Southeast Alabama Medical Center v. Sebelius

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 14, 2009 Decided July 17, 2009

No. 08-5156

SOUTHEAST ALABAMA MEDICAL CENTER, ET AL.,
APPELLANTS

v.

KATHLEEN SEBELIUS,
APPELLEE

Appeal from the United States District Court
for the District of Columbia
(No. 1:04-cv-01143)

James F. Segroves argued the cause for appellants. With
him on the briefs was Malcolm J. Harkins III.

Henry C. Whitaker, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Gregory G. Katsas, Assistant Attorney General, Jeffrey A.
Taylor, U.S. Attorney, and Mark B. Stern, Attorney. R. Craig
Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: HENDERSON, TATEL, and GARLAND, Circuit
Judges.

Opinion for the Court filed by Circuit Judge GARLAND.
 2

GARLAND, Circuit Judge: Appellants are 113 inpatient
hospitals located in Alabama, Louisiana, and Mississippi. They
contend that the Department of Health and Human Services
(HHS) interpreted the Medicare reimbursement statute in a way
that improperly deprived them of millions of dollars. The
district court disagreed and granted summary judgment for the
Department. We affirm the district court’s judgment in all but
one respect.

I

In 1983, Congress revised the Medicare reimbursement
statute to move from a “reasonable cost” method of
retrospective compensation to the Prospective Payment System
(PPS). Social Security Amendments of 1983, Pub. L. No. 98-
21, § 601, 97 Stat. 65, 149; see Transitional Hosps. Corp. of La.
v. Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000); County of Los
Angeles v. Shalala, 192 F.3d 1005, 1008-09 (D.C. Cir. 1999).
Under this system, HHS reimburses hospitals that provide
inpatient care to eligible beneficiaries according to a
preestablished formula, regardless of the actual costs incurred.
42 U.S.C. § 1395ww(d). The payment rates are tied to the
national average cost of treating a patient in a particular
“diagnosis-related group” (DRG). Id. The statute mandates that
HHS adjust the standardized payment rates for area differences
in hospital costs, id. § 1395ww(d)(3)(E), which HHS
accomplishes through annual notice-and-comment rulemaking.
This case concerns the methodology that HHS used to make
these geographic adjustments in fiscal years (FY) 2003 and
2004.

During those years, the relevant statutory section, 42 U.S.C.
§ 1395ww(d)(3)(E), provided in relevant part:
 3

The Secretary shall adjust the proportion, (as estimated
by the Secretary from time to time) of hospitals’ costs
which are attributable to wages and wage-related costs,
of the DRG prospective payment rates computed under
subparagraph (D) for area differences in hospital wage
levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the
geographic area of the hospital compared to the
national average hospital wage level. Not later than
October 1, 1990, and October 1, 1993 (and at least
every 12 months thereafter), the Secretary shall update
the factor under the preceding sentence on the basis of
a survey conducted by the Secretary (and updated as
appropriate) of the wages and wage-related costs of
subsection (d) hospitals in the United States. Not less
often than once every 3 years the Secretary (through
such survey or otherwise) shall measure the earnings
and paid hours of employment by occupational
category and shall exclude data with respect to the
wages and wage-related costs incurred in furnishing
skilled nursing facility services.

42 U.S.C. § 1395ww(d)(3)(E) (2000) (emphases added).1 HHS
has traditionally referred to the “proportion” described in
§ 1395ww(d)(3)(E)’s first sentence as the “labor-related share,”
and has referred to the “factor” described in the first two
sentences as the “wage index.” Following the district court, we
will instead refer to these constructs by their statutory names and
will capitalize “Proportion” and “Factor” for purposes of clarity.
The measurement of “the earnings and paid hours of
employment by occupational category” described in the third

1
Unless otherwise indicated, citations to 42 U.S.C.
§ 1395ww(d)(3)(E) will refer to the version in effect during FY 2003
and 2004, as codified in the 2000 edition of the U.S. Code.
 4

sentence of § 1395ww(d)(3)(E) has traditionally been known as
the “occupational mix,” a term we will retain.

