In the
United States Court of Appeals
For the Seventh Circuit

No. 99-2035

HOWARD YOUNG MEDICAL CENTER,
INCORPORATED,

Plaintiff-Appellant,

v.

DONNA E. SHALALA, Secretary of Health
and Human Services,

Defendant-Appellee.



Appeal from the United States District Court
for the Western District of Wisconsin.
No. 98 C 520--John C. Shabaz, Chief Judge.


Argued November 2, 1999--Decided March 21, 2000



  Before COFFEY, FLAUM and KANNE, Circuit Judges.

  COFFEY, Circuit Judge. On July 22, 1998, Howard
Young Medical Center, Inc. (Howard Young), a 99-
bed hospital located in Woodruff, Wisconsin,
appealed the Secretary of Health and Human
Services’ (Secretary) decision that it was not a
sole community hospital./1 On December 4, 1999,
the district court granted summary judgment in
favor of the Secretary, concluding that the
decision not to grant Howard Young sole community
hospital status was supported by the evidence in
the case and consistent with the administrative
regulations implemented by the Secretary. We
affirm.

I.   BACKGROUND

A. The Medicare System--Relevant Statutes and
Regulations

  Under the Medicare system prior to 1983,
hospitals and other health care providers were
entitled to payment of the lesser of the
"reasonable cost" or the "customary charge" for
the services they provided. See 42 U.S.C. sec.
1395f(b) (1982). This all changed in 1983 when
Congress established a prospective payment system
(PPS) for Medicare payment of inpatient hospital
services. See 42 U.S.C. sec. 1395ww(d). Under the
PPS, Medicare payments are made at predetermined
rates for hospital discharges based upon the
diagnosis of the patient. See 49 Fed. Reg. 235
(1984). Like all great bureaucracies, this is not
the end of the story. There are exceptions to the
"diagnosis" based payment scheme; the Secretary
is permitted to authorize additional payments to
hospitals which are designated as a sole
community hospital.

  A sole community hospital is defined by
Medicare as:

any hospital--

(I) that the Secretary determines is located
more than 35 road miles from another hospital,

(II) that, by reason of factors such as the time
required for an individual to travel to the
nearest alternative source of appropriate
inpatient care (in accordance with standards
promulgated by the Secretary), location, weather
conditions, travel conditions, or absence of
other like hospitals (as determined by the
Secretary), is the sole source of inpatient
hospital services reasonably available to
individuals in a geographic area who are entitled
to benefits under [Medicare], or

(III) that is designated by the Secretary as an
essential access community hospital under
[Medicare].

42 U.S.C. sec. 1395ww(d)(5)(D)(iii) (1992).
Consistent with the statute, the Secretary
promulgated administrative regulations relating
to a particular hospital’s ability to qualify as
a sole community hospital.

  The regulations promulgated by the Secretary
provide, in relevant part, that to be classified
as a sole community hospital, Howard Young must
demonstrate that it is located in a rural area,
is between 25 to 35 miles from other like
hospitals,/2 and that no more than 25 percent of
the patients in the hospital’s service area have
been admitted to other like hospitals within a
35-mile radius. See 42 C.F.R. sec. 412.92(a)(1).
The regulations, therefore, require two separate
calculations: 1) Howard Young must establish its
"service area;" and 2) the hospital must
calculate its "market share" within that service
area.

  "Service area" is defined as "the area from
which a hospital draws at least 75 percent of its
inpatients during the most recent 12-month cost
reporting period ending before it applies for
classification as a sole community hospital." 42
C.F.R. sec. 412.92(c)(3). Furthermore, a
"hospital may define its service area as the
lowest number of contiguous zip codes from which
the hospital draws at least 75 percent of its
inpatients." Medicare Provider Reimbursement
Manual (PRM) sec. 2810(A)(2)(c).

