Opinion ID: 3013878
Heading Depth: 3
Heading Rank: 1

Heading: As Applied to the Facts of this

Text: information, we are C ase , t h e S e c re t ar y ’s allowing pr ovide rs to Interpretive Rule is Arbitrary furnish the documentation and Capricious. from cost reporting periods Mercy Catholic Medical Center subsequent to the base contends the Secretary’s failure to consider period in support of the its 1990 time studies to the extent they supported a positive adjustment to its reported FY 1985 graduate medical 12 The District Court did not explicitly education costs was arbitrary and address the level of deference it warranted capricious. As a threshold matter, we must the Secretary’s interpretive rule. 11 allocation of physician Following its interpretation, the compensation costs in the Secretary now argues the limited exception GM E base period . . . . It is to the rule requiring contemporaneous only in the absence of base documentation only allows the use of period documentation that records from subsequent cost reporting subsequent documentation periods to verify costs and allocations should be considered as a claimed as graduate medical education proxy for base period costs during the graduate medical documentation for purposes education base year—not to support of determining the per increases to those costs in the base year. resident amount. In no We owe no deference to an agency event will the results interpretation plainly inconsistent with the obtained from the use of the relevant statute. See Pub. Employees r e c o rds from a cos t Retirement Sys. v. Betts, 492 U.S. 158, 171 reporting period later than (1989) (“[N]o deference is due to agency the base period serve to interpretations at odds with the plain increase or add physician language of the statute itself.”). In the compensation costs to the same vein, an agency’s interpretation of its costs used to determine the own regulations is not entitled to per resident amounts. substantial deference by a reviewing court 55 Fed. Reg. at 36,063-64 (emphasis where “‘an alternative reading is added).13 compelled by the regulation’s plain meaning or by other indications of the Secretary’s intent at the time of the 13 The Agency supplemented its rule regulation’s promulgation.’” Thomas with the following question and answer: Question: If a provider did in HCFA’s instructions, the n o t c h a r g e p hy s ic ia n use of subsequent period compensation to GME in documentation to support the base period, can it the allocation of physician request that documentation costs may not be used to from a subsequent period be increase the amount of used, at this time, to revise physician compensa tion its base period costs for the originally claimed by the purpose of calculating its provider in its GME base a v e r a g e p e r r e si d e n t period. Graduate Medical amount? Education: Questions and Answers (Nov. 8, 1990), JA Answer: No. As explained 872. 12 Jefferson Univ. Hosp., 512 U.S. at 512 (A) Verifies the hospital’s (quoting Gardebring v. Jenkins, 485 U.S. base-p eriod graduate 415, 430 (1988)). Mercy Catholic Medical medical education costs and Center contends the graduate medical the hospital’s average education rule is written in neutral number of FTE residents; language that compels intermediaries to (B) Excludes from the base- accurately calculate graduate medical period graduate medical education costs, and to correct all e d u c atio n c o s t s an y misclassified costs, operating costs and nonallowable or graduate medical education costs, to arrive m i s c l a ss i f ie d costs , at the most accurate APRA possible. We including those previously a g r e e a n d find the S e cre tar y’s allowed under § interpretation directly contradicts the plain 4 1 2 .113( b)( 3 ) o f t h is language of the graduate medical chapter; and education regulation and cannot be upheld. (C) Upon a hospital’s The plain language of the graduate request, includes graduate medical education rule does not support medical education costs that limiting corrections upon reaudit to were misc lassifie d as misclassified operating costs, but rather operating costs during the anticipates corrections of misclassified hospital’s pros pectiv e graduate medical education costs and payment base year and were operating costs. not allowable under § 42 C.F.R. § 413.86(e) and (l) 4 1 2 . 1 1 3 (b )( 3 ) o f t h is provide: chapter during the graduate medical education base (e) Determining per resident period. These costs may be amounts for the base period included only if the hospital – (1) For the base period. requests an adjustment of its
prosp e c t iv e p a yment determines a base-period per hospital-specific rate or resident amount for each target amount as described hospital as follows . . . in paragraph [(l)(2)] of this
