 United States Court of Appeals
        FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued November 7, 2012             Decided March 5, 2013

                      No. 12-5037

KAISER FOUNDATION HOSPITALS, DOING BUSINESS AS KAISER
   FOUNDATION HOSPITAL - ANAHEIM, DOING BUSINESS AS
   KAISER FOUNDATION HOSPITAL - BELLFLOWER, DOING
  BUSINESS AS KAISER FOUNDATION HOSPITAL - FONTANA,
DOING BUSINESS AS KAISER FOUNDATION HOSPITAL - HARBOR
      CITY, DOING BUSINESS AS KAISER FOUNDATION
  HOSPITAL - PANORAMA CITY, DOING BUSINESS AS KAISER
  FOUNDATION HOSPITAL - RIVERSIDE, DOING BUSINESS AS
KAISER FOUNDATION HOSPITAL - SAN DIEGO, DOING BUSINESS
AS KAISER FOUNDATION HOSPITAL - SUNSET, DOING BUSINESS
  AS KAISER FOUNDATION HOSPITAL - WEST LOS ANGELES,
         DOING BUSINESS AS KAISER FOUNDATION
              HOSPITAL - WOODLAND HILLS,
                       APPELLEE

                            v.

  KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES
     DEPARTMENT OF HEALTH AND HUMAN SERVICES,
                      APPELLANT


       Appeal from the United States District Court
               for the District of Columbia
                   (No. 1:11-cv-00092)
                              2
    Howard S. Scher, Attorney, U.S. Department of Justice,
argued the cause for appellant. With him on the briefs were
Stuart F. Delery, Acting Assistant Attorney General, Ronald
C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney.
R. Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.

    Jordan B. Keville argued the cause for appellee. With
him on the brief was Jonathan P. Neustadter. Harry R. Silver
entered an appearance.

    Before: ROGERS, BROWN and KAVANAUGH, Circuit
Judges.

    Opinion for the Court filed by Circuit Judge BROWN.

     BROWN, Circuit Judge: The Kaiser plaintiffs (“Kaiser”)
are a consortium of ten teaching hospitals located in Southern
California that receive Medicare payments to offset the costs
associated with training “full-time equivalent” residents and
intern physicians (“FTEs”). In 1997, Congress capped those
payments in such a way that the number of FTEs the hospitals
trained in 1996 would dictate the maximum reimbursement in
all future years. Although Kaiser and the Health and Human
Services Secretary (“Secretary”) agree the 1996 data is not
accurate, the Secretary believes this predicate fact cannot be
corrected outside the three-year reopening window, 42 C.F.R.
§ 405.1885.1 Concluding otherwise, the District Court granted
Kaiser’s motion for summary judgment and remanded to the
agency. Kaiser Found. Hosps. v. Sebelius, 828 F. Supp. 2d


    1
     Technically, the Secretary has adopted the views of the
Administrator of the Centers for Medicare and Medicaid Services
(“CMS”).
                             3
193, 204 (D.D.C. 2011). Unpersuaded by the Secretary’s
narrow, arbitrarily applied interpretation, we affirm.

                             I

                            A

   As the District Court explained:

            The Medicare program, established under Title
       XVIII of the Social Security Act and administered
       through CMS, provides federally funded health
       insurance to eligible aged or disabled persons. See
       generally 42 U.S.C. § 1395 et seq. Under the
       program, the Department of Health and Human
       Services “reimburses medical providers for services
       they supply to eligible patients.” Northeast Hosp.
       Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011); see
       generally 42 U.S.C. § 1395 et seq. In order to be
       reimbursed, hospitals must submit an annual cost
       report detailing the expenses they incurred during the
       past fiscal year. See 42 C.F.R. §§ 413.20, 413.24. The
       Secretary has contracted with fiscal intermediaries to
       audit cost reports, determine how much Medicare
       owes each provider, and issue interim payments. See
       42 U.S.C. § 1395h; 42 C.F.R. § 405.1803.

