                           UNITED STATES DISTRICT COURT
                           FOR THE DISTRICT OF COLUMBIA


 ALTA BATES SUMMIT MEDICAL
 CENTER,

    Plaintiff,

      v.                                                    Civil Action No. 08–1015 (CKK)
 KATHLEEN SEBELIUS, in her official
 capacity as Secretary, United States
 Department of Health & Human Services,

    Defendant.


                                 MEMORANDUM OPINION1
                                    (October 8, 2009)

       This is an action for judicial review of a decision of the Provider Reimbursement Review

Board (“PRRB” or “Board”), an entity within the United States Department of Health & Human

Services (“HHS”) whose decision in this case became final when Defendant Secretary of HHS

(the “Secretary”) did not act on it within 60 days. Plaintiff Alta Bates Summit Medical Center

(“Alta Bates”) seeks to set aside the PRRB’s determination of the appropriate base year for

calculating Medicare reimbursement costs for Alta Bates’ geriatric psychiatric unit. Alta Bates

and the Secretary have filed cross-motions for summary judgment. For the reasons explained

below, the Court shall award summary judgment to the Secretary.

                                       I. BACKGROUND

       The essential facts underlying this action are not in dispute. Alta Bates is a not-for-profit

corporation that operates an acute care hospital in Oakland, California (known at all relevant

       1
         Pursuant to Rule 25(d), Kathleen Sebelius has been substituted for Michael O. Leavitt as
the defendant in this action.
times as Summit Medical Center) and is certified by the Medicare program as a “provider of

services” to Medicare patients. Pl.’s Stmt.2, ¶¶ 1-2. In 1997, Alta Bates opened a geriatric

inpatient psychiatric unit providing services to patients 65 years of age or older and patients 55

years of age or older who have disabilities recognized by Medicare. Id., ¶ 4. Alta Bates had

previously operated a Medicare-certified inpatient psychiatric unit that it acquired during a

merger in 1992, but that unit ceased operations in June 1992, and Alta Bates subsequently

removed psychiatric services from its state license. Id., ¶¶ 10-12. Alta Bates did not have an

active psychiatric unit again until March 1997. Id., ¶ 12. The “new” geriatric psychiatric unit

occupied the same building as the “old” unit that had closed.3 Def.’s Stmt., ¶ 11.

       Medicare certified Alta Bates’ new psychiatric unit effective March 1, 1997 and classified

it as a unit excluded from Medicare’s Prospective Payment System (“PPS”). Pl.’s Stmt., ¶ 5.

Although PPS replaced the “reasonable cost” reimbursement scheme that had led to skyrocketing

costs, Congress excluded certain types of hospital units from PPS because of their atypical

patient populations. See Transitional Hospitals Corp. of La., Inc. v. Shalala, 222 F.3d 1019,

1021 (D.C. Cir. 2000). Thus, inpatient psychiatric hospital units could be certified by Medicare


       2
          The Court strictly adheres to the text of Local Civil Rule 7(h) (formerly Rule 56.1 when
resolving motions for summary judgment). See Burke v. Gould, 286 F.3d 513, 519 (D.C. Cir.
2002) (finding district courts must invoke the local rule before applying it to the case). The
Court has advised the parties that it strictly adheres to Rule 7(h) and has stated that it “assumes
facts identified by the moving party in its statement of material facts are admitted, unless such a
fact is controverted in the statement of genuine issues filed in opposition to the motion.” [7]
Order at 1 (Sept. 4, 2008). Thus, in most instances the Court shall cite only to one party’s
Statement of Material Facts (“Stmt.”) unless a statement is contradicted by the opposing party.
The Court shall also cite directly to evidence in the record, where appropriate.
       3
         The Court recognizes that the parties dispute whether the terms “new,” “old,” and
“closed” are appropriate, but the Court shall employ these terms for the sake of convenience and
clarity.

                                                 2
as PPS-excluded units and be reimbursed on a reasonable cost basis.4 Id. Under the reasonable

cost regime, a provider is reimbursed for “the cost actually incurred, excluding therefrom any

part of incurred cost found to be unnecessary in the efficient delivery of need health services . . .

.” 42 U.S.C. §§ 1395(f)(b)(1), 1395x(v)(1)(A).

