                     United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 97-1943
                                    ___________

University of Iowa Hospitals and        *
Clinics,                                *
                                        *
      Plaintiff - Appellant,            *
                                        * Appeal from the United States
      v.                                * District Court for the
                                        * Southern District of Iowa.
Donna E. Shalala, in her Official       *
Capacity as Secretary of the Department *
of Health and Human Services,           *
                                        *
      Defendant - Appellee.             *
                                   ___________

                             Submitted: December 16, 1998

                                   Filed: June 8, 1999
                                    ___________

Before MURPHY, JOHN R. GIBSON, and MAGILL, Circuit Judges.
                           ___________

JOHN R. GIBSON, Circuit Judge.

       The University of Iowa Hospitals and Clinics commenced this action in the
district court to appeal the Secretary’s determination of the Hospital’s “per resident
amount” under the Medicare program,1 which determines the reimbursement made


      1
        The Administrator of the Health Care Financing Administration acts on behalf
of the Secretary and issued the decision that the Hospital challenges. Consistent with
annually to the Hospital (and other teaching hospitals like it) for Medicare’s share of
the costs of graduate medical education. The Secretary and the Hospital both moved
for summary judgment, and the district court substantially upheld the Secretary’s
decision.2 The Hospital appeals, attacking the Secretary’s interpretation (embodied in
an informally distributed booklet entitled Questions and Answers Pertaining to
Graduate Medical Education) of various Medicare regulations under which the costs
that determine the “per resident amount” are calculated and documented. It also
challenges the factual findings underlying its particular “per resident amount.” We
affirm in part, reverse in part, and remand the case to the district court with instructions
to remand to the Secretary for further proceedings consistent with this opinion.

       Under the Medicare program, participating hospitals are reimbursed by the
government for the cost of health care services provided to eligible patients. The
Health Care Financing Administration administers Medicare with the assistance of
private organizations known as fiscal intermediaries. Most intermediaries are insurance
companies, and they review the reimbursement requests and other claims made by
participating hospitals.

      “Graduate medical education” refers to the training that hospitals such as the
University of Iowa provide to interns and residents who have recently graduated from
medical school. Such training occurs almost exclusively in clinical settings, and it often
involves health care services that are covered by Medicare. Therefore, Medicare
shares in the costs of graduate medical education when Medicare patients receive


the relevant statute and for purposes of simplicity, we consider the decision to be that
of the Secretary, and we generally refer to it as such. See 42 U.S.C. § 1395oo(f)(1)
(1994); HealthEast Bethesda Lutheran Hosp. and Rehabilitation Center v. Shalala, 164
F.3d 415, 416 (8th Cir. 1998).
       2
       The district court reversed the Secretary’s decision with regard to the Hospital’s
resident compensation costs, but the Secretary does not appeal.

                                            -2-
health care services from teaching hospitals. Costs associated with graduate medical
education include the salaries and benefits paid to interns and residents, the salaries
paid to teaching physicians for the time spent supervising interns and residents, and
various overhead and indirect costs.

       Medicare’s reimbursements for graduate medical education are derived from
each teaching hospital’s “per resident amount.” See 42 U.S.C. § 1395ww(h) (1994).
With the help of intermediaries, the Secretary determines a hospital’s “per resident
amount” by calculating the “average amount recognized as reasonable” for each full
time equivalent resident during the “base year,” or the fiscal year ending June 30,
1985.3 See 42 U.S.C. § 1395ww(h)(2) (1994). In years subsequent to the base year,
the “per resident amount” is adjusted for inflation rather than being calculated anew.
Id. A hospital’s total annual Medicare reimbursement for graduate medical education
activities is then calculated by multiplying the “per resident amount” by the hospital’s
number of full time equivalent residents, then discounting this product by the proportion
of the hospital’s patient load that is covered by Medicare. See 42 U.S.C. §
1395ww(h)(3) (1994).

       In 1989, the Secretary promulgated regulations that authorized Medicare
intermediaries to re-audit hospitals’ FY 1985 graduate medical education costs. See
42 C.F.R. § 413.86 (1998). Among other things, the Secretary was concerned that
some hospitals had claimed “questionable” base year costs that Medicare had
erroneously reimbursed and would continue to reimburse absent a re-audit of base year
costs. See 53 Fed. Reg. 36589, 36591-93 (1988) (commentary on proposed
regulations). The Supreme Court recently upheld these regulations, which are not at
issue here. See Regions Hosp. v. Shalala, 522 U.S. 448, ---, 118 S. Ct. 909, 914-18
(1998). Thus, the statutory term “recognized as reasonable” refers both to the


      3
       For the sake of consistency, we refer to the fiscal year ending June 30, 1985,
as FY 1985.

                                          -3-
Secretary’s assessment of a provider’s base year costs during the base year itself as
well as during the intermediary’s later re-audit. 118 S. Ct. at 915-18 (deferring to
Secretary’s statutory interpretation).

