                         UNITED STATES DISTRICT COURT
                         FOR THE DISTRICT OF COLUMBIA

SELECT SPECIALTY HOSPITAL -                           )
BLOOMINGTON, INC., et at., and                        )
                                                      )
SELECT SPECIALTY HOSPITAL -                           )
AUGUSTA, INC., et at.,                                )
                                                      )   Civil Case No. 09-2008 (RJL),
              Plaintiffs,                             )
                                                      )   consolidated with
             v.                                       )
                                                      )   Civil Case No. 09-2362 (RJL)
KATHLEEN SEBELIUS, Secretary,                         )
U.S. Dep 't of Health and Human Services              )
                                                      )
              Defendant.                              )

                                           f'--:.
                              MEMORANDUM OPINION
                            September#, 2012 [Dkt. ##38, 39] 1

       Plaintiffs Select Specialty Hospital Bloomington, et al. and Select Specialty

Hospital Augusta, et al. (collectively, "plaintiffs"), brought this action pursuant to the

Administrative Procedure Act ("APA"), 5 U.S.C. § 706, against Health and Human

Services ("HHS") Secretary Kathleen Sebelius ("defendant" or the "Secretary"),

challenging the Provider Review and Reimbursement Board's (the "Board")

determination that plaintiffs were not "new hospital[s]" under 42 C.P.R.§ 4l2.300(b).

On March 31,2011, this Court denied plaintiffs' motion for summary judgment and

granted, in part, and denied, in part, defendant's cross-motion for summary judgment.


       1All docket references herein are to the docket in lead Civil Case No. 09-2008.
The respective docket numbers for the pending motions in Civil Case No. 09-2362 are
numbers 41 and 44.
The Court held that the Board's interpretation was reasonable and supported by

substantial evidence. Mem. Op. [Dkt. #24] at 12-23. However, finding insufficient facts

in the record to determine whether the Board intended to treat plaintiffs Select Specialty-

South Dallas, Inc. ("South Dallas") and Victoria Healthcare, Inc. ("Victoria")-the

freestanding hospitals-as "new hospitals," the Court remanded the issue to the Secretary

for further explanation. 2 Mem. Op. at 5 & n.6, 22; Order, May 10, 2011, [Dkt. #26] at 3.

In a decision issued October 11, 2011, the Secretary determined that the freestanding

hospitals were not, in fact, new hospitals under the regulation, Supplemental

Administrative Record ("SAR") [Dkt. #36-1] at 1448, and plaintiffs thereafter filed the

instant supplemental motion for summary judgment, challenging the Secretary's decision

under the AP A. Thus, before the Court are plaintiffs' Supplemental Motion for Summary

Judgment ("Pis.' Supp. Mot.") [Dkt. #38] and defendant's Cross-Motion for Summary

Judgment ("Def. 's Mot.") [Dkt. #39]. Upon review of the parties' renewed pleadings,

relevant law, and the entire record h{(rein, plaintiffs' motion is DENIED and defendant's

motion is GRANTED.

                                    BACKGROUND

       Under Medicare's statutory and regulatory scheme, "new hospital[s]'' are

reimbursed for capital-related costs at eighty-five percent of their "reasonable costs." 67

Fed. Reg. 49,982-01, 50,101 (Aug. 1 2002) (final rule); see also 42 U.S.C. § 1395x(v)


       2Plaintiffs appealed the Court's decision, but our Circuit Court dismissed the
appeal for lack of jurisdiction. See Select Specialty Hasp. -Augusta, Inc., et al. v.
Sebelius, No. 11-5129, Order (D.C. Cir. Sept. 16, 2011) (per curiam) [Dkt. #1330086] .

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("The reasonable cost of any services shall be the cost actually incurred, excluding

therefrom any part of incurred cost found to be unnecessary in the efficient delivery of

needed health services .... "); 42 C.F.R. § 413.130(a)-(h) (defining "capital-related

costs"). Under 42 C.F.R. § 412.300(b), a new hospital is a "hospital that has operated

(under previous or present ownership) for less than 2 years," and specifically excludes

              ( 1) a hospital that builds new or replacement facilities at the
              same or another location even. if coincidental with a change of
              ownership, a change in managem~nt, or a lease arrangement;
              (2) a hospital that closes and subsequently reopens; (3) a
              hospital that has been in operation for more than 2 years but
              has participated in the Medicare program for less than 2
              years; [or] (4) a hospital that changes its status from a
              hospital that is excluded from the prospective payment
              systems to a hospital that is subject to the capital prospective
              payment systems.

42 C.F.R. § 412.300(b)(l)-(4). The rule was designed to assist hospitals "without a

historic asset base," SAR at 1449 (quoting 57 Fed. Reg. 23,618, 23,649 (June 4, 1992)),

"cover the start-up costs associated with their entry into the Medicare program," Compl.

