PROVIDENCE YAKIMA MEDICAL CENTER v. Sebelius

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

PROVIDENCE YAKIMA MEDICAL 
CENTER, a Washington non-profit
corporation; ST. VINCENT HOSPITAL,
a Montana non-profit corporation;
YAKIMA VALLEY MEMORIAL
HOSPITAL, a Washington non-profit
corporation; MERLE WEST MEDICAL
CENTER, an Oregon non-profit Nos. 09-35266 and
corporation; DEACONESS-BILLINGS 09-35402
CLINIC HEALTH SYSTEM, a Montana
non-profit corporation,
 D.C. No.
2:03-cv-03096-FVS
Plaintiffs-Appellees-
Cross-Appellants, OPINION
v.
KATHLEEN SEBELIUS,* Secretary,
United States Department of
Health and Human Services,
Defendant-Appellant-
Cross-Appellee.

Appeal from the United States District Court
for the Eastern District of Washington
Fred L. Van Sickle, District Judge, Presiding

Argued and Submitted
April 6, 2010—Seattle, Washington

Filed July 23, 2010

*Kathleen Sebelius is substituted for her predecessor, Charles E. John-
son, as Secretary of Health and Human Services. Fed. R. App. P. 43(c)(2).

10591
10592 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
Before: Michael Daly Hawkins, Carlos F. Lucero,** and
N. Randy Smith, Circuit Judges.

Per Curiam Opinion

**Honorable Carlos F. Lucero, United States Circuit Judge for the
Tenth Circuit, sitting by designation.
10594 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS

COUNSEL

Sanford E. Pitler, Bennett, Bigelow & Leedom, P.S., Seattle,
Washington, for the plaintiffs-appellees-cross-appellants.

Jeffrey A. Clair, Civil Division, United States Department of
Justice, Washington, D.C., for the defendant-appellant-cross-
appellee.

OPINION

PER CURIAM:

Secretary of the Department of Health and Human Services
Kathleen Sebelius (“the Secretary”) appeals the adverse sum-
mary judgment grant in an action brought by five not-for-
profit hospitals (“Hospitals”), each recipients of Medicare
direct graduate medical education (“DGME”) payments for
approved family medicine residency programs. The district
court found the Secretary’s methodology for calculating the
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10595
Hospitals’ base-year per resident amounts (“PRAs”) under the
existing regulation 42 C.F.R. § 413.86(e)(4)(I) (1989) (“1989
regulation”), known as Sequential Geographic Methodology
(“SGM”), arbitrary and capricious. On appeal, the Secretary
argues the agency’s Provider Review Reimbursement Board
(“PRRB”) improperly granted expedited judicial review
(“EJR”) to the Hospitals’ challenge to SGM. The Hospitals
cross appeal, challenging, among other determinations, the
district court’s failure to find the 1989 regulation both sub-
stantively and procedurally invalid on its face.

Finding a lack of subject matter jurisdiction based on the
PRRB’s incorrect granting of EJR, we vacate the district
court’s invalidation of SGM, and remand to the district court
with instructions to dismiss the Hospitals’ challenge and fur-
ther remand to the agency for it to determine the validity of
the methodology. We affirm the district court’s determination
as to the validity of the 1989 regulation.

I. BACKGROUND

A. Factual Background

The Hospitals operate residency training programs in rural
family medicine, and include Yakima Medical Center and
Yakima Valley Memorial Hospital (“Yakima Medical”),
located in Yakima Valley, Washington, St. Vincent Hospital
and Deaconess-Billings Clinic Health System (“St. Vincent”),
located in Billings, Montana, and Merle West Medical Center
(“Merle West”), located in Klamath Falls, Oregon. The five
Hospitals were recipients of Medicare DGME payments,
which are based on a hospital-specific PRA and calculated
according to several formulas. These formulas included the
1989 regulation and SGM.

The 1989 regulation based the PRA for the new graduate
medical education programs on “the lower of the following:
(A) The hospital’s actual costs . . . (B) The mean value of per
10596 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
resident amounts of hospitals located in the same geographic
wage area.”1 54 Fed. Reg. 40286, 40317 (Sept. 29, 1989). In
areas with “fewer than three amounts in the wage area, . . . the
intermediary [was required to] write HCFA [Health Care
Financing Administration]2 Central Office for a determination
of the per resident amount to use.” 54 Fed. Reg. at 40291.

