Bayside Community Hospital v. Leavitt

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

)
BAYSIDE COMMUNITY HOSPITAL, )
)
Plaintiff, )
) Civil Action No. 07-1562(EGS)
v. )
)
KATHLEEN SEBELIUS,1 Secretary )
of the Department of Health )
and Human Services, )
)
Defendant. )
)

MEMORANDUM OPINION

Plaintiff, Bayside Community Hospital (“plaintiff” or

“Hospital”), a critical access hospital (“CAH”), was denied

reimbursement by the Secretary of Health and Human Services

(“defendant” or the “Secretary”) for the costs of acquiring the

services of a certified registered nurse anesthetist (“CRNA”)

during its fiscal years 2002, 2003, and 2004. Plaintiff

challenges that denial pursuant to the Administrative Procedure

Act, 5 U.S.C. § 551 et seq (the “APA”). The parties agree that

there are no material facts in dispute and that this controversy

can be resolved on cross motions for summary judgment, which have

been filed and fully briefed. This Court referred the motions to

Magistrate Judge Deborah A. Robinson for a Report and

1
Pursuant to Federal Rule of Civil Procedure 25(d),
Secretary Sebelius, in her official capacity as the Secretary of
the Department of Health and Human Services, is automatically
substituted as the named defendant.
Recommendation. Now pending before the Court is the defendant’s

objection to the Report and Recommendation. Upon careful

consideration of the Report and Recommendation, the defendant’s

objection, the response and reply thereto, the cross motions for

summary judgment, responses and replies thereto, the applicable

law, the entire record herein, and for the reasons stated below,

the Court adopts the Magistrate Judge’s recommendations, GRANTS

plaintiff’s motion for summary judgment, and DENIES defendant’s

motion for summary judgment.

I. Statutory Framework

In order to resolve the dispute in this case, the Court must

review several statutory and regulatory provisions relating to

(a) reimbursement for CRNA services; (b) the Medicare program’s

definition of “rural” hospital; and (c) the creation of CAHs.

A. Medicare Reimbursement and the Prospective Payment
System

The Medicare statute, 42 U.S.C. § 1395 et seq. (“Social

Security Act” or “Act”), sets forth a federal health insurance

program for the elderly and disabled. A hospital participates in

the Medicare program under a “provider agreement” with the

Secretary. 42 U.S.C. § 1395cc. In 1983, Congress enacted a

Medicare reimbursement program known as the Prospective Payment

System ("PPS"), which replaced the prior practice of reimbursing

hospitals based on the “reasonable costs” of covered services.

County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir.

2
1999), cert. denied, 530 U.S. 1204 (2000). Under the PPS,

Medicare pays hospitals for their inpatient operating costs on

the basis of prospectively determined flat rates, set according

to historic regional costs and patients' diagnoses, rather than

on a reasonable cost basis. Id.

The Secretary has delegated much of the responsibility for

administering the Medicare program to the Centers for Medicare

and Medicaid Services (“CMS”). See 42 U.S.C. §§ 1395h, 1395u.

The Secretary, through CMS, delegates many of Medicare’s audit

and payment functions to organizations known as fiscal

intermediaries (“intermediaries”), which are typically private

insurance companies.

When changing to the PPS system, Congress recognized that

hospitals in different regions may not have the same cost

structures; therefore, Congress required the Secretary to

consider cost averages for each region and for hospitals located

in urban or rural areas within each region. See 42 U.S.C. §

1395ww(d)(2)(D).2

2
Section 1886(d) of the Act is codified at 42 U.S.C. §
1395ww(d). For ease of reference to the pleadings and to the
Administrative Record (“AR”), citations to the Act shall be used
to refer to the operative statutory provisions discussed in this
opinion. Citations will be provided to the codified version
where appropriate.

3
 B. CRNA Pass-Through Provision

Congress has created certain exceptions to the PPS,

including an exception that allows rural hospitals to obtain

reasonable cost (“pass-through”) reimbursement for the cost of

obtaining CRNA services. This exception was created when

Congress passed the Family Support Act of 1988. The Family

Support Act extended the provision indefinitely by adding a new

subsection (k) to section 9320 of the Omnibus Budget

Reconciliation Act of 1986, which had originally authorized the

continuation of pass-through payment status for CRNA services to

hospitals “located in a rural area (as defined for purposes of

section 1886(d) of the Social Security Act).” Family Support

Act of 1988, Pub. L. No. 100-485 (Oct. 13, 1988)(“Family Support

Act of 1988”).3

CMS created 42 C.F.R. § 412.113(c) to implement the CRNA

pass-through payment. The regulation permits a hospital to

receive pass-through payment for CRNA services if “the hospital

or CAH is located in a rural area as defined in Sec. 412.62(f).”