       The disagreement between the Hospital and the Secretary arises from the re-
auditing of the Hospital’s base year graduate medical education costs. In FY 1985, the
Hospital’s cost report claimed a “per resident amount” of $40,765.4 Blue Cross and
Blue Shield of Iowa serves as the Hospital’s Intermediary. At the Secretary’s behest,
in 1989 Blue Cross began a re-audit of the Hospital’s base year graduate medical
education costs. During the re-audit, the Blue Cross lowered the Hospital’s “per
resident amount” from the $40,765 claimed and accepted in 1985 to $33,538. When
multiplied by the Hospital’s number of full-time equivalent residents, adjusted for the
Hospital’s percentage of Medicare utilization,5 and aggregated for all years until the
present, the difference between the $40,765 and $33,538 figures amounts to more than
$10 million in total Medicare reimbursements.

      Nearly all of the difference between the “per resident amount” claimed in FY
1985 and the lower amount accepted in 1989 reflects the Secretary’s treatment of the
Hospital’s office costs. The office costs at issue concern the office space given to all
447 teaching physicians, and the costs primarily reflect depreciation and interest.
Throughout these proceedings, the Hospital has argued that these offices are used

      4
        The $40,765 amount reflects cost of resident and intern salaries; 19.09 percent
of the salaries and benefits for 91.5 of the Hospital’s 447 teaching physicians, which
percentage represented the costs of graduate medical education attributable to those
physicians who both teach residents and administer the Hospital’s graduate medical
education program; 100 percent of the office space costs for all 447 teaching
physicians; secretarial costs associated with these offices; and various support costs
such as laundry, cafeteria services, and office supplies.
      5
      In 1985, about 25 percent of the Hospital’s patient care revenue came from
Medicare.

                                          -4-
exclusively for the administration of its graduate medical education program--except
for minimal incidental usage. The offices have no medical or research equipment, and
they are not suitable for direct patient care.

        At first, Blue Cross disallowed the claimed office costs in their entirety during
the re-audit. Blue Cross, acting upon instructions from the Secretary, found inadequate
documentation of the Hospital’s teaching physician office costs. Specifically, the FY
1985 cost report did not conform to the documentation standards adopted by the
Secretary in 1990. The Secretary’s new standard required base year time studies to
document the usage of the office space as being related to graduate medical education
rather than direct patient care, research, or other disallowed expenses. The standard
was promulgated and published only informally--in a booklet of “Questions and
Answers” provided to intermediaries, which have no specific obligation to pass the
information along to providers like the Hospital. Moreover, the Hospital did not keep
records of office space usage during FY 1985 because it was never required to do so,
and the Secretary enacted the space usage documentation standard more than five years
after the fiscal “base year” ended.6 The Hospital therefore found itself forever unable
to meet the Secretary’s documentation standard, and the Secretary refused to permit the
Hospital to conduct a current time study of office space usage.

       The Secretary later retreated from the total disallowance of the Hospital’s office
costs, but only to a limited extent. Because the documentation detailing the Hospital’s
base year physician compensation costs no longer existed when Blue Cross re-audited




      6
        The Secretary’s policy was first published in November 1990, but the base
fiscal year ended in June 1985. We reject the Secretary’s argument that the 1990
publication merely “clarified” longstanding Medicare policy. The Secretary is unable
to direct us to any written indication, before November 1990, that providers were
required to create and maintain usage records of teaching physician office space.

                                          -5-
the Hospital’s base year graduate medical education costs,7 the Secretary permitted the
Hospital to conduct new time studies of teaching physicians--but only for the purpose
of demonstrating the percentage of the physicians’ salaries and benefits that were
attributable to graduate medical education activities. Thus, the Hospital conducted a
physician time study in 1991, and the parties before us agree that 19.99 percent of
teaching physicians’ time was attributable to operating the graduate medical education
program. On this basis, Blue Cross and the Secretary permitted the Hospital to claim
19.99 percent of teaching physician salaries and benefits as well as a like percentage
of the previously claimed office space costs. This result was consistent with the
standard enacted in November 1990, which reads in relevant part:

      If the provider did not maintain a specific time study on the usage of the
      office space, the physician’s (s’) time allocation agreement may be used
      in its place. However, the physician’s (s’) “total” hours must be used in
      the denominator when computing the percentage of time devoted to GME
      [graduate medical education] functions.

