                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 11a0345n.06

                                           No. 09-2443                                     FILED
                                                                                      May 20, 2011
                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT                            LEONARD GREEN, Clerk


COVENANT MEDICAL                  CENTER,         )
INCORPORATED,                                     )
                                                  )
       Plaintiff-Appellant,                       )
                                                  )
v.                                                )   ON APPEAL FROM THE UNITED
                                                  )   STATES DISTRICT COURT FOR THE
KATHLEEN SEBELIUS, Secretary of Health            )   EASTERN DISTRICT OF MICHIGAN
and Human Services,                               )
                                                  )
       Defendant-Appellee.                        )


       Before: SUTTON and STRANCH, Circuit Judges; WELLS, District Judge.*

       SUTTON, Circuit Judge. This case presents an issue of first and likely last impression:

whether the Secretary of Health and Human Services exceeded her authority in adopting a since-

abandoned “written agreement requirement” for certain Medicare reimbursements, see 42 C.F.R.

§§ 413.86(f)(3), (f)(4)(ii) (1998). Concluding that the regulation is valid and that Covenant Medical

Center is not otherwise entitled to the reimbursements in dispute, we affirm.


                                                 I.


       Under the Medicare program, the Secretary reimburses inpatient hospitals for costs associated

with “graduate medical education.” 42 U.S.C. § 1395ww(h); see also id. § 1395ww(d)(5)(B). The



       *
         The Honorable Lesley Wells, Senior District Court Judge for the Northern District of Ohio,
sitting by designation.
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Covenant Med. Ctr., Inc. v. Sebelius

Secretary pays hospitals based on the number of “full time equivalent” (FTE) residents in the

hospital’s residency program. Id. § 1395ww(h)(2). A hospital’s FTE count comprises more than

just the time residents spend in a hospital. In the years relevant here, Congress directed the Secretary

to include “all the time” residents spend in patient care activities “under an approved medical

residency training program,” so long as “the hospital incur[red] all, or substantially all, of the costs

for the training program,” “without regard to the setting in which the activities [were] performed.”

42 U.S.C. § 1395ww(h)(4)(E); see id. § 1395ww(d)(5)(B)(iv).


        Tasked with “establish[ing] rules . . . for the computation of . . . full-time-equivalent

residents,” id. § 1395ww(h)(4)(A), the Secretary determined that

        the time residents spend in nonprovider settings such as freestanding clinics, nursing
        homes, and physicians’ offices in connection with approved programs is not excluded
        in determining the number of FTE residents in the calculation of a hospital’s resident
        count if the following conditions are met—
            (i) The resident spends his or her time in patient care activities.
            (ii) There is a written agreement between the hospital and the outside entity that
            states that the resident’s compensation for training time spent outside of the
            hospital setting is to be paid by the hospital.

42 C.F.R. § 413.86(f)(3) (1998). As of 1999, the written agreement had to “indicate that the hospital

[would] incur the cost of the resident’s salary and fringe benefits . . . and [that] the hospital [was]

providing reasonable compensation to the nonhospital site for supervisory teaching activities.” Id.

§ 413.86(f)(4)(ii).


        Covenant Medical Center runs an inpatient hospital in Saginaw, Michigan. In 1968,

Covenant and another Saginaw hospital, St. Mary’s, launched a joint venture now known as the

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Synergy Medical Education Alliance. Synergy runs a residency program in which residents provide

patient care at the Synergy Clinic as well as at Covenant and St. Mary’s. Covenant and St. Mary’s

split Synergy’s gross operating costs each year based on the overall percentage of time that Synergy

residents spend at each hospital.


       For Fiscal Years 1999, 2000 and 2001, Covenant applied for Medicare reimbursements

through a private fiscal intermediary, see 42 U.S.C. §§ 1395h(a), 1395kk-1, including the percentage

of Synergy residents’ time spent at Covenant as part of its FTE count. The fiscal intermediary

excluded the time, and Covenant appealed to the Provider Reimbursement Review Board. See id.