42 C.F.R. § 412.113(c)(2)(i)(A). Section 412.62(f) defines

“rural area” as “any area outside an urban area.” 42 C.F.R. §

412.62(f). This definition tracks the language in Section

3
CMS later specified that, although CAHs are not
technically “hospitals” under the Act’s statutory definitions, it
“consider[ed] CAHs to be ‘hospitals’ for purposes of extending
eligibility for CRNA pass-through payments to them.” 66 Fed.
Reg. 39,922 (Aug. 1, 2001).

4
1886(d)(2)(D) of the Act, which also defines rural as “any area

outside [an urban area].” 42 U.S.C. § 1395ww(d)(2)(D).

C. Section 1886(d)

For purposes of the Medicare program, hospitals are defined

as or deemed to be “rural” pursuant to Section 1886(d). The crux

of the dispute in this case centers on two paragraphs within

Section 1886(d): specifically, Section 1886(d)(2)(D), which

defines the terms “urban” and “rural” and was included in Section

1886(d) when Congress created the CRNA pass-through provision in

1988, and Section 1886(d)(8)(E), which was added by Congress to

Section 1886(d) in 1999.4 Those provisions read as follows:

1886(d)(2)(D):

For purposes of this subsection, the term “region”
means one of the nine census divisions, comprising the
fifty States and the District of Columbia, established
by the Bureau of the Census for statistical and
reporting purposes; the term “urban area” means an area
within a Metropolitan Statistical Area (as defined by
the Office of Management and Budget) or within such
similar area as the Secretary has recognized under
subsection (a) of this section by regulation; the term
“large urban area” means, with respect to a fiscal
year, such an urban area which the Secretary determines
(in the publications described in subsection (e)(5) of
this section before the fiscal year) has a population
of more than 1,000,000 (as determined by the Secretary
based on the most recent available population data
published by the Bureau of the Census); and the term

4
1886(d)(8)(E) is referred to as the “rural
reclassification” provision and was added by Congress in the
Balanced Budget Refinement Act of 1999 (“BBRA”). Pub. L. No.
106-113, Title IV § 401, 113 Stat 1501A-323, 1501A-369, (as
codified at 42 U.S.C. § 1395ww(d)(8)(E) (2009)). The Secretary
incorporated this provision at 42 C.F.R. § 412.103.

5
 “rural area” means any area outside such an area or
similar area...

42 U.S.C. § 1395ww(d)(2)(D)(ii).

1886(d)(8)(E):

(i) For purposes of this subsection, not later than 60 days
after the receipt of an application . . . from a subsection
(d) hospital described in clause (ii), the Secretary shall
treat the hospital as being located in the rural area (as
defined in paragraph (2)(D)) of the State in which the
hospital is located.

(ii) For purposes of clause (i), a subsection (d) hospital
described in this clause is a subsection (d) hosptial that
is located in an urban area (as defined in paragraph (2)(D))
and satisfies any of the following criteria:

(I) The hospital is located in a rural census tract of
a metropolitan statistical area . . .

42 U.S.C. § 1395ww(d)(8)(E).5

Thus, a hospital such as plaintiff that is located in a

rural census tract of a metropolitan statistical area (“MSA”) is

not defined as a rural hospital pursuant to 1886(d)(2)(D), it is

deemed to be a rural hospital pursuant to 1886(d)(8)(E). The

parties dispute whether plaintiff is considered “rural” for

purposes of CRNA pass-through reimbursement. Plaintiff argues

that Congress, when referring to “section 1886(d)” for the

definition of rural for purposes of the CRNA pass-through

provision, referenced all portions of 1886(d), including Section

5
The provision contains other circumstances under which a
hospital may be reclassified as rural; however, none of those are
at issue here. 42 U.S.C. § 1395(d)(8)(E).

6
1886(d)(8)(E). Defendant, on the other hand, argues that only

the original definition in 1886(d)(2)(D) applies.

