United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 2, 1998 Decided October 20, 1998
No. 97-5262
ParkView Medical Associates, L.P., d/b/a Parkview Regional
Medical Center, by Quorum Health Group of Vicksburg, Inc.,
its sole general partner,
Appellant
v.
Donna E. Shalala, Secretary of the Department of Health
and Human Services,
Appellee
Appeal from the United States District Court
for the District of Columbia
(No. 94cv01941)
Jonathan L. Rue argued the cause for appellant. With him
on the briefs was Ronald N. Sutter.
Laura E. Ellis, Attorney, U.S. Department of Health &
Human Services, argued the cause for appellee. With her on
the brief were Frank W. Hunger, Assistant Attorney Gener-
al, U.S. Department of Justice, Wilma A. Lewis, U.S. Attor-
ney, Harriet S. Rabb, General Counsel, U.S. Department of
Health & Human Services, and Lawrence J. Harder, Attor-
ney. James P. Ellison, Attorney, entered an appearance.
Before: Wald, Williams and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: ParkView Medical Associates
closed its purchase of a hospital in Vicksburg, Mississippi on
November 1, 1990 and renamed the hospital ParkView Re-
gional Medical Center.1 Because of the purchase, the hospi-
tal filed one report on its wages for the last four months
under the prior ownership (the first four months of its July 1
to June 30 reporting year), and another for the first eight
months of the new ownership (thus closing out the reporting
year). Had it filed a single report for the full twelve-month
period, it would have qualified for reclassification as "urban"
rather than "rural," and would thus have been entitled to
more generous Medicare reimbursement. ParkView sued the
Secretary of Health and Human Services, claiming that the
rules that brought about denial of reclassification were arbi-
trary and capricious. Although the application of those rules
in this case has produced a seeming anomaly, ParkView has
not shown the regulations to be arbitrary or capricious, and
we accordingly affirm the district court's grant of summary
judgment for the defendant.
* * *
Under Part A of Medicare, most hospitals are reimbursed
for their services to patients through a "fiscal intermediary,"
a private organization that acts as a go-between under agree-
ment with the Secretary. See 42 U.S.C. s 1395h. A hospital
receives a predetermined amount per patient discharged in
__________
1 Except when otherwise specified, we use "ParkView" to refer
to both the partnership and the hospital.
each particular "diagnosis related group," an amount set
annually by the Secretary. See id. s 1395ww(d).
Because hospital costs tend to be higher in urban areas
than in rural, the Secretary's reimbursement rates vary with
a hospital's geographic area. First, the rates are in part
based on the "average standardized amount," a figure calcu-
lated separately for "large urban," "urban," and "rural" areas.
See id., s 1395ww(d)(3)(D). Second, the rates are also in part
based on the "wage index" for a particular area, or the
relative wage level for that area compared to the national
wage level. See id. s 1395ww(d)(3)(E). Hospitals are initial-
ly classified according to actual location, but they may apply
for reclassification into a nearby area for purposes of using
that other area's standardized amount or wage index. See id.
s 1395ww(d)(10). Such applications are made to the Medicare
Geographic Classification Review Board, which resolves the
claims under guidelines set out by the Secretary. Its deci-
sions are appealable to the Secretary. See Id.
In September of 1993, ParkView sought reclassification for
wage index purposes from the rural Mississippi area to the
urban Jackson, Mississippi area during federal fiscal year
1995. In order to qualify for such reclassification, a hospital
must show--among other things--that its "average hourly
wage is at least 108 percent of the average hourly wage of
hospitals in the area in which the hospital is located." 42
CFR s 412.230(e)(1)(iii). The data used for this comparison
are the "data from the HCFA hospital wage survey used to
construct the wage index in effect for prospective payment
purposes during the fiscal year prior to the fiscal year for
which the hospital requests reclassification," id.
s 412.230(e)(2)(i), i.e., the data for the hospital itself that the
Secretary used in creating her wage index. As ParkView
requested reclassification for 1995, it had to meet the 108%
test with the data used to construct the fiscal year 1994 wage
index, which the Secretary had just finalized and was about to
put into effect.2
__________
2 The fiscal year 1994 wage index affected reimbursements to
hospitals for discharges occurring on or after October 1, 1993 and
before October 1, 1994. 58 Fed. Reg. 46,293 (1993).