            Among other things, Medicare reimburses
       approved teaching hospitals for the direct costs of
       graduate medical education (GME) — e.g., salaries
       and benefits for residents and interns. See 42 C.F.R.
       § 413.75. The amount of GME reimbursement is
       based in part on the number of FTEs in the hospital’s
       training      program.       See       42      U.S.C.
       § 1395ww(d)(5)(B)(ii); 42 C.F.R. § 413.79(d). In
                      4
1997, Congress imposed a cap on the number of
FTEs a hospital may include for purposes of
calculating future GME payment, which is known as
the “GME FTE cap.” See 42 U.S.C.
[§] 1395ww(h)(4)(F); 42 C.F.R. § 413.79(c)(2)(i).
Specifically, for cost-report periods beginning on or
after October 1, 1997, the hospital’s unweighted FTE
count — meaning the actual number of FTEs before
applying statutorily specified weighting factors —
“may not exceed the number . . . of such full-time
equivalent residents for the hospital’s most recent
cost reporting period ending on or before December
31, 1996.” 42 U.S.C. [§] 1395ww(h)(4)(F). In other
words, the FTE count a hospital included in its latest
pre-1997 report would determine its cap (and thereby
affect its reimbursement) for the indefinite future.

     Hospitals’ pre-1997 reports included only a
weighted FTE count. See 62 Fed. Reg.
46,004(V)(I)(2)(a). Because the FTE cap is calculated
based on the unweighted count, and additional data
needed to be collected to calculate that figure, the
caps were not established until the providers’ first
cost report for the period beginning on or after
October 1, 1997 — which for [Kaiser] was filed in
1998. Id. at 46,004, 46,005; see also 42 C.F.R.
§ 413.79. “FTE count,” therefore, refers to the
weighted figure provided in the hospitals’ pre-1997
cost reports, and “FTE cap” refers to the cap
established thereafter based on the unweighted FTE
count.

     Once the GME FTE cap is established, the
intermediary takes it into account when reviewing a
hospital’s cost reports. See 42 C.F.R. § 413.79. After
                              5
        such review, the intermediary issues a “notice of
        program reimbursement” (NPR) indicating how much
        Medicare owes the hospital for the fiscal year covered
        by the report. See 42 C.F.R. § 405.1803. The hospital
        has 180 days from receipt of the NPR to request a
        review by the Provider Reimbursement Review
        Board (PRRB). See 42 U.S.C. § 1395oo(a). If the
        hospital does not timely appeal the NPR, the cost
        report is considered final. See 42 C.F.R.
        § 405.1807(c).

             The     reimbursement     determination      may
        nevertheless be reopened — upon a provider’s
        request or at the intermediary’s own initiative —
        within three years of the date of the NPR. . . . Once
        three years has passed, the intermediary’s
        determination is deemed “closed” and can no longer
        be reopened.

Kaiser, 828 F. Supp. 2d at 195–96.

                              B

     Before this litigation began, a separate group of Northern
California-based Kaiser hospitals complained clinic-based
residents were mistakenly excluded from their “Indirect
Medical Education” (“IME”) resident FTE count. The PRRB
agreed these residents should be included, see Kaiser Found.
Grp. v. Aetna Life Ins. Co., PRRB Dec. No. 96-D50 (Aug. 14,
1996), and the CMS affirmed, see Kaiser Found. Grp. v.
Aetna Life Ins. Co., HCFA Administrator Decision (Oct. 21,
1996) reprinted in [1996–2 Transfer Binder] Medicare &
Medicaid Guide (CCH) ¶ 44,980. Following suit, the present
Kaiser plaintiffs requested a similar adjustment in their own
IME resident FTE count but “did not request a similar
                              6
adjustment for GME purposes in their 1996 cost reports.”
Appellant Br. at 14.

     This oversight would haunt Kaiser. For years, Kaiser’s
intermediary used the inaccurate resident FTE count from the
1996 cost report coupled with additional data from the 1998
cost report — the “predicate facts” — to generate artificially
low GME FTE caps.2 Kaiser only challenged the errant data
in its appeal of the intermediary’s handling of the 1999–2003
cost reporting years. By then, however, the 1996 and 1998
cost reporting years were “closed.” They had fallen outside of
the three-year reopening window.