D. Critical Access Hospitals

In 1997, concerned that rural hospitals would be negatively

impacted by the PPS, Congress created the Medicare Rural Hospital

Flexibility Program.6 42 U.S.C. § 1395i-4(c)(2)(B). Under that

program, States could designate certain hospitals as CAHs. Id.7

Designation as a CAH allows a hospital to be exempt from the PPS

and reimbursed based on its reasonable rates. See 42 U.S.C. §

1395l(a)(1). The CAH statute states, in relevant part:

A. Criteria for designation as a critical access hospital
- A State may designate a facility as a critical access
hospital if the facility –

1. is a hospital that is located in a county (or
equivalent unit of local government) in a rural
area (as defined in section 1395ww(d)(2)(D) of
this title) or is treated as being located in a
rural area pursuant to section 1395ww(d)(8)(E) of
this title. . .

42 U.S.C. § 1395i-4(c)(2)(B).

6
This program expanded the existing Essential Access
Community Hospital Program. See 58 Fed. Reg. 30,630, 30,665 (May
26, 1993); see also 62 Fed. Reg. 45,966 (Aug. 29, 1997).
7
The original statute passed in 1997 utilized the
definition of “rural” at 1886(d)(2)(D). 42 U.S.C. § 1395i-
4(c)(2)(B). The BBRA created the reclassification provision at
1886(d)(8)(E) and section 401(b)(2) of the BBRA made a conforming
change to the CAH criteria, adding the reclassification provision
to the definition of “rural.” Pub. L. No. 106-113, Title IV §
401, 113 Stat 1501A-323, 1501A-369, (as codified at 42 U.S.C. §
1395ww(d)(8)(E) (2009)).

7
 Plaintiff is designated as a CAH because, though it is not

located in a rural area pursuant to 42 U.S.C. § 1395(d)(2)(D), it

is treated as being in a rural area pursuant to 42 U.S.C. §

1395(d)(8)(E) due to its location in a rural census tract of an

MSA.

E. Administrative and Judicial Review

At the close of a fiscal year, a provider of services must

submit to its intermediary a “cost report” showing both the costs

incurred by it during the fiscal year and the appropriate share

of those costs to be apportioned to Medicare. 42 C.F.R. §

413.24(f). The intermediary is required to analyze and audit the

cost report and inform the provider of a final determination of

the amount of Medicare reimbursement through a notice of program

reimbursement. Id. § 405.1803.

Providers under Medicare are permitted to appeal fiscal

intermediaries’ final determinations to the Provider

Reimbursement Review Board (“PRRB”) pursuant to 42 U.S.C. §

1395oo(a) and 42 C.F.R. § 405.1835. The PRRB is “an

administrative review panel that has the power to conduct an

evidentiary hearing and affirm, modify, or reverse the

intermediary’s [reimbursement] determination.” Your Home

Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999).

The CMS Administrator may reverse, affirm, or modify the decision

issued by the PRRB. 42 U.S.C. § 1395oo(f). A provider then has

8
the right to obtain judicial review of any final decision of the

PRRB, or any reversal, affirmance, or modification of the PRRB’s

decision by the Secretary. Id; 42 C.F.R. § 405.1877. This Court

has jurisdiction to review a decision of the Administrator

pursuant to 42 U.S.C. § 1395oo(f) and the APA, 5 U.S.C. §§ 551-

559, 701-706.

II. Factual and Procedural Background

Plaintiff is a 14-bed acute care facility located in

Anahuac, Texas. See Am. Compl. ¶¶ 5, 26. Anahuac is located in

Chambers County, Texas, which is physically located within the

Houston, Texas metropolitan statistical area. AR at 149.

Plaintiff was designated as a CAH in 2001 because of its location

in a rural census tract of an MSA, pursuant to Sections

1820(c)(2)(B) and 1886(d)(8)(E) of the Social Security Act. Am.

Compl. ¶ 27; AR at 94; 42 U.S.C. §§ 1395i-4(c)(2)(B),

1395ww(d)(8)(E).

