In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3429
T HE U NIVERSITY OF C HICAGO M EDICAL C ENTER,
d/b/a University of Chicago Hospitals & Clinics,
Plaintiff-Appellee,
v.
K ATHLEEN S EBELIUS, Secretary of Health and
Human Services,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 CV 7016—Wayne R. Andersen, Judge.
A RGUED F EBRUARY 25, 2010—D ECIDED A UGUST 25, 2010
Before C UDAHY, E VANS, and S YKES, Circuit Judges.
C UDAHY, Circuit Judge. This appeal involves a ques-
tion of regulatory and statutory interpretation affecting
whether the University of Chicago Medical Center (hospi-
tal) is entitled to approximately $2.8 million in Medicare
reimbursements for indirect medical education (IME)
2 No. 09-3429
expenses. One factor in a hospital’s IME reimbursement
is the hospital’s count of its full-time equivalent residents
(FTEs). Here, the hospital claimed an FTE total for the
1996 fiscal year that reflected the time medical residents
spent conducting educational research unrelated to the
care of Medicare patients, which we’ll call “pure research.”
The district court resolved cross motions to grant sum-
mary judgment in favor of the hospital, and the govern-
ment appeals.
I. Background
A. Medicare
In general, Medicare bears its share of an institution’s
costs “related to the care furnished beneficiaries.” 42 C.F.R.
§ 405.402(a) (1983). Hospitals used to receive reimburse-
ments for inpatient services provided to Medicare ben-
eficiaries on the basis of “reasonable cost”—an ex-post
reimbursement of actual service costs. See 42 U.S.C.
§ 1395f(b)(1); R.I. Hosp. v. Leavitt, 548 F.3d 29, 39 (1st
Cir. 2008). The reasonable cost system also covered
certain allowable education costs of teaching hospitals.
See 42 C.F.R. § 405.421(b) (1983) (“Approved educational
activities means formally organized or planned programs
of study usually engaged in by providers in order to
enhance the quality of patient care in an institution.”). But
hospitals were not reimbursed for “[c]osts incurred for
research purposes, over and above usual patient care,”
unless the research was “in conjunction with . . . the care
of patients.” 20 C.F.R. § 405.422(a)-(b) (1967) (“Where
research is conducted in conjunction with and as part of
No. 09-3429 3
the care of patients, the costs of usual patient care are
allowable to the extent that such costs are not met by
funds provided for the research.”).
To manage costs, in 1972, Congress modified the rea-
sonable cost system to allow the Secretary to limit reim-
bursements. 42 U.S.C. § 1395x(v)(1)(A). It became clear
that teaching hospitals were disadvantaged by this
system because they have higher costs of service (they
treat more severely ill patients, residents who are
assigned to teaching hospitals both request more diagnos-
tic tests and procedures and residents require more staff
because they place demands on staff to educate them, see
Report to Congress Required by the Tax Equity and Fiscal
Responsibility Act of 1982, at 48-49 (Dec. 1982), see also
H.R. Rep. No. 98-25(I), reprinted in 1983 U.S.C.C.A.N. 219,
359; S. Rep. No. 98-23, reprinted in 1983 U.S.C.C.A.N. 143,
192-93; H.R. Rep. No. 99-241(I) (1985), reprinted in 1986
U.S.C.C.A.N. 579, 592)), but they received the same
limited reimbursements as other hospitals. To compen-
sate them for their costs not covered by the new limited
reimbursements, in 1980, the Secretary of Health and
Human Services established a teaching activity adjust-
ment for teaching hospitals, based on the number of full-
time equivalent (FTE) residents employed at a teaching
hospital on a particular date. See 45 Fed. Reg. 21,582, 21,584
(Apr. 1, 1980); 47 Fed. Reg. 43,296, 43,310 (Sept. 30, 1982).
In 1983, Congress further attempted to limit Medicare
costs with the prospective payment system (PPS) whereby
the government reimbursed hospitals at a federal rate
per given service based on a patient’s diagnosis at dis-
4 No. 09-3429
charge, regardless of actual cost. Under the PPS, Medicare
no longer reimbursed teaching hospitals for the oper-
ating costs associated with graduate education. 42 U.S.C.
§ 1395ww(a)(4). Congress enacted a teaching adjustment
factor for indirect graduate medical education (IME)
costs, based on the Secretary’s teaching activity adjust-
ment from the early 1980s, as a proxy for these higher
costs. The adjustment was directly proportional to the
number of FTEs.1
B. The regulation and statute at issue
This IME teaching adjustment is calculated “in the
same manner as the adjustment for such costs under
regulations (in effect as of January 1, 1983) . . . .” based on
a detailed formula. See 42 U.S.C. § 1395ww(d)(5)(B).
