Court Opinion

ID: 766307
Source: CourtListenerOpinion
Date Created: 2012-04-18 08:00:59+00
Date Added: 2024-06-11T12:01:38.032247
License: Public Domain

192 F.3d 1005 (D.C. Cir. 1999)
County of Los Angeles, a political subdivision of the State of California, owner and operator of Los Angeles County/USC Medical Center, Harbor/UCLA Medical Center, Martin Luther King Jr./Drew Medical Center, Olive View Medical Center and High Desert Hospital, et al. Appellees/Cross-Appellantsv.Donna E. Shalala, Secretary, U.S. Department of Health and Human Services Appellant/Cross-Appellee
No. 98-5254 Consolidated with Nos. 98-5255, 98-5256, 98-5257, 98-5258, 98-5259,98-5260, 98-5261, 98-5262, 98-5325, 98-5326, 98-5327, 98-5328, 98-5329, 98-5330, 98-5331,98-5332, 98-5333
United States Court of AppealsFOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 7, 1999Decided October 1, 1999

[Copyrighted Material Omitted]
     Appeals from the United States District Court for the District of Columbia
        (No. 93cv00146)         (No. 93cv00147)         (No. 93cv00479)
        (No. 93cv00692)         (No. 93cv00836)         (No. 93cv00837)
        (No. 93cv01188)         (No. 93cv02069)         (No. 94cv01485)
Peter R. Maier, Attorney, United States Department of  Justice, argued the cause for appellant/cross-appellee.  With  him on the briefs were Frank W. Hunger, Assistant Attorney  General, Wilma A. Lewis, United States Attorney, and Barbara C. Biddle, Attorney, United States Department of Justice.
Lloyd A. Bookman argued the cause for appellees/crossappellants.  With him on the briefs were David H. Eisenstat,  Byron J. Gross, John R. Hellow, Michael G. Hercz, John R.  Jacob, and David B. Palmer.
Before:  Wald, Silberman, and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Wald.
Wald, Circuit Judge:

1
Brought by the owners of Medicare provider hospitals ("Hospitals") and the Secretary of Health  and Human Services ("Secretary"), these cross-appeals present two issues.  First, under the Medicare statute, must the  Secretary provide hospitals with retroactive reimbursements  to ensure that aggregate outlier payments during any given  fiscal year meet minimum statutory targets?  And second,  has the Secretary adequately explained why, when calculating  outlier thresholds for fiscal years 1985-1986, she relied on a  1981 database instead of more contemporaneous records from  1984 Medicare discharges?  Finding that Congress had spoken directly and unambiguously to the first question, the district court granted partial summary judgment to the Hospitals.  With respect to the second issue, however, the court  perceived nothing unreasonable in the Secretary's choice of  data, and entered judgment accordingly for the Secretary. Because we disagree with the district court on both points, we  now reverse.

I. Background

2
Through a "complex statutory and regulatory regime,"  Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993),  the Medicare program reimburses qualifying hospitals for the  services that they provide to eligible patients.  See Social  Security Act, Pub. L. No. 89-97, tit. XVIII, 79 Stat. 286, 291  (1965) (codified as amended at 42 U.S.C. §§ 1395-1395ggg  (1994 & Supp. III 1997)).  From its inception in 1965 until  October 1983, Medicare compensated hospitals for the "reasonable costs" of the inpatient services that they furnished. See 42 U.S.C. § 1395f(b).  Experience proved, however, that  this system bred "little incentive for hospitals to keep costs  down" because "[t]he more they spent, the more they were  reimbursed."  Tucson Med. Ctr. v. Sullivan, 947 F.2d 971,  974 (D.C. Cir. 1991).

3
To stem the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare  reimbursement methodology in 1983.  See Social Security  Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat 65,  149.  Since then, this new regime, known as the Prospective  Payment System ("PPS"), has reimbursed qualifying hospitals at prospectively fixed rates.  By establishing predetermined reimbursement rates that remain static regardless of the costs incurred by a hospital, Congress sought "to  reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost/effective  hospital practices."  H.R. Rep. No. 98-25, at 132 (1983),  reprinted in 1983 U.S.C.C.A.N. 219, 351.

4
Calculating prospective-payment rates begins with determining the "federal rate," a standard nationwide cost rate  based on the average operating costs of inpatient hospital services.  See 42 U.S.C. § 1395ww(d)(2)(A)-(B);  49 Fed. Reg.  234, 251 (1984).  To account for regional variations in labor  costs, the Secretary then establishes a wage index that augments the adjusted standardized payment depending on the  location of a qualifying hospital.  § 1395ww(d)(2)(H),  (d)(3)(E).  The final variable is an additional weighting factor  that reflects the disparate hospital resources required to treat  major and minor illnesses.  § 1395ww(d)(4).  For each of 470  medical conditions--known as diagnosis related groups or  "DRGs"--the Secretary assigns particular weights by which  the federal rate is to be multiplied.  The more complicated  and costlier the treatment is, the greater the weight assigned  to that particular DRG will be.  To calculate the final "DRG  prospective payment rate" for a patient discharge, the Secretary takes the federal rate, adjusts it according to the wage  index, and then multiplies it by the weight assigned to the  patient's DRG.  By statutory mandate, the Secretary must  publish the weights and values that she will factor into the  prospective-payment calculus before the start of each fiscal  year.  § 1395ww(d)(6).

5
Despite the anticipated virtues of PPS, Congress recognized that health-care providers would inevitably care for  some patients whose hospitalization would be extraordinarily  costly or lengthy.  To insulate hospitals from bearing a  disproportionate share of these atypical costs, Congress authorized the Secretary to make supplemental "outlier payments."  During the years at issue in these cross-appeals, the  outlier-payment provisions were set forth in four clauses of  the Medicare statute.  42 U.S.C. § 1395ww(d)(5)(A)(i)-(iv)  (Supp. IV 1986).  With the first two clauses, Congress established two classes of outlier payments:  day outliers and cost  outliers. § 1395ww(d)(5)(A)(i)-(ii).  A hospital could qualify  for a day-outlier payment if the patient's length of stay  exceeded the mean length of stay for that particular DRG by  a fixed number of days or standard deviations .s 1395ww(d)(5)(A)(i).  Along the same lines, the Secretary  would make cost-outlier payments when a hospital's cost adjusted charges surpassed either a fixed multiple of the  applicable DRG prospective-payment rate or such other fixed dollar amount that the Secretary established.s 1395ww(d)(5)(A)(ii).  In the third clause, Congress provided  that outlier payments "shall be determined by the Secretary  and shall approximate the marginal cost of care beyond the  cutoff point applicable" to the day or cost outlier.s 1395ww(d)(5)(A)(iii).

6
It is the fourth and final clause, however, that forms the  textual nub of the present controversy.s 1395ww(d)(5)(A)(iv).  During 1985 and 1986, paragraph  (5)(A)(iv) provided:

7
The total amount of the additional payments made underthis subparagraph for discharges in a fiscal year may notbe less than 5 percent nor more than 6 percent of thetotal payments projected or estimated to be made basedon DRG prospective payment rates for discharges in thatyear.