Plaintiff notified its intermediary of its request to

receive reasonable cost reimbursement for the services of CRNAs

obtained under arrangement for fiscal years 2002, 2003, and 2004,

pursuant to 42 C.F.R. § 412.113(c). AR at 97, 150. The

intermediary denied plaintiff’s request on the basis that, while

deemed to be located in “a rural area for the purpose of

qualifying for the CAH designation,” the Hospital is in fact

located in an urban area as defined in 42 C.F.R. §

9
412.113(c)(2)(A), and thus the CRNA exemption did not apply. AR

at 97. The intermediary determined that designation as a CAH

under 1886(d)(8)(E) has “no bearing on whether [hospitals] are

‘rural’ for purposes of § 412.113(c)[2](A) [the CRNA pass-through

regulation].” AR at 97. Plaintiff timely appealed this

denial to the PRRB, pursuant to 42 C.F.R. § 405.1835. AR at 204.

The PRRB held a hearing on this issue, reversed the

intermediary’s denial, and concluded that the Hospital should be

reimbursed for CRNA services pursuant to the pass-through

methodology set forth at 42 C.F.R. § 412.113(c). AR at 20-25.

The PRRB found that the term “rural” has the same meaning in the

CRNA statute as it does in section 1886(d) of the Act, because

the CRNA statute adopts the language in the Act. Id. The PRRB

stated that “Congressional intent was that urban hospitals that

are redesignated and treated as rural hospitals would receive

‘all categories and designations available to rural hospitals’

which would include pass-through payments for CRNA services” and

that CMS’s rationale for denial of pass-through reimbursement

“would frustrate the intent of Congress as well as that expressed

by CMS in its own regulations.” H.R. Rep. No. 106-479, at Title

IV § 401 (1999)(Conf. Rep.); AR at 24, 121.

The CMS Administrator overturned the PRRB’s decision, on the

basis that the hospital is “not physically located in a rural

10
area as defined in the regulations at 42 C.F.R. § 412.62(f).”

Am. Compl. ¶ 30; AR at 4, 7-8. The Administrator found that:

while the Provider may have been allowed to become
a CAH under section 1886(d)(8)(E) of the Act and
the implementing regulations at 42 [§] CFR
412.103, neither the statute nor regulation
specify that this designation for purposes of
qualifying under section 1820 of the Act [the CAH
provision] impacts the determination of its
location for the purposes of receiving reasonable
cost payment for CRNA services.

AR at 7. The Administrator further held that “the CRNA

reasonable cost reimbursement payment provision is outside the

scope of section 1886(d) of the Act[,]” and that “hospitals

reclassified under 1886(d)(8)(E) are not considered rural for

purposes of the CRNA reasonable cost payment.” AR at 8.

Having exhausted its administrative remedies, plaintiff then

brought the instant action in accordance with its rights under 42

U.S.C. § 1395oo(f) and 42 C.F.R. § 405.1877. The parties filed

cross-motions for summary judgment, which were referred to the

Magistrate Judge. The Magistrate Judge concluded that the

Secretary’s decision should be reversed and that plaintiff was

“rural” for purposes of CRNA reasonable cost reimbursement.

Defendant timely filed an objection to the Report and

Recommendation pursuant to Local Rule 72.3(b).

III. Standard of Review

In her Report and Recommendation, the Magistrate Judge

concluded that plaintiff is “rural” for purposes of the CRNA

11
pass-through provision. Accordingly, the Magistrate Judge

recommended that defendant’s motion for summary judgment be

denied and plaintiff’s motion for summary judgment be granted.

Defendant objects to the Report and Recommendation and argues

that the decision was within the discretion of the Secretary and

is in accordance with the relevant statutes.8

“When a party files written objections to any part of the

magistrate judge’s recommendation with respect to a dispositive

motion, the Court considers de novo those portions of the

recommendation to which objections have been made, and ‘may

accept, reject, or modify the recommended decision[.]’” Robinson

v. Winter, 457 F. Supp. 2d 32, 33 (D.D.C. 2006) (quoting Fed. R.

Civ. P. 72(b)).

Judicial review of the Secretary’s decision is governed by

the APA. 42 U.S.C. § 1395oo(f)(1); 5 U.S.C. § 706. The Court

may set aside the Board’s decision only if it is “‘arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law,’ or unsupported by substantial record

evidence.” HCA Health Servs. of Oklahoma, Inc. v. Shalala, 27

F.3d 614, 616 (D.C. Cir. 1994) (citing 5 U.S.C. § 706(2)(A) &

(E)). “[T]o the extent [the Board's interpretation is] based ...