period amount under (l) Adjustment of a paragraph (e)(1)(i) of this hospital’s target amount or section, the intermediary – . prospective payment .. hospital-specific rate – (1) 13 M isclassified oper ating Additionally, the intent of the rule costs . . . supp orts our inter pre tatio n. In promulgating § 413.86, the Secretary (2) Misclassification of determined a reaudit of FY 1985 cost graduate medical education reports was warranted because hospitals costs – (i) General rule. If may not have accurately distinguished costs that should have been between teaching time and administrative classified as graduate and other time spent by teaching medical education costs physicians in FY 1985, since at that point were treated as operating in time there were no real reimbursement costs during both the c o n s e q u e n c e s e i t h er w a y , a n d graduate medical education Intermediaries had applied the audit rules base period and the rate-of- inconsistently. 54 Fed. Reg. 40,286, increase ceiling base year or 40,288-89, 40,301-02. In this vein, the prospective payment base Secretary noted: “In establishing the base- year and the hospital wishes period per resident amount for a specific to receive benefit for the hospital . . . it is important that the amount appropriate classification of determined be an accurate determination these costs as graduate of providers’ 1984 GME costs.” 54 Fed. medical education costs in Reg. 40,286, 40,288. The goal of an t h e g radu ate m edic a l accurate determination of costs supports education base period, the both increases and decreases to 1984 hospital must request that graduate medical education costs. The the intermediary review the Secretary’s intent is particularly relevant to classification of the affected this case where Mercy Catholic Medical costs in the rate-of-increase Center is not seeking to add additional ceiling or pro spec tive costs not audited in 1985, but rather, seeks payment base year for to reallocate operating costs as graduate purposes of adjusting the medical education costs based on the same hospital’s target amount or time studies the Intermediary relied on to hospital-specific rate. reclassify costs in the opposite direction. 42 C.F.R. § 413.86(e), (l) (emphasis Our position is consistent with the added). Supreme Court’s interpretation of the The regulation’s plain language graduate medical education reaudit rule in requires the Intermediary to correct all Regions Hosp. v. Shalala, 522 U.S. 448 misclassified costs, not just misclassified (1998). In upholding the reaudits, the graduate medical education costs. The Court wrote, the audits were required “to Secretary’s restrictive approach conflicts catch errors that, if perpetual, could with the regulatory language. grossly distort future reimbursement.” 522 14 U.S. at 457-58. To make the APRA interpretation “‘qualifies for Chevron accurate and avoid perpetrating errors, the deference when it appears that Congress reaudit requires correcting all relevant delegated authority to the agency generally classification errors, not merely those that to make rules carrying the force of law, result in a reduction of graduate medical and that the agency interpretation claiming education costs. deference was promulgated in the exercise of that authority.’” George Harms Constr. As noted, we find the reaudit rule Co. v. Chao, 371 F.3d 156, 161 (3d Cir. envisions a two-way street. The 2004) (quoting United States v. Mead Secretary’s interpretation is at odds with Corp., 533 U.S. 218, 226-27 (2001)). this principle. Significantly, the Provider Agency statements contained in opinion Reimbursement Review Board agreed, letters, policy statements, agency manuals, holding the graduate medical education and enforcement guidelines lack the force rule r e q uired reclassification o f of law and “do not warrant Chevron-style misclassified graduate medical education deference.” Christensen v. Harris County, costs and operating costs. PRRB Dec. at 529 U.S. at 587; Madison v. Res. for 202,480. In doing so, the Board explicitly Human Dev., Inc., 233 F.3d 175, 185 (3d discredited the interpretation of the rule Cir. 2000). “To grant Chevron deference adopted by the Secretary in this litigation. to informal agency interpretations would Even if th e S ec re ta r y’ s unduly validate the results of an informal interpretation were not at odds with the process.” Madison, 233 F.3d at 186. We plain language of the rule, his have made clear that agency interpretive interpretation is still not entitled to guidelines “do not rise to the level of a Chevron-level deference.14 An Agency regulation and