In the

United States Court of Appeals

For the Seventh Circuit

No. 00-3707

Paragon Health Network, Inc., d/b/a Milwaukee

Subacute Center, a/k/a Milwaukee Subacute and

Rehabilitation Center,

Plaintiff-Appellant,

v.

Tommy G. Thompson,/* Secretary, Department

of Health and Human Services,

Defendant-Appellee.

Appeal from the United States District Court 

for the Eastern District of Wisconsin.

No. 98-C-0553--Rudolph T. Randa, Judge.

Argued April 12, 2001--Decided June 5, 2001

 Before Flaum, Chief Judge, and Manion and

Kanne, Circuit Judges.

 Flaum, Chief Judge. Plaintiff Paragon

Health Network, Inc. ("Paragon")/1

appeals from a district court decision

affirming a determination that its newly

opened skilled nursing facility ("SNF"),

Milwaukee Subacute Center ("MSC"), is not

eligible for an exemption from the

routine cost limits ("RCLs") of Medicare.

Paragon contends that the interpretations

by the Secretary of Health and Human

Services ("Secretary") of the relevant

regulation are arbitrary and unreasonable

and that the decision denying an

exemption to MSC is not supported by

substantial evidence. For the reasons

stated herein, we affirm.

I. Background

 Wisconsin has adopted a set of statutes

regulating nursing facilities. Wis. Stat.

sec. 150.21, et seq. Wisconsin requires

each SNF to have Certificate of Need

("CON") rights for the beds it operates.

The state has a moratorium on the

issuance of new CON rights; thus, to open

a SNF, one must obtain CON rights from a

currently existing nursing provider.

Wisconsin permits the transfer of CON
rights, but only to a related entity that

will operate within the same Health

Service Area ("HSA") as the current owner

of the rights. The state is split into

eight HSAs.

 Paragon opened MSC as a SNF in downtown

Milwaukee, Wisconsin on April 7, 1995,

with a capacity of thirty-five nursing

beds. MSC obtained the rights to these

thirty-five beds from Shores Transitional

Care and Rehabilitation Center

("Shores"), another facility owned by

Paragon. Shores is located in Glendale, a

northern suburb of Milwaukee, and the

distance between the two facilities is

about seven miles. Both MSC and Shores

are located in HSA Number Two, which is

approximately eighty miles long, forty to

fifty miles wide, and encompasses the

city of Milwaukee and seven counties. At

the time immediately before the transfer,

Shores had CON rights to four-hundredand-three beds. Shores continues to

operate as a separate facility after the

transfer of a fraction of its CON rights

to MSC. The only thing that MSC received

from Shores were the CON rights; no

residents, staff, or equipment were

transferred.

 The RCLs are the maximum amount that the

federal government will pay for services

under the Medicare program. See generally

Good Samaritan Hosp. v. Shalala, 508 U.S.

402, 404-06 (1993) (providing a "rough

description" of the RCL regime). At the

time when MSC opened, 42 C.F.R. sec.

413.30(e) exempted "new providers" from

the RCLs for a period of up to two years.

MSC applied for this exemption on June

20, 1995, but the Health Care Financing

Administration ("HCFA"), the federal

agency through which the Secretary

administers the Medicare program, denied

this request. Paragon appealed to the

Provider Reimbursement Review Board

("PRRB"), which conducted an evidentiary

hearing and concluded that MSC was not

entitled to the new provider exemption.

The PRRB found that MSC was a relocated

portion of Shores rather than a new

facility, relying only on the transfer of

CON rights from Shores to MSC in reaching

this conclusion. The PRRB also considered

whether MSC would be granted the new

provider exemption as a relocated

provider serving a substantially

different inpatient population. The PRRB

stated that MSC could not qualify for the
exemption in this manner either because

MSC’s patients came from the same cities

and towns as Shores, which is to say that

almost all of the patients of both

facilities live in Milwaukee. The HCFA

Administrator declined to review the

adjudication, and so the PRRB’s decision

became the final decision of the

Secretary. 42 U.S.C. sec. 1395oo(f)(1).

Paragon filed suit in district court

claiming that the PRRB’s decision

unreasonably interpreted 42 C.F.R. sec.

