# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 7, 2004 Decided February 4, 2005

No. 04-5092

S T

. E LIZABETH ' S M EDICAL C ENTER OF B OSTON

, I NC

.,

A PPELLANT

v.

T OMMY G. T

HOMPSON

, IN HIS OFFICIAL CAPACITY AS

S ECRETARY OF THE U.S. D EPARTMENT OF H EALTH AND

H UMAN S ERVICES

, A PPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 03cv00153)

Gregg D. Shapiro argued the cause for appellant. With him

on the briefs was Robert D. Wick.

Anthony A. Yang

, Attorney, U.S. Department of Justice,

argued the ca use for appellee. With him on the briefs were

Peter D. Keisle r , Assistant Attorney General, and B arbara C.

Biddle , Attorney.

Before: E

DWARDS

, S ENTELLE and R ANDOLPH

, Cir

cuit

Judges

.2

Opinion for the Court filed by Circuit Judge S ENTELLE

.

S ENTELLE

, Circuit Judge : St. Elizabeth’s Medical Center

of B oston (“St. Elizabeth’s”) appeals from a summary judgment

entered by the United States District Court in favor of appellee

Thompson, Secretary of Health and Human Se rvices (“the

Secretary” or “HHS”), seeking to o v erturn the Secretary’s

administrative decision that St. Elizabeth’s was not entitled to an

exem ption from limitations on Medicare reimbursements to a

new skilled nursing facility (“SNF” ). The Secretary’s decision

to deny St. Elizabeth’s th e exemption was based on his

conclusion that the St. Elizabeth’s SNF was n ot a “new

provider” within the meaning o f the governing regulation,

because it was opened with operating rights acquired from a preexisting nursing facility which wa s a SNF or its equivalent.

Because the Secretary’s conclusion that the pre-existing nursing

facility was a SNF or its equivalent was not su pported by

sufficient evidence, we hold that St. Elizabeth’s, not the

a ppellee, was entitled to summary judgment. We reverse the

judgment, and direct the remand of the admin istrative

proceedings to HHS for a determination of other related issues.

I. Glossary

B ecause of the numerous acronyms and terms of art

employed in this opinion, we provide a brief glossary.

APA Administrative Procedure Act

CMS Centers for Medicare and Medicaid

Services

HCFA Health Care Financing Administration

HHS Department of Hea lth and Human

Services

NF nursing facility

PRM Provider Reimbursement Manual3

PRRB Provider Reimbursement Review Board

RCLs reasonable cost limits

SNF skilled nursing facility

St. Elizabeth’s St. Elizabet h’s Medical Center of Boston

(Appellant)

TCU transitional care unit

II. Background

A. Regulatory Scheme

The Social S ecurity Act provides for the reimbursement of

“reasonable costs” of care for Medicare patients–primarily the

elderly and certain disabl

ed people–to Medicare-certified skilled

nursing facilities. See 42 U.S.C. § 1395 et seq

. The Centers for

Medicare and Medicaid Servic es (“CMS”) (formerly known as

the Health Care F inancing Administration (“HCFA”)),

administers Medicare on the Secretary’s behalf. S ee Community

Care Foundation v

. Thompson , 318 F.3d 219, 221 (D.C. Cir.

2003).

Seeking to encourage Medicare-certified pro viders to

operate efficiently, Congress has instructed the Secretary of

HHS (who now acts through CMS) to cap payments under these

programs at what he determines to be reasonable cost limits

(“RCLs”), see 42 U.S.C. § 1395f(b), and ap ply statutory norms

in the determination, see 42 U .S.C. § 1395x(v); s ee also 42

U.S.C. § 1395yy (setting specific nor ms for the determination of

RCLs for SNFs). With respect to reimbursements for routine

care at SNFs, the Secretary is authorized to establish appropriate

exemptions to these caps. See 42 U.S.C. § 1395yy(c). One such

exemption is the “new provider exemption,” which allows

providers of skilled nursing serv ices to receive reimbursement

a t a higher rate for the first two years of operatio n. See 42

C.F.R. § 413.30(e) (1997) (now codif ied at 42 C.F.R. §4

413.30(d)). According to the Provider Reimbursement Manual

(“PRM”), a compilatio n of interpretive rules published by HHS,

see St. Luke’s Hospital v. Thompson

, 355 F.3d 690, 692 (D.C.

Cir. 2004), the new provider exemption “was implemented to

recognize the difficulties in meeting the applicable cost limits

due to underutilization during the initi al years of providing

skilled nursing and/or reha bilitative services[.]” HCFA Pub. 15-

1, § 2533.1(A). Put another way, the exemption was meant to

“allow a [new] provider to recoup the higher costs normally

resulting from low occupan cy rates and start-up costs during the

time it takes to build its patient population.” P ara g on Health

Network v. Thompson , 251 F.3d 1141, 1149 (7th Cir. 2001).

