Court Opinion

ID: 2682241
Source: CourtListenerOpinion
Date Created: 2014-07-08 15:00:49.305968+00
Date Added: 2024-06-11T09:42:02.552796
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 14, 2014                   Decided July 8, 2014

                        No. 12-5355

 SELECT SPECIALTY HOSPITAL - BLOOMINGTON, INC., ET AL.,
                     APPELLANTS

                             v.

 SYLVIA MATHEWS BURWELL, SECRETARY, UNITED STATES
    DEPARTMENT OF HEALTH AND HUMAN SERVICES,
                    APPELLEE

                 Consolidated with 12-5358

        Appeals from the United States District Court
                for the District of Columbia
                    (No. 1:09-cv-02008)
                    (No. 1:09-cv-02362)

    David J. Bird argued the cause for appellants. With him
on the briefs were Andrew C. Bernasconi and Daniel Z.
Herbst.

     Joshua P. Waldman, Attorney, U.S. Department of
Justice, argued the cause for appellee. With him on the brief
were Stuart F. Delery, Assistant Attorney General, Ronald C.
Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney.
                               2
R. Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.

    Before: ROGERS, BROWN and MILLETT, Circuit Judges.

    Opinion for the Court filed by Circuit Judge BROWN.

    BROWN, Circuit Judge. A group of long-term care
hospitals challenges the Secretary’s determination that,
because the organizations operate out of buildings previously
owned by hospital entities, they are not “new hospitals.”
Because we cannot tell how the Secretary arrived at this
conclusion, we find it arbitrary and capricious.

                               I

    Hospitals are costly to build. Medicare has traditionally
provided for a “return on equity capital” for the construction
of such buildings, which includes “depreciation, interest,
taxes, insurance and similar expenses . . . for plant and fixed
equipment, and for moveable equipment.” Capital Payments
Under the Inpatient Hospital Prospective Payment System, 52
Fed. Reg. 33,168, 33,168 (Sept. 1, 1987). Up until the late
1980s, capital reimbursements were provided on a reasonable
cost basis—that is, “on the basis of current costs of the
individual provider, rather than costs of a past period or fixed
negotiated rate.” 42 C.F.R. § 413.5(a) (explaining the
reasonable-cost reimbursement scheme); 52 Fed. Reg. at
33,168.

   In 1987, Congress directed the Secretary of Health and
Human Services to develop a capital recovery scheme for
                                   3
hospitals through the inpatient prospective payment system,1
rather than the reasonable-cost reimbursement method. See
Omnibus Budget Reconciliation Act of 1987, Pub. L. No.
100-203, § 4006(b)(1), 101 Stat. 1330 (1987); see also 42
U.S.C. § 1395ww(g)(1). It also authorized the Secretary to
provide for appropriate exceptions to the capital prospective
payment system. 42 U.S.C. § 1395ww(g)(1)(B)(iii). To
comply with the congressional directive, the Secretary
implemented a ten-year plan, which transitioned the
Department from the old reasonable-cost capital payment
system to capital repayments made through the new inpatient
prospective payment system. See Prospective Payment
System for Inpatient Hospital Capital-Related Costs, 56 Fed.
Reg. 43,358 (Aug. 30, 1991).

     Under this scheme, the Secretary exempted “new
hospitals” from the inpatient prospective payment system for
the first two years of existence. Instead, such hospitals would
be entitled to 85% of their reasonable capital-related costs,
harking back to the old system. See 56 Fed. Reg. at 43,362,
43,453. A “new hospital” is a “hospital that has operated
(under previous or present ownership) for less than 2 years.”
See Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 1993 Rates, 57 Fed. Reg. 39,746,
39,827 (Sept. 1, 1992); see also 42 C.F.R. § 412.300(b).
About a year after the scheme was established, the following
language was added to the existing regulations:

1
  This system “reimburse[s] qualifying hospitals at prospectively
fixed rates . . . that remain static regardless of the costs incurred by
a hospital.” See Cnty. of L.A. v. Shalala, 192 F.3d 1005, 1008
(D.C. Cir. 1999). Most hospitals are reimbursed in accordance with
a standard formula derived from national data, although some are
reimbursed at hospital-specific rates. See Adirondack Med. Ctr. v.
Sebelius, 740 F.3d 692, 694–95 (D.C. Cir. 2014).
                               4
    The following hospitals are not new hospitals:

         (1) A hospital that builds new or replacement
             facilities at the same or another location even if
             coincidental with a change of ownership, a
             change in management, or a lease arrangement.

         (2) A hospital that closes and subsequently reopens.

         (3) A hospital that has been in operation for more
             than 2 years but has participated in the Medicare
             program for less than 2 years.

         (4) A hospital that changes its status from a hospital
             that is excluded from the prospective payment
             systems to a hospital that is subject to the capital
             prospective payment systems.

