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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 5, 2003 Decided January 30, 2004

No. 02-5350

ST. LUKE’S HOSPITAL,

APPELLANT

v.

TOMMY G. THOMPSON,

SECRETARY OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 00cv01884)

Leslie Demaree Goldsmith argued the cause for appellant.

With her on the briefs was Harry R. Silver.

Paul E. Soeffing, Attorney, U.S. Department of Health and

Human Services, argued the cause for appellee. With him on

the brief were Peter D. Keisler, Assistant Attorney General;

Roscoe C. Howard Jr., U.S. Attorney; Anthony J. Stein-

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
2

meyer, Attorney, U.S. Department of Justice; Alex M. Azar

II, General Counsel, U.S. Department of Health and Human

Services; Robert P. Jaye, Acting Associate General Counsel;

and Henry R. Goldberg, Deputy Associate General Counsel

for Litigation.

Before: SENTELLE, ROGERS, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: A Pennsylvania hospital that treats

patients with renal disease asked the Secretary of Health and

Human Services to increase the rate at which the Medicare

program would reimburse it for each treatment. After discovering an error in the hospital’s supporting documentation,

the Secretary denied the request, and the district court

rejected the hospital’s challenge to that ruling. Finding the

Secretary’s conclusion that the error left the hospital unable

to carry its burden of justifying a rate increase neither

arbitrary nor capricious, we affirm.

I.

Each year, the Secretary of Health and Human Services

establishes a prospective ‘‘composite rate’’ for various outpatient treatments of end-stage renal disease (ESRD). See 48

Fed. Reg. 21,254 (May 11, 1983); see also 42 U.S.C.

§ 1395rr(b) (2000) (requiring such action by the Secretary).

The composite rate, which represents the approximate pertreatment cost that the Secretary expects health-care providers to incur for various ESRD treatments, encourages efficiency, for if a provider’s per-treatment cost falls below the

composite rate, then the difference represents a profit to the

provider. At the same time, the composite rate does not

establish an absolute ceiling; providers that experience pertreatment costs above the composite rate may ask the Secretary for an ‘‘exception.’’ 42 U.S.C. § 1395rr(b)(7). A provider seeking an exception must ‘‘demonstrate[ ] with convincing

objective evidence that its total per treatment costs are

reasonable and allowable TTT, and that its per treatment costs

in excess of its payment rate are directly attributable to any
3

of the [listed] criteria.’’ 42 C.F.R. § 413.170(g) (1993).

‘‘Atypical service intensity (patient mix)’’ tops the list of

criteria. Id.

Pursuant to HHS’s Provider Reimbursement Manual

(PRM)—‘‘a compilation of interpretive rules published by

[HHS],’’ Appellee’s Br. at 5 n.5—providers must submit exception requests during 180–day periods that the Secretary

designates from time to time (or within 180 days of other

events not relevant here). PRM § 2720.2 (1993). Providers

submit requests to their ‘‘fiscal intermediaries,’’ i.e., private

organizations such as insurance companies. Id. § 2720. Intermediaries have fifteen working days to review requests

and forward them to HHS with their recommendations. Id.

§ 2723. The HHS division responsible for initially reviewing

exception requests, the Centers for Medicare & Medicaid

Services (CMS), has sixty working days in which to deny

requests, or they are automatically approved. 42 U.S.C.

§ 1395rr(b)(7). Because this sixty-day period includes the

fifteen days that intermediaries have to review applications,

CMS actually has only forty-five working days in which to

complete its review.

Located in Bethlehem, Pennsylvania, appellant St. Luke’s

Hospital applied for an exception to the prevailing ESRD

composite rate, seeking reimbursement at a rate of $174.41

per treatment—$46.43 above the composite rate of $127.98.

St. Luke’s based its request on its asserted ‘‘atypical service

intensity,’’ claiming that it had to spend an abnormally high

amount of money on staff salaries because the population it

served was both atypically old and unusually likely to suffer

from acute conditions requiring intensive treatment. St.

Luke’s submitted its request on the last day of the relevant

180–day period.

After reviewing the hospital’s request, the fiscal intermediary forwarded it to CMS with a recommendation that it be

approved. CMS denied the request, however, citing two

problems: (1) St. Luke’s failed to explain why its pertreatment cost for hemodialysis maintenance increased nineteen percent between 1992 and 1993, and (2) it provided no
4

explanation for why the number of hours that its nurses and

technicians worked tripled between 1993 and 1994. Because

of these deficiencies, CMS concluded that St. Luke’s failed to

present, as HHS regulations require, ‘‘convincing objective

evidence’’ showing not only that it met the listed criterion

(atypical patient mix), but also that this atypical mix caused

the hospital’s unusually high per-treatment costs. See 42

C.F.R. § 413.170(g).