8
Id.  Traditionally, the Secretary has read paragraph  (5)(A)(iv) to mean that at the start of each fiscal year, she  must establish the fixed thresholds beyond which hospitals  will qualify for outlier payments at levels likely to result in  outlier payments totaling between five and six percent of  projected DRG payments for that year.  In making this  estimation, the Secretary first settles on the per-diem outlier  payment, which pursuant to § 1395ww(d)(5)(A)(iii), must approximate the marginal cost of care.  She then examines  historical Medicare-discharge data to determine which thresholds, when multiplied by the per-diem payment rate, would  probably yield total outlier payments falling within the fiveto-six-percent range in paragraph (5)(A)(iv).  As the Secretary observed during the rulemaking, however, "given the  data available, forecasts of probable future outlier payments  are inexact."  50 Fed. Reg. 35,646, 35,710 (1985).  If it turns  out that the Secretary overestimated the mean length of stay  for DRGs, the actual total outlier payments at the end of the  year may amount to less than five percent of estimated DRGrelated payments.  Conversely, underestimating the mean  length of stay might produce outlier payments in excess of six  percent of estimated total DRG payments.

9
Whether the Secretary's projections prove to be correct  will depend, in large part, on the predictive value of the  historical data on which she bases her calculations.  For fiscal  year 1984, the Secretary relied on data culled from the 1981  Medicare Provider Analysis and Review ("1981 MEDPAR")  file, a database containing 1.6 million Medicare discharges  from 1981.  As a product of the old reasonable-cost system,  however, the 1981 MEDPAR file obviously did not reflect one  of "[t]he most commonly accepted expectation[s] about the  PPS at the time of its inception[:]  that it would result in  shorter stays for Medicare patients."  Office of Research &  Demonstrations, Health Care Fin. Admin., U.S. Dep't of  Health & Human Servs., Pub. No. 03231, Report to Congress: Impact of the Medicare Hospital Prospective Payment System  6-13 (1984).  By 1984, however, preliminary data indicated  that the mean length of stay for virtually all DRGs had, as  anticipated, declined dramatically under PPS.  The Secretary, nevertheless, chose to rely again on the 1981 MEDPAR  file in setting outlier thresholds for fiscal years 1985-1986.During those years, though the Secretary set thresholds at a  level projected to result in outlier payments at or above  paragraph (5)(A)(iv)'s five-percent floor, actual outlier payments in 1985 constituted only 3.0 percent of estimated DR Grelated payments and in 1986 they amounted to 4.4 percent.1Given the enormity of the Medicare program, these seemingly  modest percentage differences represent substantial sums of  money:  $241 million for fiscal year 1985 and $101 million for  fiscal year 1986.

10
Because actual outlier payments for fiscal years 1985-1986  amounted to less than five percent of projected DRG-related  payments, the Hospitals petitioned the Secretary for retroactive reimbursements to satisfy the difference.  According to  the Hospitals, paragraph (5)(A)(iv) does more than instruct  the Secretary about where she should set outlier thresholds at the beginning of each fiscal year;  it affirmatively commands her to recalibrate retroactively the outlier thresholds  if, after the fiscal year concludes, actual outlier payments do  not equal at least the five-percent statutory target.  Moreover, the Hospitals claimed that the Secretary had acted  arbitrarily and capriciously by relying on the 1981 MEDPAR  file when she forecast outlier thresholds for fiscal years 19851986.  The Secretary rejected both claims, and the Provider  Reimbursement Review Board authorized the Hospitals to  seek expedited judicial review pursuant to 42 U.S.C.  § 1395oo(f).

11
In an opinion and order dated January 20, 1998, the district  court granted in part and denied in part both the Secretary's  and the Hospitals' cross-motions for summary judgment.  In  granting a portion of the Hospitals' motion, the court proceeded no further than the first step of Chevron U.S.A. Inc.  v. Natural Resources Defense Council, Inc., 467 U.S. 837,  842-43 (1984), concluding that paragraph (5)(A)(iv) unambiguously requires the Secretary to adjust outlier payments retroactively to ensure that total actual outlier payments fall  within the statute's five-to-six-percent range.  County of Los  Angeles v. Shalala, 992 F. Supp. 26, 31-33 (D.D.C. 1998).Holding, however, that the Secretary's decision to favor the  1981 MEDPAR file over the more recent, though preliminary,  1984 data when determining outlier thresholds was "a rational  choice between two imperfect databases," the district court  granted the Secretary's motion for summary judgment on the  Hospitals' claim of arbitrary and capricious agency action. Id. at 34-36.

12
Having determined that paragraph (5)(A)(iv) required the  Secretary to make retroactive outlier payments to the Hospitals, the district court instructed the parties to meet and  confer on how to structure the final remedy.  On April 30,  1998, based largely on a joint stipulation filed by the parties,  the district court entered an order granting judgment to the  parties on each of the claims on which they respectively  prevailed.  While the April 30 order also instructed the  Secretary to tender retroactive outlier payments to the Hospitals, it did not specify a sum certain to be paid;  rather, the

13
court left it to the Secretary to calculate the amount owed. Thereafter, the Secretary noted a timely appeal and the  Hospitals noted timely cross-appeals.

II. Analysis
A.Jurisdiction

14
Before reaching the merits, it is necessary to examine our  jurisdiction to entertain these cross-appeals.  Section 1291 of  the Judicial Code provides that the courts of appeals may  review "all final decisions of the district courts of the United  States."  28 U.S.C. § 1291 (1994).  In the proceedings below,  the district court, managing this case as it would any garden variety civil suit, adjudicated not only the respective legal  rights of the parties but also took steps toward decreeing a  proper remedy.  Thus in its January 20, 1998 order, the court  resolved the merits of the Hospitals' claims, and with its April  30, 1998 order, directed the Secretary to calculate the amount  of outlier payments due to the Hospitals and to make payment accordingly.  This latter order has spawned some confusion about our jurisdiction because of the general rule applicable to civil actions that "where assessment of damages or  awarding of other relief remains to be resolved," a district  court's judgment is not " 'final' within the meaning of 28  U.S.C. § 1291."  Liberty Mut. Ins. Co. v. Wetzel, 424 U.S.  737, 744 (1976);  see also A & S Council Oil Co. v. Lader, 56  F.3d 234, 238 (D.C. Cir. 1995) (holding that an order establishing liability but referring the issue of damages to arbitration is not final).  For it is clear that neither of the district  court's orders resolved the precise quantum of payments to  be made to the Hospitals.

15
This rule of finality does not apply here, however, because  this is not an appeal from an ordinary civil judgment rendered by the district court.  With both of their claims, the  Hospitals challenged the Secretary's actions under section  10(e) of the Administrative Procedure Act, 5 U.S.C. § 706(2).As we have often observed, "[w]hen a final agency action is  challenged under the APA in district court, if the relevant  substantive statute does not provide for direct review in the court of appeals, the district court does not perform its  normal role" but instead "sits as an appellate tribunal."  PPG  Indus., Inc. v. United States, 52 F.3d 363, 365 (D.C. Cir.  1995) (quoting Marshall County Health Care Auth. v. Shalala, 988 F.2d 1221, 1225 (D.C. Cir. 1993));  accord James  Madison Ltd. v. Ludwig, 82 F.3d 1085, 1096 (D.C. Cir. 1996)  ("Generally speaking, district courts reviewing agency action  under the APA's arbitrary and capricious standard do not  resolve factual issues, but operate instead as appellate courts  resolving legal questions."), cert. denied, 519 U.S. 1077 (1997).Whether it is a court of appeals or a district court, "[u]nder  settled principles of administrative law, when a court reviewing agency action determines that an agency made an error of  law, the court's inquiry is at an end:  the case must be  remanded to the agency for further action consistent with the  corrected legal standards."  PPG Indus., 52 F.3d at 365;  see  also South Prairie Constr. Co. v. Local No. 627, Int'l Union  of Operating Eng'rs, 425 U.S. 800, 806 (1976);  SEC v. Chenery Corp., 318 U.S. 80, 94-95 (1943).  Once, therefore, the  district court held that the Secretary had misinterpreted  § 1395ww(d)(5)(A)(iv), it should have remanded to the Secretary for further proceedings consistent with its conception of  the statute.  Not only was it unnecessary for the court to  retain jurisdiction to devise a specific remedy for the Secretary to follow, but it was error to do so.  See Ommaya v.  National Insts. of Health, 726 F.2d 827, 830 (D.C. Cir. 1984)  ("If MSPB relied on incorrect legal grounds, it would be error  for this court to enforce without first remanding for agency  examination of the evidence and proper fact-finding.") (quoting White v. United States Dep't of the Army, 720 F.2d 209,  210 (D.C. Cir. 1983)).  Accordingly, because that was all that  the district court had the power to do, we construe its  January 20, 1998 order as a remand to the Secretary, and  ignore, for jurisdictional purposes, its later order on specific  relief.

