                  United States Court of Appeals

               FOR THE DISTRICT OF COLUMBIA CIRCUIT

       Argued September 7, 1999    Decided October 1, 1999 

                           No. 98-5254

         County of Los Angeles, a political subdivision 
        of the State of California, owner and operator of 
             Los Angeles County/USC Medical Center, 
                   Harbor/UCLA Medical Center, 
           Martin Luther King Jr./Drew Medical Center, 
   Olive View Medical Center and High Desert Hospital, et al. 
                    Appellees/Cross-Appellants

                                v.

                  Donna E. Shalala, Secretary, 
          U.S. Department of Health and Human Services 
                     Appellant/Cross-Appellee

                        Consolidated with 
        Nos. 98-5255, 98-5256, 98-5257, 98-5258, 98-5259, 
          98-5260, 98-5261, 98-5262, 98-5325, 98-5326, 
          98-5327, 98-5328, 98-5329, 98-5330, 98-5331, 
                         98-5332, 98-5333

                            ---------

          Appeals from the United States District Court 
                  for the District of Columbia 
                         (No. 93cv00146) 
                         (No. 93cv00147) 
                         (No. 93cv00479) 
                         (No. 93cv00692) 
                         (No. 93cv00836) 
                         (No. 93cv00837) 
                         (No. 93cv01188) 
                         (No. 93cv02069) 
                         (No. 94cv01485)

     Peter R. Maier, Attorney, United States Department of 
Justice, argued the cause for appellant/cross-appellee.  With 
him on the briefs were Frank W. Hunger, Assistant Attorney 
General, Wilma A. Lewis, United States Attorney, and Bar-
bara C. Biddle, Attorney, United States Department of Jus-
tice.

     Lloyd A. Bookman argued the cause for appellees/cross-
appellants.  With him on the briefs were David H. Eisenstat, 
Byron J. Gross, John R. Hellow, Michael G. Hercz, John R. 
Jacob, and David B. Palmer.

     Before:  Wald, Silberman, and Tatel, Circuit Judges.

     Opinion for the Court filed by Circuit Judge Wald.

     Wald, Circuit Judge:  Brought by the owners of Medicare-
provider hospitals ("Hospitals") and the Secretary of Health 
and Human Services ("Secretary"), these cross-appeals pres-
ent two issues.  First, under the Medicare statute, must the 
Secretary provide hospitals with retroactive reimbursements 
to ensure that aggregate outlier payments during any given 
fiscal year meet minimum statutory targets?  And second, 
has the Secretary adequately explained why, when calculating 
outlier thresholds for fiscal years 1985-1986, she relied on a 
1981 database instead of more contemporaneous records from 
1984 Medicare discharges?  Finding that Congress had spo-
ken directly and unambiguously to the first question, the 

district court granted partial summary judgment to the Hos-
pitals.  With respect to the second issue, however, the court 
perceived nothing unreasonable in the Secretary's choice of 
data, and entered judgment accordingly for the Secretary.  
Because we disagree with the district court on both points, we 
now reverse.

                          I. Background

     Through a "complex statutory and regulatory regime," 
Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993), 
the Medicare program reimburses qualifying hospitals for the 
services that they provide to eligible patients.  See Social 
Security Act, Pub. L. No. 89-97, tit. XVIII, 79 Stat. 286, 291 
(1965) (codified as amended at 42 U.S.C. ss 1395-1395ggg 
(1994 & Supp. III 1997)).  From its inception in 1965 until 
October 1983, Medicare compensated hospitals for the "rea-
sonable costs" of the inpatient services that they furnished.  
See 42 U.S.C. s 1395f(b).  Experience proved, however, that 
this system bred "little incentive for hospitals to keep costs 
down" because "[t]he more they spent, the more they were 
reimbursed."  Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 
974 (D.C. Cir. 1991).

     To stem the program's escalating costs and perceived inef-
ficiency, Congress fundamentally overhauled the Medicare 
reimbursement methodology in 1983.  See Social Security 
Amendments of 1983, Pub. L. No. 98-21, s 601, 97 Stat 65, 
149.  Since then, this new regime, known as the Prospective 
Payment System ("PPS"), has reimbursed qualifying hospi-
tals at prospectively fixed rates.  By establishing pre-
determined reimbursement rates that remain static regard-
less of the costs incurred by a hospital, Congress sought "to 
reform the financial incentives hospitals face, promoting effi-
ciency in the provision of services by rewarding cost/effective 
hospital practices."  H.R. Rep. No. 98-25, at 132 (1983), 
reprinted in 1983 U.S.C.C.A.N. 219, 351.

     Calculating prospective-payment rates begins with deter-
mining the "federal rate," a standard nationwide cost rate 
based on the average operating costs of inpatient hospital 

services.  See 42 U.S.C. s 1395ww(d)(2)(A)-(B);  49 Fed. Reg. 
234, 251 (1984).  To account for regional variations in labor 
costs, the Secretary then establishes a wage index that aug-
ments the adjusted standardized payment depending on the 
location of a qualifying hospital.  s 1395ww(d)(2)(H), 
(d)(3)(E).  The final variable is an additional weighting factor 
that reflects the disparate hospital resources required to treat 
major and minor illnesses.  s 1395ww(d)(4).  For each of 470 
medical conditions--known as diagnosis related groups or 
"DRGs"--the Secretary assigns particular weights by which 
the federal rate is to be multiplied.  The more complicated 
and costlier the treatment is, the greater the weight assigned 
to that particular DRG will be.  To calculate the final "DRG 
prospective payment rate" for a patient discharge, the Secre-
tary takes the federal rate, adjusts it according to the wage 
index, and then multiplies it by the weight assigned to the 
patient's DRG.  By statutory mandate, the Secretary must 
publish the weights and values that she will factor into the 
prospective-payment calculus before the start of each fiscal 
year.  s 1395ww(d)(6).

     Despite the anticipated virtues of PPS, Congress recog-
nized that health-care providers would inevitably care for 
some patients whose hospitalization would be extraordinarily 
costly or lengthy.  To insulate hospitals from bearing a 
disproportionate share of these atypical costs, Congress au-
thorized the Secretary to make supplemental "outlier pay-
ments."  During the years at issue in these cross-appeals, the 
outlier-payment provisions were set forth in four clauses of 
the Medicare statute.  42 U.S.C. s 1395ww(d)(5)(A)(i)-(iv) 
(Supp. IV 1986).  With the first two clauses, Congress estab-
lished two classes of outlier payments:  day outliers and cost 
outliers. s 1395ww(d)(5)(A)(i)-(ii).  A hospital could qualify 
for a day-outlier payment if the patient's length of stay 
exceeded the mean length of stay for that particular DRG by 
a fixed number of days or standard deviations.  
s 1395ww(d)(5)(A)(i).  Along the same lines, the Secretary 
would make cost-outlier payments when a hospital's cost-
adjusted charges surpassed either a fixed multiple of the 
applicable DRG prospective-payment rate or such other fixed 

dollar amount that the Secretary established.  
s 1395ww(d)(5)(A)(ii).  In the third clause, Congress provided 
that outlier payments "shall be determined by the Secretary 
and shall approximate the marginal cost of care beyond the 
cutoff point applicable" to the day or cost outlier.  
s 1395ww(d)(5)(A)(iii).

     It is the fourth and final clause, however, that forms the 
textual nub of the present controversy.  
s 1395ww(d)(5)(A)(iv).  During 1985 and 1986, paragraph 
(5)(A)(iv) provided:

     The total amount of the additional payments made under 
     this subparagraph for discharges in a fiscal year may not 
     be less than 5 percent nor more than 6 percent of the 
     total payments projected or estimated to be made based 
     on DRG prospective payment rates for discharges in that 
     year.
     