Although § 1395ww(d)(3)(E) is hardly a paragon of clarity,
the bottom line is as follows: The statute first requires HHS to
determine the Proportion of the DRG reimbursement that is
attributable to wages and wage-related costs. HHS must then
adjust that Proportion by a Factor reflecting the relative hospital
wage level in the hospital’s geographic area as compared to the
national average hospital wage level; the rest of the
reimbursement amount -- the share not attributable to wages or
wage-related costs -- is not adjusted. In addition, HHS must
adjust the Factor itself for occupational mix. But see infra Part
II.C (explaining that this last requirement is not applicable to the
fiscal years at issue on this appeal).

For FY 2003 and 2004, HHS determined the Proportion to
be 71.066 percent.2 The Factor varied significantly across
geographic areas, ranging in FY 2004 from a high of 1.51 in the
Oakland, California area to a low of 0.42 in northwest Puerto
Rico.3 As the mathematics worked out, hospitals in geographic
areas with Factors less than 1 -- i.e., hospitals in low-wage
regions -- wanted the Proportion to be as low as possible,
whereas hospitals in areas with Factors greater than 1 wanted the
Proportion to be as high as possible. In addition, every hospital

2
Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed.
Reg. 45,346, 45,468 (2003) [hereinafter FY 2004 Final Rule];
Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2003 Rates, 67 Fed. Reg. 49,982,
50,042 (2002) [hereinafter FY 2003 Final Rule].
3
Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates; Correction,
68 Fed. Reg. 57,732, 57,736-43 (2003).
 5

wanted its own area’s Factor to be as high as possible. The
hospitals bringing this case are all from areas that were assigned
Factors less than 1.4

The appellant hospitals challenged HHS’s final rules for FY
2003 and 2004 before the Department’s Provider
Reimbursement Review Board, see 42 U.S.C. § 1395oo(b),
which granted their request for expedited judicial review in the
United States District Court for the District of Columbia, see 42
U.S.C. § 1395oo(f)(1). The hospitals raised four main
arguments before the district court. First, they contended that
during the fiscal years in question, HHS violated
§ 1395ww(d)(3)(E) by including in the Proportion hospital
expenses that were not “attributable to wages and wage-related
costs” and that did not vary on a local basis. Second, they

4
The government provides an example to illustrate how
reimbursement payments would have been calculated “for treatment
in a diagnostic category with a payment level of $10,000”:

The part of that payment attributable to wage-related costs
[the Proportion] would be subject to adjustment. For FY
2004, the [Proportion] was approximately 71 percent;
accordingly, $7,100 was subject to adjustment. That $7,100
would be multiplied by the relevant [Factor]. In Oakland,
where the FY 2004 [Factor] was 1.51, the [Proportion]-related
payment would thus be adjusted upward to $10,721[,] with a
total payment of $13,621 [i.e., $10,721 plus the non-wage-
related share of $2,900, calculated by subtracting $7,100 from
$10,000]. In rural Louisiana, where the wage index was .75,
the calculation would result in a total payment of $8,225 [i.e.,
($7,100 x .75) + $2,900] for the same diagnostic category.

HHS Br. 4 n.1. Hence, as a consequence of the Proportion and Factor,
a hospital in Oakland would be reimbursed $5,396 more than a
hospital in rural Louisiana for providing the same type of treatment.
 6

argued that the Department’s decision to include certain cost
items in the Proportion but not in the Factor violated the plain
language of the statute and was arbitrary and capricious. Third,
they argued that HHS also violated the statute and acted
arbitrarily and capriciously by failing to adjust the Factor for
occupational mix. Finally, they maintained that HHS violated
the statute by failing to account for interstate employment when
calculating the Factor.

The district court rejected all of these arguments and
granted summary judgment for the government. Se. Ala. Med.
Ctr. v. Leavitt, 539 F. Supp. 2d 352 (D.D.C. 2008). The court
found that HHS’s interpretation of “wages and wage-related
costs” in the Proportion was consistent with the words’ ordinary
meaning, id. at 357-58; that the statute permitted HHS to use
different cost items in the Proportion as compared to the Factor,
id. at 359; that there was “no basis on [the] record on which to
conclude that the Secretary’s choice to not collect [data on
occupational mix] in time . . . to be applied in [FY 2003 and
2004] was unambiguously forbidden by the statute” or otherwise
unreasonable, id.; and that the hospitals’ failure to raise their
interstate employment argument before the Provider
Reimbursement Review Board barred them from raising it in
court, id. at 360.