16
Of course, properly characterizing the district court's order  as a remand does not, without more, resolve our jurisdictional  quandary, for a "remand order usually is not a final decision."NAACP v. United States Sugar Corp., 84 F.3d 1432, 1436 (D.C. Cir. 1996).  We have recognized "an exception to this  general rule, however, where the agency to which the case is  remanded seeks to appeal and it would have no opportunity to  appeal after the proceedings on remand."  Occidental Petroleum Corp. v. SEC, 873 F.2d 325, 330 (D.C. Cir. 1989).Animating this principle is a pragmatic concern.  Because an  agency must conduct its proceedings and render its decision  pursuant to the legal standard that the district court articulates in its remand order, "[u]nless another party appeals [the  agency's subsequent] decision, the correctness of the district  court's legal ruling will never be reviewed by the court of  appeals, notwithstanding the agency's conviction that the  ruling is erroneous."  Id.  Here, were the Secretary unable  to appeal the district court's decision at this point, on remand  she would have to interpret paragraph (5)(A)(iv) as the district court has construed it, and disburse millions of dollars in  retroactive outlier payments to various Medicare-provider  hospitals.  Absent an appeal from that decision by one of the  Hospitals, the Secretary would have no opportunity to challenge the legal basis for the disbursements.  Our jurisdiction  is therefore proper because the Secretary's appeal falls within  the exception recognized in Occidental Petroleum.  Additionally, vested with jurisdiction to review the Secretary's appeal  under § 1291, we may also consider the Hospitals' cross appeal of the district court's grant of summary judgment to  the Secretary on their arbitrary and capricious agency-action  claim.  See United States Sugar Corp., 84 F.3d at 1436.

B. The Secretary's Appeal

17
Turning first to the Secretary's challenge, we face a question of statutory interpretation that the district court resolved  in the affirmative:  whether, under § 1395ww(d)(5)(A)(iv), the  Secretary must make retroactive reimbursements to ensure  that aggregate outlier payments during any given fiscal year  constitute at least five percent of estimated or projected  DRG-related payments.  Because we may set aside agency  action only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C.  § 706(2)(A), we accord no particular deference to the judgment of the district court when conducting our review.  See HCA Health Servs. v. Shalala, 27 F.3d 614, 616 (D.C. Cir.  1994);  Hennepin County v. Sullivan, 883 F.2d 85, 91 (D.C.  Cir. 1989) ("Our review proceeds as if this case were an  immediate appeal from a decision reached after an administrative hearing on the record.");  Biloxi Reg'l Med. Ctr. v.  Bowen, 835 F.2d 345, 348-49 (D.C. Cir. 1987).

18
We initiate statutory analyses of the sort presented here by  first asking whether "Congress has directly spoken to the  precise question at issue."  Chevron U.S.A. Inc. v. Natural  Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).For if after "exhaust[ing] the traditional tools of statutory  construction," Natural Resources Defense Council, Inc. v.  Browner, 57 F.3d 1122, 1125 (D.C. Cir. 1995) (quoting Chevron, 467 U.S. at 843 n.9), we ascertain that Congress's intent  is clear, "that is the end of the matter."  Chevron, 467 U.S. at  842.  But "if the statute is silent or ambiguous with respect to  the specific issue, the question for the court is whether the  agency's answer is based on a permissible construction of the  statute."  Id. at 843.  Where judicial review is refracted  through this analytic prism, the "view of the agency charged  with administering the statute is entitled to considerable  deference;  and to sustain it, we need not find that it is the  only permissible construction that [the agency] might have  adopted."  Chemical Mfrs. Ass'n v. Natural Resources Defense Council, Inc., 470 U.S. 116, 125 (1985).

19
Contending that the statutory language boasts an ambiguity, the Secretary maintains that she has reasonably construed  paragraph (5)(A)(iv) as prescribing a specific methodology  that she must follow when setting outlier thresholds at the  beginning of each fiscal year.  Under the Secretary's interpretation, paragraph (5)(A)(iv) mandates that she must select  outlier thresholds which, when tested against historical data,  will likely produce aggregate outlier payments totaling between five and six percent of projected or estimated DR Grelated payments.  Because, under the Secretary's construction, paragraph (5)(A)(iv) speaks only to how she is to calculate outlier thresholds for the forthcoming year, the Secretary  posits that she has no obligation to ensure that actual outlier

20
payments for the year total five percent of projected DR Grelated payments.

21
Advocating a results-oriented approach, however, the Hospitals argue, and the district court agreed, that the Secretary's interpretation contradicts the unambiguous meaning of  paragraph (5)(A)(iv).  The textual lodestar guiding their  plain-meaning critique is the single phrase "payments made."According to the Hospitals, by indicating in paragraph  (5)(A)(iv) that "the total amount of the additional payments  made ... may not be less than 5 percent" of total DRGrelated payments "estimated or projected to be made," 42  U.S.C. § 1395ww(d)(5)(A)(iv) (Supp. IV 1986) (emphasis added), Congress unmistakably meant that the total amount of  additional payments actually made during a fiscal year must  meet the five-percent target.  During years in which the  Secretary's chosen thresholds yield outlier payments that fall  short of the statutory mark, the Hospitals' interpretation  would require the Secretary to bridge the difference by  recalibrating outlier variables and making retroactive payments accordingly.

22
Standing alone, however, the phrase "payments made"  hardly conveys a single meaning, much less the one that the  Hospitals advance.  As it is employed in paragraph (5)(A)(iv),  "payments made" is "simply an adjectival phrase, not a  verbial phrase indicating the past tense, and hence allows  alternative temporal readings."  United States Dep't of the  Treasury v. FLRA, 960 F.2d 1068, 1072 (D.C. Cir. 1992).  It  is not unlike the phrase "recognized as reasonable," which the  Supreme Court, quoting favorably from our decision in Administrators of the Tulane Educational Fund v. Shalala, 987  F.2d 790 (D.C. Cir. 1993), held "does not tell us whether  Congress means to refer the Secretary to action already  taken or to give directions on actions about to be taken."Regions Hosp. v. Shalala, 522 U.S. 448, ___, 118 S. Ct. 909,  916 (1998) (quoting Tulane Educ. Fund, 987 F.2d at 796).Evincing the same syntactical equivalence, the phrase "payments made" in paragraph (5)(A)(iv), though certainly capable  of accommodating the Hospitals' interpretation, can just as  easily be read to reflect Congress's intent to "give directions on actions about to be taken."  Id. In other words, instead of  embodying a retrospective inquiry into the amount of outlier  payments that have been made, the phrase "payments made  under this subparagraph" might just as plausibly reflect a  prospective command to the Secretary about how to structure  outlier thresholds for payments to be made in advance of each  fiscal year.  Cf. Regions Hosp., 522 U.S. at ___, 118 S. Ct. at  916 ("[T]he phrase 'recognized as reasonable' might mean  costs the Secretary (1) has recognized as reasonable ..., or  (2) will recognize as reasonable....").  Ultimately, whether  the phrase is "recognized as reasonable," "adversely affected," or "payments made," it is difficult to divine with much  confidence the pellucid intent of Congress because "[t]he  language, in short, is ambiguous."  United States Dep't of the  Treasury, 960 F.2d at 1072 (describing as ambiguous the  phrase "adversely affected");  accord Tulane Educ. Fund, 987  F.2d at 796.

