                            UNITED STATES DISTRICT COURT
                            FOR THE DISTRICT OF COLUMBIA



KAISER FOUNDATION HOSPITALS
dba Kaiser Foundation Hospital -
Anaheim, et al.,

       Plaintiffs,
               v.                                         Civil Action No. 11-92 (JEB)
KATHLEEN SEBELIUS, Secretary of the
United States Department of Health and
Human Services,

       Defendant.


                                 MEMORANDUM OPINION

       Plaintiffs are several hospitals, all owned and operated by Kaiser Foundation Hospitals,

that receive Medicare payments for the costs associated with training intern and resident

physicians. The amount of reimbursement each hospital receives depends in part on the number

of “full-time equivalent” residents and interns (FTEs) in its training program during a fiscal year.

In 1997, Congress limited the number of FTEs a hospital could claim in future years to the FTEs

counted in its latest pre-1997 cost report. Plaintiffs and the fiscal intermediary that administers

Medicare reimbursements agree that the FTE counts in Plaintiffs’ 1996 reports undercount the

interns and residents who participated in their teaching programs that fiscal year. Such an error

in those base-year figures results in inaccurate FTE caps and, hence, lost reimbursement every

subsequent year for Plaintiffs. In light of this, they sought to correct these incorrect FTE caps.

The intermediary, and later the Administrator of the Centers for Medicare and Medicaid Services

(CMS), denied their requests on the ground that the reports that had established the caps had



                                                 1
been finalized for more than three years and thus were no longer subject to “reopening”

according to an agency limitation period.

       Plaintiffs filed this suit challenging the Administrator’s decision and have now moved for

summary judgment. While they acknowledge that the reports establishing the FTE caps are

“closed,” they are not seeking reimbursement for such closed years. As they desire only to

correct an erroneous factual predicate that affects subsequent “open” years, they argue this does

not constitute an improper reopening. The Secretary disagrees and has filed a Cross-Motion for

Summary Judgment. Because the Administrator’s interpretation of the reopening regulation is

inconsistent with the regulatory text, applicable case law, and the Secretary’s own prior

interpretations, the Court believes Plaintiffs have the better of this argument.

I.     Background

       A. The Medicare Statutory and Regulatory Framework

       The Medicare program, established under Title XVIII of the Social Security Act and

administered through CMS, provides federally funded health insurance to eligible aged or

disabled persons. See generally 42 U.S.C. § 1395 et seq. Under the program, the Department of

Health and Human Services “reimburses medical providers for services they supply to eligible

patients.” Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011); see generally 42

U.S.C. § 1395 et seq. In order to be reimbursed, hospitals must submit an annual cost report

detailing the expenses they incurred during the past fiscal year. See 42 C.F.R. §§ 413.20,

413.24. The Secretary has contracted with fiscal intermediaries to audit cost reports, determine

how much Medicare owes each provider, and issue interim payments. See 42 U.S.C. § 1395h;

42 C.F.R. § 405.1803.




                                                  2
       Among other things, Medicare reimburses approved teaching hospitals for the direct costs

of graduate medical education (GME) – e.g., salaries and benefits for residents and interns. See

42 C.F.R. § 413.75.     The amount of GME reimbursement is based in part on the number of

FTEs in the hospital’s training program. See 42 U.S.C. § 1395ww(d)(5)(B)(ii); 42 C.F.R. §

413.79(d). In 1997, Congress imposed a cap on the number of FTEs a hospital may include for

purposes of calculating future GME payment, which is known as the “GME FTE cap.” See 42

U.S.C. 1395ww(h)(4)(F); 42 C.F.R. § 413.79(c)(2)(i).           Specifically, for cost-report periods

beginning on or after October 1, 1997, the hospital’s unweighted FTE count – meaning the actual

number of FTEs before applying statutorily specified weighting factors – “may not exceed the

number … of such full-time equivalent residents for the hospital’s most recent cost reporting

period ending on or before December 31, 1996.” 42 U.S.C. 1395ww(h)(4)(F). In other words,

the FTE count a hospital included in its latest pre-1997 report would determine its cap (and

thereby affect its reimbursement) for the indefinite future.

