.C. 2008).

The court framed the issue as follows: “Was the Secretary’s

interpretation of the applicable Medicare law and regulations, to

deny the reimbursement of bad debts arising from Part B

services provided by Extendicare Facilities [the owner of the

SNF plaintiffs], a reasonable construction of the regulations?”

Id. at 105. The court concluded that it was. Id.

The SNFs now appeal from the district court’s grant of

summary judgment to the Secretary. Our review is de novo.

Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229

(D.C. Cir. 1994). Pursuant to § 1395oo(f), we proceed under the

judicial review provisions of the Administrative Procedure Act,

which require us to set aside agency action if it is “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with the law.” 5 U.S.C. § 706(2)(A).

II

The appellants’ first contention is that the Secretary’s

refusal to reimburse them for uncollectible deductibles and

coinsurance “contravenes” the Medicare statute’s “prohibition

against cross-subsidization.” Appellants’ Br. 16. Although their

briefs do not mention it, the two-step framework of Chevron

U.S.A. Inc. v. Natural Resources Defense Counsel, Inc.

structures our review of HHS’ interpretation of the Medicare

statute. 467 U.S. 837 (1984). Under that framework, “[i]f the

intent of Congress is clear, . . . [a court] must give effect to the

unambiguously expressed intent of Congress.” Id. at 842-43.

But “if the statute is silent or ambiguous with respect to the

specific issue,” the court must uphold the agency’s interpretation

as long as it is reasonable. Id. at 843. 
6

The appellants allege that HHS’ denial of their bad debt

claims violates the “anti-cross-subsidization” principle of 42

U.S.C. § 1395x(v)(1)(A), which is italicized below:

(v) Reasonable costs

(1)(A) The reasonable cost of any services shall be the

cost actually incurred, excluding therefrom any part of

incurred cost found to be unnecessary in the efficient

delivery of needed health services, and shall be

determined in accordance with regulations establishing

the method or methods to be used, and the items to be

included, in determining such costs . . . . Such

regulations shall . . . take into account both direct and

indirect costs of providers of services . . . in order that,

under the methods of determining costs, the necessary

costs of efficiently delivering covered services to

individuals covered by the insurance programs

established by this subchapter will not be borne by

individuals not so covered, and the costs with respect

to individuals not so covered will not be borne by such

insurance programs . . . .

42 U.S.C. § 1395x(v)(1)(A). The appellants argue that if

Medicare does not reimburse the bad debts of Medicare

beneficiaries, nonbeneficiary recipients of SNF services will end

up bearing those costs, thus transgressing the anti-crosssubsidization principle. See Appellants’ Br. 16. Indeed, as the

Secretary has acknowledged, the Department has long

interpreted that principle to permit Medicare to reimburse bad

debts when Medicare pays the “reasonable costs” of services.

See Secretary’s Decision at 5-7. But the Secretary has also

concluded that this provision applies only to reimbursements

based on reasonable costs, and not to reimbursements based on

reasonable charges or on fee schedules. Id. at 7, 11.
7

The first step of our Chevron analysis is quickly concluded

by reading the statutory text set out above. As is evident on its

face, § 1395x(v)(1)(A) is silent on the subject of bad debt -- a

point we previously noted in Kidney Center of Hollywood v.

Shalala. 133 F.3d 78, 86 (D.C. Cir. 1998) (“[T]he statute does

not speak directly to the question of bad debt.”). Although bad

debt may be one of the “indirect costs” referred to in the

subsection -- which is apparently the reason the Secretary has

applied the subsection’s principle to bad debt under reasonable

cost systems -- the text is ambiguous in that respect. Even more

to the point, the statute does not tell us whether bad debt -- or

any other indirect cost -- must be reimbursed under a fee

schedule system. There is, therefore, no “unambiguously

expressed intent of Congress . . . with respect to the specific

issue” before us, and we must proceed to Chevron’s second step.

467 U.S. at 842-43.

The second-step question is whether the Secretary

permissibly read § 1395x(v)(1)(A) to apply only to

reimbursement systems based on reasonable costs, and thus to

justify bad debt reimbursement only under such systems. We

conclude that this reading was reasonable. Section 1395x is the

“definitions” section of the Medicare statute. See 42 U.S.C.

§ 1395x. As indicated by its title, subsection 1395x(v) is the

subsection that defines “reasonable costs.” Id. § 1395x(v). The

subsection’s anti-cross-subsidization principle is merely an

element of that definition: it ensures that “[t]he reasonable cost

of any services shall be the cost actually incurred,” by requiring

that the “necessary costs of efficiently delivering covered

services to individuals covered by the insurance programs . . .

will not be borne by individuals not so covered, and the costs

with respect to individuals not so covered will not be borne by

such insurance programs.” 42 U.S.C. § 1395x(v)(1)(A)

(emphases added). It was therefore reasonable for the Secretary

to read this principle, like the subsection of which it is a part, to
8

apply only to reimbursement systems based on “reasonable

costs.”