Questions and Answers Pertaining to Graduate Medical Education, No. 24 (Nov.
1990).

       The Hospital’s objections to the Secretary’s solution were, and before us are,
several. First, the 19.99 percent figure did not accurately describe the proportion of
office space usage devoted to graduate medical education. Although teaching
physicians spend only about 20 percent of their time administering the educational
program, the offices themselves are used almost solely for educational purposes, the

      7
        See 42 C.F.R. § 405.481(g)(3) (1989) (requiring record retention for four
years). Further, the Secretary determined that the Hospital’s base year “allocation
agreements” were flawed and did not adequately prove the proportion of time that the
Hospital’s teaching physicians spent operating the graduate medical education program,
but the Secretary permitted the Hospital to document its physician compensation costs
through a 1991 time study of teaching physicians.

                                          -6-
Hospital argued. Second, the Hospital objected to the Secretary’s requirement that
space usage be documented by time studies. According to the Hospital’s interpretation
of the Medicare regulatory scheme, providers need not maintain usage records of office
space, and the primary usage of space governs its classification for Medicare
reimbursement purposes, quite unlike the task- and time-oriented classification of
teaching physician salaries. Third, even if the space usage time study requirement were
legitimate, Blue Cross and the Secretary refused to permit the Hospital to prove, by
way of a new time study, that the offices existed for educational purposes, or almost
exclusively so. Fourth, the time study requirement departed from decades of past
practice in which Medicare and the intermediary had both accepted the Hospital’s
classification of the office space. Fifth and relatedly, the documentation requirement
arose five years after the information that might satisfy it ceased to be available. In this
sense, the Secretary imposed a retroactive record-keeping requirement, the Hospital
argued.

        The Hospital also objected to the intermediary and Secretary’s treatment of
secretarial costs as well as laundry and cafeteria services connected with the disputed
teaching physician office space. The intermediary disallowed the Hospital’s claim for
six full-time equivalent secretaries, finding inadequate documentation. As for laundry
and cafeteria services, the intermediary treated these as physician compensation and
therefore applied the physician time study and permitted 19.99 percent of these costs
to be classified as education-related. The intermediary prohibited altogether the
comparatively modest claim for office supplies.

      Finally, during the re-audit, the Hospital supplemented its claim for teaching
physician compensation costs. Although the Hospital had originally claimed only a
percentage of the salaries and benefits of 91.5 of its 447 teaching physicians, it
increased this claim in 1993 to encompass all 447 teaching physicians. At the
Secretary’s direction, Blue Cross denied the Hospital’s “supplemental” claim.


                                            -7-
      The Hospital appealed the intermediary’s “notice of average per resident
amount” to the Provider Reimbursement Review Board within the Health Care
Financing Administration. The Board reversed Blue Cross’s treatment of the
Hospital’s office costs and other overhead costs, finding these costs reasonable and
adequately documented under the relevant Medicare Regulations. It affirmed the
intermediary’s rejection of the Hospital’s “supplemental” claim for additional teaching
physician compensation costs, however. The Administrator of the Health Care
Financing Administration, who acts on the Secretary’s behalf, in turn reversed the
Board’s decision with respect to the Hospital’s office space and other overhead costs.
The Administrator concluded that the Hospital did not adequately document its office
space costs as being fully related to graduate medical education. Further, the
Administrator disallowed the Hospital’s claim for secretarial costs in its entirety,
approved the intermediary’s treatment of the Hospital’s cafeteria and laundry costs, but
permitted the Hospital to claim the office supply costs that it had sought. Finally, the
Administrator affirmed the Board’s rejection of the Hospital’s claim for additional
teaching physician compensation costs.

       Pursuant to 42 U.S.C. § 1395oo(f) (1994), the Hospital appealed the
Administrator’s decision to the district court. Among other things, the district court
largely upheld the Administrator’s decision (in effect, the Secretary’s decision)
regarding the Hospital’s office space and overhead costs. The court generally accepted
the Secretary’s application of the 1991 physician time studies to the determination of
the Hospital’s allowable office space expenses, but it modified the Secretary’s decision
so as to allow a somewhat greater percentage of the office costs. Meanwhile, the
district court affirmed the Administrator’s decision with respect to secretarial costs,
laundry and cafeteria costs, and the “supplemental” claim for additional teaching
physician compensation costs.