Id.  Traditionally, the Secretary has read paragraph 
(5)(A)(iv) to mean that at the start of each fiscal year, she 
must establish the fixed thresholds beyond which hospitals 
will qualify for outlier payments at levels likely to result in 
outlier payments totaling between five and six percent of 
projected DRG payments for that year.  In making this 
estimation, the Secretary first settles on the per-diem outlier 
payment, which pursuant to s 1395ww(d)(5)(A)(iii), must ap-
proximate the marginal cost of care.  She then examines 
historical Medicare-discharge data to determine which thresh-
olds, when multiplied by the per-diem payment rate, would 
probably yield total outlier payments falling within the five-
to-six-percent range in paragraph (5)(A)(iv).  As the Secre-
tary observed during the rulemaking, however, "given the 
data available, forecasts of probable future outlier payments 
are inexact."  50 Fed. Reg. 35,646, 35,710 (1985).  If it turns 
out that the Secretary overestimated the mean length of stay 
for DRGs, the actual total outlier payments at the end of the 
year may amount to less than five percent of estimated DRG-
related payments.  Conversely, underestimating the mean 
length of stay might produce outlier payments in excess of six 
percent of estimated total DRG payments.

     Whether the Secretary's projections prove to be correct 
will depend, in large part, on the predictive value of the 
historical data on which she bases her calculations.  For fiscal 
year 1984, the Secretary relied on data culled from the 1981 
Medicare Provider Analysis and Review ("1981 MEDPAR") 
file, a database containing 1.6 million Medicare discharges 
from 1981.  As a product of the old reasonable-cost system, 
however, the 1981 MEDPAR file obviously did not reflect one 
of "[t]he most commonly accepted expectation[s] about the 
PPS at the time of its inception[:]  that it would result in 
shorter stays for Medicare patients."  Office of Research & 
Demonstrations, Health Care Fin. Admin., U.S. Dep't of 
Health & Human Servs., Pub. No. 03231, Report to Congress:  
Impact of the Medicare Hospital Prospective Payment System 
6-13 (1984).  By 1984, however, preliminary data indicated 
that the mean length of stay for virtually all DRGs had, as 
anticipated, declined dramatically under PPS.  The Secre-
tary, nevertheless, chose to rely again on the 1981 MEDPAR 
file in setting outlier thresholds for fiscal years 1985-1986.  
During those years, though the Secretary set thresholds at a 
level projected to result in outlier payments at or above 
paragraph (5)(A)(iv)'s five-percent floor, actual outlier pay-
ments in 1985 constituted only 3.0 percent of estimated DRG-
related payments and in 1986 they amounted to 4.4 percent.1  
Given the enormity of the Medicare program, these seemingly 
modest percentage differences represent substantial sums of 
money:  $241 million for fiscal year 1985 and $101 million for 
fiscal year 1986.

     Because actual outlier payments for fiscal years 1985-1986 
amounted to less than five percent of projected DRG-related 
payments, the Hospitals petitioned the Secretary for retroac-
tive reimbursements to satisfy the difference.  According to 
the Hospitals, paragraph (5)(A)(iv) does more than instruct 
the Secretary about where she should set outlier thresholds 

__________
     1 Note that these percentages were derived from the actual total 
DRG prospective payments in 1985 and 1986, not the projected 
payments as set forth in the statute.  Both parties have agreed that 
this is the only practical method of calculating shortfalls at this 
point.  See Br. of Sec'y at 13 & n.4;  Br. of Hosps. at 4 & n.3.

at the beginning of each fiscal year;  it affirmatively com-
mands her to recalibrate retroactively the outlier thresholds 
if, after the fiscal year concludes, actual outlier payments do 
not equal at least the five-percent statutory target.  More-
over, the Hospitals claimed that the Secretary had acted 
arbitrarily and capriciously by relying on the 1981 MEDPAR 
file when she forecast outlier thresholds for fiscal years 1985-
1986.  The Secretary rejected both claims, and the Provider 
Reimbursement Review Board authorized the Hospitals to 
seek expedited judicial review pursuant to 42 U.S.C. 
s 1395oo(f).

     In an opinion and order dated January 20, 1998, the district 
court granted in part and denied in part both the Secretary's 
and the Hospitals' cross-motions for summary judgment.  In 
granting a portion of the Hospitals' motion, the court pro-
ceeded no further than the first step of Chevron U.S.A. Inc. 
v. Natural Resources Defense Council, Inc., 467 U.S. 837, 
842-43 (1984), concluding that paragraph (5)(A)(iv) unambigu-
ously requires the Secretary to adjust outlier payments retro-
actively to ensure that total actual outlier payments fall 
within the statute's five-to-six-percent range.  County of Los 
Angeles v. Shalala, 992 F. Supp. 26, 31-33 (D.D.C. 1998).  
Holding, however, that the Secretary's decision to favor the 
1981 MEDPAR file over the more recent, though preliminary, 
1984 data when determining outlier thresholds was "a rational 
choice between two imperfect databases," the district court 
granted the Secretary's motion for summary judgment on the 
Hospitals' claim of arbitrary and capricious agency action.  
Id. at 34-36.

     Having determined that paragraph (5)(A)(iv) required the 
Secretary to make retroactive outlier payments to the Hospi-
tals, the district court instructed the parties to meet and 
confer on how to structure the final remedy.  On April 30, 
1998, based largely on a joint stipulation filed by the parties, 
the district court entered an order granting judgment to the 
parties on each of the claims on which they respectively 
prevailed.  While the April 30 order also instructed the 
Secretary to tender retroactive outlier payments to the Hos-
pitals, it did not specify a sum certain to be paid;  rather, the 

court left it to the Secretary to calculate the amount owed.  
Thereafter, the Secretary noted a timely appeal and the 
Hospitals noted timely cross-appeals.

                           II. Analysis

A.   Jurisdiction

     Before reaching the merits, it is necessary to examine our 
jurisdiction to entertain these cross-appeals.  Section 1291 of 
the Judicial Code provides that the courts of appeals may 
review "all final decisions of the district courts of the United 
States."  28 U.S.C. s 1291 (1994).  In the proceedings below, 
the district court, managing this case as it would any garden-
variety civil suit, adjudicated not only the respective legal 
rights of the parties but also took steps toward decreeing a 
proper remedy.  Thus in its January 20, 1998 order, the court 
resolved the merits of the Hospitals' claims, and with its April 
30, 1998 order, directed the Secretary to calculate the amount 
of outlier payments due to the Hospitals and to make pay-
ment accordingly.  This latter order has spawned some confu-
sion about our jurisdiction because of the general rule appli-
cable to civil actions that "where assessment of damages or 
awarding of other relief remains to be resolved," a district 
court's judgment is not " 'final' within the meaning of 28 
U.S.C. s 1291."  Liberty Mut. Ins. Co. v. Wetzel, 424 U.S. 
737, 744 (1976);  see also A & S Council Oil Co. v. Lader, 56 
F.3d 234, 238 (D.C. Cir. 1995) (holding that an order estab-
lishing liability but referring the issue of damages to arbitra-
tion is not final).  For it is clear that neither of the district 
court's orders resolved the precise quantum of payments to 
be made to the Hospitals.