It was also reasonable for the Secretary to conclude that the

fee schedule system, which the Balanced Budget Act applied to

SNFs, is materially different from a cost-based system. As the

Secretary explained:

Unlike a reasonable cost payment, payment under a fee

schedule is not related to a provider’s cost outlay for

the service and does not involve costs or, likewise,

unrecovered “costs.” Under a fee schedule, Medicare

makes payment for a specific service for which there is

a predetermined rate which includes a margin for profit

and which reflects the price of doing business. 

Secretary’s Decision at 11. Indeed, the Secretary noted that,

although Medicare does reimburse providers covered by

reasonable cost systems for bad debts, “Medicare’s longstanding

policy has been not to pay for bad debts for any services paid

under a reasonable charge or fee schedule methodology.” Id.

Appellants dispute the consistency of this “longstanding

policy.” They note, for example, that Medicare reimburses

providers for bad debts under the Part A prospective payment

system, notwithstanding that a PPS is not based on actual costs.

A fee schedule, they insist, is just a variation of a PPS. 

It is true that under the Part A prospective payment system,

“the amount of payment per discharge is fixed in advance, is not

based on a hospital’s actual costs, and is not subject to

retroactive adjustment.” Washington Hosp. Ctr. v. Bowen, 795

F.2d 139, 142 n.2 (D.C. Cir. 1986). But the Secretary

reasonably explains that there is also a material difference

between the Part A PPS and the physician fee schedule
9

3

Appellants’ opening brief also argued that the Secretary

conceded, in a 1998 Program Memorandum, that the Balanced Budget

Act did not alter providers’ entitlement to reimbursement for bad debts

relating to services provided to dual beneficiaries. Appellants’ Br. 39

(citing Program Memorandum A-98-18, Medicare & Medicaid Guide

(CCH) [1998-1 Transfer Binder] ¶ 46,321). The Secretary responded

that this Program Memorandum was only applicable and sent to

contractors that made payments under the Part A prospective payment

system. See Appellee’s Br. 44. Appellants did not dispute that

response in their reply brief.

applicable to SNFs. The Part A PPS is based on hospitals’

average costs per discharge in an annual base period, see 42

U.S.C. § 1395ww(d)(2)(A), and “bad debts incurred during the

. . . base period were not included in the calculation of the

prospective rates.” Secretary’s Decision at 13. By contrast, the

Part B physician fee schedule is based on prices health care

providers charge, and “[h]istorically, these prices have reflected

the entities[’] costs of doing business including expenses such

as bad debt.” Id. (quoting Medicare Program; Provider Bad

Debt Payment, 68 Fed. Reg. 6682, 6683 (proposed Feb. 10,

2003)).3

As another counterexample to the Secretary’s claim of a

consistent policy of denying bad debt reimbursement under fee

schedule systems, appellants proffer the case of ambulatory

surgical centers. Medicare pays such centers according to a fee

schedule. See 42 U.S.C. §§ 1395k(a)(2)(F), 1395l(i)(2)(A).

And yet, it nonetheless reimburses their bad debts. See

Medicare Program; Payment for Facility Services Related to

Ambulatory Surgical Procedures Performed in Hospitals on an

Outpatient Basis, 52 Fed. Reg. 36,765, 36,771-72 (Oct. 1, 1987).

The Secretary reasonably distinguishes this counterexample

as well, explaining that appellants’ contention misconstrues the

payment method that the Medicare statute specifically prescribes
10

4

See 42 U.S.C. §§ 1395l(a)(8)(A)(i), 1395m(k), 1395w-4.

for ambulatory surgical centers. Although the statute does

require the Secretary to establish a “fair fee” for the services

provided by such centers, 42 U.S.C. § 1395l(i)(2)(A), the term

“fee” does not have its usual meaning because the statute

requires the Secretary, in estimating a fair fee, to consider the

“costs incurred by such centers.” Id. § 1395l(i)(2)(A)(i). And

because payment rates for ambulatory surgical centers are thus

based on costs rather than charges, they are closer to the Part A

PPS (under which the Secretary continues to reimburse

providers for bad debts) than to the physician fee schedule

applicable to SNFs. 

Finally, appellants maintain that the Secretary’s

interpretation of the Medicare statute is unreasonable because

“the physician fee schedule, which is now used to pay SNFs for

the services that are the subject of this appeal, does not include

any component of bad debt reimbursement.” Appellants’ Br. 24.