       Hospitals’ pre-1997 reports included only a weighted FTE count. See 62 Fed. Reg.

46,004(V)(I)(2)(a). Because the FTE cap is calculated based on the unweighted count, and

additional data needed to be collected to calculate that figure, the caps were not established until

the providers’ first cost report for the period beginning on or after October 1, 1997 – which for

Plaintiffs’ was filed in 1998. Id. at 46,004, 46,005; see also 42 C.F.R. § 413.79. “FTE count,”

therefore, refers to the weighted figure provided in the hospitals’ pre-1997 cost reports, and

“FTE cap” refers to the cap established thereafter based on the unweighted FTE count.

       Once the GME FTE cap is established, the intermediary takes it into account when

reviewing a hospital’s cost reports. See 42 C.F.R. § 413.79. After such review, the intermediary

issues a “notice of program reimbursement” (NPR) indicating how much Medicare owes the



                                                 3
hospital for the fiscal year covered by the report. See 42 C.F.R. § 405.1803. The hospital has

180 days from receipt of the NPR to request a review by the Provider Reimbursement Review

Board (PRRB). See 42 U.S.C. § 1395oo(a). If the hospital does not timely appeal the NPR, the

cost report is considered final. See 42 C.F.R. § 405.1807(c).

       The reimbursement determination may nevertheless be reopened – upon a provider’s

request or at the intermediary’s own initiative – within three years of the date of the NPR. See

42 C.F.R. 405.1885(a)-(b) (2001); see also Your Home Visiting Nurse Servs., Inc. v. Shalala,

525 U.S. 449, 451 (1999); HCA Health Servs. of Okla. v. Shalala, 27 F.3d 614, 615 (D.C. Cir.

1994). Once three years has passed, the intermediary’s determination is deemed “closed” and

can no longer be reopened. See 42 C.F.R. § 405.1885(b); see also Regions Hospital v. Shalala,

522 U.S. 448, 455 (1998); HealthEast Bethesda Lutheran Hosp. and Rehabilitation Center v.

Shalala, 164 F.3d 415, 417 (8th Cir. 1998). The three-year time limit is intended to balance the

interests in finality of “intermediary determinations and the resulting amount of program

payment” with the need to allow reasonable time for corrections.         See Medicare Provider

Reimbursement       Manual,      Part    I,    Pub.     15-1,     §     2930,     available     at

http://www.cms.gov/Manuals/PBM/list.asp (last visited December 9, 2011).

       B. Factual and Procedural History

       Plaintiffs each operate a hospital complex consisting of a hospital and an affiliated

physician clinic. See A.R., Vol. 1 at 104. In 1996, CMS (then known as the Administrator of

the Health Care Financing Administration) and the PRRB determined that the residents rotating

through the affiliated clinics of other Kaiser-owned hospitals would count toward their intern and

resident FTE counts for a separate Medicare reimbursement called “indirect medical education”

(IME). See Kaiser Found. Group-IME Costs v. Aetna Life Ins. Co., HCFA Adm’r Dec. (Oct. 21,

1996), reprinted in [1996-2 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 44,980 (AR,
                                                4
Vol. 1, at 195-97); Kaiser Found. Group-IME Costs v. Aetna Life Ins. Co., PRRB Hr’g Dec. No.

96-D50 (Aug. 14, 1996), reprinted in [1996-2 Transfer Binder] Medicare & Medicaid Guide

(CCH) ¶ 44,559 (AR, Vol. 1 at 199-204). Those hospitals’ respective IME caps were increased

accordingly at that time to include these residents. See A.R., Vol. 1 at 104.

