1

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

SAINT FRANCIS MEDICAL CENTER, et 

al.,

Plaintiffs,

v. Civil Action No. 15-1659 (JDB)

THOMAS E. PRICE, Secretary of the U.S. 

Department of Health and Human 

Services.

1

Defendant.

MEMORANDUM OPINION

The formula that the Department of Health and Human Services uses to determine 

Medicare payment rates for hospitals incorporates data on the number of hospital discharges in 

1981. This data helps form the base rate, which is then adjusted and used to determine the current

hospital payment rates. The plaintiffs here—almost 300 hospitals that participate in the Medicare 

program—believe that the 1981 data is faulty. Under the prior version of the applicable 

regulation—42 C.F.R. § 405.1885—a provider could only challenge reimbursement 

determinations within three years, but could challenge the predicate facts that formed the basis of 

the reimbursement rate even if those facts dated from more than three years prior. In other words, 

a provider could only challenge its payment amount within three years, but could challenge errors 

in even much older data that was used to determine that amount. In 2013, however, the Department 

promulgated a regulation (“the 2013 Amendment”) stating that the three-year limit on reopening 

reimbursement determinations applied to predicate facts as well as actual payments. 

 1 Thomas E. Price has been substituted for Sylvia M. Burwell per Federal Rule of Civil Procedure 25(d).
2

Plaintiffs contend that the 2013 Amendment is unlawful under the Administrative 

Procedure Act, 5 U.S.C. § 706, and the Medicare Act, 42 U.S.C. § 1395 et seq., because it is an 

unlawful retroactive rule, because the agency’s decision to apply it to their pending claims was 

arbitrary and capricious, and because even if the rule is applied only prospectively, it is still 

arbitrary and capricious to do so. The agency, on the other hand, maintains that the 2013 

Amendment is not retroactive as applied to plaintiffs’ pending Board appeals; that even if it is, the 

agency has the power to enact the rule retroactively; that the Board was correct to apply it to their 

pending appeals; and that the 2013 Amendment is not arbitrary and capricious when applied 

prospectively. The Court will assume without deciding that the rule is retroactive as applied here, 

but determines that the agency exercised its statutory authority to apply the rule retroactively. 

Further, the Court concludes that the Board was not arbitrary and capricious in applying the 2013 

Amendment to plaintiffs’ pending claims, nor is the rule as a whole arbitrary and capricious when 

applied prospectively. Therefore, the Court will grant the Secretary’s cross-motion for summary 

judgment and deny the hospitals’ motion for summary judgment. 

BACKGROUND

I. STATUTORY BACKGROUND

A. The Medicare Act, the Inpatient Prospective Payment System, and the 1981 Data

In 1965, Congress enacted the Medicare Act, which provides health insurance for the 

elderly and disabled. See 42 U.S.C. § 1395 et seq. Initially, Medicare reimbursed hospitals for 

the actual “reasonable costs” of the inpatient services they provided. See Methodist Hosp. of 

Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (citing 42 U.S.C. § 1395f(b) (1988)). 

Then in 1983, Congress “completely revised the scheme for reimbursing Medicare hospitals.” Id.

Under the new payment system, known as the Inpatient Prospective Payment System, hospitals 
3

are paid a fixed amount for each Medicare beneficiary that they treat, “regardless of the actual 

operating costs they incur.” See Sebelius v. Auburn Reg’l Med. Ctr., 133 S. Ct. 817, 822 (2013). 

This fixed amount is calculated by starting with a base rate that is then adjusted in various ways 

for each specific beneficiary at each specific hospital. See 42 U.S.C. § 1395ww(d)(2). The base 

rate uses 1981 hospital cost reporting data, and was first developed in 1983 for use in the 1984 

fiscal year. See id. § 1395ww(d). This 1983 base rate, using 1981 data, still forms the building 

block of Medicare payments to hospitals today. 

