Court Opinion

ID: 3051537
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:36:16.030434+00
Date Added: 2024-06-11T11:49:26.025833
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

COUNTY OF LOS ANGELES,                 
                Plaintiff-Appellant,
                                            No. 06-55222
                 v.
MICHAEL O. LEAVITT, Secretary of             D.C. No.
                                           CV-04-04236-TJH
the United States Department of
                                              OPINION
Health and Human Services,
               Defendant-Appellee.
                                       
        Appeal from the United States District Court
            for the Central District of California
       Terry J. Hatter, Chief District Judge, Presiding

                Argued and Submitted
         November 6, 2007—Pasadena, California

                   Filed March 31, 2008

     Before: Betty B. Fletcher, Stephen Reinhardt, and
            Pamela Ann Rymer, Circuit Judges.

                Opinion by Judge Rymer;
                Dissent by Judge Reinhardt

                            3217
3220          COUNTY OF LOS ANGELES v. LEAVITT

                         COUNSEL

Tami S. Smason, Foley & Lardner LLP, Los Angeles, Cali-
fornia, for the plaintiff-appellant.

John S. Koppel, United States Department of Justice, Civil
Division, Washington, D.C., for the defendant-appellee.

                         OPINION

RYMER, Circuit Judge:

   This appeal, which involves Medicare reimbursement of
indirect medical education expenses (IME) incurred by a pub-
lic teaching hospital with an approved intern and resident pro-
gram, presents two questions: first, whether it was arbitrary
and capricious for the Secretary of Health and Human Ser-
vices to interpret the Medicare statute and regulations provid-
ing for IME payment on the basis of “available beds” as
presumptively meaning physical beds, when the hospital’s fis-
cal intermediary had previously accepted a calculation based
on budgeted beds; and second, whether the Secretary’s find-
ings in this case were supported by substantial evidence.

   Los Angeles County/University of Southern California
Medical Center (County/USC or Med Center) appeals the dis-
trict court’s judgment upholding a final determination by the
Provider Reimbursement Review Board (PRRB) that County/
USC’s intermediary, Blue Cross and Blue Shield Association
(Blue Cross), properly used a physical bed count in the for-
mula for calculating the hospital’s IME adjustment for fiscal
year ending (FYE) June 30, 1994. We conclude that the Sec-
                 COUNTY OF LOS ANGELES v. LEAVITT                     3221
retary had discretion to presume that “available beds” means
actual beds, rather than budgeted beds. We owe deference to
this interpretation. Applying it, we conclude that the PRRB
could find, based on the record, that County/USC failed to
carry its burden of proving that beds in excess of the budgeted
bed figure should be excluded from the physical count. Sub-
stantial evidence supports the PRRB’s decision because the
actual number of beds at County/USC that were physically
ready to be occupied was not in dispute, and there was evi-
dence that all beds at the hospital — whether budgeted or not
— were maintained and could be used at any time for patient
care. Accordingly, the Secretary’s determination was not arbi-
trary and capricious.

                                     I

   All hospitals with a provider agreement receive predeter-
mined payments for discharged patients under the “prospec-
tive payment system” (PPS).1 As a teaching hospital subject
to PPS, County/USC is entitled to an additional payment to
cover the added, indirect costs of medical education. 42
U.S.C. § 1395ww(d)(5)(B) (2006). The amount of the IME
adjustment is based on a hospital’s ratio of full-time equiva-
lent interns and residents to available beds.

   The calculation is complicated, but the bottom line is that
the higher the number of beds, the lower the eventual pay-
ment and vice versa. See Little Co. of Mary Hosp. & Health
Care Ctrs. v. Shalala, 165 F.3d 1162, 1164 (7th Cir. 1999).2
   1
     Congress established a “prospective payment system” for operating
costs of inpatient hospital services for reporting periods beginning on or
after October 1, 1983. 42 U.S.C. § 1395ww(d); 42 C.F.R. § 412.6 (2007).
Under the PPS, a hospital is paid a predetermined amount for each dis-
charged patient that is intended to cover the cost of all inpatient hospital
services furnished to that patient.
   2
     As Judge Posner explained:
    The government has found that the higher the ratio of [the num-
    ber of interns and residents] to the number of beds (and the fewer
3222             COUNTY OF LOS ANGELES v. LEAVITT
The Social Security Act caps this ratio at the ratio of interns
and residents to “available beds (as defined by the Secretary)”
during the hospital’s most recent cost reporting period. 42
U.S.C. § 1395ww(d)(5)(B)(vi).

   The implementing regulation provides, in pertinent part:

     For purposes of this section, the number of beds in
     a hospital is determined by counting the number of
     available bed days during the cost reporting period,
     not including beds or bassinets in the healthy new-
     born nursery, custodial care beds, or beds in distinct
     part hospital units, and dividing that number by the
     number of days in the cost reporting period.

