Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify
the Clerk of any formal errors in order that corrections may be made
before the bound volumes go to press.
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 7, 2002 Decided February 7, 2003
No. 01-5295
COMMUNITY CARE FOUNDATION,
F/K/A NORTHWEST MEDICAL SYSTEM, INC.,
D/B/A NORTHWEST MEDICAL CENTER,
APPELLEE
v.
TOMMY G. THOMPSON, SECRETARY OF THE
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 99cv02947)
Richard A. Olderman, Attorney, U.S. Department of Jus-
tice, argued the cause for appellant. With him on the briefs
were Roscoe C. Howard, Jr., U.S. Attorney, and Barbara C.
Biddle, Assistant Director, U.S. Department of Justice.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
Dan M. Peterson argued the cause and filed the brief for
appellee.
Before: SENTELLE, ROGERS and GARLAND, Circuit Judges.
Opinion for the Court filed by Circuit Judge SENTELLE.
SENTELLE, Circuit Judge: This is an appeal from the dis-
trict court’s ruling which reversed a decision of the Secretary
of Health and Human Services (‘‘HHS’’) that denied pass
through treatment for certain costs incurred by a provider
during its participation in a nursing education program.
Community Care Found. v. Thompson, No. 99CV02947
(D.D.C. June 18, 2001). Finding the rule relied upon by the
Secretary to be a reasonable interpretation of an ambiguous
statute and the present application of that rule supported by
substantial evidence, we reverse.
I
The Medicare program provides federally funded health
insurance for the aging and the disabled. 42 U.S.C. § 1395 et
seq. (1992 & West Supp. 2002). Medicare is administered by
the Centers for Medicare and Medicaid Services, formerly the
Health Care Financing Administration (‘‘HCFA’’) of HHS.
Part A of Medicare authorizes payment for covered care at
hospitals and other specified institutions. 42 U.S.C. § 1395c–
1395i–5. Part A services are furnished by ‘‘providers’’ who
have entered into agreements with the Secretary of HHS. 42
U.S.C. §§ 1395x(u), 1395cc. In order to receive payments
from HHS, providers must comply with the provider agree-
ment and with all relevant Medicare statutes and regulations.
42 U.S.C. § 1395cc(b)(2).
Medicare payments to a provider are based on a ‘‘cost
report’’ submitted by the provider at the close of each fiscal
year. 42 C.F.R. § 413.20(b) (2001). A cost report is filed
with a fiscal intermediary (‘‘FI’’), which is usually an insur-
ance company such as Blue Cross Blue Shield, designated by
the Secretary of HHS. 42 U.S.C. § 1395h; 42 C.F.R.
§ 413.20(d). The FI analyzes the report and issues a written
‘‘notice of amount of program reimbursement’’ (‘‘NPR’’). If
3
the provider is dissatisfied with the FI’s determination, the
provider may appeal to the Provider Reimbursement Review
Board (‘‘PRR Board’’). 42 U.S.C. § 1395oo(a)(3); 42 C.F.R.
§ 405.1835 (2001). The PRR Board’s decision may be re-
viewed by the Secretary’s delegate, in this case the Adminis-
trator of the HCFA. The HCFA may affirm, reverse, modi-
fy, or remand a PRR Board decision. 42 C.F.R. § 405.1875.
This result is subject to judicial review. 42 U.S.C.
§ 1395oo(f)(1).
From 1966 until 1983, Medicare reimbursed health care
providers based upon the ‘‘reasonable costs’’ of inpatient
services furnished to Medicare patients. 42 U.S.C.
§ 1395f(b). Under this regime, providers were reimbursed
for the actual costs they incurred, provided they fell within
certain cost limits. 42 U.S.C. § 1395x(v)(1)(A). As hospital
costs increased, so did Medicare reimbursements.
