Swedish American Hospital v. Leavitt

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

SWEDISH AMERICAN HOSPITAL, :
:
Plaintiff, : Civil Action No.: 08-2046 (RMU)
:
v. : Re Document Nos.: 28, 32
:
KATHLEEN SEBELIUS, :
Secretary of the Department of :
Health and Human Services, :
:
Defendant. :

MEMORANDUM OPINION

GRANTING IN PART AND DENYING IN PART THE PLAINTIFF’S
MOTION FOR SUMMARY JUDGMENT; GRANTING IN PART AND DENYING IN PART THE
DEFENDANT’S CROSS-MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

This matter comes before the court on the parties’ cross-motions for summary judgment.

In September 2008, the Department of Health and Human Services (“HHS”) issued an

administrative ruling that required the plaintiff, a hospital in Rockford, Illinois, to repay several

million dollars to the Medicare program for the training of its medical residents. The plaintiff

commenced this action challenging the ruling under the Administrative Procedure Act (“APA”),

5 U.S.C. §§ 701 et seq., arguing that the defendant should be estopped from demanding

reimbursement. For the following reasons, the court grants in part and denies in part the parties’

respective motions, and remands the matter to the administrative agency for further proceedings

regarding the plaintiff’s alleged entitlement to relief under 42 C.F.R. § 412.86(g)(8).
 II. BACKGROUND

A. Legal Framework

1. Medicare Reimbursement of Medical Education Costs

Medicare provides health insurance to the elderly and disabled by entitling eligible

beneficiaries to have payment made on their behalf for the care and services rendered by health

care providers. See 42 U.S.C. §§ 1395 et seq. Providers, in turn, are reimbursed by insurance

companies, known as “fiscal intermediaries,” that have contracted with the DHS to aid in

administering the Medicare program. See id. § 1395h. Fiscal intermediaries determine the

amount of reimbursement due to providers under the Medicare Act and applicable regulations.

See id.

Providers that train residents in approved residency programs may be reimbursed for the

costs of “graduate medical education” (“GME”) and “indirect medical education” (“IME”). See

42 U.S.C. § 1395ww. One variable used to calculate the reimbursable GME and IME costs

allocable to a provider is the number of full-time equivalent (“FTE”) residents in that provider’s

training program. See id. A high GME or IME FTE resident count yields a correspondingly

high GME or IME payment for the provider. See id.

To receive reimbursement for these services rendered to Medicare beneficiaries, a

provider must submit a yearly “cost report” to its fiscal intermediary, in which it demonstrates

the costs incurred during the previous fiscal year and the portion of those costs allocable to

Medicare. See 42 C.F.R. § 413.20. The fiscal intermediary may audit the cost report before

determining the total amount of reimbursement to which the hospital is entitled, which is then

memorialized in a Notice of Program Reimbursement (“NPR”). See id. § 405.1803. The fiscal

intermediary may reopen and revise a cost report within three years after the date of the NPR.

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Id. § 405.1885.

2. The FTE Resident Cap

In the Balanced Budget Act of 1997 (“BBA”), Congress capped the number of residents

that a hospital may count for purposes of calculating the IME adjustment and GME payments.

42 U.S.C. §§ 139ww(d)(5)(B). More specifically, for cost reporting periods beginning on or

after October 1, 1997, the BBA limited the number of GME FTEs and IME FTEs that a hospital

could count for the purpose of calculating GME and IME payments to the FTEs in “the

hospital’s most recent cost reporting period ending on or before December 31, 1996” (“FTE

resident cap”). Id.

As evidenced by the BBA’s legislative history, Congress was concerned with how best to

design and calculate the FTE resident cap. H.R. Conf. Rep. No. 105-217, at 821-22 (1997), as

reprinted in 1997 U.S.C.C.A.N. 176, 441-42. Recognizing the complexity of the issues raised,

Congress chose to delegate to the defendant the task of implementing rules to govern the FTE

resident cap. Id. In delegating this rule-making authority, Congress noted that the defendant

should “give special consideration to facilities that meet the needs of underserved rural areas.”

Id. Similarly, Congress instructed the defendant to apply the “proper flexibility to respond to

[the] changing needs” of training programs; such flexibility, however, would necessarily be

“limited by the conference agreement that the aggregate number of FTE residents should not

increase over current levels.” Id.

The defendant promulgated regulations implementing the FTE resident cap in 1997. See

42 C.F.R. §§ 413.86(g)(4), 412.105(f)(1)(iv) (1997) (“1997 Final Rule”). The defendant

subsequently revised the regulations concerning the GME and IME resident caps in 1998, 1999

and 2001. See 42 C.F.R. §§ 413.86, 412.105 (1998) (“1998 Final Rule”); 42 C.F.R. §§

3
413.86(g)(8) (1999) (“the 1999 Final Rule”); 42 C.F.R. §§ 413.86(g)(8)(iii), 412.105(f)(1)(ix)

(2001) (“the 2001 Final Rule”). Through these regulations, the defendant carved out exceptions

to the FTE resident cap, two of which are relevant here: (1) the Affiliated Group Exception and

(2) the Temporary Cap Increase Exception.