42 C.F.R. 412.105(b) (1993).3

    the number of beds, holding number of interns and residents
    constant, the higher that ratio will be), the more teaching the hos-
    pital will be doing. For if the hospital has fewer beds, it probably
    has a smaller medical staff, and hence a higher ratio of interns
    and residents to fully trained doctors—the teachers. The higher
    that ratio, the more training the fully trained doctors must do.
    Suppose Hospital A has 300 beds, 75 interns and residents, and
    25 fully trained doctors, and Hospital B has 600 beds, 75 interns
    and residents, and 125 fully trained doctors (so that in both hospi-
    tals there is one doctor for every three beds). The fully trained
    doctors in Hospital A will have much heavier teaching loads than
    the fully trained doctors in B because the ratio of interns and resi-
    dents to fully trained doctors is so much higher in A (3:1) than
    in B (3:5).
Little Co. Of Mary Hosp., 165 F.3d at 1164.
   3
     In the course of making changes to the IME regulation that are not at
issue here, the Secretary stated in the preamble to the final rule for “Medi-
care Program: Changes to the Inpatient Hospital Prospective Payment Sys-
tem”:
    For purposes of the prospective payment system, “available
    beds” are generally defined as adult or pediatric beds (exclusive
    of newborn bassinets, beds in excluded units, and custodial beds
    that are clearly identifiable) maintained for lodging inpatients.
                COUNTY OF LOS ANGELES v. LEAVITT                     3223
  The Provider Reimbursement Manual (PRM) issued by the
Health Care Financing Administration (HCFA),4 which
administers the medicare program for the Secretary, defines
“available beds” for purposes of the IME adjustment:

     A bed is defined for this purpose as an adult or pedi-
     atric bed (exclusive of beds assigned to newborns
     which are not in intensive care areas, custodial beds,
     and beds in excluded units) maintained for lodging
     inpatients, including beds in intensive care units,
     coronary care units, neonatal intensive care units,
     and other special care inpatient hospital units. Beds
     in the following locations are excluded from the def-
     inition: hospital-based skilled nursing facilities or in
     any inpatient area(s) of the facility not certified as an
     acute care hospital, labor rooms, PPS excluded units
     such as psychiatric or rehabilitation units, post
     anaesthesia or postoperative recovery rooms, outpa-
     tient areas, emergency rooms, ancillary departments,
     nurses’ and other staff residences, and other such
     areas as are regularly maintained and utilized for
     only a portion of the stay of patients or for purposes
     other than inpatient lodging.

     To be considered an available bed, a bed must be
     permanently maintained for lodging inpatients. It
     must be available for use and housed in patient

    Beds used for purposes other than inpatient lodgings, beds certi-
    fied as long-term, and temporary beds are not counted. If some
    of the hospital’s wings or rooms on a floor are temporarily unoc-
    cupied, the beds in these areas are counted if they can be immedi-
    ately opened and occupied.
50 Fed.Reg. 35,646, 35,683 (September 3, 1985).
   4
     HCFA is now known as the Centers for Medicare and Medicaid Ser-
vices (CMS), but the parties and the PRRB continue to refer to the agency
as HCFA, as shall we.
3224             COUNTY OF LOS ANGELES v. LEAVITT
      rooms or wards (i.e., not in corridors or temporary
      beds). Thus, beds in a completely or partially closed
      wing of the facility are considered available only if
      the hospital put [sic] the beds into use when they are
      needed. The term “available beds” as used for the
      purpose of counting beds is not intended to capture
      the day-to-day fluctuations in patient rooms and
      wards being used. Rather, the count is intended to
      capture changes in the size of a facility as beds are
      added to or taken out of service.

HCFA Pub. 15-1 § 2405.3G (Rev. 345); PRM, § 2405.3G
(Adjustment for the Indirect Cost of Medical Education)
(August 1988).5

   Blue Cross also published an Administrative Bulletin
which pertains to the IME adjustment. It indicates how to
treat areas of a hospital that are temporarily or permanently
closed:

      In a situation where rooms or floors are temporarily
      unoccupied, the beds in these areas must be counted,
      provided the area in which the beds are contained is
      included in the hospital’s depreciable plant assets,
      and the beds can be adequately covered by either
      employed nurses or nurses from a nurse registry. In
      this situation, the beds are considered “available”
      and must be counted even though it may take 24-48
      hours to get nurses on duty from the registry.

Administrative Bulletin No.1841, 88.01 (November 18, 1988).

   Against this backdrop, a provider of covered care such as
  5
   The Supreme Court described another section of the PRM as a “proto-
typical example” of an interpretative rule “ ‘issued by an agency to advise
the public of the agency’s construction of the statutes and rules which it
administers.’ ” Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995).
              COUNTY OF LOS ANGELES v. LEAVITT            3225
County/USC submits a cost report to its fiscal intermediary
each year. An intermediary — in this case, Blue Cross — is
a private entity with whom the Secretary contracts to deter-
mine the amount of Medicare payments to be made to a pro-
vider based on the cost report. The report shows the costs
incurred during the fiscal year and what proportion is to be
allocated to Medicare. A provider that is dissatisfied with the
intermediary’s determination may request a hearing before the
PRRB. 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835.

   County/USC is one of six acute care hospitals owned and
operated by Los Angeles County. It is a major teaching hospi-
tal. The maximum amount of services available each year is
based on a budget approved by the Los Angeles County
Board of Supervisors. The number of “budgeted beds” for a
given fiscal year is an estimate of how far the budget will
stretch, or how many beds the hospital can afford to supply
with all the necessary services and goods for patient care.

   County/USC had used budgeted beds for calculating its
IME payment since 1986. For FYE June 30, 1994, however,
Blue Cross determined that the cost report understated the
number of beds physically available in the hospital’s inpatient
areas, and therefore increased the count. County/USC
appealed to the PRRB. Prior to the evidentiary hearing, the
parties stipulated that the number of beds physically located
in the hospital during the FYE June 30, 1994 was 1,320 and
that the number of budgeted beds was 1,197. Thus, 123 beds
are at issue.