The new provider exemption provided at the time that:

Exemptions from the limits i mposed under this section may

be gra nted to a new provider . . . . A new provider is a

provider of inpatient services that has operated as the type

of provider (or the equivalent) for which it is certified under

Medicare, under present and pre vious ownership, for less

than three full years.

42 C.F.R. § 413.30(e) (1997). This means that, to qualify for

th e new provider exemption, a facility must show that it is either

(1) new, or (2) operating for the firs t time as a SNF or

equivalent. I t follows logically that facilities that (1) have

operated before under “present or previous owne rship,” a nd (2)

have operated as a SNF or equival ent, cannot qualify as “new

providers.”

In some instances, the new provider exemption may

also be av ailable to relocated providers, provided they can show

that “in the new location a substantially different inpatient

population is being served.” PRM § 2604.1.

Given the complex state and federal administrative schemes

that nursing care providers must navig ate to set up a SNF, it is5

not always obvious whether a newly opened facility has

operated before under previous ownership. Several states, for

example, require that new facilities purchase the right to offer

the new beds they plan to make available, so as to keep the total

number of nursing home beds in the state constant. S ee, e.g.,

Ashtabula County Medical Center v. Thompson

, 352 F.3d 1090,

1092 (6th Cir. 2 003) (describing Ohio “certificate of need”

(“CON”) program); Maryland General Hospital, Inc. v.

Thom pson , 308 F.3d 340, 342-43 (4th Cir. 2002) (describing

Maryland’s CON program); Paragon Health Network , 251 F.3d

at 1143 (d escribing Wisconsin’s CON program). But our sister

circuits have split over whether it is reasonable for CMS to

attribute operation under previous ow n ership to a newly opened

SNF solely because it acquired such rights. C ompare Maryland

General Hospital

, 308 F.3d at 345 (4th Cir.) (unreasonable),

with Providence Health System v. Thompson, 353 F.3d 661, 666-

68 (9th Cir. 2003) (reasonable); South Shore Hospital Inc. v

. Thompson

, 308 F.3d 91, 105-06 (1st Cir. 2 0 02) (reasonable);

Paragon Health Network

, 251 F.3d at 1149-50 (7th Cir.)

(reasonable). There is no definitive court precedent as to what

it means to operate as a SNF or its equivalent.

B. Factual and Procedural Background

In 1996, St. Elizabeth’s opened a tran sitional care unit

(“TCU”) using op erating rights purchased from the Friel

Nursing Home, an extan t nursing home in Quincy,

Massachusetts. St. Elizabeth’s purchased those operating rights

for the sole purpose of obtaining a dete rmination of need

(“DON”) from the Massachusetts Department of Public

Health–then necessary under state law to opening a new nursing

facility. (At the time, Massachusetts had imposed a moratorium

on creating new nursin

g home beds in the state, which meant

that anyone seeking to open new nurs ing facilities had to first

obtain the operating rights to existing nursing beds.) Before St.6

Elizabeth’s opened the TCU in October of that year, Friel ceased

operations completely.

The TCU, which qualifies as a SNF under the Medicare

statute, 42 U.S.C. § 1395x(j), see HHS Letter of November 27,

1996, provides rehabilit ative care for patients recovering from

major surgery who “no longer require the intensity and scope of

invasiv e procedures, yet, have complex medical and therapeutic

management needs

. . . .” Dep. of Francis X. Campion at 240

(Jan. 30, 2001), reprinted in J.A. 729. In other words, the TCU

is intended for (mainly elderly) patients who need short-term

care and rehabilitation after surgery, but will eventu ally return

to their own home s, or transfer to long-term care facilities for

less intensive care. Patients in the TCU are attended by a team

of physicians, nurses, physical, occupational and speech

therapists, and social workers, and stay an average of 10-15

days.

In January 1997, St. Elizabeth’s applied to CMS for the new

provider exemption fo r the new TCU. CMS denied St.

Elizabeth’s request, on the basis that (1) the TCU “was

established due to the purchase and relocation of 29 long term

care beds from [Friel],” whic h (2) as a Medicaid-certified

nursing facility (“NF”), pro vided the same “type of services” as

the TCU. HHS Letter of June 23, 1997. In other words, CMS

determined that because the TCU acquired operating rights from

Friel, it in effect operated previously under o ther ownership.