     Accepting as much, Kaiser forswears any direct
challenge to the 1996 and 1998 cost reports. Although the
intermediary would have to adjust the total reimbursement for
the open cost reporting years 1999–2003 using the corrected
GME FTE cap, nothing, Kaiser maintains, would necessitate
an adjustment to the total reimbursement from either closed
reporting period. In other words, Kasier does not believe its
challenge would have improper retroactive effect because the
intermediary would not have to reopen any closed cost report.
See Appellee Br. at 11.

     The intermediary was unconvinced. Any modification of
the data underlying the 1996/1998 GME FTE cap, it reasoned,
would constitute a reopening of closed years even if it did not
affect Kaiser’s final reimbursement determination. See
Kaiser, 828 F. Supp. 2d at 197. The PRRB agreed with
Kaiser’s position. See Kaiser Found. Hosps. v. Palmetto
GBA/First Coast Serv. Options, PRRB Dec. No. 2011-D1
(Oct. 1, 2010). But the CMS Administrator, after sua sponte

    2
      A higher FTE cap would have allowed Kaiser to claim —
and presumably obtain — greater reimbursements.
                                7
review, did not. See Kaiser Found. Hosps. v. Palmetto
GBA/First Coast Serv. Options, HCFA Administrator
Decision (Nov. 30, 2010). Because the Administrator’s
reversal constituted the final decision of the Secretary, see 42
U.S.C. § 1395oo(f), Kaiser renewed its challenge in the
District Court.

     Finding in Kaiser’s favor, the District Court granted
Kaiser’s motion for summary judgment and remanded the
matter to the agency. See Kaiser, 828 F. Supp. 2d at 204.
Assuming arguendo that the FTE cap was tied to a specific
cost report, the court concluded modifying FTE counts in
closed years did not constitute a “reopening.” The Secretary’s
interpretation ran afoul of the plain language of the reopening
regulation, id. at 199–200, and, among other shortcomings,
contravened recent cases in which the Secretary took contrary
positions, id. at 200–02. The Secretary appealed.

     On appeal, the agency advances two sets of arguments.
First, changes to predicate facts in closed years constitute an
impermissible reopening under § 405.1885. Second, and in
the alternative, even if the modification of predicate facts in a
closed year does not itself amount to a reopening, the change
will necessitate an adjustment of that year’s reimbursement,
which all parties agree constitutes an impermissible
reopening. We consider each argument in turn.3

                                II

                                A



    3
       Like the District Court, we assume arguendo that the cap is
tied to particular cost reports. Kaiser, 828 F. Supp. 2d at 199.
                                8
    In relevant part, the Secretary’s reopening regulation
provides:

    A determination of an intermediary . . . may be reopened
    with respect to findings on matters at issue in such
    determination . . . . Any such request to reopen must be
    made within 3 years of the date of the notice of the
    intermediary . . . decision . . . .

42 C.F.R. § 405.1885(a) (2001).4 For a provider like Kaiser
that has filed cost reports pursuant to 42 C.F.R §§ 413.20 and
413.24(f), “Intermediary determination” is defined as:

    a determination of the amount of total reimbursement due
    the provider, pursuant to § 405.1803 following the close
    of the provider’s cost reporting period, for items and
    services furnished to [Medicare] beneficiaries for which
    reimbursement may be made on a reasonable cost basis
    under Medicare for the period covered by the cost report.

42 C.F.R. § 405.1801(a). In simpler terms, § 405.1801(a)
speaks of inputs and outputs — the “items and services
furnished” and the “amount of total reimbursement due,”
respectively.