do not have the effect of law.” Id. (quoting Brooks v. Village of Ridgefield Park, 185 F.3d 130, 135 (3d 14 Cir. 1999)). In Presbyterian Medical Center, 1998 U.S. Dist. LEXIS 6254, aff’d, 170 F.3d As for the persuasiveness of agency 1146, the District Court for the District of interpretive guidelines, we continue to rely Columbia held the Secretary’s instruction on the framework laid out in Skidmore v. on the use of later time-records was an Swift, 323 U.S. 134 (1944). See “interpretive rule,” and afforded the rule Christensen, 529 U.S. at 587; Madison, Chevron deference. Id. at . We note Presbyterian was decided before Christensen v. Harris County, 529 U.S. instruction at issue is an interpretive rule. 576 (2000), where the Supreme Court See 5 U.S.C. § 553(b)(A) (discussing clarified the deference due agency opinion informal rule-making without notice and letters. See id. at 587 (declining to afford comment). But we disagree with the level Chevron deference to Department of of deference granted in Presbyterian Labor’s opinion letter). We believe the Medical Center. 15 233 F.3d at 186. The Skidmore Court the base year.15 The HCFA Administrator explained: determined that subsequent year time studies may be used to increase physician We consider that the rulings, compensation in excess of amounts interpretations and opinions originally claimed in the graduate medical of the Administrator under education cost center if the time studies t h i s A c t , w h i le n o t were consistent with contemporaneous controlling upon the courts data. The Administrator subsequently by reason of their authority, repudiated his earlier position, see do constitute a body of Presbyterian Med. Ctr., 1998 U.S. Dist. experience and informed LEXIS 6254, and adopted his current judgment to which courts position, that the amount claimed in the and litigants may properly graduate medical education cost center resort for guidance. The could only be increased based on weight of such a judgment contemporaneous documentation, not in a particular case will subsequent period time studies. “The depend upon the Secretary is not estopped from changing a thoroughness evident in its view . . . believe[d] to have been grounded consideration, the validity of upon a mistaken legal interpretation,” its reasoning, its consistency Good Samaritan Hosp. v. Shalala, 508 with earlier an d later U.S. 402, 417 (1993), but this pronouncements, and all inconsistency can affect the level of those factors which give it d e f e r e n ce af fo rd ed an ag en cy’ s power to persuade, if interpretation. See Skidmore, 323 U.S. at lacking power to control. 140. The Secretary’s internally conflicting 323 U.S. at 140. positions on this issue militate against affording deference to the interpretive Under Skidmore analysis, we find rule.16 the Agency has inconsistently applied the Secretary’s instructions concerning what costs can be recognized in the reaudit 15 As noted, M ercy Catholic Medical process. In Abbott v. NW Mem’l Hosp., Center did retain some of its 339 allocation PRRB Dec. No. 95-D10, Medicare & agreements, and these were included in the Medicaid Guide (CCH) ¶ 42, 970 (Dec. 7, administrative record. 1994) aff’d, HCFA Adm’r Dec., Medicare 16 & Medicaid Guide (CCH) ¶ 43,136 (Feb. Mercy Catholic Medical Center also 2, 1995), the provider presented base year argues the Secretary endorsed a position physician allocation agreements, but did inconsistent with that taken in the current not produce supporting time records from case when defending the validity of the graduate medical education rule before the Supreme Court in Regions, 522 U.S. 448. 16 In Regions, the Supreme Court considered there are some pieces of the broader issue of whether the paper and other evidence Secretary’s enactment of the rule that are no longer around, providing for a retrospective reaudit of the Secretary will permit the graduate medical education costs was a hospital to introduce – reasonable interpretation of the graduate medical education amendment, 42 U.S.C. Ms. Blatt [government § 1395ww(h), under Chevron. The Court counsel]: Yes conditioned its affirmance of the graduate m e d i c a l e d ucatio n rule o n th e Question: – other evidence, understanding that hospitals would not be later evidence, or anything penalized for lack of documentation which that – they were no longer required to maintain. Id. at 465. The Secretary overcame this Ms. Blatt: That’s correct, problem through the “equitable solution” and ironica lly, Justice discussed above. According to Mercy Breyer, the petitioner did Catholic Medical Center, Government present subsequent year data counsel suggested the Secretary would . . . because the [old] time allow