St. Luke’s appealed CMS’s denial to the Provider Reimbursement Review Board (PRRB), the HHS division responsible for reviewing CMS decisions. See 42 U.S.C. § 1395oo(a)

(2000). Reversing CMS’s denial and granting the hospital’s

requested exception, the PRRB ruled first that CMS had

improperly cited PRM section 2725.3E, which applies only

when a facility seeks an exception based on its status as an

‘‘isolated essential facility.’’ St. Luke’s made no claim to be

such a facility. As to the tripling of nurse and technician

hours, the PRRB stated that the hospital’s request contained

an ‘‘obvious’’ error: for each of three categories of workers—

registered nurses, licensed practical nurses, and technicians—

St. Luke’s reported the combined number of hours for all

three categories. Although the three groups of workers

actually worked a combined total of 37,983 hours during the

relevant year, St. Luke’s gave that number for each category,

making the total for the three categories appear three times

the actual figure and roughly three times what it had been in

other years. The PRRB concluded that because the correct

data appeared elsewhere in the hospital’s 690–page request

and were thus available to CMS, the agency erred in failing to

conduct ‘‘further review of the obvious error.’’ St. Luke’s

Hosp. v. Blue Cross & Blue Shield Ass’n, PRRB Hearing

Dec. No. 2000–D42, [2001–1 Transfer Binder] Medicare &

Medicaid Guide (CCH) ¶ 80,432, at 14 (Apr. 4, 2000), reprinted in J.A. A70, A83. CMS must, the PRRB stated, ‘‘properly

review all information submitted. Observance of an obvious

error and not responding to it is patently wrong and unfair to

this Provider.’’ Id.

The CMS Administrator, pursuant to statutory authority,

see 42 U.S.C. § 1395oo(f)(1), decided on his own motion to
5

review the PRRB’s decision, which he reversed. According

to the Administrator, even if CMS had conducted further

review of the hospital’s ‘‘obvious’’ error, it would have been

unable to resolve the problem because contrary to the

PRRB’s contention, the hospital’s exception request nowhere

contained the correct number of total hours. The request

contained only the total number of nurses and technicians.

Although St. Luke’s suggested that CMS could have obtained

the hourly figures by multiplying the employee totals by

2080—the number of hours that HHS regulations assume

full-time employees work per year—the Administrator pointed out that even if CMS had done this extra work, there

would have been an unexplained discrepancy of approximately

2000 hours between the 1993 figures and the projected 1994

figures. In any event, the Administrator ruled, CMS has no

duty to perfect exception requests. HHS regulations ‘‘make

unequivocally clear that the Provider bears the burden of

proving to [CMS’s] satisfaction’’ that it deserves an exception.

St. Luke’s Hosp. v. Blue Cross & Blue Shield Ass’n, HCFA

Adm’r Dec., [2000–2 Transfer Binder] Medicare & Medicaid

Guide (CCH) ¶ 80,534, at 11 (June 2, 2002), reprinted in J.A.

A27. The Administrator also pointed out that although CMS

normally would have given St. Luke’s a chance to submit

additional information, it did not do so because the hospital

submitted its exception request on the last day of the 180–day

window, meaning that it could not have provided additional

data before the window closed. Id.; see also PRM § 2723.3A

(stating that a request for supplemental information does not

extend the original 180–day window).

St. Luke’s challenged the Administrator’s decision, which

represented the Secretary’s final determination, in the United

States District Court for the District of Columbia. See 42

U.S.C. § 1395oo(f)(1) (providing for such review). Granting

summary judgment for the Secretary, the district court analyzed the case much as the CMS Administrator had, although

unlike the Administrator the court addressed CMS’s improper reliance on the PRM section that applies only to isolatedfacility exceptions. Deeming the citation to this section a

‘‘typographical error,’’ the court concluded that it did not
6

‘‘transform[ ] the plaintiff[’]s deficient request into something

else.’’ St. Luke’s Hosp. v. Thompson, 224 F. Supp. 2d 1, 10

(D.D.C. 2002).

St. Luke’s now appeals. ‘‘Because the district court entered a summary judgment, we review its decision de novo

and therefore, in effect, review directly the decision of the

Secretary.’’ Lozowski v. Mineta, 292 F.3d 840, 845 (D.C. Cir.