The problem with the 1981 data, according to plaintiffs, is that it does not distinguish 

between discharges and transfers. A discharge is when the patient leaves the hospital, whereas a 

transfer is when the patient is moved to a different care setting. Prior to 1984, both were classified 

as “discharges”; after 1984 they were classified differently because the distinction mattered for the 

hospital’s payment amount. The result is that the 1981 data and hence the base rate overcounts 

discharges. This overcounting matters because the base rate is determined, in part, by the average 

cost-per-discharge. See id. § 1395ww(d)(2). Thus, an artificially high number of discharges 

means a lower average cost-per-discharge—in other words, plaintiffs claim that overcounting 

discharges in 1981 has led to underpaying hospitals in every year since. The agency acknowledges 

that the 1981 data does not distinguish between discharges and transfers, but disagrees that this 

presents a problem. See Medicare Program; Prospective Payment for Medicare Inpatient Hospital 

Services, 49 Fed. Reg. 234, 246 (Jan. 3, 1984) (Final Rule) (describing discharge/transfer issue as

a “small discrepancy” expected to have “no significant effect” on payment rates). This case centers 

on whether the providers can correct the 1981 data several decades later.
4

B. Determining and Challenging Payment Amounts

The Centers for Medicare and Medicaid Services (CMS), an agency within the Department 

of Health and Human Services, administers the Medicare program. It contracts with entities 

known as Medicare Administrative Contractors (“MACs” or “contractors”) to process provider 

payments. (Prior to the Medicare Modernization Act of 2003, these entities were known as “fiscal 

intermediaries.” See 42 U.S.C. § 1395h; Note to id. § 1395kk-1). At the end of every fiscal year, 

each provider gives its MAC a cost report, and the MAC in turn calculates the hospital-specific 

adjustments and determines the amount owed to that provider for the prior fiscal year. See 42 

C.F.R. § 405.1803. This is known as the Notice of Amount of Program Reimbursement. See id.

If a provider disputes the Notice of Program Reimbursement, it may appeal through CMS’s 

internal review process. Generally, a provider may appeal to the Provider Reimbursement Review 

Board “within 180 days after notice of the [MAC’s] final determination.” 42 U.S.C. 

§ 1395oo(a)(3); see also 42 C.F.R. § 405.1835. A decision by the Board becomes final after 60 

days unless the Secretary “reverses, affirms, or modifies” it. 42 U.S.C. § 1395oo(f). Once the 

decision is final, the provider may seek review in a district court. Id.

In addition to this appeal process, both the current and the prior version of the CMS 

regulations at issue in this case allow a MAC to reopen an otherwise-closed final reimbursement 

determination within three years of the final determination. See 42 C.F.R. § 405.1885(a)–(b); see 

also Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999). This 

reimbursement determination may be reopened on a motion of CMS, the MAC itself, or the 

provider. 42 C.F.R. § 405.1885(a)(2), (b). After three years, however, the determination is closed 

and cannot be reopened. See id. § 405.1885(b); see also Regions Hosp. v. Shalala, 522 U.S. 448, 

455 (1998). As we will see, the issue here is how that reopening regulation applies to this case.
5

C. Predicate Facts, the Kaiser Decision, and the 2013 Amendment

In 2011, a district court held that the version of § 405.1885 in effect at the time did not 

prohibit challenging “predicate facts” that are more than three years old, as long as the only 

reimbursement years at issue are within the three-year reopening period. See Kaiser Found. Hosps. 

v. Sebelius, 828 F. Supp. 2d 193 (D.D.C. 2011), aff’d, 708 F.3d 226 (D.C. Cir. 2013). A predicate 

fact is a factual determination that is used to determine the reimbursement amount. For example, 

the number of discharges that a hospital had in 1981 is a predicate fact that is used to determine 

the reimbursement amount in later years.

The version of § 405.1885(a)(1) in effect at the time of the Kaiser decision stated: 

A Secretary determination, an intermediary determination, or a decision by a reviewing 

entity . . . may be reopened, for findings on matters at issue in a determination or decision, 

by CMS[,] . . . by the intermediary[,] . . . or by the reviewing entity that made the 

decision[.]” 

