                      UNITED STATES COURT OF APPEALS
                           FOR THE FIFTH CIRCUIT

                  _________________________________

                             No. 93-7592
                  _________________________________


                 STA-HOME HOME HEALTH AGENCY, INC.,

                                                    Plaintiff-Appellant,

                                   versus

                DONNA E. SHALALA, Secretary of U.S.
             Department of Health and Human Services,

                                                        Defendant-Appellee.

            ___________________________________________

           Appeal from the United States District Court
             for the Southern District of Mississippi

           _____________________________________________
                        (September 26, 1994)

Before POLITZ, Chief Judge, and DUHÉ and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, CIRCUIT JUDGE:

      This appeal, arising out of the denial of Medicare program

reimbursement to Sta-Home Home Health Agency, Inc., for that

portion of salaries deducted from the pay checks of its employees

and   retained   by    it,   concerns   whether   the    Secretary   of   the

Department of Health and Human Services reasonably interpreted

applicable statutes and regulations to conclude that an employee's

gross salary is not a reimbursable "reasonable cost" to the extent

that a portion of the salary is never paid to the employee.               The

district court upheld the Secretary, and we AFFIRM.
                                   I.

     Sta-Home is a provider of medical services in the Medicare

program, pursuant to Title XVIII of the Social Security Act, 42

U.S.C. §§ 1395 et seq., which provides health insurance for the

aged and disabled.     The Medicare program reimburses participating

hospitals and other medical providers for the "reasonable cost" of

medical services provided to eligible beneficiaries.        42 U.S.C. §

1395f(b)(1).1    Among other things, for a cost to be reasonable, it

must be "actually incurred".      42 U.S.C. § 1395x(v)(1)(A).2

     Because Sta-Home is a non-profit corporation, its only revenue

comes from Medicare or other insurance reimbursements, and private

donations.3     In 1985, in order to generate funds to cover non-

reimbursed    costs,   Sta-Home   initiated   a   program   whereby   its

employees were provided with forms to indicate their willingness to



1
     A "home health agency" provides skilled nursing services and
other therapeutic services at the patient's residence under
supervision by the patient's physician. 42 U.S.C. §§ 1395x(m) &
(o).
2
     Providers receive Periodic Interim Payments each month, and
these payments should approximate the reimbursable costs. The
final decision on reimbursement is based on a detailed cost
review prepared by the provider at the end of each year. A
provider's fiscal intermediary makes the initial decision whether
a particular cost may be reimbursed under the applicable
regulations. 42 U.S.C. § 1395h. If the provider is dissatisfied
with the intermediary's decision, it can obtain a hearing before
the Provider Reimbursement Review Board (PRRB). 42 U.S.C. §
1395oo. Within 60 days after the PRRB renders its decision, the
Administrator of the Health Care Financing Administration may, on
its own motion, reverse, affirm or modify the PRRB decision. 42
U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875.
3
     According to the testimony at the PRRB hearing, Sta-Home's
Medicare utilization is approximately 94%.

                                  - 2 -
donate a portion of their salaries to Sta-Home.4   According to Sta-

Home, these contributions were necessary to cover Medicare and

Medicaid losses in indigent care -- incurred costs that were not

covered by Medicare regulations for reimbursement.5

     The program was first presented to the employees at a meeting

by Vic Caracci, then CEO of Sta-Home, who discussed the poor

financial condition of the company and suggested that each employee

contribute one hour of their salary every two weeks.         Sta-Home

management personnel were stationed outside the meeting with the

appropriate   forms   to   be   completed   by   willing   employees.

Approximately 55% of the employees chose to contribute, and their

paychecks were reduced accordingly.     Therefore, the contributed

amount never left Sta-Home's account; in other words, it was never

paid to the employee.


4
     According to Sta-Home, the donation program was prompted by
an employee's suggestion; before its institution, employees had
engaged in various fund raising activities, such as bake sales,
to generate additional funds for Sta-Home. Vic Caracci, former
Sta-Home CEO, testified that, after the suggestion was made, he
contacted the chief auditor of the intermediary and was told that
the contribution program would be acceptable. Caracci was also
given a copy of a March 8, 1978, letter from the predecessor to
HHS, which stated:

          In any case where a provider agrees to compensate
          an employee and includes such amount in allowable
          costs but the employee through agreement or
          arrangement with the provider receives and retains
          less than the full compensation with the effect
          that the provider purposely inflates its costs,
          then appropriate reduction must be made to the
          provider's recorded costs to reflect actual costs
          incurred.
5
     Sta-Home had received contributions from "key" employees in
1982, and those contributions were disallowed.

                                - 3 -
     At    the    end    of   the   1985   fiscal    year,     Sta-Home   sought

reimbursement for the gross amount of all employees' salaries,

including the portion never paid the employees.                The intermediary

offset the amount claimed for salaries by the amount of the

contribution, so that Sta-Home was reimbursed only the amount

actually paid its employees.6

     Sta-Home sought review of the intermediary's decision by the

Provider    Reimbursement       Review     Board    (PRRB).7     Following   an

evidentiary hearing, the PRRB held in favor of Sta-Home.

