 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued March 22, 2011                  Decided June 17, 2011

                         No. 10-5201

  UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER,
                      APPELLANT

                              v.

                    KATHLEEN SEBELIUS,
                        APPELLEE


        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:08-cv-00946)



    Christopher L. Keough argued the cause for appellant.
With him on the briefs were Daniel J. Hettich, Paul D.
Clement, Ashley C. Parrish, and Erin E. Murphy.

     Jorge Lopez, Jr. and Patricia A. Millett were on the brief
for amicus curiae Memorial Sloan-Kettering Cancer Center in
support of appellant.

     Mark D. Polston, Deputy Associate General Counsel for
Litigation, U.S. Department of Health & Human Services,
argued the cause for appellee. With him on the brief were
Ronald C. Machen, Jr., U.S. Attorney, and R. Craig
Lawrence and Mitchell P. Zeff, Assistant U.S. Attorneys.
                              2

    Before:SENTELLE, Chief            Judge,     BROWN     and
KAVANAUGH, Circuit Judges.

    Opinion    for   the   Court   filed   by   Circuit   Judge
KAVANAUGH.

     KAVANAUGH, Circuit Judge: In 1965, Congress passed
and President Johnson signed the Act creating Medicare.
Medicare was primarily designed to ensure adequate health
care for Americans who are 65 or older.

     Paying for Medicare has posed a massive challenge for
the U.S. Government, as the costs of Medicare have grown
significantly over time. For several decades now, Congress
has intermittently attempted to rein in Medicare costs.

     This case involves cost-saving tools that Congress has
devised for Medicare payments to cancer hospitals. The case
specifically concerns Medicare reimbursements paid to one
cancer hospital – M.D. Anderson in Texas – in 2000 and 2001
for inpatient and outpatient costs.

     The first issue on appeal relates to cancer hospitals’
inpatient costs. Medicare reimburses cancer hospitals for the
reasonable costs of inpatient services for Medicare patients up
to a target amount. If a cancer hospital proves that its actual
costs exceeded the target amount because of “events beyond
the hospital’s control,” the target amount is increased, and
Medicare reimburses the cancer hospital for costs attributable
to those events. In this case, M.D. Anderson requested an
increase to its target amount in 2000 and 2001 due to the high
cost of certain new cancer drugs. The Department of Health
and Human Services denied that request, and the District
Court affirmed HHS’s decision.
                               3

     On appeal, the Hospital claims that HHS, after an
administrative hearing on the Hospital’s claim, imposed a
new requirement that the Hospital expressly prove the net
financial impact of the new drugs – as opposed to its simply
showing the gross cost of the new drugs. The Hospital argues
that it did not receive proper notice of the new net financial
impact requirement and thus did not have a fair opportunity to
satisfy the requirement at the administrative hearing. We
agree. The Hospital did not receive timely notice of the
requirement and, on remand to HHS, must be given an
opportunity to satisfy it.

     The second issue concerns cancer hospitals’ outpatient
costs. Since 2000, Medicare has typically reimbursed cancer
hospitals for outpatient care based on a statutory formula that
provides the hospitals a fraction of their reasonable costs.
One component of that formula is the reasonable cost of the
hospital’s outpatient care in 1996. The overarching idea is to
ensure that cancer hospitals can receive Medicare
reimbursement for at least the same proportion of their actual
costs that the hospitals received in 1996. In this case, the
Hospital contends that HHS misapplied the formula and
undercompensated the Hospital.           The problem for the
Hospital is that its interpretation of the statute would actually
give cancer hospitals higher reimbursements in 2000 and later
years than they would have received in 1996 for the same
actual costs.       We do not believe that the statute
unambiguously says that, or that the Secretary’s interpretation
of ambiguous language is unreasonable. The Hospital, of
course, must show one or the other in order to overcome
HHS’s interpretation. See Chevron, U.S.A., Inc. v. Natural
Res. Def. Council, 467 U.S. 837 (1984). The District Court
granted summary judgment to HHS on this issue, and we
affirm the District Court’s decision.
                              4

     In sum, we reverse the District Court’s decision regarding
the Hospital’s request to raise the target amount for inpatient
costs. The District Court should remand the matter to HHS.
On remand, HHS must provide the Hospital an opportunity to
show the net financial impact of the new cancer drugs. We
affirm the District Court’s decision granting summary
judgment to HHS with respect to cancer hospitals’ outpatient
costs.