     This rule of finality does not apply here, however, because 
this is not an appeal from an ordinary civil judgment ren-
dered by the district court.  With both of their claims, the 
Hospitals challenged the Secretary's actions under section 
10(e) of the Administrative Procedure Act, 5 U.S.C. s 706(2).  
As we have often observed, "[w]hen a final agency action is 
challenged under the APA in district court, if the relevant 
substantive statute does not provide for direct review in the 

court of appeals, the district court does not perform its 
normal role" but instead "sits as an appellate tribunal."  PPG 
Indus., Inc. v. United States, 52 F.3d 363, 365 (D.C. Cir. 
1995) (quoting Marshall County Health Care Auth. v. Shala-
la, 988 F.2d 1221, 1225 (D.C. Cir. 1993));  accord James 
Madison Ltd. v. Ludwig, 82 F.3d 1085, 1096 (D.C. Cir. 1996) 
("Generally speaking, district courts reviewing agency action 
under the APA's arbitrary and capricious standard do not 
resolve factual issues, but operate instead as appellate courts 
resolving legal questions."), cert. denied, 519 U.S. 1077 (1997).  
Whether it is a court of appeals or a district court, "[u]nder 
settled principles of administrative law, when a court review-
ing agency action determines that an agency made an error of 
law, the court's inquiry is at an end:  the case must be 
remanded to the agency for further action consistent with the 
corrected legal standards."  PPG Indus., 52 F.3d at 365;  see 
also South Prairie Constr. Co. v. Local No. 627, Int'l Union 
of Operating Eng'rs, 425 U.S. 800, 806 (1976);  SEC v. Chen-
ery Corp., 318 U.S. 80, 94-95 (1943).  Once, therefore, the 
district court held that the Secretary had misinterpreted 
s 1395ww(d)(5)(A)(iv), it should have remanded to the Secre-
tary for further proceedings consistent with its conception of 
the statute.  Not only was it unnecessary for the court to 
retain jurisdiction to devise a specific remedy for the Secre-
tary to follow, but it was error to do so.  See Ommaya v. 
National Insts. of Health, 726 F.2d 827, 830 (D.C. Cir. 1984) 
("If MSPB relied on incorrect legal grounds, it would be error 
for this court to enforce without first remanding for agency 
examination of the evidence and proper fact-finding.") (quot-
ing White v. United States Dep't of the Army, 720 F.2d 209, 
210 (D.C. Cir. 1983)).  Accordingly, because that was all that 
the district court had the power to do, we construe its 
January 20, 1998 order as a remand to the Secretary, and 
ignore, for jurisdictional purposes, its later order on specific 
relief.

     Of course, properly characterizing the district court's order 
as a remand does not, without more, resolve our jurisdictional 
quandary, for a "remand order usually is not a final decision."  
NAACP v. United States Sugar Corp., 84 F.3d 1432, 1436 

(D.C. Cir. 1996).  We have recognized "an exception to this 
general rule, however, where the agency to which the case is 
remanded seeks to appeal and it would have no opportunity to 
appeal after the proceedings on remand."  Occidental Petro-
leum Corp. v. SEC, 873 F.2d 325, 330 (D.C. Cir. 1989).  
Animating this principle is a pragmatic concern.  Because an 
agency must conduct its proceedings and render its decision 
pursuant to the legal standard that the district court articu-
lates in its remand order, "[u]nless another party appeals [the 
agency's subsequent] decision, the correctness of the district 
court's legal ruling will never be reviewed by the court of 
appeals, notwithstanding the agency's conviction that the 
ruling is erroneous."  Id.  Here, were the Secretary unable 
to appeal the district court's decision at this point, on remand 
she would have to interpret paragraph (5)(A)(iv) as the dis-
trict court has construed it, and disburse millions of dollars in 
retroactive outlier payments to various Medicare-provider 
hospitals.  Absent an appeal from that decision by one of the 
Hospitals, the Secretary would have no opportunity to chal-
lenge the legal basis for the disbursements.  Our jurisdiction 
is therefore proper because the Secretary's appeal falls within 
the exception recognized in Occidental Petroleum.  Addition-
ally, vested with jurisdiction to review the Secretary's appeal 
under s 1291, we may also consider the Hospitals' cross-
appeal of the district court's grant of summary judgment to 
the Secretary on their arbitrary and capricious agency-action 
claim.  See United States Sugar Corp., 84 F.3d at 1436.

B.   The Secretary's Appeal

     Turning first to the Secretary's challenge, we face a ques-
tion of statutory interpretation that the district court resolved 
in the affirmative:  whether, under s 1395ww(d)(5)(A)(iv), the 
Secretary must make retroactive reimbursements to ensure 
that aggregate outlier payments during any given fiscal year 
constitute at least five percent of estimated or projected 
DRG-related payments.  Because we may set aside agency 
action only if it is "arbitrary, capricious, an abuse of discre-
tion, or otherwise not in accordance with law," 5 U.S.C. 
s 706(2)(A), we accord no particular deference to the judg-
ment of the district court when conducting our review.  See 

HCA Health Servs. v. Shalala, 27 F.3d 614, 616 (D.C. Cir. 
1994);  Hennepin County v. Sullivan, 883 F.2d 85, 91 (D.C. 
Cir. 1989) ("Our review proceeds as if this case were an 
immediate appeal from a decision reached after an adminis-
trative hearing on the record.");  Biloxi Reg'l Med. Ctr. v. 
Bowen, 835 F.2d 345, 348-49 (D.C. Cir. 1987).

     We initiate statutory analyses of the sort presented here by 
first asking whether "Congress has directly spoken to the 
precise question at issue."  Chevron U.S.A. Inc. v. Natural 
Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).  
For if after "exhaust[ing] the traditional tools of statutory 
construction," Natural Resources Defense Council, Inc. v. 
Browner, 57 F.3d 1122, 1125 (D.C. Cir. 1995) (quoting Chev-
ron, 467 U.S. at 843 n.9), we ascertain that Congress's intent 
is clear, "that is the end of the matter."  Chevron, 467 U.S. at 
842.  But "if the statute is silent or ambiguous with respect to 
the specific issue, the question for the court is whether the 
agency's answer is based on a permissible construction of the 
statute."  Id. at 843.  Where judicial review is refracted 
through this analytic prism, the "view of the agency charged 
with administering the statute is entitled to considerable 
deference;  and to sustain it, we need not find that it is the 
only permissible construction that [the agency] might have 
adopted."  Chemical Mfrs. Ass'n v. Natural Resources De-
fense Council, Inc., 470 U.S. 116, 125 (1985).

     Contending that the statutory language boasts an ambigui-
ty, the Secretary maintains that she has reasonably construed 
paragraph (5)(A)(iv) as prescribing a specific methodology 
that she must follow when setting outlier thresholds at the 
beginning of each fiscal year.  Under the Secretary's inter-
pretation, paragraph (5)(A)(iv) mandates that she must select 
outlier thresholds which, when tested against historical data, 
will likely produce aggregate outlier payments totaling be-
tween five and six percent of projected or estimated DRG-
related payments.  Because, under the Secretary's construc-
tion, paragraph (5)(A)(iv) speaks only to how she is to calcu-
late outlier thresholds for the forthcoming year, the Secretary 
posits that she has no obligation to ensure that actual outlier 

payments for the year total five percent of projected DRG-
related payments.

     Advocating a results-oriented approach, however, the Hos-
pitals argue, and the district court agreed, that the Secre-
tary's interpretation contradicts the unambiguous meaning of 
paragraph (5)(A)(iv).  The textual lodestar guiding their 
plain-meaning critique is the single phrase "payments made."  
According to the Hospitals, by indicating in paragraph 
(5)(A)(iv) that "the total amount of the additional payments 
made ... may not be less than 5 percent" of total DRG-
related payments "estimated or projected to be made," 42 
U.S.C. s 1395ww(d)(5)(A)(iv) (Supp. IV 1986) (emphasis add-
ed), Congress unmistakably meant that the total amount of 
additional payments actually made during a fiscal year must 
meet the five-percent target.  During years in which the 
Secretary's chosen thresholds yield outlier payments that fall 
short of the statutory mark, the Hospitals' interpretation 
would require the Secretary to bridge the difference by 
recalibrating outlier variables and making retroactive pay-
ments accordingly.