        The reasonable cost regime applicable to PPS-excluded psychiatric units was modified by

the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), which placed new limits on

reasonable cost reimbursement. See Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.

No. 97-248, § 1010(a)(1), 96 Stat. 324, 331-35 (codified at 42 U.S.C. § 1395ww(b)). Under

TEFRA, hospitals are given financial incentives to keep costs below a “target amount” and

penalized when costs exceeded that amount. See 42 U.S.C. § 1395ww(b). A hospital’s TEFRA

target amount is determined by the amount of allowable operating costs of inpatient hospital

services during the year before TEFRA applied to the unit (known as the “base period” or “base

year”), plus an annual percentage increase designed to adjust for inflation. See id.

§ 1395ww(b)(3)(A). Thus, the amount of costs incurred during the base year is critical to

determining the reimbursement rates for hospital units that are excluded from PPS.

        After Alta Bates acquired its “old” psychiatric unit in 1992, it reported that the unit was

subject to a TEFRA target amount. Def.’s Stmt., ¶ 7.5 The base year that had been established

for that “old” unit was 1984. See Def.’s Stmt., ¶ 15; Pl.’s Stmt., ¶ 8. When Alta Bates submitted

its first cost report for its new geriatric psychiatric facility in 1998, it reported the unit as a new


        4
        Since the time period relevant to this dispute, HHS has promulgated regulations creating
a PPS for inpatient psychiatric facilities. See generally 42 C.F.R. Part 132, Subpart N.
        5
        Alta Bates also indicated that this unit had been certified by Medicare effective March 1,
1992 (the date that Alta Bates acquired the unit). Def.’s Stmt., ¶ 6.

                                                    3
unit excluded from PPS and subject to the cost-based reimbursement with no existing TEFRA

target rate limit applied. Pl.’s Stmt., ¶ 6. When Alta Bates was initially audited by the Medicare

fiscal intermediary6 for that fiscal year, the auditors concluded that the proper TEFRA base year

should be the fiscal year ending February 28, 1998.7 Pl.’s Stmt., ¶ 7. However, the intermediary

subsequently determined that the proper TEFRA base year for the new unit was 1984–the base

year that had been established for the “old” unit previously operated by Alta Bates. Pl.’s Stmt.,

¶ 8. By applying the base year cost of $4555.42 per discharge and updating it by annual

percentage increases, the intermediary determined that the per discharge target amount was

$7434.31, resulting in a reimbursement per discharge of $8177.74. Id., ¶¶ 14-15. By contrast,

the actual cost per Medicare discharge at Alta Bates’ geriatric psychiatric unit was $16,108.41 for

the 1998 cost year. Id., ¶ 14. The intermediary took a similar approach in the 1999 cost year,

resulting in a per discharge reimbursement of $10,534 compared to actual costs of $13,277.92

per discharge. Id., ¶ 16.

       Alta Bates appealed the intermediary’s adjustments to the Provider Reimbursement

Review Board, a five-person panel within HHS that hears Medicare reimbursement disputes.

The PRRB heard the appeal on July 17, 2007. Def.’s Stmt., ¶ 17. On April 15, 2008, the Board

rendered a decision affirming the intermediary’s decision to utilize 1984 as the TEFRA base year



       6
         A fiscal intermediary (now referred to as a Medicare Administrative Contractor) is an
organization that enters into an agreement with the Secretary to administer Medicare payments
and perform other program functions. See 42 U.S.C. §§ 1395h, 1395kk-1; 42 C.F.R.
§ 413.20(b).
       7
        Alta Bates reports costs based on a fiscal year that ends on the last day of February.
Accordingly, the first annual cost report for the new psychiatric unit was for the fiscal year
ending February 28, 1998.

                                                 4
for Alta Bates’ psychiatric unit. Id., ¶ 19. Alta Bates appealed to the Administrator of the

Centers for Medicare & Medicaid Services (CMS), who declined to review the Board’s decision.

Id., ¶ 23. The Board’s decision thus became the final decision of the Secretary. See 42 U.S.C. §

1935oo(f)(1). Alta Bates brought this action seeking judicial review of the Board’s decision.