413.30(e) and was not supported by

substantial evidence, but the court

rejected Paragon’s arguments and entered

summary judgment in favor of the

Secretary. 

II. Discussion

A. Standard of Review

 42 U.S.C. sec. 1395oo(f)(1) states that

we review the Secretary’s decision under

the Administrative Procedure Act. Thus,

we will reverse the Secretary’s

determination only if it is arbitrary,

capricious, not supported by substantial

evidence, or otherwise deficient under

the standards set forth in 5 U.S.C. sec.

706. In addition, we normally defer to

the Secretary’s reasonable construction

of the Medicare regulations. See Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504,

512 (1994). We first consider whether the

regulation is ambiguous. See Christensen

v. Harris County, 529 U.S. 576, 588

(2000). If not, then we apply the

regulation according to its plain

meaning; if so, then the Secretary’s

interpretation is entitled to

"controlling weight unless it is plainly

erroneous or inconsistent with the

regulation." Thomas Jefferson, 512 U.S.

at 512 (internal quotation marks

omitted); see also Bowles v. Seminole

Rock & Sand Co., 325 U.S. 410, 414

(1945).

B. Secretary’s Interpretation

 42 C.F.R. sec. 413.30(e) contains an

exemption to the Medicare RCLs for a "new

provider." A new provider is defined as

"a provider of inpatient services that

has operated as the type of provider (or

the equivalent) for which it is certified

for Medicare, under present and previous

ownership, for less than three full

years."/2 The Provider Reimbursement
Manual ("PRM"), a set of instructions

issued by the Secretary that constitutes

an administrative interpretation of the

Medicare statute and regulations, see

Shalala v. Guernsey Mem’l Hosp., 514 U.S.

87, 101-02 (1995) (referring to PRM

provisions as interpretive rules),

provides further guidance on new provider

exemptions. PRM sec. 2604.1 reiterates

the definition of new provider contained

in the regulation, and then states that a

provider which relocates could be granted

new provider status if it meets certain

conditions./3

 In denying that MSC was a new provider,

the PRRB relied solely on the fact that

MSC had acquired CON rights from Shores.

In determining the length of time a

provider has "operated," the Secretary

considers the "previous ownership" of the

SNF’s CON rights. The operating history

of the SNF from which any CON rights were

obtained is imputed to the acquiring

provider. In the instant case, this

interpretation caused the PRRB to

conclude that MSC had been operating

since 1979, the year Shores opened, since

MSC and Shores provide the same type of

service. Instead of MSC being a new

provider, the PRRB decided that MSC was a

relocated part of Shores.

C. New Provider

 1. Challenges to Seminole Rock

deference.

 Paragon has a number of arguments as to

why the Secretary’s interpretation is

incorrect, but the contentions we will

initially consider regard the weight that

should be given to the Secretary’s

construction of 42 C.F.R. sec. 413.30(e).

Paragon claims that the deference

normally accorded agency interpretations

of their own regulations is warranted

only where the interpretation is both

contemporaneous with the regulation and

consistently applied. Appellant claims

that the contemporaneity requirement for

deference is not satisfied here because

the Secretary’s interpretation relying

solely on the transfer of CON rights to

deny that a SNF is a new provider was not

made until 1995, while the regulation was

promulgated in 1979. Paragon also

contends that the interpretation has not

been consistent, relying on PRM sec.

2154.2.C., which defines "relocate" as
"[t]o move an existing provider to a new

location and close the old provider."

Paragon claims that this is the only

definition of "relocate" in the PRM, and

so should be applied whenever that word

appears in the Medicare statute,

regulations, or PRM provisions. Paragon

seizes upon the last part of this

definition to argue that MSC cannot be a

relocated provider since the old

provider, Shores, has not closed. Thus,

the PRRB was inconsistent in labeling MSC

as a relocated provider since this

decision ignored the definition of

"relocate" contained in the PRM.

 The Secretary claims that the current

interpretation of 42 C.F.R. sec.

413.30(e) is not new, but does not cite

any decision construing that regulation

in the manner at issue here until 1995.

The Secretary also cites a number of

post-1995 PRRB decisions that have

consistently applied the proffered

interpretation. Appellee claims that the

definition of "relocate" contained in PRM

sec. 2154.2.C. has never been applied to

new provider exemptions and concerns a

completely different subject. HCFA has

long recognized the concept of a partial

relocation in applying new provider

exemptions from the RCLs.