42 C.F.R. § 405.1885(a)(1) (2011). Subsections (b)(1) and (b)(2) specified that “reopenings” may 

only occur within three years of the challenged determination. See id. § 405.1885(b)(1)–(2). The 

Kaiser decision held that the term “findings on matters at issue in a determination or decision” in 

§ 405.1885(a)(1) did not include predicate facts, and that the agency’s contrary interpretation was 

not supported by the text, and was arbitrary and capricious because the agency had taken 

conflicting positions in various cases. See Kaiser Found. Hosps., 828 F. Supp. 2d at 199–203; see 

also Kaiser Found. Hosps. 708 F.3d at 231–33.

Following the Kaiser decision, the agency revised the regulation to make clear that 

predicate facts are subject to the three-year time limit. The parties call this revision “the 2013 

Amendment.” The 2013 Amendment added § 405.1885(a)(1)(iii), which states:

A specific finding on a matter at issue may include a predicate fact, which is a finding of 

fact based on a factual matter that first arose in or was first determined for a cost reporting 
6

period that predates the period at issue . . . and once determined, was used to determine an 

aspect of the provider’s reimbursement for one or more later cost reporting periods.

Id. § 405.1885(a)(1)(iii) (2014) (emphasis added). The revised subsections (b)(1) and (b)(2) make 

clear that the three-year time limitation applies to all reopenings—including those addressing

predicate facts—whether requested by the agency or the provider. Id. § 405.1885(b). The Notice 

of Final Rulemaking also states the 2013 Amendment applies to “intermediary determinations, 

appeals, and reopenings (including requests for reopening) that are pending on or after the effective 

date of the final rule.” Medicare and Medicaid Programs: Provider Reimbursement

Determinations and Appeals, 78 Fed. Reg. 74826, 75165 (Dec. 10, 2013) (Final Rule); see also

Medicare and Medicaid Programs: Provider Reimbursement Determinations and Appeals, 78 Fed. 

Reg. 43534, 43683 (July 19, 2013) (Proposed Rule) (“we are proposing that it be effective . . . for 

any appeals or reopenings . . . that are pending on or after the effective date of the final rule”). 

II. FACTUAL AND PROCEDURAL HISTORY

The plaintiffs are 277 hospitals who seek to correct the 1981 discharge data incorporated 

into the base payment rates for hospitals. They do not challenge their reimbursement amounts for 

every year since 1984 (when the 1981 data was first used to determine the base rate). Rather, they 

only challenge their reimbursement amounts for cost years 2002 through 2015.2 The first appeal 

was filed in 2005, within the three-year reopening limit for cost year 2002. Since then, additional 

providers and cost years have been added. See; Pls.’ Mot. for Summ. J. [ECF No. 22] at 10;

Compl. [ECF No. 1] ¶ 17. The appeals were all consolidated before the Board. See Compl. ¶ 26; 

42 C.F.R. § 405.1837.

 2 Although different plaintiff hospitals challenge different sets of years, they are all between 2002 and 2015.
7

On April 5, 2015, the Board issued a final decision in this matter. It concluded that it 

lacked jurisdiction over plaintiffs’ appeals because the 2013 Amendment “specifically bar[s]” this 

type of action, and the “revision applies to this case because it applies retroactively to pending cost 

report appeals.” April 5, 2015 PRRB Decision, Cases Nos. 05-1826GC et al. [ECF 31-1] at 

AR000005. Moreover, “[t]he revision of the 1981 base year (the predicate facts) in this case is 

clearly the type of revision the Secretary wanted to preclude through the December 10, 2013 

Federal Register notice.” Id. at AR000006.

Plaintiffs timely sought review of the Board’s decision in this Court. See Compl. ¶ 57.