The hospitals now appeal, making the same four arguments.
We address each of them below. We note, however, that
although resolution of these arguments has financial significance
for the appellants’ FY 2003 and 2004 claims, the significance of
the arguments for any subsequent-year claims is extremely
limited. See Oral Arg. Recording at 7:57-8:05 (acknowledgment
by counsel for appellants that their primary arguments in this
case “do not affect [them] for the future”). The import of the
first two arguments was greatly diminished if not negated by a
statutory amendment, effective in FY 2005, which directs HHS
 7

to “substitute ‘62 percent’ for the [P]roportion” unless doing so
“would result in lower payments to a hospital than would
otherwise be made.” Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, Pub. L. No. 108-173,
§ 403(a)(1), 117 Stat. 2066, 2265 (codified at 42 U.S.C.
§ 1395ww(d)(3)(E)(ii)). And as explained in Part II.C below,
appellants’ third argument was mooted by statutory amendments
to the provision regarding occupational mix.

II

In reviewing HHS’s actions on appeal from the district
court, this “court addresses the issue de novo, without deference
to the decision of the district court.” Methodist Hosp. of
Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C. Cir. 1994).
We review the Department’s interpretation of provisions of the
Medicare statute under the two-step framework of Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984). Under that framework, “[i]f the intent of Congress
is clear, . . . [a court] must give effect to the unambiguously
expressed intent of Congress.” Id. at 842-43. But “if the statute
is silent or ambiguous with respect to the specific issue,” the
court must uphold the agency’s interpretation as long as it is
reasonable. Id. at 843. We review other aspects of HHS’s
actions under the Administrative Procedure Act (APA), pursuant
to which we will uphold them unless they are “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2)(A); see 42 U.S.C.
§ 1395oo(f)(1).

A

The hospitals’ primary target on appeal is the Proportion --
that is, “the proportion . . . of hospitals’ costs which are
attributable to wages and wage-related costs.” 42 U.S.C.
 8

§ 1395ww(d)(3)(E). For the fiscal years in question, HHS
interpreted the phrase “costs which are attributable to wages and
wage-related costs” to include “wages[,] salaries, [and] fringe
benefits,” as well as “professional fees, contract labor, postage,
business services, and labor-intensive services.” FY 2003 Final
Rule, 67 Fed. Reg. at 50,041; see FY 2004 Final Rule, 68 Fed.
Reg. at 45,467-68. “Each of these categories,” HHS has said,
“is classified as labor-related because it consists of direct
payments to labor inputs by the hospital or hospital payments for
services that are very labor intensive.” Medicare Program;
Changes to the Inpatient Hospital Prospective Payment System
and Fiscal Year 1991 Rates, 55 Fed. Reg. 35,990, 36,046 (1990)
[hereinafter FY 1991 Final Rule]. The hospitals object to three
cost items that HHS included in its calculation of the Proportion.

1. First and foremost, the hospitals maintain that HHS
should not have included payments made for hospital
employees’ health insurance, worker’s compensation insurance,
pension plans, and other fringe benefits because they are not
“wages” or “wage-related.” But the Medicare statute defines
neither “wages” nor “wage-related,” and there is nothing
unreasonable about HHS’s determination that these cost items
fit within common definitions. As the district court noted, some
dictionaries define the term “wage,” itself, to include fringe
benefits. See, e.g., WEBSTER’S THIRD NEW INTERNATIONAL
DICTIONARY OF THE ENGLISH LANGUAGE UNABRIDGED 2568
(1976) (defining a “wage” as “a pledge or payment of usually
monetary remuneration by an employer especially for labor or
services usually according to contract and on an hourly, daily,
or piecework basis and often including bonuses, commissions,
and amounts paid by the employer for insurance, pension,
hospitalization, and other benefits” (emphases added)
(abbreviations in original replaced with whole words)). In any
event, fringe benefits -- which are part of the compensation an
employee receives for his or her services -- fit comfortably
 9