                               I

     We first analyze M.D. Anderson’s argument concerning
its Medicare reimbursements for inpatient costs in 2000 and
2001. We review the statutory and regulatory framework, and
we then address the merits of the Hospital’s challenge to its
Medicare reimbursement for inpatient services.

                              A

    Congress has repeatedly attempted to slow the increase in
Medicare costs for hospitals’ inpatient services. In 1982,
Congress set a ceiling – known as the “target amount” – on
the annual reimbursement that Medicare would permit for
hospitals’ inpatient costs. See 42 U.S.C. § 1395ww(b)(3).
Although most hospitals are now subject to a different
Medicare system, the regime created in 1982 continues to
apply to cancer hospitals – that is, hospitals such as M.D.
Anderson that integrate cancer research with patient care. See
42 U.S.C. § 1395ww(d)(1)(B)(v)(I).

     The target amount is usually based on the previous year’s
reasonable inpatient costs plus an inflation-based rate of
increase. But there is an exception: HHS must increase the
                              5
target amount by more than the inflation-based rate when
there are “events beyond the hospital’s control.”

     Under HHS regulations, to obtain an increase to the
target amount greater than the standard inflation-based bump
for events beyond a hospital’s control, the hospital must show
that the increase is “reasonable, attributable to the
circumstances specified separately, identified by the hospital,
and verified by” an intermediary.                  42 C.F.R.
§ 413.40(g)(1)(ii).

                              B

     The University of Texas operates a cancer hospital, the
M.D. Anderson Cancer Center in Houston, Texas. For 2000
and 2001, the Hospital requested an adjustment to its inpatient
target amount to cover the costs of using new cancer drugs. It
requested an extra $4.8 million for 2000 and an additional
$4.18 million for 2001.

     The Hospital submitted its request to a component of
HHS called the Provider Reimbursement Review Board,
which issued the final HHS decision in this case. After
holding an administrative hearing, the Board issued an
opinion rejecting the Hospital’s request. In that opinion, the
Board said that the Hospital had failed to show the net
financial impact of the new drugs, but rather had shown only
the gross cost of the new drugs.

    Although neither the statute nor the HHS regulation
explicitly requires the Hospital to prove the net financial
impact of using a new cancer drug, we agree with HHS that
such a requirement is a reasonable application of the statute
and regulation. If a new drug costs $1000, but saves $1000
that the hospital would have spent on the old cancer
                               6
treatment, then the net financial impact for the hospital – that
is, the increase that is attributable to the new drug – is $0. Of
course, the analysis is rarely so straightforward. And the
problem in this particular case is that the Board held its
administrative hearing with regard to M.D. Anderson before
the Board announced (in its later opinion in this case) that a
hospital must show the net financial impact of new drugs in
order to raise the target amount. In prior proceedings with
other hospitals, moreover, the Board had not required an
express showing of the net financial impact of the different
drugs. See Belmont Hills Hospital v. Blue Cross & Blue
Shield Ass’n/Blue Cross of California, PRRB Dec. No. 99-
D39 (Apr. 21, 1999). In essence, therefore, the Board sprung
this requirement on the Hospital after the hearing – when it
was too late for the Hospital to put forward evidence to satisfy
the requirement.

     That won’t do. To use the terms of our precedents, the
“regulated party” here was “not on notice of the agency’s
ultimate interpretation.” General Electric Co. v. EPA, 53
F.3d 1324, 1334 (D.C. Cir. 1995) (internal quotation marks
omitted). The Hospital did not have notice that it had to show
the net financial impact of the new cancer drugs.

     We thus reverse the District Court’s decision with regard
to the Hospital’s inpatient costs. The District Court should
remand the case to HHS, and HHS in turn should provide the
Hospital an opportunity to show the net financial impact of
the new cancer drugs it used in 2000 and 2001.