§ 1395oo.


       A divided Board ruled for Covenant. The majority relied on 42 C.F.R. § 413.17(a), which

says that “costs applicable to services, facilities, and supplies furnished to the provider by

organizations related to the provider by common ownership or control are includable in the allowable

cost of the provider at the cost to the related organization.” Covenant and Synergy were, “for all

intents and purposes, considered part of the same overall organization,” the Board reasoned, and

Covenant could thus include the Synergy residents’ time toward its FTE count. The Board separately

held that Covenant’s documentation of its “normal business practices and agreements” satisfied the

written agreement requirement.


       The Administrator of the Centers for Medicare and Medicaid Services reversed. See 42

C.F.R. § 405.1875. “[T]here must be a written agreement,” the Administrator held, “even if the


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Covenant Med. Ctr., Inc. v. Sebelius

hospital and nonhospital setting are related,” and Covenant and Synergy did not satisfy the

requirement. AR.15. The Administrator also determined that Covenant had not shown that it

incurred “all or substantially all” of the costs for Synergy’s residency program, as the regulations

require, because it split costs with St. Mary’s on a 75/25 basis.


       Covenant challenged the Secretary’s decision in district court. See 42 U.S.C. § 1395oo(f).

Both parties moved for summary judgment, and the district court ruled for the Secretary.


                                                  II.


       This appeal raises three related questions: Does the written agreement requirement apply to

related parties under 42 C.F.R. § 413.17? If so, did Covenant comply with the requirement? If the

written agreement requirement applies to Covenant and if Covenant failed to comply with it, is the

requirement a valid exercise of the Secretary’s administrative authority?


       Applicability to Related Parties. Covenant argues that it may include the Synergy residents’

time in its reimbursement request because the written agreement requirement does not apply to

related parties under 42 C.F.R. § 413.17. As Covenant sees it, § 413.17’s general rule, allowing

hospitals to claim reimbursement for “costs applicable to services, facilities, and supplies furnished”

by a related party, overrides the requirements of §§ 413.86(f)(3) and (f)(4)(ii) for residency costs.


       The first problem with this argument is that federal courts “do not write on a blank slate”

when interpreting agency regulations. Rosen v. Goetz, 410 F.3d 919, 927 (6th Cir. 2005). We give


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the Secretary’s interpretation “substantial deference,” Claiborne-Hughes Health Ctr. v. Sebelius, 609

F.3d 839, 844 (6th Cir. 2010), so long as it is not “plainly erroneous or inconsistent with the

regulation,” Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).


       On at least two occasions, the Secretary has said that related parties must have written

agreements under §§ 413.86(f)(3) and (f)(4)(ii). When the Secretary promulgated the written

agreement requirement in 1998, a response to one stakeholder’s comment made clear that the final

rule “requir[ed] a written agreement between hospitals and nonhospital sites for purposes of this final

rule, even where the hospital and nonhospital site are related organizations under § 413.17.”

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year

1999 Rates, 63 Fed. Reg. 40,954, 40,996 (July 31, 1998). And in this case, exercising the

Secretary’s authority to review Board decisions, see 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875,

the Administrator concluded that “there must be a written agreement, even if the hospital and the

nonhospital setting are related. . . . The specific regulation controlling the counting of FTEs in the

nonhospital setting does not provide for an exception, pursuant to the related party regulation, to the

written agreement requirement.” AR.15.


       The Secretary’s position is not inconsistent with the regulation, and indeed respects the

interpretive principle that “a specific provision . . . controls ones of more general application.”

Bloate v. United States, __ U.S. __, 130 S. Ct. 1345, 1354 (2010). In this instance, the written

agreement requirement covers only FTE calculations while the related party regulation covers all

“services, facilities, and supplies,” 42 C.F.R. § 413.17(a), permitting the Secretary to invoke the

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specific regulation (the written agreement requirement) over the general one (the related party

regulation).