                                    II. LEGAL STANDARD

       When reviewing a decision of the PRRB, the court shall follow the standard of review set

forth in the Administrative Procedure Act. See 42 U.S.C. § 1395oo(f)(1). Under that standard,

the court shall “hold unlawful and set aside agency action, findings, and conclusions found to be

. . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5

U.S.C. § 706(2). “‘The party challenging an agency’s action as arbitrary and capricious bears the

burden of proof.’” City of Olmstead Falls v. Fed. Aviation Admin., 292 F.3d 261, 271 (D.C. Cir.

2002) (quoting Lomak Petroleum, Inc. v. Fed. Energy Regulatory Comm’n, 206 F.3d 1193, 1198

(D.C. Cir. 2000)). The Court need not find that the agency’s decision is “‘the only reasonable

one, or even that it is the result [the Court] would have reached had the question arisen in the

first instance in judicial proceedings.’” Am. Paper Inst., Inc. v. Am. Elec. Paper Serv. Corp., 461

U.S. 402, 422 (1983) (quoting Unemployment Compensation Comm’n v. Aragon, 329 U.S. 143,

153)). The Court’s review is limited to the administrative record. Bloch v. Powell, 227 F. Supp.

2d 25, 30 (D.D.C. 2002).

       The court “must give substantial deference to an agency’s interpretation of its own

regulations.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). The court’s “task is

not to decide which among several competing interpretations best serves the regulatory purpose.”

Id. Rather, the agency’s interpretation is controlling “unless it is plainly erroneous or


                                                  5
inconsistent with the regulation.” Id. (citations omitted). Broad deference is all the more

warranted where the regulation concerns a complex and technical regulatory program such as

Medicare. See id. (applying deferential standard to the Secretary’s construction of Medicare

reimbursement issues before the PRRB).

                                           III. DISCUSSION

        At issue in this case is the PRRB’s interpretation of two specific regulatory provisions

that govern the determination of the proper base period for PPS-excluded hospital units under

TEFRA. The first provision, 42 C.F.R. § 413.40(b)(1)(i) (hereafter “subsection (i)”), states that

once a TEFRA target amount is established for a particular excluded unit, that target amount

remains applicable to the unit despite intervening cost periods in which the unit is either not

subject to TEFRA or not participating in the Medicare program. The second provision, 42

C.F.R. § 413.40(b)(1)(ii) (hereafter “subsection (ii)”), states that the base period for a “newly

established excluded unit” is the first cost reporting period of at least 12 months following the

new unit’s certification to participate in Medicare. The PRRB determined that subsection (i)

applies in this case because Alta Bates previously operated a psychiatric unit with an established

TEFRA target amount, and that amount remains applicable despite the unit’s nonparticipation in

the Medicare program from 1992 to 1997. See Administrative Record (“AR”) at 38 (PRRB

Decision). Alta Bates contends that subsection (i) cannot apply because its geriatric psychiatric

unit is an entirely new unit for which no TEFRA target amount has been established, and the

Board therefore should have applied subsection (ii) instead. The question before the Court is

thus whether the PRRB has properly interpreted these regulations and applied them correctly or

appropriately to the facts of this case.


                                                  6
A.     The PRRB’s Interpretation of the Regulations Is Reasonable

       The parties each offer conflicting interpretations of the applicable regulations. However,

under the APA’s deferential standard of review, “[i]f the Secretary ‘has given the text a reading

that is linguistically possible and makes sense in light of the purposes of the [regulation],’ her

interpretation must prevail.” SSM Rehabilitation Inst. v. Shalala, 68 F.3d 266, 269 (8th Cir.

1995) (quoting Homemakers N. Shore, Inc. v. Bowen, 832 F.2d 408, 413 (7th Cir. 1987)).

Accordingly, the Court must determine whether the PRRB’s interpretation of the regulations is

plausible.

       The text of the relevant provisions is below:

       (i) The target amount established under this provision remains applicable to a hospital or
       excluded hospital unit, as described in §§ 412.25 through 412.30 of this chapter, despite
       intervening cost reporting periods during which the hospital or excluded hospital unit is
       not subject to the ceiling as a result of other provisions of the law or regulations, or
       nonparticipation in the Medicare program, unless the hospital or excluded hospital unit
       qualifies as a new hospital or excluded hospital unit under the provisions of paragraph (f)
       of this section.