Although no on-point regulations appeared in the Code
of Federal Regulations on January 1, 1983, the Secretary
had issued several notices in the Federal Register, de-
scribed above, that established a teaching adjustment
and that defined FTE, a variable in the IME formula,
based on the number of residents and interns employed
full time or more and one-half the total number employed
part time. 47 Fed. Reg. 43,296, 43,310 (Sept. 30, 1982). This
Federal Register notice, then, was the basis for the reg-
ulation defining the FTE count for the IME adjustment
1
Congress also allowed an adjustment for direct graduate
medical expenses (DGME), e.g., salaries, stipends and class-
room expenses, based on an FTE count. 42 U.S.C. § 1395ww(h).
When we use the term FTE, we mean the IME FTE.
No. 09-3429 5
which, after several regulatory amendments, evolved
into its 1996 version, at issue here. The 1996 version of the
regulation provides that, for residents enrolled in ap-
proved teaching programs:
In order to be counted, the resident must be assigned
to one of the following areas:
A. the portion of the hospital subject to the [PPS]
B. the outpatient department of the hospital2
C. . . . any entity receiving a grant under section
330 of the Public Health Service Act.
2
In 1985, Congress amended the relevant statute to require
reimbursement for residents working in outpatient depart-
ments of hospitals, which overrode the Secretary’s determina-
tion earlier that year to exclude these residents from the
FTE count because they were performing services still com-
pensated under the reasonable cost system. See Consolidated
Omnibus Reconciliation Act of 1985 (COBRA), Pub. L. No. 99-
272 § 9104; 50 Fed. Reg. 35,646, 35,681-82 (Sept. 3, 1985) (“It
is important to note that Medicare, in fact, continues to pay
for outpatient services on a reasonable cost basis, and these
costs include the indirect costs of services performed by
interns and residents treating outpatients. Continuing to pay
for them under the indirect medical education adjustment,
while simultaneously paying on a reasonable cost basis,
would pay for their indirect costs twice.”). Congress did not
provide much explanation for the decision to override the
secretary’s earlier decision to exclude from the FTE count
residents assigned to outpatient areas. See H.R. Rep. No. 99-
241(I) (1985), reprinted in 1986 U.S.C.C.A.N. 579, 593.
6 No. 09-3429
42 C.F.R. § 412.105(g)(1)(ii) (1996) (emphasis added). A
resident’s FTE status “is based on the total time neces-
sary to fill a residency slot,” 42 C.F.R. § 412.105(g)(1)(iii),
and some residents may be counted as “partial [FTEs]
based on the proportion of time assigned to an area of the
hospital listed in paragraph (g)(1)(ii) . . . compared to the
total time necessary to fill a full-time internship or resi-
dency slot.” Id.
In 2001, to “reiterate . . . longstanding policy regarding
time that residents spend in research,” 66 Fed. Reg. 22,646,
22,699 (May 4, 2001); see also 66 Fed. Reg. 39,828, 39,896-97
(Aug. 1, 2001), the Secretary again amended the regula-
tion at issue, this time to address (for a subsequent period)
the issue in this appeal. The Secretary excluded from
the FTE count, for a “portion of the hospital subject to
the [PPS]” and the “outpatient department,” “time spent
by a resident in research that is not associated with
the treatment or diagnosis of a particular patient.” 42
C.F.R. § 412.105(f)(1)(iii)(B) (2001) (the regulation had
been moved to subsection (f) after 1996). This amend-
ment was parroted in new statutory provisions enacted
as part of the health care reform legislation of this year,
discussed more fully below.
C. Administrative and district court decisions
In fiscal year 1996, the hospital included in its Medi-
care IME FTE count time residents spent on pure re-
search. After several levels of administrative review, the
Administrator of the Centers for Medicare and Medicaid
Services excluded this time from the count. The Adminis-
trator reviewed Medicare’s legislative and regulatory
No. 09-3429 7
history and concluded that, under the “reasonable cost”
system and the PPS, indirect costs unrelated to patient
care were never reimbursed under Medicare, and that
the applicable regulation governing the FTE count must
be interpreted to exclude those pure research costs
from the possible reimbursable costs. The Administrator
held that the regulation at issue is best read by inter-
preting “area” to be “sphere or scope of operation or
action” and by construing “assigned” as an operational
term. Supp. App. 38. The Administrator noted that,
because Medicare is a financing program, Medicare
conceives of a hospital as containing cost-reporting areas
rather than as a physical facility.