3. Affiliated Group Exception

In 1997, the defendant issued a regulation stating that “[h]ospitals that are part of the

same affiliated group may elect to apply the limit on an aggregate basis” (“the Affiliated Group

Exception”). 42 C.F.R § 413.86(g)(4) (1997) (“1997 Final Rule”). Initially, the defendant

narrowly defined an “affiliated group” as “two or more hospitals located in the same geographic

wage area . . . in which individual residents work at each of the hospitals seeking to be treated as

an affiliated group during the course of the approved program.” Id. The regulation did not

address whether a written agreement was necessary to demonstrate the existence of an affiliated

group. See generally id.

In 1998, the defendant issued revised regulations which provided further guidance

regarding the requirements to qualify under the Affiliated Group Exception. See 42 C.F.R. §

413.86(b)(2). More specifically, the 1998 Final Rule expanded the definition of affiliated group

to include providers in contiguous areas that were under common ownership. Id. Additionally,

the preamble to the 1998 Final Rule clarified the documentation needed to demonstrate the

existence of an affiliated group for cap sharing purposes, stating that

[h]ospitals that qualify to be members of the same affiliated group for the current
residency training year and elect an aggregate cap must provide an agreement to
the fiscal intermediary and the HCFA specifying the planned changes to
individual hospital count under an aggregate FTE cap by July 1 for . . . the
residency training year. Each agreement must be for a minimum of one year and
may specify the adjustment to each respective hospital cap under an aggregate cap
in the event the agreement terminates, [or] dissolves. . . . [Further] [e]ach

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 agreement must specify that any positive adjustment for one hospital must be
offset by a negative adjustment for the other hospital of at least the same
amount.

63 Fed. Reg. 26318, 26341 (May 12, 1998); see also 42 C.F.R. 413.86(g)(7)(ii) (2002)

(incorporating the language used in the preamble of the 1998 Final Rule into the text of the 2002

Final Rule). Additionally, the defendant stated that “[h]ospitals that no longer have a

relationship for training residents do not meet the criteria for being members of the same

affiliated group even if those hospitals jointly participated in residency training in the past.” 63

Fed. Reg. at 26341.

2. The Temporary Cap Increase Exception

The second relevant regulatory exception to the FTE resident cap applies in

circumstances in which a hospital closes or discontinues its resident training program

(“Temporary Cap Increase Exception”). Unlike the Affiliated Group Exception, the Temporary

Cap Increase Exception was not articulated in the original 1997 Final Rule, but was, instead, first

addressed in the preamble to the 1998 Final Rule. See 63 Fed. Reg. at 26330. The relevant

passage states that a temporary adjustment to the FTE resident cap may be appropriate “[w]hen a

hospital takes on residents because another hospital closes or discontinues its program.” Id. The

rule is grounded in the notion that “[i]n these situations, residents may have partially completed a

medical residency training program and would be unable to complete their training without a

residency position at another hospital.” Id. Somewhat inconsistently, however, the defendant

appears in the same preamble to limit the Temporary Cap Increase Exception solely to hospital

closures, stating that the agency

believe[s] that it is appropriate to allow temporary adjustments to the FTE caps
for a hospital that provides residency positions to medical residents who have
partially completed a residency training program at a hospital which closed. For

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 purposes of this final rule, we will allow for temporary adjustments to a hospital’s
FTE cap to reflect residents affected by a hospital closure.

Id.

The defendant did not include language addressing the Temporary Cap Increase

Exception in the text of the 1998 Final Rule. See generally 42 C.F.R. §§ 413.86, 412.105

(1998). In 1999, however, the defendant revised the regulations so as to allow a temporary

adjustment to the FTE resident cap following a hospital’s closure. See 42 C.F.R. § 413.86(g)(8)

(1999). The preamble to the 1999 Final Rule further articulated that the Temporary Cap Increase

Exception does not apply to circumstances “other than hospital closures because, unless the

hospital actually terminates its Medicare agreement, it will retain its statutory FTE cap” and “can

still decide to train residents at the hospital or affiliate with other hospitals for purposes of

establishing an aggregate cap.” 64 Fed. Reg. 41490, 41522-23 (July 30, 1999).

In 2001, the defendant expanded the Temporary Cap Increase Exception to cover

circumstances in which a hospital assumes the training of additional residents because of another

hospital’s termination of its residency program. See 42 C.F.R. §§ 413.86(g)(8), 412.105(f)(1)(ix)

(2001); 66 Fed. Reg. 39828, 39899 (Aug. 1, 2001). Notably, this amendment only applied to

cost reporting periods and discharges beginning on or after October 1, 2001. 66 Fed. Reg. at

39899.

B. Factual & Procedural History

The plaintiff is a teaching hospital and Medicare provider located in Rockford, Illinois.

Compl. ¶¶ 1, 11. It trains residents to become family practice physicians through its

participation in the Family Practice Residency Program (“the residency program”), a program

sponsored by the University of Illinois College of Medicine. Id. ¶¶ 12-14.

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 During fiscal years 1995 and 1996, another hospital, St. Anthony Medical Center (“St.

Anthony”), also participated in the residency program. Id. ¶¶ 17-18. In 1996, St. Anthony

withdrew from the program and the plaintiff absorbed the residents that St. Anthony would

otherwise have trained. Id.