LEGAL STANDARD

The parties seek the Court’s review of an administration action. Therefore, although the 

motions are styled as motions for summary judgment, Rule 56(a)’s standard does not apply. See

Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89 (D.D.C. 2006); Fed. R. Civ. P. 56(a). Rather, 

summary judgment “serves as the mechanism for deciding, as a matter of law, whether the agency 

action is supported by the administrative record and otherwise consistent with the APA standard 

of review.” Kaiser Found. Hosps., 828 F. Supp. 2d at 198 (citing Richards v. INS, 554 F.2d 1173, 

1177 & n.28 (D.C. Cir. 1977)).

Whether the agency had the authority to apply the 2013 Amendment retroactively is a 

question of statutory interpretation, which a court determines de novo. See Bowen v. Univ. of 

Georgetown Hosp., 488 U.S. 204, 208–09 (1988). “[C]ourts should be reluctant to find such 

authority absent an express statutory grant.” Id. at 208–09. Likewise, whether a rule has a 

retroactive effect is a question of law for the courts to decide. See Green v. United States, 376 

U.S. 149, 160 (1964); Nat’l Petrochemical & Refiners Ass’n v. EPA, 630 F.3d 145, 162 (D.C. Cir. 
8

2010) (“it is for the court to decide the legal question presented by petitioners’ retroactivity 

challenge,” namely, whether the rule was retroactive). 

If the agency has the statutory authority to enact a retroactive rule, and if the rule is in fact 

retroactive, then the agency’s decision to apply the rule retroactively is subject to the 

Administrative Procedure Act’s familiar standard of arbitrary and capricious review. This is 

because the Medicare Act, 42 U.S.C. § 1395oo(f)(1), incorporates the Administrative Procedure 

Act, 5 U.S.C. § 706. Under the APA’s standard, the Court must “hold unlawful and set aside” 

agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance 

with the law.” 5 U.S.C. § 706(2)(A). Likewise, plaintiffs’ other two claims—that the Board’s 

decision to apply the 2013 Amendment to their pending appeals was unlawful, and that the 2013 

Amendment applied only prospectively—are also evaluated under the same arbitrary and 

capricious standard. See id.; 42 U.S.C. § 1395oo(f)(1). 

“Under this ‘narrow’ standard of review, ‘a court is not to substitute its judgment for that 

of the agency.’” Kaiser Found. Hosps., 828 F. Supp. 2d at 198 (quoting Motor Vehicle Mfrs.

Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Rather, a decision 

is arbitrary and capricious if it is not “reasoned.” State Farm, 463 U.S. at 43; see also Nat’l Tel. 

Co-op. Ass’n v. FCC, 563 F.3d 536, 540 (D.C. Cir. 2009) (“The APA’s arbitrary-and-capricious 

standard requires that agency rules be reasonable and reasonably explained.”). A court “must 

assess, among other things, whether the agency decision was based on ‘consideration of the 

relevant factors.’” Nat’l Tel. Co-op Ass’n, 563 F.3d at 540 (quoting State Farm, 463 U.S. at 43). 

However, courts “do not defer to the agency’s conclusory or unsupported suppositions.”

United Techs. Corp. v. Dept. of Defense, 601 F.3d 557, 562 (D.C. Cir. 2010) (internal quotation 

marks omitted). Nor can the agency’s “post hoc rationalizations . . . substitute for an agency’s 
9

failure to articulate a valid rationale in the first instance.” Kaiser Found. Hosps., 828 F. Supp. 2d 

at 198 (internal quotation marks omitted) (citing El Rio Santa Cruz Neighborhood Health Ctr., 

Inc. v. Dept. of Health & Human Servs., 396 F.3d 1265, 1276 (D.C. Cir. 2005)). But the 

explanation need not be perfect: “a decision that is not fully explained may be upheld ‘if the 

agency’s path may reasonably be discerned.’” Id. at 198 (quoting Bowman Transp., Inc. v. 

Arkansas-Best Freight System, Inc., 419 U.S. 281, 286 (1974)). 