2002). Employing familiar APA standards, we will set aside

the Secretary’s decision only if it is ‘‘arbitrary, capricious, an

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

5 U.S.C. § 706(2)(A) (2000); see also 42 U.S.C. § 1395oo(f)(1)

(providing that the APA standard applies in cases involving

denials of exception requests).

II.

We begin with the error in the hospital’s exception request.

As noted above, the request incorrectly stated that each of

three groups—the hospital’s registered nurses, licensed practical nurses, and technicians—worked 37,983 hours, for a total

of 113,949 hours. In fact, the three groups worked a combined 37,983 hours; St. Luke’s accidentally listed the threegroup total for each group. CMS rejected the hospital’s

request because, among other things, the error left it unable

‘‘to properly evaluate the provider’s request for the additional

salary costs.’’

According to St. Luke’s, the error could not provide a basis

for denying the exception request because it had no effect on

CMS’s analysis. Not so, responds the Secretary: the incorrect data ‘‘affected subsequent calculations for total direct

service hours, average direct service hours per treatment,

and unit cost multipliers for FY 1993. These calculations are

made to determine if a facility qualifies for an exception.’’

Appellee’s Br. at 28 (citation omitted). Not only did St.

Luke’s fail to challenge this response in the district court,

which accepted the explanation, but it makes no reply to it

here. In any event, we think it perfectly reasonable for the

Secretary to require accurate staffing information from St.
7

Luke’s given that the hospital’s exception request rested

partly on high staffing costs.

St. Luke’s next argues that even if the error had significance, it did not justify CMS’s rejection of the exception

request because the error was clear and the correct data

appeared elsewhere in the request. By failing to find that

data, St. Luke’s insists, CMS violated its PRM section 2724

obligation to review ‘‘all the information submitted.’’ Again,

the Secretary disagrees. Correcting the error, he argues,

would have required much more than simply substituting

hourly figures that appeared elsewhere in the request. According to the Secretary, fixing the mistake would have

required several steps. To begin with, CMS would have had

to recognize the error, something that the Secretary says was

harder than St. Luke’s believes. Although St. Luke’s insists

the error was ‘‘obvious,’’ the hospital, as the Secretary points

out, alerted neither the fiscal intermediary nor CMS to the

error at any time prior to CMS’s denial. The Secretary also

contends that even if CMS had recognized the error, it would

have had to find the correct employee figures elsewhere in

the exception request, verify their accuracy, and then multiply the employee numbers by 2080 to obtain a total-hours

figure. Given the volume of requests that CMS must process, each in only forty-five days, the Secretary argues that it

would be unreasonable to expect CMS to do this work for the

provider.

Resolution of this issue turns on what CMS can reasonably

be expected to do when exception requests contain some sort

of error. For three reasons, we agree with the Secretary

that, under the circumstances of this case, CMS had no

obligation to correct the hospital’s error.

First, HHS regulations, unchallenged by St. Luke’s, place

the burden on the provider to adduce ‘‘convincing objective

evidence’’ that it merits an exception. 42 C.F.R. § 413.170(g).

St. Luke’s has not explained how requiring CMS to discern

and then correct providers’ errors is consistent with this

burden of proof, or how evidence that is wrong could possibly

be ‘‘convincing.’’ Nor do we understand how we would
8

distinguish between errors that are obvious and those that

are not. Asked for some guidance at oral argument, counsel

was unable to suggest any principled basis for drawing such

distinctions.

Second, even if CMS had done the work that St. Luke’s

insists it should have, it still would have faced a 2000–hour, or

five percent, discrepancy between the 1993 figures and the

projected figures for 1994. Although the district court relied

on this discrepancy in granting summary judgment for the

Secretary, St. Luke’s failed to address the issue in this court

until its reply brief, at which point it says only that the

discrepancy may have represented the hospital’s plan to hire

one additional employee in the coming year. Yet St. Luke’s

did not offer this explanation (or any other) to CMS, meaning

that even if CMS had done the work that St. Luke’s says it

should have, the agency still would have faced a significant

unexplained discrepancy. In other words, St. Luke’s argues

not that CMS should have ignored obviously wrong data in

favor of accurate information, but that the agency should

have ignored obviously wrong data in favor of seemingly ‘‘less

wrong’’ information that it could have calculated from the

data it had. We find this argument unpersuasive.