B. Howard Young’s 1992 Application for Sole
Community Hospital Status

  In 1992, Howard Young filed an application for
sole community hospital status, as required, with
its fiscal intermediary, Blue Cross and Blue
Shield United of Wisconsin (Blue Cross). See 42
C.F.R. sec. 412.92(b)(1)(i). In its application,
Howard Young defined its service area by
identifying the 16 zip codes most dependent upon
the hospital. In identifying the 16 zip codes,
Howard Young used those areas with the highest
percentage of discharges as opposed to those
areas with the highest number of discharges.
Based on the information submitted, Blue Cross
recommended that the Health Care Financing
Administration (HCFA) approve Howard Young’s
application.

  The HCFA disagreed and denied Howard Young’s
application for sole community hospital status.
HCFA did so because Howard Young failed to comply
with the "lowest number of zip codes" requirement
when it selected zip codes with the highest
percentages of discharges instead of the zip
codes with the highest numbers of discharges. The
HCFA used the information submitted by the
hospital and recalculated Howard Young’s service
area in accordance with the regulations. Because
the hospital had 2,253 discharges during the time
period under consideration, its service area (in
order to meet the required 75%) needed to contain
at least 1,690 discharges. See 42 C.F.R. sec.sec.
412.92 (a)(1), (c)(3). The HCFA explained that it
recalculated the service area "in the order of
discharges from the highest to the lowest, until
the service area has included at least 75 percent
of [the hospital’s] inpatient discharges . . . ."
This recalculation resulted in a ten zip code
service area as opposed to the 16 zip code area
that the hospital proposed. The HCFA then took
those ten zip codes and compared Howard Young’s
market share as compared to "other like
hospitals" located in a 35 miles radius. By
merely comparing the statistics of the hospitals,
HCFA concluded that Howard Young’s market share
was only 41.4%, well short of the 75% required
for sole community hospital status.

C. Proceedings before the Provider Reimbursement
Review Board

  In accordance with the regulations, Howard Young
appealed the HCFA’s denial of its application to
the Provider Reimbursement Review Board (PRRB).
Shortly before the hearing, in September and
October of 1995, Howard Young submitted
additional discharge data regarding its 1991
fiscal year that it had received from the State
of Wisconsin’s Office of Health Care Information.
According to Howard Young, this new information,
which was also submitted to the HCFA,
"conclusively established that [it] qualified for
sole community hospital status." Basically Howard
Young took the ten zip code service area
designated by the HCFA and substituted the
Boulder Junction, Wisconsin, zip code for the
Rhinelander, Wisconsin, zip code despite the fact
that Boulder Junction had fewer discharges than
Rhinelander./3

  The PRRB held an administrative hearing on
October 12, 1995, and the only parties allowed to
participate, according to the regulations, were
the hospital and the intermediary, and neither
the Secretary nor the HCFA. See 42 C.F.R. sec.
405.1843. At the hearing, the hospital and the
intermediary stipulated that if the new
information submitted by the hospital was used,
then it would qualify for sole community hospital
status.

  On March 26, 1998, the PRRB reversed the HCFA
and granted Howard Young sole community hospital
status effective September 24, 1992. In so doing,
the PRRB concluded that it was authorized to
consider the new materials submitted by the
hospital under 42 U.S.C. sec. 1395oo(d). The PRRB
also concluded that the information submitted by
Howard Young was relevant to the determination of
whether it qualified for sole community hospital
status under Medicare. Based on the fact that the
hospital and the intermediary stipulated that
Howard Young would qualify as a sole community
hospital if the information submitted in 1995 was
used, the PRRB concluded that Howard Young was
"entitled" to sole community hospital status.

D.   The Secretary’s Decision

  The Secretary, acting through her designated
agent, the Deputy Administrator of HCFA, reversed
the PRRB and concluded that the HCFA had
"properly denied [Howard Young’s] request for
designation as a sole community hospital." The
Secretary determined that the regulations and PRM
require that Howard Young submit all relevant
information with its original application. Based
on the original information submitted by the
hospital, the Secretary found that the HCFA had
properly analyzed the data and denied Howard
Young’s application because the application did
not use the "lowest number of zip codes." The
Secretary also concluded that there was no
legitimate reason to substitute Boulder Junction
for Rhinelander because Boulder Junction had
fewer discharges.