HCFA described SGM in a June 1997 letter to the reim-
bursement manager of Blue Cross of Montana. The methodol-
ogy was used in the mid-1990s by HCFA to calculate the
PRAs for hospitals with “fewer than three amounts in the
wage area.” See 54 Fed. Reg. at 40291. In its letter, HCFA
noted:

If there are at least three hospitals in the same geo-
graphic wage area, we determine the base year per
resident amount based on a weighted average of the
per resident amounts in the same geographic wage
area. If there are less than three teaching hospitals in
the same geographic wage area, we include all hos-
pitals in contiguous wage areas. If we continue to
have fewer than three hospitals for this calculation,
we use a statewide average. In the case of St. Vin-
cent’s and Deaconess, there are fewer than three hos-
pitals with teaching programs in the entire state so
1
The term “same geographic wage area” refers to an urban area (“a met-
ropolitan statistical area” (“MSA”) as defined by the Office of Manage-
ment and Budget, certain urban areas specified by the Social Security
Amendments) or rural area (any area outside an urban area), 42 C.F.R.
§ 412.62(f), in the hospital-specific wage index as calculated by the Secre-
tary. 42 C.F.R. § 412.63(w).
2
The Health Care Financing Administration is a division of HHS that
administers Medicare payments. HCFA was renamed Centers for Medi-
care and Medicaid Services (“CMS”) in 2001. See Press Release, U.S.
Dept. of Health & Human Services, The New Centers for Medicare &
Medicaid Services (CMS) (June 14, 2001) (available at http://
www.hhs.gov/news/press/2001pres/20010614a.html). We use CMS and
HCFA interchangeably throughout this Opinion.
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10597
we calculated a weighted average among all hospi-
tals with teaching programs in contiguous states.

However, in its final rule, issued in 1997, the Secretary ulti-
mately declined to adopt SGM as its methodology, relying
instead on the “regional weighted average per resident
amounts determined for each of the nine census regions estab-
lished by the Bureau of Census for statistical and reporting
purposes” for areas with fewer than three hospitals in a given
geographic wage area. 62 Fed. Reg. 45966, 46004 (Aug. 29,
1997).

Here, the Secretary calculated the Hospitals’ PRAs via
SGM, based on the weighted average of PRAs of teaching
hospitals in each state (for Merle West, Yakima Medical, the
PRAs of Oregon and Washington, respectively), or the
weighted average of PRAs of teaching hospitals in contiguous
states (St. Vincent). The Hospitals appealed these PRA deter-
minations to the PRRB, contending their allowed Medicare
DGME costs exceeded these determinations.

B. Procedural Background

The Hospitals’ district court action challenged both the
Secretary’s 1989 regulation and “its prior ad-hoc methodolo-
gy,” or SGM, as “inconsistent with the plain and unambigu-
ous wording of the governing Medicare statute, inconsistent
with clear congressional intent, patently unreasonable, arbi-
trary and capricious, and otherwise contrary to law.”

In 2005, the PRRB, which had granted EJR as to the valid-
ity of the Secretary’s 1989 regulation, granted EJR “over the
issue of whether 42 C.F.R. § 413.86(e)(4)(I) [(1989 regula-
tion)], as applied by the Intermediaries [(via SGM)] to each
of the Providers in this appeal, violates 42 U.S.C.
§ 1395ww(h)(2)(F).” EJR permits a party to seek judicial
review in federal court, without the issuance of a final deci-
sion of the PRRB, of an action “which involves a question of
10598 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
law or regulations relevant to the matters in controversy
whenever the Board determines . . . that it is without authority
to decide the question.” 42 U.S.C. § 1395oo(f)(1).