Further, CMS determined that Friel’s status as a nursing facility

qualifi e d it as a SNF or its equivalent. Because, according to

CMS, the TCU had operated before under “present or previous

ownership” as a SNF or equivalent, it could not qualify as a

“new” provider under 42 C.F.R. § 413.30(d). The CMS further

concluded that the TCU

was not entitled to the new provider

exemption as a relocated facility, because the TCU’s inpatient

population was not substantially different from Friel’s.7

St. Elizabeth’s appealed this decision to the Provider

Reimbursement R

e view Board (“PRRB”), which reversed the

CMS, determining that the TCU was entitled to the new

provider exemption because mere “acquisition of bed rights” did

not amount to an existing faci lity changing hands. HHS PRRB

Dec. No. 2002-D49 (Sept. 30, 2002), reprinted in J.A. 83 at 117,

119.

In December 2002, the Secretary, a c ting through the CMS

Administrator, reversed the PRRB’s decision. Decision of the

Admi nistrator, Review of PRRB Dec. 2002-D49. In January

2003, St. Elizabeth’s filed suit in the U.S. District Court for the

District of Columbia, challenging the Administrator’s decision

a s arbitrary and capricious in violation of section 706 of the

Administrative Procedure Act (“APA”), 5 U.S.C. § 706. See

Complaint

, J.A. at 1. The District Court heard the challenge

under 42 U.S.C. § 1395oo(f), which provides for judicial review

of the final HHS decision.

In its complaint, St. Elizabeth’s argued t hat the decision was

arbitrary and capricious , and unsupported by substantial evidence

on three main gro unds: (i) Friel’s operating rights were never

actually transfe rred to the TCU; (ii) even if they were

transf erred, the TCU was a “new provider” because transfer of

bed operating rights did not amount to a transfer of ownership,

and Friel never operated as a SNF; and (iii) regardless, the TCU

qualified for the PRM’s relocated provider exem ption. J.A. at

13. Resolving cross motions for summary judgment, the district

court r u led in favor of HHS, on the basis that “the Secretary’s

determinat i ons that Friel was the previous owner of the TCU,

Friel operated as the equivalent of a SNF for over 3 years and St.

Elizabeth’s is not a relocated provide r [we]re rationally

connected to the facts[.]” 307 F. Supp. 2d 73, 80 (D.D.C. 2004).8

St. Elizabeth’s appeals from that decision, reasserting the

arguments made in its original comp laint before the District

Court. We have jurisdiction under 28 U.S.C. § 1291, and reverse

on the basis that the Administrator lacked substant i al evidence

to con clude that Friel operated as a SNF or its equivalent. We

therefore conclude that

St. Elizabeth’s was entitled to the new

provider exemption.

III. Discussion

A. Standard of Review

The Admi nistrator’s decision can be set aside only if it is

“unsupported by substantia l evidence,” or “arbitrary, capricious,

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

5 U.S.C. § 706(2)(E); see 42 U.S.C. § 139 5oo(f)(1) (providing

that judici al review of HHS reimbursement decisions shall be

made un der APA standards). Because we apply the same

standard of review as the district court, we proceed de novo, as

if the case were before us on direct appeal from the

administrat

ive hearing below. Tenet Healthsystems Healthcorp

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

B. Equivalent Provider Status

As related above, CMS concluded that the St. Elizabeth’s

TCU did not qualify for the new provider exempt ion because (1)

the fact that it was opened using ope rating rights acquired from

Friel meant it had already been in operation under prior

ownership, and (2) Friel

“was an equivalent provider of skilled

nursing and/or rehabilitative services.” Decision of

Administrator at 11. Under the terms of the governing

regulation, both conclusions had to be made to di squalify the

TCU from the exemption. See 42 C.F.R. § 413.30(e) (1997).9

To come to the second conclusion–that Friel operated as a

SNF or its equivalent–CMS relied primarily on the fact that Friel

was a Medicaid-certified NF and operated as such. I d

. Specifically, the Administrator reasoned:

[B]oth Medicare SNFs and Medicaid NFs are required to

provide directly or indire ctly, the same basic range of

services. These ranges of services include those nursing

services and specialized rehabili tative services needed to

attain or maintain each residen t’s highest practicable level

of physical, mental, and psychological well-being.

Consequently, the fact that th e prior owner of the [TCU’s]

DO N rights was a NF supports the conclusion that it [was]

clearly an equivalent provider of skilled nursing and/or

rehabilitative services . . . .