[Dkt. #1] '1!34 (citing 67 Fed. Reg. at 50,101).

       Plaintiffs South Dallas and Vjctoria are freestanding hospitals; that is, they are not

located in the same building as another hospital and therefore are not hospitals-within-

hospitals. Mem. Op. at 5 n.6; 42 C.F .R. § 412.22( e). South Dallas began operating in

August 2002 at a site that, from August 1994 to February 2000, was operated as a

medical facility. SAR at 1462. "[B]etween 2000 and 2002, there was no medical facility

or hospital at that site." !d. Victoria began operating in 2003 at a facility site that, from

October 1982 to September 1993, was used "as a going medical concern," but, between
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1993 and Victoria's establishment, the facility was "used for non-medical" purposes. !d.

The freestanding hospitals redesigned and reconstructed the facilities, and plaintiffs

sought reimbursement of these start-up expenses for South Dallas and Victoria as capital-

related costs for new hospitals. See Compl. ,-r,-r 43, 53-54, 57, 69-70. The Board

determined that plaintiffs' hospitals were not new hospitals, specifically noting that "[t]he

intent of the regulations is to prohibit the cost of reimbursement treatment under the

exemption for hospitals' facility costs that have been reimbursed in the pr[ e]ceding two

years." Mem. Op. at 22 (citation omitted). Because it was unclear whether the Board

intended to apply this temporal limitation, thereby treating the freestanding hospitals as

"new hospitals," the Court remanded to the Secretary for further explanation. !d.; Order,

May 11, 2011 [Dkt. #29]. On remand, the Secretary determined that these two

freestanding hospitals did not qualify as new hospitals, SAR at 1448, and plaintiffs are

now challenging that decision as arbitrary and capricious, see Pis.' Supp. Mot.

                               STANDARD OF REVIEW

       Under Federal Rule of Civil Procedure 56( a), summary judgment is appropriate

when the evidence in the record demonstrates that "there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ.

P. 56(a); see, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). When deciding a

motion for summary judgment in a case involving a review of final agency action, "the

Court's role is limited to reviewing the administrative record." Air Transport Ass 'n of

Am., Inc. v. Nat'! Mediation Bd., 719 F. Supp. 2d 26, 32 (D.D.C. 2010) (citations


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omitted). "[T]he function of the district court is to determine whether or not as a matter

of law the evidence in the administrative record permitted the agency to make the

decision it did." Stuttering Found. ofAm.     v. Springer, 498 F. Supp. 2d 203, 207 (D.D.C.
2007) (quoting Occidental Eng'g Co. v. INS, 753 F.2d 766,769-70 (9th Cir. 1985)); see

also Fed. R. Civ. P. 56(a).

       Under the AP A, final agency action may be found unlawful if it is "arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C.

§ 706(2)(A). Agency action is arbitrary only if it is "not rational and based on

consideration of the relevant factors." FCC v. Nat 'l Citizens Comm. for Broad., 436 U.S.

775, 803 ( 1978). Final agency action is also unlawful if it is "unsupported by substantial

evidence." 5 U.S.C. § 706(2)(E). But agency action is "unsupported by substantial

evidence" only when it lacks what "a reasonable mind might accept as adequate to

support a conclusion." Consolo v. Fed. Mar. Comm'n, 383 U.S. 607,619-20 (1966)

(internal citation and quotations omitted).

       Indeed, the Court's review of final action affords "substantial deference" to an

agency's interpretation of its own regulations. Abington Crest Nursing & Rehab. Ctr. v.

Leavitt, 541 F. Supp. 2d 99, 104 (D.D.C. 2008). Ultimately, this amounts to something

"more deferential ... than that afforded under Chevron[, U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984)]." Wyo. Outdoor Council v. U.S. Forest

Serv., 165 F.3d 43, 52 (D.C. Cir. 1999). As a result, the "agency's interpretation

[receives] 'controlling weight unless it is plainly erroneous or inconsistent with the


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regulation."' Abington, 541 F. Supp. 2d at 104-05 (quoting Thomas Jefferson Univ. v.

Shalala, 512 U.S. 504, 512 (1994)).

       Unfortunately for plaintiffs, in light of this deferential standard and the facts in the

record, this Court must DENY plaintiffs' Supplemental Motion for Summary Judgment,

and, for the following reasons, will GRANT defendant's Cross-Motion for Summary

Judgment.

                                        ANALYSIS

       This Court has already determined that the regulation is ambiguous, Mem. Op. at

13-15; thus, the Court's only role is to determine ifthe Secretary's interpretation was

reasonable. See Wyo. Outdoor Council, 165 F.3d at 52 ("So long as an agency's

interpretation of ambiguous regulatory language is reasonable, it should be given effect.")