       Although IME is subject to the same FTE cap as GME, see 42 U.S.C. §§ 1395ww; see

also Swedish American Hosp. v. Sebelius, 773 F. Supp. 2d 1, 3 (D.D.C. March 29, 2011),

Plaintiffs’ GME caps were not increased to reflect the affiliated clinics’ 1996 residents and

interns. See A.R., Vol. 1 at 104. Because of this, Plaintiffs contend – and the intermediary

agrees – that their GME FTE caps are too low. See Joint Stipulation, A.R., Vol. 1 at 277-79

(January 29, 2009). Plaintiffs, however, did not appeal the FTE counts from their 1996 reports

or the GME FTE cap established by their 1998 reports within the respective three-year

limitations periods. Instead, the Hospitals finally sought to increase their GME FTE cap through

a timely filed appeal of their 1999-2003 cost-reporting years. See A.R., Vol. 1 at 61-70. By

raising their FTE cap, they could obtain greater reimbursement in subsequent years since rates

are still pegged to the figure reported in 1998. Plaintiffs are not, it should be emphasized,

seeking to revisit their actual reimbursement in closed years.

       The intermediary denied Plaintiffs’ appeal, finding it could not increase their GME FTE

caps because the cost reports establishing the caps were no longer subject to reopening. See

A.R., Vol. 1 at 107-111. The intermediary took the position that Plaintiffs’ 1998 cost reports

were the reports at issue because the GME FTE caps first appeared there (based on FTE counts

in the 1996 reports). See A.R., Vol. 1 at 107.        Because those reports were all closed, the

intermediary concluded that it could not adjust Plaintiffs’ GME FTE caps without violating the

three-year limit on reopening. See A.R., Vol. 1 at 278.



                                                 5
         When Plaintiffs appealed to the PRRB, it found the intermediary’s decision to be in error.

See PRRB Dec. No. 2011-D1 (A.R., Vol. 1 at 61-69). Since Plaintiffs’ and the intermediary had

stipulated that the GME FTE caps were understated, the only issue before the PRRB was

whether correcting the cap would entail reopening a cost report after more than three years had

passed. Id. at 66. It held that adjusting Plaintiffs’ caps to correctly count all FTEs would not

constitute a reopening because “such an adjustment would have no effect on [Plaintiffs’]

reimbursement for FYE 12/31/1996 or FYE 12/31/1998 (or any closed year).”               Id. at 67.

Relying on decisions of United States Courts of Appeals, the PRRB concluded that “the

correction of predicate factual issues in a closed year does not constitute a reopening when the

corrections are made for the purposes of determining a provider’s reimbursement in a later open

year.” Id. at 68.

         On December 3, 2010, the CMS Administrator, at her own initiative, reversed the

PRRB’s decision. See A.R., Vol. 1 at 57 & 1-16; see also 42 U.S.C. § 1395oo(f)(1). She found

that since the GME FTE caps were tied to closed cost reports, increasing the caps would violate

the reopening limitation. See A.R., Vol. 1 at 15. The Administrator’s reversal constitutes the

final decision of the Secretary. See 42 U.S.C. § 1395oo.

         Plaintiffs filed their Complaint on January 14, 2011, seeking judicial review of the

Secretary’s decision. The parties have now filed Cross-Motions for Summary Judgment, which

the Court considers here.

   II.      Standard of Review

         Although styled Motions for Summary Judgment, the pleadings in this case more

accurately seek the Court’s review of an administrative decision. The standard set forth in Rule

56(c), therefore, does not apply because of the limited role of a court in reviewing the


                                                 6
administrative record. See Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89-90 (D.D.C. 2006)

(citing National Wilderness Inst. v. United States Army Corps of Eng'rs, 2005 WL 691775, at *7

(D.D.C. 2005); Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995), amended on

other grounds, 967 F. Supp. 6 (D.D.C. 1997)).         “[T]he function of the district court is to

determine whether or not as a matter of law the evidence in the administrative record permitted

the agency to make the decision it did.” Id. (internal citations omitted). Summary judgment thus

serves as the mechanism for deciding, as a matter of law, whether the agency action is supported

by the administrative record and otherwise consistent with the APA standard of review. See

Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977), cited in Bloch v. Powell, 227 F.

Supp. 2d 25, 31 (D.D.C. 2002), aff’d, 348 F.3d 1060 (D.C. Cir. 2003).