57 Fed. Reg. at 39,827; see also 42 C.F.R. § 412.300(b)(1)–
(4) (codifying the exceptions). In adding these exceptions,
the Secretary explained the exemption was intended only for
“new entrants into the hospital field that do not have a historic
asset base.” See 57 Fed. Reg. at 39,790.

    While the “new hospitals” exemption was originally
conceived as a temporary measure, the Secretary made it a
permanent one about ten years later. See 67 Fed. Reg. 31,404,
31,488–89 (May 9, 2002) (proposed rule); see also 67 Fed.
Reg. 49,982, 50,101 (Aug. 1, 2002) (final rule). The
provision was intended to be a “special protection to new
hospitals,” given concerns that “prospective payments . . .
may not be adequate initially to cover the capital costs of
newly built hospitals.” See 67 Fed. Reg. at 50,101. But, the
Secretary said, the exemption would “only be available to
those hospitals that have not received reasonable cost-based
                                5
payments under the Medicare program in the past, and would
need special protection during their initial period of
operation.” Id.

     A group of long-term care hospitals (“the Hospitals”), all
associated with the Select Specialty Hospitals organization,
identified themselves as “new hospitals” within the meaning
of 42 C.F.R. § 412.300(b). They claimed capital-cost
reimbursements under the 85% “reasonable cost basis” rule,
rather than the formulae provided by the prospective payment
system. See J.A. at 155, 232. Most of the hospitals are
“hospitals-within-hospitals”—independent       entities   that
operate in the same building or campus as an established
“host” hospital. J.A. at 154, 231. In contrast, some are
freestanding hospitals. J.A. at 154–55.

     An intermediary disagreed with the Hospitals’ self-
determined “new hospital” designation and reduced the
amount of capital recovery. J.A. at 155, 232. The Hospitals
appealed the intermediary’s decision to the Provider
Reimbursement Review Board (“the Board”). In considering
the appeal, the Board determined the meaning of “hospital”
under § 412.300(b) was ambiguous, as it was unclear whether
the term referred to the institutional entity, the brick-and-
mortar asset, or both. J.A. at 161, 237. As the parties
stipulated that “all of the [leased] buildings . . . were operated
by [a] hospital for more than 2 years prior to the lease
arrangement,” the Board determined the designation did not
apply. J.A. at 162, 238; see also J.A. at 156, 232. Two board
members dissented, arguing the majority unceremoniously
disregarded the newly-formed nature of the business entity
and the enormous capital expenditures involved in
rehabilitating and reconstructing the facilities. See J.A. at
167–68, 242–43. The Medicare Administrator upheld the
Board’s decision.
                                6
      The Hospitals challenged the Board’s decision in district
court, but the same outcome awaited them.2 When presented
with the Government’s motion for summary judgment, the
district court concluded both sides offered plausible
interpretations of 42 C.F.R. § 412.300(b): one that permitted
consideration of physical assets, and one that precluded it.
See J.A. at 330. It also found the exceptions of §
412.300(b)(1)–(4) added to the interpretive disarray. Calling
the prefatory language “regrettably . . . ambiguous,” the court
suggested “the ensuing examples [could be] merely examples,
but also could be interpreted as enumerating an exclusive
list.” See Select Specialty Hosp.—Bloomington, Inc. v.
Sebelius, 774 F. Supp. 2d 332, 340 (D.D.C. 2011). In light of
the ambiguity, it proceeded to uphold the Board’s
determination as both reasonable and supported by substantial
evidence. The Hospitals appealed.

                                II

     We review a district court’s grant of summary judgment
de novo, “which is to say we ‘review the administrative action
directly, according no particular deference to the judgment of
the District Court.’” Roberts v. United States, 741 F.3d 152,
157–58 (D.C. Cir. 2014) (quoting Holland v. Nat’l Mining
Ass’n, 309 F.3d 808, 814 (D.C. Cir. 2002)). While we

2
  Because it was unclear whether the agency’s decision applied to
the freestanding hospitals, the district court remanded the case to
the Administrator for clarification. See Select Specialty Hosp.—
Bloomington, Inc. v. Sebelius, 774 F. Supp. 2d 332, 344 (D.D.C.
2011). The Administrator indicated in the affirmative. See J.A. at
354. The district court upheld the Administrator’s subsequent
determination regarding the freestanding hospitals. See Select
Specialty Hosp.—Bloomington, Inc. v. Sebelius, 893 F. Supp. 2d 1,
5 (D.D.C. 2012). Those hospitals also appealed, and their appeal is
now before us in this consolidated case.
                                7
generally give “substantial deference” to an agency’s
interpretation of its own regulation, deference is unwarranted
if the interpretation is “plainly erroneous or inconsistent with
the regulation.” Thomas Jefferson Univ. v. Shalala, 512 U.S.
504, 512 (1994) (citation and internal quotation mark
omitted); Kaiser Found. Hosps. v. Sebelius, 708 F.3d 226,
230–31 (D.C. Cir. 2013).

