                    United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                               ________________

                                  No. 98-3141
                               ________________

In Home Health, Inc., a Minnesota        *
corporation,                             *
                                         *
      Appellee,                          *      Appeal from the United States
                                         *      District Court for the
      v.                                 *      District of Minnesota.
                                         *
Donna Shalala, Secretary of Health       *
and Human Services,                      *

      Appellant.

                               ________________

                               Submitted: June 14, 1999
                                   Filed: September 1, 1999
                               ________________

Before HANSEN and MAGILL, Circuit Judges, and JONES,1 District Judge.
                        ________________

HANSEN, Circuit Judge.




      1
      The Honorable John B. Jones, United States District Judge for the District of
South Dakota, sitting by designation.
       The Secretary of Health and Human Services (the Secretary) appeals the district
court's2 order reversing the Secretary's decision to limit reimbursement to In Home
Health, Inc. (In Home) for physical therapy services provided to Medicare patients.
The Secretary argues that under 42 U.S.C. § 1395x(v)(5)(A)3 the Secretary may limit
reimbursements to home health agencies for physical therapy services provided by
physical therapists who are bona fide employees of the provider but who are paid on
a per-visit basis. The district court found that the Secretary's interpretation of 42
U.S.C. § 1395x(v)(5)(A) was contrary to the language of the statute and granted In
Home's motion to declare unlawful and set aside the Secretary's decision. We affirm.

                                        I.
                      A. Reimbursement under the Medicare Act

       In Home is a provider of services under the Medicare program. The Medicare
Act provides reimbursement to Medicare providers for the lesser of the reasonable
costs or customary charges for services furnished to Medicare patients. Reasonable
costs are defined as actual costs less costs that are "unnecessary in the efficient delivery
of needed health services." 42 U.S.C. § 1395x(v)(1)(A). When the health services
delivered involve therapy services "furnished under an arrangement," then 42 U.S.C.
§ 1395x(v)(5)(A) limits recovery to an amount equal to the salary that would have been
paid to a person in an "employment relationship," providing:

       Where physical therapy services . . . are furnished under an arrangement
       with a provider of services . . . the amount included in any payment to
       such provider . . . as the reasonable cost of such services (as furnished


       2
      The Honorable Richard H. Kyle, United States District Judge for the District of
Minnesota.
       3
       All references are to the 1988 version of the United States Code in effect at the
time the costs in dispute arose.
                                             2
      under such arrangements) shall not exceed an amount equal to the salary
      which would reasonably have been paid for such services . . . to the
      person performing them if they had been performed in an employment
      relationship with such provider or other organization (rather than under
      such arrangement) . . . as the Secretary may in regulations determine to
      be appropriate.

42 U.S.C. § 1395x(v)(5)(A).

      Pursuant to the statute, the Secretary promulgated regulations entitled
"Reasonable Cost of Physical and Other Therapy Services Furnished Under
Arrangements," which states in part:

      The reasonable cost of the services of physical . . . therapists . . .
      furnished under arrangements . . . with a provider of services . . . may not
      exceed an amount equivalent to the prevailing salary and additional costs
      that would reasonably have been incurred by the provider . . . had such
      services been performed by such person in an employment relationship,
      plus the cost of other reasonable expenses incurred by such person in
      furnishing services under such an arrangement.

42 C.F.R. § 413.106(a) (1992).4


      4
       The language of 42 C.F.R. § 413.106(a) has not changed since 1992. However,
in 1998, 42 C.F.R. § 413.106(c)(5) was amended to provide:

            If therapy services are performed in situations where
            compensation to a therapist employed by the provider is
            based, at least in part, on a fee-for-service or on a
            percentage of income (or commission), the guidelines will
            apply. The entire compensation will be subject to the
            guidelines in cases where the nature of the arrangements is
            most like an under "arrangement" situation, although
            technically the provider may treat the therapists as
            employees. The intent of this section is to prevent an
                                           3
       The "prevailing salary"referenced in the regulation is determined by using the
Salary Equivalency Guidelines (the Guidelines) published by the Secretary in the
Federal Register. The final notice in the Federal Register states, "This notice
establishes revised schedules of salary equivalency guidelines for Medicare
reimbursement for the reasonable costs of physical therapy and respiratory therapy
services furnished under an arrangement by an outside contractor . . . ." 48 Fed. Reg.
44922 (1983) (emphasis added).5