      This appeal followed. The Hospital continues to maintain that all of its teaching
physician office space should be treated as part of its graduate medical education

                                          -8-
program, as should its related costs for clerical, laundry, and cafeteria services. The
Hospital continues to claim portions of the salaries and benefits of all 447 teaching
physicians, but it presses this claim only conditionally and only to the extent that we
deny its claimed office and overhead costs. In other words, the Hospital seeks
additional salary reimbursement only up to the total amount of base year graduate
medical education costs that it originally claimed in FY 1985. The Secretary argues
that the Administrator’s decision was not contrary to law, arbitrary and capricious, or
unsupported by substantial evidence. She defends the Administrator’s decision rather
than the district court’s. We reverse the judgment of the district court with respect to
the Hospital’s teaching physician office costs, we affirm the district court’s treatment
of the related secretarial, laundry and cafeteria expenses as well as its denial of the
Hospital’s claim for additional teaching physician compensation costs, and we remand
the case to the district court with instructions to remand to the Secretary for further
proceedings consistent with this opinion.

                                           I.

       The Hospital first asserts that its “per resident amount” should be based upon
100 percent of the office costs for its teaching physicians. The Hospital makes many
arguments, but they are essentially twofold. First, it argues that the Secretary’s
requirement that office space usage be documented with time studies from FY 1985
creates an impermissible retroactive rule and is otherwise inconsistent with the
Medicare regulatory scheme. Second, it attacks the Secretary’s treatment of the office
space on factual grounds, arguing that the record does not support the conclusion that
the offices in question are used for any purposes but graduate medical education.

                                          A.

      The relevant Medicare statute provides that judicial review shall be governed by
the Administrative Procedure Act as set forth in 5 U.S.C. § 706 (1994). See 42 U.S.C.

                                          -9-
§ 1395oo(f) (1994). Thus, a reviewing court must set aside an agency action held to
be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law” or unsupported by substantial evidence. See 5 U.S.C. §§ 706(2)(A), (E) (1994).
Judicial review under the APA involves questions of law, and we review the district
court’s conclusions de novo. See Shalala v. St. Paul-Ramsey Medical Center, 50 F.3d
522, 527 (8th Cir. 1995).

         The requirement that office space usage be documented with base year time
studies, first enacted by the Secretary in November 1990, is itself an interpretation of
two general Medicare record-keeping regulations: 42 C.F.R. §§ 413.20 and 413.24
(1998).8 We accord substantial deference to an agency’s interpretation of its own
regulation. See Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945);
Appley Bros. v. United States, 164 F.3d 1164, 1173 (8th Cir. 1999). So long as the
interpretation does not violate the Constitution or a federal statute, we will reject it only
if it is “plainly erroneous or inconsistent with the regulation.” Seminole Rock, 325
U.S. at 414; Stinson v. United States, 508 U.S. 36, 45 (1993). Nevertheless, an agency
may not interpret a regulation so as to violate a statute. See, e.g., United States v.
LaBonte, 520 U.S. 751, 756-63 (1997) (amended commentary to sentencing guideline
held to violate plain language of statute underlying particular guideline).

       We first address the Hospital’s argument that the Secretary may not apply the
space usage documentation standard retroactively. To determine whether a rule is
retroactive, we must ask “whether the new provision attaches new legal consequences
to events completed before its enactment.” Landgraf v. USI Film Prods., 511 U.S. 244,
270 (1994). So defined, retroactive prescriptions are disfavored in the law. See id. at


       8
        Because the relevant portions of these two regulations have not changed since
their enactment in 1986 and because the Secretary does not cite a particular year’s
version in support of the challenged space usage documentation standard, we refer to
the most recent codification of the regulations.

                                            -10-
265 (“Elementary considerations of fairness dictate that individuals should have an
opportunity to know what the law is and to conform their conduct accordingly; settled
expectations should not be lightly disrupted.”); Regions Hosp. v. Shalala, 522 U.S.
448, ---, 118 S. Ct. 909, 914-15 (1998) (ordinarily, legality of conduct should be
assessed under law that existed when conduct took place); Health Ins. Ass’n of
America, Inc. v. Shalala, 23 F.3d 412, 425 (D.C. Cir. 1994) (courts cannot award
Health Care Financing Administration recovery out of deference to interpretive rules
that did not exist when transactions at issue were conducted; Secretary may only rely
upon statutory and regulatory provisions in effect at time of relevant transactions), cert.
denied, 513 U.S. 1147 (1995). Because of retroactivity’s disfavored status, statutes are
presumed to operate only prospectively. See Bowen v. Georgetown Univ. Hosp., 488
U.S. 204, 208 (1988). As a further result, when Congress delegates legislative
authority to an administrative agency, courts will presume that the delegation forbids
the agency from creating retroactive prescriptions, and only express congressional
authorization will overcome this presumption. See id. We must therefore decide
whether the Secretary has created a retroactive rule, and, if so, whether the Secretary
has statutory authority to do so.