  The PRRB concluded that Blue Cross properly used the
number of physical beds located within County/USC’s facility
as a measure of the available beds. It found that the number
of budgeted beds was not an absolute cap on bed utility
because on any given day the budgeted cap of 1,197 may have
3226             COUNTY OF LOS ANGELES v. LEAVITT
been exceeded. Finally, the Board found no evidence that
County/USC closed floors or areas of the hospital.6

   County/USC appealed to the Secretary, who declined
review. The PRRB’s decision thus became the final adminis-
trative action for purposes of federal jurisdiction. 42 U.S.C.
§ 1395oo(f) (1993). The Med Center sought review in the dis-
trict court, which granted summary judgment in favor of the
Secretary. This timely appeal followed.

                                    II

  Judicial review of a decision of the PRRB is pursuant to the
Administrative Procedures Act (APA). For this reason, we
may not set aside its findings or conclusions unless they are
“unsupported by substantial evidence,” 5 U.S.C. § 706(2)(E)
(1966), or are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” Id. § 706(2)(A);
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).

   Courts must defer to an administrative agency’s reasonable
construction of a statute unless Congress has spoken unam-
biguously. Chevron U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, 842-45 (1984). “[A]n agency violates the
APA if it has ‘relied on factors which Congress has not
intended it to consider, entirely failed to consider an important
aspect of the problem, offered an explanation for its decision
that runs counter to the evidence before the agency, or is so
implausible that it could not be ascribed to a difference in
view or the product of agency expertise.’ ” Ranchers Cattle-
men Action Legal Fund United Stockgrowers of America v. U.
S. Dept. of Agric., 499 F.3d 1108, 1115 (9th Cir. 2007) (quot-
ing Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto.
  6
   The PRRB also noted that County/USC was reimbursed for the capital
costs of all 1,320 physical beds and concluded that it would be inconsis-
tent for the provider to be reimbursed the capital costs of those beds but
for them not to be included in computing the IME adjustment.
                COUNTY OF LOS ANGELES v. LEAVITT                3227
Ins. Co., 463 U.S. 29, 43 (1983)). “Our task is not to decide
which among several competing interpretations best serves
the regulatory purpose.” Thomas Jefferson Univ., 512 U.S. at
512.

                                 III

   [1] County/USC’s principal argument is that it was arbi-
trary and capricious for the Secretary to move from using
budgeted beds to using physical beds without an explanation.
An agency is not precluded from changing its mind, Good
Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993), but
“an agency changing its course must supply a reasoned analy-
sis indicating that prior policies and standards are being delib-
erately changed, not casually ignored . . . .” Nw. Envtl. Def.
Ctr. v. Bonneville Power Admin., 477 F.3d 668, 687 (9th Cir.
2007) (citations omitted). This rule has no application here,
however, because it was Blue Cross that had approved
County/USC’s claims for IME reimbursement based on bud-
geted beds.7 County/USC points to no decision by the PRRB
or the Secretary that embraces a budgeted-bed approach, nor
does it suggest that the Secretary has taken inconsistent litiga-
tion or rule-making positions on this issue. While a fiscal
intermediary is the Secretary’s agent for purposes of review-
ing cost reports and making final determinations with respect
to the total reimbursement due to a provider absent an appeal
to the PRRB, see Kaiser v. Blue Cross of Cal., 347 F.3d 1107,
1117 (9th Cir. 2003), intermediary interpretations are not
binding on the Secretary, who alone makes policy. See Loma
Linda Univ. Med. Ctr. v. Leavitt, 492 F.3d 1065, 1074 (9th
Cir. 2007).

  Recognizing that the Secretary has never explicitly taken a
position that “available beds” may be measured by budgeted
  7
   A Blue Cross representative testified at the PRRB hearing that Blue
Cross had previously taken the budgeted bed number to be based on a
physical survey of the hospital.
3228             COUNTY OF LOS ANGELES v. LEAVITT
beds instead of physical beds, County/USC posits that he
implicitly acceded to use of budgeted beds by virtue of Blue
Cross’ Bulletin. It reasons that since the Secretary knew that
Blue Cross deemed beds to be “available” only when they
could adequately be covered by nurses, it must have been a
change in position to count the 123 beds at issue for FYE
1994 because nurses could not be hired over budget. No such
inference arises, however, because the Bulletin’s discussion
about staffing pertains only to beds that are in rooms or floors
that are temporarily unoccupied.

   [2] Consequently, prior Blue Cross approvals based on a
budgeted beds calculation did not make the Secretary’s deter-
mination that the intermediary properly used a physical bed
count for FYE 1994 arbitrary and capricious. Therefore, the
Secretary’s interpretation is entitled to no less deference on
this account.8