23
Hoping to stave off judicial review under Chevron's deferential second step, the Hospitals attempt to resuscitate their  plain-meaning interpretation by contrasting the two ways in  which Congress modified the word "made" in paragraph  (5)(A)(iv).  When it first appears, "made" is used without  modifiers to describe the "total amount of the additional  payments made under this subparagraph";  later, the word  materializes to indicate that the total amount of outlier payments just described may not be less than five percent "of the  total payments projected or estimated to be made" for DRGrelated payments.  42 U.S.C. § 1395ww(d)(5)(A)(iv).  Because, the Hospitals reason, Congress employed words of  estimation and projection to modify the total amount of DRGrelated payments "to be made" but neglected to do so when  describing the total amount of outlier payments "made," it  must have intended that total outlier payments actually made  during a fiscal year would equal at least five percent of  estimated or projected DRG-related payments.2

24
Whatever logic this internal construction of paragraph  (5)(A)(iv) enjoys, to prevent statutory interpretation from  degenerating into an exercise in solipsism, "we must not be  guided by a single sentence or member of a sentence, but  look to the provisions of the whole law."  United States Nat'l  Bank v. Independent Ins. Agents of Am., Inc., 508 U.S. 439,  455 (1993) (quoting United States v. Heirs of Boisdore, 49  U.S. (8 How.) 113, 122 (1849)).  Under Chevron step one, "we  consider not only the language of the particular statutory  provision under scrutiny, but also the structure and context of  the statutory scheme of which it is a part."  Illinois Pub.  Tele. Ass'n v. FCC, 117 F.3d 555, 568 (D.C. Cir. ), modified,  123 F.3d 693 (1997), cert. denied, ___ U.S. ___, 118 S. Ct. 1361 (1998);  accord Conroy v. Aniskoff, 507 U.S. 511, 515  (1993) ("[T]he meaning of statutory language, plain or not,  depends on context.");  Davis v. Michigan Dep't of Treasury,  489 U.S. 803, 809 (1989) ("[W]ords of a statute must be read  in their context and with a view to their place in the overall  statutory scheme.").  By examining paragraph (5)(A)(iv) in its  immediate statutory context, any putative clarity that that provision might arguably have quickly recedes to ambiguity  once again.

25
Preceding paragraph (5)(A)(iv) by two paragraphs,  § 1395ww(d)(3)(B) provided during the time relevant to this  litigation:

26
The Secretary shall reduce each of the average standard-ized amounts under subparagraph (A) ... by a proportion equal to the proportion (estimated by the Secretary)of the amount of payments under this subsection based on DRG prospective payment amounts which are additional payments described in paragraph (5)(A) (relating to outlier payments)....

27
42 U.S.C. § 1395ww(d)(3)(B) (Supp. IV 1986) (emphasis added).  Not only does this provision expressly indicate that total  outlier payments are to be estimated by the Secretary, but it  also employs language that closely parallels the language that  later appears in paragraph (5)(A)(iv).  In our endeavor to  determine whether the "total amount of the additional payments made under this subparagraph" contemplates outlier  payments actually made or those estimated to be made, we  find it significant that in paragraph (3)(B) Congress provided  that the "amount of payments ... which are additional payments described in paragraph (5)(A)" are to be "estimated by  the Secretary."  § 1395ww(d)(3)(B).  Given that in paragraph  (3)(B) it had already indicated that the Secretary would  estimate the amount of outlier payments described in subparagraph (5)(A), Congress could have reasonably concluded that  there was no need to provide expressly in paragraph  (5)(A)(iv) that the phrase "payments made" referred to payments estimated to be made.  Thus, whatever can be said for  Congress's disparate modification of the word "made" in  paragraph (5)(A)(iv), when we open the analytic aperture to  examine that clause in its proper statutory context, the  inherently ambiguous phrase "payments made" becomes no  clearer.

28
Nor does a passing observation in the Conference Report  that "the Secretary would be required to provide additional  payments for outlier cases amounting to not less than 5  percent, and not more than 6 percent, of total projected or  estimated DRG related payments," compel us to adopt the Hospitals' construction of the statute under Chevron step one. H.R. Conf. Rep. No. 98-47, at 189 (1983), reprinted in 1983  U.S.C.C.A.N. 404, 479 (emphasis added).  Ambiguous in its  own right, this passage, if given the gloss that the Hospitals  advance, would chafe against the commentary in the Senate  Report.  Suggesting that paragraph (5)(A)(iv) reflects the  prospective inquiry that the Secretary advocates, the Senate  Report provides that the "[t]otal expected payments resulting  from this policy will be not less than 5 percent, nor more than  6 percent, of total medicare payments to hospitals."  S. Rep.  No. 98-23, at 51, reprinted in 1983 U.S.C.C.A.N. 143, 191  (emphasis added).  The only conclusion that we can safely  draw from these seemingly contradictory passages is that  "the little legislative history that exists for [paragraph  (5)(A)(iv)] is as ambiguous as the statute itself."  Deaf Smith  County Grain Processors, Inc. v. Glickman, 162 F.3d 1206,  1212 (D.C. Cir. 1998).

29
Ultimately, neither the text, structure, nor legislative history of paragraph (5)(A)(iv) illuminates Congress's unambiguous intent.  Although the Hospitals' interpretation, and the  one that the district court adopted, is plausible, it is not the  "only possible interpretation," Sullivan v. Everhart, 494 U.S.  83, 89 (1990), and it certainly is not "an inevitable one."Regions Hosp., 522 U.S. at ____, 118 S. Ct. at 917.  Because  we find the statute ambiguous, we proceed to assess whether  the Secretary's interpretation of paragraph (5)(A)(iv) is "reasonable and consistent with the statutory scheme and legislative history."  Cleveland v. United States Nuclear Regulatory  Comm'n, 68 F.3d 1361, 1367 (D.C. Cir. 1995).

30
In marking off the metes and bounds of our review under  the second step of Chevron, we accord particular deference to  the Secretary's interpretation of paragraph (5)(A)(iv) "given  the tremendous complexity of the Medicare statute."  Appalachian Reg'l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1054  (D.C. Cir. 1997);  accord Methodist Hosp. v. Shalala, 38 F.3d  1225, 1229 (D.C. Cir. 1994).  The Hospitals, however, urge us  not to defer in any way to the Secretary's interpretation of  paragraph (5)(A)(iv) because, they contend, that provision  does not delegate interpretative authority to the Secretary but explicitly limits her discretion.  The problem with this  argument, of course, is that it assumes the truth of the  proposition that we just rejected.  Were paragraph (5)(A)(iv)  truly "an explicit limitation on the Secretary's discretion," Br.  of Hosps. at 40, there would be no need to analyze the  provision under Chevron step two.  While paragraph  (5)(A)(iv) is certainly designed to regulate the Secretary's  discretion to some extent, as we have already concluded, the  precise contours of that provision are hardly explicit but are  instead ambiguous.  Nor is it problematic, as the Hospitals  suggest, that Congress did not expressly delegate interpretative authority to the Secretary in paragraph (5)(A)(iv).  Deference to agency interpretation is warranted "when Congress  has left a gap for the agency to fill pursuant to an express or  implied delegation of authority to the agency."  Chevron, 467  U.S. at 843-44 (internal quotations omitted).  Where, as here,  Congress enacts an ambiguous provision within a statute  entrusted to the agency's expertise, it has "implicitly delegated to the agency the power to fill those gaps."  National Fuel  Gas Supply Corp. v. FERC, 811 F.2d 1563, 1569 (D.C. Cir.  1987);  see also Chevron, 467 U.S. at 843-44.