ParkView Medical Associates had purchased the hospital
on November 1, 1990. A hospital that experiences a change
in ownership must file a terminating cost report at the end of
the seller's ownership, see id. s 413.24(f)(1), and has the
option of changing its cost reporting period for the future, see
id. s 413.24(f)(3). ParkView kept its old cost reporting
period: July 1 to June 30. It thus filed two consecutive
short-period reports: a four-month report for July 1, 1990 to
October 31, 1990 and an eight-month report for November 1,
1990 to June 30, 1991--the normal end of its reporting period.
But this brought ParkView up against another rule. The
1994 index was to be based on "data for hospital cost report-
ing periods beginning on or after October 1, 1989 and before
October 1, 1990 (FY 1990)." 58 Fed. Reg. 46,293 (1993).
Unfortunately for ParkView, the beginning date of its eight-
month report was a month after the end of the October-to-
October window; thus the report was not included in the 1994
wage index calculation. The result: ParkView could not use
the data from the eight-month report to show that it satisfied
the 108% test for reclassification. See 42 CFR
s 412.230(e)(2)(i). If calculated from a combination of the two
short-period reports' data, the average hourly wage would
have been 119.6589% of the local average. Apparently be-
cause of seasonal fluctuations, however, calculations based on
only the four-month data fell short of the 108% criterion by a
hair--107.5948%. The Medicare Geographic Classification
Review Board accordingly denied ParkView's request for
1995 reclassification, and the Secretary affirmed the denial.
* * *
Judicial review of the denial itself is barred. See 42 U.S.C.
s 1395ww(d)(10)(C)(iii)(II) ("The decision of the Secretary
shall be final and shall not be subject to judicial review.").
But this bar leaves hospitals free to challenge the general
rules leading to denial. See Universal Health Servs. v.
Sullivan, 770 F. Supp. 704, 710-12 (D.D.C. 1991); see also
Athens Community Hosp. v. Shalala, 21 F.3d 1176 (D.C. Cir.
1994) (striking down adjacency rule governing reclassifica-
tions). But cf. Skagit County Public Hosp. Dist. No. 2 v.
Shalala, 80 F.3d 379, 386-87 (9th Cir. 1996) (finding review
precluded if challenge brought "only to achieve reversal of the
reclassification decision"). Among those rules, ParkView
does not question the requirement of 42 CFR
s 412.230(e)(2)(i) that to satisfy the 108% requirement a
hospital must use the data that had been used in constructing
the wage index. Its attack on the Secretary's strict reliance
on data from cost reports starting within the October-to-
October window for those purposes, then, is necessarily an
attack on the construction of the 1994 wage index.3
We first note that the Secretary had good general reasons
for many of the elements in her data collection method for
this index. By using data for periods for which reports were
already filed with fiscal intermediaries and audited, rather
than a single uniform period, she avoided any need for
Procrustean adjustments of existing data or for generation of
entirely new data. See 58 Fed. Reg. 46,302 (1993) ("We
believe that the FY 1990 data is much more accurate than any
we have used previously.... [Those] data have been sub-
jected to comprehensive edits and revisions, both before and
after the publication of the proposed rule."). Similarly, the
use of a fixed one-year time window (in this case the federal
fiscal year), within which the start of a reporting period must
fall, obviously advances the interest in getting more-or-less
contemporaneous data that can be updated annually, as 42
U.S.C. s 1395ww(d)(3)(E) requires. See 58 Fed. Reg. 30,236
__________
3 ParkView repeatedly refers to its challenge as one to the
Secretary's "annualization" policy. It is true that she provided for
annualization of cost reports shorter or longer than a year--that is,
"dividing the data by the number of days in the cost report and
then multiplying the results by 365." 58 Fed. Reg. 46,298 (1993).
ParkView's claim, however, is not that the Secretary somehow
distorted the wage index by giving short cost reports excessive
weight, but that the Secretary wrongly made no provision for
inclusion of the second short-period report. Indeed, since the 108%
comparison is made on average hourly wages, it is not apparent that
non-annualization would have had any effect at all on ParkView's
reclassification claim.
(1993) (identifying FY 1990 window as response to this statu-
tory requirement).