     Standing alone, however, the phrase "payments made" 
hardly conveys a single meaning, much less the one that the 
Hospitals advance.  As it is employed in paragraph (5)(A)(iv), 
"payments made" is "simply an adjectival phrase, not a 
verbial phrase indicating the past tense, and hence allows 
alternative temporal readings."  United States Dep't of the 
Treasury v. FLRA, 960 F.2d 1068, 1072 (D.C. Cir. 1992).  It 
is not unlike the phrase "recognized as reasonable," which the 
Supreme Court, quoting favorably from our decision in Ad-
ministrators of the Tulane Educational Fund v. Shalala, 987 
F.2d 790 (D.C. Cir. 1993), held "does not tell us whether 
Congress means to refer the Secretary to action already 
taken or to give directions on actions about to be taken."  
Regions Hosp. v. Shalala, 522 U.S. 448, ---, 118 S. Ct. 909, 
916 (1998) (quoting Tulane Educ. Fund, 987 F.2d at 796).  
Evincing the same syntactical equivalence, the phrase "pay-
ments made" in paragraph (5)(A)(iv), though certainly capable 
of accommodating the Hospitals' interpretation, can just as 
easily be read to reflect Congress's intent to "give directions 

on actions about to be taken."  Id. In other words, instead of 
embodying a retrospective inquiry into the amount of outlier 
payments that have been made, the phrase "payments made 
under this subparagraph" might just as plausibly reflect a 
prospective command to the Secretary about how to structure 
outlier thresholds for payments to be made in advance of each 
fiscal year.  Cf. Regions Hosp., 522 U.S. at ---, 118 S. Ct. at 
916 ("[T]he phrase 'recognized as reasonable' might mean 
costs the Secretary (1) has recognized as reasonable ..., or 
(2) will recognize as reasonable....").  Ultimately, whether 
the phrase is "recognized as reasonable," "adversely affect-
ed," or "payments made," it is difficult to divine with much 
confidence the pellucid intent of Congress because "[t]he 
language, in short, is ambiguous."  United States Dep't of the 
Treasury, 960 F.2d at 1072 (describing as ambiguous the 
phrase "adversely affected");  accord Tulane Educ. Fund, 987 
F.2d at 796.

     Hoping to stave off judicial review under Chevron's defer-
ential second step, the Hospitals attempt to resuscitate their 
plain-meaning interpretation by contrasting the two ways in 
which Congress modified the word "made" in paragraph 
(5)(A)(iv).  When it first appears, "made" is used without 
modifiers to describe the "total amount of the additional 
payments made under this subparagraph";  later, the word 
materializes to indicate that the total amount of outlier pay-
ments just described may not be less than five percent "of the 
total payments projected or estimated to be made" for DRG-
related payments.  42 U.S.C. s 1395ww(d)(5)(A)(iv).  Be-
cause, the Hospitals reason, Congress employed words of 
estimation and projection to modify the total amount of DRG-
related payments "to be made" but neglected to do so when 
describing the total amount of outlier payments "made," it 
must have intended that total outlier payments actually made 
during a fiscal year would equal at least five percent of 
estimated or projected DRG-related payments.2

__________
     2 The Hospitals cite only to this court's decision in Washington 
Hospital Center v. Bowen, 795 F.2d 139 (D.C. Cir. 1986), to buttress 
their argument that the plain meaning of "made" can be inferred 

     Whatever logic this internal construction of paragraph 
(5)(A)(iv) enjoys, to prevent statutory interpretation from 
degenerating into an exercise in solipsism, "we must not be 
guided by a single sentence or member of a sentence, but 
look to the provisions of the whole law."  United States Nat'l 
Bank v. Independent Ins. Agents of Am., Inc., 508 U.S. 439, 
455 (1993) (quoting United States v. Heirs of Boisdore, 49 
U.S. (8 How.) 113, 122 (1849)).  Under Chevron step one, "we 
consider not only the language of the particular statutory 
provision under scrutiny, but also the structure and context of 
the statutory scheme of which it is a part."  Illinois Pub. 
Tele. Ass'n v. FCC, 117 F.3d 555, 568 (D.C. Cir. ), modified, 
123 F.3d 693 (1997), cert. denied, --- U.S. ----, 118 S. Ct. 
1361 (1998);  accord Conroy v. Aniskoff, 507 U.S. 511, 515 
(1993) ("[T]he meaning of statutory language, plain or not, 
depends on context.");  Davis v. Michigan Dep't of Treasury, 
489 U.S. 803, 809 (1989) ("[W]ords of a statute must be read 
in their context and with a view to their place in the overall 
statutory scheme.").  By examining paragraph (5)(A)(iv) in its 
immediate statutory context, any putative clarity that that 

__________
from the different language that Congress used to modify that word 
in paragraph (5)(A)(iv).  That decision misses the mark, however.  
In Washington Hospital Center, we presumed that when Congress 
amended a pre-existing section of the Medicare statute by adding 
and deleting certain words, it must have intended the amended 
provision to have a different meaning from its predecessor provi-
sion.  Id. at 146.  More on point for the Hospitals, though they did 
not cite it, would be the canon of construction that posits that 
"where Congress includes particular language in one section of a 
statute but omits it in another section of the same Act, it is 
generally presumed that Congress acts intentionally and purposely 
in the disparate inclusion or exclusion."  Russello v. United States, 
464 U.S. 16, 23 (1983);  accord Independent Bankers Ass'n of Am. v. 
Farm Credit Admin., 164 F.3d 661, 667 (D.C. Cir. 1999).  Of 
course, "[c]anons of construction are, after all, only aids in the 
process of statutory construction, nothing more, nothing less."  
Eagle-Picher Indus. v. United States EPA, 759 F.2d 922, 927 n.6 
(D.C. Cir. 1985).  As we demonstrate, infra, this canon does not 
resolve the ambiguity in paragraph (5)(A)(iv).

provision might arguably have quickly recedes to ambiguity 
once again.

     Preceding paragraph (5)(A)(iv) by two paragraphs, 
s 1395ww(d)(3)(B) provided during the time relevant to this 
litigation:

     The Secretary shall reduce each of the average standard-
     ized amounts under subparagraph (A) ... by a propor-
     tion equal to the proportion (estimated by the Secretary) 
     of the amount of payments under this subsection based 
     on DRG prospective payment amounts which are addi-
     tional payments described in paragraph (5)(A) (relating 
     to outlier payments)....
     
42 U.S.C. s 1395ww(d)(3)(B) (Supp. IV 1986) (emphasis add-
ed).  Not only does this provision expressly indicate that total 
outlier payments are to be estimated by the Secretary, but it 
also employs language that closely parallels the language that 
later appears in paragraph (5)(A)(iv).  In our endeavor to 
determine whether the "total amount of the additional pay-
ments made under this subparagraph" contemplates outlier 
payments actually made or those estimated to be made, we 
find it significant that in paragraph (3)(B) Congress provided 
that the "amount of payments ... which are additional pay-
ments described in paragraph (5)(A)" are to be "estimated by 
the Secretary."  s 1395ww(d)(3)(B).  Given that in paragraph 
(3)(B) it had already indicated that the Secretary would 
estimate the amount of outlier payments described in subpar-
agraph (5)(A), Congress could have reasonably concluded that 
there was no need to provide expressly in paragraph 
(5)(A)(iv) that the phrase "payments made" referred to pay-
ments estimated to be made.  Thus, whatever can be said for 
Congress's disparate modification of the word "made" in 
paragraph (5)(A)(iv), when we open the analytic aperture to 
examine that clause in its proper statutory context, the 
inherently ambiguous phrase "payments made" becomes no 
clearer.

     Nor does a passing observation in the Conference Report 
that "the Secretary would be required to provide additional 
payments for outlier cases amounting to not less than 5 
percent, and not more than 6 percent, of total projected or 
estimated DRG related payments," compel us to adopt the 

Hospitals' construction of the statute under Chevron step one.  
H.R. Conf. Rep. No. 98-47, at 189 (1983), reprinted in 1983 
U.S.C.C.A.N. 404, 479 (emphasis added).  Ambiguous in its 
own right, this passage, if given the gloss that the Hospitals 
advance, would chafe against the commentary in the Senate 
Report.  Suggesting that paragraph (5)(A)(iv) reflects the 
prospective inquiry that the Secretary advocates, the Senate 
Report provides that the "[t]otal expected payments resulting 
from this policy will be not less than 5 percent, nor more than 
6 percent, of total medicare payments to hospitals."  S. Rep. 
No. 98-23, at 51, reprinted in 1983 U.S.C.C.A.N. 143, 191 
(emphasis added).  The only conclusion that we can safely 
draw from these seemingly contradictory passages is that 
"the little legislative history that exists for [paragraph 
(5)(A)(iv)] is as ambiguous as the statute itself."  Deaf Smith 
County Grain Processors, Inc. v. Glickman, 162 F.3d 1206, 
1212 (D.C. Cir. 1998).