In 2007, the court granted summary judgment in favor of
the Hospitals, and found SGM lacked the force of law and
that under the appropriate Skidmore level of deference,3 SGM
is arbitrary and capricious. In the same order, the court
accorded the 1989 regulation Chevron deference,4 upheld the
regulation, and declined to find the regulation arbitrary and
capricious. The court then ordered the Secretary in 2008 to
“calculate a weighted average PRA based on Plaintiffs’
Medicare-allowable base-year costs, and set each Plaintiff’s
PRA at the lesser of: (a) Each Plaintiff’s actual average cost
per resident; or (b) The average weighted cost per resident of
the five Plaintiffs.” The order required the Secretary to submit
the new figures to the court and allowed the court to retain
jurisdiction over the matter. The Secretary ultimately submit-
ted those calculations, and the court awarded these amounts
and entered judgment for the Hospitals.

The Secretary filed a timely notice of appeal challenging
the subject matter jurisdiction of the district court under the
2005 EJR, the court’s reversal of the PRRB’s determination,
3
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). Skidmore defer-
ence requires that “[t]he weight of such a judgment in a particular case
will depend upon the thoroughness evident in its consideration, the valid-
ity of its reasoning, its consistency with earlier and later pronouncements,
and all those factors which give it power to persuade, if lacking power to
control.” Id.; see also Gonzales v. Oregon, 546 U.S. 243, 268-69 (2006).
4
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842-43 (1984). Chevron’s two-part analysis requires the court to ask, first,
“whether Congress has directly spoken to the precise question at issue.”
Id. at 842. If Congressional intent is clear, the court and the agency “must
give effect to the unambiguously expressed intent of Congress.” Id. at 843.
However, 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.; see also Edwards v.
McMahon, 834 F.2d 796, 799 (9th Cir. 1987).
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10599
via SGM, of the DGME amounts due to the Hospitals, and the
court’s limitation of the Secretary’s discretion to reaudit the
Hospitals’ base DGME costs.

The Hospitals filed a timely cross appeal challenging the
court’s failure to invalidate SGM on procedural grounds, fail-
ure to find the 1989 regulation substantively and procedurally
invalid on its face, failure to specify, in the alternative, that its
remedy was based on the 1989 regulation itself, and the
exclusion of evidence of the Secretary’s comparable programs
under Fed. R. Evid. 408.

II. STANDARD OF REVIEW

We review de novo both the district court’s subject matter
jurisdiction and the district court’s grant of summary judg-
ment. See Schnabel v. Lui, 302 F.3d 1023, 1029 (9th Cir.
2002) (subject matter jurisdiction); Rene v. MGM Grand
Hotel, Inc., 305 F.3d 1061, 1064 (9th Cir. 2002) (grant of
summary judgment), cert. denied, 123 S. Ct. 1573 (2003)
(same). Our review is not of the Secretary’s/PRRB’s reim-
bursement determination itself, but the district court’s deter-
minations.

III. DISCUSSION

A. 2005 EJR Grant

The Secretary challenges the district court’s jurisdiction,
contending because reimbursement determinations under
SGM “do not turn on a question of law or regulation that the
PRRB cannot review, . . . they consequently are not amenable
to expedited judicial review” under 42 U.S.C. § 1395oo(f)(1).
Because SGM is an “ad hoc” methodology and does not meet
the requirements of § 1395oo(f)(1), we agree that the PRRB’s
2005 grant of EJR was in error, and the district court should
not have determined it had jurisdiction.
10600 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
1. PRRB’s decision

[1] Section 1395oo(f) gives providers the right to obtain
judicial review of any action of the fiscal intermediary involv-
ing a question of law or regulations whenever the Board
determines that it is without authority to decide the question.
See Bethesda Hosp. Ass’n v. Bowen, 485 U.S. 399, 406 (1988)
(“Subsection (f)(1) grants providers the right to obtain judicial
review of an action of the fiscal intermediary, but the predi-
cate is that the Board must first make a determination that it
is without authority to decide the matter because the provid-
er’s claim involves a question of law or regulations.”).5