                               III

     The question before us is whether the Board’s
interpretation of the Secretary’s regulation—specifically, her
definition of “new hospital”—is arbitrary and capricious. The
parties begin at a curious starting point: the meaning of the
word “hospital.” The Hospitals suggest the meaning is
clear—42 U.S.C. § 1395x(e) indicates “hospital” means the
institutional entity, not the physical facility. See Appellants’
Br. at 38, 42. As none of the Hospitals—independent
offshoots of an overarching corporation—existed prior to the
cost period at issue, they maintain their institutions are all
“new.” See Appellants’ Br. at 42. But the meaning of
“hospitals” is beside the point—the Government does not
contest that a “hospital” could be the organizational entity.
See Appellee’s Br. at 31–33. Instead, the crux of the
Government’s concern is the meaning of the word “new”—a
question to which § 1395x(e) does not speak. Unfortunately,
neither does the Board’s decision.

     The Hospitals’ disorientation is understandable; it was
the Board that first puzzlingly emphasized the interpretation
of “hospital,” instead of “new.” See J.A. at 161, 237 (“The
Board finds that the regulation defining a ‘new hospital’ . . . is
ambiguous, in that it is not clear if the term ‘hospital’ means
the individual physical assets . . . or the business entity as a
whole, which would include both bricks and mortar and the
                               8
operations.”). On appeal, the Government attempts to patch
up the Board’s maladroitness by claiming the Board was
interpreting the phrase “new hospital,” as opposed to one
word or the other. See Appellee’s Br. at 35. But the
Government’s patch job is too little, too late. Simply put, the
Board—having resolved a question that was tangential to the
essential one—never adequately explained how to discern the
newness of a hospital. Certainly, “individual physical assets”
are to be considered—but in what way? See J.A. at 161, 237.

     “[T]here are cases where an agency’s failure to state its
reasoning or to adopt an intelligible decisional standard is so
glaring that we can declare with confidence that the agency
action was arbitrary and capricious.” Checkosky v. S.E.C., 23
F.3d 452, 463 (D.C. Cir. 1994). This is one of them. We can
easily recognize the two guiding principles motivating the
Board’s decision: (1) eliminating the possibility of double
reimbursement and (2) giving newcomer hospitals without a
historic asset base an opportunity to establish new operations.
And yet, we cannot discern how the Board’s decision serves
these two principles.

                               A

    We start with the first impetus—that “the exemption to
receive cost reimbursement for the capital-related costs
should be limited only to assets for which the Medicare
program has not previously made payment under the
reasonable cost principles.” J.A. at 161–62, 237. After
pronouncing that “at the very least, an analysis of the physical
assets” is necessary under 42 C.F.R. § 412.300(a), the Board
jumped to the conclusion that the prior operation of the
various physical assets by other hospital entities meant that
the assets had already been the subject of a reasonable cost
basis reimbursement. See J.A. at 161, 237. The source of the
                              9
Board’s sweeping presumption remains a mystery. Nothing
in the record suggests a physical asset used by another
hospital organization for a period of more than two years is
inherently one that has already received capital
reimbursement based on reasonable cost principles. Nor do
we know how such a categorical approach faithfully serves
the double-reimbursement principle. Even if prior hospital
organizations had obtained reimbursement for an original
building construction, additional costs specific to
renovations—such as for new equipment—would not have
been previously reimbursed. The Board’s failure to connect
the dots makes remand necessary. See Phila. Gas Works v.
FERC, 989 F.2d 1246, 1250 (D.C. Cir. 1993) (explaining an
agency’s submission of an “inadequate explanation for its
conclusions” warrants remand to the agency).

                              B

     Before we reach the Board’s other rationale, some
untangling is in order. At oral argument, the Government’s
counsel seemed to suggest the Board employed a “new
building” rationale, i.e., a new hospital (organizationally
speaking) that constructs a facility from scratch is the only
type of entity deserving of reimbursement based on
reasonable cost principles. See Oral Arg. at 39:15 (“And the
Secretary reasonably concluded here that newly built facilities
are a more compelling need because there are greater capital
costs . . . .”). This observation is distinct from the Board’s
reasoning.      In the comments made during the initial
promulgation of the exemption, the Secretary did say the
exemption “would not apply to a facility that opens as an
acute care hospital if that hospital has operated in the past
under current or previous ownership and has a historic asset
base.” 57 Fed. Reg. at 23,649. But the Secretary also
emphasized the newness of hospitals as entities and
                              10
organizations which, because of their newness, would have a
harder time entering the field. See id. (“The exemption is
intended to protect hospitals that come under the capital
prospective payment system without a historic asset base and
need special consideration for their original plant and
equipment costs during their initial years of operation.”
(emphasis added)); see also 57 Fed. Reg. at 39,790 (“[W]e
believe it is appropriate to restrict the new hospital exemption
under the capital prospective payment system to new entrants
into the hospital field that do not have a historic asset base.”
(emphasis added)). It appears the Board hewed to this holistic
approach by stating only that, “at the very least,”
consideration of the physical assets is required. J.A. at 161,
237. The Secretary’s position on appeal, however, is that new
construction is a necessary condition.

