                           UNITED STATES DISTRICT COURT
                           FOR THE DISTRICT OF COLUMBIA


BORGESS MEDICAL CENTER, et al.                        )
                                                      )
              Plaintiff,                              )
                                                      )
                 v.                                   )    Civil Case No. 12-144 (RJL)
                                                      )
KATHLEEN SEBELIUS, Secretary                           )
Department ofHealth and Human Services                 )
                                                       )
              Defendant.                               )

                                       1?.--
                                MEMORANDUM OPINION
                           (September __!!J_., 2013) (Dkts. ##19, 21)


       Plaintiffs Borgess Medical Center ("Borgess") and Bronson Methodist Hospital

("Bronson") ("plaintiffs" or "Hospitals," collectively) commenced this action against

Kathleen Sebelius, in her official capacity as Secretary of the United States Department

of Health and Human Services ("Secretary"), pursuant to 42 U.S.C. § 1395 et seq.,

seeking judicial review ofthe Secretary's denial of reimbursements for costs associated

with offsite resident training during fiscal years 2000 through 2004. See Compl. [Dkt.

#1]. Before the Court are the parties' cross-motions for summary judgment. Upon

consideration of the parties' pleadings, relevant law, and the entire record in this case, the

Court GRANTS defendant's Motion for Summary Judgment [Dkt. #21] and DENIES

plaintiffs' Motion for Summary Judgment [Dkt. #19].




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                                     BACKGROUND

       A. Statutory and Regulatory Background

       The Medicare Act provides health insurance benefits to eligible elderly and

disabled persons. 42 U.S.C. § 1395 et seq. The Centers for Medicare and Medicaid

Services ("CMS") administers the program for the Secretary. 42 U.S.C. § 1395kk; 42

C.F.R. § 400.200 et seq. Medicare Part A serves as hospital insurance and covers the

cost of hospital care, related post-hospital care, home health services, and hospice care.

42 U.S.C. § 1395c et seq. The Secretary contracts with fiscal intermediaries to determine

and process payments to hospitals. 42 U.S.C. § 1395h. At the close of the fiscal year, a

participating hospital submits a cost report to its intermediary. 42 C.F.R. §§ 413.20,

413.24. After auditing the report, the intermediary issues a Notice of Program

Reimbursement ("NPR"). 42 C.F.R. § 405.1803. A hospital may challenge an NPR by

requesting a hearing before the Provider Reimbursement Review Board ("PRRB"). 42

U.S.C. § 1395oo(a). The PRRB's decision is subject to review by the CMS

Administrator. 42 U.S.C. § 1395oo(f)(l); 42 C.F.R. § 405.1875(a). The Administrator's

decision constitutes a final agency decision subject to judicial review. 42 U.S. C. §

1395oo(f)(1); 42 C.F.R. § 405.1877.

       Under Part A of the Medicare program, hospitals that operate approved medical

residency programs are entitled to reimbursement for certain costs related to graduate

medical education. Medicare makes both a direct graduate medical education payment

("GME") and an indirect graduate medical education payment ("IME"). GME costs

include residents' salaries and fringe benefits, as well as compensation paid to teaching

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physicians and supervisors. 42 U.S.C. § 1395ww(h); 42 C.F.R. § 413.86(b)(3) (1998).

IME costs include higher-than-average operating costs incurred as an indirect result of

having a teaching program. 42 U.S.C. §§ 1395f(b), 1395ww(d); 42 C.F.R. § 412.105

(1998).

       Congress amended the Medicare statute in 1986 and 1997 to include the time

residents spend training in nonhospital settings in GME and IME payment calculations.

See 42 U.S.C. §§ 1395ww(d)(5)(B)(iv), 1395ww(h)(4)(E). These statutory provisions

("Nonhospital Site Statutes") permit reimbursement so long as (1) the residents' time is

related to patient care, and (2) the hospital incurs all, or substantially all, of the costs for

the training program in the nonhospital setting. !d. The Nonhospital Site Statutes do not

define the second requirement, which is referred to herein as the "All or Substantially All

Requirement."

       For the cost reporting years at issue in this case, the Secretary's regulations

defined the statutory All or Substantially All Requirement to include:

       the residents' salaries and fringe benefits (including travel and lodging
       where applicable) and the portion of the cost of teaching physicians'
       salaries and fringe benefits attributable to direct graduate medical
       education.