                                    IV

   County/USC alternatively argues that, even if it were not
arbitrary and capricious to change course, still it is arbitrary
and capricious for the Secretary to reject budgeted beds in
favor of a physical bed count. Med Center emphasizes that it
is a publicly-funded hospital and submits that physical beds
for which there is no budget for staffing, linen, dietary, phar-
maceutical, and other resources should not be part of the mea-
sure of a hospital’s routine inpatient operations for IME
reimbursement purposes because such beds do not affect the
teaching intensity. In addition, it contends that the Provider
Reimbursement Manual contemplates day-to-day fluctuations
  8
    In any event, as we have observed, “the consistency of the Secretary’s
position is one ‘factor’ in determining whether to accord deference . . . .
‘[W]here the agency’s interpretation of a statute is at least as plausible as
competing ones, there is little, if any, reason not to defer to its construc-
tion.’ ” Queen of Angels/Hollywood Presbyterian Med. Ctr., 65 F.3d 1472,
1481 (9th Cir. 1995) (quoting Good Samaritan, 508 U.S. at 417).
                 COUNTY OF LOS ANGELES v. LEAVITT                      3229
in usage, and that the legislative history and commentary to
different Medicare adjustments that also depend on “available
beds” — disproportionate share hospital (DSH) payments,
and payments for rural referral centers — further indicate that
beds must be staffed in order to qualify.9 The PRRB consid-
ered each of these arguments, but concluded that while bud-
geted beds may be an appropriate vehicle to establish staffing
levels and related ancillary and administrative activity, the
number of budgeted beds cannot identify which beds were or
were not available.

   [3] The parties’ disagreement boils down to whether the
IME calculation must be staff-driven or may be size-driven.
Said differently, the dispute turns on whether beds are a proxy
for the number of patients (as County/USC would have it), or
may stand-in for the number of physicians. The Secretary’s
judgment is that a facility’s size is what relates to teaching
load and that the best measure of this is the number of beds
maintained for patient use. His rationale is that hospitals gen-
erally do not maintain beds they are unable to use. See Little
Co. of Mary, 165 F.3d at 1164 (citing Medicare Program: Fis-
cal Year 1986 Changes to the Inpatient Hospital Prospective
Payment System, 51 Fed. Reg. 16772, 16775 (May 6, 1986)).
The Med Center counters that budgeted resources, particularly
for nursing support, are the appropriate measure for publicly-
funded hospitals, and that beds should be a proxy for the
patients served.
   9
     See 53 Fed.Reg. 38476, 38514 (stating for purposes of the rural referral
center adjustment that the agency “will count only licensed beds actually
available for use, that is, beds in place, staffed and available to receive
patients for inpatient lodging.”); S. Rep. No. 98-23 at 140, reprinted in
1983 U.S.C.C.A.N. 143, 359 (Mar. 11, 1983) (stating that the purpose of
the IME payment is to compensate hospitals for increased demands on
staff); 42 U.S.C. § 1395ww(d)(5)(F)(i)(II) (directing the Secretary to pro-
vide disproportionate share payments based on the number of “beds”); H.
Rep. No. 99-241, Part I (July 31, 1985), reprinted in 1985 U.S.C.C.A.N.
579, 596 (indicating that beds should be staffed and available for purposes
of calculating disproportionate share payments).
3230              COUNTY OF LOS ANGELES v. LEAVITT
   [4] No doubt the Secretary could have decided to measure
“available beds” by counting nurses or patients had he
thought this was sounder policy. However, if both his and
County/USC’s views are plausible, the Secretary’s will pre-
vail. Thomas Jefferson, 512 U.S. at 512. His view is reason-
ably grounded in the statutory scheme. All hospitals are
subject to the PPS, and all teaching hospitals are eligible for
the IME adjustment that Congress provides to hospitals with
a graduate medical education program to account for greater
costs per case. The assumption is that, across the universe of
teaching hospitals (public as well as private), additional tests
will be ordered to train residents and more nursing and medi-
cal teaching staff will be necessary to support the program.
Congress chose to gauge the extra cost of the teaching load
by reference to available beds rather than available staffing,
so we cannot say that the Secretary unreasonably pegged the
formula to an actual bed count rather than a budgeted bed
count that turns on staffing.10
  10
     Two other circuits (in addition to the Seventh Circuit’s analysis) have
concluded that beds are not to be counted as a proxy for patients, but as
a proxy for size and doctors. See Clark Reg’l Med. Ctr. v. U.S. Dept. of
Health and Human Servs., 314 F.3d 241, 248-49 (6th Cir. 2002) (consider-
ing the regulation that provides a supplemental payment to “disproportion-
ate share” hospitals based in part on bed size calculated in accordance with
the IME payment scheme, and noting that the “day-to-day, or perhaps
even hour-to-hour, change in the occupancy of these beds does not reflect
the overall size of the Plaintiff hospitals, which is what the bed count is
intended to capture.”); Altoona Hosp. v. Thompson, 131 Fed. Appx. 355,
359 (3rd Cir. 2005) (noting that “Congress contemplated that the agency
would count beds as a proxy not for the number of patients, as the Hospi-
tal suggests, but rather for the number of doctors at a given facility . . . .
Presumably, Congress chose to tie the amount of reimbursement to the
number of beds in a facility because a simple counting of the beds main-
tained for patient use would be less burdensome for the agency and, in all
likelihood, less susceptible to manipulation by the hospitals. Given this
understanding, it seems reasonable to do as the agency has done and
decline to engraft staffing concerns onto the definition of ‘available
beds.’ ”) (emphasis in original).
               COUNTY OF LOS ANGELES v. LEAVITT               3231
   [5] The Secretary’s approach is consistent with the purpose
of the IME adjustment, and with the Manual. Congress recog-
nized that increased patient care costs associated with gradu-
ate medical education programs include “the additional tests
and procedures ordered by residents as well as the extra
demands placed on other staff as they participate in the educa-
tion process,” H.R. Rep. No. 98-25, pt. 1, at 132 (1983),
reprinted in 1983 U.S.C.C.A.N. 219, 359, but left the task of
defining “available beds” in “the ratio of the number of
interns and residents . . . to the hospital’s available beds” to
the Secretary. The regulation promulgated by the Secretary
opted to count the number of available bed days (excluding
certain types of beds) and divide that number by 365 (for
most years). The PRM added the refinement that, to be con-
sidered “available,” a bed must be “permanently maintained
for lodging inpatients,” and that all such beds, i.e, all beds that
are physically present in the hospital and permanently main-
tained for use in treating patients at any time during the year,
are treated as presumptively available for the entire period for
purposes of calculating the IME payment. (Hospitals may
show that some of their beds are not in fact available and
should be excluded.) With the presumption that a bed avail-
able once is available always, the number of available bed
days is equal to 365 times the number of physical beds. Divid-
ing this product by the number of days in the accounting
period gets back to the number of physical beds. In this way,
the Manual links the count of available bed days specified in
the regulation and the physical count that the Secretary con-
doned in this case.