After the plaintiff took on the residents who had been training at St. Anthony, the

plaintiff contacted the fiscal intermediary, Mutual of Omaha (“Mutual”), which advised the

plaintiff to adjust its GME and IME FTE resident caps upward to reflect the fact that the plaintiff

had assumed the former St. Anthony residents. Id. ¶¶ 18-19. As a result, the plaintiff’s NPRs for

fiscal years 1998 through 2002 were based on FTE resident caps that reflected both the residents

trained by the plaintiff and the residents previously trained at St. Anthony. Id. ¶ 20.

In February 2005, Mutual reopened the cost reports for fiscal years 1999 through 2002 1

and adjusted the plaintiff’s FTE resident caps downward to omit consideration of the residents

who had previously trained at St. Anthony. Id. ¶¶ 21-22. Likewise, Mutual omitted

consideration of St. Anthony’s residents in the NPR that it issued for fiscal year 2003. Id. ¶ 23.

After the plaintiff appealed Mutual’s determination, the Provider Reimbursement Review Board

(“PRRB”) issued a ruling affirming Mutual’s adjustments on September 30, 2008. Id. ¶ 25. This

determination resulted in Medicare recouping nearly $5 million from the plaintiff. Id.

1
Because the NPR for fiscal year 1998 was issued in February 2000, see Compl. ¶ 37, the three-
year limitation period for reopening a cost report had elapsed by the time Mutual issued the
Notices of Reopening in February 2005, see id. ¶ 21.

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 The plaintiff commenced this action in November 2008, alleging that the agency’s

decision violated the APA. 2 Id. ¶¶ 66-87. In March 2010, the court declined to dismiss the

claims against the defendant. See Mem. Op. (Mar. 5, 2010) at 15. The parties have now filed

cross-motions for summary judgment. With the motions ripe for adjudication, the court turns to

the applicable legal standards and the parties’ arguments.

III. ANALYSIS

A. Legal Standard for a Motion for Summary Judgment

Summary judgment is appropriate when the pleadings and evidence show “that there is

no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of

law.” FED. R. CIV. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);

Diamond v. Atwood, 43 F.3d 1538, 1540 (D.C. Cir. 1995). To determine which facts are

“material,” a court must look to the substantive law on which each claim rests. Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A “genuine dispute” is one whose resolution

could establish an element of a claim or defense and, therefore, affect the outcome of the action.

Celotex, 477 U.S. at 322; Anderson, 477 U.S. at 248.

In ruling on a motion for summary judgment, the court must draw all justifiable

inferences in the nonmoving party’s favor and accept the nonmoving party’s evidence as true.

Anderson, 477 U.S. at 255. A nonmoving party, however, must establish more than “the mere

existence of a scintilla of evidence” in support of its position. Id. at 252. To prevail on a motion

2
The plaintiff also asserted tort claims against Mutual and its successor-in-interest, but the court
dismissed these claims for lack of jurisdiction in an earlier ruling. See Mem. Op. (Mar. 5, 2010)
at 11-12.

8
for summary judgment, the moving party must show that the nonmoving party “fail[ed] to make

a showing sufficient to establish the existence of an element essential to that party’s case, and on

which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322. By pointing to

the absence of evidence proffered by the nonmoving party, a moving party may succeed on

summary judgment. Id.

The nonmoving party may defeat summary judgment through factual representations

made in a sworn affidavit if he “support[s] his allegations . . . with facts in the record,” Greene v.

Dalton, 164 F.3d 671, 675 (D.C. Cir. 1999) (quoting Harding v. Gray, 9 F.3d 150, 154 (D.C. Cir.

1993)), or provides “direct testimonial evidence,” Arrington v. United States, 473 F.3d 329, 338

(D.C. Cir. 2006). Indeed, for the court to accept anything less “would defeat the central purpose

of the summary judgment device, which is to weed out those cases insufficiently meritorious to

warrant the expense of a jury trial.” Greene, 164 F.3d at 675.

B. Legal Standard for APA Review of the PRRB’s Decision

Pursuant to the Medicare statute, the court reviews PRRB decisions in accordance with

standard of review set forth in the APA. 42 U.S.C. § 1395oo(f)(1); Thomas Jefferson Univ. v.

Shalala, 512 U.S. 504, 512 (1994); Mem’l Hosp./Adair Cnty Health Ctr., Inc. v. Bowen, 829 F.2d

111, 116 (D.C. Cir. 1987). The APA requires a reviewing court to set aside an agency action

that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or

“unsupported by substantial evidence in a case . . . otherwise reviewed on the record of an

agency hearing provided by statute.” 5 U.S.C. § 706(2)(A), (E). The “arbitrary and capricious”

9
standard and the “substantial evidence” standard “require equivalent levels of scrutiny.” 3 Adair

Cnty, 829 F.2d at 117. Under both standards, the scope of review is narrow and a court must not

substitute its judgment for that of the agency. Motor Veh. Mfrs. Ass’n v. State Farm Mutual Ins.

Co., 463 U.S. 29, 43 (1983); Gen. Teamsters Local Union No. 174 v. Nat’l Labor Relations Bd.,

723 F.2d 966, 971 (D.C. Cir. 1983). As long as an agency has “examined the relevant data and

articulated a satisfactory explanation for its action including a rational connection between the

facts found and the choice made,” courts will not disturb the agency’s action. Md. Pharm., Inc.

v. Drug Enforcement Admin., 133 F.3d 8, 16 (D.C. Cir. 1998). The burden of showing that the

agency action violates the APA standards falls on the provider. Diplomat Lakewood Inc. v.

