*

Honorable Jesse E. Eschbach, Senior U.S. Circuit Judge for

the Seventh Circuit, sitting by designation. 

United States Court of Appeals,

Eleventh Circuit.

No. 94-2683.

SARASOTA MEMORIAL HOSPITAL; Venice Hospital; HCA Doctors

Hospital of Sarasota; Englewood Community Hospital, PlaintiffsAppellants,

v.

Donna E. SHALALA, Secretary, Department of Health and Human

Services, Defendant-Appellee.

Aug. 11, 1995.

Appeal from the United States District Court for the Middle

District of Florida. (No. 92-1816-CIV-T-17(A), Elizabeth A.

Kovachevich, Judge.

Before DUBINA, Circuit Judge, RONEY and ESCHBACH*

, Senior Circuit

Judges.

DUBINA, Circuit Judge:

Plaintiffs/Appellants, four hospitals in the Sarasota, Florida

Metropolitan Statistical Area ("MSA"), appeal from the district

court's grant of summary judgment in favor of the Secretary of

Health and Human Services ("the Secretary") denying the hospitals'

claim that they were entitled to an adjustment to the wage index

that was used to calculate their Medicare reimbursement payments

for fiscal years 1986 through 1988. The district court's order

specifically upheld the Secretary's determination that Social

Security payments paid by one of the hospitals, Sarasota Memorial

Hospital, in accordance with the Federal Insurance Contributions

Act ("FICA") on behalf of its employees, were properly classified

as fringe benefits and not wages for Medicare reimbursement
 1

A fiscal intermediary is a private organization, usually an

insurance company, that has contracted with the Secretary to act

as an agent for the HFCA. Under previous regulations, provider

hospitals were required to submit annual cost reports to

designated intermediaries to determine the total amount of

Medicare reimbursement owed to the provider. 

purposes. We reverse.

I. Statement of the Case

A. Facts and Procedural History

The Social Security Amendments of 1983, Pub.L. No. 98-21, 1983

U.S.C.C.A.N. (97 Stat.) 65, created a Prospective Payment System

("PPS") to reimburse hospitals for operating costs incurred in

providing inpatient services to Medicare patients. Under this

system, hospitals were to be reimbursed a fixed amount for each

patient treated depending upon the type of treatment provided. To

establish the PPS, the Secretary was required to develop several

rates and adjustment factors to determine the amount each hospital

would be reimbursed for its inpatient operating costs. One of the

rate adjustment factors is known as the wage index, which was

created to reflect "the relative hospital wage level in the

geographic area of the hospital compared to the national average

hospital wage level." 42 U.S.C. § 1395ww(d)(3)(E) (1983).

The wage index at issue in this appeal was based on total

wages paid by the hospitals in the Sarasota MSA during their fiscal

year ending in 1982. In March of 1984, Medicare fiscal

intermediaries, acting as agents for the Health Care Financing

Administration ("HFCA"),1 which is responsible for the

administration of Medicare Services, submitted surveys to hospitals

providing Medicare services to determine the average hourly wage
 2

In addition, the 1982 wage index was combined with the 1984

wage index to determine payments for Medicare services rendered

during the fiscal year ending in 1988. 

paid in 1982 by hospitals in each MSA. Like the other hospitals in

the Sarasota MSA, Sarasota Memorial Hospital ("Memorial") reported

information regarding its wages and employee-related costs for 1982

to the HFCA. The HFCA calculated the Sarasota MSA average hourly

wage and compared it to regional and national average hourly wages

to create a wage index. This wage index was then applied to

compute the PPS payments for Medicare services rendered on or after

May 1, 1986, and through September 30, 1987.2

In 1982, Memorial was responsible for paying FICA taxes, which

included a tax equal to 6.7% of the employees' wages. In addition,

each employee at Memorial was also responsible for paying 6.7% of

his or her wages in FICA taxes, but these taxes were ordinarily

withheld from each employee's gross wages, resulting in lower

take-home pay. In 1982, however, Memorial paid the FICA taxes for

which its employees were responsible, rather than withholding 6.7%

from each employee's wages. Therefore, when Memorial filled out

its 1982 fiscal year cost report, it reported the FICA taxes it had

paid on behalf of its employees as employee health and welfare

costs, rather than gross hospital salaries. Because the wage

survey that Memorial received in 1984 required the providers to

report their employee health and welfare costs and gross salaries

as reported on their 1982 cost reports, Memorial reported the

employee FICA payments it had paid as employee health and welfare

costs, rather than gross salaries.