The district court disagreed with the Administrator
and held that “outpatient department” and “portion”
clearly referred to geographical locations within the
hospital facility. Univ. of Chi. Med. Ctr. v. Sebelius, 645
F. Supp. 2d 648, 653-54 (N.D. Ill. 2009). It interpreted
“area” as limited to its geographical definition because
“outpatient department” “clearly denotes a geographic
location” and therefore held that “portion” has a geo-
graphic meaning because “area” does. 645 F. Supp. 2d at
654 (applying the interpretive principle that a word used
multiple times in the same section of an enactment
or regulation has the same effect throughout). Conse-
quently, reasoned the district court, the plain text of the
regulation did not allow the Secretary to decrease the
hospital’s IME reimbursement because the hospital’s
residents were in the portion of the hospital subject to
PPS, even if they were conducting pure research. See id.
at 655.
8 No. 09-3429
II. Discussion
A. The parties’ positions
The questions on appeal are whether the hospital’s
residents in 1996 were assigned to (A) “the portion of the
hospital that is subject to the [PPS]” and whether the
Secretary’s interpretation of the regulation comports
with the underlying statute. The hospital reads the
terms “portion”, “area” and “assigned” to be spatial or
geographical terms and argues that the regulation is
clear on its face. That is, the hospital argues that, if the
hospital assigns its residents to the right places when
the FTE count is made—i.e., one of the physical spaces
in the hospital where services are compensated under
the PPS system—their time should be reimbursed
without further inquiry. Every district court to have
addressed the issue, including the district court in our
case, has held that the regulation at issue has no patient-
care requirement and therefore has agreed with a version
of the hospital’s position. See Henry Ford Health Sys. v.
Sebelius, 680 F. Supp. 2d 799 (E.D. Mich. 2009), appeal
docketed No. 10-1209 (6th Cir. Feb. 22, 2010); Univ. Med. Ctr.
Corp. v. Leavitt, No. 05-495, 2007 WL 891195 (D. Ariz. Mar.
21, 2007); R.I. Hosp. v. Leavitt, 501 F. Supp. 2d 283 (D. R.I.
2007), rev’d, 548 F.3d 29 (1st Cir. 2008); Riverside Methodist
Hosp. v. Thompson, 2003 WL 22658129, [2003-2 Transfer
Binder] Medicare & Medicaid Guide (CCH) ¶ 301,341
(S.D. Ohio July 31, 2003).
The government argues that the regulation contains
a patient-care requirement by reading the terms “portion”,
“area” and “assigned” to have a functional meaning. That
No. 09-3429 9
is, these terms condition Medicare reimbursement on the
services or functions performed involving residents’
activities. The government notes that PPS reimburses
medical services for patient care, not places in the
hospital and so “portion of the hospital that is subject to
the [PPS]” is plausibly a functional concept as well as a
physical location. The Secretary argues that, when resi-
dents are performing pure research, they are not “as-
signed” to the part of the hospital subject to the PPS
because the only costs incurred in that “portion” are the
patient-care-related, operating costs incurred while
providing inpatient hospital services. The First Circuit
agreed with the government. R.I. Hosp. v. Leavitt, 548
F.3d 29 (1st Cir. 2008). The words “patient care”, of
course, are not in the regulation.
To bolster their positions, the parties muster a variety
of statutes, regulations, auditing practices, statements of
legislative history and statements of the agency having
a variety of vintages to argue about the underlying
intent and purpose of the regulation. The government
invokes the history of Medicare and argues that the
IME was only meant to reimburse costs related to the
care of patients. The hospital, for its part, argues that
the IME had no such requirement and was an easy-to-
administer, rough proxy for indeterminate indirect costs
of teaching hospitals based on the number of residents
relative to the size of the hospital. We agree that the
plain language of the relevant part of the regulation,
read in context, suggests that the Secretary should
have been concerned only with the residents’ location in
10 No. 09-3429
calculating the IME FTE count. Given the muddle sur-
rounding adoption of a teaching adjustment to the PPS
to help out teaching hospitals, however, the answer
to whether the regulation allows the IME adjustment to
reimburse teaching hospitals for the costs of their resi-
dents’ pure research is less than clear. And, of course, if
we were faced with a possibly ambiguous regulation,
deference to the agency’s construction of an ambiguous
regulatory provision would be at its height. See Auer v.
Robbins, 519 U.S. 452 (1997) (internal citations omitted);
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)
(we generally defer to the Secretary’s interpretation of
regulations, especially of complex and highly technical
programs like Medicare). Luckily for us, however, Con-
gress stepped into the fray and provided us with a
clear, statutory answer.
B. The Patient Protection and Affordable Care Act
resolves this case
In March 2010, after oral argument in this appeal, the
President signed into law health-care-reform legislation
that amended the statute at issue. The parties disagree
about whether these amendments affect the outcome
of this appeal.