       Judicial review of the Secretary’s decision in this case is governed by the Medicare

statute, 42 U.S.C. § 1395oo(f)(1), which incorporates the Administrative Procedure Act, 5

U.S.C. § 706. The Court, accordingly, must “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). Under this “narrow” standard of review, “a court is not to substitute its judgment

for that of the agency.” Motor Vehicle Manufacturers Ass’n of U.S., Inc. v. State Farm Mut.

Auto. Ins. Co., 463 U.S. 29, 43 (1983).         Rather, the Court “will defer to the [agency’s]

interpretation of what [a statute] requires so long as it is ‘rational and supported by the record.’”

Oceana, Inc. v. Locke, 2011 WL 2802989, at *2 (D.C. Cir. July 19, 2011) (quoting C & W

Fishing Co. v. Fox, 931 F.2d 1556, 1562 (D.C. Cir. 1994)).

       An agency is required to “examine the relevant data and articulate a satisfactory

explanation for its action.” Id. at 30. For that reason, courts “‘do not defer to the agency's

conclusory or unsupported suppositions,’” United Techs. Corp. v. U.S. Dept. of Defense, 601



                                                 7
F.3d 557, 562 (D.C. Cir. 2010) (quoting McDonnell Douglas Corp. v. U.S. Dept. of the Air

Force, 375 F.3d 1182, 1187 (D.C. Cir. 2004)), and “counsel's ‘post hoc rationalizations’ cannot

substitute for an agency's failure to articulate a valid rationale in the first instance. El Rio Santa

Cruz Neighborhood Health Ctr., Inc. v. U.S. Dept. of Health & Human Servs., 396 F.3d 1265,

1276 (D.C. Cir. 2005); see Burlington Truck Lines v. United States, 371 U.S. 156, 169, 83 S. Ct.

239, 9 L.Ed.2d 207 (1962).” Zarmach Oil Services, Inc. v. U.S. Dept. of the Treasury, 750 F.

Supp. 2d 150, 155 (D.D.C. 2010). The reviewing court thus “may not supply a reasoned basis

for the agency’s action that the agency itself has not given.” Bowman Transp., Inc. v. Arkansas-

Best Freight System, Inc., 419 U.S. 281, 285-86 (1974) (internal citation omitted). Nevertheless,

a decision that is not fully explained may be upheld “if the agency's path may reasonably be

discerned.” Id. at 286.

       An agency’s interpretation of its own regulation is entitled to “‘substantial deference.’”

St. Luke’s Hosp. v. Sebelius, 611 F.3d 900, 904 (D.C. Cir. 2010) (quoting Thomas Jefferson

Univ. v. Shalala, 512 U.S. 504, 512 (1994)). Under this standard, the agency’s construction

controls unless it is “plainly erroneous or inconsistent with the regulation.” Id. (quoting Thomas

Jefferson Univ., 512 U.S. at 512). In other words, a court may find an agency interpretation

unlawful if “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.’” Thomas

Jefferson Univ., 512 U.S. at 512 (quoting Gardebring v. Jenkins, 485 U.S. 415, 430 (1998)).

       The court will not, however, defer to an agency’s “post hoc rationalizations,” which may

be evidenced by prior conflicting interpretations of the regulation. See Akzo Nobel Salt, Inc. v.

Federal Mine Safety and Health Review Com’n, 212 F.3d 1301, 1304-05 (D.C. Cir. 2000); see

also United States Air Tour Ass’n v. Fed’l Aviation Admin., 298 F.3d 997, 1016 n. 15 (D.C. Cir.



                                                  8
2002). Likewise, if an agency’s interpretation of a regulation shifts such that the agency is

treating like situations differently without sufficient reason, the court may reject the agency’s

interpretation as arbitrary. See County of Los Angeles v. Shalala, 192 F.3d 1005, 1022 (D.C.

Cir. 1999).