DISCUSSION

I. RETROACTIVE APPLICATION OF THE 2013 AMENDMENT

The Court will assume without deciding that the 2013 Amendment is retroactive as applied 

to appeals on reopenings that were pending on its effective date. The parties do not dispute—nor

could they—that the Secretary has the statutory authority to apply the 2013 Amendment 

retroactively. The relevant statute states: “A substantive change in regulations . . . . shall not be 

applied . . . retroactively . . . unless the Secretary determines that (i) such retroactive application is 

necessary to comply with statutory requirements; or (ii) failure to apply the change retroactively 

would be contrary to the public interest.” 42 U.S.C. § 1395hh(e)(1)(A). This is the clear statement 

that Bowen requires. See Bowen, 488 U.S. at 208–09.

The parties also do not dispute that the agency invoked this statutory authority and made

the statutorily required determinations. The agency stated in the Final Rule: “We have determined 

that retroactive application of the proposed revision to § 405.1885 is necessary to ensure 

compliance with various statutory provisions . . . . We have further determined that it would be in 

the public interest to apply the proposed revision to . . . appeals[] and reopenings . . . that are 

pending on or after the effective date of the final rule.” Final Rule, 78 Fed. Reg. at 75165. 
10

The question, then, is whether that determination was arbitrary and capricious. See 42 

U.S.C. § 1395oo(f)(1) (incorporating APA standard); 5 U.S.C. § 706(2)(A) (stating APA arbitrary 

and capricious standard). Although the agency’s explanation could have been more robust, and at 

times the agency merged its explanation for the rule as a whole with its explanation for applying 

the rule retroactively, the decision was ultimately “reasonable and reasonably explained.” Nat’l 

Tel. Co-op. Ass’n, 563 F.3d at 540. 

The 2013 Amendment represents a policy choice “between the competing values of finality 

and accuracy.” See Methodist Hosp. of Sacramento, 38 F.3d at 1235. First, the agency explained 

the importance of finality. It stated that the 2013 Amendment

furthers the interests of both providers and the agency in maintaining the finality of 

intermediary determinations. The alternative, of allowing appeal and reopening of a 

predicate fact after the expiration of the 3-year reopening period, may result in inconsistent 

intermediary determinations on a reimbursement matter recurring in different fiscal periods 

for the same provider. [The alternative] . . . could also result in intermediary determinations 

that are contrary to Medicare law and policy regarding a specific reimbursement 

matter . . . . [R]eimbursement for a given provider’s cost should not be based on one 

finding about a predicate fact in the base period and a different finding about the same 

predicate fact for purposes of determining reimbursement in later fiscal periods.

Final Rule, 78 Fed. Reg. at 75164. 

Plaintiffs argue that because they only challenge reimbursement determinations for open 

cost years (2002 through 2015), rather than for already closed cost years (such as 1984 through 

2001), their appeals raise no finality concerns. See Pls.’ Mot. at 24. But the agency’s reasoning 

explains why that is not true. As the agency explains, allowing predicate facts to be altered for 

even the open cost years could result in “a different finding about the same predicate fact for 

purposes of determining reimbursement in later fiscal periods.” Final Rule, 78 Fed. Reg. at 75164. 

When asked at oral argument whether allowing the plaintiffs’ pending appeals to move forward

would result in inconsistent base rate determinations, plaintiffs’ counsel answered that it would 
11

not for these plaintiffs, but that he could not speak for other hospitals. The agency, on the other 

hand, must consider how the 2013 Amendment would apply to all hospitals. This is precisely why 

the determination of how to weigh the interest in finality versus the interest in accuracy is 

committed to the agency’s judgment: it requires “consideration of the relevant factors,” State Farm,

463 U.S. at 42–43, and ultimately, weighing “the competing values of finality and accuracy” to 

reach a policy decision, Methodist Hosp. of Sacramento, 38 F.3d at 1235.