providers to add to, as well as records did not break . . . decrease, base-year graduate medical down the costs [sufficiently] education costs based on the following . . . they were allowed to use discussion at oral argument: a new time study, and that’s why there was a settlement Question [Breyer, J.]: I in this case, the petitioner would just like to be clear in actually got an increase in my own mind. What the per-resident average . . . petitioner said . . . [is] that . they have changed the classification of certain Oral Argument Transcript at 16, Regions fixed costs, the Hospital v. Shalala, No. 96-1375, 1997 administrative costs, from WL 751915 (U.S.S.Ct. Dec. 1, 1997). education costs to operating Based on this interchange, Mercy Catholic costs, not because of new Medical Center argues that the principle of e v i dence but b e c a u se judicial estoppel should prevent the petitioner no longer had Secretary from switching positions in this audit documentation . . . . litigation. Because we find the Secretary’s Am I right in thinking that interpretive rule contrary to the plain isn’t the problem, because if language of the regulation, inconsistently 17 Nonetheless, the Secretary argues GME costs . . . reasonably its interpretative rule is reasonable and f u r t h e r s — n o t entitled to deference. Contending later frustr a t e s — accurate year records are inherently less reliable, determination of GME the Secretary argues it is reasonable to costs.” limit the weight afforded to these records. Id. at 1150-51 (internal quotations and According to the Secretary, hospitals may citations omitted). We respectfully attempt to manipulate graduate medical disagree. education costs with documentation developed after the base year, for purposes We see no valid reason to generally of increasing their APRA. ascribe to teaching hospitals wrongful over-reporting of teaching costs. Because In Presbyterian Medical Center v. of the Consistency Rule, hospitals had no Shalala, 170 F.3d 1146 (D.C. Cir. 1999), opportunity to change classification of the Court of Appeals for the D.C. Circuit costs in FY 1985 from that reported in FY noted the Secretary’s interpretive rule was 1983, the prospective payment system base reasonable because: year. 42 C.F.R. § 412.113(b)(3). Nor did GME costs claimed in the teaching hospitals have a financial base year have already gone incentive to misallocate either graduate through a verif icatio n medical education costs or operating costs process requiring in the prospective payment system base contemporaneous year, 1983, as Medicare reimbursed both documentation. Additional education costs and operating costs on a GME costs claimed during reasonable cost basis during that period. reaudit have not. Because Consequently, there is no reason to expect later year record are errors in cost reporting in 1984-85 would inherently less reliable, and have favored reporting costs in one because hospitals have category or the other. Additionally, since significant incentives to § 1395ww(h) was enacted in 1986 and inflate their GM E costs in mandated the use of FY 1985 as the the base year . . . we think graduate medical education base year—a the interpretive rule, by year which predated this change in the p r o h i b i t i n g law— to set the APRA, providers had no noncontemporaneous notice or opportunity to “game the system” records from supporting by over-reporting teaching costs.17 17 applied, and lacking valid reasoning, we The Secretary’s Interpretive Rule does do not reach Mercy Catholic Medical not clarify the difference between adding Center’s judicial estoppel argument. graduate medical education costs not 18 previously claimed, and reclassifying had previously claimed. There, the misclassified graduate medical education Provider Reimbursement Review Board costs previously classified as operating noted: costs. The district court in Presbyterian The provider is not noted the specific question before the court attempting to increase or was “whether later year records can be add the physician used to support an increase in GME costs compensation cost to the over what was originally claimed in the costs claimed on its 1984 base year.” 1998 U.S. Dist. LEXIS 6254, cost report which was used at . In discussing the Secretary’s to determine the Provider’s interpretive rule, the court noted: “In [the per resident amount. All of Secretary’s] judgment, however, she did the costs that the Provider not think it appropriate for hospitals to be has claimed were claimed in able to use later year records to support an the base year, although they increase in GME costs over what hospitals may not have been claimed had originally claimed.” Id. at -13; see