within the broad meaning of the term “wage-related.” See id. at
1916 (defining “related” as “having relationship: connected by
reason of an established or discoverable relation”); see also
Morales v. Trans World Airlines, Inc., 504 U.S. 374, 383 (1992)
(“The ordinary meaning of [‘relating to’] is a broad one[,] . . .
and the words thus express a broad [statutory] purpose.”);
Moshea v. NTSB, No. 08-1218, --- F.3d ---, --- (D.C. Cir. June
30, 2009) (“Without getting into a metaphysical discussion of
the meaning of the phrase ‘related to,’ it suffices here to say that
the words ‘related to’ are broad.”).

The hospitals also maintain that HHS wrongly included the
cost of payments for insurance premiums, pensions, and other
fringe benefits because such costs do not vary based on local
labor markets. It is true that the Secretary has found it relevant,
in determining whether a cost item is wage-related, to examine
whether the item varies with the local labor market. For
example, the 2004 final rule stated that “[w]e define the
[Proportion] to include all costs that are likely related to,
influenced by, or vary with local labor markets, even if they
could be purchased in a national market.” FY 2004 Final Rule,
68 Fed. Reg. at 45,468 (emphasis added). But although HHS’s
statements on this issue are not crystal clear, we do not read
them as declaring that only costs that vary with local labor
markets may be included in the Proportion.

Nor does the statute itself impose such a requirement. The
statute provides only that the Secretary must, first, estimate the
Proportion of hospitals’ costs “which are attributable to wages
and wage-related costs,” 42 U.S.C. § 1395ww(d)(3)(E), and,
second, adjust that Proportion “for area differences in hospital
wage levels by [the] [F]actor,” id. The geographic element
enters at step two -- in the calculation of the Factor -- and not at
step one’s calculation of the Proportion. As counsel for HHS
correctly noted at oral argument, the Proportion and the Factor
 10

are “two different moving parts that work together” to
accomplish the purpose of adjusting PPS payments for area
wage differences, and the role of the Proportion is to define the
“universe” of costs that the Factor adjusts on this basis. Oral
Arg. Recording at 21:01-26.

Accordingly, while it might have been reasonable for HHS
to restrict the Proportion to cost items that vary on a local basis,
it was not unreasonable for the agency to decline to do so. See
Entergy Corp. v. Riverkeeper, Inc., 129 S. Ct. 1498, 1505 (2009)
(holding that an agency’s “view governs if it is a reasonable
interpretation of the statute -- not necessarily the only possible
interpretation, nor even the interpretation deemed most
reasonable by the courts”). Even if the hospitals are correct that
the costs of fringe-benefit items used to calculate the Proportion
do not vary with local labor markets -- a proposition that is not
obvious and certainly not proven -- it would not establish a
violation of the Medicare statute or the APA.

2. The hospitals also contend that the agency erred by
including in the Proportion payments to independent contractors
for certain nonmedical services. These include the services of
landscapers, accountants, and lawyers. In the district court, the
hospitals asserted that only amounts “paid directly by the
hospital to the individual providing the service to the hospital,
whether that individual is an independent contractor or a
hospital employee,” were appropriately included. Se. Ala. Med.
Ctr., 539 F. Supp. 2d at 357. Although this, too, might have
been a reasonable line to draw, it is not the only reasonable line.
As the district court found, “[t]he statute does not expressly limit
the wages and wage-related costs to those paid by the hospital
directly to an individual, as opposed to some third-party
employer of individuals providing hospital services.” Id.
Rather, the statute simply directs HHS to include costs that are
“attributable to wages and wage-related costs,” 42 U.S.C.
 11

§ 1395ww(d)(3)(E) (emphasis added), and payments to third
parties to provide workers reasonably fall within that category.
Indeed, when a hospital hires an outside entity to provide
individuals to perform services for which it might otherwise
have used or hired its own employees, the hospital incurs costs
that it would otherwise have spent directly on wages. See
Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2003 Rates, 67
Fed. Reg. 31,404, 31,447 (2002) [hereinafter FY 2003 Proposed
Rule] (“By capturing more than just the direct labor costs[,] . . .
our definition captures the ‘buy-versus-hire’ decisions hospitals
make in the purchase of their inputs.”).