The agency then connected the value of finality to the need for the rule to be retroactive, 

explaining:

We have determined that retroactive application of the proposed revision to § 405.1885 is 

necessary to ensure compliance with various statutory provisions such as the target amount 

(under section 1886(b) of the Act) and the cap on residents for GME reimbursement (under 

section 1886(h)(4)(F)(i) of the Act); the 180-day period for filing appeals to the Board 

(under section 1878(a)(3) of the Act); and the 3-year limit on reopening (under 

§§ 405.1885(b)(1), (2) of the regulations). We have further determined that it would be in 

the public interest to apply the proposed revision to intermediary determinations, appeals, 

and reopenings (including requests for reopening) that are pending on or after the effective 

date of the final rule. Not applying the proposed revisions to pending intermediary 

determinations, appeals, and reopenings would undermine the 3-year limit on reopening 

and the interests of both the Medicare program and Medicare providers in the finality of 

reimbursement determinations, and would be inconsistent with the statutory scheme.

Final Rule, 78 Fed. Reg. at 75165. The agency here explicitly made the factual findings called for 

in 42 U.S.C. § 1395hh(e)(1)(A)(i)–(ii). 

The agency later reiterated this reasoning in response to a comment, stating:

[S]ection 1871(e)(1)(A) of the Act permits retroactive application because it is necessary 

to ensure compliance with various statutory payment provisions such as the TEFRA target 

amount (under section 1886(b) of the Act) and the caps on residents for GME and IME 

reimbursement (under sections 1886(h)(4)(F) and 1886(d)(5)(B)(v) of the Act); the 180-

day filing period for appeals to the Board (under section 1878(a)(3) of the Act); and the 3-

year period for reopening (under §§ 405.1885(b)(1), and (b)(2) of the regulations). In 

addition, we continue to believe that retroactive application furthers the public interest in 

safeguarding the 3-year limit on reopening and the interests of both Medicare providers 

and the Medicare program in preserving the finality of reimbursement determinations. 

Contrary to the commenter’s assertion, the revised reopening rules still provide an avenue

to correct predicate facts, thus promoting accuracy in reimbursement determinations. The 
12

revised reopening rules also protect the interests of administrative finality by ensuring that 

both Medicare providers and the Medicare program can close their books on a cost 

reporting period without worrying that the other party will invoke the Kaiser decision to 

make changes to predicate facts long after the close of the 3-year reopening period, when 

documents and witnesses may no longer be available.

Final Rule, 78 Fed. Reg. at 75169.

3

By identifying the statutory provisions that make “(i) such retroactive application . . . 

necessary to comply with statutory requirements,” 42 U.S.C. § 1395hh(e)(1)(A)(i), the agency has 

attempted to fulfill its statutory obligation. It has done so in a manner that is reasonable and 

reasonably explained. See Nat’l Tel. Co-op. Ass’n, 563 F.3d at 540. It is true that one of the 

provisions the agency identifies does not provide support for its argument. Namely, the agency’s 

statement that retroactive application of the 2013 Amendment is necessary to comply with “the 

cap[] on residents for GME and IME reimbursement” was rejected by the D.C. Circuit in Kaiser 

Foundation Hospitals, 708 F.3d at 233 (adopting district court’s statement that there is “no legal 

support” for the agency’s claim that the Medicare Act’s GME provisions require the prior version 

of § 405.1885 to be interpreted to include predicate facts in the three-year reopening limit). Thus,

the reference to GME and IME has little weight. But the agency’s reference to TEFRA does not 

have this same deficiency. This explanation, while not perfect, therefore meets the agency’s 

burden under the “narrow” arbitrary and capricious standard. See State Farm, 463 U.S. at 43; see 

also Bowman Transp., 419 U.S. at 286 (“we will uphold a decision of less than ideal clarity if the 

agency’s path may reasonably be discerned”). 

 3 GME and IME refer to Graduate Medical Education and Indirect Medical Education, which are both 

statutorily authorized adjustments to a hospital’s Medicare payment rate to compensate the hospital for the costs of 

training medical residents and interns. See Kaiser Found. Hosps., 708 F.3d at 228–29 (explaining GME and IME 

payments). TEFRA target amounts (the acronym stands for the Tax Equity and Fiscal Responsibility Act of 1982) 

refers to a cap on the rate of increase for inpatient hospital services at some hospitals, and payment adjustments that 

are based on where that hospital’s costs fall in relation to the cap. See 42 U.S.C. § 1395ww(b); 42 C.F.R. § 413.40. 