42 C.F.R. § 413.86(b)(3) (1998), AR at 0645. The Secretary also imposed an additional

regulatory requirement that, in order for a hospital to count resident training time at

nonhospital sites, the hospital must have a written agreement with the nonhospital site

       indicat[ing] that the hospital will incur the cost of the resident's salary and
       fringe benefits while the resident is training in the nonhospital site and the
       hospital is providing reasonable compensation to the nonhospital site for
       supervisory teaching activities. The agreement must indicate the

                                                3
       compensation the hospital is providing to the nonhospital site for
       supervisory teaching activities.

42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648. This regulation is referred to herein as

the "Written Agreement Requirement."

       B. Factual and Procedural Background

       Plaintiffs are non-profit acute care hospitals located in Kalamazoo, Michigan. The

Hospitals have agreements with the Michigan State University Kalamazoo Center for

Medical Studies ("KCMS") to rotate medical residents through KCMS' nonhospital

clinic facility ("Affiliation Agreements"). See AR at 931-42. The Hospitals' joint

resident training program dates back to 1973, when they entered into an agreement

establishing the predecessor of KCMS, the Southwestern Michigan Area Health

Education Center ("SWMAHEC"). AR at 796-800. The 1973 Agreement, which

remains in effect, provides that the Hospitals "shall provide the CORPORATION with

financing to carry out its purposes as negotiated on a yearly basis." See AR at 799,

811-15. In 1989, the Hospitals expanded the joint training program to include rotations

at KCMS clinics. The Affiliation Agreements state that the Hospitals "share[] joint and

equal responsibility for providing [KCMS] with sufficient financing to carry out [the

KCMS] programs as negotiated on a yearly basis." AR at 931, 933, 935, 937, 939, 941.

      The Hospitals claim that their former fiscal intermediary, United Government

Services ("UGS"), allowed Medicare reimbursement for costs the Hospitals incurred for

resident rotations at KCMS clinics. See Compl.   ~   23. In 2008, however, the Hospitals'

current fiscal intermediary, National Government Services ("NGS"), began to issue NPRs


                                             4
and revised NPRs disallowing reimbursement for these costs. 1 !d. at~ 24. NOS claimed

that the Hospitals could not satisfy the statutory All or Substantially All Requirement

because they split the costs of the KCMS training program. !d. NOS also found that the

Hospitals failed to meet the Written Agreement Requirement. See AR at 47.

       The Hospitals successfully challenged NOS' disallowances before the PRRB. See

Compl.   at~   31; AR at 38-52. The PRRB concluded that the Hospitals satisfied the All or

Substantially All Requirement because the two Hospitals jointly paid all of the costs of

the resident training program at KCMS. AR at 48-50. The PRRB also held that the

Hospitals satisfied the Written Agreement Requirement. AR at 46-48. The PRRB's

decision was reversed, however, by the CMS Administrator, acting under authority

delegated by the Secretary. AR at 2-19. The Administrator interpreted the All or

Substantially All Requirement to preclude multiple hospitals from sharing the costs of

nonhospital training ("Single Hospital Interpretation"). AR at 17. The Administrator

also concluded that the Hospitals failed to comply with the Written Agreement

Requirement. AR at 18. Plaintiffs now challenge that final agency decision.

                                STANDARD OF REVIEW

      The Medicare Act provides for judicial review of the Administrator's final

decision under the Administrative Procedure Act ("APA"). 42 U.S.C. § 1395oo(f)(l).

Under the APA's strict standard of review, the Court must set aside agency actions,



'NOS issued revised NPRs for Borgess' fiscal years ended ("FYE") 6/30/01, 6/30/02, and
6/30/03, Compl. at~ 25, and for Bronson's FYE 12/31100, 12/31101, and 12/31102, id. at
~ 27. NOS also issued NPRs denying reimbursement for Bronson's FYE 12/31103 and
12/31104. !d. at~ 28.
                                             5
findings, and conclusions that are "arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Under the arbitrary and

capricious standard, an agency action "may be invalidated ... if [it is] not rational and

based on consideration of the relevant factors." FCC v. Nat'! Citizens Comm. for Broad.,

436 U.S. 775, 803 (1978) (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S.

402, 413-16 (1971)). Factual conclusions are reviewed under the substantial evidence

standard and may be overturned where they are "unsupported by substantial evidence in a

case ... reviewed on the record of an agency hearing provided by statute." 5 U.S.C. §

706(2)(E); see also Overton Park, 401 U.S. at 414. The Supreme Court has "defined

'substantial evidence' as 'such relevant evidence as a reasonable mind might accept as

adequate to support a conclusion."' Consolo v. Fed. Mar. Comm 'n, 383 U.S. 607,

619-20 (1966) (quoting Canso!. Edison Co. ofNew Yorkv. NLRB, 305 U.S. 197,229

(1938)). Substantial evidence "is something less than the weight of the evidence, and the

possibility of drawing two inconsistent conclusions from the evidence does not prevent

an administrative agency's finding from being supported by substantial evidence." !d. at

620. In applying the substantial evidence standard, the reviewing court may not

"displace ... [a] choice between two fairly conflicting views, even though the court

would justifiably have made a different choice had the matter been before it de novo."