On appeal, the hospitals take a somewhat different tack,
suggesting that the line should be drawn against including fees
paid for “non-health-care-related” or “nonmedical” services,
while permitting the inclusion of payments to “non-employee
independent contractors such as physicians.” Appellants’ Br.
20; see id. at 22-23, 34-37. Again, this might have been a
reasonable line to draw. But the statute merely requires the
inclusion of “costs which are attributable to wages and wage-
related costs,” 42 U.S.C. § 1395ww(d)(3)(E), and HHS did not
act unreasonably in interpreting that phrase to include
nonmedical costs.5

5
The hospitals make three further arguments that also fail to
persuade. First, they suggest that HHS’s habit of referring to the
Proportion as the “labor-related share,” rather than the “wage-related
share,” betrays a lack of fidelity to the statutory text. Yet while the
term “labor-related share” may be an infelicitous shorthand, it carries
no legal force. Second, they cite the Internal Revenue Code for a
more restrictive definition of “wages” than the one used by HHS. The
tax code, however, is not germane to this unrelated area of law;
indeed, the Supreme Court has “pointed out that the word ‘wages’ has
different meanings under different statutes.” United States v. Davis,
154 F.2d 314, 317 (D.C. Cir. 1946) (citing Williams v. Jacksonville
 12

3. Finally, the hospitals challenge HHS’s decision to
include postage costs in calculating the Proportion, and with this
they strike a heavier blow. HHS initially proposed to exclude
postage from the Proportion in FY 2003, see FY 2003 Proposed
Rule, 67 Fed. Reg. at 31,447, but ultimately declined to do so in
that year and in both of the next two. In its FY 2006
rulemaking, however, HHS changed its mind, concluding:

We do not believe that we should continue to include
postage costs in the [Proportion] as postage fees are set
at nationally uniform rates and are not affected by local
purchasing power of hospitals. The cost of postage is
primarily influenced by weight of the package and the
distance the package is traveling.

Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2006 Rates, 70
Fed. Reg. 47,278, 47,395-96 (2005) (citation omitted). The
question is whether there was any reasonable ground for
including postage costs in the fiscal years under challenge here.

In its FY 2003 and 2004 final rules, HHS gave no reason at
all for deciding against its initial proposal to revise the
Proportion by excluding postage.6 HHS’s briefs offer one

Terminal Co., 315 U.S. 386 (1942)). Finally, the hospitals claim that
HHS’s definition of the Proportion is inconsistent with its own cost-
reporting worksheet. See Addendum to HHS Br. at 56 (reproducing
the worksheet). The worksheet, however, is not inconsistent with the
agency’s definition. See, e.g., id. at line 9 (directing hospitals to report
fees paid to certain independent contractors as “Other Wages &
Related Costs”).
6
The HHS brief states that the Secretary “decided not to make
that and other revisions to the [Proportion] because he was concerned
that the proposed revisions resulted in a net increase in the
 13

somewhat opaque rationale, citing the Department’s 1990
statement that it includes “very labor-intensive” services in the
Proportion. FY 1991 Final Rule, 55 Fed. Reg. at 36,046 (quoted
in HHS Br. at 26). Yet even assuming that postage (or mail
delivery) is very labor-intensive, HHS does not argue that
postage is materially more labor-intensive than other excluded
services or explain why postage was included while other very
labor-intensive services were not. Cf. Oral Arg. Recording at
30:38-59 (acknowledgment by HHS that “we have no position
on what kind of detailed analysis might support [the
determination] that postage is or is not labor-intensive”).

