United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 7, 2004 Decided February 4, 2005

No. 04-5092

ST. ELIZABETH'S MEDICAL CENTER OF BOSTON, INC.,

APPELLANT

v.

TOMMY G. THOMPSON, IN HIS OFFICIAL CAPACITY AS

SECRETARY OF THE U.S. DEPARTMENT OF HEALTH AND

HUMAN SERVICES,

APPELLEE

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 cause for appellee. With him on the briefs were

Peter D. Keisler, Assistant Attorney General, and Barbara C.

Biddle, Attorney.

Before: EDWARDS, SENTELLE and RANDOLPH, Circuit

Judges.
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Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: St. Elizabeth’s Medical Center

of Boston (“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 Services (“the

Secretary” or “HHS”), seeking to overturn the Secretary’s

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

exemption from limitations on Medicare reimbursements to a

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

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

conclusion that the St. Elizabeth’s SNF was not a “new

provider” within the meaning of the governing regulation,

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

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

facility was a SNF or its equivalent was not supported by

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

appellee, was entitled to summary judgment. We reverse the

judgment, and direct the remand of the administrative

proceedings to HHS for a determination of other related issues.

I. Glossary

Because 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 Health and Human

Services

NF nursing facility

PRM Provider Reimbursement Manual
3

PRRB Provider Reimbursement Review Board

RCLs reasonable cost limits

SNF skilled nursing facility

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

(Appellant)

TCU transitional care unit

II. Background

A. Regulatory Scheme

The Social Security Act provides for the reimbursement of

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

elderly and certain disabled people–to Medicare-certified skilled

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

Medicare and Medicaid Services (“CMS”) (formerly known as

the Health Care Financing Administration (“HCFA”)),

administers Medicare on the Secretary’s behalf. See Community

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

2003). 

Seeking to encourage Medicare-certified providers 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 apply statutory norms

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

U.S.C. § 1395yy (setting specific norms 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 services to receive reimbursement

at a higher rate for the first two years of operation. See 42

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

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

(“PRM”), a compilation 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 initial years of providing

skilled nursing and/or rehabilitative 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 occupancy rates and start-up costs during the

time it takes to build its patient population.” Paragon 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 imposed under this section may

be granted 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 previous ownership, for less

than three full years.

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

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

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

equivalent. It follows logically that facilities that (1) have

operated before under “present or previous ownership,” and (2)

have operated as a SNF or equivalent, cannot qualify as “new

providers.” In some instances, the new provider exemption may

also be available 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 navigate to set up a SNF, it is
5

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. See, e.g.,

AshtabulaCountyMedical Center v. Thompson, 352 F.3d 1090,

1092 (6th Cir. 2003) (describing Ohio “certificate of need”

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

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

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

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

circuits have split over whether it is reasonable for CMS to

attribute operation under previous ownership to a newly opened

SNF solely because it acquired such rights. Compare Maryland

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

withProvidenceHealthSystem v.Thompson, 353F.3d 661,666-

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

Thompson, 308 F.3d 91, 105-06 (1st Cir. 2002) (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 transitional care unit

(“TCU”) using operating rights purchased from the Friel

Nursing Home, an extant nursing home in Quincy,

Massachusetts. St. Elizabeth’s purchased those operating rights

for the sole purpose of obtaining a determination 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 nursing home beds in the state, which meant

that anyone seeking to open new nursing 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 rehabilitative care for patients recovering from

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

invasive 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 eventually return

to their own homes, 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 for 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],” which (2) as a Medicaid-certified

nursing facility (“NF”), provided 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 other ownership.

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

qualified 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 Review 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 facility changing hands. HHS PRRB

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

119.

In December 2002, the Secretary, acting through the CMS

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

Administrator, 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

as 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 that the decision was

arbitrary and capricious, and unsupported by substantial evidence

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

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

transferred, 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 exemption. J.A. at

13. Resolving cross motions for summary judgment, the district

court ruled in favor of HHS, on the basis that “the Secretary’s

determinations 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 provider [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 complaint before the District

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

on the basis that the Administrator lacked substantial evidence

to conclude 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 Administrator’s decision can be set aside only if it is

“unsupported by substantial 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. § 1395oo(f)(1) (providing

that judicial review of HHS reimbursement decisions shall be

made under 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

administrative 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 exemption because (1)

the fact that it was opened using operating 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 disqualify 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. Id.

Specifically, the Administrator reasoned:

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

provide directly or indirectly, the same basic range of

services. These ranges of services include those nursing

services and specialized rehabilitative services needed to

attain or maintain each resident’s highest practicable level

of physical, mental, and psychological well-being.

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

DON 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, this 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) rehabilitation services for the rehabilitation of

injured, disabled, or sick persons, or 

(C) on a regular basis, health-related care and

services to individuals who because of their mental

or physical condition require care and services

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

made available to them only through 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 services for

residents who require medical or nursing care, or

(B) rehabilitation services for the rehabilitation of

injured, disabled, 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 rehabilitative care. Some facilities

may, indeed, qualify as both NFs and SNFs. However, a facility

must be primarily engaged in providing skilled nursing or

rehabilitative care to qualify as a SNF, whereas a facility need

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

bare fact that an institution has gained NF status or is operating

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

SNF or its equivalent. To do so, a NF would additionally have

to be “primarily engaged in providing . . . skilled nursing care

and related services . . . or rehabilitation services . . . .” 42

U.S.C. § 1395i-3(a)(1).

 

The record evidence is all to the effect 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 rehabilitative services. The Government

points out that Friel provided some treatment of bed sores,

vitamin injections, and some unspecified rehabilitation as skilled

nursing care, see 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 this
11

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 provider exemption covers new facilities for

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

is entitled to additional monies for both years, because the

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

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

order additional reimbursement for the fiscal year ending in

September 1997, because, when it started the administrative

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

on reimbursement for that year. Govt. Br. at 58. The

Government further contends that we have no jurisdiction over

any subsequent cost reporting 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 fiscal years.” HHS PRRB

Jurisdictional Decision in Case No. 98-0489, reprinted in J.A.

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

PRRB reserved the right to determine the specific 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.” Id. The PRRB has not yet done so. The
12

Government is right, in a sense, that we do not have jurisdiction

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

to additional reimbursement, because there has therefore been no

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

that we can only order reimbursement for the fiscal year ending

in September 1997, the Government is incorrect. Now that the

substantive decision as to the TCU’s entitlement to the new

provider exemption has been reinstated, the PRRB should

proceed, as it reserved the right to do, to determine the exact

years for which St. Elizabeth’s is entitled to reimbursement.

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

task of the PRRB, not the courts. 

IV. Conclusion

The Secretary’s determination, through the CMS, that St.

Elizabeth’s was not entitled to the new provider exemption to

reasonable cost limits for Medicare reimbursement is not

supported by substantial evidence, because there was no

evidentiary basis for the conclusion that Friel operated as a SNF

or its equivalent. The district court erred in concluding

otherwise. Accordingly, we reverse the summary judgment. We

further order that the case be remanded to the Department of

HHS for a formal determination of the cost-reporting periods to

which that decision applies.