       The space usage documentation standard set out in the “Questions and Answers”
booklet creates a retroactive rule. Enacted in November 1990, the rule requires
hospitals to have undertaken time studies of office space usage during the base year--
five years before the standard’s enactment. If a provider failed to undertake the
required time studies during its base year (when it lacked any notice that it was required
to do so), its reimbursement for teaching physician office space is reduced to the
percentage of physicians’ time that is spent in graduate medical education activities.
Although a prescription “is not made retroactive merely because it draws upon
antecedent facts for its operation,” Regions Hosp., 118 S. Ct. at 915 (quotation
omitted), the rule in question does not merely require the application of antecedent
facts. Nor does it simply call for “application of the cost reimbursement principles in
effect at the time the costs were incurred.” See id. Rather, the time study requirement

                                           -11-
creates a new reimbursement principle because it “change[s] the standards under which
the base year costs are to be determined”--at a time when those standards cannot be
met because the data no longer exist and cannot be created. See id. (quoting Toledo
Hosp. v. Shalala, 104 F.3d 791, 795 (6th Cir. 1997)). In this sense, the rule “attaches
new legal consequences to events completed before its enactment.” Landgraf, 511 U.S.
at 270.

       Several inequities surround the Secretary’s approach to the Hospital’s teaching
physician office costs. First, the Hospital had no notice of the space usage time study
requirement until five years after the requirement could be satisfied. The Secretary and
the intermediary had always accepted the Hospital’s claim for the office space, and no
statute, regulation, or administrative statement even hinted at the Secretary’s new
requirement.9 Second, the Secretary refused to permit the Hospital to provide a current
time study to meet the November 1990 standard’s requirement of a base year time
study. Third, the standard’s retroactive application has resulted in substantial
underpayments to the Hospital (by its account, some $10 million dating back to the
intermediary’s re-audit). Fourth, the Secretary’s approach perpetually “locks in” these
underpayments because each subsequent year’s reimbursement depends upon the
inflation-adjusted “per resident amount” for the base year.

      Having concluded that the Secretary imposed a retroactive prescription upon the
Hospital, we consider whether the underlying Medicare statutes expressly permit the
Secretary’s approach. The Secretary’s brief nowhere even suggests a possible


      9
        The plain language of the general record-keeping regulations relied upon by the
Secretary does not provide advance notice of the new record-keeping requirement. See
42 C.F.R. §§ 413.20, 413.24. Section 413.20 merely requires providers to “maintain
sufficient financial records and statistical data for proper determination of costs payable
under the program.” Section 413.24 requires providers to furnish “adequate cost data”
that “must be based on their financial and statistical records which must be capable of
verification by qualified auditors.” See 42 C.F.R. § 413.24(a), (c).

                                           -12-
statutory basis for imposing retroactive record-keeping standards upon Medicare
providers,10 and our own research reveals no such authorization. Because the Secretary
relies upon the general record-keeping regulations at 42 C.F.R. §§ 413.20, 413.24, we
turn to the statutory bases of those regulations to determine whether Congress has
expressly permitted the Secretary to enact retroactive documentation requirements of
hospitals’ graduate medical education costs. The statutory authority for those
regulations is as follows: 42 U.S.C. §§ 1302, 1395f(b), 1395g, 1395l, 1395l(a), (i) and
(n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww (1994). See 42 C.F.R. Ch. IV,
Subch. B, Pt. 413, Authority (1998). We have carefully examined the lengthy texts of
these statutory provisions, and we find no support for the Secretary’s retroactive
record-keeping requirement. Accord Georgetown Univ. Hosp., 488 U.S. at 209, 213-
15 (general authority to promulgate cost limit rules in sections 1395x(v)(1)(A), 1395hh,
and 1395ii held not to permit Secretary to enact retroactive cost limits); id. at 209-13
(Secretary’s statutory authority to “provide for the making of suitable retroactive
corrective adjustments” in subsection 1395(x)(v)(1)(A)(ii) only permits case-by-case
adjustments to reimbursement where regulations prescribing computation methods
reach incorrect result in individual cases). Insofar as the Secretary’s standard penalizes
providers for not meeting a documentation requirement five years before the enactment
of that requirement, we must reject the standard.