                               II

     We next address the Hospital’s Medicare reimbursements
for 2000 and 2001 outpatient costs. We review the statutory
and regulatory framework, and we then address the merits of
                             7
the Hospital’s challenge to its Medicare reimbursement for
outpatient services.

                             A

     As with Medicare inpatient costs, Congress has
repeatedly attempted to slow the rapid increases in Medicare
outpatient costs. Under the old system, hospitals treated
outpatients, and then informed Medicare of the cost of the
treatment, and then received money to cover costs that were
“reasonable.” Not surprisingly, costs exploded under this
system because there was little check on the services and
costs for which hospitals received reimbursement. In 1990,
Congress instructed HHS to implement a new system for
reimbursing those outpatient costs. Under this new approach,
Medicare would pay hospitals fixed amounts set in advance of
the patients’ treatment. The new system – designed “to
encourage health care providers to improve efficiency and
reduce operating costs” – is called the Prospective Payment
System. Methodist Hospital of Sacramento v. Shalala, 38
F.3d 1225, 1227 (D.C. Cir. 1994).

     Recognizing that the Prospective Payment System would
be implemented slowly, Congress in 1990 instituted an
interim policy to lower Medicare payments immediately.
That interim policy took effect in 1991. See Pub. L. No. 101-
508, § 4151, 104 Stat. 1388-71, 71-72 (1990). The interim
policy reduced payments to hospitals for their outpatient
costs. It did so by imposing various cost reduction factors.
For example, if a hospital had $10 million in reasonable
outpatient costs, and if the applicable cost reduction factor
                                 8
was 10%, the hospital would receive $9 million in payments
from Medicare. 1

     In 1997, with the Prospective Payment System for
outpatients still not implemented by HHS, Congress passed
and President Clinton signed the Balanced Budget Act of
1997. Pub. L. No. 105-33, 111 Stat. 251. That law set
January 1999 as the initial date by which HHS was required
to implement the Prospective Payment System for outpatients.
But HHS missed the deadline.

     In 1999, Congress then passed and President Clinton
signed the Balanced Budget Refinement Act of 1999. Pub. L.
No. 106-113, 113 Stat. 1501. Under the 1999 Act, two things
relevant to this case were to happen after HHS implemented
the Prospective Payment System for outpatients. First, the
interim cost reduction factors that had existed since 1991
would expire. Second, a “transitional adjustment to limit
decline in payment” for hospitals would begin. 42 U.S.C.
§ 1395l(t)(7) (capitalization altered).

    Congress created the “transitional adjustment” because
some hospitals would receive significantly less money under
the new Prospective Payment System than they had
previously been receiving. To ease those hospitals into the
new system, they were allowed for the first few years to
obtain the amount they would have received before the
Balanced Budget Act of 1997 – referred to in the statute as the
“pre-BBA amount” – rather than the lower amount they
would receive under the Prospective Payment System.
     1
       The cost reduction factor for capital-related costs began at
15% in 1991 and declined to 10% for the years after that. Pub. L.
No. 101-508, § 4151, 104 Stat. 1388-71, 71-72 (1990). The cost
reduction factor for non-capital-related costs began at 5.8% in 1991
and remained at that level. Id.
                                9

    Of importance here, the transitional adjustment also
permanently guaranteed cancer hospitals – such as M.D.
Anderson – at least their “pre-BBA amount.”

     The “pre-BBA amount” is defined by the statute as “the
reasonable cost of the hospital” for the current year multiplied
by a fraction. Id. § 1395l(t)(7)(F). The fraction’s numerator
is the Medicare payment that the Hospital received for
outpatient “services furnished during the cost reporting period
ending in 1996.” Id. The fraction’s denominator is “the
reasonable cost of such services for such period.” Id. Thus,
the “pre-BBA amount” equals:

                                       (1996 Medicare Payment)
    (Current Year Reasonable Cost) X    -------------------------------
                                        (1996 Reasonable Cost)