As a result of Memorial's exclusion of the employee FICA
payments from gross salaries on the survey form, the HFCA did not

include the FICA payments in Memorial's wage costs when calculating

the wage index for the Sarasota MSA. Revision of the Sarasota 1982

wage index to include Memorial's FICA payments made on its

employees' behalf in 1982 would result in an estimated

$1,056,000.00 additional Medicare payment to Memorial and an

additional $6,299,661.80 to all hospitals in the Sarasota MSA.

Before publishing the final 1982 wage index for Sarasota, the

HCFA wrote to the hospitals participating in the wage survey and

provided them with the opportunity to verify the accuracy of their

data. Although Memorial notified the HFCA of its exclusion of the

FICA payments from its wage costs and requested that the payments

be included in its salary figures, HFCA refused to revise the 1982

wage index, stating that it considered employee FICA contributions

paid by an employer to be fringe benefits, not wages. In its

response the HCFA quoted the definition of fringe benefits from the

Medicare Provider Reimbursement Manual § 2144.1, which provides:

"[f]ringe benefits are amounts paid to, or on behalf of, an

employee, in addition to direct salary or wages, and from which the

employee ... derives a personal benefit before or after the

employee's retirement or death."

The hospitals in the Sarasota MSA appealed the Secretary's

determination that the FICA payments were not wages to the Provider

Reimbursement Board ("the Board") pursuant to 42 U.S.C. § 1395 oo

(a). Although the Board held that it had jurisdiction over the

matter, it recognized that it is bound by Medicare regulations,

including the 1982 wage index published by the Secretary.
Accordingly, the Board held that it had no authority to resolve the

appeal and granted expedited judicial review of the issue pursuant

to 42 U.S.C. § 1395 oo (f)(1). The hospitals then filed suit

against the Secretary in federal district court, arguing that the

1982 wage index was invalid because it treated the FICA

contributions made by Memorial on behalf of its employees as fringe

benefits, rather than as wages.

The parties filed cross motions for summary judgment, and the

district court granted summary judgment to the Secretary, holding

that her "interpretation of employer-paid employee FICA was

entirely within her discretion, and reasonable in accordance with

the existing law." Sarasota Memorial Hospital v. Shalala, 848

F.Supp. 974, 978 (M.D.Fla.1994). In addition, the district court

held that the hospitals' contention that the Secretary's ruling was

a change in existing policy and therefore violated the notice and

comment provisions of the Administrative Procedures Act, 5 U.S.C.

§ 553, was without merit because the Secretary's decision was

merely interpretive of the existing definition of the term "fringe

benefit." The hospitals then perfected this appeal.

B. Historical Background

Prior to the Social Security Amendments of 1983, employees of

state and local governments were not required to participate in the

Social Security program; however, states could opt-in various

groups of employees such as those in certain occupations. As a

governmental hospital, Memorial was not required to participate in

FICA, but some time before 1982, the State of Florida and the

Secretary entered into an agreement that provided for Memorial and
 3

In January, 1984, Memorial ceased paying its employees'

share of FICA taxes because the IRS no longer permitted it to

exclude employer-paid employee FICA taxes from the employees'

wages for purposes of its own FICA liability. In December, 1983,

Memorial, anticipating the change, gave each employee a 6.7% wage

increase, in addition to usual year-end wage adjustments, to

cover deductions for the employee's share of FICA. 

other government entities in Florida to participate in the Social

Security program. 42 U.S.C. § 418(a). Once the agreement to

participate was made by the State of Florida, Memorial and its

employees were required to pay FICA taxes. Thus, Memorial's

participation in FICA in 1982 was not voluntary.

Prior to October 1, 1979, Memorial deducted its employees'

FICA taxes from each employee's gross pay. After October 1, 1979,

Memorial began paying employee FICA taxes directly to the

government instead of deducting them from the employees' gross pay.