31
Equally untenable is the Hospitals' argument that the  Secretary's interpretation is not entitled to deference because  she did not adopt it through either formal rule making or  adjudication.  But as our precedents make clear, "an agency  need not promulgate a legislative rule setting forth its interpretation of a statutory term for that term to be entitled to  deference."  Association of Bituminous Contractors, Inc. v.  Apfel, 156 F.3d 1246, 1251-52 (D.C. Cir. 1998).  In fact,  "[e]ven if the legal briefs contained the first expression of the  agency's views, under the appropriate circumstances we  would still accord them deference so long as they represented  the agency's 'fair and considered judgment on the matter.' "United Seniors Ass'n v. Shalala, 182 F.3d 965, 971 (D.C. Cir.  1999) (quoting Auer v. Robbins, 519 U.S. 452, ____, 117 S. Ct.  905, 912 (1997));  see National Wildlife Fed'n v. Browner, 127  F.3d 1126, 1129 (D.C. Cir. 1997) ("The mere fact that an  agency offers its interpretation in the course of litigation does not automatically preclude deference to the agency.");  Tax  Analysts v. IRS, 117 F.3d 607, 613 (D.C. Cir. 1997).

32
There is no reason to suspect that the Secretary's interpretation of paragraph (5)(A)(iv) embodies anything other than  her fair and considered opinion.  In a final rule published on  January 3, 1984, the Secretary articulated the same interpretation of paragraph (5)(A)(iv) that she has pressed before  both us and the district court.  See 49 Fed. Reg. 234, 265  (1984).  With that rule, she not only observed that under her  interpretation "there is no necessary connection between the  amount of estimated outlier payments and the actual payments made to hospitals for cases that actually meet the  outlier criteria," id., but she also admonished Medicare providers that, in the event she overestimated the amount of  outlier payments, she would "not adjust the DRG rates to  compensate hospitals for funds that were not actually paid for  outlier cases."  Id. at 266.  Even if, as the Hospitals complain, the final rule failed to provide a "cogent explanation" of  the policies undergirding the Secretary's interpretation, the  fact remains that for the past fifteen years, the Secretary has never wavered from that interpretation.  We are confident  that the interpretation of paragraph (5)(A)(iv) under review  embodies the Secretary's "fair and considered judgment on  the matter."  Auer, 519 U.S. at ____, 117 S. Ct. at 912.  It,  accordingly, demands deference from the judiciary.

33
Having settled on the scope of our review, we have no  difficulty concluding that the Secretary has advanced a reasonable interpretation of paragraph (5)(A)(iv).  Congress established outlier payments because it recognized that "there  will be cases within each [DRG] that will be extraordinarily  costly to treat ... because of severity of illness or complicating conditions, and [will] not [be] adequately compensated for  under the DRG payment methodology."  S. Rep. No. 98-23, at  51 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 191.  But as  the term "outlier" suggests, these payments were not intended to subsidize hospitals simply for treatments, which in  absolute terms, were extraordinarily costly or lengthy.  Rather, Congress directed the Secretary to provide "additional  payments for cases which are extraordinarily costly to treat, relative to other cases within the DRG."  Id. (emphasis  added);  accord H.R. Rep. No. 98-25, at 134-35 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 353-54 ("Your Committee is  concerned that under the prospective payment system, there  will be cases within each [DRG] that will be extraordinarily  costly to treat, relative to other cases within that DRG....").Thus the House version would have required the Secretary to  tender outlier payments only when a patient's length of stay  exceeded by thirty days the average length of stay for cases  in that same DRG, see H.R. Rep. No. 98-25, at 135, reprinted  in 1983 U.S.C.C.A.N. at 354, while the Senate bill, which the  Conference Committee adopted, authorized outlier payments  for cases in which a patient's length of stay eclipsed the mean  length of stay for discharges within that same DRG by a fixed  number of days or standard deviations.  See 42 U.S.C.  § 1395ww(d)(5)(A)(i) (Supp. IV 1986);  S. Rep. No.  98-23, at  51, reprinted in 1983 U.S.C.C.A.N. at 191;  H.R. Conf. Rep.  No. 98-47, at 188 (1983), reprinted in 1983 U.S.C.C.A.N. 404,  478.

34
The Secretary's interpretation of paragraph (5)(A)(iv)  evinces far greater fidelity to Congress's conception of outlier  payments than does the view espoused by the Hospitals. Under the Secretary's reading of the statute, if it turns out  that actual outlier payments do not meet the five-percent  target at the end of the fiscal year, it is because the lengths of  stay for DRGs in that year proved to be shorter than the  historical averages reflected in the data on which the Secretary based her threshold calculations.  Whether it is because  hospitals became more efficient or a miracle drug was introduced during the year, the shorter lengths of stay mean that  there were fewer extraordinarily costly cases during the year. In other words, there were fewer outliers--and therefore,  fewer outlier payments needed to be made.

35
Under the Hospitals' interpretation, however, regardless of  actual costs or inpatient lengths of stay during a fiscal year,  Medicare providers are guaranteed a substantial and fixed  sum of outlier payments.  As they read the statute, even  during a fiscal year in which the length of stay for every  inpatient discharge in every DRG in every hospital equaled or exceeded by just a day the mean length of stay for each  respective DRG, the Secretary would nonetheless have to  reward hospitals with additional "outlier" payments totaling  five percent of the entire DRG budget.  One need not be well  versed in the discipline of statistics to recognize that such  insignificant deviations from the mean do not constitute outliers.  To sanction the Hospitals' interpretation of paragraph  (5)(A)(iv) would not only require us to assume that Congress  did not appreciate the meaning of outlier--a term, it should  be noted, that appears throughout both the legislative history  and the text of the Medicare statute--but it would also  transform the character of the outlier-payment regime from a  system intended to insulate hospitals from aberrational and  extraordinary costs into nothing more than an entitlement  program for Medicare providers.  Such was hardly Congress's intent, for if anything, Congress indicated that it was  "equally concerned that adjustments may be required for  cases which have an unusually short length of stay or which  are significantly less costly than the DRG payment."  H.R.  Conf. Rep. No. 98-47, at 478, reprinted in 1983 U.S.C.C.A.N.  at 478 (emphasis added);  see also H.R. Rep. No. 98-25, at 135,  reprinted in 1983 U.S.C.C.A.N. at 354 ("The Secretary would  be required to study ... the appropriateness of, and necessity for, adjustments in payment rates for extremely short  lengths of stay within a DRG....").  Proposals like these  reflect a reluctance to reimburse Medicare providers at rates  grossly disproportionate to the cost of treatment.  We find it  unlikely that Congress nevertheless would have wanted hospitals to reap additional compensation over and above the  standard DRG payment where treatment costs for a particular discharge were not extraordinarily costly relative to the  mean costs for that DRG.