Harris, 613 F.2d 1009, 1018 (D.C. Cir. 1979); St. Joseph’s Hosp. (Marshfield, Wis.) v. Bowen,

1988 WL 235541, at *3 (D.D.C. Apr. 15, 1988).

In reviewing an agency’s interpretation of its regulations, the court must afford the

agency substantial deference, giving the agency’s interpretation “controlling weight unless it is

plainly erroneous or inconsistent with the regulation.” 4 Thomas Jefferson Univ., 512 U.S. at 512

(internal quotations omitted); Presbyterian Med. Ctr. of Univ. of Pa. Health Sys. v. Shalala, 170

F.3d 1146, 1150 (D.C. Cir. 1999); see also Qwest Corp. v. Fed. Commc’ns Comm’n, 252 F.3d

462, 467 (D.C. Cir. 2001) (stating that the court would reverse an agency’s reading of its

3
This Circuit has explained that the substantial evidence standard is a subset of the arbitrary and
capricious standard. Sithe/Indep. Power Partners v. Fed. Energy Regulatory Comm’n, 285 F.3d
1, 5 n.2 (D.C. Cir. 2002). “While the substantial evidence test concerns support in the record for
the agency action under review, the arbitrary and capricious standard is a broader test subsuming
the substantial evidence test but also encompassing adherence to agency precedent.” Mem’l
Hosp./Adair Cnty Health Ctr., Inc. v. Bowen, 829 F.2d 111, 117 (D.C. Cir. 1987).
4
“[A court’s] review in such cases is ‘more deferential . . . than that afforded under Chevron.’”
Wyo. Outdoor Council v. U.S. Forest Serv., 165 F.3d 43, 52 (D.C. Cir. 1999) (quoting Nat’l Med.
Enters. Inc. v. Shalala, 43 F.3d 691, 697 (D.C. Cir. 1995)).

10
regulations only in cases of a clear misinterpretation). “So long as an agency’s interpretation of

ambiguous regulatory language is reasonable, it should be given effect.” Wyo. Outdoor Council

v. United States Forest Serv., 165 F.3d 43, 52 (D.C. Cir. 1999). Where the regulations involve a

complex, highly technical regulatory program such as Medicare, broad deference is “all the more

warranted.” Thomas Jefferson Univ., 512 U.S. at 512 (internal quotations omitted); Presbyterian

Med. Ctr., 170 F.3d at 1151. As for interpretive guides, they are without the force of law but

nonetheless are entitled to some weight. Furlong v. Halala, 156 F.3d 384, 393 (2d Cir. 1998).

C. The Court Grants in Part and Denies in Part the Defendant’s Motion for
Summary Judgment & Grants in Part and Denies in Part the
Plaintiff’s Motion for Summary Judgment

In its motion, the plaintiff argues that (1) the government should be “estopped from

denying reimbursement to [the plaintiff],” (2) “the PRRB decision is inconsistent with

Congressional intent” and (3) “the PRRB decision and [the defendant’s] actions were arbitrary

and capricious.” Pl.’s Mot. at 23. The defendant responds that, as a matter of law, a claim of

estoppel against the government is not viable where a Medicare provider has relied on the

erroneous advice of a fiscal intermediary. Def.’s Cross-Mot. at 2. The defendant further

contends that its refusal to increase the plaintiff’s resident caps was reasonable “given the clear

language of the [BBA] and the lack of any applicable regulatory exception.” Id. The court

addresses each of these arguments below.

1. The Defendant Cannot Be Estopped From Recovering Medicare Funds Provided to the
Plaintiff Based on Erroneous Advice Provided By the Fiscal Intermediary

The plaintiff first argues that the defendant should be estopped from seeking

reimbursement of Medicare funds disbursed to the plaintiff because the plaintiff reasonably and

detrimentally relied on erroneous advice it had received from Mutual. Pl.’s Mot. at 23. Because

11
this advice was “so closely connected to the basic fairness of the administrative decision[-

]making process,” the plaintiff argues, the defendant “should be estopped from disavowing the

misstatement.” Id. The plaintiff further asserts that estoppel is especially appropriate here

because the defendant has been unjustly enriched by receiving the benefits of having additional

residents educated by the plaintiff. Id. at 29-30. In response, the defendant argues that Supreme

Court precedent precludes the plaintiff from demonstrating reasonable reliance based on

reimbursement-related advice and the conduct of a Medicare fiscal intermediary. 5 Def.’s Cross-

Mot. at 35.

“Estoppel is an equitable doctrine invoked to avoid injustice in particular cases.” Heckler

v. Cmty Health Servs., 467 U.S. 51, 59 (1984). A party attempting to apply equitable estoppel

against the government must show, inter alia, that “the party relied on its adversary’s conduct in

such a manner as to change his position for the worse [and that] the party’s reliance was

reasonable.” Keating v. Fed. Energy Regulatory Comm’n, 569 F.3d 427, 434 (D.C. Cir. 2009)

(internal citations omitted). Reasonable reliance means that “the party claiming the estoppel did

not know nor should it have known that its adversary’s conduct was misleading.” Cmty Health

Servs., 467 U.S. at 59.