        Covenant objects that the Secretary’s rulings—the 1998 response and the Administrator’s

decision here—did not go through the notice-and-comment rulemaking process. Chevron deference

to administrative interpretations of statutes, it is true, turns on whether the interpretation comes in

a form with “the force of law.” United States v. Mead Corp., 533 U.S. 218, 226–27 (2001);

Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000).            But this limit does not apply to

administrative interpretations of regulations. Just this Term, the Supreme Court deferred to an

administrative interpretation found in an amicus brief, as it had in Auer v. Robbins, 519 U.S. 452

(1997), asking only whether the agency’s position was “consistent with the regulatory text.” Chase

Bank USA, N.A. v. McCoy, __ U.S. __, 131 S. Ct. 871, 880 (2011). The same inquiry leads to the

same conclusion here.


        Compliance with the Written Agreement Requirement. Even if the written agreement

requirement applies to related entities, Covenant insists that it complied with it. For the fiscal years

at issue, the Secretary required Covenant to produce a written agreement with Synergy indicating that

Covenant would “incur the cost of the resident’s salary and fringe benefits” and “provid[e]

reasonable compensation to [Synergy] for supervisory teaching activities.”                  42 C.F.R.

§ 413.86(f)(4)(ii). In trying to make this showing before the agency, Covenant took a buckshot

approach, producing a slew of documents and arguing that any one of them could satisfy the written

agreement. Not one of the documents hit the mark, the Administrator held, and substantial evidence

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supports that conclusion. 5 U.S.C. § 706(2)(E); see Med. Rehab. Servs., P.C. v. Shalala, 17 F.3d

828, 831 (6th Cir. 1994).


       The one document in the administrative record that amounts to a written agreement between

Covenant and Synergy contains several provisions suggesting that Covenant would not incur the

costs of Synergy’s residency program:

       * Synergy “assume[s] full responsibility for the education of the . . . residents.”
       AR.328
       * Synergy residents “are at all times acting and performing as independent
       contractors under the direction, supervision and control of the instructors of
       [Synergy]. No student/resident or principal, employee, or agent of [Synergy] shall
       be considered an employee of [Covenant].” AR.331.
       * Synergy is “solely liable for any and all liability arising out of the acts or
       omissions of its agents or employees. . . . Further, [Synergy] shall indemnify and save
       [Covenant] harmless from any and all claims made or causes of action asserted by a
       student resident because of or in any way related to the student resident’s
       involvement in the medical education program . . . .” AR.331–32.

Instead of indicating that Covenant agreed to bear the costs of Synergy’s residency program, see 42

C.F.R. § 413.86(f)(4)(ii), the record shows that Covenant incurred those costs only indirectly,

through its “member hospital contributions” to Synergy’s overall operating budget, AR.563. From

an organizational standpoint, that may have been the most practical way to structure the relationship,

with Synergy bearing direct responsibility for the residency program and Covenant and St. Mary’s

making lump sum payments to cover these and other costs. But however sensible as a matter of

business operation, this approach does not satisfy § 413.86(f)(4)(ii).




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       Validity of the Written Agreement Requirement. If all else fails, Covenant urges us to

conclude that the written agreement requirement exceeds the Secretary’s authority. Under the

relevant statute, Covenant points out, Congress directed the Secretary to count “all the time” a

resident spends in patient care toward a hospital’s FTE count “if the hospital incurs all, or

substantially all, of the costs for the training program.” 42 U.S.C. § 1395ww(h)(4)(E) (emphasis

added). The statute thus imposes just two requirements—that residents must engage in patient care

and that the hospital must incur all or substantially all of the costs—and beyond that, Covenant

urges, the Secretary may not impose any additional preconditions to reimbursement, including a

written agreement requirement.


       But the Secretary could permissibly conclude that a written agreement is not a new

substantive requirement but a procedural mechanism for satisfying the two statutory requirements.