Universal Camera Corp. v. NLRB, 340 U.S. 474,488 (1951).

       The Supreme Court has established a two-step framework for reviewing an

agency's interpretation of a statute that the agency administers. See Chevron, US.A., Inc.

v. NRDC, 467 U.S. 837, 842-43 (1984). Under the first step, the Court must look at the

                                              6
statute to determine whether Congress has "directly spoken to the precise question at

issue." !d. at 842. If it has, "that is the end of the matter." !d. If, however, "the statute

is silent or ambiguous with respect to the specific issue," the court proceeds to Chevron

step two and must determine whether the agency's interpretation is "based on a

permissible construction of the statute." !d. at 843. Under this second step, the

Secretary's statutory interpretation will be given controlling weight so long as it falls

"within the bounds of reasonable interpretation." Your Home Visiting Nurse Servs., Inc.

v. Shalala, 525 U.S. 449, 453 (1999). The Secretary's reading "need not be the only

reasonable one" in order to be upheld. Conn. Dep 't ofIncome Maint. v. Heckler, 4 71

U.S. 524, 532 (1985). Where a Medicare statutory provision is subject to multiple

reasonable interpretations, courts defer to the Secretary's interpretation. See Gentiva

Healthcare Corp. v. Sebelius, 2013 WL 3800066, *3 (D.C. Cir. 2013).

       When the agency action at issue is "the construction of an administrative

regulation rather than a statute ... deference is even more clearly in order." Udall v.

Tallman, 380 U.S. 1, 16 (1965). "[T]he agency's interpretation must be given controlling

weight unless it is plainly erroneous or inconsistent with the regulation." Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (quotations and citations omitted).

In other words, a court "must defer to the Secretary's interpretation unless an alternative

reading is compelled by the regulation's plain language or by other indications of the

Secretary's intent at the time of the regulation's promulgation." !d. (quotations and

citations omitted). The more complex a regulatory program is, the greater the deference

owed. See id.; see also Methodist Hosp. ofSacramento v. Shalala, 38 F.3d 1225, 1229

                                              7
(D.C. Cir. 1994) ("[I]n framing the scope of review, the court takes special note of the

tremendous complexity of the Medicare statute. That complexity adds to the deference

which is due to the Secretary's decision.").

                                        ANALYSIS

       This case involves the issue of whether plaintiff Hospitals are entitled to

reimbursement under the Medicare Act for costs the Hospitals incurred in training

medical residents at KCMS during fiscal years 2000 through 2004. I agree with the

Secretary's decision denying plaintiffs reimbursement for two reasons. First, the

Nonhospital Site Statutes are reasonably read to require the Secretary to disallow

reimbursement where two or more hospitals split the costs of nonhospital training.

Second, the Hospitals' Affiliation Agreements with KCMS do not satisfy the Written

Agreement Requirement. Accordingly, the Secretary's decision denying reimbursement

was reasonable and not arbitrary, capricious, or in violation of the law, and the Court will

grant the Secretary's Motion for Summary Judgment.

       Congress did not speak directly to whether the All or Substantially All

Requirement is satisfied where there is cost-splitting between two or more hospitals.

Plaintiffs, of course, interpret the Nonhospital Site Statutes to permit reimbursement

where cost-splitting occurs. By contrast, the Secretary has concluded that the Single

Hospital Interpretation is necessary to comply with the statutory requirements. Indeed, in

2007, the Secretary clarified the Single Hospital Interpretation in the Federal Register via

notice and comment procedures:



                                               8
       ... under current policy, if two (or more) hospitals train residents in the
       same accredited program, and the residents rotate to the same nonhospital
       site(s), the hospitals cannot share the costs of that program at that
       nonhospital site ... as we do not believe this is consistent with the statutory
       requirement ... that the hospital incur "all, or substantially all, of the costs
       for the training program in that setting."

72 Fed. Reg. 26870, 26969 (May 11, 2007) (emphasis in original). This clarification,

however, did not constitute a substantive change in payment policy. Prior to any of the

cost reporting years at issue in this case, the Secretary announced that

       Under sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) ofthe Act, a hospital
       may include the time a resident spends in nonprovider settings in its
       indirect medical education (IME) and direct GME full-time equivalent
       count if it incurs "all or substantially all" of the costs oftraining residents in
       the nonhospital site.