     It may help to put aside those somewhat confusing details
of the formula and focus momentarily on the big picture. A
key point of this statutory formula was to ensure that cancer
hospitals would generally receive reimbursement for at least
the same percentage of their actual costs that they had
received in 1996. For example, suppose a hospital’s
outpatient costs in 1996 were $10 million and it received $9
million from Medicare. If the hospital in 2000 again had the
same outpatient costs of $10 million, it again would receive
$9 million in reimbursement. In other words, a cancer
hospital that had the same outpatient costs in 2000 that it had
in 1996 would receive the same reimbursement in 2000 that it
had received in 1996.
                              10
                              B

     HHS has interpreted the statute in exactly that
commonsense fashion. But the Hospital objects, arguing that
the statutory text doesn’t actually support that seemingly
commonsense result.         The Hospital focuses on the
denominator of the fraction used in the pre-BBA definition –
the “reasonable cost” for 1996. The Hospital argues that this
term does not mean the reasonable costs actually incurred by
the Hospital in 1996, but rather means the reasonable costs as
discounted by the statutory cost reduction factors that reduced
the Hospital’s actual reimbursement in 1996. See M.D.
Anderson Opening Br. at 35-55; M.D. Anderson Reply Br. at
2-24.

     Importantly, by plugging the Hospital’s interpretation
into the statutory formula, cancer hospitals would be entitled
to receive more in 2000 than they received in 1996 even if
their actual costs in 2000 were exactly the same as in 1996.
Needless to say, if you have followed along this far, it seems
extremely unlikely that Congress enacted such a windfall
provision.

    Keep in mind that the Hospital’s burden is to show that
the statute unambiguously supports its interpretation. See
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.
837 (1984). It cannot do so. The Hospital’s interpretation
runs into several textual and contextual roadblocks. To begin
with, the premise of the Hospital’s argument is that the cost
reduction factors in 1996 actually reduced a hospital’s costs,
not just its Medicare payments. But the statute at least in
some places refers to reduction in “payments” to hospitals
when describing the effect of the 1996 cost reduction factors.
See 42 U.S.C. §§ 1395x(v)(1)(S)(ii)(I)-(II). That alone makes
                              11
it near impossible for the Hospital to say that the statute
unambiguously supports its interpretation.

     As a matter of common parlance, moreover, the interim
outpatient cost reduction factors that began in 1991 caused
reductions in the reimbursements or payments to the Hospital,
not reductions in the Hospital’s actual costs. The fact that a
cost-reduction statute that took effect in 1991 lowered
Medicare’s reimbursements to the Hospital in 1996 obviously
does not mean that the Hospital’s actual costs were somehow
magically lower in 1996.

     In addition, to reiterate a point made above, the effect of
the Hospital’s interpretation would be rather bizarre. The
Hospital’s interpretation of the key statutory term “pre-BBA
amount” would give the Hospital higher payments in 2000
than it received pre-BBA in 1996 – even if the Hospital’s
actual costs were exactly the same in 2000 as in 1996. In
light of the statutory text, context, and purpose, that result
makes no sense at all and highlights the serious flaw in the
Hospital’s suggested approach.

     The Hospital’s interpretation would not give hospitals
just a “pre-BBA amount,” which is what the statutory text
requires. Its interpretation would give hospitals a pre-1991
amount – meaning the amount hospitals received back before
Congress initially imposed any cost reduction factors on
reimbursements to hospitals for outpatient costs.           The
Hospital’s interpretation, in other words, would give cancer
hospitals a tremendous windfall that Congress in 1999 plainly
did not intend – and did not write into the statute’s text.

    We need not decide whether the statute unambiguously
supports HHS’s interpretation. All we need to decide – and
do decide – is that the statute does not unambiguously support
                             12
the Hospital’s interpretation and that HHS’s contrary
interpretation is reasonable. See Chevron, 467 U.S. 837.

                            ***

     We reverse the judgment of the District Court with
respect to the Hospital’s inpatient costs. The District Court
should remand the case to HHS, and HHS should give the
Hospital an opportunity to show the net financial impact of
the new cancer drugs it used in 2000 and 2001. We affirm the
judgment of the District Court with respect to the Hospital’s
outpatient costs.

                                                 So ordered.