specifically in the Intern and also Cleveland Clinic Found. v. Shalala, Resident cost center. No. 1:94 CV 2414, 1996 WL 636135, at Abbott, Medicare & Medicaid Guide  (N.D. Ohio, Aug. 28, 1996) (rejecting (CCH) ¶ 42, 970, at 42,898. provider’s “attempts to claim additional The Agency supplemented its costs no[t] previously claimed in the base interpretive rule with the following year period”). question and answer: Unlike the situation in Presbyterian Question: If a provider did and Cleveland Clinic, Mercy Catholic n o t c h a r g e p h ys i c i a n Medical Center’s requested reclassification compensation to GME in of misclassif ied gra duate medical the base period, can it education costs would serve only to request that documentation partially offset the graduate medical from a subsequent period be education costs that were found by the used, at this time, to revise Intermediary to have been misclassified on its base period costs for the reaudit, and would not raise Mercy purpose of calculating its Catholic Medical Center’s graduate a v e r a g e p e r r e si d en t medical education costs above the amount amount? contemporaneously claimed in FY 1985. Answer: No. As explained In Abbott as well, the graduate in HCFA’s instructions, the medical education cost additions did not use of subsequent period result in total graduate medical education documentation to support costs in excess of the amount the hospital the allocation of physician 19 The Secretary’s interpretation on “[a] long line of precedent requires the Intermediary to apply the [establishing] . . . that an agency action is graduate medical education reaudit rule in arbitrary when the agency offers a one-sided fashion. An agency acts insufficient reasons for treating similar arbitrarily and capriciously when it situations differently.” Id. at 1022 construes or applies a regulation in an (quoting Transactive Corp. v. United inconsistent manner. See Walter Boswell States, 91 F.3d 232, 237 (D.C. Cir. 1996)). Mem’l Hosp. v. Heckler, 749 F.2d 788, The court held the Secretary’s discretion, 799 (D.C. Cir. 1984) (“It would be although broad, “is not a license to . . . arbitrary and capricious for HHS to bring treat like cases differently.” Id. at 1023 varying interpretations of the statute to (quoting Airmark Corp. v. FAA, 758 F.2d bear [in allocating costs to Medicare], 685, 691 (D.C. Cir. 1985)). depending on whether the result helps or By allowing non-contemporaneous hurts the Medicare’s balance sheets . . . .”). records to verify graduate medical F u r thermore, the Secre tar y’s education costs or deduct graduate medical interpretation eschews the fundamental education costs claimed in the base-year goal of neutral accuracy in a reaudit. See, cost report, but not allowing such records e.g., Boswell, 749 F.2d at 799; County of to support the inclusion of graduate Los Angeles v. Shalala, 192 F.3d 1005 medical education costs misclassified as (D.C. Cir. 1999). In County of Los o p e r a ting co sts , th e S ec re tar y’ s Angeles, the Court of Appeals for the D.C. interpretive rule frustrates the regulatory Circuit rejected the Secretary’s explanation goal of ensuring an accurate determination for selectively ignoring data where it of a provider’s graduate medical education would increase Medicare payments based costs. The Secretary either credits or ignores later year time studies depending on whether the correction of errors will costs may not be used to result in a reduction or increase in a increase the amount of hospital’s graduate medical education physician compensation reimbursement. The Secretary’s restrictive originally claimed by the interpretive rule is arbitrary and capricious provider in its GME base because it contradicts the plain language of period. the rule, has not been applied consistently, Graduate Medical Education: Questions and is unreasonable.18 and Answers (Nov. 8, 1990), JA 872 (emphasis added). As this case concerns 18 misclassified graduate medical education The Secretary’s rule may also effect costs, we find the Secretary’s position an illegal cost-shifting of Medicare costs concerning costs not originally claimed, to non-Medicare patients, as it will shift does not su pp ort the S ecretary’s costs properly borne by Medicare to other interpretation as applied to this case. patients. See 42 U.S.C. 20 2. Evidentiary Issues Support Mercy no longer had any of the 339s and Remand. that Mercy did not submit any other evidence, other than the time study Mercy Catholic Medical Center conducted in 1990.” Mercy Catholic Med. contends the District Court and the Board Ctr., 2003 U.S. Dist. LEXIS 4688, at - erred in rejecting its appeal on the added 25. ground that Mercy Catholic