“The fundamental principle of equitable estoppel applies to government agencies, as well

as private parties.” ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104, 1111 (D.C. Cir. 1988); see

also Office of Pers. Mgmt. v. Richmond, 496 U.S. 414, 426 (1990) (declining to accept the

government’s “argument for an across-the-board no-estoppel rule”). It is clear, however, that the

5
The defendant argues, in the alternative, that the record shows “that any advice [the plaintiff]
received from Mutual was not final or concrete, and it was not reasonable for [the plaintiff] to
rely upon it.” Def.’s Cross-Mot. at 39. The court does not reach this argument because, as
discussed below, the plaintiff’s reliance on advice by a fiscal intermediary was unreasonable. See
Heckler v. Cmty Health Servs., 467 U.S. 51, 60 (1984).

12
doctrine’s “application to the government must be rigid and sparing.” ATC Petroleum Inc., 860

F.2d at 1111; see also Int’l Union v. Clark, 2006 WL 2590846, at *12 (D.D.C. Sept. 11, 2006)

(observing that “[t]here is a clear presumption in this Circuit against invoking the [estoppel]

doctrine against government actors in any but the most extreme circumstances”), as not “a single

case [before the Supreme Court] has upheld an estoppel claim against the Government for the

payment of money,” Richmond, 496 U.S. at 426; see also ATC Petroleum Inc., 860 F.2d at 1111

(noting that the Circuit has also not applied estoppel to require payment from the government).

In determining whether the plaintiff’s reliance on Mutual’s advice was reasonable, the

Supreme Court’s decision in Heckler v. Community Health Services, 467 U.S. 51 (1984), is

particularly instructive. In Community Health Services, the respondent, a Medicare provider,

invoked estoppel after it had relied on erroneous information provided by a fiscal intermediary.

Cmty Health Servs., 467 U.S. at 59. The Supreme Court held that, as a participant in the

Medicare program, the respondent had “a duty to familiarize itself with the legal requirements

for cost reimbursement.” Id. at 64. This obligation included acquainting itself “with the nature

of and limitations on the role of a fiscal intermediary.” Id. The Supreme Court explained that

[t]here is simply no requirement that the Government anticipate every problem
that may arise in the administration of a complex program such as Medicare;
neither can it be expected to ensure that every bit of informal advice given by its
agents in the course of such a program will be sufficiently reliable to justify
expenditure of [substantial] sums of money.

Id. The Court held that “[a]s a recipient of public funds well acquainted with the role of a fiscal

intermediary, [the Medicare provider] knew [that the fiscal intermediary] only acted as a conduit;

it could not resolve policy questions.” Id. at 64-65. Thus, the Court concluded that a Medicare

participant’s reliance on a fiscal intermediary’s erroneous advice was “insufficient to raise []

13
estoppel” against the government because the advice should not have “induced [the participant’s]

reliance” in the first place. Id.

Here, as in Community Health Services, when questions arose concerning the plaintiff’s

FTE resident count, the plaintiff “made no attempt to have the question resolved by the

Secretary” or any other legal authority and was instead “satisfied with the policy judgment” of

the fiscal intermediary, a “mere conduit.” Id. at 64. Because the plaintiff’s reliance on Mutual

was unreasonable, id.; see also Bradley Mem. Hosp. v. Leavitt, 599 F. Supp. 2d 6, 15 (D.D.C.

2009) (holding that the plaintiffs’ decision “to rely on statements made by the [fiscal]

intermediary’s employees cannot now be blamed on the Secretary”); Monongahela Valley Hosp.,

Inc. v. Sullivan, 945 F.2d 576, 589 (3d Cir. 1991) (“Because a fiscal intermediary can neither

definitively interpret regulations nor make policy pronouncements, [the Medicare provider’s]

contention that it reasonably relied on [a fiscal intermediary’s] representation . . . misapprehends

the nature of the relationship between the [f]iscal [i]ntermediary and the Secretary.”), the

defendant cannot be estopped from demanding reimbursement for the costs of training residents

in excess of its allotted FTE residents under the BBA based on the erroneous advice provided by

Mutual.

2. The PRRB’s Decision Does Not Contravene Congress’s Intent

The plaintiff argues that the PRRB’s decision must be set aside as inconsistent with the

Congressional intent underlying the BBA. Pl.’s Mot. at 30-31. The plaintiff contends that by

enacting the BBA Congress intended to maintain the status quo with respect to the number of

resident training positions available on a national level – what the plaintiff refers to as a “national

cap.” Id. at 30-31. Therefore, the plaintiff suggests that it could use St. Anthony’s FTE resident

counts as long as it would not adjust the national cap figure. See id. The plaintiff acknowledges

14
that Congress also intended to institute a “facility cap,” which would limit the individual medical

provider’s FTE resident count. Id. Nevertheless, the plaintiff suggests that this facility cap was

intended to be shared by the facilities in a common area, so that those FTE resident positions that

were not utilized by one-area hospital could be used by another hospital. See id. In support of

this theory, the plaintiff asserts that the BBA “allows [the defendant] to make adjustments to the

number of FTEs at each hospital as long as the aggregate number of FTEs in the area remains

capped.” Id. at 31. The plaintiff further contends that Congress intended that the defendant be

“flexible” in administrating the FTE resident cap “so that the Medicare program could respond to

changing needs,” such as “hospitals initiating and terminating teaching programs.” Id. The

plaintiff concludes that the PRRB’s decision is inconsistent with Congressional intent because it

fails “to follow the Congressional mandate to be flexible and refusing to recognize the national

cap.” Id.