    In Kaiser’s view, the reference to “total amount of
reimbursement” establishes that “a cost report [is] only . . .
‘reopened’ . . . where there is a change to the total amount of

    4
      Although the reopening regulation was amended in 2008, the
court below “cited to this version without explanation.” Appellant
Br. at 5 n.3. We agree with the Secretary, however, that the
“oversight is irrelevant.” Id. The operative language remained the
same. Compare 42 C.F.R. § 405.1885(a) (2001), with 42 C.F.R. §
405.1885(a)(1), (b)(2) (2010).
                               9
Medicare compensation paid to a provider.” Appellee Br. at
21. In contrast, “reconsideration of predicate factual issues”
with no effect on closed reimbursements does not reopen the
report. Id. Meaning, the intermediary will only have reopened
a “determination” subject to the three-year reopening window
if it adjusts the output, not the inputs.

     The Secretary, by contrast, believes inputs matter
independently of the output. In her view, toggling an input
would constitute a reopening of an “Intermediary
determination” irrespective of its effect on the output.
Consequently, any alteration of predicate facts must be done
within the three-year reopening window. The Secretary
argues the output language cannot be read without reference
to the input language since it is “difficult to imagine that the
‘amount owed’ can in any sense be separated from the data
upon which it is based.” Appellant Br. at 25, 28. In like vein,
the Secretary also maintains that § 405.1801(a)’s cross-
reference to 42 C.F.R. § 405.1803 is suggestive because the
latter’s requirement of notice “[e]xplain[ing] the
intermediary’s determination of total program reimbursement
due,” id. § 405.1803(a)(1)(i), “will necessarily refer to the
data (or predicate facts) upon which the total reimbursement
is based.” Appellant Br. at 25.

     The Secretary thinks her interpretation is entitled to
deference under Bowles v. Seminole Rock & Sand Co., 325
U.S. 410 (1945), and its progeny. We disagree. Although
courts will normally give “controlling weight” to an agency’s
interpretation of its own regulations, Thomas Jefferson Univ.
v. Shalala, 512 U.S. 504, 512 (1994) (internal quotation
marks omitted), deference is unmerited where the
interpretation is “plainly erroneous or inconsistent with the
regulation . . . .” Ass’n of Private Sector Colls. & Univs. v.
Duncan, 681 F.3d 427, 442 (D.C. Cir. 2012) (internal
                                 10
quotation marks and citations omitted). Believing the
Secretary’s interpretation to be inconsistent with her own
regulations, we decline the invitation to defer.

     To start, we think the plain language of § 405.1801(a)(1),
which defines “determination of an intermediary,” a phrase
that appears in the reopening regulation, too suggestive to
ignore. Where the term “determination” is both spatially
proximate to — and logically bound with — “total
reimbursement,” an output, the mere mention of inputs in a
separate, subsequent clause does not automatically render
those inputs material to the definition.5 Indeed, contextual
clues lead us to believe that the reference to inputs is more
likely illustrative than essential. Consider, for example, the
structure of § 405.1801(a), which consists of four context-
dependent definitions of “Intermediary determination.” When
speaking of “a hospital that receives payments for inpatient
hospital services under the prospective payment system,” the
phrase is defined as:

    a determination of the total amount of payment due the
    hospital, pursuant to § 405.1803 following the close of the
    hospital’s cost reporting period, under that system for the
    period covered by the determination.

42 C.F.R. § 405.1801(a)(2). But for the descriptive final
clause, the operative language in this provision and
§ 405.1801(a)(1) would be functionally indistinguishable.
    5
        Both parties agree that the “total reimbursement” is
“material” because any effort to adjust this figure would necessarily
constitute a reopening of an intermediary determination. Their
dispute turns instead on whether the intermediary’s toggling of the
inputs would, on its own, do the same. This is what we mean when
we speak of materiality — an intermediary action capable of
triggering § 405.1801(a)(1) and, in turn, the reopening provision.
                                11
Compare id. § 405.1801(a)(1) (“a determination of the
amount of total reimbursement due the provider), with id.
§ 405.1801(a)(2) (“a determination of the total amount of
payment due the hospital”). This is by no means dispositive
indicium of the agency’s intent, but we do think it suggestive.
A functional explanation for the inclusion of the “items and
services” language — to differentiate among contexts — cuts
against the Secretary’s a priori argument that the mere
presence of the input clause is itself proof of its materiality.6