It cannot be the case that every service purchased by a
hospital that is very labor-intensive is therefore “attributable to”
the hospital’s “wages and wage-related costs.” 42 U.S.C.
§ 1395ww(d)(3)(E). Although much labor surely goes into the
manufacture of ambulances, HHS does not contend that the
entire purchase price of an ambulance can be counted toward the
Proportion. HHS must explain why the cost of the stamps on a
hospital’s letters is wage-related while the cost of the ambulance
in its garage or the grapes in its cafeteria is not. “Until the
Secretary provides such an explanation,” this court “cannot
evaluate whether the Secretary’s interpretation of the statute is
reasonable within the meaning of Chevron step two.” Kidney
Ctr. of Hollywood v. Shalala, 133 F.3d 78, 88 (D.C. Cir. 1998).

In the previous section, we concluded that HHS reasonably
classified payments to certain independent contractors as “wages

[Proportion], which would have harmed rural hospitals like plaintiffs.”
HHS Br. 25-26 (citing FY 2003 Final Rule, 67 Fed. Reg. at 50,042
(first emphasis added)). But neither the brief nor the final rules
suggest that excluding postage alone would have had that harmful
result (and no doubt it would not have), or that there was any need to
tie postage to the other proposed revisions.
 14

or wage-related” where the contractors provided workers whom
the hospital might otherwise have hired directly. Such
payments, the Department reasonably explained, “capture[] the
‘buy-versus-hire’ decisions hospitals make in the purchase of
their inputs.” FY 2003 Proposed Rule, 67 Fed. Reg. at 31,447.
But that rationale cannot justify including postage costs as
wages or wage-related, as there is no realistic possibility that a
hospital would hire its own employees to deliver any significant
fraction of its mail.

HHS does point out that it has counted postage costs toward
the Proportion since the PPS system was first established. But
that is history, not explanation. No matter how consistent its
past practice, an agency must still explain why that practice
comports with the governing statute and reasoned
decisionmaking. Although it does motivate us to give the
agency another chance to provide an adequate explanation, no
amount of historical consistency can transmute an unreasoned
statutory interpretation into a reasoned one. Cf. Smiley v.
Citibank (S.D.), N.A., 517 U.S. 735, 740 (1996) (“To be sure,
agency interpretations that are of long standing come before us
with a certain credential of reasonableness, since it is rare that
error would long persist. But neither antiquity nor
contemporaneity with the statute is a condition of validity.”).

In sum, although HHS has reasonably explained why two
of the three cost categories that appellants challenge come
within the statutory Proportion, it has failed to provide such an
explanation for postage. We therefore remand this issue for
HHS to provide an adequate explanation, if it can. See
Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm’n, 988
F.2d 146, 150-51 (D.C. Cir. 1993).7

7
At oral argument, HHS contended for the first time that the
hospitals’ postage argument was waived because they did not raise it
 15

B

The hospitals’ next contention is that HHS’s decision to
include certain contract labor cost items in the Proportion, but
not in the Factor, conflicts with the Medicare statute and the
APA. The hospitals reject the explanation that HHS provided in
its rulemaking: although the agency possessed adequate data to
include nonmedical professional fees and certain other labor-
intensive services in the Proportion, it lacked adequate data to
include them in the Factor. See FY 2004 Final Rule, 68 Fed.
Reg. at 45,399; FY 2003 Final Rule, 67 Fed. Reg. at 50,022-23.
If the data were not good enough for the Factor, the hospitals
contend, then they cannot have been good enough for the
Proportion.

The hospitals’ argument overlooks the textual and
functional differences between the Proportion and the Factor.
Whereas the statute provides that the Proportion shall be
“estimated by the Secretary,” it states that the Factor shall be
updated “on the basis of a survey conducted by the Secretary.”
42 U.S.C. § 1395ww(d)(3)(E). Whereas the Proportion need
only be estimated “from time to time,” the Factor must be
updated “at least every 12 months.” Id. And whereas the
Proportion measures “hospitals’ costs which are attributable to

with the agency at the appropriate time. This contention is itself
waived because HHS did not raise it with this court at the appropriate
time. See Ark Las Vegas Rest. Corp. v. NLRB, 334 F.3d 99, 108 n.4
(D.C. Cir. 2003) (holding that points raised for the first time at oral
argument are waived); Belton v. Washington Metro. Area Transit
Auth., 20 F.3d 1197, 1202 (D.C. Cir. 1994) (holding that a party may
waive its own waiver argument by not raising it in a timely fashion on
appeal). In any event, the hospitals did raise the argument before the
agency. See Appellants’ Additional Excerpts from the Administrative
Record 269a-70a, 418a.
 16

wages and wage-related costs,” Congress intended the Factor to
“reflect[] the relative hospital wage level in the geographic area
of the hospital compared to the national average hospital wage
level.” Id. The statute thus makes clear that the Proportion and
the Factor are not identical constructs. Accordingly, the
Secretary has some discretion to construct them in non-identical
ways.