   III.       Analysis

          This case boils down to one basic question: does adjusting Plaintiffs’ GME FTE caps

constitute a “reopening” of their previous cost reports in violation of the three-year limitations

period? The Secretary contends that it does. She interprets the statute that limits the number of

FTEs as tying the cap to particular cost reports – in this case, Plaintiffs’ 1996 reports for the FTE

count and their 1998 reports for the FTE cap. She further maintains that adjusting the FTE cap

requires reopening those reports; as more than three years have passed since the NPR was issued,

reopening is impermissible. Plaintiffs respond that the statute does not tie the GME FTE cap to

any particular cost report. Even if it did, they contend that the Secretary’s interpretation of the

reopening regulation is inconsistent with its language and relevant case law, as well as the

Secretary’s own prior stance on the regulation; as such, it should be rejected as arbitrary and

capricious.

          The Court need not address the threshold issue of whether the cap is tied to any cost

report. Assuming for purposes of this Motion that it is, Plaintiffs nonetheless prevail because

they demonstrate the unreasonableness of the Secretary’s view that adjusting the GME FTE cap

in a closed cost-report year necessitates reopening the report. As a result, the limitations period

does not bar what they seek to accomplish.




                                                 9
         A. Reopening

         Plaintiffs first maintain that the Secretary’s position that adjusting the GME FTE cap

would constitute an untimely reopening is contrary to the language of the reopening regulation.

Pl. Mot. at 17. The regulation states in relevant part:

                A Secretary determination, an intermediary determination, or a
                decision by a reviewing entity … may be reopened, for findings
                on matters at issue in a determination or decision, by CMS (with
                respect to Secretary determinations), by the intermediary (with
                respect to intermediary determinations) or by the reviewing entity
                that made the decision ….

42 C.F.R. §§ 405.1885(a)(1). It thus applies to “intermediary determination[s],” which are

defined as “determination[s] of the amount of total reimbursement” or “of the total amount of

payment” due to the provider for a given cost-reporting period. See 42 C.F.R. §§ 405.1885(a),

405.1801(a). The only intermediary decisions subject to the terms of the reopening regulation,

according to its plain language, therefore, are determinations of the total amount owed. Since

Plaintiffs are not seeking modification of the reimbursement amount for any closed cost-report

year, they submit that adjusting GME FTE caps does not amount to a reopening, and the three-

year restriction should not apply. See Pl. Mot. at 2, 16-17, 21. This position finds considerable

support.

         In the most significant case, the Eighth Circuit considered the applicability of the

reopening regulation to an analogous matter and concluded, at the Secretary’s urging, that the

three-year limit on reopening does not apply to “reconsideration of predicate factual issues …

with no intention of changing the total reimbursement amount applicable to a year.” HealthEast

Bethesda Lutheran Hospital and Rehabilitation Center v. Shalala, 164 F.3d 415, 417-18 (8th Cir.

1998).     HealthEast involved a Medicare provision that allows hospitals to be reimbursed “for

interest payments on ‘necessary’ loans to the extent that such payments exceed income on the


                                                 10
hospitals’ investments.” Id. at 416 (citing 42 C.F.R. §413.153(a)(1)). The issue in that case was

whether the intermediary could reassess the necessity of loans obtained during closed cost-

reporting years for purposes of determining the amount of reimbursement in an open-report year.

See id. at 416-17.

       The court in HealthEast looked to the language of the reopening regulation to determine

whether the Secretary’s position was “plainly erroneous or inconsistent with the regulation.” Id.

at 417 (citing Bowles v. Seminole Rock and Sand Co., 325 U.S. 410, 414 (1945)). Like the

Plaintiffs in this case, the Secretary argued that an intermediary determination is only reopened

when the total amount of reimbursement for a closed cost-reporting period is disturbed. See

HealthEast, 164 F.3d at 417. The court agreed.

       It found that, according to the text of the regulation, the three-year limit applies to an

intermediary determination “‘with respect to findings on matters at issue in such determination.’”