       If the provider of services under the Medicare program is not satisfied with the
amount of reimbursement determined and the amount in controversy exceeds $10,000,
the provider can request a hearing before the Provider Reimbursement Review Board
(PRRB). The decision of the PRRB is final unless the Secretary on her own motion
decides to affirm, reverse, or modify the PRRB decision. If the provider is dissatisfied
with the final agency determination, it may then seek judicial review in accordance with
the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706.

                       B. Factual and Procedural Background

       In Home is a provider of home health care to Medicare beneficiaries throughout
fourteen states. During the fiscal year in dispute, 1992, In Home operated under the
name Home Health Plus in San Leandro and Concord, California. The physical
therapist costs in dispute arose out of the San Leandro and Concord offices. The


             employment relationship from being used to circumvent the
             guidelines.

The Secretary acknowledges in her brief that this amendment does not apply in this
case.
      5
       The Guidelines were not updated again until 1997. However, the 1983 Federal
Register notice provides a monthly increase of the Guideline amount for subsequent
months. See 48 Fed. Reg. 44922, 44928 (1983).
                                           4
regional intermediary responsible for administering Medicare payments for services
provided by those offices was Blue Cross and Blue Shield of Iowa.

       In 1992, In Home provided 15,925 physical therapy visits to Medicare patients.
In Home utilized both outside suppliers of physical therapy services and its own
employees who were paid on a per-visit basis. The physical therapy visits provided by
In Home's own employees totaled 14,685. These employees had entered into an
employment agreement with In Home in which the employee agreed to accept an on-
call position and to accept clients for treatment on the days which the employee
designated that he or she was available to work. The employment agreement also
stated that the employee could terminate at any time by giving a two-week written
notice. In addition, the employee agreed not to accept employment, for a period of six
months, with any home care company in a contractual relationship with In Home. In
Home withheld the employee share of FICA and Medicare taxes and paid the
employer's share. It also paid the required amounts for worker's compensation
insurance. The employment agreement entitled the employees to participate in In
Home's 401(k) plan, health insurance plan, and stock purchase plan--benefits that are
only provided to In Home's employees. The Secretary does not dispute that these
therapists were employees of In Home.

       In Home sought reimbursement from Blue Cross and Blue Shield of Iowa for the
physical therapy services provided by its employees. Blue Cross and Blue Shield of
Iowa applied the Guidelines to determine the reasonableness of the costs incurred by
In Home. As a result of applying the Guidelines, Blue Cross and Blue Shield
disallowed $207,000 in claimed reimbursements.

       In Home appealed to the PRRB. The PRRB reversed the disallowance, finding
that the Guidelines should not have been applied to In Home's employees. The
Secretary reversed the PRRB's ruling. In Home then sought judicial review in the
District of Minnesota. The district court concluded that the Secretary's decision was

                                          5
arbitrary and capricious because the Secretary failed to adequately explain the decision.
On remand, the Secretary again reversed the PRRB ruling. The Secretary specifically
found that Blue Cross and Blue Shield of Iowa properly applied the Guidelines to In
Home's physical therapy compensation. In Home again sought judicial review and filed
a motion to declare unlawful and set aside the Secretary's decision. The district court
granted In Home's motion. The Secretary appeals.

                                           II.

       The Secretary argues that the district court erred by not allowing her to apply the
Guidelines in this situation. She contends that the statute distinguishes between
services furnished "under an arrangement" and those provided through a salaried
"employee relationship" and, therefore, In Home's employees, who were not salaried
but who were paid on a per-visit basis, were subject to the Guidelines promulgated
pursuant to 42 U.S.C. § 1395x(v)(5)(A). Further, the Secretary argues that because the
plain language of the statute is silent or ambiguous on the issue of whether it should be
applied to employees compensated on a per-visit basis, the Secretary's interpretation
should be upheld because it is reasonable.