[2] The PRRB granted EJR for SGM in its 2005 proceed-
ing “over the issue of whether [the 1989 regulation], as
applied by the Intermediaries to each of the Providers in this
appeal, violates 42 U.S.C. § 1395ww(h)(2)(F) by failing to
base the Providers’ average per-resident amounts on the
‘approved [full-time equivalent] resident amounts of compa-
rable residency programs.” The PRRB found jurisdiction to
address the issue in a hearing,6 and then “conclude[d] it lack-
[ed] the authority to grant relief sought by the Providers[,]
using the Providers’ audited, Medicare allowable costs as the
basis for PRAs” because the remedy was not prescribed by
the 1989 regulation. It also stated it was unable to invalidate
“a method of reimbursement that is solely within the discre-
tion of the Secretary to administer, as is the case here.” Here,
we evaluate the PRRB’s determination that it lacked the
authority to review SGM. If, as the Secretary contends, the
PRRB had the authority to decide the question of SGM’s
validity, then its grant of EJR was incorrect, and the district
court lacked subject matter jurisdiction to evaluate SGM’s
validity.
5
The EJR statute also has an amount in controversy requirement, which
is not disputed here as having been met. See § 1395oo(f)(2).
6
Neither party here challenges the PRRB’s determination that it had
jurisdiction to conduct the hearing.
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10601
[3] The PRRB reviewed the decision of a fiscal
intermediary—CMS—as to the PRA for each hospital, which
was used to calculate the DGME funds. Per the statute, the
hospital had the “right to obtain judicial review of any action
of the fiscal intermediary”—here, the PRA determination by
the CMS using SGM—“which involves a question of law or
regulations relevant to the matters in controversy whenever
the Board determines . . . that it is without authority to decide
the question.” § 1395oo(f)(1). Our task is to determine
whether SGM is a “question of law or regulations relevant to
the matters in controversy.” See id.

2. Ad hoc policy or regulation

The Secretary argues that SGM was an “ad hoc” policy and
not a regulation under the statute. We agree.7 The district
7
Anticipating the argument that the PRRB’s lack-of-authority determi-
nation under § 1395oo(f) is not subject to review by the federal courts, our
review evaluates the PRRB’s lack-of-authority determination, as distinct
from its jurisdictional determination. While the authority of the federal
courts to review the final decision of the PRRB that it lacks jurisdiction
has been subject to much debate in the courts, see Edgewater Hosp., Inc.
v. Bowen, 857 F.2d 1123, 1130-32 (7th Cir. 1988), there has not been
much debate surrounding the PRRB’s determination that it lacks the
authority to address an issue. See id. at 1130 (“As a consequence, jurisdic-
tion over the Board’s determination that it does not have authority is
clear.”) (citing Hosp. Ass’n of R.I. v. Sec’y of Health & Human Servs., 820
F.2d 533, 537 (1st Cir. 1987)). The Seventh Circuit, the only circuit to
address the issue directly, has stated, “the statute itself establishes a right
to judicial review of the Board’s determination that it lacks the authority
to decide a question of law or regulations by designating that determina-
tion a ‘final decision.’ ” Bowen, 857 F.2d at 1130. The First Circuit has
not addressed the jurisdiction of the federal courts over the Board’s lack-
of-authority determination; rather, it addressed whether the Board is
required to consider a particular regulation or policy itself before granting
EJR. See Hosp. Ass’n of R.I., 820 F.2d at 537-38. The First Circuit merely
concluded that the PRRB’s grant of EJR creates a right to judicial review,
and did not address the propriety of, or challenges to, the Board’s lack of
authority determination. See id. In fact, the Seventh Circuit’s citation of
Hospital Association of R.I. suggests that the First Circuit case supports
the federal courts’ review of the PRRB’s lack-of-authority determination.
See Edgewater Hosp., at 1130.
10602 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
court lacked jurisdiction to review SGM because SGM was
not a regulation; no rule was promulgated as this was a case-
by-case adjudication, and did not involve rulemaking of any
kind.

[4] We distinguish rulemaking from adjudication:

A rule is: The whole or a part of an agency statement
of general or particular applicability and future effect
designed to implement, interpret, or prescribe law or
policy or describing the organization, procedure, or
practice requirements of an agency. . . . An adjudica-
tion (which results in an order) is virtually any
agency action that is not rulemaking. 5 U.S.C.
§ 551(6)-(7). Two principal characteristics distin-
guish rulemaking from adjudication. First, adjudica-
tions resolve disputes among specific individuals in
specific cases, whereas rulemaking affects the rights
of broad classes of unspecified individuals. Second,
because adjudications involve concrete disputes,
they have an immediate effect on specific individu-
als (those involved in the dispute). Rulemaking, in
contrast, is prospective, and has a definitive effect on
individuals only after the rule subsequently is
applied.