Id. at 417 (citing 42 C.F.R. § 405.1885(a)). HealthEast argued that “the phrase ‘findings on

matters at issue’ includes all questions involved in the determination,” including “predicate facts

germane to the calculation of the appropriate amount of total reimbursement.” Id. The court

rejected this view, stating that “it would make no sense” to read the regulation to mean that an

intermediary determination could not be reopened with respect to predicate factual questions that

do not alter the total reimbursement.      Id. at 418.    Instead, the court concluded that the

regulation’s text “specifies … that the three-year limitation on reopening applies solely to the

amount of total reimbursement.” Id. at 417. Because reconsideration of predicate facts that will

not affect reimbursement in a closed year “does not fall within the definition of an ‘intermediary

determination,’ … [it] is not subject to the three-year limitation.”         Id. at 417-18. This




                                                 11
interpretation, the court stated, “is the only interpretation logically consistent with the regulatory

language.” Id. at 418.

       The Secretary attempts to distinguish HealthEast by arguing that the intermediary there

“‘did not seek to alter its final determinations’” for closed cost-reporting periods, whereas here

the FTE numbers reported for 1996 or 1998 “would need to be changed, which would require the

alteration of the intermediary’s final determination of the total amount of program

reimbursement for that period.” Def. Mot. & Opp. at 24-25 (quoting HealthEast, 164 F.3d at

418). This argument is unavailing. It is undisputed that Plaintiffs in this case are not seeking

revision of the total reimbursement due to them from their 1996 and 1998 cost reports, see Def.

Mot. & Opp. at 2, 20, 23; Pl. Mot. at 2, Pl. Opp. & Reply at 14, 16-17, and the Secretary’s

conclusory assertions that changing the GME FTE cap would require adjustments to those total

reimbursement amounts cannot change that. See Def. Mot. & Opp. at 22-23, 25, 28; Pl. Opp. &

Reply at 14-16. The Secretary offers no legal support for her claim that the caps cannot be

increased without modifying the total reimbursement for closed years, particularly where

Plaintiffs have disclaimed such sums.

       Although this Court is not bound by an Eighth Circuit decision, its reasoning appears

sound – indeed, the Secretary himself supported it. Nor is there any meaningful difference

between the facts there and here. In HealthEast, the necessity of loans, like the GME FTE caps

here, was a key factor in determining the amount of reimbursement a Medicare provider would

receive going forward. 164 F.3d at 416. In both cases, determinations initially made in earlier,

closed reports affected levels of reimbursement in later, open years. Just as in HealthEast, where

the hospitals do not seek adjusted reimbursement for closed years, changing predicate facts does

not constitute a reopening.



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         The Supreme Court has also reached the same conclusion in a similar matter. Regions

Hospital v. Shalala, 522 U.S. 448 (1998), involved per-resident GME costs – another factor used

to calculate total Medicare reimbursement for GME. Just as for the FTE count, Congress

designated a baseline year for per-resident cost determinations that would be “used to calculate

GME reimbursements for all subsequent years.” Id. at 453.        To “ensure that future payments

would be based on an ‘accurate’ determination of providers’ [base-year] … costs,” the Secretary

passed a regulation giving intermediaries authority to verify hospitals’ costs during the base

period. Id. at 454. The regulation aimed to “prevent future overpayment,” but the Secretary

made clear that it could not be used to recover “excess reimbursement” for years in which the

three-year window for reopening had passed. Id. at 454-55 (emphasis in original). In an audit of

the base-year costs for Regions Hospital, an intermediary determined that the average cost per

resident was actually several thousand dollars lower than the figure previously approved. Id. at

454-55. The Secretary sought to use the reduced (and more accurate) base-year amount “to

determine reimbursements for future years and past years within the three-year reopening

window[, but] not … to recoup excessive reimbursement paid [for the base-year], for the three-

year window had already closed on that year.” Id. at 455. The Supreme Court concluded that

this did not violate the reopening regulation because “[t]he Secretary did not enlarge the time the

agency had to seek repayment of excess reimbursements in years closed under the three-year

prescription; rather, the Secretary extended only the time for determining the proper amount of

reimbursement due in subsequent years.” Id. at 462. This shows, contrary to the Secretary’s

present assertion, that foundational elements of GME payment calculation can be altered for

open years without affecting total reimbursement in – and thereby reopening – closed cost-report

years.