       (ii) The base period for a newly established excluded unit is the first cost reporting period
       of at least 12 months following the unit’s certification to participate in the Medicare
       program.

42 C.F.R. § 413.40(b)(1). Under subsection (i), a previously established TEFRA target amount

remains in effect unless the hospital unit qualifies as “new” under 42 C.F.R. § 413.40(f), which

provides a new provider exemption for certain hospitals that have been operating and providing

services for less than two full years. See 42 C.F.R. § 413.40(f).8 The parties appear to agree that


       8
          Section 413.40(f) defines a “new hospital” as “a provider of hospital inpatient services
that (A) [h]as operated as the type of hospital for which CMS granted it approval to participate in
the Medicare program, under present or previous ownership (or both), for less than two full
years; and (B) [h]as provided the type of hospital inpatient services for which CMS granted it
approval to participate in the Medicare program, for less than 2 years.” 42 C.F.R.

                                                  7
Alta Bates’ psychiatric unit does not qualify for this new provider exemption, and Alta Bates did

not request such an exemption. See Pl.’s Opp’n to Def.’s Cross-Mot. for Summ. J. & Reply to

Def.’s Opp’n to Pl.’s Mot. for Summ. J. (“Pl.’s Opp’n”) at 6-9; AR at 38 (PRRB’s Decision).

Instead, Alta Bates contends that its geriatric psychiatric unit falls squarely within the ambit of

subsection (ii) as a “newly established excluded unit.”

        The regulations do not define the term “newly established excluded unit.” Alta Bates

argues that this phrase plainly and unambiguously encompasses its geriatric pyschiatric unit. In

support of that proposition, Alta Bates relies on several facts that are undisputed in the record.

First, Alta Bates closed its “old” unit shortly after acquiring it in 1992 and amended its state

license so that it could no longer legally provide inpatient psychiatric services. See Mem. in

Supp. of Pl.’s Mot. for Summ. J. (“Pl.’s Mem.”) at 16. Second, Alta Bates obtained a new

Medicare certification for its geriatric psychiatric unit, effective March 1, 1997—something it

contends it would not have had to do if it already had an existing unit. See id. at 17. Third, the

geriatric psychiatric unit serves a much older patient population with different needs and higher

costs than the old unit, such that it does not make sense to consider it to be the same unit. Id. at

26-33. Thus, Alta Bates maintains, the facts clearly show that the geriatric psychiatric unit is an

altogether different unit than the one that Alta Bates briefly operated in 1992.

        The Secretary does not dispute these facts but contends they are irrelevant. The Medicare


§ 413.40(f)(1)(i). Although paragraph (f) does not explicitly define the term “newly established
unit,” it states that “[a] newly established unit that is excluded from [PPS] . . . does not qualify
for the [new provider] exemption . . . unless the unit is located in an acute care hospital that, if it
were subject to the provisions of this section, would qualify as a new hospital under paragraph
(f)(1)(i) of this section.” Id. § 413.40(f)(1)(ii). Thus, to qualify under paragraph (f), a newly
established excluded unit must be located in a hospital that has been operating and providing
particular services for less than two years.

                                                   8
regulations for excluded hospital units do not distinguish between a “geriatric psychiatric” unit

and an ordinary psychiatric unit. See 42 C.F.R. §§ 412.25, 412.27. According to the Secretary,

Alta Bates’ Medicare certification is merely part of an administrative mechanism to ensure

compliance with Medicare standards. See Mem. of P. & A. in Supp. of Def.’s Cross-Mot. for

Summ. J. and in Opp’n to Pl.’s Mot. for Summ. J. (“Def.’s Mem.”) at 19. Nothing in the

Medicare regulations, the Secretary notes, equates obtaining Medicare certification with

becoming a “newly established” unit. See id. at 18. Although the Secretary considers Alta

Bates’ decision to reapply for Medicare certification proper in this instance because it had to

have its state license amended to authorize psychiatric services, the Secretary does not view the

certification as relevant to the unit’s status as a “newly established excluded unit.” Id. at 19.