Yesler Terrace Community Council v. Cisneros, 37 F.3d 442,
448 (9th Cir. 1994) (internal citations omitted) (alterations in
original). A regulation is defined as a “rule or order, having
legal force, usually issued by an administrative agency.” See
Black’s Law Dictionary (8th ed. 2004). Here, SGM was pro-
mulgated not through notice and comment rulemaking, formal
adjudication, or formal rulemaking, but rather came in a letter
to the Hospitals, which stated it would be applied on a case-
by-case basis. SGM likewise “did not affect the rights of a
‘broad class’ of people, and so no notice and comment was
required,” as it was not rulemaking. See MacLean v. Dep’t of
Homeland Security, 543 F.3d 1145, 1152 (9th Cir. 2008). It
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10603
was applied to “specific individuals in specific cases,” namely
each of the Hospitals, and involved the “concrete dispute[ ]”
of the calculation of a PRA for hospitals with less than three
comparable hospitals in the area. See Yesler Terrace, 37 F.3d
at 448.

The effect was immediate; once the Hospitals received the
letter, they knew their PRA and therefore their subsequent
DGME reimbursement. See id.; see also RLC Indus. Co. v.
Commissioner, 58 F.3d 413, 417 (9th Cir. 1995)
(“Rulemaking, the quasi-legislative power, is intended to add
substance to the Acts of Congress, to complete absent but
necessary details . . . Adjudication, the quasi-judicial power,
is intended to provide for the enforcement of agency . . . regu-
lations on a case-by-case basis.”) (citations omitted); Portland
Audubon Soc’y v. Endangered Species Comm., 984 F.2d
1534, 1540 (9th Cir. 1993) (“Where an agency’s task is to
adjudicate disputed facts in particular cases, an administrative
determination is quasi-judicial. By contrast, rulemaking con-
cerns policy judgments to be applied generally in cases that
may arise in the future.”) (citations omitted).

[5] “Interpretations such as those in opinion letters—like
interpretations contained in policy statements, agency manu-
als, and enforcement guidelines, all . . . lack the force of law”
Christensen v. Harris County, 529 U.S. 576, 587 (2000). The
PRRB, therefore, had the authority to decide the question at
issue because it did not involve a question of law or regula-
tions. See § 1395oo(f)(1). The Board incorrectly determined
that it lacked authority to decide the issue, and, as a result,
incorrectly granted EJR. Therefore, the district court lacked
jurisdiction over the validity of SGM. We vacate the district
court’s invalidation of SGM, and remand to the district court
with instructions to dismiss the Hospitals’ challenge and fur-
ther remand to the agency for it to determine the validity of
the methodology.8
8
Because we find the district court lacked subject matter jurisdiction,
and remand to the agency to consider the validity of SGM, we do not
10604 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
B. The 1989 Regulation

The remaining issue before us, from the Hospitals’ cross
appeal, is whether the district court erred in concluding the
1989 regulation was both substantively and procedurally valid
on its face. The Hospitals argue the district court erred in fail-
ing to invalidate, under Chevron, 467 U.S. at 842-43, the por-
tion of the 1989 regulation applicable to hospitals in
geographic wage areas with less than three teaching hospitals,
because the regulation deviated from the mandate of 42
U.S.C. § 1395ww(h)(2) by “impermissibly differentiat[ing] a
subset of new teaching programs from all others.”9 They also
argue the 1989 regulation was arbitrary and capricious under
5 U.S.C. § 706(2)(A) due to the Secretary’s failure to provide
notice of or rationale of the methodology to be applied by the
HCFA with respect to Hospitals in a geographic wage area
with less than three hospitals.