36
Moreover, compared to the Hospitals' interpretation of  paragraph (5)(A)(iv), the Secretary's reading better harmonizes each of the four clauses in paragraph (5)(A).  As did the  district court, the Hospitals struggle to reconcile their conception of the fourth clause with the language of the third,  which provides that the amount of each outlier payment "shall  approximate the marginal cost of care beyond the cutoff point applicable" for each DRG.  42 U.S.C. § 1395ww(d)(5)(A)(iii)  (Supp. IV 1986).  Under the Hospitals' construction of the  statute, outlier payments might bear little relationship to the  marginal cost of care.  At the end of each fiscal year, if actual  outlier payments fell short of the five-percent target, the  Secretary would be required retroactively to supplement  those payments to satisfy the difference.  Depending on how  great that initial disparity was, by the time that these curative outlays were made, the newly computed outlier payments  might not approximate anything close to the marginal cost of  care as paragraph (5)(A)(iii) mandates.  By contrast, outlier  payments under the Secretary's interpretation will always  approximate the marginal cost of care because when determining where to set outlier thresholds for DRGs at the  beginning of each fiscal year, she directly factors the marginal cost of care into her calculus.

37
Echoing the district court's holding, the Hospitals discount  paragraph (5)(A)(iii) as merely a "guideline" while contending  that paragraph (5)(A)(iv) operates "as a limitation on the  Secretary's discretion."  County of Los Angeles, 992 F. Supp.  at 32.  Based on this view, the Secretary is supposed to set  outlier thresholds at the beginning of each year "at marginal  cost and then, when actual outlier data is known, adjust[ ] the  final payments to ensure that the Secretary has met her  statutory obligation to the providers."  Id. at 31.  Why this  parsing of the statutory language is more reasonable than  that of the Secretary's--much less compelled as an unambiguously plain reading of the provision, as the Hospitals have  urged--is not at all clear.  After all, paragraph (5)(A)(iii)  employs mandatory language of the sort not normally used if  all that Congress intended to do was to offer a discretionary  guideline for the Secretary to follow.  See  § 1395ww(d)(5)(A)(iii) ("The amount of such additional payment under clauses (i) and (ii) shall be determined by the  Secretary and shall approximate the marginal cost of  care....") (emphasis added).  Nevertheless, even were the  Hospitals' synthesis of the third clause into the remainder of  paragraph (5)(A) plausible, it would not be enough to impugn  the otherwise reasonable interpretation that the Secretary has advanced since "we need not find that it is the only  permissible construction that [the Secretary] might have  adopted but only that [her] understanding of this very 'complex statute' is a sufficiently rational one to preclude a court  from substituting its judgment for that of [the Secretary]."Young v. Community Nutrition Inst., 476 U.S. 974, 981  (1986) (internal quotation omitted).

38
Moreover, the Secretary's interpretation avoids the substantial administrative burden attendant with the Hospitals'  vision of paragraph (5)(A)(iv).  It strains credulity to assume  that Congress would have directed the Secretary to establish  outlier thresholds in advance of each fiscal year, see  § 1395ww(d)(3)(B), (d)(6), and process millions of bills based  on those figures, only to have her at the end of the year  recalibrate those calculations, reevaluate anew each of the  millions of inpatient discharges under the revised figures, and  disburse a second round of payments.  As we have held in an  analogous context, "[u]nder these circumstances, retroactive  corrections would cause a significant, if not debilitating, disruption to the Secretary's administration of the already complex Medicare program."  Methodist Hosp., 38 F.3d at  1233.  Nor is this administrative process rendered less awkward and unwieldy if, as the Hospitals suggest, the Secretary  actively monitors outlier payments and adjusts the thresholds  as the fiscal year unfolds.  Apart from the tremendous resources that would be required to maintain such a vigilant  watch over a program as expansive as Medicare, intermittently modifying outlier thresholds at various times during the  year would mean that different hospitals would likely receive  different outlier reimbursements for the same treatments  based on nothing more than the fortuity of when they treated  a patient.

39
By the same token, this uncertainty and fluidity in outlier payment amounts under the Hospitals' interpretation lead us  to the final virtue of the Secretary's construction.  One of the  touchstones of the Prospective Payment System, as its name  suggests, is prospectively determined reimbursement rates  that remain constant during the fiscal year.  In setting, prior  to each fiscal year, fixed outlier thresholds and per-diem reimbursement rates that are not later subject to retroactive  correction, the Secretary promotes certainty and predictability of payment for not only hospitals but the federal government--concerns that played a prominent role in Congress's  decision to adopt PPS.  See H.R. Rep. No.  98-25, at 132,  reprinted in 1983 U.S.C.C.A.N. at 351 ("The bill is intended  to improve the medicare program's ability to act as a prudent  purchaser of services, and to provide predictibility [sic] regarding payment amounts for both the Government and  hospitals.").  To be sure, we have previously speculated that  "the real linchpin of the [PPS] system may not be that the  exact reimbursement figure is known in advance, but rather  may be that the hospital knows that nothing it does in  providing services will lead to a higher reimbursement level."Georgetown Univ. Hosp. v. Bowen, 862 F.2d 323, 330 (D.C.  Cir. 1988) (Georgetown II).  Yet while we, therefore, have  recognized that retroactive corrections may not ultimately  undermine PPS, we have emphasized that that "does not  establish that a prospective-only policy is unreasonable."Methodist Hosp., 38 F.3d at 1232.

40
In Methodist Hospital, we found the Secretary's decision  not to recalculate retroactively the DRG wage index to be  reasonable, in part, because the Secretary's prospective policy  advanced the principles of PPS.3  With language applicable to  the present case, we held:While retroactive adjustments might leave the "linchpin"of PPS intact, that does not mean that a prospective-only policy would not further, to some degree, the overall goals of PPS....  [H]ospitals, like other businesses, do make projections about future costs and service levels based on their experience and historical patterns.  To the extent that the Secretary's prospectivity policy permits hospitals to rely with certainty on one additional element in the PPS calculation rate ... the Secretary could reasonably conclude that it will promote efficient and realistic cost-saving targets.

41
Id.  The same, quite reasonably, can be said of the Secretary's interpretation of paragraph (5)(A)(iv).  Under her construction of the statute, at the outset of each fiscal year,  hospitals know the point beyond which a patient's length of  stay will trigger outlier payments and the corresponding rate  at which they will be reimbursed for each day beyond the  threshold.  A less determinate policy would not only deprive  hospitals of the ability to make accurate projections about  outlier payments for the forthcoming year but also threaten  them at the end of each year with the prospect of actually  having to forfeit a portion of those payments to the Secretary; for as the Hospitals concede, under their interpretation,  Medicare providers collectively would be bound to repay any  portion of outlier payments that exceeded six percent of  estimated DRG-related payments.  See Br. of Hosps. at 3132.  We conclude that the Secretary has advanced a reasonable interpretation of an ambiguous statutory provision, and,  therefore, reverse the judgment of the district court with  respect to the Secretary's appeal.