       It is clear from subsection (i) that if Alta Bates had continued to operate its “old”

psychiatric unit and simply withdrawn from the Medicare program between June 1992 and

March 1997, the previously established TEFRA base year would remain in effect when it sought

to rejoin the program. It is less clear from the text of the regulations whether the fact that a

hospital completely closes an old unit and reopens a new one changes that result. The PRRB

concluded that it does not, because otherwise a hospital could obtain a new base year (and thus

increase its target amount) anytime it wanted simply by closing and reopening. AR at 38.

Although the Board found in this case that “there is no evidence of intent to manipulate the base

year rate,” it held that Alta Bates’ interpretation of the regulation would have “adverse policy

implications.” Id. The Board thus concluded that subsection (ii)’s definition of “newly

established excluded unit” applies only to hospital units that have never had a TEFRA target




                                                  9
amount established.9 Id. The Board further rejected Alta Bates’ contention that subsection (i)

cannot apply unless an excluded unit is in existence during the intervening cost reporting periods

in which the TEFRA target amount did not apply. Id.

       The Court finds that the PRRB’s interpretation of the regulations is reasonable. Alta

Bates argues that the phrase “newly established excluded unit” plainly refers to a unit that was

not in existence prior to its Medicare certification. However, as demonstrated by the facts of this

case, the phrase is ambiguous. While “newly established” might mean “newly certified,” it could

also be interpreted to apply only to a completely new facility, or, as the Board construed it, to

apply only to units operated by providers who have never operated a similar excluded unit with

an established TEFRA target amount. Moreover, the phrase “nonparticipation in the Medicare

program” is elastic enough to include nonparticipation due to a unit’s closure and decertification.

The PRRB’s interpretation is reasonable in light of the nature of the TEFRA program and the

regulations as a whole, and the Court must defer to an agency’s reasonable interpretation of

ambiguous regulatory provisions.

       Alta Bates claims that when the Board considered the “adverse policy implications” of

Alta Bates’ plain-language approach, see AR at 38, the Board surreptitiously (and impermissibly)

rewrote the regulations through interpretation. See Pl.’s Mem. at 24-25. But the Board did not



       9
         The parties’ arguments contain a certain degree of semantic circularity—Alta Bates
argues that no TEFRA target amount was previously established for its new unit, while the
Secretary counters that the unit is not “new” as a matter of law (even if as a factual matter it may
be quite different than the unit that was previously operated). The crux of the Board’s
interpretation of the regulations is that once a provider establishes an inpatient psychiatric unit
excluded from PPS and obtains a TEFRA base year for that unit, there can never be a “newly
established excluded unit” for purposes of subsection (ii) (unless the unit qualifies as new under
42 C.F.R. § 413.40(f)). See AR at 38.

                                                 10
adopt an unreasonable construction of the regulations, nor did it contradict a prior agency

explication. Indeed, the agency’s ability to exercise judgment grounded in policy concerns is one

of the primary rationales for deferring to an agency’s interpretation of its own regulations. See

Thomas Jefferson Univ., 512 U.S. at 512.10 Moreover, the Board’s construction of subsection (i)

is supported by the fact that the provision already includes one explicit exception—for units that

qualify as new under paragraph (f)—whereas Alta Bates seeks to add an additional, implicit

exception for units that were not in existence during the intervening cost reporting periods.11

        Another factor supporting the agency’s interpretation is the availability of alternative

avenues of relief for Alta Bates. For example, under 42 C.F.R. § 413.40(i), Alta Bates can apply

for a new base period that is “more representative of the reasonable and necessary cost of

furnishing inpatient services . . . .” Although Alta Bates protests that obtaining a new base period

would be difficult because of the documentation that would be required, see Pl.’s Opp’n at 21,

the fact that the regulations contemplate such a base-year adjustment indicates that the Board’s

interpretation of subsection (i) is not unduly restrictive. The Secretary also cites other