 Before we address the legal issues, we

set forth the history of the

interpretation of 42 C.F.R. sec.

413.30(e) as best we can determine from

the submissions of both parties. That

regulation has been given the same

consistent interpretation since 1995, but

neither party has provided evidence of

any construction prior to that time.

Thus, we assume that the regulation was

first authoritatively construed in 1995.

We also accept that the definition of

"relocate" contained in PRM sec.

2154.2.C. has not been applied to the

regulations concerning exemptions and the

concept of a partial relocation has been

recognized by HCFA.

 We first conclude that the apparent lack

of contemporaneity between the

promulgation of the regulation and the

Secretary’s interpretation of it does not

affect the high level of deference we owe

to the Secretary. In the context of

judicial deference to agency

interpretations of administrative

statutes under Chevron, U.S.A., Inc. v.
Natural Resources Defense Council, Inc.,

467 U.S. 837 (1984), an agency

construction formulated well after the

statute’s enactment is still entitled to

deference. See Smiley v. Citibank (South

Dakota), N.A., 517 U.S. 735, 740-41

(1995). Smiley explained that the

rationale of Chevron is a presumption

that Congress intended for ambiguities in

a statute primarily to be resolved by the

agency charged with administering that

statute, and so deference is warranted

regardless of whether the agency

officials interpreting the law have any

special knowledge of Congress’s specific

intentions at the time the statute was

passed. Id. The rationale for Seminole

Rock deference is similar to that for

Chevron. Martin v. Occupational Safety &

Health Review Commission, 499 U.S. 144,

151 (1991) explains that regulatory

deference is justified by the presumption

that the power to authoritatively

interpret the agency’s own regulations is

part of the lawmaking powers delegated by

Congress. Thus, just as with Chevron,

deference to regulatory interpretations

does not depend on contemporaneity, since

no demonstration that the agency

officials had special insight into the

intentions behind the passage of the

regulation is required. Instead, Congress

is presumed to have delegated the primary

power to fill regulatory ambiguities to

the agency, and courts owe deference to

agency decisions that clarify a

regulation regardless of the fact that

the agency waited to exercise this power.

 Moving on to the consistency question,

we initially note that Paragon is not

arguing that the Secretary has in the

past used the PRM sec. 2154.2.C.

definition of "relocate" in new provider

determinations under 42 C.F.R. sec.

413.30(e) and PRM sec. 2604.1, but now

refuses to do so. A HCFA witness at the

PRRB hearing stated that HCFA had always

recognized the concept of partial

relocations, where the original provider

does not close its doors, and Paragon has

not brought forth any evidence to contest

that assertion. Rather, Paragon contends

that HCFA and the PRRB should have used

the PRM sec. 2154.2.C. in making new

provider determinations, contrary to the

actual practice. Paragon relies on the

canon that "identical words used in

different parts of the same act are

intended to have the same meaning,"
Commissioner v. Keystone Consol. Indus.,

Inc., 508 U.S. 152, 159 (1993) (internal

quotation marks omitted), to argue that

the definition in PRM sec. 2154.2.C.

should be applied to new provider

determinations under PRM sec. 2604.1.

 The PRM, while a useful guide to

interpreting the Medicare statute and

regulations, is not strictly binding on

the Secretary; we will uphold a decision

despite certain variations from the

manual. See Howard Young Med. Ctr. Inc.

v. Shalala, 207 F.3d 437, 442-43 (7th

Cir. 2000); Adventist Living Ctrs., Inc.

v. Bowen, 881 F.2d 1417, 1423-24 & n.10

(7th Cir. 1989). Thus, Paragon’s argument

that the Secretary is required to use the

PRM definition has less weight than if

that definition appeared in the Medicare

statutes or regulations. Moreover, the

canon Paragon relies on has reduced force

when the identical word is used in

different provisions which address

disparate subjects. See Atlantic Cleaners

& Dyers, Inc. v. United States, 286 U.S.

427, 433 (1932); see also United States

v. Cleveland Indians Baseball Co., 121 S.