  The Secretary also determined that the HCFA’s
denial of Howard Young’s application for sole
community hospital status could only reasonably
be reversed based on the information originally
submitted to the HCFA, and not based on the
information submitted to the PRRB. In any event,
the Secretary concluded that the information
Howard Young submitted to the PRRB failed to
"demonstrate that HCFA improperly denied [sole
community hospital] status," but could only be
considered, at most, "a new application for [sole
community hospital] status and not a basis for
reversing HCFA’s original denial." Finally, the
Secretary concluded that the PRRB had
"incorrectly based its decision on the
stipulation," because the HCFA’s recalculation of
Howard Young’s service area "is supported by the
record and consistent with the requirements of
the regulations and manual instructions."

  Howard Young appealed the Secretary’s reversal
of the PRRB to the district court, which granted
summary judgment in favor of the Secretary.
Howard Young now appeals to this Court.

II.    ISSUE

  On appeal, we consider whether the Secretary’s
decision to uphold the HCFA’s denial of Howard
Young’s application for sole community hospital
status was supported by substantial evidence and
in accordance with the law.

III.    DISCUSSION

  As the district court observed, review in
federal court of decisions entrusted to
administrative agencies is deferential and thus
very limited in scope. We will set aside agency
action only if we determine that its decision is
arbitrary, capricious, an abuse of discretion,
unsupported by substantial evidence in the case,
or not in accordance with the law. See 5 U.S.C.
sec. 706(2)(A), (E); see also Central States
Enter., Inc. v. ICC, 780 F.2d 664, 673, 674 n.10
(7th Cir. 1985). In applying this standard, we
look to the administrative record in existence,
and we thus accord no deference to the district
court’s disposition of the matter. See Hanson v.
Espy, 8 F.3d 469, 472 (7th Cir. 1993). We focus
primarily on whether the agency considered the
relevant data and offered a satisfactory
explanation for its action; we look only for a
rational connection between the facts the agency
found and the decision it made. See Motor Vehicle
Mfrs. Ass’n v. State Farm Mutual Ins. Co., 463
U.S. 29, 43 (1983). We are not permitted to
reweigh the evidence or to substitute our own
judgment for that of the administrative agency.
See Jancik v. HUD, 44 F.3d 553, 556 (7th Cir.
1995). Furthermore, "[t]he Secretary’s
interpretation of regulations issued pursuant to
the complex and reticulated Medicare Act is
entitled to considerable deference . . . [and
t]he fact that the PRRB and the Secretary may
have reached different conclusions does not
diminish the deference due the Secretary’s final
decision; [f]inal responsibility for rendering
decisions rests with the agency itself, not with
subordinate hearing officers." Adventist Living
Centers, Inc. v. Bowen, 881 F.2d 1417, 1420-21
(7th Cir. 1989) (internal citations and
quotations omitted).

A. Denial of the Hospital’s Application Based on
the 1992 Data

  Howard Young argues that the Secretary’s
decision with respect to the 1992 data was
neither supported by substantial evidence nor in
accordance with the law governing the designation
of a facility as a sole community hospital.
According to Howard Young, its original 1992
application identified a sixteen zip code area
that accounted for more than 75 percent of its
inpatient admissions with less than 25 percent of
inpatients from the same service area having been
admitted to other like hospitals within a 35-mile
radius. Thus, Howard Young argues, its original
application satisfied the requirements set forth
in the regulations and the PRM. See 42 C.F.R.
sec. 412.92(a) (1)(i); PRM sec. 2810(A)(2)(c).