      10
         The Secretary argues that her approach is consistent with the statutory
framework setting out the “per resident amount” methodology for calculating
reimbursable graduate medical education expenses, see 42 U.S.C. § 1395ww(h), the
enactment of which followed Congress’s intent in 1986 to establish “a new and
presumably more accurate methodology for reimbursing GME costs.” Appellee’s Br.
at 29. Whether or not the Secretary has accurately described Congress’s intent and
whether or not the challenged rule furthers that intent, the Secretary does not refer us
to any express congressional authorization to enact retroactive documentation standards
for graduate medical education expenses.

                                          -13-
       Aside from the rule’s retroactivity, the Hospital makes several other arguments
attacking the Secretary’s space usage time study requirement. In particular, the
Hospital argues that the requirement to produce a time study of the office space is
unsupported by the general Medicare record-keeping regulations, and that the
requirement deserves little deference because it was not enacted contemporaneously
with the regulations it interprets and was not the product of notice-and-comment
rulemaking. Furthermore, the Hospital contends that the time study requirement
contradicts decades of past practice by the Secretary, intermediaries, and providers
alike, and that it departs from various current Medicare practices under which the
primary usage of space (rather than the particular percentage of its usage for various
purposes) governs Medicare’s reimbursement of the space. In essence, these
arguments assert not only that the Secretary may not retroactively require providers to
conduct a time study of teaching physician office space usage, but that the Secretary
may not enact any such requirement at all.

       We decline to address these arguments for two reasons. First, we review only
what the Secretary did, not what she might have done. See Securities & Exchange
Comm’n v. Chenery Corp., 318 U.S. 80, 93-94 (1943) (legality of agency’s action
depends upon what agency actually did). The Secretary has never attempted to impose
the time study requirement prospectively against the Hospital; in fact, she has expressly
refused to do so despite requests by the Hospital to adjust its reimbursement based on
a current time study of office space usage. Because the Secretary has not sought to
impose the time study requirement prospectively, we should not address whether the
law would permit her to. Second, the Hospital has acquiesced to the time study
requirement’s prospective application. It requested such an application below, and its
reply brief restates the Hospital’s willingness to undertake a current time study of the
office space. See Appellant’s Reply Br. at 7 n.2: “UIHC had no notice by regulation
or manual that this space documentation would be required. If creating such records
now and relating them back to 1985 is viewed as desirable by the Court, UIHC would
be pleased to do so. UIHC has not compiled usage records to date because the

                                          -14-
Secretary has been emphatic that the only time subsequent year records will be
accepted is for physician time studies.”

      On remand, the Secretary must determine the proportion of the teaching
physician office space usage that relates to the Hospital’s graduate medical education
program.11 Among the range of choices available to her, the Secretary might (i) require
the Hospital to undertake a current time study of office space usage,12 or (ii) derive,
based on the current record or after further proceedings, the percentage by which the
teaching physician offices are used for graduate medical education. We leave the
choice to the Secretary’s sound discretion, but any finding is subject to judicial review
and must be supported by substantial evidence.

                                           B.

       The Hospital also attacks the Secretary’s treatment of the teaching physician
office costs on evidentiary grounds. We must assess whether the Secretary’s decision,
as expressed by the Administrator of the Health Care Financing Administration, is
supported by “substantial evidence.” See 5 U.S.C. § 706(2)(E). “Substantial
evidence” is more than a scintilla but less than a preponderance of the evidence; it is


      11
         Once this proportion is determined, the Secretary must adjust the Hospital’s
previous reimbursements dating back to the re-audit, when the office space claim was
initially disallowed (then later somewhat increased). The Hospital’s future
reimbursements -- predicated upon the “base year” -- should employ this same
proportion.
      12
         This holding results from the Hospital’s stated willingness to conduct a current
time study. Again, aside from the retroactive effect of the Secretary’s space usage
documentation standard, we express no opinion as to the legality of the requirement
that office space usage be documented with time studies or of the consequences that
result from a provider’s failure to produce time studies--so long as those consequences
operate prospectively.

                                          -15-
“such relevant evidence as a reasonable mind might accept as adequate to support a
conclusion.” Donaho v. FMC Corp., 74 F.3d 894, 900 n.10 (8th Cir. 1996) (citation
omitted).