The defendant, in turn, contends that Congress’s objective in enacting the BBA was not

to impose a “national cap,” which would maintain Medicare costs at the status quo, but rather

that Congress sought to reduce costs by decreasing the number of resident slots paid for through

Medicare. Def.’s Cross-Mot. at 30. The defendant further argues that even if Congress intended

to impose a national cap, the text of the BBA clearly imposes a facility-level cap as well. Id.

Although the defendant acknowledges that Congress required it to be flexible when “applying

the cap limit to new, not already-established programs” and to promulgate regulations to address

the implementation of the provision of the BBA at issue, the defendant argues that Congress did

not require it to “promulgate regulations or exercise flexibility in the way that the plaintiff

desires.” Id. at 31.

“Where . . . an agency is applying a statute entrusted by Congress to its administration,”

15
the court employs the familiar Chevron analysis. Nat’l Med. Enter. Inc. v. Shalala, 43 F.3d 691,

695 (D.C. Cir. 1995); see also Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.

837 (1984). The court first determines “whether Congress has spoken to the precise question at

issue” by looking at either the statutory language or its legislative history. Chevron, 467 U.S. at

842. However, “[i]f the language is plain on its face, courts do not ordinarily resort to legislative

history.” Saadeh v. Farouki, 107 F.3d 52, 57 (D.C. Cir. 1997). If Congress has made its intent

unambiguous, either through statutory language or legislative history, the court ends its inquiry.

See Chevron, 467 at 858-64. Otherwise, the court must defer to the agency’s position, so long as

it is reasonable. Id. at 843; Sea-Land Servs., Inc. v. Dep’t of Transp., 137 F.3d 640, 645 (D.C.

Cir. 1998) (holding that “[Chevron] deference comes into play of course, only as a consequence

of statutory ambiguity, and then only if the reviewing court finds an implicit delegation of

authority to the agency”).

The BBA’s statutory language clearly limits a teaching hospital’s GME FTEs and IME

FTEs to the number reported on “the hospital’s most recent reporting period ending on or before

December 31, 1996.” 42 U.S.C. §§ 139ww(d)(5)(B). Thus, the statutory language expresses

Congress’s intent to impose a facility-level cap as well as Congress’s intent that the FTE resident

count be limited to the figure reported in the “reporting period ending on or before December 31,

1996.” Id. The plaintiff fails to offer any alternative interpretation of the statutory language,

instead focusing exclusively on the BBA’s legislative history. See Symons v. Chrysler Corp.

Loan Guarantee Bd., 670 F.2d 238, 241 (D.C. Cir. 1981) (“It is axiomatic that in interpreting any

statutory provision our starting point must be the language of the statute itself.” (quoting

Consumer Product Safety Comm’n v. GTE Sylvania, 447 U.S. 102, 108 (1980))).

At any rate, the relevant legislative history does not demonstrate that Congress intended

16
to allow a teaching hospital to absorb the FTE resident credits from a second hospital solely

because the second hospital chose to terminate its participation in a jointly-taught residency

program. See H.R. Conf. Rep., at 821-22 (1997), as reprinted in 1997 U.S.C.C.A.N. 176, 442-

43. Although Congress clearly wanted the defendant to utilize flexibility when promulgating

rules governing the FTE resident cap, it expressly stated that such flexibility was to be “limited

by the [Senate and House] conference agreement that the aggregate number of FTE residents

should not increase over current levels.” See id. Moreover, the legislative history confirms that

Congress recognized the “complex issues” that would result from instituting the FTE resident

cap and specifically authorized the defendant to promulgate regulations to address these issues.

Id.; see also Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 696 (1991) (“When Congress,

through express delegation . . . has delegated policy-making authority to an administrative

agency, the extent of judicial review of the agency’s policy determinations is limited.”). Given

Congress’s delegation of authority to the defendant and the absence of any compelling evidence

in the legislative record indicating that Congress intended to interpret the BBA in the fashion

propounded by the plaintiff, the court must defer to the agency’s position so long as it is

reasonable. See Chevron, 467 U.S. at 842; Sea-Land Servs., Inc., 137 F.3d at 645. Accordingly,

the court turns to consider whether the PRRB’s decision was reasonable.

3. Although the PRRB Reasonably Decided That the Affiliated Group Exception Did Not
Apply, It Was Arbitrary Not to Address Whether the Temporary Cap Exception Applied

The plaintiff argues that the PRRB acted arbitrarily by failing to consider various

“relevant factors” in demanding reimbursement under the FTE resident cap. Pl.’s Mot. at 32.