     Even assuming § 405.1801 could bear the Secretary’s
strained interpretation, the reopening regulation cannot. Under
§ 405.1885(a), an intermediary determination can “be
reopened with respect to findings on matters at issue in such
determination” if challenged within the three-year window.
As the Eighth Circuit explained in HealthEast, “[i]t would
make no sense to say that an intermediary determination . . .
could be reopened ‘with respect to’ predicate factual
questions that do not alter the total reimbursement amount.”
HealthEast Bethesda Lutheran Hosp. & Rehab. Ctr. v.
Shalala, 164 F.3d 415, 418 (8th Cir. 1998). It is only when
alteration of the “matters at issue” could change the total
reimbursement determination that it “make[s] sense to say
that a determination could be reopened ‘with respect to’
them.” Id. This interpretation, the court concluded, “is the




    6
       The Secretary’s argument regarding the intervening citation
to § 405.1803 suffers from the same conceptual shortcomings. That
provision is entirely procedural. It identifies the steps the
intermediary must take to issue a determination but offers no
insight as to what constitutes a reopening. Again, the Secretary has
proffered nothing to convince us that the mere reference to inputs
somehow imbues them with independent, material significance.
                                12
only interpretation logically consistent with the regulatory
language.” Id. 7 We concur.

     Nor do we believe Regions Hospital v. Shalala, 522 U.S.
448 (1998), compels a contrary result. The issue before the
Court in that case was a narrow one: did Congress intend “to
prohibit the Secretary from ensuring an accurate GME base-
year amount by reauditing a provider’s statement of 1984
GME costs for past errors, outside the Secretary’s three-year
reopening window.” Id. at 457. Having found ambiguity in
the relevant statutory language at Chevron Step One, the
Court proceeded to determine the reasonableness vel non of
the Secretary’s reaudit regulation. See id. at 457–60.

    “The key point of Regions,” the Secretary contends, “is
the validity of the reaudit regulation; without that regulatory
authority the reaudit of the [closed] cost reports would have
been barred by the reopening regulation.” Reply Br. at 26.
The inferential argument might be restated thusly: the
agency’s decision to promulgate a reauditing provision is
proof that reopening regulation does not, by its own terms,
allow modification of predicate facts in closed years. We

    7
       The Secretary in HealthEast agreed. With language mirroring
Kaiser’s own, the Secretary concluded that § 405.1801(a) — the
very provision at issue here — “did not apply” to closed year loans
“because the regulation limits reopening only with respect to
‘intermediary determinations,’ which are defined as the final
determinations of the amount a hospital will be reimbursed.”
HealthEast, 164 F.3d at 417. “Since the amounts of the
reimbursements for the [closed year] interest payments were not
disturbed, the Secretary argued, the ‘intermediary determination’
was not improperly reopened.” Id. The PRRB likewise agreed in
Edgemont Hospital v. Mutual of Omaha Insurance Co., PRRB Dec.
No. 95-D34 (Apr. 6, 1995), a decision the Secretary did not reverse
sua sponte.
                                13
disagree. At most, Regions and its analogue in this Court,
Administrators of Tulane Educational Fund v. Shalala, 987
F.2d 790 (D.C. Cir. 1993), stand only for the proposition that
the Secretary acted reasonably in promulgating a reauditing
regulation in light of statutory silence. We fail to see how the
Secretary’s decision to announce its policy through
rulemaking — a potentially pragmatic decision on the
Secretary’s part8 — would necessarily foreclose the agency
from interpreting the reopening regulation to the same effect.

     The Secretary is not unfamiliar with this argument,
having made it as recently as 2009. Citing Regions, the
Secretary indicated that “even if the intermediary had
reaudited and revised the IME FTE determination made in the
1996 base year cost report — and it did not — the Supreme
Court has already held that such reauditing and revision is
reasonable.” Hillcrest Riverside, Inc. v. Sebelius, No. 09-cv-
00018, Memorandum of Points and Authorities in Support of
Defendant’s Cross-Motion for Summary Judgment and
Opposition to Plaintiff’s Motion for Summary Judgment at 19
n.9 (D.D.C. Oct. 2, 2009). Seeing no reason to depart from the
Secretary’s recent wisdom, we hold that the reopening
regulation allows for modification of predicate facts in closed
years provided the change will only impact the total
reimbursement determination in open years.