        By its own terms, the Secretary’s space usage documentation standard applies
only when teaching physicians use offices both for graduate medical education
purposes and other purposes. See Questions and Answers Pertaining to Graduate
Medical Education, No. 24 (Nov. 1990). The Hospital argues that the record contains
no evidence that the offices are used for any non-educational purposes, other than
incidentally. On this basis, the Hospital argues that the time study requirement does
not apply to it at all, much less retroactively. We are not persuaded. First, the
Hospital’s very argument concedes that at least “incidental” usage of the office space
is not related to graduate medical education. Second, substantial evidence suggests that
the offices are not used solely for reimbursable activities. Kenneth H. Yerington, the
Hospital’s Director of Financial Management and Control, testified before the Provider
Reimbursement Review Board that it was “conceivable” that teaching physicians
incidentally used the offices for purposes other than graduate medical education.
Yerington further conceded that the offices were used for “academic endeavors,
including research funded by grants,” and the Hospital’s Medicare cost report reduced
the claimed office costs to account for the use of the offices for research and
administrative activities (a surprising fact if the offices are used solely for reimbursable
graduate medical education activities). Third, the language of the time study
requirement does not make an exception for “incidental” non-reimbursable space
usage.

       Nevertheless, we also reject the Secretary’s argument that substantial evidence
supports the Administrator’s decision to limit the Hospital’s office space claim to the
percentage of time that teaching physicians spent pursuing graduate medical education
activities--about 20 percent. The Secretary argues that the allocation of teaching
physicians’ time provides substantial evidence of how their offices are used. We do

                                           -16-
not believe that the record supports the Secretary’s conflating of physician time with
office time. Yerington’s testimony as well as photographs of the office space in
question demonstrate that much of the physicians’ activities (especially patient care,
and to a lesser extent many administrative and research activities) cannot be conducted
in the small and sparsely furnished offices, which lack medical equipment. Thus,
substantial evidence supports the conclusion that less than 100 percent of the office
space usage is related to graduate medical education, but it does not support the
conclusion that only 20 percent of the office space usage is so related.
                                          II.

       The Hospital also appeals the district court’s affirmance of the Secretary’s
treatment of the clerical, laundry, and cafeteria expenses. These costs are modest when
compared to the disputed office costs themselves. The Secretary disallowed the
Hospital’s claim for six full-time equivalent secretaries who assisted the teaching
physicians’ graduate medical education activities; further, the Secretary permitted the
Hospital to claim about 19 percent of related laundry and cafeteria expenses--reflecting
the percentage of time that teaching physicians spent operating the graduate medical
education program. In these two respects, we affirm the judgment of the district court.

       Turning first to the Hospital’s secretarial costs, the Secretary’s policy permits
reimbursement for clerical costs so long they are “attributable to teaching physicians.”
Questions and Answers Pertaining to Graduate Medical Education, No. 48, (Nov.
1990). The Secretary may classify such clerical costs as related to graduate medical
education “based upon the portion of physician time allocated to GME.” Id. The
Hospital did not demonstrate which clerical expenses were related to graduate medical
education and which were not. Rather, the Hospital’s calculation of secretarial costs
simply assumed that the costs were a set percentage of faculty costs--a percentage
derived from an unidentified and undated university-wide study. The Secretary
therefore concluded that the Hospital’s claim failed under the general Medicare
regulations requiring providers to supply adequate and auditable documentation, see

                                         -17-
42 C.F.R. §§ 413.20, 413.24, and disallowed the claimed secretarial costs in their
entirety.

       The Hospital argues that its secretarial costs have always been permitted in the
past and that the costs themselves (six secretaries for the teaching duties of 447
physicians) are reasonable. We are not persuaded. To be reimbursable, the costs
claimed by providers need not only be reasonable, see 42 U.S.C. § 1395ww(h)(2), but
must also be adequately documented. See 42 C.F.R. §§ 413.20, 413.24. Unlike the
evidence presented by the Hospital to demonstrate the purpose and general usage of the
teaching physician offices, the Hospital’s documentation did not even purport to show
what portion of the claimed secretarial costs, if any, were related to graduate medical
education. We conclude that the Secretary’s treatment of the clerical expenses
permissibly interprets the regulations relied upon and is supported by substantial
evidence. See 42 C.F.R. § 413.24(a) (1998) (“Providers . . . must provide adequate
cost data. This must be based on their financial and statistical records which must be
capable of verification by qualified auditors.”). Nor do we believe that the Secretary
abused her discretion or acted arbitrarily and capriciously by rejecting the Hospital’s
claim outright, rather than permitting the Hospital another chance to document its
clerical expenses. The relevant Medicare regulations place upon the Hospital the
obligation to substantiate the costs that it claims, and the Secretary may generally deny
reimbursement when presented with inadequate documentation. See Girling Health
Care, Inc. v. Shalala, 85 F.3d 211, 215 (5th Cir. 1996); Daviess County Hosp. v.
Bowen, 811 F.2d 338, 346-47 (7th Cir. 1987).