Ct. 1433, 1441 (2001). PRM sec. 2154.2.C.

is contained in a section of the PRM

discussing when planning costs will be

incorporated into the historical cost of

a facility, while the issue in this case

is exemptions from the RCLs for new

providers, which is discussed in a wholly

different chapter of the PRM. As noted

above, the Secretary has consistently

labeled a transfer of less than an entire

facility as a partial relocation for

purposes of the new provider exemption.

Given all of these circumstances, we find

nothing untoward in the Secretary’s

declining to rely on the definition of

"relocate" in PRM sec. 2154.2.C. in

making new provider determinations under

42 C.F.R. sec. 413.30(e) and PRM sec.

2604.1. Thus, we conclude that Seminole

Rock deference is owed to the Secretary’s

interpretation of 42 C.F.R. sec.

413.30(e) despite the lack of

contemporaneity and refusal to apply PRM

sec. 2154.2.C./4 

 2. Ambiguity.

 Having found that Seminole Rock

deference is warranted, we next determine

whether 42 C.F.R. sec. 413.30(e) is

ambiguous. Paragon argues that the
regulation has a plain meaning, which is

contradicted by the Secretary’s

interpretation. Paragon focuses on the

phrase "provider of inpatient services

that has operated" in the regulation and

its relation to "present and previous

ownership." According to the appellant,

the question of ownership must be decided

with respect to the "provider" as a

whole. A "provider" consists of all those

attributes necessary for a SNF to

"operate[ ]"-- that is, not just CON

rights, but physical beds, employees,

administrators, equipment, patients,

referral sources, etc. Paragon backs this

up with a citation to PRM sec. 2604.1,

which states that a "new provider is an

institution that has operated . . . ."

Paragon claims that the use of the word

"institution" in the PRM underscores the

fact that "provider" in 42 C.F.R. sec.

413.30(e) refers to the facility as a

whole, rather than just CON rights. Thus,

only when the SNF as an entire operating

institution is transferred to a new owner

can the exemption for a new provider be

denied. 

 Despite Paragon’s arguments, we conclude

that the regulation is ambiguous on what

constitutes a "provider." Paragon is

correct that a nursing "provider" is

composed of many different attributes,

but changing one or more of these

characteristics does not mean that the

SNF becomes a different "provider." For

example, if a facility fires all its

staff and hires a new one, but makes no

other changes, an ordinary user of the

English language probably would consider

the SNF with the new staff to be the same

"provider" as it was before. Similarly, a

SNF that replaced all of its old

equipment with new models would still be

the same "provider" as it was before the

modernization. Even if a SNF both fired

its staff and replaced all of its

equipment, one might still call it the

same "provider" if the administration and

physical plant remained the same. Of

course, if all the various things that

make up a SNF were new in the sense that

they had not been part of another

facility, then one would have to call

that SNF a "new provider." Conversely, if

a nursing facility did not change any of

its aspects, it would unquestionably

continue to be the same provider rather

than a new one. The difficulty in drawing

a line between these two extremes is what
makes the word "provider" ambiguous as

used in the regulation. 

 3. Reasonableness.

 Since the regulation is ambiguous, we

next examine whether the Secretary’s

interpretation is plainly erroneous or

inconsistent with the text. We begin with

what is basically an extension of

Paragon’s argument for the clarity of the

regulation’s language. Even if words like

"provider" and "operate[ ]" are

ambiguous, these must refer to more than

just a provider’s CON rights. In

determining whether a SNF operated "under

. . . previous ownership," the Secretary

should not rely on CON rights alone but

also take account of whether the staff,

referrals, equipment, etc. of the

facility are the same as the one from

which the CON rights were obtained.

 Paragon’s argument does have a degree of

merit--terms like "operate[ ]" and

"provider" suggest that one should look

to whether a group of attributes making

up the institution have changed such that

the SNF may be described as new, rather

than just focusing on a single

characteristic, such as CON rights.

Nevertheless, we conclude that the

Secretary’s interpretation is not so much

at variance with the language of the

regulation as to be deemed plainly

erroneous or inconsistent with the text.