Congress gave the Secretary authority to “establish rules consistent with [§ 1395ww(h)(4)] for the

computation of the number of full-time-equivalent residents in an approved medical residency

training program,” id. § 1395ww(h)(4)(A), and the written agreement requirement comfortably fits

within that grant of authority under Chevron. “Regulation, like legislation, often requires drawing

lines.” Mayo Found. for Med. Educ. & Research v. United States, __ U.S. __, 131 S. Ct. 704, 715

(2011). The Secretary reasonably determined that the written agreement requirement “would

improve administrability, and thereby . . . avoid[] the wasteful litigation and continuing uncertainty

that would inevitably accompany a purely case-by-case approach,” id. (citations and quotation marks




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omitted), for determining whether a hospital “incurs all, or substantially all, of the costs for [a

particular] training program,” 42 U.S.C. § 1395ww(h)(4)(E).


       Chevron supports this conclusion. At step one of Chevron, we ask whether Congress spoke

directly to the issue at hand. Sierra Club v. EPA, 557 F.3d 401, 405 (6th Cir. 2009). In this instance

it did not, as Congress said nothing in §§ 1395ww(h)(4)(A) or (h)(4)(E) about the documentation

the Secretary may require. Elsewhere, moreover, Congress endorsed the Secretary’s authority to

insist on documentation before reimbursement, providing that “no . . . payments shall be made to any

provider unless it has furnished such information as the Secretary may request in order to determine

the amounts due such provider . . . for the period with respect to which the amounts are being paid

or any prior period.” 42 U.S.C. § 1395g(a).


       That § 1395ww(h)(4)(E) requires the Secretary to reimburse “all the time” spent in patient

care, contrary to Covenant’s position, does not prohibit the Secretary from imposing documentation

requirements for establishing what time was spent in patient care and for proving that the other

conditions for reimbursement were met. Otherwise, the Secretary would be severely handicapped

in administering the program. Under Covenant’s reading, she could not require hospitals to submit

reimbursement requests before receiving payment because, if she did, she would not end up

including “all the time” spent in patient care, only the requested time. Likewise, under Covenant’s

reading, she could not require hospitals to submit their documentation electronically, make them

meet deadlines or impose any other requirement that might lead to crediting less than “all the time.”



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Section 1395ww(h)(4)(E) says nothing about these sorts of procedural requirements, and accordingly

the statute does not preclude the Secretary from imposing them.


       At step two of Chevron, we ask whether the Secretary’s interpretation—establishing a written

agreement requirement—reasonably construes the statute. Sierra Club, 557 F.3d at 405. The

Secretary may specify the documentation hospitals must submit, 42 U.S.C. § 1395g(a), and the

written agreement does just that, “provid[ing] an administrative tool for use by the fiscal

intermediaries to assist in determining whether hospitals would incur all or substantially all of the

costs of the training in the nonhospital setting in accordance with Congressional intent.” Medicare

Program; Changes to the Hospital Inpatient Prospective Payment Systems & Fiscal Year 2005 Rates,

69 Fed. Reg. 48,916, 49,179 (Aug. 11, 2004). It was reasonable for the Secretary to conclude that

§ 1395g(a) permitted this measure and that § 1395ww(h)(4)(E) did not prohibit it.


       Through it all, Covenant may well have intended to comply with the Secretary’s FTE

regulations and simply did not know about the written agreement requirement until after the fact.

But that does not save it. “Just as everyone is charged with knowledge of the United States Statutes

at Large, Congress has provided that the appearance of rules and regulations in the Federal Register

gives legal notice of their contents.” Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384–85 (1947);

see also 44 U.S.C. § 1507. “As a participant in the Medicare program, [Covenant] had a duty to

familiarize itself with the legal requirements for cost reimbursement.” Heckler v. Cmty. Health

Servs. of Crawford Cnty., Inc., 467 U.S. 51, 64 (1984). Because the written agreement requirement



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legitimately applied to Covenant and because the Secretary permissibly concluded that Covenant did

not meet it, the Secretary’s final decision must be upheld.


                                                III.


       For these reasons, we affirm.




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