63 Fed. Reg. 40954,40986 (July 31, 1998) (emphasis added). And, in 2003, the

Secretary stated in the Federal Register that a hospital could not qualify for

reimbursement of its offsite medical education costs if it funds only a portion of

the offsite training program. See 68 Fed. Reg. 45346, 45439 (Aug. 1, 2003).

       I defer to the Secretary's Single Hospital Interpretation because it is reasonable

and consistent with the plain language of the All or Substantially All Requirement.

Congress used the singular terms "hospital" and "program," rather than plural terms

"hospitals" and "programs." Not surprisingly, Congress later used alternative language

in the Patient Protection and Affordable Care Act ("PPACA"), which revised the

Nonhospital Site Statutes to allow hospitals to share nonhospital training costs effective

July 1,2010:

       If more than one hospital incurs these costs, either directly or through a
       third party, such hospitals shall count a proportional share of the time, as

                                               9
          determined by written agreement between the hospitals, that a resident
          spends training in that setting.

See 42 U.S.C. §§ 1395ww(h)(4)(E) and 1395ww(d)(5)(B) (both as amended

effective July 1, 201 0). Unfortunately for the plaintiffs, the statutes and

regulations in place during the cost reporting years at issue did not permit a

hospital seeking reimbursement to incur anything less than all, or substantially all,

of the costs of the training in the nonhospital setting. It is of no moment that UGS

failed to disallow reimbursement to the Hospitals for costs incurred in connection

with the joint training program at KCMS. See Thomas Jefferson Univ., 512 U.S.

at 517.

          I also defer to the Secretary's reasonable interpretation of the Written Agreement

Requirement, which was promulgated to enable the Secretary to quickly and easily verify

compliance with the All or Substantially All Requirement. See Covenant Med. Ctr., Inc.

v. Sebelius, 424 Fed. App'x. 434, 438 (6th Cir. 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 for determining whether a hospital

incurs all, or substantially all, of the costs for [a particular] training program.")

(quotations and citations omitted). Specifically, the Secretary requires the written

agreement between the hospital and nonhospital to:

          indicate that the hospital will incur the cost of the resident's salary and
          fringe benefits while the resident is training in the nonhospital site and the
          hospital is providing reasonable compensation to the nonhospital site for
          supervisory teaching activities. The agreement must indicate the

                                                 10
       compensation the hospital is providing to the nonhospital site for
       supervisory teaching activities.

42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648.

       Plaintiffs' documentation here does not comply with this requirement, which

applied to all hospitals seeking Medicare reimbursement during the cost reporting years

at issue in this case. The 1973 Agreement does not satisfy the Written Agreement

Requirement because it was not executed, as required, between a hospital and

nonhospital. See AR at 796-800. The Affiliation Agreements do not satisfy the Written

Agreement Requirement because their use of the phrase "sufficient financing" is

ambiguous. See AR at 931, 933, 935, 937, 939, 941. Put simply, the plain language of

the Affiliation Agreements does not obligate the Hospitals to pay for all, or substantially

all, of the costs of the KCMS training programs. The Affiliation Agreements also fail to

sufficiently detail the compensation scheme for supervisory teaching activities and the

amounts the Hospitals will actually pay for these activities. See Kingston Hasp. v.

Sebelius, 828 F. Supp. 2d 473, 478 (N.D.N.Y. 2011). Finally, the KCMS Bylaws do not

meet the Written Agreement Requirement for at least three reasons. First, they are not an

agreement between a hospital and a nonhospital site. Second, they do not on their face

commit the Hospitals to incur all, or substantially all, of the costs of the training program.

Third, KCMS receives funding from private patients and grants, and the Hospitals cannot

cite to any document confirming that KCMS did not use such funding to pay supervisory

physician costs, resident salaries, or other nonhospital training costs. See AR at 314, 316,

340, 974, 991, 1000, 2644. In short, the documents plaintiffs proffer woefully fail to


                                              11
meet the standards of the Written Agreement Requirement that the Secretary reasonably

interpreted to ensure compliance with the All or Substantially All Requirement.

                                    CONCLUSION

      Thus, for all of the foregoing reasons, the Court GRANTS defendant's Motion for

Summary Judgment and DENIES plaintiffs' Motion for Summary Judgment. An Order

consistent with this decision accompanies this Memorandum Opinion.




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