Medicare is a highly complex and

technical program, and so deference to

the Secretary’s determinations in the

course of administering the system is

especially warranted. Thomas Jefferson,

512 U.S. at 512. Furthermore, an agency

need not adopt the most natural reading

of the regulation, but only a reasonable

one. Pauley v. BethEnergy Mines, Inc.,

501 U.S. 680, 702 (1991). The Secretary

explains that a transfer of CON rights

does not result in the provision of any

new services. Even though the transferee

might have new equipment, staff, etc., it

will provide the same kind of services as

the transferor of the CON rights, just at

a different location. We cannot say that

the Secretary’s interpretation that

because no new services are being

provided there is not a new provider is

unreasonable.

 Paragon also has a few policy arguments
as to why the Secretary’s construction of

42 C.F.R. sec. 413.30(e) should be

invalidated, but none of these are

convincing. The first is that the purpose

of the new provider exemption is "to

allow a provider to recoup the higher

costs normally resulting from low

occupancy rates and start-up costs during

the time it takes to build its patient

population." San Diego Physicians &

Surgeons Hosp. v. Aetna Life Ins. Co.,

[1990-1991 Transfer Binder] Medicare &

Medicaid Guide (CCH) para. 39,007, at

25,061 (HCFA Administrator 1991). When

MSC opened, it incurred large start-up

costs and had a very low occupancy rate,

resulting in high costs per patient. The

receipt of CON rights from Shores did

nothing to ameliorate these expenses.

Thus, CON rights alone should not be used

to deny that a SNF is a new provider

since these rights have no relation to

the purposes of the exemption.

 However, the Secretary has an adequate

response to this argument. At the time in

question, SNFs were reimbursed under

Medicare the lesser of the reasonable

cost of or the customary charge for the

service in question./5 42 U.S.C. sec.

1395f(b)(1) (1994). The definition of

"reasonable cost" excludes any "cost

found to be unnecessary in the efficient

delivery of needed health services." 42

U.S.C. sec. 1395x(v) (1)(A). The

Secretary contends, as with the textual

argument above, that the transfer of CON

rights simply shifts around SNF services.

Creating a new facility and moving

services to it, as Paragon did between

MSC and Shores, is costly, but no benefit

is gained in the overall delivery of

health services if the new facility is

providing the same services to the same

populace as the old one. Thus, the

Secretary’s judgment that the high startup costs of MSC were "unnecessary in the

efficient delivery of needed health

services" is a reasonable one that will

not be disturbed by this court.

 Paragon’s next arguments focus upon the

effect of making a new provider

determination depend upon CON rights. The

first is that several states do not have

CON or similar programs, and that a HCFA

witness at the PRRB hearing admitted that

in such a state MSC would have been

considered a new provider. To make a new

provider determination depend solely on
which state the SNF happens to be in is

unreasonable and arbitrary. The second is

that under the Secretary’s interpretation

a new provider cannot exist in Wisconsin

because the state has imposed a

moratorium on issuing new CON rights. Any

SNF that begins operations will have to

obtain its CON rights from an already

existing provider and have the transferor

provider’s history imputed to it,

preventing it from being a new provider

under 42 C.F.R. sec. 413.30(e). 

 We again find the Secretary’s responses

to these arguments to be sufficiently

convincing so as to prevent us from

declaring the interpretation to be

plainly erroneous. Regarding the first,

the Secretary points out that a CON

program provides benefits for SNFs. More

specifically, institutions like MSC are

insulated from the effects of competition

with new entrants. This fact reduces the

need for new SNFs to obtain extra funds

from Medicare in order to stay afloat. As

for the second argument, the Secretary

can rely in part on the state’s

determination that no new nursing

facilities are needed to support a

decision that additional beds are

unnecessary to the efficient delivery of

health care services in that state.

Paragon complains that Wisconsin also ap

proved the movement of beds from Shores

to MSC, indicating that the state thought

that the move was necessary to serve the

area of inner-city Milwaukee. However,

there is no evidence that Wisconsin’s

approval of the transfer of beds was made

under the strict standard imposed by 42

U.S.C. sec. 1395x(v)(1)(A). Wisconsin

might approve such relocations even

though the cost is not necessary to the

efficient delivery of health care. Thus,

the Secretary could reasonably use

Wisconsin’s decisions about the state’s

need for nursing care to set an upper

limit on the costs that are necessary for

Medicare to bear, while denying

reimbursement of costs in areas where the

Secretary believes Wisconsin is too

lenient.