Id. As a comparison of the statutory definitions of NFs and

SNFs reveals, thi s reasoning is flawed. The Medicaid statute

defines a NF as:

An institution (or a distinct part of an institution) which

(1) is primarily engaged in providing to residents:

(A) skilled nursing care and related services for

residents who require medical or nursing care,

(B) rehabilita

tion services for the rehabilitation of

injured, disabled, or sick persons, or

(C) on a reg

u lar basis, health-related care and

services to individuals who because of their mental

or physical condition require care and s ervices

(above the level of room and board) which can be

made available to them only throu gh institutional

facilities . . . .10

42 U.S.C. § 1396r(a) (emphasis added). In contrast, Medicare

defines a SNF as an institution that:

(1) is primarily engaged in providing to residents--

(A) skilled nursing care and related s ervices for

residents who require medical or nursing care, or

(B) rehabilitation services for the rehabilitation of

injured, disab led, or sick persons, and is not primarily

for the care and treatment of mental diseases. . . .

42 U.S.C. § 1395i-3(a) (emphasis added).

It is evident that the range of services provided by a NF can

encompass skilled nursing or rehab ilitative care. Some facilities

may, indeed, qualif

y as both NFs and SNFs. However, a facility

must be primarily engaged in providing skilled nursing or

rehabilitative care to qualify as a SNF, wher eas a facility need

not even offer such services at all to qualify as a NF. Thus, the

b are fact that an institution has gained NF status or is ope rating

as a NF, without more, is not sufficient to qualify the NF as a

SNF or its equiva l ent. To do so, a NF would additionally have

to be “pr imarily engaged in providing . . . skilled nursing care

an d related services . . . or rehabilitation services . . . .” 42

U.S.C. § 1395i-3(a)(1).

The record evidence is all to the e ffect that Friel was

primarily engaged in providing custodial care to its residents; it

does not show that Friel was primarily engaged in providing

skilled nursing and/or re habilitative services. The Government

points out that Friel provided some treatmen t of bed sores,

vitamin injection

s, and some unspecified rehabilitation as skilled

nursing care, s ee Govt. Br. at 52–54. But the underlying

documentary evidence as to the provision of these services

suffices only to show that Friel occasionally provided this11

limited range of services. Thus, the CMS conclusion that Friel

was a SNF or equivalent must be overturned for lack of

substantial evidence, under 5 U.S.C. § 706(E)(2).

C. Remedy

Because the second CMS decision, representing the final

HHS decision, is invalid, we reinstate the September 30, 2002

PRRB decision granting the TCU the new provider exemption.

HHS PRRB Dec. No. 2002-D49. But one final question remains

to be answered: Is the St. Elizabeth’s TCU entitled to

reimbursement for the costs above the reasonable cost limits that

it incurred in just 1997, or for the successive fiscal year, as well.

(Recall that the new provi der exemption covers new facilities for

their first tw o years of operation.) St. Elizabeth’s argues that it

is entitled to additional monies for both years, bec ause the

exemption “has a defined multi-year pe riod of duration.” Aplt.

Br. at 62. The Government responds that this court can only

order additional reimbursement for the fiscal ye ar ending in

September 1997, because, when it started the administrative

appeal process, St. Elizabeth’s had only receive d a CMS opinion

on reimbursem

ent for that year. Govt. Br. at 58. The

Government further contends that we have no juri sdiction over

any subsequent cost reportin g period(s), because St. Elizabeth’s

only exhausted administrative remedies for 1997. Id. at 59.

This isn’t quite true. In a separate jurisdictional decision,

the PRRB determined that its decision, if rendered in favor of the

TCU, would apply to “multiple fisc al years.” HHS PRRB

Jurisdictional Decision in Case No. 98-0 4 89, reprinted in J.A.

131, 133. Which years, exactly, remains to be decided, as the

PRRB reserved the right to determine the specif ic cost-reporting

periods for which the TCU is entitled to the exemption “should

it find for the [TCU] with regard to the substance of the issue

under dispute.” I

d

. The PRRB has not yet done so. The12

Government is right, in a sense, that we do no t have jurisdiction

over the issue of the specific years for which the TCU is entitled

to additional reimburseme nt, because there has therefore been no

final agency decision on that count. But insofar as it is arguing

that w e can only order reimbursement for the fiscal year ending

in September 1997, the Government is inc orrect. Now that the

substantive deci sion as to the TCU’s entitlement to the new

provider exempt

i on has been reinstated, the PRRB should

proceed, as it re served the right to do, to determine the exact

years for which St. Elizabeth’s is entitled to reimbu rsement.

While this would seem a simple task under th e statute, it is the

task of the PRRB, not the courts.

IV. Conclusion

The Secretary’s determination, through t he CMS, that St.

E lizabeth’s was not entitled to the new provider exemption to

reasonable cost limit s for Medicare reimbursement is not

supported by substantial evidence, because there was no

eviden tiary basis for the conclusion that Friel operated as a SNF

or its equivalent. The district court erred in concluding

otherwise. Accordingly, we reverse the summ ary judgment. We

f urther order that the case be remanded to the Department of

HHS for a formal determination of the cos t-reporting periods to

which that decision applies.