  The HCFA, however, was able to use the
statistics submitted by Howard Young with its
original application for sole community hospital
status to recalculate the hospital’s service
area. By listing zip codes in order of discharges
from the highest to the lowest number until the
service area included at least 75% of the
hospital’s inpatient discharges, the HCFA was
able to devise a service area for Howard Young
which contained only ten zip codes. Using this
service area, the HCFA calculated that the
hospital’s market share was only 41.4%, obviously
short of the 75% necessary to be designated a
sole community hospital. See 42 C.F.R. sec.
412.92(a)(1)(i). In an effort to challenge the
propriety of the HCFA’s proposed service area,
Howard Young asserts that contiguity is a
requirement to be considered in determining a
facility’s service area.

  Howard Young’s argument is misplaced. Despite
the fact that the PRM uses the term "contiguous
zip codes," zip code continuity is not a
requirement, and was included in the PRM by
mistake. See 61 Fed. Reg. 46203 (1996). The HCFA
revised the sole community hospital regulations
in 1988 and stated that the proper criterion is
simply the "lowest number of zip codes." See 53
Fed. Reg. 38510-11 (1988). The HCFA explained
that it applied the "lowest number" test since
October 1, 1988, because the lowest number of
contiguous zip codes method does not present a
very "accurate picture of a hospital’s true
service area . . . ." 61 Fed. Reg. 46204 (1996).
Additionally, in the 1988 Federal Register
preamble, the HCFA also noted that it would use
the "lowest number of zip codes" in determining
a provider’s service area.

  In St. Anthony Mem’l Hosp. v. Blue Cross and
Blue Shield of Ill., PRRB No. 2000-D5, the
Secretary explained that statements in the PRM
are generally considered interpretive, not
binding, whereas statements in the preamble
portion of the Federal Register constitute the
agency’s statutory interpretation. PRRB No. 2000-
D5 at 11, citing Methodist Hosps. of Sacramento
v. Shalala, 38 F.3d 1225, 1229-35 (D.C. Cir.
1994); Jewish Hosp. v. Sec. of Health and Human
Servs., 19 F.3d 270, 272-76 (6th Cir. 1994).
Thus, the fact that the preamble to both the 1988
and 1996 Federal Register stated that a service
area would be made up of the lowest number of zip
codes, without any mention that they be
contiguous, indicates that contiguity is not a
requirement for a sole community hospital
application.

  Because contiguity of zip codes is not required
when defining a service area for purposes of
determining whether Howard Young qualifies as a
sole community hospital, we defer to the service
area as defined by the HCFA in considering the
hospital’s application. Under the service area
delineated by the HCFA, Howard Young had only
41.4% of the market share; the regulations
require 75%. Thus, we refuse to overturn the
Secretary’s decision upholding the HCFA’s denial
of Howard Young’s original application for sole
community hospital status.

B.   Consideration of the Hospital’s 1995 Data

  Shortly before the PRRB hearing, Howard Young
submitted a new ten zip code service area that
accounted for more than 75% of its inpatients
discharged within the hospital’s fiscal year 1991
and established that fewer than 25% of the
patients from the relevant service area were
admitted to other like hospitals. As stated
earlier, counsel for the hospital and counsel for
the fiscal intermediary stipulated that the ten
zip codes submitted by the hospital would satisfy
the requirements of the regulations and the PRM.
Using this new service area, the parties then
stipulated that if Howard Young were allowed to
use the information it submitted to the PRRB,
rather than the data that was before the HCFA in
1992, it would satisfy the market share test and
thereby qualify Howard Young as a sole community
hospital. As noted before, neither the HCFA nor
the Secretary was a party to this stipulation.

  Howard Young argues before this Court that: 1)
the PRRB properly considered the 1995 data; 2) if
this 1995 data is considered, it qualifies as a
sole community hospital; and 3) that the HCFA and
the Secretary are bound by the stipulation made
by counsel for the intermediary at the PRRB
hearing.