(internal citation omitted).

       Relying on "the plain reading of the regulation," the Secretary found that the

freestanding hospitals did "not qualify as [] 'new hospital[ s] "' because (1) the

freestanding hospitals had "both occupied buildings which had previously operated as

hospitals for longer than two years"; (2) "the regulation d[id] not require that the two

years of operation under present and prior ownership ... occur immediately preceding

the start-up cost reporting period"; and (3) "requiring the 'two years' to occur

'immediately preceding' would conflict with the purpose of the new hospital exemption

and produce illogical results." SAR at 1448. The Secretary acknowledged that the

Board's previous use of the "phrase 'the pr[e]ceding two years' ... was an inadvertent


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error on part of the Board," which was "not intend[ed] to add any additional requirements

to the plain reading of the regulation at 42 C.F.R. § 412.300(b)." !d. at 1450 n.7.

Notably, the regulation does not even include the contested phrase. See 42 C.F.R.

§ 412.300(b).

       Plaintiffs contend that although the Secretary originally "concluded that the term

'hospital' includes both the physical facility and the operation of the facility," Pls.' Reply

in Supp. ofPls.' Supp. Mot. ("Pls.' Reply") [Dkt. #43] at 4 (quoting Def.'s Mem. ofP. &

A. in Supp. ofDef.'s Mot. ("Def.'s Mem.") [Dkt. #39] at 7), she now, for purposes of

deciding the freestanding hospital issue, "considers ... only the physical structure of the

building in which the hospital occupies," id. ·.According to plaintiffs, "[t]his [new]

application ofthe term 'hospital' is . : . unreaso'nable" because it "ignores the plain

meaning of the regulation" and the Secretary's original interpretation, Pls.' Reply at 2,

and leads to "illogical results," id. at 7; see also id. at 4-10. Unfortunately for plaintiffs, I

find no divergence between these interpretations. The Secretary's analysis in both

decisions reflects that a hospital, under the regulation, is comprised of both an operating

entity and a physical facility. See Mem. Op. at 16-17 & n.19; SAR at 1448. Specifically,

the Secretary's most recent decision required an "inquiry into whether either the

operating institution or the physical facility has previously operated for a period of two

years." Def.'s Reply to Pis.' Opp'n to Def.'s Mot. [Dkt. #46] at 5. The freestanding

hospitals' physical facilities had operated as hospitals for more than two years, SAR at

1448, and "[t]he fact that there was a time gap between the operation of the previous



                                               7
hospitals ... and the subsequent start-up of the two free-standing [hospitals] at issue here

d[id] not change the fact that the 'hospital asset' in use by these Providers is a 'hospital

asset' which was previously used for more than two years," id. at 1450.

       Plaintiffs additionally argue that the Secretary's interpretation contradicts the

statutory intent, Pis.' Reply at 10, leading to "absurd results," Pis.' Supp. Mot. at 11, and

that, because the freestanding hospitals "meet ... the spirit of the regulation," they should

be deemed new hospitals, Pis.' Mem. in Supp. ofPls.' Supp. Mot. ("Pis.' Mem.") [Dkt.

#41] at 9. I disagree. The Secretary directly addressed the purpose of the regulation,

which is "to protect hospitals ... without a historic asset base and need special

consideration for their original plant and equipment costs during their initial years of

operation," SAR at 1448 (quoting 57 Fed. Reg. 23618, 23649 (Jun. 4, 1992)), and found

the freestanding hospitals to be outside this purpose because they operate out of "existing

facilities." SAR at 1449. 3 In fact, the Secretary stated that, in light of this purpose,

plaintiffs' interpretation would lead to "illogical results." SAR at 1448.

       Thus, because the freestanding hospitals were not without a historic asset base and

"were not 'operating' under previous or present ownership for less than two years," they

were not eligible for reimbursement as "new hospital[s]." !d. at 1449-50. Finding the

Secretary's interpretation neither "plainly erroneous" nor "inconsistent with the

regulation," I conclude that the Secretary's interpretation is reasonable.

       3 Plaintiffs attempt to reargue that, unless an exception applies, the free-standing
hospitals must be considered "new hospitals," Pis.' Supp. Mot. at 7-9, but this Court has
already stated that "the four exceptions [do not] represent the entire universe of what may
be excluded from the definition of 'new hospital."' Mem. Op. at 15.
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                                   CONCLUSION

      For the foregoing reasons, the Court DENIES plaintiffs' Supplemental Motion for

Summary Judgment [Dkt. #38] and GRANTS defendant's Cross-Motion for Summary

Judgment [Dkt. #39]. The Court further DISMISSES this action in its entirety. An order

consistent with this decision accompanies this Memorandum Opinion.
                                         ''
                                        "'




                                                  United States District Judge




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