Medical Center failed to produce form 339 At oral argument, and in a physician allocation agreements for the subsequent letter to this Court, Mercy three missing departments. We recognize Catholic Medical Center proved that some the able District Court was presented with or iginal 339s from the missin g a confusing administrative record. departments had been included in the Nonetheless, we reverse and remand based administrative record, though, apparently, o n t h e a lt e r n a ti v e g ro u n d t h at not as formal exhibits.19 To the extent the contemporaneous evidence of teaching Provider Reimbursement Review Board programs, including 339 forms, was and the District Court grounded their presented to the Provider Reimbursement decisions on Mercy Catholic Medical Review Board. Center’s inability to produce copies of the 339 forms for the three missing There is no dispute that Mercy departments, it is clear that at least some of Catholic Medical Center conducted these forms were produced in the accredited medical residency programs in administrative record.20 Therefore, we will its Laboratory, OB/GYN, and Radiology Departments in 1984-85. Before the Board, Mercy Catholic Medical Center 19 According to Mercy Catholic Medical introduced contemporaneous Center’s letter to this Court dated May 4, documentation verifying its graduate 2004, a “departmental 339 allocation” medical education activities. The Board form for the Radiology Department was found: “In fiscal year 1985, the provider introduced as PRRB Exhibit 32. conducted GME teaching programs in its OB/GYN, Laboratory, and Radiology 20 Although no 339 forms for individual Departments.” PRRB Dec. at 202,480. doctors were included in the appendix to Yet, the Board noted, “[t]here is no this Court, a “departmental 339 allocation” creditable evidence in the record to form for all teaching physicians in the reclassify the misclassified OC to GME Radiology Department in 1985 was costs because of the lack of form 339's . . included. JA 381. Health Care Financing . .” Id. at 202,481. The District Court also A d m i n i s t r a t i o n ’ s i n s t r u c t io n s t o concluded, “[t]he record indicates that in te r me dia r ie s specify that suc h “departmental time allocations may be accepted” on reaudits. Instructions for § 1395(x)(v)(1)(A). Implementing Program Payments for 21 reverse and remand on the alternative The District Court affirmed, noting, “[t]he ground that sufficient contemporaneous fact that the Subcontractor may have the documentation of teaching programs in the documents in its possession does not “missing departments” was produced to satisfy the requirements set forth by the support the reclassification of costs and regulations.” Mercy Catholic Med. Ctr., should have been considered by the Board. 2003 U.S. Dist. LEXIS 4688, at -34. We cannot agree. In sum, the Secretary’s position that later year time studies may only be used to As noted, an increase in the correct misclassified operating costs, and hospital-specific rate and target amount is not misclassified graduate medical anticipated by the Secretary’s own education costs, is arbitrary and capricious. regulations to achieve consistent We will reverse and remand with classification of costs where costs i n s tr u c t io n s to th e P r o v i d er originally classified as graduate medical Reimbursement Review Board to order the education costs should have been reported Intermediary to recalculate Mercy Catholic as operating costs. See 42 C.F.R. § Medical Center’s graduate medical 413.86(l)(1). Additionally, because of the education costs after auditing the time Consistency Rule, allowable operating studies and other available documentation costs involved in setting the hospitalfrom the three missing departments. specific rate and target amount must be treated consistently through out the B. Hospital-Specific Rate and Target prospective payment transition period (i.e. Amount Mercy Catholic Medical Center’s FY Mercy Catholic Medical Center also 1985-1989). 42 C.F.R. § 412.113(b)(3).21 contends the District Court failed to order Once it is determined that misclassified the Intermediary to increase its hospital- specific rate and TEFRA target amount. 