C. The Hospitals' Cross-Appeal

42
Because outlier thresholds are measured by their distance  from the mean length of stay, accurately forecasting outlier payments depends, in large part, on how closely the mean  length of stay reflected in the Secretary's historical data  reflects the actual average length of stay for that particular  DRG.  When setting outlier thresholds for fiscal years 19851986, the Secretary relied on the 1981 MEDPAR file, a  database containing patient-specific data for a random sample  of 20 percent of all Medicare-hospital discharges during 1981.Compiled during an era when Medicare still reimbursed  hospitals under the reasonable-cost system, the 1981 MEDPAR file could not have predicted how, under PPS, the  average length of stay for virtually all DRGs would eventually  decline dramatically.  The Hospitals observe, however, that  by July 27, 1984, the Secretary had already collected data  from 2.5 million discharges under PPS that indicated that the  average length of stay for all DRGs had declined from 9.5  days to 7.5 days under the new payment methodology. Pursuant to section 10(e) of the APA, 5 U.S.C. § 706(2)(A), the  Hospitals claim that the Secretary acted arbitrarily and capriciously when she calculated outlier thresholds for 1985-1986  based on the 1981 MEDPAR file instead of the preliminary  1984 data and failed to explain adequately her decision. Rejecting the Hospitals' claim, the district court agreed with  the Secretary that her decision to use the 1981 MEDPAR file  over the more contemporaneous but preliminary 1984 data  "was a rational choice between two imperfect databases."County of Los Angeles, 992 F. Supp. at 36.

43
Under the APA, we may set aside agency action found to  be "arbitrary, capricious, an abuse of discretion, or otherwise  not in accordance with law."  5 U.S.C. § 706(2)(A).  Foreclosed from substituting our judgment for that of the agency, we  do not set aside agency action lightly.  See Motor Vehicles  Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,  43 (1983);  Petroleum Communications, Inc. v. FCC, 22 F.3d  1164, 1172 (D.C. Cir. 1994).  Nevertheless, we intervene to  ensure that the agency has "examine[d] the relevant data and  articulate[d] a satisfactory explanation for its action."  State  Farm, 463 U.S. at 43.  "Where the agency has failed to  provide a reasoned explanation, or where the record belies  the agency's conclusion, we must undo its action."  BellSouth Corp. v. FCC, 162 F.3d 1215, 1222 (D.C. Cir. 1999) (citation  and quotation omitted).

44
The only contemporaneous explanation that the Secretary  offered for using the 1981 MEDPAR file consisted of two  sentences in the Federal Register:  "Based upon outlier and  DRG payment data received through July 27, 1984, there is  no evidence to suggest that total outlier payments are below  the levels intended.  Therefore, as discussed above, we are  continuing to set the outlier thresholds on the basis of the  1981 MEDPAR data."  49 Fed. Reg. 34,728, 34,769 (1984)  (emphasis added).  We agree with the Ninth Circuit, which  recently considered this same issue, that the Secretary's  "explanation that there was no evidence of an outlier shortfall  was simply not supported by the record before her and did  not explain her failure to use the more recent data."  Alvarado Community Hosp. v. Shalala, 155 F.3d 1115, 1122 (9th  Cir. 1998).  Data that the Secretary possessed as late as July  27, 1984, indicated that the average length of stay for practically all DRGs had declined considerably under the nascent  PPS program.  More concretely, at that point during the  fiscal year, outliers constituted only 1.9 percent of total PPS  discharges instead of 5.0 percent as predicted.  And while  these conclusions were drawn from preliminary data, that  data reflected 2.5 million patient discharges under PPS;  the  1981 MEDPAR file, by contrast, contained 1.6 million discharge records.  Failure to account for this trend is all the  more perplexing insofar as the Secretary herself had anticipated that the average length of stay for DRGs would decline  under PPS.  In 1984 she observed that "[t]he most commonly  accepted expectation about the PPS at the time of its inception was that it would result in shorter stays for Medicare  patients....  [R]educed length of stay was to be one of the  major vehicles through which hospital costs were to be controlled under the PPS."  Office of Research & Demonstrations, Health Care Fin. Admin., U.S. Dep't of Health &  Human Servs., Pub. No. 03231, Report to Congress:  Impact of  the Medicare Hospital Prospective Payment System 6-13  (1984).  At bottom, for the Secretary to say that she had "no  evidence to suggest that total outlier payments [were] below the levels intended," 49 Fed. Reg. at 34,769, runs "counter to  the evidence before the agency" and "is so implausible that it  could not be ascribed to a difference in view or the product of  agency expertise."  State Farm, 463 U.S. at 43.

45
In her brief, the Secretary now contends that what she  meant by "no evidence" was "no reliable evidence."  To  bolster this specific claim and her broader argument that the  1984 data were too suspect and incomplete to make accurate  outlier projections, the Secretary appended to her summary  judgment motion in the district court an affidavit from Rose  Connerton, an official with the Health Care Financing Administration ("HCFA") who helped develop the outlier thresholds  for 1985-1986.  Essentially, the Connerton affidavit claims  that the 1984 data were not complete and did not represent a  random sample of cases, that because they were based on a  partial year they would not reflect seasonal and regional  variances, and that any analysis drawn from them would be skewed.4  See J.A. 90 (Aff. of Connerton pp 10, 12, 15).  The  Hospitals contend that the Connerton affidavit, having surfaced for the first time during litigation, is an impermissible  post-hoc rationalization that the district court should have  stricken.  See SEC v. Chenery Corp., 318 U.S. 80, 87-88 (1943);  Reeve Aleutian Airways, Inc. v. United States, 889  F.2d 1139, 1144 (D.C. Cir. 1989).  Indeed, faced with a similar  affidavit from Connerton, the Ninth Circuit held that the  district court erred in considering it.  See Alvarado Community Hosp., 155 F.3d at 1124.  Ultimately, we need not reach  this question, for even were we inclined to accept everything  in the Connerton affidavit, we would still remand to the  Secretary for a more adequate justification for her database  selection.

46
"A long line of precedent has established that an agency  action is arbitrary when the agency offer[s] insufficient reasons for treating similar situations differently."  Transactive  Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir. 1996);  see  also State Farm, 463 U.S. 29, 57 (1983);  Airmark Corp. v.  FAA, 758 F.2d 685, 691-92 (D.C. Cir. 1985);  Local 777,  Democratic Union Org. Comm. v. NLRB, 603 F.2d 862, 872  (D.C. Cir. 1978).  Although maligning the 1984 data as too  unreliable to calculate outlier thresholds for fiscal years 19851986, the Secretary nonetheless used those same data on  August 31, 1984, to reduce across-the-board all 470 DRG  weighting factors by 1.05 percent.  See 49 Fed. Reg. 34,728,  34,770-71 (1984).  Such an adjustment was necessary, the  Secretary noted at the time, because "[t]he emerging experience under the prospective payment system"--an experience  gleaned from the preliminary 1984 data--revealed that the  different incentives that hospitals faced under PPS were  producing unexpected distortions.  See id.  In making this  correction, the Secretary expressly endorsed the reliability of  the 1984 data:  "To date, we have now analyzed 2.5 million  discharges under the prospective payment system, which fully  reflect the effect of those incentives, and we believe this  affords us a better measure of the effect of coding improvements in the average case mix."  Id. at 34,771.  Moreover, in  responding to a question about the legitimacy of the preliminary data during a 1984 congressional oversight hearing, the  HCFA Administrator responded that "[o]ur sample now is  based on approximately 50 percent of all of the claims or the  admissions that we had projected for this year.  We think  that's a fairly representative sample."  Adjustments in Medicare's Prospective Payment System:  Hearing Before the  Subcomm. on Health of the Comm. on Fin., 98th Cong. 62  (statement of Mr. Davis, Administrator, HCFA).  In sum, the  Secretary has inadequately explained why the 1984 data were  suitable for one significant calculation but unreliable for  another.  Her sole justification is that preliminary data may  be used to make across-the-board adjustments, as was done  to reduce all DRG weighting factors by 1.05 percent, but that  they may not be used for setting outlier thresholds because a  unique standard deviation must be calculated for each of the  470 DRGs. What renders this explanation inadequate is that  DRG weighting factors, like outlier thresholds, are ordinarily  determined on a DRG-by-DRG basis.  Indeed, the very purpose of a DRG weighting factor is to reflect the different  costs of treating minor and major illnesses;  to do so, each  DRG must be assigned its own unique weight based on the  cost and complexity of treatment peculiar to that DRG.  The  Secretary's proffered distinction is thus not reasonable.  She  may in her discretion, of course, rely on preliminary data to  make an across-the-board adjustment to variables that ordinarily are determined on a case-by-case basis.  But when she  does so, she must be prepared to explain why she cannot also  use that data to make a similar adjustment to variables that  are also typically calculated on an individual basis.  As broad  as her discretion is, it "is not a license to ... treat like cases  differently."  Airmark Corp., 758 F.2d at 691;  accord Teva  Pharms., USA, Inc. v. FDA, 182 F.3d 1003, 1010-11 (D.C.  Cir. 1999);  Transactive Corp., 91 F.3d at 237;  Local 777, 603  F.2d at 872.