   County/USC relies on one statement in the PRM — “[t]he
term ‘available beds’ as used for the purpose of counting beds
is not intended to capture the day-to-day fluctuations in
patient rooms and wards” — to argue that it was irrational for
the Secretary to reject the use of budgeted beds on the basis
that the budgeted-bed cap could be exceeded on any given
day, because a single day’s fluctuation is not what the regula-
tion is intended to do. But the statement upon which it relies
3232           COUNTY OF LOS ANGELES v. LEAVITT
in isolation carries no such weight, for the Manual goes on to
explain that the count is intended “to capture changes in the
size of a facility as beds are added to or taken out of service.”
This squares with the Secretary’s interpretation.

   Nor are we persuaded that the Secretary’s reasoning is
undermined by references to staffing in the legislative history.
For one thing, Congress explicitly delegated a definition of
“available beds” to the Secretary which, presumably, it would
not have done had it intended the concept to turn on “avail-
able staffing.” Beyond this, the Secretary could sensibly con-
clude that staffing concerns are effectively accounted for
within the adjustment itself. That teaching hospitals incur
more indirect costs than non-teaching hospitals — including
for staff support — is the reason for additional reimbursement
by way of the IME payment; it is not conversely a require-
ment that the reimbursement be further increased when some
of these costs are not in the budget of a particular hospital.

   Finally, neither Congressional direction in establishing
DSH payments nor commentary to the rural referral regula-
tion casts doubt on the reasonableness of the Secretary’s deci-
sion to count physical beds for purposes of the IME payment.
Both the DSH regulation and the rural referral regulation
incorporate the IME definition of “available beds,” not the
other way around. See Clark Reg’l Med. Ctr., 314 F.3d at
246-47 (indicating that the definition of beds for purposes of
the IME adjustment in PRM § 2405.3(G) applies to the DSH
payment).

   [6] Given that the Secretary’s interpretation of “available
beds” for purposes of the IME payment is reasonable, the
remaining question is whether the PRRB’s application to
County/USC is arbitrary and capricious. The PRRB found
that County/USC’s budgeted beds calculus was a proxy for
services, not size; and that the budget did not establish a ceil-
ing on bed availability, but was instead a proxy for the aver-
age number of beds available on a daily census that does not
              COUNTY OF LOS ANGELES v. LEAVITT            3233
identify which beds were or were not available. County/USC
submits that, to the contrary, the budgeted beds figure is a
static figure representing the maximum amount of hospital
resources allocated to inpatient care. We conclude that sub-
stantial evidence supports the PRRB’s finding.

   [7] Med Center does not dispute that the 123 beds at issue
were used for patient care from time to time and could be so
used whenever needed. These beds were plugged in and ready
to go. They were not taken out of service, or located in an
area that was closed, temporarily or permanently. They were,
in short, “maintained for lodging inpatients.”

   [8] Testimony by county administrators indicates that the
budgeted-beds figure is used to monitor the hospital’s perfor-
mance against the budget during the year; it is “a proxy for
the nursing care and the dietary and linen contract that we’d
have to spend out money on,” or put otherwise, “the number
of inpatient days that we can provide.” There was testimony,
as well, that County/USC cannot provide care beyond its
budgeted-bed figure, that its emergency rooms are frequently
saturated, and that if the hospital operates over budget during
one time period it must reduce spending later. However, the
evidence shows that “budgeted beds” does not mean that beds
are not available for patient care on any given day. As one
administrator testified, the budgeted bed total has nothing to
do with the physical capacity (number of mattresses) at Med
Center that can be pressed into service when needed. This
being so, the PRRB was not compelled to find that the nature
of Med Center’s budget limitations or its status as a public
hospital excluded any physical beds from being available at
any time during the cost reporting period.

   [9] As neither the Secretary’s interpretation of “available
beds” nor his application to County/USC’s proffered exclu-
sion of beds in excess of those budgeted is arbitrary or capri-
cious, we affirm.
3234           COUNTY OF LOS ANGELES v. LEAVITT
  AFFIRMED.

REINHARDT, Circuit Judge, dissenting:

   I agree with the majority that the Secretary did not act arbi-
trarily and capriciously when he switched from using the
number of budgeted beds to using the number of physical
beds for calculating the Medicare IME adjustment. I also
agree that the Secretary’s interpretation of “available beds” as
presumptively meaning physical beds is entitled to deference
from this court and is reasonable as a general matter. How-
ever, because I believe that County/USC met its burden of
rebutting the presumption and showing that certain beds
should have been excluded from Med Center’s available bed
count in the fiscal year ending June 30, 1994 (“FY1994) —
namely the 123 beds that made up the difference between the
number of physical beds and the number of budgeted beds —
I would hold that the Provider Reimbursement Review
Board’s (“Board”) decision was arbitrary and capricious.