     Organizationally speaking, the Hospitals are newcomers
to the field. No one disputes that, though the Hospitals are the
progeny of a parent corporation specializing in the
establishment of long-term care hospitals. But they are
independent entities nonetheless, and the Board’s decision
evinces no difference between the Hospitals and new entrants
to the field that are unaffiliated with any parent entity which
would deprive them of the preferential treatment the
regulations provide.

     Even if assets were to govern the analysis, we still do not
understand the Board’s predilection for having something
built from the ground up. Consider the fact that lease
payments and renewals are included in the definition of
reimbursable capital assets. See 42 C.F.R. § 412.302(b)(3);
42 C.F.R. § 413.130. This seems to suggest that a hospital (as
an institution) need not build a physical asset brick-by-brick
to be eligible for reimbursement on a reasonable-cost basis.
See J.A. at 161, 237 (“The Board also finds significant that
                               11
this regulation which defines a new hospital explicitly states
its purpose at 42 C.F.R. § 412.300(a) as establishing a
reimbursement methodology for inpatient hospitals ‘capital-
related costs,’ which are defined in § 412.302 and includes
physical assets.”). And yet, in its inquiry to determine the
newness of a “hospital,” the Board looked to when the “bricks
and mortar were established” for a particular physical asset
and who had laid them. Id. What is the difference between
an old hospital building that has been completely gutted and
renovated and a new hospital building built from the ground
up? Will the Board’s decision allow for recompense for the
latter, but not the former?3

     At oral argument, counsel equivocated when asked to
describe the Board’s decisional rationale. Compare Oral Arg.
at 34:13 (“I think the definition now is you have to be both a
new entity and you have to have a new facility, and the only
thing the Secretary clarified here is that a renovation is not the
same as a new building, and therefore you are not a new

    3
         The Government explains that a case-by-case
determination as to the “newness” of a hospital would
“require the Department to conduct time-consuming
examinations to determine how many renovations are
‘enough’ to make the facility ‘new,’ or how much a
theoretical, newly-built facility would have cost if it had been
constructed, and whether the renovations at issue were more
costly.” Appellee’s Br. at 49–50. The Board, of course, did
not articulate this particular rationale in its decision, and we
therefore cannot entertain the Government’s post hoc
justification. See Catholic Healthcare W. v. Sebelius, 748
F.3d 351, 354 (D.C. Cir. 2014) (“[W]e do not affirm agency
decisions on a legal analysis other than that expressed by the
agency.”).
                              12
hospital, but I think the Secretary is leaving open what
happens in the next case when what you’ve renovated has
never been a hospital.”), with Oral Arg. at 38:16 (“What’s
dispositive is whether you build something new or whether
you’re just merely renovating.”). His equivocation is telling.
Despite the Board’s decision, the district court’s opinion, the
Government’s briefs on appeal, and oral argument, we still
cannot discern precisely what the Board’s decisional standard
was. It is a standard that requires hospitals be built from the
ground up, yet also a standard which leaves open the
possibility of an existing building that had never served as a
hospital or an older hospital—say, nonoperational for fifty
years—being renovated and subsequently reimbursed under
reasonable cost principles. Such an amorphous rule is, by
definition, arbitrary and capricious. See Coburn v. McHugh,
679 F.3d 924, 934 (D.C. Cir. 2012) (noting agency decisions
that “lack coherence” and “make it impossible for this court to
determine whether [such decisions] survive arbitrary and
capricious review under the APA” fail the test of “reasoned
decisionmaking”).

                              IV

     To be clear, we have no reason to doubt the Secretary’s
authority to define what a “new hospital” is. Nor do we have
cause to question the Board’s ability to adopt a decisional
standard based on that definition. But when ambiguity begets
ambiguity, making it such that we cannot discern the
decisional standard, much less the correctness of its
application, we have little choice but to declare the decision
arbitrary and capricious—especially as our review is
constrained to the rationale provided by the Board, see SEC v.
Chenery Corp., 332 U.S. 194, 196 (1947), however
unintelligible it may be.
                             13
     We reverse the district court’s grant of the Appellee’s
motion for summary judgment and remand with instruction to
return this case to the Secretary for further proceedings not
inconsistent with this opinion.
                                                  So ordered.