In 1983, in an effort to curtail escalating Medicare expendi-
tures, Congress revised the reimbursement scheme. Con-
gress adopted the Prospective Payment System (‘‘PPS’’),
which relies upon prospectively fixed rates (based upon geo-
graphic location and diagnosis) for each category of treatment
rendered. 42 U.S.C. § 1395ww. PPS was more restrictive
than the reasonable cost system.
Since the first Medicare regulations were issued in 1966,
the Secretary has permitted reimbursement for the costs of
‘‘approved educational activities.’’ 20 C.F.R. § 405.421 (1967),
later redesignated as 42 C.F.R. § 405.421 (1977), and then as
42 C.F.R. § 413.85 (1986). By regulation, the Secretary has
defined ‘‘approved educational activities’’ as ‘‘formally orga-
nized or planned programs of study usually engaged in by
providers in order to enhance the quality of patient care.’’ 42
C.F.R. § 413.85(c) (2001). This regulation, ever since its
origination, has expressed that the costs of educational activi-
ties should be borne by the community, but until communities
would undertake to bear these costs, the Medicare program
would share appropriately in the support. See 66 Fed. Reg.
3359 (Jan. 12, 2001). The regulation has also stated that it
was not intended that Medicare pay for increased costs
4
resulting from a redistribution of costs from educational
institutions to providers. Id.
In the early 1970s, the HCFA found that the Medicare
program’s liability for the costs of educational programs had
expanded to include the costs of some programs that were
actually run by universities with some support by providers.
The HCFA believed that these programs should not be
subsidized by Medicare. Accordingly, in 1975, the HCFA
adopted a standard that required that the provider be the
‘‘legal operator’’ of the education program in order to obtain
reimbursement for its associated costs. The HCFA modified
this standard following some adverse rulings, including a 1979
Seventh Circuit case which held that 42 C.F.R. § 405.421
does not require that a provider be the ‘‘legal operator’’ of an
educational program in order to qualify for reimbursement.
St. John’s Hickey Mem. Hosp., Inc. v. Califano, 599 F.2d 803
(7th Cir. 1979).
Following the Congressional adoption of PPS in 1983, the
Secretary once again issued new regulations. Although PPS
was stricter that the reasonable cost system that preceded it,
Congress retained the more lenient reasonable cost system
for ‘‘approved educational activities.’’ 42 U.S.C.
§ 1395ww(a)(4). The costs of approved educational activities
‘‘pass through’’ PPS and are reimbursed under the reasonable
cost system. 42 U.S.C. § 1395ww(a)(4), (d). The new regula-
tions that implemented PPS prohibited pass through treat-
ment for ‘‘[c]linical training of students not enrolled in an
approved education program operated by the provider’’ and
‘‘activities that do not involve the actual operation of an
approved education program.’’ 42 C.F.R. § 413.85(d)(6), (7).
As early as 1984, the Secretary had stated that ‘‘only the
costs of those approved medical education programs operated
directly by a hospital be excluded from [PPS].’’ Medicare
Program; Prospective Payment for Medicare Inpatient Hos-
pital Services, 49 Fed. Reg. 234, 267 (Jan. 3, 1984) (preamble
to rule) (emphasis added). The Secretary continued on in the
preamble:
5
If a program is operated by another institution, TTT [it]
must be noted that by far the majority of the costs of
that program are borne by that other institution, and not
by the hospital. While it is true that the hospital may
incur some costs associated with its provision of clinical
training to students enrolled in a nearby institution, the
hospital also gains in return. For example, it obtains the
services of the trainee TTT We do not believe that this
type of relationship was what Congress intended when it
provided for a pass through of the costs of approved
medical education programs. Rather, we believe that
Congress was concerned with those programs that a
hospital operates itself, and for which it incurs substan-
tial direct costsTTTT We are revising 405.421(d)(6) [now
413.85(d)(6)] to clarify that the costs of clinical training
for students enrolled in programs, other than at the
hospital, are normal operating costs.