Under Internal Revenue Code ("IRC") provisions, an employer could

pay its employees' share of FICA taxes directly instead of

deducting them from gross wages, thereby reducing the employer's

own payroll tax liability for FICA. Although the IRC provision

excluding employer-paid employee FICA taxes from employee gross

income was eliminated in 1981, governmental employers covered by

Social Security were permitted to continue to pay employee FICA

taxes directly to the government through December 31, 1983.

Omnibus Reconciliation Act of 1980, Pub.L. No. 96-499, § 1141, 1980

U.S.C.C.A.N. (94 Stat.) 2693-94; 26 U.S.C. § 3121(a)(6).

Therefore, during fiscal year 1982 and through December, 1983,

Memorial continued to pay FICA taxes on behalf of its employees and

derived cost saving benefits by treating these payments as

non-wages for purposes of FICA taxes.3
Before the PPS was developed, Medicare reimbursements had been

based on a hospital's actual, reasonable costs, without a

distinction between salaries and health and welfare costs. 42

U.S.C. §§ 1395f(b) (1982), 1395x(v)(1)(A) (1982). Like the annual

cost reports, the survey on 1982 wages sought information regarding

both salaries and health and welfare costs; however, the costs

reported as employee health and welfare costs for the survey were

not included in the calculation of the 1982 wage index. See 50

Fed.Reg. 24,377 (June 10, 1985).

II. Standard of Review

 Pursuant to 42 U.S.C. § 1395oo (f)(1), the standard for

judicial review of the Secretary's actions is governed by the

Administrative Procedure Act, 5 U.S.C.A. § 706. Under that

standard of review, considerable weight should be given to an

agency's regulations interpreting matters over which the agency is

charged to administer. See Medical Center Hospital v. Bowen, 839

F.2d 1504, 1510 (11th Cir.1988) (citations omitted); Chevron

U.S.A. v. Natural Resources Defense Council, Inc., et al., 467 U.S.

837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984), reh'g

denied, 468 U.S. 1227, 105 S.Ct. 28, 29, 82 L.Ed.2d 921 (1984).

"Neither a district court nor an appellate court may overturn the

Secretary's decision unless it is arbitrary, capricious, an abuse

of discretion, not in accordance with law, or unsupported by

substantial evidence in the record taken as a whole." Carraway

Methodist Medical Center v. Heckler, 753 F.2d 1006, 1009 (11th

Cir.1985) (citations omitted).

 Although deference should be afforded especially "when, as
here [in Medicare], the regulation concerns "a complex and highly

technical regulatory program,' in which the identification and

classification of relevant "criteria necessarily require

significant expertise and entail the exercise of judgment grounded

in policy concerns,' " Shalala v. Guernsey Memorial Hospital, ---

U.S. ----, ----, 115 S.Ct. 1232, 1243, 131 L.Ed.2d 106 (1995)

(O'Connor, J., dissenting) (quoting Thomas Jefferson University v.

Shalala, 512 U.S. ----, ----, 114 S.Ct. 2381, 2387, 129 L.Ed.2d 405

(1994) (citation omitted)), courts are not bound by an agency's

interpretation. Furthermore, a court must not abdicate its

responsibility to review "an agency's construction that is alleged

to be inconsistent with the statutory mandate." Medical Center

Hospital, 839 F.2d at 1510.

III. Discussion

The issue on appeal is whether the Secretary correctly

determined that the FICA contributions made by Memorial on behalf

of its employees were fringe benefits and not wages for purposes of

calculating the 1982 wage index for the Sarasota MSA. There are

two parts to the FICA tax: half is owed by the employer, and half

is owed by the employee. It is only the employee's half that is at

issue here. The question is whether if the employer pays the half

owed by the employee directly to the Government, rather than paying

it as wages so the employee can pay what he or she owes the

Government, the payment loses its character as part of the

employee's wage. In this analysis, we refer to this as FICA taxes

or contributions "paid on behalf of the employees."

We begin our analysis by examining the pertinent Medicare
statute, 42 U.S.C. § 1395ww(d)(3)(E) (1983), which provides:

[t]he Secretary shall adjust the proportion, (as estimated by

the Secretary from time to time) of hospitals' costs which are

attributable to wages and wage-related costs ... for area

differences in hospital wage levels by a factor (established

by the Secretary) reflecting the relative hospital wage level

in the geographic area of the hospital compared to the

national average hospital wage level.