                                                13
       The Court agrees with the Secretary that Regions is not directly controlling here because

it involved a regulation that authorized the Secretary to reconsider the base-year calculation even

after the cost report for that year was finalized and no longer subject to reopening. See Def. Mot.

& Opp. at 26-27. Here there is no such regulation, and the Court’s review is of the Secretary’s

actions in relation to a normal NPR review. This distinction, however, does not dictate a

different result because a central question in Regions was still whether reauditing base-year

figures outside the three-year window for purposes of calculating reimbursement in open years

violated time limits on reopening. See Regions, 522 U.S. at 462-63. The Court concluded it did

not. Id. The outcome here should be no different.

       The PRRB’s decision in this case, furthermore, is consistent with its ruling in an

analogous case, which the Secretary did not reverse. Edgemont Hospital v. Mutual of Omaha

Insurance Co., PRRB Dec. No. 95-D34, Medicare & Medicaid Guide (CCH) ¶ 43,264 (Apr. 6,

1995) (A.R., Vol. 1, 237-42), like this action, involved a ceiling on reimbursement based on

figures in a designated year. Id. at 237. The issue was whether the intermediary could adjust the

base-year calculations and “index[] correct cost information through” closed report years for

purposes of correcting the reimbursement limit in later years. Id. at 241. The provider in that

case argued that changing the base-year rate and carrying it through closed cost reports

constituted a reopening and was therefore impermissible.         Id. at 238-39.     Rejecting that

argument, the PRRB upheld the intermediary’s adjustments. Id. at 241. The Board reasoned that

“because the base-year rate serves as a foundation for future years, it must be as correct as

possible.” Id. It further noted that “[t]here is no statutory or regulatory support for the concept

that adjusting the [reimbursement limit] in subsequent years, to conform with a correct base-year

determination, amounts to a reopening.” Id. This decision clearly supports Plaintiffs’ position



                                                14
that the base-year GME FTE cap can be corrected in closed reports without reopening them and,

indeed, suggests that an erroneous base-year calculation must be modified to ensure appropriate

levels of reimbursement in later years.

       The Secretary again attempts, unsuccessfully, to distinguish this case on the ground that

both the relevant statute and a regulation promulgated by the Secretary authorized the changes

made to the base-year rate. See Def. Mot. & Opp. at 27-28; Pl. Opp. & Reply at 21-22. While

this is true, the Board did not rely on the fact that changes were made pursuant to the statute and

regulation when it held that indexing the corrected rates through closed cost reports did not

amount to a reopening. See Edgemont, PRRB Dec. No. 95-D34, A.R. Vol. 1 at 240-41. Rather,

the Board concluded that, because indexing the modified numbers through closed reports was

“the only means by which to correct” the reimbursement limit for subsequent years and because

the reopening regulation did not prevent such adjustments, the modifications were permissible –

and indeed necessary – to ensure accuracy in subsequent years. Id. at 241. The same principle

applies here.

       Finally, in determining the reasonableness of the Secretary’s position here, the Court

must consider that it has shifted from what she espoused in previous cases. Since she has failed

to adequately explain the change, this, too, counsels in favor of finding her decision arbitrary.

Regions presents the most glaring illustration of the Secretary’s inconsistency on this issue. The

Secretary there sought precisely what Plaintiffs want here – that is, a correction of a base-year

figure in order to ensure accurate GME reimbursement levels for open years. See 522 U.S. at

455; Pl. Mot. at 1-2, 30. In addition, she emphasized there that the total reimbursement in the

base year would not be altered, since the report for that year was no longer subject to reopening.

Regions, 522 U.S. at 455-56. While the Secretary did not see any problem with changing a base-



                                                15
year figure while leaving total reimbursement undisturbed in Regions, she argues here that a

change to the base-year FTE cap would necessitate an adjustment in the total reimbursement in

violation of the three-year limit on reopening. The Secretary thus accomplished in Regions what

she contends it is unlawful for Plaintiffs to do here.