     The Administrator of the Health Care Financing Administration

(HCFA), however, reversed the PRRB decision.                 The Administrator

stated     that    the    evidence       established    that     the   employee

contributions were used by Sta-Home to pay for costs not covered

for Medicare, with the result that, by providing reimbursement for

the full amount of salary, Medicare would be "paying for those



6
     Sta-Home's cost report for that year reflected that its
revenues exceeded expenses by $42,377. According to an anonymous
letter dated December 26, 1984, to the Mississippi Health Care
Commission, a "concerned employee" claimed that Sta-Home had
purchased "13 new cars and a new van [and taken] trips ... to
North Carolina, San Francisco, and Dallas to workshops."
7
     Before review by the PRRB, the parties apparently agreed,
and then disagreed, to submit the matter to the Blue Cross
Association (BCA) for resolution. BCA issued an opinion in favor
of Sta-Home, but that opinion was seemingly based on the
incorrect assumption that the intermediary had withdrawn its
objections to the contributions. The BCA opinion is not before
us for review, and neither party has asserted that it is in any
way binding on them or this court. Sta-Home apparently
emphasizes this incident to suggest that the Secretary or the
intermediary engaged in some kind of impropriety with regard to
the preparation or disclosure of that opinion, and we reject that
suggestion.

                                      - 4 -
nonallowable costs, in violation of the regulations".8                Along that

line,   the   Administrator        found     that,   "[i]n    substance",    the

contributions were "reductions or refunds of salary expense" under

42 C.F.R. § 413.98(c), and should properly reduce the expenses for

the period in which they are received. He noted that "contribution

schemes such as this are not a generally accepted practice in the

region",   and   that    "Medicare     has    previously      noted   that   such

practices ... have the effect of inflating the provider's costs and

are not acceptable".          Finally, the Administrator stated that he

           agree[d] with the PRRB that the practice of
           accepting   employee   donations  through   payroll
           deductions, as in this case, creates a perception
           of impropriety.      That the amount claimed as
           salaries   fall[s]   within   the  guidelines   for
           "reasonable salaries," is irrelevant.       To the
           extent they were "contributed" to the Provider, and
           not paid, they do not represent a "cost incurred."

     Accordingly,       the    Administrator    allowed      the   reimbursement

sought for salaries to be offset by the amount of contributions.

The district court upheld that decision.

                                       II.

     The Supreme Court recently re-stated the principles guiding

our review of the Secretary's decision:

           The [Administrative Procedures Act], which is
           incorporated by the Social Security Act, commands

8
     Sta-Home misconstrues the Administrator's decision, reading
it to hold that the total salary expense was disallowed because
expenses were not properly documented. Employees contributed to
Sta-Home to compensate for costs that were incurred but not
reimbursed by Medicare for various reasons, including failure to
document properly. In issue is the contribution scheme, not why
underlying costs were held not covered by Medicare. It was
because of those non-covered costs that the scheme was
implemented.

                                      - 5 -
             reviewing courts to "hold unlawful and set aside"
             agency action that is "arbitrary, capricious, an
             abuse of discretion, or otherwise not in accordance
             with law."   5 U.S.C. § 706(2)(A).     We must give
             substantial deference to an agency's interpretation
             of its own regulations. Our task is not to decide
             which among several competing interpretations best
             serves the regulatory purpose.          Rather, the
             agency's interpretation must be given "`controlling
             weight   unless   it   is  plainly    erroneous   or
             inconsistent with the regulation.'"        In other
             words,   we   must   defer   to   the    Secretary's
             interpretation unless an "alternative reading is
             compelled by the regulation's plain language or by
             other indications of the Secretary's intent at the
             time of the regulation's promulgation." This broad
             deference is all the more warranted when, as here,
             the regulation concerns "a complex and highly
             technical regulatory program," in which the
             identification and classification of relevant
             "criteria necessarily require significant expertise
             and entail the exercise of judgment grounded in
             policy concerns."

Thomas Jefferson University v. Shalala, 114 S. Ct. 2381, 2386-87

(1994) (citations omitted).

     In reviewing an agency's construction of a statute which it

administers, we must first determine "whether Congress has directly

spoken to the precise question at issue."             Chevron U.S.A. v.

Natural Resources Defense Council, 467 U.S. 837, 842 (1984).         "If

a court, employing traditional tools of statutory construction,

ascertains that Congress had an intention on the precise question

at issue, that intention is the law and must be given effect";

however, "if the statute is silent or ambiguous with respect to the

specific issue," the court asks whether the agency's answer is

based   on      a   "permissible     construction",    or   "reasonable

interpretation", of the statute.      467 U.S. at 843-44 & n.9.     Sta-

Home bears the "difficult burden" of proving that the Secretary's


                                   - 6 -
interpretation    of    the    applicable      statutes   conflicts   with      the

statutory scheme.      Sun Towers, Inc. v. Heckler, 725 F.2d 315, 325

(5th Cir. 1984).