The Secretary disagrees, insisting that the schedule is “based on

data reflecting what health care providers charge, which

historically has taken into account the costs of being unable to

collect some co-pays and deductibles.” Appellee’s Br. 33. We

could resolve this dispute on the ground that the appellants bear

the burden of proof here, see City of Olmstead Falls, Ohio v.

FAA, 292 F.3d 261, 271 (D.C. Cir. 2002) (“[T]he party

challenging an agency’s action as arbitrary and capricious bears

the burden of proof.”), and that the record is devoid of evidence

on this issue. But there is another, more fundamental ground for

resolution: Medicare pays the SNFs based on the physician fee

schedule not because of a decision made by the Secretary, but

because of a decision made by Congress.4

 It may be, as

appellants contend, that “the physician fee schedule, which is

based on physicians’ historical charges, has nothing to do with

costs that institutions, like SNFs, incur in providing services to
11

Medicare beneficiaries.” Appellants’ Reply Br. 2. But if so, the

appellants’ quarrel is with Congress and not the Secretary.

III

The appellants’ second contention is that the Secretary’s

denial of reimbursement for bad debts “disregards the plain

terms” of the Secretary’s own regulation. Appellants’ Br. 31.

The Supreme Court has described the scope of our review of

such a contention as follows: “We must give substantial

deference to an agency’s interpretation of its own regulations.

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)

(internal quotation marks and citations omitted); see Bowles v.

Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).

In the fiscal year in question, the regulation at issue, 42

C.F.R. § 413.80(d), provided as follows:

Under Medicare, costs of covered services furnished

beneficiaries are not to be borne by individuals not

covered by the Medicare program, and conversely,

costs of services provided for other than beneficiaries

are not to be borne by the Medicare program.

Uncollected revenue related to services furnished to

beneficiaries of the program generally means the

provider has not recovered the cost of services covered

by that revenue. The failure of beneficiaries to pay the

deductible and coinsurance amounts could result in the

related costs of covered services being borne by other

than Medicare beneficiaries. To assure that such

covered service costs are not borne by others, the costs
12

5

As noted in footnote 1 above, this regulation is now found in 42

C.F.R. § 413.89. While this case was pending in the district court, the

Secretary published a new subsection, which the Secretary stated was

intended to “clarify that payment of bad debts for covered services

paid for under a reasonable charge-based methodology or fee schedule

is not allowable.” Medicare Program; Revisions to Payment Policies,

71 Fed. Reg. 69,624, 69,712 (Dec. 1, 2006). The new subsection

provides: “Bad debts arising from covered services paid under a

reasonable charge-based methodology or a fee schedule are not

reimbursable under the program.” 42 C.F.R. § 413.89(i).

attributable to the deductible and coinsurance amounts

that remain unpaid are added to the Medicare share of

allowable costs. Bad debts arising from other sources

are not allowable costs.

See 42 C.F.R. § 413.80(d) (1997) (emphasis added).5 As is

readily apparent, § 413.80(d) incorporates the anti-crosssubsidization principle found in the statutory subsection that we

discussed in Part II. See 42 U.S.C. § 1395x(v)(1)(A). There is,

however, a difference. Unlike the statutory provision, the

regulation expressly addresses the bad debt issue and mandates

reimbursement of unpaid deductibles and coinsurance to prevent

cross-subsidization.

But the fact that the regulation expressly covers bad debt

does not answer the question of whether it applies to payment

systems based on fee schedules. Just as the statutory provision

is located in a subsection that defines “Reasonable Costs,” the

regulation is located in the part of the Medicare regulations that

sets forth the “Principles of Reasonable Cost Reimbursement.”

42 C.F.R. Part 413. It was therefore perfectly sensible for the

Secretary to read the regulatory anti-cross-subsidization

principle in the same manner as its statutory counterpart: that is,

to apply only to reasonable cost reimbursement systems. As the

Secretary reasonably explained, the regulation’s “bad debt
13

provision arises from the reasonable ‘cost’ anti-crosssubsidization provision[,] which is not controlling under the

reasonable charge/fee schedule methodology” set forth in the

Balanced Budget Act. Secretary’s Decision at 11. 

Although there are quite a number of “reasonabl[es]” in that

last sentence, they should not obscure our bottom line: the

Secretary’s interpretation of the Secretary’s own regulation is

neither “plainly erroneous” nor “inconsistent with the

regulation,” and it therefore commands our deference. Thomas

Jefferson Univ., 512 U.S. at 512.

IV

Because the Secretary’s denial of the appellants’

reimbursement request violates neither the Medicare statute nor

the program’s regulations, the judgment of the district court is

Affirmed.