Medicare Program; Prospective Payment for Medicare Inpa-
tient Hospital Services, 49 Fed. Reg. at 267.
In 1989 and 1990, Congress passed legislation (the Omnibus
Budget Reconciliation Act of 1989, Pub. L. No. 101–239, 103
Stat. 2106 (1989) (‘‘OBRA 89’’) and the Omnibus Budget
Reconciliation Act of 1990, Pub. L. No. 101–508, 104 Stat.
1388 (1990) (‘‘OBRA 90’’)) relating to the reimbursement of
costs associated with nursing education programs. Section
6205 of OBRA 89, Pub. L. No. 101–239, created a temporary
category of hospital-based nursing schools in addition to those
already recognized under 42 C.F.R. § 413.85. It permitted
reimbursement of a hospital’s reasonable costs of training
students in a hospital-based nursing school ‘‘if, before June
15, 1989, and thereafter, the hospital demonstrates that for
each year, it incurs at least 50 percent of the costs of training
nursing students at such school, the nursing school and
hospital share some common board members, and all instruc-
tion is provided at the hospital, or if in another building, a
building on the immediate grounds of the hospital.’’ 42
U.S.C. § 1395x note (Recognition of Costs of Certain
Hospital–Based Nursing Schools). Section 4004(b) of OBRA
90 allows reasonable cost reimbursement of the clinical train-
6
ing costs associated with nursing and allied health education
programs not operated by a hospital upon certain conditions.
42 U.S.C. § 1395ww note (Payments for Medical Education
Costs).
Appellee Community Care Foundation (‘‘Northwest’’), for-
merly Northwest Medical Systems, Inc., owns and operates
Northwest Medical Center, an acute care hospital in Spring-
dale, Arkansas. Baptist Medical Systems, Inc. (‘‘BMS’’) is an
Arkansas non-profit corporation. During the relevant time
period, BMS operated the Baptist Medical Systems School of
Nursing (‘‘BMSSN’’) at the Baptist Medical Center in Little
Rock, Arkansas.
On May 14, 1990, Northwest and Washington Regional
Medical Center (‘‘WRMC’’) entered into an agreement with
BMS to operate a nursing education program to benefit both
Northwest and WRMC. This agreement provided that BMS
would extend its nursing program by establishing a nursing
school at a facility provided by Northwest and WRMC. The
new school would be known as BMSSN–Northwest. North-
west and WRMC agreed to provide the site, equipment,
furnishings, and liability insurance, and to reimburse BMSSN
for all direct expenses that exceeded collections for tuition,
fees, and books. The agreement also provided that:
BMSSN shall have full and complete ownership of the
school, as well as full and complete charge of the admin-
istration, management and operation of BMSSN–North-
west. BMSSN shall also have the exclusive right to
determine and make all fiscal, technical and professional
policies relating thereto including, but not limited to, the
educational curriculum and the recruitment, selection,
and termination of faculty, staff and students TTT Curric-
ulum content, classroom instruction, and clinical laborato-
ry instruction shall be determined by BMSSN in its sole
discretion.
Agreement at 2–4.
The agreement set out BMSSN’s role as one of an ‘‘inde-
pendent contractor.’’ Id. at 6. Northwest and WRMC gen-
7
erally were not permitted to ‘‘have [ ]or exercise any control
over the professional judgment or methods used by BMSSN
in the performance of services’’ under the agreement. Id. at
6.
In its cost report for the fiscal year ending in June of 1991,
Northwest included $198,409 for costs relating to the
BMSSN–Northwest nursing education program. Northwest
claimed these as pass through costs subject to the more
favorable reasonable cost reimbursement. The Medicare re-
imbursement impact of the classification of these costs was
estimated to be $89,045.
The FI, Blue Cross/Blue Shield of Arkansas (‘‘BCBS’’),
issued an NPR reclassifying Northwest’s costs related to
BMSSN–Northwest. BCBS determined that Northwest was
not actually operating BMSSN–Northwest. Recognizing that
only those education programs actually operated by the pro-
vider could receive pass through treatment, BCBS concluded
that Northwest’s claimed costs should be treated as normal
operating costs subject to PPS. Northwest appealed this
determination to the PRR Board.