       We also reject the Hospital’s argument that the claimed laundry and cafeteria
costs should be treated as fully related to graduate medical education. The Secretary
treated these costs as physician compensation and allowed them to be claimed
accordingly--i.e., in proportion to the percentage of physicians’ time spent pursuing
graduate medical education activities. The Hospital has not proven that these expenses
compensate teaching physicians solely for graduate medical education activities, rather

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than for patient care, research, administration, and other duties. We cannot conclude
that the Secretary’s approach violates any relevant regulations, that it is arbitrary and
capricious, that it is unsupported by substantial evidence, or that it constitutes an abuse
of discretion.

                                           III.

      Finally, we reject the Hospital’s argument that it should be allowed the additional
physician compensation costs requested in 1993 and over and above those originally
sought in FY 1985. In its FY 1985 cost report, the Hospital claimed 19.09 percent of
the compensation for 91.5 teaching physicians. Eight years later, faced with the
intermediary’s rejection of the Hospital’s claimed office costs, it attempted to claim
19.99 percent of the compensation for all 447 teaching physicians.13

       Throughout these proceedings, the intermediary, the Provider Reimbursement
Review Board, the Administrator of the Health Care Financing Administration, and the
district court have rejected the Hospital’s “supplemental” physician compensation
claim for the same reason, relying upon the Medicare “anti-redistribution” rule in 42
C.F.R. § 413.85(c) (1998). In relevant part, the regulation provides as follows:

      Although the intent of the program is to share in the support of
      educational activities customarily or traditionally carried on by providers
      in conjunction with their operations, it is not intended that this program
      should participate in increased costs resulting from redistribution of costs
      from educational institutions or units to patient care institutions or units.




      13
        The 19.99 percent figure is based upon the 1991 time study, which showed that
teaching physicians spent 19.99 percent of their time operating the Hospital’s graduate
medical education program.

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(emphasis added). The “anti-redistribution” rule provides that educational activities
will not be reimbursed when they result from a “redistribution,” or shift, of costs from
an educational facility to a patient care facility. See Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 514 (1994). The rule serves to ensure that Medicare will bear the costs
of graduate medical education only if those costs are not already borne by the Hospital
or the community in some other way.

       Because the Hospital claims salary and benefit expenses for an additional 355.5
teaching physicians not previously claimed, the Secretary ruled and now argues that the
claim seeks a prohibited redistribution of costs. The Hospital, on the other hand, only
seeks its “supplemental” claim to the extent that its office and other overhead expenses
are denied. In other words, the Hospital does not seek to exceed the total expenses
(approximately $4.6 million) claimed in its 1985 cost report; it only asks that the
“supplemental” claim be permitted to substitute for those base year claims that are
disallowed. On this basis, the Hospital argues that the “anti-redistribution” rule does
not apply because its claim seeks no increase in total base year costs.

       In essence, the Hospital and the Secretary present us with two competing
interpretations of the “anti-redistribution” regulation. Under the Hospital’s
interpretation, there is a “redistribution” only if the total costs claimed today are over
and above the total costs claimed in the base year (and thus, the costs not met by other
“community” means). Under the Secretary’s reading, by contrast, there is a forbidden
“redistribution” if the Hospital receives an increase in any individual category of costs
claimed in the base year. In this case, the Hospital seeks an increase in teaching
physician compensation costs but not total costs.

       We must decide whether graduate medical education costs should be aggregated
or separated for purposes of the “anti-redistribution” rule. In doing so, we must accept
the Secretary’s interpretation of the regulation unless it is plainly erroneous or
inconsistent with the regulation. See Stinson v. United States, 508 U.S. 36, 45 (1993);

                                          -20-
Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945). The language of the
regulation does not compel the interpretation urged by the Hospital, and we therefore
give legal force to the Secretary’s reading. Accord Thomas Jefferson, 512 U.S. at 515
(The “shift of any reimbursable [cost] from an educational institution or unit to a patient
care institution or unit is prohibited.”) (quotations omitted and emphasis added). We
therefore affirm the district court’s judgment insofar as it affirmed the Secretary’s
denial of the Hospital’s claim for further physician compensation costs not claimed
during the base year.

                                           IV.

       For the foregoing reasons, we reverse the judgment of the district court insofar
as it upheld, while modifying, the Secretary’s treatment of the Hospital’s teaching
physician office costs. We otherwise affirm the judgment of the district court, and we
remand with instructions to remand the case to the Secretary for further proceedings
consistent with this opinion.

   A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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