    Alternatively, we agree with the District Court that the
Secretary has acted arbitrarily in treating similarly situated
    8
        A case-by-case approach would have been unwieldy and
inefficient where the Secretary had “reason to believe some
‘questionable’ GME costs had been ‘erroneously reimbursed’ to
providers for their 1984 fiscal year,” Regions, 522 U.S. at 454, and
was obligated to communicate that shortcoming — as well as all
new changes in the methodology for Medicare payments — to
private fiscal intermediaries.
                               14
parties differently. Kaiser, 828 F. Supp. 2d at 203; see also
Eagle Broad. Grp., Ltd. v. FCC, 563 F.3d 543, 551 (D.C. Cir.
2009) (“[A]n agency may not treat like cases differently.”
(internal quotation marks omitted)); Kreis v. Sec’y of the Air
Force, 406 F.3d 684, 687 (D.C. Cir. 2005) (“[A]n agency
must treat similar cases in a similar manner unless it can
provide a legitimate reason for failing to do so.” (internal
quotation marks omitted)). HHS routinely championed a
permissive interpretation of the reopening regulation when
correction of the predicate facts would have resulted in a
windfall for the agency, see, e.g., HealthEast, 164 F.3d at
416, but adopted a contrary view here, where the benefits
would inure to the provider. At bottom, the Secretary has
given us no reason to think that this inherently suspicious
record was the product of reasoned, good faith
decisionmaking. She has distinguished the cases on their
facts, but these are distinctions without difference. Whether
the reimbursement scheme in HealthEast is distinct from the
one-off “data capture” here, Appellant Br. at 30, for example,
is an entirely moot point; that fact played an inessential role in
how the Secretary interpreted the reopening regulation.

                                B

    The Secretary next argues that “the Medicare Act would
not allow the intermediary to change the 1996 GME resident
count . . . without . . . changing the corresponding
reimbursement amount,” Appellant Br. at 26, which all parties
concede would constitute a reopening of an “Intermediary
determination.”

     The District Court rejected this claim out of hand, noting
that the Secretary offered “no legal support for her claim that
the caps cannot be increased without modifying the total
reimbursement for closed years, particularly where Plaintiffs
                                 15
have disclaimed such sums.” Kaiser, 828 F. Supp. 2d at 201.
On appeal, the Secretary attempts to fill the legal void with
three generic provisions of the Medicare statute that allegedly
“entitle[] the provider to the reimbursement due under the
GME . . . formulas.” Appellant Br. at 26.9

     We are unmoved. As a threshold matter, the Secretary
has failed spectacularly to square this bold claim with — or
otherwise justify the departure from — HealthEast, Regions,
and (among others) Tulane. See, e.g., Motor Vehicle Mfrs.
Ass’n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 42
(1983); E. Ky. Power Co-op, Inc. v. FERC, 489 F.3d 1299,
1306 (D.C. Cir. 2007) (explaining that an agency “must
provide reasoned analysis indicating that prior policies and
standards are being deliberately changed, not casually
ignored” (internal quotation marks omitted)). Those cases
assumed alterations to predicate facts would not trigger a
mandatory reauditing of closed year reimbursements, see,
e.g., Regions, 522 U.S. at 462, and the Secretary agreed.

                                 III

For the foregoing reasons, the decision of the lower court is

                                                          Affirmed.



    9
       They include 42 U.S.C. §§ 1395ww(h)(1) (“[T]he Secretary
shall provide for payments for [GME] costs in accordance with [42
U.S.C. § 1395ww(h)(3)]”), 1395ww(d)(5)(B) (“The Secretary shall
provide for an additional payment amount for . . . indirect costs of
medical education.”), and 1395g(a) (“The Secretary shall
periodically determine the amount which should be paid under this
part to each provider of services . . . with necessary adjustments on
account of previously made overpayments or underpayments.”).