For instance, the plaintiff argues that in determining whether St. Anthony’s FTE resident slots

should have been counted toward the plaintiff’s FTE resident count, the PRRB should have

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considered the fact that St. Anthony had not used any of its FTE resident slots since September

30, 1996 and that it would likely not do so in the future due to the length of time that it would

take to establish an accredited resident training program. Id. at 32-34. Additionally, the plaintiff

argues that a written affiliation agreement between itself and St. Anthony was not necessary to

transfer St. Antony’s FTE resident slots because St. Anthony and the plaintiff had been joint

sponsors of the Family Practice Program since 1971 and were actively negotiating a merger in

1996 and 1997. Pl.’s Reply at 14-15. Thus, the plaintiff asserts that the defendant erred by not

making “an exception” to the requirement for a written affiliation agreement because in the event

that St. Anthony had “stayed in the [Family Practice Program], or even merely withdrawn after

the passage of the BBA, [the plaintiff and St. Anthony] could have made other arrangements in

order to aggregate the resident caps which had not been in place when [St. Anthony] withdrew.”

Id. at 15.

The plaintiff also contends that the PRRB “failed to set forth adequate reasons for

denying [the plaintiff’s] upward adjustment [to] the FTE Resident Caps,” Pl.’s Mot. at 39, and

instead “summarily concluded that [the plaintiff] [did] not meet any of the various requirements

of the Medicare regulations that would have allowed it to include St. Anthony’s [FTE slots] and

count [them] in its resident count,” id. at 35. More specifically, the plaintiff argues that the

preamble to the 1998 Final Rule suggests that the defendant was of the position that an “upward

adjustment of a hospital’s FTE Resident Caps would be appropriate in instances in which the

hospital assumed additional residents . . . because [] another hospital closed or discontinued its

teaching program.” Id. at 39. The plaintiff submits that the PRRB’s failure to provide any

“reasoned analysis” for the defendant’s “sudden change” in position from the preamble statement

in the 1998 Final Rule is arbitrary and capricious. Id.

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 The defendant argues that the plain language of the BBA required the plaintiff to cap its

residents at the number of FTE residents included on the plaintiff’s most recent cost reporting

period ending on or before December 31, 1996. Def.’s Cross-Mot. at 20. The defendant

contends that the plaintiff has not complied with the regulatory requirements for an Affiliated

Group Exception because it has neither shown that it was jointly participating in the training of

interns and residents with St. Anthony nor advanced any formal agreement between St. Anthony

and the plaintiff specifying the planned cap changes. Id. at 21-23. Additionally, the defendant

argues that the Temporary Cap Increase Exception would not have allowed the plaintiff to

combine St. Anthony’s allotted FTE residents with its own because it was not until October 1,

2001 that the defendant provided a temporary cap increase to hospitals that absorbed residents

from another hospital’s discontinued residency programs. Id. at 25-26. The defendant asserts

that although the Temporary Cap Increase Exception was in effect prior to 2001, it applied solely

to hospital closures. Id. at 26. Although the defendant acknowledges that the preamble to the

1998 Final Rule expressly states that “a temporary adjustment to the cap is appropriate and

consistent” when a hospital absorbs residents due to a program discontinuance, it argues that

aside from this “somewhat loose[ly] draft[ed]” sentence, the 1998 Final Rule is clear in

providing a temporary cap increase solely in situations where a hospital closed. Id. at 27.

The court affords substantial deference to an agency’s interpretation of its own

ambiguous regulatory language. Wyo. Outdoor Council, 165 F.3d at 52. The court, however, is

also required to assess whether an agency, in rendering its decision, “examined the relevant data

and articulated a satisfactory explanation for its action including a rational connection between

the facts found and the choice made.” Md. Pharm., Inc., 133 F.3d at 16 (quoting Motor Veh.

Mfrs. Ass’n., 463 U.S. 29, 43 (1983)). Although an agency’s decision need not “be a model of

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analytic precision to survive a challenge,” an agency must “provide an explanation that will

enable the court to evaluate the agency’s rationale at the time of decision.” Dickson v. Sec’y of

Def., 68 F.3d 1396, 1404-05 (D.C. Cir. 1995); see also Motor Veh. Mfrs. Ass’n., 463 U.S. at 43

(observing that an agency’s explanation must minimally contain “a rational connection between

the facts found and the choice made”). “When an agency merely parrots the language of a

statute without providing an account of how it reached its results, it has not adequately explained

the basis for its decision.” Dickson, 68 F.3d at 1405. Likewise, a recitation of the facts is

insufficient if the agency has omitted the “critical step” of “connecting the facts to the

conclusion.” Id.

As previously discussed, the Affiliated Group Exception provides that hospitals that

qualify as members of an “affiliated group” may apply their FTE resident cap limits on an

aggregate basis.” 42 C.F.R § 413.86(g)(4) (1997). In the preamble to the 1998 Final Rule, the

defendant clarified that before hospitals may aggregate their FTE resident caps, they must enter

into an agreement “specify[ing] that any positive adjustment for one hospital must be offset by a

negative adjustment for the other hospital of at least the same amount.” 63 Fed. Reg. at 26341.

The defendant further clarified that past participation by hospitals in a joint training program did

not suffice to invoke coverage under the Affiliated Group Exception. See id.