          Likewise, in Regions, the Secretary recognized the absurdity of allowing a mistake in a

base-year calculation to be perpetuated indefinitely due to the time limit on reopening. The

Secretary stated in that case that “it is ‘hard to believe that Congress intended that misclassified

and nonallowable costs [would] continue to be recognized through the GME payment

indefinitely.” Id. at 458-59 (citing 54 Fed. Reg. 40301 (1989)). Yet, in this case, the Secretary

maintains that it is perfectly reasonable to allow the error to affect reimbursement levels far into

the future. The only real difference between the miscalculation in that case and the purported

error here is that perpetuation of the mistake in Regions would have resulted in a financial loss to

the agency, whereas in this case, the agency stands to gain. This seems to be the very definition

of treating like situations differently. Since the Secretary has failed to provide sufficient reasons

for her change of position, the Court finds that her decision in this case was arbitrary. See

County of Los Angeles, 192 F.3d at 1022 (“‘A long line of precedent has established that an

agency action is arbitrary when the agency offer[s] insufficient reasons for treating similar

situations differently.’”) (quoting Transactive Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir.

1996)).

          In sum, the Court finds that the Secretary’s position on reopening is not in accordance

with the law. While the Court is mindful of the deference that is due to the Secretary under the

APA, Plaintiffs’ position “is the only interpretation logically consistent with the regulatory




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language.” HealthEast, 124 F.3d at 418. Summary judgment, accordingly, is appropriately

entered for Plaintiffs.

        B. Remedy

        Plaintiffs request that the Court enforce their stipulation with the intermediary regarding

the correct number of FTEs rather than remanding the matter to the agency. See Pl. Opp. & Mot.

at 26-33; see also Joint Stipulation at 1-2 (Jan. 29, 2009) (A.R., Vol. 1 at 213-14). They point

out that it took “considerable effort to come to an understanding regarding what the Hospitals’

GME FTE caps would be in the event the Hospitals prevailed,” and that failing to honor the

agreement would not only be inefficient, but would also create disincentives for parties to

cooperate in future PRRB proceedings. Id. at 27, 31-32. In addition, Plaintiffs emphasize that

the PRRB, which ruled in their favor before being reversed by the CMS Administrator, honored

the stipulation. Id. at 28 (citing PRRB Dec. at 9 (A.R., Vol. 1 at 69)), 30.

        The Secretary contends, however, that remand is the only appropriate course of action

here. See Def. Reply at 21-24. The Court agrees. In administrative review cases, the district

court “does not perform its normal role but instead sits as an appellate tribunal.” Palisades Gen’l

Hosp. v. Leavitt, 426 F.3d 400, 403 (D.C. Cir. 2005) (internal quotation marks and citation

omitted). As such, it has “no jurisdiction to order specific relief,” but must instead remand to the

agency. Id.; see also Fed. Power Comm’n v. Idaho Power Co., 344 U.S. 17, 20 (1952) (“[T]he

function of the reviewing court ends when an error of law is laid bare. At that point the matter

once more goes to the [agency] for reconsideration”); County of Los Angeles, 192 F.3d at 1011

(“‘Under settled principles of administrative law, when a court reviewing 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.’”)

(quoting PPG Indus., Inc. v. United States, 52 F.3d 363, 365 (D.C. Cir. 1995)). In fact, the D.C.
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Circuit has expressly rejected a Ninth Circuit case on which Plaintiffs rely for the proposition

that a district court can decline to remand an administrative review case where there is an

identifiable way to resolve the factual issue. See County of Los Angeles, 192 F.3d at 1023

(“necessarily part[ing] ways” with the Ninth Circuit’s decision in Alvarado Community Hospital

v. Shalala, 155 F.3d 1115, 1125 (9th Cir. 1998)); Pl. Opp. & Reply at 28. In light of established

precedent, the Court believes remand is the proper course here.

IV.    Conclusion

       The Court will issue a contemporaneous order that grants Plaintiffs’ Motion for Summary

Judgment, denies Defendant’s Motion for Summary Judgment, and remands to HHS for

proceedings consistent with this Opinion.




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