A point of particular significance is that an “estimate[]” is
not the same thing as a determination based on a “survey.” To
estimate the national total costs of any category of hospital
expenditure for the Proportion, HHS only had to possess
sufficiently valid and reliable aggregate data -- from whatever
source -- on which to base its figures. For this purpose, HHS
found, statistics developed by outside entities like the
Department of Commerce were appropriate. By contrast, the
statute limits the Factor to expenditures that can be measured
“on the basis of a survey” that reflects relative hospital wage
levels by geographic area. For that purpose, HHS collected
wage-and-hour information from hospitals. Those surveys
asked for data on wages and hours of hospital employees and of
contractors that provided direct patient-care services. But HHS
did not believe that hospitals could reliably report the wages and
hours associated with other contractors that provided services
that affected patient care indirectly, often at off-site facilities.
See, e.g., Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 1997 Rates, 61
Fed. Reg. 46,166, 46,182 (1996).

The hospitals do not challenge HHS’s assessment of these
collection difficulties, nor do they explain why the data HHS
relied upon for the Proportion were deficient for its purpose.
Even if it would have been preferable for the Department to use
identical cost items in the Proportion and the Factor, we cannot
say that the limited deviations it permitted were unreasonable.
 17

Cf. Methodist Hosp. of Sacramento, 38 F.3d at 1230 (“The
statute does not specify how the Secretary should construct the
[Factor], nor how often she must revise it, although these
methodological issues both bear significantly on the accuracy of
the Secretary’s adjustments. Rather, Congress through its
silence delegated these decisions to the Secretary.”).

C

The hospitals’ third contention is that HHS violated the
Medicare statute by failing to adjust the Factor to account for
occupational mix, notwithstanding “Congress’s unambiguous
instruction that he do so unless it was not ‘feasible.’”
Appellants’ Br. 14. This claim fails because the congressional
instruction cited by the hospitals did not apply to the fiscal years
at issue in this case.

For many years, § 1395ww(d)(3)(E) provided that the
survey on which the Factor is based “shall measure”
occupational mix “[t]o the extent determined feasible by the
Secretary.” See, e.g., 42 U.S.C. § 1395ww(d)(3)(E) (1994). It
is undisputed that, until 2004, HHS had never taken such
measurements. On December 21, 2000, however, Congress
repealed this discretionary language and replaced it with the
following new language: “Not less often than once every three
years the Secretary (through such survey or otherwise) shall
measure” data on occupational mix. Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000, Pub.
L. No. 106-554 App. F, § 304(c), 114 Stat. 2763A-463, 2763A-
495 (codified in part at 42 U.S.C. § 1395ww(d)(3)(E)). An
uncodified provision of that legislation further instructed the
Secretary to “first complete” the collection and measurement of
occupational mix data “[b]y not later than September 30, 2003,
for application beginning October 1, 2004” -- that is, for
 18

application beginning in FY 2005. Id. § 304(c)(3), 114 Stat. at
2763A-495.

The consequence of these amendments was that, by the end
of the 2000 calendar year, § 1395ww(d)(3)(E) no longer
required the Secretary to measure data on occupational mix if he
determined it was feasible -- just that he do so in time for
application in FY 2005. In short, for the fiscal years relevant to
this case (2003 and 2004), § 1395ww(d)(3)(E) gave the
Secretary a pass with respect to occupational mix. The
Medicare statute therefore provides no support for the hospitals’
claim.