     Ultimately, neither the text, structure, nor legislative histo-
ry of paragraph (5)(A)(iv) illuminates Congress's unambigu-
ous intent.  Although the Hospitals' interpretation, and the 
one that the district court adopted, is plausible, it is not the 
"only possible interpretation," Sullivan v. Everhart, 494 U.S. 
83, 89 (1990), and it certainly is not "an inevitable one."  
Regions Hosp., 522 U.S. at ----, 118 S. Ct. at 917.  Because 
we find the statute ambiguous, we proceed to assess whether 
the Secretary's interpretation of paragraph (5)(A)(iv) is "rea-
sonable and consistent with the statutory scheme and legisla-
tive history."  Cleveland v. United States Nuclear Regulatory 
Comm'n, 68 F.3d 1361, 1367 (D.C. Cir. 1995).

     In marking off the metes and bounds of our review under 
the second step of Chevron, we accord particular deference to 
the Secretary's interpretation of paragraph (5)(A)(iv) "given 
the tremendous complexity of the Medicare statute."  Appa-
lachian Reg'l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1054 
(D.C. Cir. 1997);  accord Methodist Hosp. v. Shalala, 38 F.3d 
1225, 1229 (D.C. Cir. 1994).  The Hospitals, however, urge us 
not to defer in any way to the Secretary's interpretation of 
paragraph (5)(A)(iv) because, they contend, that provision 
does not delegate interpretative authority to the Secretary 

but explicitly limits her discretion.  The problem with this 
argument, of course, is that it assumes the truth of the 
proposition that we just rejected.  Were paragraph (5)(A)(iv) 
truly "an explicit limitation on the Secretary's discretion," Br. 
of Hosps. at 40, there would be no need to analyze the 
provision under Chevron step two.  While paragraph 
(5)(A)(iv) is certainly designed to regulate the Secretary's 
discretion to some extent, as we have already concluded, the 
precise contours of that provision are hardly explicit but are 
instead ambiguous.  Nor is it problematic, as the Hospitals 
suggest, that Congress did not expressly delegate interpreta-
tive authority to the Secretary in paragraph (5)(A)(iv).  Def-
erence to agency interpretation is warranted "when Congress 
has left a gap for the agency to fill pursuant to an express or 
implied delegation of authority to the agency."  Chevron, 467 
U.S. at 843-44 (internal quotations omitted).  Where, as here, 
Congress enacts an ambiguous provision within a statute 
entrusted to the agency's expertise, it has "implicitly delegat-
ed to the agency the power to fill those gaps."  National Fuel 
Gas Supply Corp. v. FERC, 811 F.2d 1563, 1569 (D.C. Cir. 
1987);  see also Chevron, 467 U.S. at 843-44.

     Equally untenable is the Hospitals' argument that the 
Secretary's interpretation is not entitled to deference because 
she did not adopt it through either formal rulemaking or 
adjudication.  But as our precedents make clear, "an agency 
need not promulgate a legislative rule setting forth its inter-
pretation of a statutory term for that term to be entitled to 
deference."  Association of Bituminous Contractors, Inc. v. 
Apfel, 156 F.3d 1246, 1251-52 (D.C. Cir. 1998).  In fact, 
"[e]ven if the legal briefs contained the first expression of the 
agency's views, under the appropriate circumstances we 
would still accord them deference so long as they represented 
the agency's 'fair and considered judgment on the matter.' "  
United Seniors Ass'n v. Shalala, 182 F.3d 965, 971 (D.C. Cir. 
1999) (quoting Auer v. Robbins, 519 U.S. 452, ----, 117 S. Ct. 
905, 912 (1997));  see National Wildlife Fed'n v. Browner, 127 
F.3d 1126, 1129 (D.C. Cir. 1997) ("The mere fact that an 
agency offers its interpretation in the course of litigation does 

not automatically preclude deference to the agency.");  Tax 
Analysts v. IRS, 117 F.3d 607, 613 (D.C. Cir. 1997).

     There is no reason to suspect that the Secretary's interpre-
tation of paragraph (5)(A)(iv) embodies anything other than 
her fair and considered opinion.  In a final rule published on 
January 3, 1984, the Secretary articulated the same interpre-
tation of paragraph (5)(A)(iv) that she has pressed before 
both us and the district court.  See 49 Fed. Reg. 234, 265 
(1984).  With that rule, she not only observed that under her 
interpretation "there is no necessary connection between the 
amount of estimated outlier payments and the actual pay-
ments made to hospitals for cases that actually meet the 
outlier criteria," id., but she also admonished Medicare pro-
viders that, in the event she overestimated the amount of 
outlier payments, she would "not adjust the DRG rates to 
compensate hospitals for funds that were not actually paid for 
outlier cases."  Id. at 266.  Even if, as the Hospitals com-
plain, the final rule failed to provide a "cogent explanation" of 
the policies undergirding the Secretary's interpretation, the 
fact remains that for the past fifteen years, the Secretary has 
never wavered from that interpretation.  We are confident 
that the interpretation of paragraph (5)(A)(iv) under review 
embodies the Secretary's "fair and considered judgment on 
the matter."  Auer, 519 U.S. at ----, 117 S. Ct. at 912.  It, 
accordingly, demands deference from the judiciary.

     Having settled on the scope of our review, we have no 
difficulty concluding that the Secretary has advanced a rea-
sonable interpretation of paragraph (5)(A)(iv).  Congress es-
tablished outlier payments because it recognized that "there 
will be cases within each [DRG] that will be extraordinarily 
costly to treat ... because of severity of illness or complicat-
ing conditions, and [will] not [be] adequately compensated for 
under the DRG payment methodology."  S. Rep. No. 98-23, at 
51 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 191.  But as 
the term "outlier" suggests, these payments were not intend-
ed to subsidize hospitals simply for treatments, which in 
absolute terms, were extraordinarily costly or lengthy.  Rath-
er, Congress directed the Secretary to provide "additional 
payments for cases which are extraordinarily costly to treat, 

relative to other cases within the DRG."  Id. (emphasis 
added);  accord H.R. Rep. No. 98-25, at 134-35 (1983), reprint-
ed in 1983 U.S.C.C.A.N. 219, 353-54 ("Your Committee is 
concerned that under the prospective payment system, there 
will be cases within each [DRG] that will be extraordinarily 
costly to treat, relative to other cases within that DRG....").  
Thus the House version would have required the Secretary to 
tender outlier payments only when a patient's length of stay 
exceeded by thirty days the average length of stay for cases 
in that same DRG, see H.R. Rep. No. 98-25, at 135, reprinted 
in 1983 U.S.C.C.A.N. at 354, while the Senate bill, which the 
Conference Committee adopted, authorized outlier payments 
for cases in which a patient's length of stay eclipsed the mean 
length of stay for discharges within that same DRG by a fixed 
number of days or standard deviations.  See 42 U.S.C. 
s 1395ww(d)(5)(A)(i) (Supp. IV 1986);  S. Rep. No.  98-23, at 
51, reprinted in 1983 U.S.C.C.A.N. at 191;  H.R. Conf. Rep. 
No. 98-47, at 188 (1983), reprinted in 1983 U.S.C.C.A.N. 404, 
478.

     The Secretary's interpretation of paragraph (5)(A)(iv) 
evinces far greater fidelity to Congress's conception of outlier 
payments than does the view espoused by the Hospitals.  
Under the Secretary's reading of the statute, if it turns out 
that actual outlier payments do not meet the five-percent 
target at the end of the fiscal year, it is because the lengths of 
stay for DRGs in that year proved to be shorter than the 
historical averages reflected in the data on which the Secre-
tary based her threshold calculations.  Whether it is because 
hospitals became more efficient or a miracle drug was intro-
duced during the year, the shorter lengths of stay mean that 
there were fewer extraordinarily costly cases during the year.  
In other words, there were fewer outliers--and therefore, 
fewer outlier payments needed to be made.