The PRR Board reversed BCBS’ decision and concluded
that Northwest had engaged in the joint operation of the
nursing education program. Northwest Med. Ctr. v. Blue
Cross & Blue Shield Ass’n/Blue Cross & Blue Shield of Ark.,
PRRB Dec. No. 99–D55 (June 20, 1995). The PRR Board
found four factors ‘‘significantly noteworthy’’ to this conclu-
sion: (1) Northwest’s nursing staff provided training and
supervision to the students; (2) the students interacted with
Northwest’s medical staff; (3) Northwest’s Director of Edu-
cation served as liaison between BMSSN and Northwest; and
(4) instructors and students on the Northwest campus were
subject to Northwest’s policies relating to patient care and
safety. Id. at 11–12.
The PRR Board also found that BMS was itself a Medicare
provider. The PRR Board noted that BMS is a non-profit
that directly owns and leases hospital facilities in the Medi-
care program; that no separate corporation existed for
BMSSN; and that BMS holds the nursing school license from
the Arkansas State Board of Nursing. Id. at 11. The PRR
8
Board found that Northwest and BMS were providers jointly
operating the nursing education program, and that North-
west’s costs associated with the program should be given pass
through treatment and reimbursed on the reasonable cost
system. The HCFA appealed this decision to the HCFA
Administrator.
The Administrator reversed the PRR Board. Northwest
Med. Ctr. v. Blue Cross & Blue Shield of Ark., Review of
PRRB Dec. No. 99–D55 (HCFA 1999). The Administrator
concluded that Northwest ‘‘was not the operator of the pro-
gram, nor the joint operator of the nursing program with
BMS/BMSSN as required by the PPS revised 42 CFR
413.85.’’ Id. at 10. The Administrator found that the four
factors cited by the PRR Board did not constitute ‘‘operation’’
of the program. Id. Instead, the Administrator focused on
the contractual nature of the arrangement, and decided that
Northwest ‘‘merely contracted for a service to be furnished
by BMS, the owner and operator of the nursing school.’’ Id.
Therefore, the Administrator found that 42 C.F.R.
§ 413.85(d)(6) barred reimbursement of Northwest’s costs of
participation in the nursing education program. The Admin-
istrator also ruled that BMS was not itself a provider. Rath-
er, BMS ‘‘is a corporation which owns several facilities which,
in turn, have provider agreements with the Medicare pro-
gram.’’ Id. at 10 n.22.
Northwest sought review of the Secretary’s decision in the
district court. (The Administrator’s decision constitutes the
final decision of the Secretary of HHS. Id. at 12.) The
district court reversed the Secretary’s decision. The district
court held that the Secretary’s decision to limit pass through
treatment to the costs of programs actually operated by the
provider was inconsistent with the intent of Congress and
unreasonable. The district court further found the Secre-
tary’s decision unsupported by substantial evidence because
the Secretary focused on the contractual terms of the agree-
ment among the parties without considering how the parties
acted in operating the program. The Secretary of HHS
appealed.
9
II
Section 1395ww(a)(4) of the Medicare statute excludes ‘‘ap-
proved educational activities’’ from the definition of ‘‘operat-
ing costs of inpatient hospital services,’’ which receive reim-
bursement according to PPS. 42 U.S.C. § 1395ww(a)(4).
The present case turns on the construction of the term
‘‘approved educational activities;’’ thus we turn to the familiar
two-step methodology of Chevron U.S.A. v. Natural Re-
sources Defense Council, 467 U.S. 837 (1984).