The district court did not err in upholding the validity of the
regulation under Chevron, nor did it err in declining to find
the 1989 regulation arbitrary and capricious.10

1. Chevron step one

[6] We ask first “whether Congress has directly spoken to

address the Hospitals’ appeal of the district court’s exclusion of evidence
of comparable programs in its remedy determination following its invali-
dation of SGM, and the Hospitals’ challenge to the district court’s failure
to specify that its remedy was based on the 1989 regulation itself.
9
The Hospitals do not otherwise challenge the substance of the 1989
regulation.
10
The district court’s reasoning for declining to reach the § 706(2)(A)
analysis was, however, incorrect. The replacement of the 1989 regulation
by the 1997 regulation did not render the Hospitals’ claim moot. Despite
the replacement regulation, the Hospitals suffered losses to their allotted
DGME payments under the calculation of their PRAs during the 1990s
under the carveout provision of the 1989 regulation.
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10605
the precise question at issue.” Chevron, 467 U.S. at 842. Here,
the statute is ambiguous with respect to the Secretary’s
responsibility of establishing PRAs for post-1984 DGME pro-
grams. The plain language of the statute is based in the
ambiguous term “comparable programs”: “the Secretary shall
. . . provide for such approved FTE [full-time equivalent] resi-
dent amounts as the Secretary determines to be appropriate,
based on approved FTE resident amounts for comparable pro-
grams.” 42 U.S.C. § 1395ww(h)(2). Congress, however, pro-
vided no criteria to determine program compatibility.

The Hospitals cite to the Federal Register, and the Secre-
tary’s “inten[t] to establish reasonable base-year DGME costs
in a manner that would not disadvantage new programs.”
However, in that same text of the regulation, the Secretary
also notes, “If there are fewer than three amounts in the wage
area, we are proposing that the intermediary write HCFA
Central Office for a determination of the per resident amount
to use. The per resident amount used for the first year would
be updated in future years without regard to actual costs.” 53
Fed. Reg. at 36595 (emphasis added). Simply indicating that
the Secretary did not want hospitals to be disadvantaged is not
an indication of the meaning of “comparable,” and certainly
does not preclude this portion of the 1989 regulation, particu-
larly when the Secretary notes that updates in future years will
be without regard to actual costs.

The Hospitals also contend the “comparable programs”
requirement is rendered superfluous by the portion of the Sec-
retary’s regulation here, and that the Secretary’s interpretation
“adds new language to the statute not contained therein,”
thereby creating two different classes of new teaching pro-
grams. Nothing in the statute, however, attempts to define
“comparable programs,” or exclude any possible definitions;
the regulation merely defines what is ambiguous within the
statute.
10606 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
2. Chevron step two

[7] Under Chevron step two, if congressional intent is
ambiguous, a reviewing court must defer to the agency’s
interpretation of the statute unless it is “contrary to clear con-
gressional intent or frustrates the policy Congress sought to
implement.” Schneider v. Chertoff, 450 F.3d 944, 960 (9th
Cir. 2006). The Hospitals argue nothing in the statute implies
the Secretary may treat hospitals in wage areas with less than
three teaching hospitals different from all other new pro-
grams. However, nowhere does the statute itself forbid the
Secretary from making such an exception. The district court
correctly noted that “[g]iven the absence of clear congressio-
nal intent to the contrary, it was permissible for the Secretary
to provide for the exceptional situation presented by hospitals
with new GME programs located in areas where a meaningful
average could not be calculated.” Therefore, the challenged
regulation was correctly deemed valid and accorded Chevron
deference.

3. Arbitrary and capricious challenge

The 1989 regulation was promulgated via informal rule-
making under 5 U.S.C. § 553, and such action may be set
aside if found “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law.” 5 U.S.C.
§ 706(2)(A); see Motor Vehicle Mfrs. Ass’n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 41 (1983). An arbitrary and
capricious challenge requires us to adhere to a narrow scope
of review, wherein we are “not to substitute [our] judgment
for that of the agency.” State Farm, 463 U.S. at 43. The
agency, however, is required to “examine the relevant data
and articulate a satisfactory explanation for its action includ-
ing a rational connection between the facts found and the
choices made,” id. (internal quotation marks and citation
omitted), and we in turn must review that explanation, consid-
ering “whether the decision was based on a consideration of
the relevant factors and whether there has been a clear error
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10607
of judgment.” Id. (internal quotation marks and citation omit-
ted). A rule is arbitrary and capricious “if the agency has
relied on factors which Congress has not intended it to con-
sider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs
counter to the evidence before the agency, or is so implausible
that it could not be ascribed to a difference in view or the
product of agency expertise.” Id.