In accordance with this statute, the Secretary established the 1982

wage index for the periods relevant to this appeal. A wage index

had been used by the Department of Health and Human Services for

many years prior to the advent of the PPS to adjust the proportion

of hospitals' costs attributable to wages; however, before the PPS

was adopted, the adjustments affected only the hospitals' cost

limits, rather than the hospitals' actual payment levels. After

the PPS was put into effect, Congress mandated that the Secretary

develop a more accurate wage index than the one previously used

under the former Medicare cost reimbursement program. See H.R.Rep.

No. 432, 98th Cong., 2nd Sess., pt. II, at 1809-10 (1984),

reprinted in 1984 U.S.C.C.A.N. 1423-24.

 FICA participation for non-governmental employers such as

private hospitals was mandatory in 1982. Private hospitals

deducted FICA taxes from their employees' gross pay in a similar

manner to deductions taken for income taxes. For purposes of the

wage index, the Secretary classified FICA taxes which were withheld

from the private hospital employees' gross pay as wages. Memorial,

however, paid its employee FICA taxes directly to the government,

rather than including the amount of the tax in the employees' gross

pay and then withholding it as a deduction. Because of the manner

in which the taxes were paid, the Secretary classified Memorial's
employee FICA taxes as fringe benefits and not wages, thereby

excluding the FICA taxes from the calculation of Memorial's and, in

turn, the Sarasota MSA's average wages. The Hospitals contend that

the Secretary's refusal to include the FICA payments made by

Memorial on behalf of its employees in computing the wage level for

Memorial distorted the 1982 wage index so that it failed to reflect

the relative hospital wage level for the Sarasota MSA compared to

the other regions. Thus, the hospitals assert that the Secretary

failed to develop an index that accurately compares the Sarasota

MSA wage level with the national wage level in violation of the

statutory mandate.

The Secretary responds that she correctly determined that the

FICA payments made by Memorial on behalf of its employees were

fringe benefits and not wages under existing Medicare law and FICA

tax law. Moreover, the Secretary argues that the uniformity of the

wage index would be compromised if she were required to determine

which, if any, fringe benefits could be reclassified as wages. The

Secretary's position is based upon her determination that employer

paid contributions to pension plans, regardless of whether the plan

is private or FICA, clearly fall within the Medicare Provider

Reimbursement Manual ("PRM") definition of fringe benefits. See

PRM § 2144.1, CCH, Medicare & Medicaid Manual ¶ 5999F.

The district court held that it is "entirely reasonable" that

the Secretary would find that the employer-paid employee FICA

payments fit into the PRM definition of fringe benefits. Sarasota

Memorial, 848 F.Supp. at 978. In addition, the district court held

that the Secretary's distinction in classification based upon who
 4

Section 26 U.S.C. § 3101 mandates that the income of every

employee is subject to a tax equal to a percentage of the

individual's wages as defined in § 3121(a). Section 3121(a)

provides: "(a) Wages.—For purposes of this chapter, the term

"wages' means all remuneration for employment...." (emphasis

added). The chapter referred to codifies the IRC provisions

governing FICA taxes. 

pays the taxes was reasonable because the "definition of fringe

benefits states that it is an amount paid by the employer." Id.

We disagree.

Under PRM § 2144.1, an amount paid to or on behalf of an

employee must be "in addition to direct salary or wages" before

being classified as a fringe benefit. Therefore, the Secretary

must classify FICA taxes as non-wages before they can be considered

fringe benefits; yet, the Secretary is looking to the definition

of fringe benefits to determine if the taxes are wages.

 The Secretary heavily relies upon 26 U.S.C. § 3121(a)(6) to

support her position that employee FICA taxes paid by a government

employer are not wages for Medicare reimbursement purposes. By its

own terms, however, § 3121(a)(6) excludes employer-paid employee

FICA taxes from the definition of wages only for purposes of

calculating FICA taxes.4

 Furthermore, employer-paid employee FICA

taxes are included in the definition of wages for purposes of

federal income taxes. See First National Bank of Chicago v. United

States, 964 F.2d 1137, 1140 n. 8 (Fed.Cir.1992) ("The term "wages'

includes the amount paid by an employer on behalf of an employee

(without deduction from the remuneration of, or other reimbursement

from, the employee) ... on account of any tax imposed upon the

employee by [FICA].... 26 C.F.R. § 31.3401(a)-1(b)(6)").