In interpreting an agency’s enabling or organic statute, we
‘‘employ traditional tools of statutory construction’’ to deter-
mine ‘‘whether Congress has directly spoken to the precise
question at issue.’’ Chevron, 467 U.S. at 843 n.9, 842. We
‘‘must give effect to the unambiguously expressed intent of
Congress;’’ if the statute is unambiguous on the question at
issue, our inquiry ends there. Id. at 842–43 (Chevron step
one). Where ‘‘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 upon a permissible construction of
the statute.’’ Id. at 843 (footnote omitted) (Chevron step
two). In addition, the ‘‘tremendous complexity’’ of the Medi-
care program enhances the deference due the Secretary’s
decision. Methodist Hosp. of Sacramento v. Shalala, 38 F.3d
1225, 1229 (D.C. Cir. 1994). The Supreme Court has stated
that the deference is ‘‘even more warranted’’ when the Secre-
tary’s interpretation concerns such a ‘‘complex and highly
technical regulatory program.’’ Thomas Jefferson Univ. v.
Shalala, 512 U.S. 504, 512 (1994) (quotation omitted).
Congress did not define ‘‘approved educational activities,’’
leaving the definition of that term to the Secretary. North-
west contends otherwise, arguing that the legislative history
of the PPS legislation establishes that Congress intended to
incorporate into PPS the extant definition of ‘‘approved edu-
cational activities’’ created by earlier regulations and case
law. The legislative history that Northwest cites reads:
‘‘Medical education expenses, such as the salaries of interns
and residents under approved education programs (as defined
in current regulation, including nursing education programs),
10
would continue to be paid on the basis of reasonable cost.’’
H.R. Rep. No. 98–25 at 140 (1983), reprinted in 1983
U.S.C.C.A.N. 219, 359 (emphasis added). According to
Northwest, this single statement from a House Report signals
unambiguous Congressional intent to incorporate into the
PPS system the extant definition of approved educational
facilities. Northwest argues that this bit of legislative history
renders section 1395ww(a)(4) unambiguous. We disagree.
As Judge Leventhal observed, reviewing legislative history is
like ‘‘looking over a crowd and picking out your friends.’’
Wald, Some Observations on the Use of Legislative History
in the 1981 Supreme Court Term, 68 Iowa L. Rev. 195, 214
(1983). Here, Northwest’s review of the legislative history
has produced but one ‘‘friend.’’ This solitary statement from
a House Report is insufficient to render unambiguous the
undefined term ‘‘approved educational activities’’ in section
1395ww(a)(4). And so we move to step two of the Chevron
analysis.
Since shortly after the advent of the PPS system, the
Secretary has adopted a construction of section 1395ww(a)(4)
that defines ‘‘approved educational activities’’ – the ones that
receive the more favorable reasonable cost reimbursement –
as those medical education programs that are ‘‘operated
directly’’ by a hospital. Medicare Program; Prospective
Payment for Medicare Inpatient Hospital Services, 49 Fed.
Reg. at 267; Northwest Med. Ctr. v. Blue Cross & Blue
Shield of Ark., Review of PRRB Dec. No. 99–D55, at 10
(HCFA 1999). Northwest urges a construction of section
1395ww(a)(4) that would allow reasonable cost reimbursement
for those programs that further the Secretary’s stated pur-
pose of prohibiting favorable treatment of costs redistributed
from a non-provider to a provider. Northwest argues that
the Secretary’s construction is unreasonable here because
there is no redistribution of costs in the present case. Even
assuming there is no redistribution of costs here, Northwest
overlooks another purpose underlying the Secretary’s rule.
The Secretary seeks to avoid granting favorable reimburse-
ment to any program that ‘‘is operated by another institution’’
that bears ‘‘the majority of the costs of that program.’’
11
Medicare Program; Prospective Payment for Medicare Inpa-
tient Hospital Services, 49 Fed. Reg. at 267. The Secretary
finds no reason to use federal taxpayer money to support a
program that already receives sufficient support from other
sources, especially where the provider receives some gain in
return for its contributions of resources to the program.