     Under the Hospitals' interpretation, however, regardless of 
actual costs or inpatient lengths of stay during a fiscal year, 
Medicare providers are guaranteed a substantial and fixed 
sum of outlier payments.  As they read the statute, even 
during a fiscal year in which the length of stay for every 
inpatient discharge in every DRG in every hospital equaled or 

exceeded by just a day the mean length of stay for each 
respective DRG, the Secretary would nonetheless have to 
reward hospitals with additional "outlier" payments totaling 
five percent of the entire DRG budget.  One need not be well 
versed in the discipline of statistics to recognize that such 
insignificant deviations from the mean do not constitute outli-
ers.  To sanction the Hospitals' interpretation of paragraph 
(5)(A)(iv) would not only require us to assume that Congress 
did not appreciate the meaning of outlier--a term, it should 
be noted, that appears throughout both the legislative history 
and the text of the Medicare statute--but it would also 
transform the character of the outlier-payment regime from a 
system intended to insulate hospitals from aberrational and 
extraordinary costs into nothing more than an entitlement 
program for Medicare providers.  Such was hardly Con-
gress's intent, for if anything, Congress indicated that it was 
"equally concerned that adjustments may be required for 
cases which have an unusually short length of stay or which 
are significantly less costly than the DRG payment."  H.R. 
Conf. Rep. No. 98-47, at 478, reprinted in 1983 U.S.C.C.A.N. 
at 478 (emphasis added);  see also H.R. Rep. No. 98-25, at 135, 
reprinted in 1983 U.S.C.C.A.N. at 354 ("The Secretary would 
be required to study ... the appropriateness of, and necessi-
ty for, adjustments in payment rates for extremely short 
lengths of stay within a DRG....").  Proposals like these 
reflect a reluctance to reimburse Medicare providers at rates 
grossly disproportionate to the cost of treatment.  We find it 
unlikely that Congress nevertheless would have wanted hospi-
tals to reap additional compensation over and above the 
standard DRG payment where treatment costs for a particu-
lar discharge were not extraordinarily costly relative to the 
mean costs for that DRG.

     Moreover, compared to the Hospitals' interpretation of 
paragraph (5)(A)(iv), the Secretary's reading better harmon-
izes each of the four clauses in paragraph (5)(A).  As did the 
district court, the Hospitals struggle to reconcile their con-
ception of the fourth clause with the language of the third, 
which provides that the amount of each outlier payment "shall 
approximate the marginal cost of care beyond the cutoff point 

applicable" for each DRG.  42 U.S.C. s 1395ww(d)(5)(A)(iii) 
(Supp. IV 1986).  Under the Hospitals' construction of the 
statute, outlier payments might bear little relationship to the 
marginal cost of care.  At the end of each fiscal year, if actual 
outlier payments fell short of the five-percent target, the 
Secretary would be required retroactively to supplement 
those payments to satisfy the difference.  Depending on how 
great that initial disparity was, by the time that these cura-
tive outlays were made, the newly computed outlier payments 
might not approximate anything close to the marginal cost of 
care as paragraph (5)(A)(iii) mandates.  By contrast, outlier 
payments under the Secretary's interpretation will always 
approximate the marginal cost of care because when deter-
mining where to set outlier thresholds for DRGs at the 
beginning of each fiscal year, she directly factors the margin-
al cost of care into her calculus.

     Echoing the district court's holding, the Hospitals discount 
paragraph (5)(A)(iii) as merely a "guideline" while contending 
that paragraph (5)(A)(iv) operates "as a limitation on the 
Secretary's discretion."  County of Los Angeles, 992 F. Supp. 
at 32.  Based on this view, the Secretary is supposed to set 
outlier thresholds at the beginning of each year "at marginal 
cost and then, when actual outlier data is known, adjust[ ] the 
final payments to ensure that the Secretary has met her 
statutory obligation to the providers."  Id. at 31.  Why this 
parsing of the statutory language is more reasonable than 
that of the Secretary's--much less compelled as an unambigu-
ously plain reading of the provision, as the Hospitals have 
urged--is not at all clear.  After all, paragraph (5)(A)(iii) 
employs mandatory language of the sort not normally used if 
all that Congress intended to do was to offer a discretionary 
guideline for the Secretary to follow.  See 
s 1395ww(d)(5)(A)(iii) ("The amount of such additional pay-
ment under clauses (i) and (ii) shall be determined by the 
Secretary and shall approximate the marginal cost of 
care....") (emphasis added).  Nevertheless, even were the 
Hospitals' synthesis of the third clause into the remainder of 
paragraph (5)(A) plausible, it would not be enough to impugn 
the otherwise reasonable interpretation that the Secretary 

has advanced since "we need not find that it is the only 
permissible construction that [the Secretary] might have 
adopted but only that [her] understanding of this very 'com-
plex statute' is a sufficiently rational one to preclude a court 
from substituting its judgment for that of [the Secretary]."  
Young v. Community Nutrition Inst., 476 U.S. 974, 981 
(1986) (internal quotation omitted).

     Moreover, the Secretary's interpretation avoids the sub-
stantial administrative burden attendant with the Hospitals' 
vision of paragraph (5)(A)(iv).  It strains credulity to assume 
that Congress would have directed the Secretary to establish 
outlier thresholds in advance of each fiscal year, see 
s 1395ww(d)(3)(B), (d)(6), and process millions of bills based 
on those figures, only to have her at the end of the year 
recalibrate those calculations, reevaluate anew each of the 
millions of inpatient discharges under the revised figures, and 
disburse a second round of payments.  As we have held in an 
analogous context, "[u]nder these circumstances, retroactive 
corrections would cause a significant, if not debilitating, dis-
ruption to the Secretary's administration of the already-
complex Medicare program."  Methodist Hosp., 38 F.3d at 
1233.  Nor is this administrative process rendered less awk-
ward and unwieldy if, as the Hospitals suggest, the Secretary 
actively monitors outlier payments and adjusts the thresholds 
as the fiscal year unfolds.  Apart from the tremendous re-
sources that would be required to maintain such a vigilant 
watch over a program as expansive as Medicare, intermittent-
ly modifying outlier thresholds at various times during the 
year would mean that different hospitals would likely receive 
different outlier reimbursements for the same treatments 
based on nothing more than the fortuity of when they treated 
a patient.

     By the same token, this uncertainty and fluidity in outlier-
payment amounts under the Hospitals' interpretation lead us 
to the final virtue of the Secretary's construction.  One of the 
touchstones of the Prospective Payment System, as its name 
suggests, is prospectively determined reimbursement rates 
that remain constant during the fiscal year.  In setting, prior 
to each fiscal year, fixed outlier thresholds and per-diem 

reimbursement rates that are not later subject to retroactive 
correction, the Secretary promotes certainty and predictabili-
ty of payment for not only hospitals but the federal govern-
ment--concerns that played a prominent role in Congress's 
decision to adopt PPS.  See H.R. Rep. No.  98-25, at 132, 
reprinted in 1983 U.S.C.C.A.N. at 351 ("The bill is intended 
to improve the medicare program's ability to act as a prudent 
purchaser of services, and to provide predictibility [sic] re-
garding payment amounts for both the Government and 
hospitals.").  To be sure, we have previously speculated that 
"the real linchpin of the [PPS] system may not be that the 
exact reimbursement figure is known in advance, but rather 
may be that the hospital knows that nothing it does in 
providing services will lead to a higher reimbursement level."  
Georgetown Univ. Hosp. v. Bowen, 862 F.2d 323, 330 (D.C. 
Cir. 1988) (Georgetown II).  Yet while we, therefore, have 
recognized that retroactive corrections may not ultimately 
undermine PPS, we have emphasized that that "does not 
establish that a prospective-only policy is unreasonable."  
Methodist Hosp., 38 F.3d at 1232.