 1.   The Stipulation

  As a preliminary matter, we do not consider the
Secretary to be bound by the stipulation entered
into at the PRRB hearing by counsel for the
hospital and counsel for the intermediary.
Pursuant to the regulations, neither the
Secretary nor the HCFA were a party to, and thus
did not participate in, the hearing before the
PRRB. See 42 C.F.R. sec. 405.1843 (except when
the HCFA acts directly as intermediary, "neither
the Secretary nor the Health Care Financing
Administration may be made a party to the
hearing"). Thus we will not hold the HCFA, much
less the Secretary, responsible for a stipulation
that they had no chance to challenge and that may
conflict with the agency’s official position
regarding service areas. See Heckler v. Community
Servs., 467 U.S. 51, 64 (1984) (government not
bound by misrepresentations made by fiscal
intermediary regarding published Federal
regulations under Medicare program). See also
Appalachian Reg’l Healthcare, Inc. v. Shalala,
131 F.3d 1050, 1053 n.4 (D.C. Cir. 1997) ("the
intermediary’s position is not the Secretary’s .
. . . [W]e think it plain that a statement by
intermediary’s counsel in the course of an
internal quasi-adjudicatory proceeding" cannot be
thought of "as the official departmental
position" (citations omitted)); Monongahela
Valley Hosp. v. Sullivan, 945 F.2d 576, 589 (3rd
Cir. 1991) ("[provider’s] contention that it
reasonably relied on Blue Cross’s representation
. . . ’misapprehends the nature of the
relationship between the fiscal intermediary and
the Secretary’" (citations omitted)).


 2.   The 1995 Data
  In reviewing the PRRB’s decision, the Secretary
found that even if the 1995 data had been before
the HCFA in 1992, the outcome would have been the
same because there was no reason to alter the
service area proposed by the HCFA, especially in
light of the fact that the Boulder Junction area
had far fewer discharges than the Rhinelander
area. According to the Secretary’s interpretation
of the regulations, it is unacceptable to replace
a zip code with a higher number of discharges
with a zip code with fewer discharges because a
service area is to be defined by listing zip
codes in order of the number of discharges, from
the highest to the lowest, until the service area
includes at least 75% of the hospital’s inpatient
discharges.

  Because Howard Young’s proposed service area did
not comport with the regulations, the Secretary
found that the hospital’s proposed new service
area, created in 1995 by replacing the
Rhinelander zip code with the Boulder Junction
zip code, was improper. Giving the proper
deference to the Secretary’s interpretations, we
refuse to hold that this reading of the
regulations and PRM was incorrect.

  Accordingly, we hold that the ten zip code
service area proposed by the HCFA was consistent
with the regulations and the service area
proposed by the hospital in 1995, by substituting
the Boulder Junction zip code for the Rhinelander
zip code, was inconsistent with the regulations.
Thus, even if the 1995 data was considered,
Howard Young’s application would still fall short
of qualifying it as a sole community hospital./4
  The district court’s grant of summary judgment
to the Secretary is

AFFIRMED.



/1 Sole community hospital is a designation, under
Medicare, that the hospital serves a community
with limited access to medical care. The reason
that Howard Young cares about such a designation
is that sole community hospitals recover
additional monies under Medicare.

/2 "The term ’like hospital’ means a hospital
furnishing short-term, acute care. [Health Care
Financing Administration] will not evaluate
comparability of specialty services in making
determinations on classifications as sole
community hospitals." 42 C.F.R. sec.
412.92(c)(2).

/3 For the hospital’s 1991 fiscal year, the time
period relevant to the determination of its sole
community hospital status,   the Boulder Junction
area had 90 discharges and   was ranked 11th in
number of discharges while   the Rhinelander area
had 130 discharges and was   ranked sixth.

/4 Because we hold that the Secretary properly
denied Howard Young’s application for sole
community hospital status even if the 1995 data
was considered, we need not address the issue of
whether the Secretary erred in concluding that
the hospital’s 1995 data was improperly
considered by the PRRB.