Next, Northwest suggests that the Secretary’s construction
argues that OBRA 89 and OBRA 90 significantly altered the
Secretary’s reimbursement scheme. This argument is a weak
one. OBRA 89 and OBRA 90 did not significantly alter the
reimbursement scheme; they merely set up limited excep-
tions where non-providers can be reimbursed subject to cer-
tain conditions. As Northwest’s arguments fail, we see that
the Secretary’s construction of section 1395ww(a)(4) is a
reasonable one. Hence, we defer to the Secretary’s construc-
tion.
Northwest further claims that the Secretary’s decision is
arbitrary and capricious because it is inconsistent with prior
decisions of the PRRB, St. Mary’s Med. Ctr. v. Blue Cross/
Blue Shield, PRRB No. 97–D82 (July 15, 1997); Barberton
Citizens Hosp. v. Blue Cross/Blue Shield, PRR Board No.
94–D61 (July 28, 1994); and St. Ann’s Hosp. v. Blue Cross/
Blue Shield, PRRB No. 93–D61 (July 21, 1993). These
decisions suggest that Northwest would need only to ‘‘en-
gage’’ in the nursing education program in order to be
entitled to pass through treatment. Whether or not the
Secretary could have departed from these decisions had they
been his own (and we note the Secretary’s contention that he
could have so departed), Provider Reimbursement Manual,
Part I, § 2927 (‘‘Decisions by the Administrator,’’ which con-
stitute the final decisions of the Secretary, ‘‘are not prece-
dents for application to other cases.’’), all the decisions came
from the PRR Board level. There is no authority for the
proposition that a lower component of a government agency
may bind the decision making of the highest level. As we
held in Amor Family Broadcasting Group v. FCC, 918 F.2d
960 (D.C. Cir. 1991), ‘‘even if these cases were found to evince
internal inconsistency at a subordinate level, the [agency]
itself would not be acting inconsistently.’’ Id. at 962. All
12
that we or the regulated entity can properly ask of the agency
is that it explain its departure. This the Secretary has
expressly done. Northwest Med. Ctr. v. Blue Cross & Blue
Shield of Ark., Review of PRRB Dec. No. 99–D55, at 10 n.21
(HCFA 1999). We require no more of the Secretary.
Northwest’s last argument requiring discussion is that the
Secretary’s decision is not based upon substantial evidence in
the record as required by the APA. 5 U.S.C. § 706(2)(E)
(1996). The Secretary’s decision that Northwest did not
directly operate the program was based upon a close reading
of the contract governing the operation of the program. As
outlined above, the contract sets up BMSSN as an ‘‘indepen-
dent contractor’’ with ‘‘full and complete ownership of the
school,’’ ‘‘full and complete charge of [its] administration,
management and operation,’’ and ‘‘the exclusive right to
determine and make all fiscal, technical and professional
policies relating thereto.’’ Agreement at 2. In addition, the
contract does not permit Northwest to ‘‘have [ ]or exercise
any control over the professional judgment or methods used
by BMSSN in the performance of services’’ under the agree-
ment. Id. at 6. Northwest acknowledges that the contract
sets up BMSSN, not Northwest, as the operator of the
program. However, Northwest contends that in reality
Northwest contributes greatly to the operation of the pro-
gram by paying for many of the costs associated with the
program, such as faculty salaries, and by providing facilities
for the program. Notwithstanding Northwest’s contribu-
tions, the contract between the parties clearly leaves North-
west with a role less than that of an operator of the program.
The contract itself constitutes substantial evidence for the
Secretary’s decision. Thus, we need not discuss the factors
relied upon by the PRR Board.
III
The Secretary’s interpretation of section 1395ww(a)(4) so as
to require ‘‘direct’’ operation of the program is a permissible
one. Furthermore, the Secretary’s application of that rule
here was supported by substantial evidence. The district
13
court erred in concluding otherwise. Accordingly, we re-
verse.
So ordered.