        10
          Alta Bates suggests that the policy concerns cited by the Board do not support its
interpretation of the regulations because TEFRA limits are no longer applicable to inpatient
psychiatric units. See Pl.’s Mem. at 25. But the Court is not permitted to substitute its own
policy judgment for the agency’s. New York v. U.S. Envt’l Prot. Agency, 413 F.3d 3, 18 (D.C.
Cir. 2005).
        11
           Alta Bates contends that because the Board did not explicitly refer to paragraph (f) in
its written opinion, the Secretary cannot now make any arguments based on paragraph (f) to
defend the Board’s decision. See Pl.’s Opp’n at 6-7. However, although an agency’s post hoc
rationalizations are not entitled to deference, interpretations in the form of a legal brief are “still
‘worthy’ of deference despite the existence of litigation interests on the part of the agency.”
United States v. Levin, 496 F. Supp. 2d 116, 124 (D.D.C. 2007) (quoting Auer v. Robbins, 519
U.S. 452, 462 (1997)). The positions advanced by the Secretary reflect the “agency’s fair and
considered judgment on the matter” and are thus entitled to deference. See Nat’l Wildlife Fed’n
v. Browner, 127 F.3d 1126, 1129 (D.C. Cir. 1997) (citing Auer, 519 U.S. at 462).

                                                   11
adjustments that are available to Alta Bates, see Def.’s Mem. at 21, though Alta Bates disputes

whether these provisions could provide meaningful relief, see Pl.’s Opp’n at 20. However, these

adjustment provisions demonstrate that the regulations can accommodate changed circumstances

without Alta Bates’ preferred construction.

       Alta Bates further contends that the Board’s decision is arbitrary, capricious, and not

supported by substantial evidence because the record clearly establishes that the “old” unit and

“new” unit are factually distinct entities. See Pl.’s Mem. at 26-33. However, the Board did not

make a factual finding that the old and new units were similar or the same. See AR at 38.

Rather, the Board accepted the undisputed facts presented to it and determined that they fit

within 42 C.F.R. § 413.40(b)(1)(i). Id. Accordingly, the Court cannot conclude that the Board’s

decision was arbitrary, capricious, or unsupported by substantial evidence. Furthermore, because

the Secretary’s interpretation of her own regulations “is neither ‘plainly erroneous’ nor

‘inconsistent with the regulation,’” it commands the Court’s deference. Abington Crest Nursing

& Rehab. Ctr. v. Sebelius, 575 F.3d 717 (D.C. Cir. 2009) (quoting Thomas Jefferson Univ., 512

U.S. at 512).

B.     The PRRB’s Interpretation of the Regulations Does Not Violate Medicare’s Ban on
       Cross-Subsidization

       Alta Bates implies that the PRRB’s interpretation of the regulations cannot be correct

because it would violate Medicare’s “anti-cross-subsidization” principle. See Pl.’s Mem. at 34-

35. Medicare’s authorizing statute provides that the Secretary’s regulations shall:

       take into account both direct and indirect costs of providers of services . . . in order
       that, under the methods of determining costs, the necessary costs of efficiently
       delivering covered services to individuals covered by [Medicare] will not be borne
       by individuals not so covered, and the costs with respect to individuals not so


                                              12
       covered will not be borne by such insurance programs . . . .

42 U.S.C. § 1395x(v)(1)(A). Alta Bates contends that the Board’s decision violates this

principle by dramatically underfunding Alta Bates’ geriatric psychiatric unit, such that the

costs of treating Medicare patients will necessarily be subsidized by non-Medicare

patients. The Secretary reads this provision as only permitting reimbursement for costs

that are allowable under the Medicare program, and the Secretary’s contention is that

these costs are not allowable pursuant to the TEFRA restrictions. See Def.’s Mem. at 22

n.10. Otherwise, the Secretary maintains, any denial of reimbursement for costs

exceeding TEFRA limits would violate the anti-cross-subsidization principle, defeating

the entire purpose of TEFRA in combating rising costs. The Court agrees, and because

the Secretary’s construction of the TEFRA statute and regulations is entitled to deference,

the Court finds that the Board’s decision does not violate Medicare’s ban on cross-

subsidization.

                                   IV. CONCLUSION

       For the foregoing reasons, the Court shall DENY Plaintiff’s [13] Motion for

Summary Judgment and GRANT Defendant’s [18] Cross-Motion for Summary

Judgment. An appropriate Order accompanies this Memorandum Opinion.



Date: October 8, 2009

                                                           /s/

                                                     COLLEEN KOLLAR-KOTELLY
                                                     United States District Judge



                                            13