In our analysis of whether an agency’s action was arbitrary
or capricious, we are required to be “highly deferential, pre-
suming the agency action to be valid.” J & G Sales Ltd. v.
Truscott, 473 F.3d 1043, 1051 (9th Cir. 2007) (citing Irvine
Med. Ctr. v. Thompson, 275 F.3d 823, 830-31 (9th Cir.
2002)). “Where [an] agency’s line-drawing does not appear
irrational and the party challenging the agency action has not
shown that the consequences of the line-drawing are in any
respect dire, courts will leave that line-drawing to the agen-
cy’s discretion.” Id. at 1052 (citing Leather Indus. of Am. v.
EPA, 40 F.3d 392, 409 (D.C. Cir. 1994) (internal modifica-
tions and quotation marks omitted)). And while an agency
should provide a reasoned basis for its actions, State Farm,
463 U.S. at 43, we “will uphold a decision of less than ideal
clarity if the agency’s path may be reasonably discerned.”
McFarland v. Kempthorne, 545 F.3d 1106, 1113 (9th Cir.
2008) (citing State Farm, 463 U.S. at 43) (internal modifica-
tions and quotation marks omitted).

[8] The Hospitals argue the 1989 regulation was arbitrary
and capricious, first because the Secretary did not articulate
any justification for treating a subset of new teaching pro-
grams differently from all others when she permitted HCFA
to make the PRA determination of hospitals with fewer than
three hospitals in a given wage area. The Secretary’s assump-
tion in creating this “carveout” exception appears to be that
the resulting mean value of PRAs for hospitals with less than
three hospitals in a given wage area is inaccurate. On its face,
the assumption does not appear unreasonable or arbitrary; cal-
10608 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS
culating a mean from a larger pool results in a more accurate
number than an average of two numbers (two hospitals in a
given wage area) or the reliance on one number alone. And
while the failure to provide an explanation for the choice of
the carveout is troubling, see State Farm, 463 U.S. at 50-51,
it does not appear to rise to the level of “rel[ying] on factors
which Congress has not intended it to consider, entirely fail-
[ing] to consider an important aspect of the problem, offer-
[ing] an explanation for its decision that runs counter to the
evidence before the agency, or [being] so implausible that it
could not be ascribed to a difference in view or the product
of agency expertise.” See State Farm, 463 U.S. at 43; cf. id.
at 46 (rescission of a regulatory provision by NHSTA arbi-
trary and capricious where the agency “gave no consideration
whatever to modifying the standard” to require the use of air-
bag technology) (emphasis added); see also J & G Sales Ltd.,
473 F.3d at 1052 (agency’s demand letter with reliance on
absolute number of firearms traces was not arbitrary and
capricious because “[t]he agency need not craft the perfect
threshold in order to survive review, but merely demonstrate
that its threshold stems from reasoned decision making . . .
[which] the agency has done”). The carveout provision does
not appear to be a product of irrational line-drawing, and the
Hospitals, while they have shown a loss of funds from the
provision, have not “shown that the consequences of the line-
drawing are in any respect dire.” See J & G Sales Ltd., 473
F.3d at 1052 (internal quotation marks and citation omitted).

[9] Alternatively, according to the Hospitals, the 1989 reg-
ulation was arbitrary and capricious because the Secretary
“failed to consider key aspects of the issue, or to provide a
plausible explanation for this decision” when she did not
modify the final rule based on comments she received, and
did not explain how criteria reported in the rule “would ensure
that PRAs were set based on reasonable costs and truly com-
parable programs.” However, the comments cited by the Hos-
pitals do not address the perceived inappropriateness of
treating hospitals with less than three in a wage area differ-
 PROVIDENCE YAKIMA MEDICAL CENTER v. SEBELIUS 10609
ently from other hospitals. The district court, therefore, did
not err in failing to find the 1989 regulation arbitrary and
capricious.

IV. CONCLUSION

The district court lacked subject matter jurisdiction to con-
sider the validity of SGM. We vacate the district court’s
invalidation of SGM, and remand to the district court with
instructions to dismiss the Hospitals’ challenge and further
remand to the agency for it to determine the validity of the
methodology. We affirm the district court’s determination that
the 1989 regulation was substantively and procedurally valid.

VACATED AND REMANDED IN PART; AFFIRMED
IN PART. Each party shall bear its own costs on appeal.