21 As noted, the Board declined to order the Mercy Catholic Medical Center also Intermediary to increase Mercy Catholic contends that because its Target Amount Medical Center’s hospital-specific rate and applied only to a psychiatric unit not in target amount in an amount corresponding operation until FY 1985, there was no to the Intermediary’s reduction of the same rational basis to require Mercy Catholic costs from the APRA because Mercy M e d i c a l C e n t e r to i n t ro d u c e Catholic Medical Center had not provided d o c u m e n t a t io n e v i d e n c i n g t h e d o c u m e n t a t io n d i r e c t l y t o t h e comparability of its FY 1983 and FY 1985 I n t e rm e d iary, but rath er to th e costs as a precondition to increasing the Subcontractor. PRRB Dec. at 202,481. t a rg e t am oun t. T he r e f o r e , n o “comparability data” was necessary to adjust the target amount, and the Board’s Graduate Medical Education Costs, JA finding on insufficient documentation was 341. irrelevant to the target amount adjustment. 22 graduate medical education costs should adjustments on the technicality that Mercy have been reimbursable as operating costs, Catholic Medical Center provided the data an increase to the hospital-specific rate and supporting comparability within the 180 target amount is required not merely for day period to the Intermediary’s consistency purposes, but also in light of Subcontractor rather th an dire ctly Medicare’s cost-shifting prohibition. 42 providing it to the Intermediary. PRRB U.S.C. § 1395x(v)(1)(A). For these Dec. at 202,481. We do not find this reasons, the hospital-specific rate/target distinction legally significant. amount adjustment is critical. Mercy Providing data to the on-site Catholic Medical Center’s request for a Subcontractor is the legal equivalent of revision of both its hospital-specific rate providing the data to the Intermediary and target amount was appropriate and under Centers for Medicare and Medicaid timely. Services Manuals and principles of As discussed, the Provider agency. In collecting data for an audit, the Reimbursement Review Board did not Subcontractor steps into the shoes of the deny the adjustments for substantive Intermediary. See Medicare Intermediary reasons. See PRRB Dec. at 202,481. Manual, JA 919. A subcontracted audit Mercy Catholic Medical Center had firm is authorized to receive cost reports provided the appropriate and sufficient and make its working papers available to documentation to the Intermediary’s the Intermediary for review and to obtain Subcontractor.22 JA 161. The Board, necessary information. See id. pt. F (“The however, refused to order the hospital- independent audit firm’s [Subcontractor’s] spec ific rate and targ et amount working papers, including permanent files and reviews of internal control, are to be made available to representatives of the 22 The record demonstrates the evidence Secretary and the intermediary, at all provided by Mercy Catholic Medical reasonable times, for review and obtaining Center was sufficient to make the any necessary information.”). Under the adjustments to the hospital-specific rate Medicare Intermediary Manual, the and target amount. The Board found “the Intermediary and the Subcontractor are Subcontractor . . . had received adequate interchangeable in the function of information for . . . revisions to the receiving documents. The Board’s HSR/TEFRA target amount.” PRRB Dec. decision also described the Intermediary at 202,481. In fact, the “best evidence” of p e r f o r m i n g a u d i t s “ t h r o ug h i t s comparability between the prospective Subcontractor.” PRRB Dec. at 202,466. payment system and graduate medical Under these circumstances, we find education base years was the cost reporting the documents were plainly within the data and supporting audit records that were control of the “prime contractor” (in this already in the Intermediary’s possession case, the Intermediary). In the context of until at least 1992. JA 156. 23 Fed. R. Civ. P. 34(a), so long as the party § 413.86, it does not follow that the has the legal right or ability to obtain the provider may not supply the data to the documents from another source upon Interm edia ry throug h the o n-site demand, that party is deemed to have Subcontractor. The Subcontractor was control. See Fed R. Civ. P. 34(a) entitled to receive cost documentation (allowing “[a]ny party [to] serve on any from Mercy Catholic Medical Center as other party a request . . . any designated the Intermediary’s agent. An agency documents . . . which are in the possession, relationship may be established by: (1) custody or control of the party upon whom express authority; (2) implied authority, to the request is served); see also Poole v. do all that is proper, usual and necessary Textron, 192 F.R.D. 494, 501 (D. Md. for the authority actually granted; (3) 2000) (“[A] party is charged with apparent authority, as where the principal knowledge of what its agents know or holds one out as agent by words or what is in the records available to it.”) conduct; and (4) agency by estoppel. See (internal quotation omitted). In the Rule SEI Corp. v. Norton & Co., 631 F. Supp. 34 context, control