47
This case must therefore be remanded to the Secretary to  allow her either to recalculate outlier thresholds for fiscal  years 1985-1986 or to offer a reasonable explanation for  refusing to use the 1984 data in setting outlier thresholds  during those years.  In reaching this conclusion, we necessarily part ways with the Ninth Circuit, which, in Alvarado  Community Hospital, chose not to remand to the Secretary,  but instead ordered her to adjust outlier thresholds for fiscal  year 1985 based on final 1984 data.  Alvarado Community  Hosp., 155 F.3d at 1125.  As the Supreme Court has instructed, however, where "the record before the agency does not  support the agency action, ... the proper course, except in  rare circumstances, is to remand to the agency for additional  investigation or explanation."  Florida Power & Light Co. v.  Lorion, 470 U.S. 729, 744 (1985);  see also Dunlop v. Bachowski, 421 U.S. 560, 574-75 (1975) ("Where the statement inadequately discloses his reasons, the Secretary may be afforded  opportunity to supplement his statement."), overruled on  other grounds by Furniture & Piano Moving v. Crowley, 467  U.S. 526, 549-50 n.22 (1984).  We find no reason to depart  from that course here.  While we have identified significant  inconsistencies and gaps in the Secretary's rationale for using  the 1981 MEDPAR file, bedrock principles of administrative  law preclude us from declaring definitively that her decision  was arbitrary and capricious without first affording her an  opportunity to articulate, if possible, a better explanation. See Bechtel v. FCC, 10 F.3d 875, 887 (D.C. Cir. 1993);Philadelphia Gas Works v. FERC, 989 F.2d 1246, 1251 (D.C.  Cir. 1993);  Sullivan Indus. v. NLRB, 957 F.2d 890, 905 n.12  (D.C. Cir. 1992);  Tex Tin Corp. v. EPA, 935 F.2d 1321, 1324  (D.C. Cir. 1991);  see also Checkosky v. SEC, 23 F.3d 452, 463  (D.C. Cir. 1994) (Silberman, J., concurring) (citing some of the  "many instances where we have remanded to an agency for a  better explanation before finally deciding that the agency's  action was arbitrary and capricious").  Because we fail to  perceive any "rare circumstances" that would warrant a  break with established administrative practice, we adhere to  the proper course of remanding this matter to the Secretary.

III. Conclusion

48
For the foregoing reasons, we reverse the judgment of the  district court with respect to the Secretary's appeal, and  remand with instructions to enter judgment in the Secretary's  favor.  As for the Hospitals' cross-appeal, we reverse the  judgment of the district court, and instruct it to remand the  case to the Secretary for further proceedings consistent with  this opinion.

49
So ordered.

Notes:

1
 Note that these percentages were derived from the actual total  DRG prospective payments in 1985 and 1986, not the projected  payments as set forth in the statute.  Both parties have agreed that  this is the only practical method of calculating shortfalls at this  point.  See Br. of Sec'y at 13 & n.4;  Br. of Hosps. at 4 & n.3.

2
 The Hospitals cite only to this court's decision in Washington  Hospital Center v. Bowen, 795 F.2d 139 (D.C. Cir. 1986), to buttress  their argument that the plain meaning of "made" can be inferred  from the different language that Congress used to modify that word  in paragraph (5)(A)(iv).  That decision misses the mark, however. In Washington Hospital Center, we presumed that when Congress  amended a pre-existing section of the Medicare statute by adding  and deleting certain words, it must have intended the amended  provision to have a different meaning from its predecessor provision.  Id. at 146.  More on point for the Hospitals, though they did  not cite it, would be the canon of construction that posits that  "where Congress includes particular language in one section of a  statute but omits it in another section of the same Act, it is  generally presumed that Congress acts intentionally and purposely  in the disparate inclusion or exclusion."  Russello v. United States,  464 U.S. 16, 23 (1983);  accord Independent Bankers Ass'n of Am. v.  Farm Credit Admin., 164 F.3d 661, 667 (D.C. Cir. 1999).  Of  course, "[c]anons of construction are, after all, only aids in the  process of statutory construction, nothing more, nothing less."Eagle-Picher Indus. v. United States EPA, 759 F.2d 922, 927 n.6  (D.C. Cir. 1985).  As we demonstrate, infra, this canon does not  resolve the ambiguity in paragraph (5)(A)(iv).

3
 The Hospitals cannot successfully distinguish Methodist Hospital.  Admittedly, unlike the DRG wage index at issue in Methodist  Hospital, outlier payments do not factor directly into every inpatient discharge.  But outlier payments do influence indirectly the  overall DRG payment rate that governs all discharges.  As already  discussed, pursuant to § 1395ww(d)(3)(B), the Secretary must reduce the standard DRG payment rate by a factor equal to the  outlier payments that she predicts she will have to disburse during  the forthcoming year.  Nor is it accurate to claim, as the Hospitals  do, that outlier payments are entirely divorced from PPS.  As an  initial matter, the provisions relating to outliers are contained in the  same subsection of § 1395ww as those establishing the PPS regime.See § 1395ww(d).  Moreover, Congress established outlier payments not as a distinct reimbursement methodology but as a  carefully crafted supplement to PPS.  For that reason, Georgetown  II, which concerned retroactive adjustments under the pre-PPS  "reasonable cost" system--clearly a payment methodology lacking  any relationship to PPS--is inapposite.

4
 Through the Connerton affidavit, the Secretary attempts to  dramatize the unreliability of the partial 1984 data.  As of April 27,  1984, reported outliers constituted only 1.9 percent of total PPS  discharges.  See J.A. 71.  By the end of fiscal year 1984, however,  actual outlier payments ended up totaling 5.3 percent of total PPS  payments, suggesting, Connerton avers, that the preliminary data  were in fact unreliable.  Although Connerton's calculations are  accurate, the conclusions that she draws from them are subject to  debate.  During a portion of fiscal year 1984, the Secretary erroneously provided hospitals with additional outlier payments for nonPPS-covered treatments, but never sought to recoup these surplus  amounts.  That outlier payments amounted to 5.3 percent that year  thus may say less about the reliability of the 1984 data and more  about the scope of the Secretary's clerical error.  Whatever the  reason, this dispute underscores the wisdom of Benjamin Disraeli's  sardonic quip (attributed to him by Mark Twain) about the three  great falsehoods:  "lies, damn lies, and statistics."