   As the majority explains, the relevant interpretive regula-
tion directs that “beds available at any time during the cost
reporting period are presumed to be available during the
entire cost reporting period.” PRM-1 § 2405.3; Maj. Op. at
3231. However the majority relegates to a parenthetical a cru-
cial caveat: hospitals may provide “evidence to the contrary”
in order to “exclude beds from the count.” Id. In other words,
hospitals have the opportunity to prove that certain beds
should not be considered available and thus should be
excluded from the count. At a hearing before the Board,
County/USC presented evidence that the 123 physical beds
that were not included in the budget should be excluded from
the IME calculation because those beds were not actually
available for patient use during the year. Disregarding the
substantial evidence presented by County/USC, the Board
concluded that all 1,320 physical beds should be considered
               COUNTY OF LOS ANGELES v. LEAVITT             3235
available beds and denied County/USC’s request to adjust the
figure. Thus, the issue in this case is not whether the Secre-
tary’s interpretation of the term “available beds” as presump-
tively meaning physical beds instead of budgeted beds is
arbitrary and capricious, but rather whether the Board’s ruling
that County/USC did not meet its burden of showing that the
physical beds that were not budgeted for were not actually
available and thus should be excluded from the count.

                                I

   At the hearing before the Board, County/USC presented
substantial evidence that in FY1994, Med Center did not actu-
ally use any of the extra physical beds that were not included
in the budgeted beds figure. According to the Chief Financial
Officer of Med Center, there was not a single day that the
hospital had the resources to staff all of the budgeted beds to
say nothing of the physical beds. He testified that the average
number of beds that were actually available in the relevant
year was 1,056, and that that number could vary on any given
day by 50. Therefore, on the busiest days of the year, Med
Center had only 1,106 beds available for patient care. If any-
thing, the 1,197 budgeted beds that County/USC seeks to use
as the available bed figure is too high, not too low. If the bud-
geted beds figure is too high, then the 1,320 physical bed fig-
ure that the Secretary proposes is certainly too high. With this
testimony alone, County/USC more than met its burden of
proving that the 1,197 budgeted beds was a more accurate
count of available beds in FY1994 than the 1,320 physical
beds.

   Even counsel for the Secretary admitted during the hearing
that in the relevant year “there’s a fair cushion between the
amount that the hospital calls budgeted beds and what its cen-
sus was.” He stated that the question of whether the hospital
could actually use the physical beds that were not included in
the budgeted bed count was “hypothetical” and “abstract”
3236          COUNTY OF LOS ANGELES v. LEAVITT
because actual data indicates that the hospital did not even use
all of the budgeted beds that year.

   The Board’s decision did not discuss or acknowledge the
strong testimony County/USC offered. Instead, it found that
“[t]he provider had 1,320 beds available, and on any given
day its budgeted cap of 1,197 may have been exceeded.” In
light of the CFO’s undisputed testimony and the admission of
the Secretary’s own lawyer that the budgeted cap was never
actually exceeded, it is apparent that the “ ‘explanation for
[the Board’s] decision runs counter to the evidence before the
agency.’ ” Ranchers Cattlemen Action Legal Fund United
Stockgrowers of America v. United States Dept. of Agric., 499
F.3d 1108, 1115 (9th Cir. 2007) (quoting Motor Vehicle Mfrs.
Ass’n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43
(1983)). On that basis, I would hold that the Board’s decision
was arbitrary and capricious under that APA.

                               II

   In addition to holding that County/USC met its burden of
showing that the budgeted beds figure more accurately
reflected the actual number of available beds at Med Center
in FY1994 than the physical beds figure, I would also hold
that County/USC offered sufficient proof that budgeted beds
is the appropriate figure to use to measure available beds at
Med Center as a general rule.

   The Board’s findings and decision to use the physical bed
count to calculate Med Center’s IME adjustment ran counter
to the evidence presented by County/USC at the hearing.
First, the Board found that County/USC stipulated that Med
Center had 1,320 beds “available for patient care” and that
this was “the strongest argument that this number is appropri-
ate for the IME calculation.” The Stipulation does not support
the Board’s finding. The Stipulation states: “For the fiscal
year ended June 30, 1994 . . . the Intermediary agrees to
revise the Provider’s indirect medical education (“IME”) pay-
               COUNTY OF LOS ANGELES v. LEAVITT              3237
ment amount using 1320 beds in the ratio of interns and
residents-to-beds.” (emphasis added). The reason that it was
the Intermediary (Blue Cross) that stipulated to this number
— instead of County/USC, as the board claims — is that Blue
Cross originally sought to use the full count of licensed beds
at Med Center, which was 2,045, but later agreed to lower that
number to 1320 after County/USC demonstrated that some of
those licensed beds could not be considered for the purposes
of the IME calculation. The stipulation binds Blue Cross to a
lower bed count number than it originally proposed. It does
not represent, as the Board suggests, a concession on the part
of County/USC that 1,320 is the appropriate number of beds
to use for the IME calculation. In fact, the Stipulation clarifies
that it “only partially settles the IME bed count issue that is
still pending at the PRRB” — that is, the discrepancy between
physical beds and actual beds that is now before us. Addition-
ally, there is nothing in the Stipulation that discusses whether
the beds were “available for patient care” and County/USC
certainly did not stipulate that they were, as the Board found.