Accordingly, the Secretary's reliance on § 3121(a)(6) as general
 5

Although the Secretary contended at oral argument that she

had historically relied upon the FICA definition of wages for

Medicare purposes and therefore further relied upon the

definition to resolve this dispute, the Secretary has pointed to

no regulations, case law, or significant decisions to support her

position. Moreover, independent research reveals no decision,

other than the instant one, where the FICA definition of wages

was adopted for Medicare purposes. 

authority for excluding employer-paid employee FICA from wages is

misplaced.5

The distinction that the Secretary attempts to make here

between FICA taxes paid by an employer on behalf of an employee and

FICA taxes withheld from an employee's pay is of no consequence.

Once the State of Florida chose to participate in the Social

Security program, Memorial was required to participate and pay FICA

taxes. Thus, the only way the payments could be considered

voluntary payments to a pension fund, as the Secretary suggests, is

to ignore the fact that Memorial, like all private hospitals

throughout the nation, was required to pay the FICA taxes. Once

Memorial participated in the program, it was in a uniform position

with all private hospitals and other participating governmental

hospitals. Because the Secretary was required to establish a wage

index to create a uniform picture of what wage levels were at all

provider hospitals in 1982, we hold that the Secretary's exclusion

of employee FICA taxes from wages for some hospitals and not

others, for purposes of creating the 1982 wage index, was arbitrary

and capricious.

Moreover, we reject the Secretary's assertion that she could

not allow only one governmental provider to reclassify fringe

benefits as wages without compromising the uniformity of the index.
In support of this argument, the Secretary contends that she had

every reason to believe that all other governmental hospitals

participating in FICA completed the survey as Memorial did

originally, reporting employee FICA contributions as employee

health and welfare costs rather than gross salaries. (Appellee's

Brief at 19). Although the Secretary's decision is based upon

maintaining a uniform index, the Secretary has conceded that

relatively few hospitals "had the option to treat FICA the way

[Memorial] did." (Appellee's Brief at 26). The uniformity of the

wage index is compromised if the Secretary does not classify the

same items of costs as wages for all providers.

The Secretary cannot make arbitrary distinctions between the

same payments by different providers without any basis. See LGH,

Ltd. v. Sullivan, 786 F.Supp. 1047, 1053 (D.D.C.1992). We see no

reasonable basis for classifying the same FICA payments as wages

when deducted from an employee's gross pay, but as fringe benefits

when paid directly by the employer. In this case, the Secretary's

decision to treat Memorial's employee FICA taxes as a fringe

benefit for the limited purpose of excluding it from the 1982 wage

index for the Sarasota MSA contradicts the definition of fringe

benefits and is inconsistent with the Secretary's treatment of

employee FICA taxes as wages for most of the other provider

hospitals in the nation.

While we take seriously our obligation to afford deference to

the Secretary's reasonable interpretation of her own regulations,

particularly when a complex program like Medicare is concerned, we

hold that the Secretary's classification of employee FICA taxes as
fringe benefits is unreasonable and inconsistent with the mandate

of the Medicare statute requiring a uniform wage index.

Because we hold that the Secretary's policy of excluding

employer-paid employee FICA taxes from wages is inconsistent with

the mandate of § 1395ww(d)(3)(E) of the Medicare Act, we need not

address Memorial's contention that the Secretary's decision changed

existing policy and therefore failed to comply with the

Administrative Procedures Act.

IV. Conclusion

In summary, we conclude that the Secretary erred in refusing

to include Memorial's employee FICA taxes as wages for the purpose

of calculating the 1982 wage index for the Sarasota MSA.

Accordingly, we reverse the district court's grant of summary

judgment to the Secretary. Because the Secretary has stipulated

that retroactive relief will be available to the appellants should

we reverse the district court's judgment, we remand this matter to

the district court with directions to remand it to the Secretary

for the purpose of affording appellants the stipulated relief.

REVERSED and REMANDED.