In rendering the decision at issue, the PRRB referenced the Affiliated Group Exception,

noting that the defendant’s 1997 Final Rule “provided for affiliation agreements among parties

and the related allocation of FTEs to the members of the affiliated group.” A.R. at 17. The

PRRB concluded, however, that the plaintiff had not satisfied “any of the various requirements

of the Medicare regulations that would have allowed it to include St. Anthony’s” FTE resident

count in calculating its own FTE resident cap number. Id. In determining that the plaintiff had

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not qualified under the Affiliated Group Exception, the PRRB noted that although the plaintiff

and St. Anthony executed an “affiliation agreement” on March 15, 1991, St. Anthony had

withdrawn from the Family Practice Program on June 30, 1996. Id. Thus, the PRRB noted that

the only affiliation agreement effective as of July 1, 1996 was between the plaintiff and the

University of Illinois and that that agreement “ma[de] no allowance for another hospital’s

residents or caps to be shared.” Id. After reviewing these “affiliation agreements,” the PRRB

concluded that the plaintiff’s “FTE resident cap should only reflect its 1996 FTE resident count”

and that “St. Anthony’s 1996 FTE count [had] remain[ed] assigned to [St. Anthony] upon the

termination of its relationship with [the plaintiff] and the University on June 30, 1996.” Id.

The plaintiff asserts that the PRRB acted arbitrarily and capriciously by concluding that

the Affiliated Group Exception did not apply based solely on the absence of a written affiliation,

without considering the “economic realities” of the relationship between St. Anthony and the

plaintiff. Pl.’s Mot. at 32-25; Pl.’s Reply at 14-15. The PRRB, however, specified that it had

reviewed the plaintiff’s evidence documenting “the history and relationship” between the

plaintiff and St. Anthony (including documents of the potential merger). A.R. at 17. At any rate,

the PRRB reasonably inferred that pursuant to the preamble to the 1998 Final Rule, the plaintiff

was required to have entered into a written affiliation agreement. See Kennecott Utah Copper

Corp. v. U.S. Dep’t of Interior, 88 F.3d 1191, 1223 (D.C. Cir. 1996) (recognizing that a preamble

to a rule may have independent legal effect when an agency “inten[ds] to bind either itself or

regulated parties” and holding that even “absent an express statement to that effect, [a court] may

infer that the agency intended the preamble to be binding if what it requires is sufficiently

clear”); see also Martin v. Occupational Safety & Health Review Comm’n, 499 U.S. 144, 150

(1991) (“[A]n agency’s construction of its own regulations is entitled to substantial deference.”).

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Indeed, in light of the fact that the defendant specified in the preamble to the 1998 Final Rule

that an affiliation agreement cannot be inferred solely on the basis of a hospital’s past efforts to

jointly train residents with another hospital, 63 Fed. Reg. at 26341, the PRRB also acted

reasonably in rejecting the plaintiff’s argument that the previous training partnership between

itself and St. Anthony was sufficient to trigger the Affiliated Group Exception. Accordingly, the

court concludes that the PRRB did not act arbitrarily or capriciously insofar as it denied the

plaintiff relief under the Affiliated Group Exception and grants in part the defendant’s cross-

motion for summary judgment on this issue. See Md. Pharm., Inc., 133 F.3d at 16 (concluding

that the agency’s actions were not arbitrary or capricious because the agency had examined the

evidence and “articulated a satisfactory explanation for its action including a rational connection

between the facts found and the choice made” (internal quotation marks and citations omitted)).

The PRRB’s rejection of the Temporary Cap Increase Exception, however, presents a

different matter. Under that exception, a provider who “takes on residents because another

hospital closes or discontinues its program” is eligible for a temporary adjustment to its FTE

resident cap. 63 Fed. Reg. at 26330; see also 42 C.F.R. § 413.86(g)(8) (1999); 42 C.F.R. §§

413.86(g)(8), 412.105(f)(1)(ix) (2001); 66 Fed. Reg. at 39899-901. Although the PRRB

acknowledged that the defendant’s regulations provide for a Temporary Cap Increase Exception,

see A.R. 10-11, the PRRB failed to provide any explanation whatsoever as to why this exception

does not apply to the plaintiff’s case, see A.R. at 17. The PRRB’s restatement of the regulatory

provisions is insufficient to constitute a reasoned opinion under the APA. Dickson, 68 F.3d at

1405; see also Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985) (stating that “if the

agency has not considered all relevant factors or if the reviewing court simply cannot evaluate

the challenged agency action on the basis of the record before it, the proper course, except in rare

22
circumstances, is to remand to the agency for additional investigation or explanation”); Sprint

Nextel Corp., v. Fed. Commc’n. Comm’n., 508 F.3d 1129, 1131 (D.C. Cir. 2007) (observing that

under the APA, the court “require[s] more than a result; [it] need[s] the agency’s reasoning for

that result); Am. Rivers v. U.S. Army Corps of Eng’rs, 217 F. Supp. 2d 230, 251 (D.D.C. 2003)

(“If an agency fails to articulate a rational basis for its decision, it is appropriate for a court to

remand for reasoned decision-making.”). Accordingly, the court grants in part the plaintiff’s

motion for summary judgment and remands this matter to the PRRB so that it may provide

further analysis with respect to this issue.

IV. CONCLUSION

For the foregoing reasons, the court grants in part and denies in part the plaintiff’s motion

for summary judgment and grants in part and denies in part the defendant’s cross-motion for

summary judgment. Further, the court remands to the PRRB for the reasons stated herein. An

Order consistent with this Memorandum Opinion is separately and contemporaneously issued

this 29th day of March, 2011.

RICARDO M. URBINA
United States District Judge

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