                                        A.

     Pursuant    to    the    Social   Security    Act,   Sta-Home    is   to    be

reimbursed only for "reasonable costs", 42 U.S.C. §1395o, a term

defined, in part, as "the cost actually incurred".                42 U.S.C. §

1395x(v)(1)(A).        The Secretary maintains that the portions of

salaries contributed (returned) to Sta-Home by payroll deduction

were not "actually incurred".                As stated, if the Secretary's

interpretation of the statute is reasonable, we defer to it.

Chevron, 467 U.S. at 843-44.

     It is undisputed that the portion of some employees' salaries

designated as a donation to Sta-Home never left its account and was

never paid to those employees. Because Sta-Home was never required

to pay this portion of the salaries, it was most reasonable for the

Secretary to conclude that that cost was not "actually incurred".9

     Moreover, contrary to Sta-Home's contention, this statutory

interpretation is not inconsistent with the applicable regulations.

The refunds of expenses regulation referenced by the Administrator,

42 C.F.R. § 413.98(c), provides that



9
     Because we conclude that the total amount of the salaries
was not actually incurred, we need not consider whether they were
reasonable in amount. We note, however, that the 1978 letter,
see supra n. 4, does not require the Secretary to prove that the
provider inflated salaries, but rather states that an agreement
or arrangement between the provider and the employee to return a
portion of salary has the effect of inflating salaries.

                                       - 7 -
           refunds of expenses are reductions in the cost of
           goods or services purchased ... If they are
           received in the same accounting period in which the
           purchases were made or expenses were incurred, they
           will reduce the purchases or expenses of that
           period....

If the contributed portion of the salary is a "refund", it is clear

that it was properly offset under § 413.98(c).

     "Refunds" are defined by 42 C.F.R. §413.98(b)(3) as "amounts

paid back or a credit allowed on account of an overcollection".

Sta-Home asserts, based on an artful grammatical analysis, that the

contributions were not refunds because they were not paid back "on

account of an overcollection".        Under this scenario, however, any

amount that is paid out by Sta-Home as a reimbursable expense and

then is returned by the payee for any reason other than "on account

of an overcollection", is not subject to offset.        (For example, if

a thermometer manufacturer sold Sta-Home a thermometer for $100 and

then, pursuant to a separate agreement, voluntarily gave Sta-Home

$75 of that money back, Sta-Home would be able to be reimbursed

$100 by the Medicare program, without any offset, because the $75

was not paid "on account of an overcollection".)

     In any event, as noted earlier, the Administrator held that

"[i]n   substance,   the   employee    contributions   ...   were   merely

reductions or refunds of salary expense."        (Emphasis added.)     The

cited regulation was just one of several bases relied on by the

Administrator for his ruling.         The guiding principle is found in

the Act; reimbursement is allowed only for "cost[s] actually

incurred".   The Secretary's interpretation is in keeping with this



                                 - 8 -
statutory directive; that is, refunds are any amounts paid back.10

Therefore, the decision is not arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law; we are not

authorized to set it aside.

                                 B.

     Sta-Home raises additional points attacking supporting bases

looked to by the HCFA for his decision.    Because we uphold that

decision on the ground that the excess (refunded) salary costs were

not "actually incurred", we need not address these issues.11   See

Thomas Jefferson University v. Shalala, 114 S. Ct. 2381 (1994).

                                III.

     Accordingly, the judgment is

                              AFFIRMED.

10
     Another factor supporting this interpretation is that the
Secretary has consistently applied this interpretation. At the
hearing, there was evidence of two other instances in which
employee contributions had been made; and in both, the Secretary
offset the gross salaries by the amount of contributions.
Interestingly, one of the instances involved Sta-Home. There was
no proof that the Secretary had ever interpreted the statute or
regulation in an inconsistent manner.
11
     We note, however, that Sta-Home's reliance on § 604 of the
Provider Reimbursement Manual ("PRM"), which provides that
"[u]nrestricted contributions are not deducted from costs in
computing allowable costs", is misplaced, inasmuch as the PRM
does not carry the force and effect of law, Mother Frances
Hospital v. Shalala, 15 F.3d 423 (5th Cir. 1994), petition for
cert. filed, 62 U.S.L.W. 3827 (U.S. May 31, 1994) (No. 93-1907),
and certainly does not displace a reasonable statutory
interpretation. Further, we reject Sta-Home's contention that it
was denied a "just" administrative process. This contention,
which was properly construed by the district court as one of
estoppel, is not cognizable in a claim for public funds, Office
of Personnel Management v. Richmond, 496 U.S. 414 (1990); and,
furthermore, the claim of any improper scheme to mislead Sta-Home
as to the allocability of certain costs is without support in the
record.

                                - 9 -