Recognizing the obstacle that the 2000 amendments pose
for their argument, the hospitals cite the general savings statute,
1 U.S.C. § 109,8 for the proposition that Congress’s “subsequent
. . . imposition of a firm deadline to fix a problem that the
Secretary had created and continued for years” -- the failure to
adjust the Factor for occupational mix -- “does not absolve the
Secretary of liability for his past misconduct.” Appellants’ Br.
55. The hospitals’ reliance on § 109 is misplaced. Even if
HHS’s longstanding failure to measure data regarding
occupational mix constituted a violation of the prior version of
§ 1395ww(d)(3)(E) -- a point we need not decide -- § 109 would

8
Section 109, entitled “Repeal of statutes as affecting existing
liabilities,” states in pertinent part:

The repeal of any statute shall not have the effect to release or
extinguish any . . . liability incurred under such statute, unless
the repealing Act shall so expressly provide, and such statute
shall be treated as still remaining in force for the purpose of
sustaining any proper action or prosecution for the
enforcement of such . . . liability.

1 U.S.C. § 109.
 19

at most suggest that the 2000 amendments did not “release or
extinguish any . . . liability incurred under” that prior version.
1 U.S.C. § 109. But the hospitals do not claim that they are
owed anything on account of liabilities incurred by HHS prior
to December 2000. Their claim is that HHS violated
§ 1395ww(d)(3)(E) by failing to adjust the Factor for
occupational mix in FY 2003 and 2004. And that is a claim as
to which both the pre-amendment Medicare provision and the
savings statute are irrelevant.

D

Finally, the hospitals allege that HHS impermissibly failed
to account for interstate employment, particularly “nurse
migration,” in calculating the Factor. The inputs to the Factor,
they note, “do not take into account the fact that hospitals in
neighboring . . . areas often compete with each other for the
same employee pool.” Appellants’ Br. 56. As a consequence,
HHS “established reimbursement rates that are too low to permit
hospitals in low-[Factor] states . . . to effectively compete for
employees with neighboring states that have higher [Factors].”
Id. This, the hospitals maintain, violates the statutory command
that the Factor “reflect[] the relative hospital wage level in the
geographic area of the hospital compared to the national
average hospital wage level.” 42 U.S.C. § 1395ww(d)(3)(E)
(emphasis added).

The government contends that we should not reach this
claim because the hospitals failed to raise it before the Provider
Reimbursement Review Board. The hospitals insist that they
did raise it. Although the record is not entirely clear, it contains
at least one submission that in our view did raise the nurse
migration argument specifically with respect to FY 2004. See
Supp. J.A. 110a.
 20

In any event, the argument fails on its merits. Section
1395ww(d)(3)(E) provides only that the Factor should “reflect[]
the relative hospital wage level in the geographic area of the
hospital compared to the national average hospital wage level.”
42 U.S.C. § 1395ww(d)(3)(E). As the Second Circuit has found,
“the statute leaves considerable ambiguity as to the term
‘geographic area,’ which, based only on the literal language of
the provision, could be as large as a several-state region or as
small as a city block.” Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d
163, 175 (2d Cir. 2006). As that court further found, HHS’s
longstanding policy of using Metropolitan Statistical Areas
(MSAs) -- which can be interstate -- to define those “geographic
areas” is a reasonable response to this ambiguity. Id. at 167,
175-78. If it was reasonable for HHS to define “geographic
area” in the Factor by reference to the MSA classifications, it
was likewise reasonable for the agency to decline to complicate
matters by layering in a dynamic model of migratory and
commuting patterns. The statute does not define “geographic
area,” much less require HHS to take into account the movement
of workers across such areas.

The hospitals do not seriously dispute any of this, nor
suggest any mechanism by which HHS could have measured
inter-area effects, nor explain why such an effort would have led
to a sounder result. Whether or not it would have been desirable
for the Department to adjust the Factor on the basis of inter-area
employment, it was reasonable for it to decline to do so.

III

For the foregoing reasons, we affirm the judgment of the
district court in part, reversing solely with respect to HHS’s
decision to include postage costs in the Proportion. We remand
the case to the district court with instructions to remand it to
 21

HHS for further consideration on that issue consistent with this
opinion.

So ordered.