As the Supreme Court recently quipped, “[w]elcome to—and apologies for—the acronymic world of federal 

legislation.” Fry v. Napoleon Comm. Schools, No. 15-497, Slip Op. at 2 (S. Ct. Feb. 22, 2017).
13

Likewise, the agency reasonably made the factual determination that “(ii) failure to apply 

the change retroactively would be contrary to the public interest.” 42 U.S.C. § 1395hh(e)(1)(A)(ii). 

It identified a public interest served by prioritizing finality over accuracy as the evidentiary 

difficulty in adjudicating facts from over 30 years ago: “documents and witnesses may no longer

be available.” Final Rule, 78 Fed. Reg. at 75169. At oral argument, government counsel indicated 

that correcting the 1981 data would be particularly difficult because the data itself is not separately 

coded for discharges versus transfers. While the Court does not normally credit additional 

information provided after the rulemaking, cf. El Rio Santa Cruz Neighborhood Health Ctr., 396 

F.3d at 1276, this decision, even though “not fully explained[,] may be upheld ‘[because] the 

agency’s path may reasonably be discerned.’” Kaiser Found. Hosps., 828 F. Supp. 2d at 198

(quoting Bowman Transp., 419 U.S. at 286). Although the agency perhaps should have provided 

this information as a specific example of why stale evidence poses a problem, it did not need to do 

so under the “narrow” standard of arbitrary and capricious. See State Farm, 463 U.S. at 43. 

Plaintiffs also present several alternatives that the agency could have adopted to implement 

its policy objectives rather than applying the rule retroactively to all pending appeals. For example, 

plaintiffs argue, the agency could have only applied the rule retroactively to those GME-related 

claims that were at issue in Kaiser. See Pls.’ Mot. at 21. But “a court is not to substitute its 

judgment for that of the agency.” State Farm, 463 U.S. at 43. The fact that the agency did not 

adopt the plaintiffs’ preferred policy choice does not render its choice arbitrary and capricious. 

II. THE BOARD’S DETERMINATION WAS NOT ARBITRARY AND CAPRICIOUS

Plaintiffs next argue that the Board’s determination that the 2013 Amendment applies to 

their pending appeals was arbitrary and capricious. This argument is a nonstarter. 
14

The 2013 Amendment is crystal clear that it applies to pending appeals. It states, “[w]e 

have further determined that it would be in the public interest to apply the proposed revision to 

intermediary determinations, appeals, and reopenings (including requests for reopening) that are 

pending on or after the effective date of the final rule.” Final Rule, 78 Fed. Reg. at 75165 

(emphasis added). This conclusion is also referenced in passing elsewhere in the preamble to the 

2013 Amendment. For example, in responding to a comment, the preamble restates the question 

by noting “[t]he commenter asked whether the proposed revisions to the reopening rules, which 

apply to pending appeals, would govern its pending Board appeal . . . .” Id. (emphasis added). It 

is hard to imagine how the agency could be more clear.

Plaintiffs respond that the uncertainty comes from the relationship between 42 C.F.R. 

§ 405.1885 and § 405.1835. The former was altered by the 2013 Amendment; the latter—which 

governs certain appeals taken within 180 days—was not. Plaintiffs claim that because their 

appeals to the Board were taken under § 405.1835, it is unclear whether the time limitations in 

§ 405.1885 apply to them.4

That argument misunderstands how the two sections operate. While plaintiffs may have 

filed their appeal of the MAC determination with the Board within 180 days of that determination,

as required by § 405.1835, they sought to challenge a predicate fact that was established much 

earlier than 180 days (or 3 years) before their filing. As the 2013 Amendment makes clear, 

challenging a predicate fact is “reopening” a “matter at issue,” which is subject to the time 

limitations of § 405.1885. See 42 C.F.R. § 405.1885(a)(1)(iii). Plaintiffs’ request is therefore 

governed by § 405.1885, and is not permitted under that section. The agency’s own regulation 

was unambiguous, and the Board applied that unambiguous meaning to the matter before it. 