   The majority does not discuss the Board’s finding on this
issue despite the fact that the Board considered it the “strong-
est argument” for using the number of physical beds instead
of the number of budgeted beds. Because the Board’s finding
clearly “runs counter to the evidence before [it],” I would
hold that it was arbitrary and capricious in violation of the
APA. See Ranchers Cattlemen Action Legal Fund United
Stockgrowers of America, 499 F.3d at 1115.

   Next, the Board found that the budgeted beds count was an
appropriate figure to use for planning staffing numbers and
other administrative purposes, but that it did not constitute “an
absolute cap on bed utility.” However, the evidence before the
Board proved that the budgeted beds figure did serve as a
limit to the number of beds available for use at Med Center.

  According to testimony presented by County/USC, the term
“budgeted beds” connotes how much “staff, materials and
3238           COUNTY OF LOS ANGELES v. LEAVITT
supplies, pharmaceuticals, support is available to provide care
and . . . sets a ceiling for the operational capacity of the orga-
nization.” Plainly stated, the budgeted beds figure “sets a cap
on the capability of the organization to deliver safe, appropri-
ate patient care.” Because the “budgeted beds” figure is “a
proxy for the nursing care and the dietary and linen con-
tracts,” the number of budgeted beds represents “the number
of inpatient days” Med Center can provide. In fact, County/
USC monitors the bed count “every single day” and any devi-
ations are immediately corrected.

   County/USC also presented testimony that, unlike a private
hospital in which the budget functions as a “floor” for plan-
ning purposes and can be expanded to accommodate
increased demand or emergencies, the budget for Med Center
“is really a ceiling.” Med Center’s budget is determined by
the Los Angeles County Board of Supervisors and cannot be
altered during the year. The section head of the Controller’s
Division responsible for the hospital’s budget team testified
that in his ten to fifteen years of experience, he did not recall
a hospital ever getting the number of budged beds adjusted
during the year.

   Ignoring the extensive testimony to the contrary, the major-
ity nevertheless argues that the physical beds that were not
budgeted were available because they were “plugged in and
ready to go.” Maj. Op. at 3233. This is not so. They’re not
even “fired up and ready to go.” Med Center’s CFO testified
that a bed is only available when “there’s a physical bed that
meets the needs of the patient and there is staff to operate
them.” A bed that does not have staff, linens, or food is no
more available for use by a patient than the painting on the
wall. If there is an empty bed, “plugged in” or not, but no
nurses to staff it, a “patient would have to wait in the Emer-
gency Room until such time as the bed became available to
transfer him or her.” Once the Emergency Room is saturated,
patients are turned away rather than put in the empty beds that
fall outside of the budgeted number. In other words, the phys-
              COUNTY OF LOS ANGELES v. LEAVITT             3239
ical beds are not necessarily available. Only those beds that
are budgeted for can reasonably be considered available.
Thus, the budget serves as a fixed cap on bed utility.

   Although one hospital official testified that from a budget-
ary perspective, it was “marginally” possible to provide inpa-
tient hospital care in more beds than the budget provides, such
a scenario would be almost impossible. If the hospital could
save money in another area, or if every patient who came to
the hospital required only a low cost service, or if there were
a sudden increase in paying patients, it might be possible to
“bump up” the number of beds by the end of the year to “op-
erate a few more.” There are so many fixed variables in the
“budgeted beds” figure, however, that “it would be very diffi-
cult to increase the number of beds that [Med Center] oper-
ate[s] on the basis of those changes.” Additionally, on any
given day the number of available beds could theoretically
exceed the number of budgeted beds, but that increase would
have to be balanced out by a proportional decrease later in the
year. As discussed above, this did not actually happen on any
day in FY 1994 — and the figure for budgeted beds has never
been altered in the ten to fifteen years that the head of the
responsible Controller’s Division has been at County/USC.

   The majority characterizes the parties’ disagreement as
being whether the IME calculation should be based on the
staffing level of the hospital or the size of the hospital. Maj.
Op. at 3229-30. According to the majority, the Secretary rea-
sonably chose to base the calculation on the size of the hospi-
tal, not, as County/USC advocated, on “a budgeted bed count
that turns on staffing.” Maj. Op at 3230. This analysis misses
the point. The budgeted bed count does not “turn[ ] on staff-
ing.” Maj. Op. at 3230. Just the reverse — the level of staffing
turns on the number of budgeted beds. Similarly, the number
of beds available for patient care (i.e. the size or capacity of
the hospital) is at most the number of budgeted beds.
3240             COUNTY OF LOS ANGELES v. LEAVITT
   This is not true of all hospitals. The staffing levels of pri-
vate hospitals are not limited by the number of budgeted beds.
When a private hospital experiences an unexpectedly busy
year, its revenues increase along with its patient census
because private hospitals treat many more paying and insured
patients. The hospital then uses those unanticipated revenues
to hire additional staff and provide the services necessary to
transform a physical bed into an available bed, thereby
increasing the capacity of the hospital. Thus, the number of
budgeted beds does not provide a limit on the staffing levels
or the number of available beds because both can be increased
during the year. The physical bed count is the only accurate
measure of a private hospital’s size. At Med Center, however,
the budget limits the staffing level and the size of the hospital
(the number of available beds). Consequently, at Med Center,
there is no meaningful distinction between the size or capacity
and the level of staffing because both are fixed by the same
figure — the number of budgeted beds. Distinguishing
between the size and the level of staffing or the number of
budgeted beds at Med Center was arbitrary and capricious.1