 To summarize, the lack of the

contemporaneity between the regulation’s

promulgation and the adoption of the

Secretary’s current construction does not

eliminate the deference we owe to the

Secretary. Likewise, this deference is

also not affected by the Secretary’s
decision to use a definition of

"relocate" for the new provider exemption

other than the one stated in the PRM for

use on a different subject. The

regulation is ambiguous, and the

Secretary’s interpretation of the

regulation is not plainly erroneous on

either textual or policy grounds.

D. Relocated Provider

 The Secretary has interpreted the

exemption for new providers in 42 C.F.R.

sec. 413.30(e) to be available to certain

relocated providers. PRM sec. 2604.1

discusses when a relocated provider will

be granted the status of a new provider,

stating in part:

[F]or purposes of this provision, a

provider which relocates may be granted

new provider status where the normal

inpatient population can no longer be

expected to be served at the new

location. The distance moved from the old

location will be considered but will not

be the determining factor in granting new

provider status. For example, a specialty

hospital may move a considerable distance

and still care for generally the same

inpatient population, while the

relocation of a general hospital a

relatively short distance within a

metropolitan area may greatly affect the

inpatient population served. A provider

seeking such new provider status must

apply to the intermediary and demonstrate

that in the new location a substantially

different inpatient population is being

served.

MSC’s request for new provider status

based on its relocation was denied by the

PRRB. In interpreting the phrase

"substantially different inpatient

population," the PRRB applies a "same

cities and towns" standard: if the

relocated provider’s current patients

came from the same cities and towns as at

its old location, then the exemption will

be denied. The vast majority of patients

for both MSC, the relocated provider, and

Shores, the original location, come from

the city of Milwaukee, and thus the PRRB

denied the exemption.

 1. Retroactivity.

 Paragon’s first challenge is that the
PRRB’s decision retroactively applied a

new rule, violating Bowen v. Georgetown

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

Paragon claims that current PRM sec.

2533.1.B.3, which did not come into

effect until after MSC’s application for

the new provider exemption, was used to

dispose of its request. PRM sec.

2533.1.B.3 states that the new provider

exemption may be granted to a relocated

provider only if the SNF relocates to a

different state-defined HSA. Paragon

relies primarily on the fact that a HCFA

witness at the PRRB hearing admitted that

the agency applied this new standard in

rejecting MSC’s application.

 However, the evidence does not support

Paragon’s position. What the HCFA witness

said is irrelevant to our review, since

the PRRB’s adjudication stands as the

final decision of the Secretary under 42

U.S.C. sec. 1395oo(f)(1). The PRRB simply

did not apply the standard contained in

PRM sec. 2533.1.B.3. The PRRB’s

discussion of MSC’s request for new

provider status as a relocated provider

never mentions the fact that Shores and

MSC are both located in HSA Number Two.

Instead, the opinion relies on the fact

that "practically 100 percent" of MSC’s

admissions come from the same cities and

towns as Shores’ admissions. Thus, the

PRRB did not retroactively apply PRM sec.

2533.1.B.3.

 2. Arbitrary and capricious.

 Paragon’s next argument is that the

same-cities-and-towns standard is

arbitrary and capricious since it contra

dicts the language of PRM sec. 2604.1.

That PRM section states that relocation

"a relatively short distance within a

metropolitan area" can be sufficient for

new provider status. Paragon claims that

the same-cities-and-towns standard means

that a provider that moves within a

metropolitan area cannot qualify for new

provider status, contradicting this

portion of the PRM’s text. 

 We reject Paragon’s textual argument. A

metropolitan area can contain many

different municipal corporations. If a

provider primarily serving one town

relocates within the same metropolitan

area to a different town and begins to

serve mostly residents of the new town,

then that relocated provider could attain
new provider status under the Secretary’s

interpretation of PRM sec. 2604.1. Thus,

there is no contradiction between stating

that movement within a metropolitan area

can be sufficient for granting new

provider status while also dictating that

the new location must serve patients from

different cities and towns than the old

location.