     In Methodist Hospital, we found the Secretary's decision 
not to recalculate retroactively the DRG wage index to be 
reasonable, in part, because the Secretary's prospective policy 
advanced the principles of PPS.3  With language applicable to 
the present case, we held:

__________
     3 The Hospitals cannot successfully distinguish Methodist Hospi-
tal.  Admittedly, unlike the DRG wage index at issue in Methodist 
Hospital, outlier payments do not factor directly into every inpa-
tient discharge.  But outlier payments do influence indirectly the 
overall DRG payment rate that governs all discharges.  As already 
discussed, pursuant to s 1395ww(d)(3)(B), the Secretary must re-
duce the standard DRG payment rate by a factor equal to the 
outlier payments that she predicts she will have to disburse during 
the forthcoming year.  Nor is it accurate to claim, as the Hospitals 
do, that outlier payments are entirely divorced from PPS.  As an 
initial matter, the provisions relating to outliers are contained in the 
same subsection of s 1395ww as those establishing the PPS regime.  
See s 1395ww(d).  Moreover, Congress established outlier pay-
ments not as a distinct reimbursement methodology but as a 

     While retroactive adjustments might leave the "linchpin" 
     of PPS intact, that does not mean that a prospective-only 
     policy would not further, to some degree, the overall 
     goals of PPS....  [H]ospitals, like other businesses, do 
     make projections about future costs and service levels 
     based on their experience and historical patterns.  To 
     the extent that the Secretary's prospectivity policy per-
     mits hospitals to rely with certainty on one additional 
     element in the PPS calculation rate ... the Secretary 
     could reasonably conclude that it will promote efficient 
     and realistic cost-saving targets.
     
Id.  The same, quite reasonably, can be said of the Secre-
tary's interpretation of paragraph (5)(A)(iv).  Under her con-
struction of the statute, at the outset of each fiscal year, 
hospitals know the point beyond which a patient's length of 
stay will trigger outlier payments and the corresponding rate 
at which they will be reimbursed for each day beyond the 
threshold.  A less determinate policy would not only deprive 
hospitals of the ability to make accurate projections about 
outlier payments for the forthcoming year but also threaten 
them at the end of each year with the prospect of actually 
having to forfeit a portion of those payments to the Secretary;  
for as the Hospitals concede, under their interpretation, 
Medicare providers collectively would be bound to repay any 
portion of outlier payments that exceeded six percent of 
estimated DRG-related payments.  See Br. of Hosps. at 31-
32.  We conclude that the Secretary has advanced a reason-
able interpretation of an ambiguous statutory provision, and, 
therefore, reverse the judgment of the district court with 
respect to the Secretary's appeal.

C.   The Hospitals' Cross-Appeal

     Because outlier thresholds are measured by their distance 
from the mean length of stay, accurately forecasting outlier 

__________
carefully crafted supplement to PPS.  For that reason, Georgetown 
II, which concerned retroactive adjustments under the pre-PPS 
"reasonable cost" system--clearly a payment methodology lacking 
any relationship to PPS--is inapposite.

payments depends, in large part, on how closely the mean 
length of stay reflected in the Secretary's historical data 
reflects the actual average length of stay for that particular 
DRG.  When setting outlier thresholds for fiscal years 1985-
1986, the Secretary relied on the 1981 MEDPAR file, a 
database containing patient-specific data for a random sample 
of 20 percent of all Medicare-hospital discharges during 1981.  
Compiled during an era when Medicare still reimbursed 
hospitals under the reasonable-cost system, the 1981 MED-
PAR file could not have predicted how, under PPS, the 
average length of stay for virtually all DRGs would eventually 
decline dramatically.  The Hospitals observe, however, that 
by July 27, 1984, the Secretary had already collected data 
from 2.5 million discharges under PPS that indicated that the 
average length of stay for all DRGs had declined from 9.5 
days to 7.5 days under the new payment methodology. Pursu-
ant to section 10(e) of the APA, 5 U.S.C. s 706(2)(A), the 
Hospitals claim that the Secretary acted arbitrarily and capri-
ciously when she calculated outlier thresholds for 1985-1986 
based on the 1981 MEDPAR file instead of the preliminary 
1984 data and failed to explain adequately her decision.  
Rejecting the Hospitals' claim, the district court agreed with 
the Secretary that her decision to use the 1981 MEDPAR file 
over the more contemporaneous but preliminary 1984 data 
"was a rational choice between two imperfect databases."  
County of Los Angeles, 992 F. Supp. at 36.

     Under the APA, we may set aside agency action found to 
be "arbitrary, capricious, an abuse of discretion, or otherwise 
not in accordance with law."  5 U.S.C. s 706(2)(A).  Foreclos-
ed from substituting our judgment for that of the agency, we 
do not set aside agency action lightly.  See Motor Vehicles 
Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 
43 (1983);  Petroleum Communications, Inc. v. FCC, 22 F.3d 
1164, 1172 (D.C. Cir. 1994).  Nevertheless, we intervene to 
ensure that the agency has "examine[d] the relevant data and 
articulate[d] a satisfactory explanation for its action."  State 
Farm, 463 U.S. at 43.  "Where the agency has failed to 
provide a reasoned explanation, or where the record belies 
the agency's conclusion, we must undo its action."  BellSouth 

Corp. v. FCC, 162 F.3d 1215, 1222 (D.C. Cir. 1999) (citation 
and quotation omitted).

     The only contemporaneous explanation that the Secretary 
offered for using the 1981 MEDPAR file consisted of two 
sentences in the Federal Register:  "Based upon outlier and 
DRG payment data received through July 27, 1984, there is 
no evidence to suggest that total outlier payments are below 
the levels intended.  Therefore, as discussed above, we are 
continuing to set the outlier thresholds on the basis of the 
1981 MEDPAR data."  49 Fed. Reg. 34,728, 34,769 (1984) 
(emphasis added).  We agree with the Ninth Circuit, which 
recently considered this same issue, that the Secretary's 
"explanation that there was no evidence of an outlier shortfall 
was simply not supported by the record before her and did 
not explain her failure to use the more recent data."  Alvara-
do Community Hosp. v. Shalala, 155 F.3d 1115, 1122 (9th 
Cir. 1998).  Data that the Secretary possessed as late as July 
27, 1984, indicated that the average length of stay for prac-
tically all DRGs had declined considerably under the nascent 
PPS program.  More concretely, at that point during the 
fiscal year, outliers constituted only 1.9 percent of total PPS 
discharges instead of 5.0 percent as predicted.  And while 
these conclusions were drawn from preliminary data, that 
data reflected 2.5 million patient discharges under PPS;  the 
1981 MEDPAR file, by contrast, contained 1.6 million dis-
charge records.  Failure to account for this trend is all the 
more perplexing insofar as the Secretary herself had antici-
pated that the average length of stay for DRGs would decline 
under PPS.  In 1984 she observed that "[t]he most commonly 
accepted expectation about the PPS at the time of its incep-
tion was that it would result in shorter stays for Medicare 
patients....  [R]educed length of stay was to be one of the 
major vehicles through which hospital costs were to be con-
trolled under the PPS."  Office of Research & Demonstra-
tions, Health Care Fin. Admin., U.S. Dep't of Health & 
Human Servs., Pub. No. 03231, Report to Congress:  Impact of 
the Medicare Hospital Prospective Payment System 6-13 
(1984).  At bottom, for the Secretary to say that she had "no 
evidence to suggest that total outlier payments [were] below 

the levels intended," 49 Fed. Reg. at 34,769, runs "counter to 
the evidence before the agency" and "is so implausible that it 
could not be ascribed to a difference in view or the product of 
agency expertise."  State Farm, 463 U.S. at 43.