       "Under the APA, the Secretary's decision shall be set aside if it is arbitrary,
capricious, an abuse of discretion, unsupported by substantial evidence, or contrary to
law." Hennepin County Med. Ctr. v. Shalala, 81 F.3d 743, 748 (8th Cir. 1996); see 5
U.S.C. § 706. "Federal court review is de novo." Hennepin County Med. Ctr., 81 F.3d
at 748. "The plain meaning of a statute controls, if there is one, regardless of an
agency's interpretation." Id. (citing Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-43 (1984)). "An agency's interpretive rules, which are
not subject to APA rulemaking procedures, are nonbinding and do not have the force
of law." Id.




                                            6
       We find that 42 U.S.C. § 1395x(v)(5)(A) does not provide a basis for the
application of the Guidelines to In Home's employee physical therapists. The first part
of the sentence in 42 U.S.C. § 1395x(v)(5)(A) explains that the subsection applies to
persons providing physical therapy services "under an arrangement" with a provider.
The second part of the sentence explains that the reasonable cost of compensation for
persons "under an arrangement" is calculated by reference to the salary which would
reasonably have been paid to the person if that person had been in an "employment
relationship" with the provider. The plain meaning of 42 U.S.C. § 1395x(v)(5)(A) and
42 C.F.R. § 413.106, which uses similar language, distinguishes between services
provided "under an arrangement" and those provided by a person in an "employment
relationship." It is clear from the language that a physical therapist who is "under an
arrangement" is different from a person in an "employment relationship" with the
provider. The Guidelines apply to a person "under an arrangement." The final notice
in the Federal Register indicates that a person "under an arrangement" is an outside
contractor. The Secretary's attempt to now further limit the term "employment
relationship" to mean only salaried employees is not supported by the statute or the
Secretary's contemporaneous interpretation as reflected in the 1992 regulation.

       The statutory reference to "the salary which would reasonably have been paid"
to a person in an employment relationship does not render a nonsalaried employee
subject to the Guidelines as a person "under an arrangement." The term "salary" as
used in this manner and not specifically defined in the statute can be as generic as "a
remuneration for services given." See WEBSTER'S THIRD NEW INTERNATIONAL
DICTIONARY 2003 (1986). Thus, the statute requires nothing more than that a provider
should be reimbursed for the services performed by a nonemployee, i.e., an outside
contractor working under an arrangement with the provider, similarly to what an
employer reasonably would pay its employee for such services. Services provided by
a provider's employee are themselves subject to a reasonableness requirement. See 42
U.S.C. § 1395x(v)(1).


                                          7
      The Secretary points to her own Provider Reimbursement Manual (PRM) to
support her position that the Guidelines should be applied to In Home's employee
physical therapists. The PRM explains:

            The guidelines apply only to the costs of services performed by
      outside suppliers, not to the salaries of providers' employees. However,
      the costs of the services of a salaried employee who was formerly an
      outside supplier of therapy or other services, or any new salaried
      employment relationships, will be closely scrutinized to determine if an
      employment situation is being used to circumvent the guidelines. Any
      costs in excess of an amount based on the going rate for salaried
      employee therapists must be fully justified.

             In situations where compensation, at least in part, is based on a fee-
      for-service or on a percentage of income (or commission), these
      arrangements will be considered nonsalary arrangements, and the entire
      compensation will be subject to the guidelines in this chapter.

PRM § 1403.

      We have construed the PRM to contain only nonbinding interpretative rules that
have not been subjected to APA rulemaking procedures. Shalala v. St. Paul-Ramsey
Med. Ctr., 50 F.3d 522, 527-28 n.4 (1995). To the extent the PRM supports the
Secretary's view that paid per-visit employees are subject to the Guidelines, we
conclude that this agency interpretation is contrary to the plain language of the statute
as articulated above. Accordingly, we cannot defer to the Secretary's interpretation.
       We need not reach the Secretary's second argument regarding reasonableness
because we conclude the plain meaning of 42 U.S.C. § 1395x(v)(5)(A) controls.

                                          III.

      We affirm the district court's reversal of the Secretary's decision and hold that
the Secretary may not apply the Guidelines to In Home's employee physical therapists.
                                           8
A true copy.

      Attest:

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




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