 Paragon also argues that the samecities-and-towns standard is arbitrary

since it does not take account of the

fact that such incorporated areas can

vary widely in size. That the standard

applied by the PRRB treats disparately

sized towns and cities the same is true,

but agencies are permitted to rely on

broad categorizations that may not

perfectly reflect the underlying facts.

Cf. Heckler v. Campbell, 461 U.S. 458,

467-68 (1983) (holding that using

guidelines rather than a completely

individualized inquiry to determine what

kinds of jobs a disabled person can

perform is not arbitrary or capricious).

The same-cities-and-towns standard has a

reasonable connection to determining

whether a substantially different

inpatient population is being served by a

relocated provider, and is more efficient

and less costly than a more detailed

method.

 3. Substantial evidence.

 Paragon’s next argument is that the

PRRB’s decision is not supported by

substantial evidence. Paragon cites

patient referral and zip code data to

support its claim that MSC was serving a

substantially different inpatient

population from Shores’. Paragon’s

contention here seems to be premised on

the same-cities-and-towns standard being

invalid. However, we have already upheld

that standard, and so the only question

for purposes of substantial evidence is

whether MSC’s patients came from the same

cities and towns as Shores’. The PRRB

found that patients for both facilities

came overwhelmingly from Milwaukee, and

Paragon has not challenged this finding.

Therefore, the PRRB’s decision is

supported by substantial evidence.

III. Conclusion

 Seminole Rock deference is owed to the
Secretary’s construction of 42 C.F.R.

sec. 413.30(e). Relying on the operating

history of the transferor of CON rights

to deny the new provider exemption to the

transferee is not plainly erroneous.

Using the same-cities-and-towns standard

to find that a relocated SNF is not

serving a substantially different

inpatient population is not arbitrary or

capricious. Since the Secretary’s

interpretations are reasonable, we Affirm

the district court’s decision upholding

the PRRB’s decision denying new provider

status to MSC.

FOOTNOTES

/* Pursuant to Fed. R. App. P. 43(c), Tommy G.

Thompson is automatically substituted for the

original defendant, Donna E. Shalala.

/1 After filing the instant action, Paragon changed

its name to Mariner Post-Acute Network, Inc. This

opinion will use appellant’s name at the time it

commenced the case.

/2 After MSC’s request, the language defining a new

provider was modified by replacing "provider"

with "SNF" and moved to 42 C.F.R. sec. 413.30(d).

We will refer to the language and location of the

older version in effect when MSC applied for the

exemption.

/3 PRM sec. 2604.1 was removed from the manual after

MSC applied for its exemption and has been replaced by PRM sec. 2533, which is substantially

different, as partially described below in Part

D.1.

/4 We wish to make clear that, for the reasons

provided in the preceding discussion, we find

that the Secretary has consistently interpreted

42 C.F.R. sec. 413.30(e) and did not reverse a

prior interpretation in denying MSC’s request. If

the parties’ submissions had demonstrated that

the Secretary had in fact reversed course, we

would be confronted with a different case presenting a number of issues we need not address.

For example, in such circumstances, the interpretive change could be considered arbitrary and

capricious if it "does not take account of legitimate reliance on [the] prior interpretation."

Smiley, 517 U.S. at 742. Similarly, since MSC

opened prior to HCFA’s 1995 decisions establishing the interpretation at issue here, the Secretary’s current interpretation could have been

impermissibly retroactive if MSC would have been

considered a new provider under a prior interpretation of the regulation. Id. at 744 n.3; Bowen

v. Georgetown Univ. Hosp., 488 U.S. 204 (1988).
Finally, we need not consider the D.C. Circuit’s

position that to change a previously established

interpretation of a regulation an agency must

follow notice and comment procedures. See Alaska

Prof’l Hunters Ass’n, Inc. v. FAA, 177 F.3d 1030,

1033-34 (D.C. Cir. 1999); Paralyzed Veterans of

Am. v. D.C. Arena L.P., 117 F.3d 579, 586 (D.C.

Cir. 1997). But see Warder v. Shalala, 149 F.3d

73, 81-82 (1st Cir. 1998) (holding and collecting

cases stating that notice and comment is not

required solely because a new interpretive rule

contradicts an old one).

/5 Beginning on July 1, 1998, SNFs are reimbursed on

a prospective payment system. 42 U.S.C.

sec. 1395yy(e).