     In her brief, the Secretary now contends that what she 
meant by "no evidence" was "no reliable evidence."  To 
bolster this specific claim and her broader argument that the 
1984 data were too suspect and incomplete to make accurate 
outlier projections, the Secretary appended to her summary 
judgment motion in the district court an affidavit from Rose 
Connerton, an official with the Health Care Financing Admin-
istration ("HCFA") who helped develop the outlier thresholds 
for 1985-1986.  Essentially, the Connerton affidavit claims 
that the 1984 data were not complete and did not represent a 
random sample of cases, that because they were based on a 
partial year they would not reflect seasonal and regional 
variances, and that any analysis drawn from them would be 
skewed.4  See J.A. 90 (Aff. of Connerton pp 10, 12, 15).  The 
Hospitals contend that the Connerton affidavit, having sur-
faced for the first time during litigation, is an impermissible 
post-hoc rationalization that the district court should have 
stricken.  See SEC v. Chenery Corp., 318 U.S. 80, 87-88 

__________
     4 Through the Connerton affidavit, the Secretary attempts to 
dramatize the unreliability of the partial 1984 data.  As of April 27, 
1984, reported outliers constituted only 1.9 percent of total PPS 
discharges.  See J.A. 71.  By the end of fiscal year 1984, however, 
actual outlier payments ended up totaling 5.3 percent of total PPS 
payments, suggesting, Connerton avers, that the preliminary data 
were in fact unreliable.  Although Connerton's calculations are 
accurate, the conclusions that she draws from them are subject to 
debate.  During a portion of fiscal year 1984, the Secretary errone-
ously provided hospitals with additional outlier payments for non-
PPS-covered treatments, but never sought to recoup these surplus 
amounts.  That outlier payments amounted to 5.3 percent that year 
thus may say less about the reliability of the 1984 data and more 
about the scope of the Secretary's clerical error.  Whatever the 
reason, this dispute underscores the wisdom of Benjamin Disraeli's 
sardonic quip (attributed to him by Mark Twain) about the three 
great falsehoods:  "lies, damn lies, and statistics."

(1943);  Reeve Aleutian Airways, Inc. v. United States, 889 
F.2d 1139, 1144 (D.C. Cir. 1989).  Indeed, faced with a similar 
affidavit from Connerton, the Ninth Circuit held that the 
district court erred in considering it.  See Alvarado Commu-
nity Hosp., 155 F.3d at 1124.  Ultimately, we need not reach 
this question, for even were we inclined to accept everything 
in the Connerton affidavit, we would still remand to the 
Secretary for a more adequate justification for her database 
selection.

     "A long line of precedent has established that an agency 
action is arbitrary when the agency offer[s] insufficient rea-
sons for treating similar situations differently."  Transactive 
Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir. 1996);  see 
also State Farm, 463 U.S. 29, 57 (1983);  Airmark Corp. v. 
FAA, 758 F.2d 685, 691-92 (D.C. Cir. 1985);  Local 777, 
Democratic Union Org. Comm. v. NLRB, 603 F.2d 862, 872 
(D.C. Cir. 1978).  Although maligning the 1984 data as too 
unreliable to calculate outlier thresholds for fiscal years 1985-
1986, the Secretary nonetheless used those same data on 
August 31, 1984, to reduce across-the-board all 470 DRG 
weighting factors by 1.05 percent.  See 49 Fed. Reg. 34,728, 
34,770-71 (1984).  Such an adjustment was necessary, the 
Secretary noted at the time, because "[t]he emerging experi-
ence under the prospective payment system"--an experience 
gleaned from the preliminary 1984 data--revealed that the 
different incentives that hospitals faced under PPS were 
producing unexpected distortions.  See id.  In making this 
correction, the Secretary expressly endorsed the reliability of 
the 1984 data:  "To date, we have now analyzed 2.5 million 
discharges under the prospective payment system, which fully 
reflect the effect of those incentives, and we believe this 
affords us a better measure of the effect of coding improve-
ments in the average case mix."  Id. at 34,771.  Moreover, in 
responding to a question about the legitimacy of the prelimi-
nary data during a 1984 congressional oversight hearing, the 
HCFA Administrator responded that "[o]ur sample now is 
based on approximately 50 percent of all of the claims or the 
admissions that we had projected for this year.  We think 
that's a fairly representative sample."  Adjustments in Medi-

care's Prospective Payment System:  Hearing Before the 
Subcomm. on Health of the Comm. on Fin., 98th Cong. 62 
(statement of Mr. Davis, Administrator, HCFA).  In sum, the 
Secretary has inadequately explained why the 1984 data were 
suitable for one significant calculation but unreliable for 
another.  Her sole justification is that preliminary data may 
be used to make across-the-board adjustments, as was done 
to reduce all DRG weighting factors by 1.05 percent, but that 
they may not be used for setting outlier thresholds because a 
unique standard deviation must be calculated for each of the 
470 DRGs.  What renders this explanation inadequate is that 
DRG weighting factors, like outlier thresholds, are ordinarily 
determined on a DRG-by-DRG basis.  Indeed, the very pur-
pose of a DRG weighting factor is to reflect the different 
costs of treating minor and major illnesses;  to do so, each 
DRG must be assigned its own unique weight based on the 
cost and complexity of treatment peculiar to that DRG.  The 
Secretary's proffered distinction is thus not reasonable.  She 
may in her discretion, of course, rely on preliminary data to 
make an across-the-board adjustment to variables that ordi-
narily are determined on a case-by-case basis.  But when she 
does so, she must be prepared to explain why she cannot also 
use that data to make a similar adjustment to variables that 
are also typically calculated on an individual basis.  As broad 
as her discretion is, it "is not a license to ... treat like cases 
differently."  Airmark Corp., 758 F.2d at 691;  accord Teva 
Pharms., USA, Inc. v. FDA, 182 F.3d 1003, 1010-11 (D.C. 
Cir. 1999);  Transactive Corp., 91 F.3d at 237;  Local 777, 603 
F.2d at 872.

     This case must therefore be remanded to the Secretary to 
allow her either to recalculate outlier thresholds for fiscal 
years 1985-1986 or to offer a reasonable explanation for 
refusing to use the 1984 data in setting outlier thresholds 
during those years.  In reaching this conclusion, we necessar-
ily part ways with the Ninth Circuit, which, in Alvarado 
Community Hospital, chose not to remand to the Secretary, 
but instead ordered her to adjust outlier thresholds for fiscal 
year 1985 based on final 1984 data.  Alvarado Community 
Hosp., 155 F.3d at 1125.  As the Supreme Court has instruct-

ed, however, where "the record before the agency does not 
support the agency action, ... the proper course, except in 
rare circumstances, is to remand to the agency for additional 
investigation or explanation."  Florida Power & Light Co. v. 
Lorion, 470 U.S. 729, 744 (1985);  see also Dunlop v. Bachow-
ski, 421 U.S. 560, 574-75 (1975) ("Where the statement inade-
quately discloses his reasons, the Secretary may be afforded 
opportunity to supplement his statement."), overruled on 
other grounds by Furniture & Piano Moving v. Crowley, 467 
U.S. 526, 549-50 n.22 (1984).  We find no reason to depart 
from that course here.  While we have identified significant 
inconsistencies and gaps in the Secretary's rationale for using 
the 1981 MEDPAR file, bedrock principles of administrative 
law preclude us from declaring definitively that her decision 
was arbitrary and capricious without first affording her an 
opportunity to articulate, if possible, a better explanation.  
See Bechtel v. FCC, 10 F.3d 875, 887 (D.C. Cir. 1993);  
Philadelphia Gas Works v. FERC, 989 F.2d 1246, 1251 (D.C. 
Cir. 1993);  Sullivan Indus. v. NLRB, 957 F.2d 890, 905 n.12 
(D.C. Cir. 1992);  Tex Tin Corp. v. EPA, 935 F.2d 1321, 1324 
(D.C. Cir. 1991);  see also Checkosky v. SEC, 23 F.3d 452, 463 
(D.C. Cir. 1994) (Silberman, J., concurring) (citing some of the 
"many instances where we have remanded to an agency for a 
better explanation before finally deciding that the agency's 
action was arbitrary and capricious").  Because we fail to 
perceive any "rare circumstances" that would warrant a 
break with established administrative practice, we adhere to 
the proper course of remanding this matter to the Secretary.

                         III. Conclusion

     For the foregoing reasons, we reverse the judgment of the 
district court with respect to the Secretary's appeal, and 
remand with instructions to enter judgment in the Secretary's 
favor.  As for the Hospitals' cross-appeal, we reverse the 
judgment of the district court, and instruct it to remand the 
case to the Secretary for further proceedings consistent with 
this opinion.

                                                      So ordered.

                                   