is defined as the legal 497, 501 (E.D. Pa. 1986). right to obtain required documents on Based on the relationship between demand. See Gerling Int’l Ins. Co. v. the Subcontractor and Intermediary, the Comm’r, 839 F.2d 131, 140 (3d Cir. subcontractor likely had express or implied 1988); 8A Charles Alan Wright & Arthur authority to receive documents from R. Miller, Federal Practice and Procedure Mercy Catholic Medical Center. See § 2210 (2d ed. 1994). The Medicare Medicare Intermediary Manual pts. D-F. Intermediary Manual specifically requires The Subcontractor undoubtably possessed the Subcontractor’s working papers and the authority to conduct the reaudit of the files be made available to the Intermediary graduate medical education costs. JA 153. and Secretary at all “reasonable times.” As noted, adjustment of the hospital- Medicare Intermediary Manual pt. F. specific rate and target amount is tied to Because the record demonstrates Mercy the classification of hospitals’ costs. See Catholic Medical Center provided the 42 C.F.R. § 413.86(l). Rationally, the necessary documents to the Subcontractor, Subcontractor should be authorized to and the Intermediary employed the receive documents for both cost Subcontractor to conduct the audit and reclassifications and adjustments to a receive documents, the documents were hospital’s specific rate and target amount. accessible to the Intermediary and within Alternatively, if the subcontractor lacked its control. express authority to receive documents, the While there is no question the fact that it had conducted the graduate Intermediary determines the APRA and medical education reaudit, and had corresponding adjustments to the hospital- conducted all of Mercy Catholic Medical specific rate and the Target Amount under Center’s audits since the “mid 70s,” JA 24 153, demonstrates the Subcontractor had payment system and the graduate medical apparent authority to receive the education base years—to effect an documents. “It is well settled that apparent adjustment of the hospital-specific authority (1) ‘results from a manifestation rate—until the Board has determined by a person that another is his agent’ and whether to approve a reaudit classification (2) ‘exists only to the extent that it is of operating costs to graduate medical reasonable for the third person dealing education costs. with the agent to believe that the agent is The Secretary maintains Mercy authorized.’” Taylor v. People’s Natural Catholic Medical Center’s reliance on 42 Gas Co., 49 F.3d 982, 989 (3d Cir. 1995) U.S.C. § 1395oo(d) is unavailing. We (quoting Restatement (Second) of Agency agree. This statute does not require the § 8 cmts. a & c (1958)). Mercy Catholic Board to receive additional evidence not Medical Center reasonably believed the considered by the Intermediary, but only Subcontractor had the authority to receive confers discretion on the Board as to what the relevant documentation. The will be allowed into the administrative Intermediary and the Subcontractor were record. Taking Mercy Catholic Medical jointly obligated to safeguard the Center’s argument to its logical hospital’s documents. Therefore, Mercy conclusion, all statutory or regulatory Catholic Medical Center fulfilled its deadlines imposed on providers for burden by providing appropriate data to purposes of Medicare reimbursement the Intermediary’s agent. would be inconsequential, since providers Mercy Catholic Medical Center also could proffer all required reports and contends it was entitled to present documents by the time of the hearing. evidence not submitted to the Intermediary Nevertheless, because we find to the Provider Reimbursement Review Mercy Catholic Medical Center to have Board for de novo review, and that the fulfilled its burden by presenting sufficient Board violated 42 U.S.C. § 1395oo(d) by data for adjusting its hospital-specific rate not considering this evidence.23 In this and target amount to the Subcontractor, we vein, Mercy Catholic Medical Center will reverse the Board and the District argues it should be allowed to present Court on this issue. We will remand to the evidence comparing the prospective District Court to remand to the Provider Reimbursement Review Board with 23 instructions to order the Intermediary to 42 U.S.C. § 1395oo(d) provides in adjust Mercy Catholic Medical Center’s relevant part: “A decision by the Board hospital-specific rate and target amount to shall be based upon the record made at correspond to reclassified operating costs such hearing, which shall include the and graduate medical education costs. evidence considered by the intermediary and such other evidence that may be obtained or received by the Board . . . .” 25