   Furthermore, the Board found that “there was no evidence
  1
    Indeed, this crucial distinction between the function of Med Center’s
budget and that of a private hospital also explains why Altoona Hosp. v.
Thompson, 131 Fed. Appx. 355 (3rd Cir. 2005), is not relevant to this
case. Altoona involved a private hospital that argued that some of its phys-
ical beds should not be included in the IME adjustment calculation
because they were not able to be staffed within 24-48 hours. Id. at 356.
However, the hospital admitted that it kept the beds because there was “a
potential for an increase in patient census” and it “hoped to gain market
share.” Id. Thus, staffing levels at Altoona Hospital did not determine the
size of the hospital. At Med Center, however, the size of the hospital and
the staffing level are coterminous. Clark Reg’l Med. Ctr. v. Dept. of
Health and Human Servs., 314 F.3d 241 (6th Cir. 2002), is also inapposite.
That case involved the question of whether beds that were used for two
purposes should be counted when the regulation excluded one of the pur-
poses from the calculation. Unlike the unbudgeted physical beds in this
case, the beds in question at Clark Regional Medical Center were “always
staffed and available for acute case inpatients.” Id. at 248.
               COUNTY OF LOS ANGELES v. LEAVITT             3241
that the Provider closed off various floors or areas of the hos-
pital.” The majority asserts the same. Maj. Op. at 3233. This
is true as a factual matter, but it should not have any effect on
the outcome of the case. The interpretive regulation refers to
closed wings as an example of one situation in which a bed
would not be considered “available for use and housed in
patient rooms or wards.” PRM, §2405.3G. The regulation
never directs that a bed will be considered available unless it
is kept in a closed wing. Although some hospitals may well
have to place unused beds in a closed ward in order to prove
that they are not available, Med Center presented substantial
evidence that the physical beds that were not included in the
budget were not available for patient care. Requiring the hos-
pital to move those beds to a closed ward would be unreason-
able as there are 123 physical beds that will necessarily
remain unused for the entire year, it is immaterial whether the
area in which they are placed is closed off physically. The
interpretive regulation does not mandate that the only way to
exclude physical beds from the count is to move them to a
closed ward and the Board’s determination that such a
requirement applied in all cases was arbitrary and capricious.

  The Board and the majority also argue that the budgeted
beds figure did not indicate which beds were available and
which beds were not. Again, I fail to see how identifying
which particular beds are available and which are not makes
any difference in determining the size of the hospital for the
purpose of the IME adjustment. Neither the majority nor the
Board provide an explanation.

   Finally, the Board found that because Med Center “was
reimbursed capital costs” for the 1,320 physical beds, “it
would be inconsistent” for Med Center “not to include those
beds in computing the Provider’s IME adjustment.” The
Board does not specify which capital costs would be reim-
bursed based on the number of physical beds, nor does the
Board explain how capital cost reimbursement relates to bed
availability.
3242           COUNTY OF LOS ANGELES v. LEAVITT
   The Chairman of the Board questioned the CFO about the
issue of capital costs. According to the CFO, the hospital files
its cost reports based on the number of budgeted beds not the
number of physical beds. Even the Chairman acknowledged
that “the building cost is the same whether there’s [sic] 1300
or 1500” beds. The only other capital cost that the Board
could possibly be referring to that was discussed at the hear-
ing was depreciation, but, as the CFO testified, “[d]epre-
ciation is not based on the number of beds that’s [sic] in use.”
There is no evidence in the record that the hospital was
receiving extra reimbursement money for capital costs
because it had a number of physical beds that were not avail-
able for use. The Board’s finding on this issue is not sup-
ported by the evidence.

   Even if the unavailable physical beds did qualify Med Cen-
ter for additional capital costs, this fact would be irrelevant to
the available bed count for the purpose of the IME adjust-
ment. There are many beds that are not included in the avail-
able bed figure that presumably the hospital is reimbursed for,
including the bassinets and psychiatric beds that the regula-
tions expressly exclude from the IME count. The purpose of
the IME adjustment is to reimburse hospitals for the costs
involved in treating patients while also teaching medical stu-
dents. The number of available beds is relevant because it
reflects the workload of actual doctors working with actual
patients. Whether or not a physical bed entitles the hospital to
receive additional reimbursement for capital costs is irrelevant
to that calculation. I would hold that the Board’s finding on
this issue was arbitrary and capricious because it was not sup-
ported by the evidence and it was irrelevant to the question
before it.

                          Conclusion

  Although the Secretary’s adopted presumption about the
appropriate figure to use in calculating “available beds” is
entitled to deference from this court, the Board is not permit-
              COUNTY OF LOS ANGELES v. LEAVITT           3243
ted to impose that presumption categorically without regard to
the evidence before it. Because I believe that County/USC
more than met its burden of proving that the physical beds at
Med Center that were not in the budget appropriation were
not available for the any portion of FY1994 and thus should
be excluded from the bed count used to determine the IME
adjustment, I would hold that the Board acted arbitrarily and
capriciously when it held the opposite. Therefore I respect-
fully dissent.