Third, St. Luke’s failed to submit its exception request until

the very last day of the 180–day window, leaving no time for

CMS to request additional data. See PRM § 2723.3A (noting

that incomplete exception requests are returned to providers

with a letter stating that ‘‘[o]ur returning your exception

request does not extend the deadline by which you must

submit an exception request with all the required documentation’’). Defending its last-minute submission, St. Luke’s simply repeats—untenably given its burden of proof—that its

exception request contained all required information. St.

Luke’s also argues that it submitted its request so late

because the Secretary failed to provide adequate advance

notice of the 180–day window. Because St. Luke’s (again

waiting until the last minute) advances this argument only in

its reply brief, ‘‘we will not consider it.’’ A.J. McNulty & Co.

v. Sec’y of Labor, 283 F.3d 328, 338 (D.C. Cir. 2002). Finally,

St. Luke’s tells us that exception requests are complex, that
9

its request ‘‘clearly could not be properly compiled and submitted within weeks,’’ and that in fact ‘‘it took St. Luke’s

months to prepare a comprehensive request.’’ Appellant’s

Reply Br. at 16. But none of this explains the hospital’s

decision to wait until the 180th day. Had St. Luke’s taken

even three months to compile and submit its exception request, CMS would have had to complete its review a full

month before the 180–day window closed, giving St. Luke’s

plenty of time to submit whatever additional data CMS

wanted. By waiting until the last day, St. Luke’s essentially

gambled that its exception request would be error-free. Having gambled and lost, it may not now shift the blame to CMS.

The hospital’s remaining arguments require little discussion. It contends that CMS violated the agency’s PRM

section 2724 duty to review ‘‘all the information submitted.’’

In support of this argument, St. Luke’s points only to the fact

that CMS denied the request. As we have explained, that

denial hardly shows a lack of thorough review, since even a

thorough review of ‘‘all the information submitted’’ would

have yielded an unexplained 2000–hour discrepancy—a discrepancy that by itself would have justified rejecting the

exception request.

Next, St. Luke’s argues that because the error appeared in

a document that it had previously filed with HHS, it would

have had to alter the document in order to correct the

mistake. As the Secretary points out, however, a procedure

exists for situations precisely like this one, allowing for the

filing of amended cost reports. ‘‘Not only did St. Luke’s fail

to avail itself of this procedure, it also neglected to explain or

even bring the error to CMS’s attention in its exception

request.’’ Appellee’s Br. at 28 n.16.

Nor do we see anything in the Secretary’s decision that

conflicts with Christ Hospital v. Blue Cross & Blue Shield

Ass’n, HCFA Adm’r Dec., [2000–12 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 80,416 (Feb. 11, 2000), reprinted in Appellant’s Br. at addendum 10. There, CMS,
10

then known as the Health Care Financing Administration

(HCFA), denied an exception request on the ground that

certain data were missing, stating that ‘‘[w]e did not recompute the percentages for the patient characteristics TTT since

it is not HCFA’s responsibility to summarize the patient data

to make them meaningful.’’ Id., reprinted in Appellant’s Br.

at addendum 13. The Administrator reversed and remanded,

but not—as St. Luke’s suggests—on the ground that HCFA

should itself have undertaken any calculations. Rather, the

Administrator remanded because the supposedly missing data

were not in fact missing. ‘‘The Administrator finds and the

record reflects that the [data] were included in the Provider’s

ESRD exception request package. Therefore, the Administrator remands this case to afford HCFA the opportunity to

examine the data that the Provider furnishedTTTT’’ Id.

Since here the correct hourly figures were in fact unavailable,

Christ Hospital provides no support for the hospital’s charge

of inconsistency.

Finally, St. Luke’s contends that given the district court’s

willingness to excuse CMS’s erroneous reliance on PRM

section 2725.3E, the hospital’s mistake should also be excused. Like the district court, we disagree. While both

errors may have been ‘‘typographical,’’ the errors were very

different. The hospital’s error went to the heart of its case,

leaving it unable to carry its burden of presenting ‘‘convincing

objective evidence.’’ CMS simply made an error about the

proper legal basis for an otherwise unassailable decision.

Because CMS’s error ‘‘had no bearing on the procedure used

or the substance of the decision reached,’’ Mass. Trs. of E.

Gas & Fuel Assocs. v. United States, 377 U.S. 235, 248 (1964),

it provides no basis for vacating the Secretary’s decision.

III.

Having found nothing arbitrary or capricious in the Secretary’s decision to reject the hospital’s exception request on

the ground that it contained a material error, we need not

consider St. Luke’s challenge to CMS’s other ground for
11

denying the request—the unexplained nineteen percent increase in the hospital’s costs for one type of treatment.

The district court’s judgment is affirmed.

So ordered.