The real question, then, is whether it was arbitrary and
capricious for the Secretary to fail to adopt a rule that would
more elegantly fit ParkView's special circumstance. Here,
inclusion of ParkView's two short periods would have pro-
duced the precise equivalent of inclusion of a single one-year
period starting July 1, 1990, and the Secretary does not offer
any reasons to contest ParkView's view that use of the one-
year data in constructing the wage index (and thus in adjudi-
cating ParkView's reclassification claim) would have yielded a
more accurate result.
But in considering ParkView's contention we cannot be
blinded by hindsight. Despite being notified in April 1993
that the Secretary's preliminary 1994 wage index calculation
used only the four-month report, ParkView made no protest
at the time. Indeed, it failed even to allude to the issue until
it filed its reclassification request in late September, weeks
after the index at issue had been finalized on September 1,
1993. See 58 Fed. Reg. 46,270 (1993). This is fatal to
ParkView's claim that the Secretary failed to explain this
feature of her choice. "[A]n agency 'cannot be expected to
make silk purse responses to sow's ear arguments.' Similar-
ly, a zero argument deserves a zero response." NRDC v.
EPA, 937 F.2d 641, 647-48 (D.C. Cir. 1991) (quoting City of
Vernon v. FERC, 845 F.2d 1042, 1047 (D.C. Cir. 1988)).
Since ParkView entirely failed to challenge the Secretary's
rule in the process of its adoption, we cannot fault the
Secretary for her failure to refute the unvoiced attack.
Hindsight similarly gives a false sheen to the alternative
now proposed by ParkView: "The Secretary should have
considered the possibility of using aggregate data from more
than one cost report for providers who continue in the
program after the sale of a facility and do not change their
fiscal year." In other words, according to ParkView, the
Secretary should have structured an exception fitted to Park-
View's particular case: where two short periods (one starting
after the close of the October-to-October window) add up to
exactly one year starting within the window. Unless such
period combinations are quite common, the Secretary might
reasonably believe that the added precision would not justify
the added complication. Such a conclusion would be especial-
ly defensible in the absence of evidence that the seasonal
variations that so unluckily affected ParkView are often deci-
sive. Further, and critically, ParkView has not shown that
the situations covered by its proposed exception were so
common, or that application of the Secretary's exceptionless
rule would ordinarily lead to consequences so outrageous,
that it was arbitrary and capricious for the Secretary not to
anticipate and correct the problem on her own--despite si-
lence from the parties most directly concerned.
To point up what it sees as the egregiousness of the
Secretary's supposed error, ParkView notes Secretarial de-
terminations that in its view show the common sense necessi-
ty of addressing the glitch of which it has run afoul. First, it
notes that the Secretary has permitted inclusion of cost
reports for hospitals with cost reporting periods longer than
52 weeks. But the periods involved were only very slightly in
excess of 52 weeks, and the decision was, like the use of
short-period reports, part of an effort to include data from as
many hospitals as possible. See 58 Fed. Reg. 46,298 (1993)
("The data were included because no data from these hospi-
tals would be available for the cost reporting period described
above, and particular labor market areas might be affected
due to the omission of these hospitals."). This concern seems
to us distinct from ParkView's concern here: whether the
data from a particular included hospital were sufficiently
accurate or representative.
ParkView also says that when the Secretary, in construct-
ing the 1995 wage index calculation, was confronted with two
ParkView reports that satisfied the October-to-October test
(the report for the eight-month period starting November 1,
1990 and the report for the full year starting July 1, 1991),
the Secretary excluded the short-period report. But we do
not see how the Secretary's decision to rely on a full year of
ParkView's experience, rather than the year plus an addition-
al eight months, speaks to the rationality of excluding periods
that do not start in the October-to-October window.
ParkView can, of course, always propose a change in the
regulations, and if it confronted the Secretary with a specific
alternative (and perhaps with data as well), Secretarial in-
transigence in favor of the present rule might be arbitrary
and capricious. See Health Insurance Ass'n of America v.
Shalala, 23 F.3d 412, 417 (D.C. Cir. 1994) (noting contingent
character of arbitrary and capricious classification). On the
present record, however, we cannot so characterize the meth-
od the Secretary used to calculate the 1994 wage index. We
therefore affirm the grant of summary judgment.
So ordered.