 4 Plaintiffs’ complaint does not state that their appeals to the Board were under § 405.1835 rather than 

§ 405.1885. However, because the parties do not contest this fact, the Court will assume that it is true.
15

III.THE 2013 AMENDMENT IS NOT ARBITRARY AND CAPRICIOUS

Finally, plaintiffs argue that the entire 2013 Amendment is arbitrary and capricious even if 

applied only prospectively. First, they maintain that the agency has “failed to explain adequately 

[its] departure from prior cases where [it] argued in favor of” plaintiffs’ position here, as detailed 

by the district court in Kaiser. See Pls.’ Mot. at 26; Kaiser Found. Hosps, 828 F. Supp. 2d at 202–

03. Because the agency has “offer[ed] insufficient reasons for treating similar situations 

differently,” the rule is arbitrary and capricious, according to plaintiffs. See County of Los Angeles 

v. Shalala, 192 F.3d 1005, 1022 (D.C. Cir. 1999) (internal quotation marks omitted). 

The plaintiffs misunderstand County of Los Angeles’s consistency requirement. In the 

past, the agency did treat similar situations differently without adequate explanation. See Kaiser

Found. Hosps., 708 F.3d at 233 (“Alternatively, we agree with the District Court that the Secretary 

has acted arbitrarily in treating similarly situated parties differently.”). But that inconsistency was 

in how the agency interpreted the prior version of § 405.1885(a)(1)—sometimes the agency argued 

that it permitted reopening predicate facts from more than three years prior, and sometimes it 

argued the opposite. See id. The 2013 Amendment altered the regulation at issue, rather than 

adopting a view on how that regulation should be interpreted. It made the text of the regulation 

explicit that predicate facts are governed by the three-year reopening period, see 42 C.F.R. 

§ 405.1885(a)(1)(iii), and that this applies to reopenings at the request of the agency, see id.

§ 405.1885(b)(1), and of the provider, see id. § 405.1885(b)(2). The agency’s earlier

interpretations of the prior version of § 405.1885—whether inconsistent with each other or with 

the current version—tell us little about whether the agency’s explanation for the issuance of the

current version of § 405.1885 is arbitrary and capricious. Cf. FCC v. Fox Television Stations, 556 

U.S. 502, 515–16 (2009) (change in agency policy generally reviewed under the same arbitrary 
16

and capricious standard as initial agency action). Imagine the counterfactual where plaintiffs’ 

argument were correct: an agency could never adopt a new policy approach and enact that 

approach through rulemaking, because the new rule would (by design) contradict the old policy. 

This is not the type of inconsistency that renders an agency rulemaking arbitrary and capricious. 

Second, the plaintiffs argue that the agency’s “substantive reasoning behind promulgating 

the 2013 Amendment is unpersuasive.” Pls.’ Mot. at 26. This argument boils down to a 

disagreement with the agency’s decision to prioritize finality over accuracy in the hospital base 

rate. See id. at 27 (“If a predicate fact . . . causes inaccurate Medicare reimbursement . . . all parties 

should have an interest in correcting such facts.”) But that decision is committed to the judgment 

of the agency. Here, the agency determined that after three years, the value of finality outweighs

the value of accuracy, and thus extended the reopening regulation to cover predicate facts. While 

the plaintiffs might wish that the agency had reached a different conclusion, that does not make 

the agency’s decision unlawful. Here, the 2013 Amendment represents a “reasonable choice 

between the competing values of finality and accuracy,” and is thus lawful. Methodist Hosp. of 

Sacramento, 38 F.3d at 1235.

CONCLUSION

For the reasons explained above, plaintiffs’ motion for summary judgment will be denied, 

and defendant’s cross-motion for summary judgment will be granted. A separate order has been 

issued on this date.

 /s/ 

JOHN D. BATES

United States District Judge

Dated: March 10, 2017