The Patient Protection and Affordable Care Act
(PPACA), Pub. L. No. 111-148 § 5505 (2010) amended
the relevant statute, 42 U.S.C. § 1395ww(d)(5)(B), in two
ways that affect the calculation of the IME FTE and,
particularly, whether costs incurred by residents per-
No. 09-3429 11
forming activities unrelated to patient care may be re-
imbursed by Medicare. Congress specified that, effec-
tive January 1, 1983 the IME FTE count includes: “all
the time spent by an intern or resident in an approved
medical residency training program in non-patient care
activities, such as didactic conferences and seminars . . . that
occurs in the hospital.” PPACA § 5505(b) (emphasis
added), (c)(1). At the same time, it also clarified that,
for periods after October 1, 2001 (and without “giv[ing]
rise to any inference as to how the law in effect prior
to such date should be interpreted”), “all the time
spent by an intern or resident in an approved medical
residency training program in research activities that are not
associated with the treatment or diagnosis of a particular
patient . . . shall not be counted.” PPACA § 5505(b), (c)(3).
Lastly, Congress addressed both research activities and
non-patient care activities related to the reimbursements
for direct graduate medical expenses (DGME), effective
January 1, 2009. For the DGME FTE count, all residents’
time is reimbursable, if residents, who are assigned to
a non-provider setting “that is primarily engaged in
furnishing patient care . . . [, are engaged in] non-patient
care activities, such as didactic conferences and seminars,
but not including research not associated with the treat-
ment or diagnosis of a particular patient . . . .” PPACA
§ 5505(a), (c)(2) (emphasis added).3
3
The term “non-patient care activities” appears nowhere else
in the law. “Research activities” is used in unrelated provisions
addressing the endeavors of those who may qualify for a tax
(continued...)
12 No. 09-3429
The parties dispute whether “non-patient care activi-
ties,” includes as a subset “research activities that are not
associated with the treatment or diagnosis of a particular
patient.” To us, in ordinary parlance, research activities
are clearly a subset of non-patient care activities. In addi-
tion, the amendments to the DGME reimbursement
also compel this understanding of the relation between
the two clauses (i.e., the “but not including” language
emphasized, supra).
The government responds that pure research is not a
subset of non-patient care activities, and it calls these
two “distinct regulatory categories,” without citation. The
government urges us to give teeth to the “no inferences”
language of PPACA, to heed our warning that “statutory
constructions that render another part of the same pro-
vision superfluous,” should be avoided, see Harrell v.
U.S. Postal Serv., 445 F.3d 913, 925 (7th Cir. 2006)
(internal citations omitted) and to remember the inter-
pretive principle that the specific trumps the general.
See In re Gulevsky, 362 F.3d 961, 963 (7th Cir. 2004).
Under its reading, therefore, Congress provided no
guidance about whether to allow Medicare reimburse-
ments for pure research until periods after Octo-
ber 2001, but specified that the IME FTE includes the
separate category of non-patient-care activities for all
3
(...continued)
break for research related to “therapeutic discovery projects”,
PPACA § 9023, research related to some congenital-heart-
disease-related programs, § 10411, and research for breast-
cancer-related programs, § 10413.
No. 09-3429 13
periods post-1983. In the government’s view, that is,
Congress declined to step on our toes and, instead, in-
tended to let us resolve this appeal without any
statutory interference.4
The hospital has the stronger position regarding the
effect of the PPACA on the present appeal because Con-
gress spoke clearly when it retroactively allowed reim-
bursement for non-patient care activities starting in
1983.5 This language calls into question the basic thesis
underlying the government’s argument, namely that
Medicare doesn’t (at least as of 1983) extend to non-
patient-care activities when it reimburses the indirect
costs of medical education. The government puts con-
siderable weight on the no-inferences clause to argue
that Congress left the issue with us and our sister cir-
cuits to address. We think, however, that this no-infer-
ences provision is unclear at best and, in any event, does
not contradict the clear meaning of the earlier language
4
The government informs us that there is no relevant legisla-
tive history interpreting this section of the PPACA and the
hospital likewise provides no legislative-history support for
its position.
5
As the hospital noted, the district court dismissed without
discussion any arguments that the hospital’s records were
incomplete as to whether the residents were assigned to the
portions of the hospital subject to the PPS or to the out-
patient department. The district court’s holding in favor of the
hospital necessarily depended on this finding, and we see no
reason to prolong this dispute by remanding the case as the
government requests.
14 No. 09-3429
allowing reimbursement for non-patient care activities
during the time period relevant to the present appeal.
We hold, therefore, that the hospital should have re-
ceived reimbursement as part of its IME adjustment
for pure research in 1996. We note that this position is
contrary to the First Circuit’s opinion, but the First
Circuit did not have the opportunity to consider Con-
gress’s health-care legislation, and we believe that leg-
islation is dispositive.
Because of this new statutory provision, therefore,
the district court’s judgment is A FFIRMED.
8-25-10