8
The Court notes that defendant objects to the Report and
Recommendation in its entirety on the grounds that it fails to
adequately address the Secretary’s contentions in support of its
summary judgment motion. Because the Court considers defendant’s
motion de novo, those contentions will be addressed fully herein.

12
on the language of the Medicare [statute] itself,” the Court will

examine the decision with the appropriate deference due to an

agency that has been charged with administering the statute. Id.

at 617 (quoting Marymount Hosp., Inc. v. Shalala, 19 F.3d 658,

661 (D.C. Cir. 1994)).

As the D.C. Circuit has explained, “[i]n examining the

Secretary’s interpretation of a statute that she administers, the

court applies the familiar methodology of Chevron U.S.A., Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct.

2778, 81 L.Ed.2d 694 (1984).” Methodist Hosp. of Sacramento v.

Shalala, 38 F.3d 1225, 1229 (D.C. Cir. 1994). The court’s first

question must be “whether Congress has directly spoken to the

precise question at issue.” Chevron, 467 U.S. at 842. “If the

intent of Congress is clear, that is the end of the matter; for

the court, as well as the agency, must give effect to the

unambiguously expressed intent of Congress.” Id. at 842-43.

The court moves to the second step of Chevron only “if the

statute is silent or ambiguous with respect to the specific

issue.” Id. at 843. Under those circumstances, the court must

consider whether the agency’s interpretation “is based on a

permissible construction of the statute.” Id. If so, then the

court “must defer to the Secretary’s” interpretation. Methodist

Hosp. of Sacramento, 38 F.3d at 1229.

13
 Finally, “in framing the scope of review, the court takes

special note of the tremendous complexity of the Medicare

statute. That complexity adds to the deference which is due to

the Secretary’s decision.” Id. (giving heightened deference to

the Secretary’s policy of denying retroactive effect to a revised

wage index); see also Robert Wood Johnson Univ. Hosp. v.

Thompson, 297 F.3d 273, 282 (3d Cir. 2002) (“The broad deference

of Chevron is even more appropriate in cases that involve a

‘complex and highly technical regulatory program,’ such as

Medicare, which “require[s] significant expertise and entail[s]

the exercise of judgment grounded in policy concerns.’” (quoting

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)

(additional citations omitted))).

IV. Analysis

The issue in this case is whether the Secretary was

arbitrary and capricious in determining that plaintiff was not

entitled to reasonable cost reimbursement pursuant to the CRNA

pass-through provision. Plaintiff argues that it is entitled to

reasonable cost reimbursement for CRNA services because of: 1)

the plain language of the statutes and evidence of Congressional

intent; and 2) the Secretary’s inconsistent statements and

decisions relating to reasonable cost reimbursement under the

CRNA statute.

14
 1. The Plain Language of the Relevant Statutes and
Evidence of Congressional Intent

Pursuant to the language of the CRNA pass-through provision,

“rural” is defined at Section 1886(d). Family Support Act of

1988. Plaintiff’s position is that when Section 1886(d)(8)(E)

was added to the Act, it expanded the definition of rural found

at 1886(d)(2)(D). 42 U.S.C. § 1395ww(d)(8)(E). Plaintiff argues

that this expanded concept of rural applies to all purposes for

which 1886(d) is used as the definition for “rural,” including

the CRNA pass-through provision, which states that rural will be

considered “as defined in 1886(d).” Family Support Act of 1988.

Defendant argues that, for purposes of the CRNA pass-through

provision, the reference to rural “as defined in 1886(d)” refers

only to the original definition at 1886(d)(2)(D), which was in

place at the time the CRNA pass-through provision was passed.

Based on the language in 1886(d)(8)(E) that the reclassification

is “for purposes of this subsection,” defendant contends that

1886(d)(8)(E) only applies within 1886(d) - in other words,

hospitals in urban areas are only reclassified as rural for

purposes of: 1) payment under inpatient PPS; 2) payment under the

Medicare outpatient PPS; and 3) becoming a CAH. Def.’s Mot. for

Summ. J. (“Def.’s Mot.”) 5 (citing 42 U.S.C. § 1395ww(d)(8)(E);

42 U.S.C. § 1395l(t)(16)(A); 42 U.S.C. § 1395i-4(c)(2)(B)).9

9
Congress specifically incorporated Section 1886(d)(8)(E)
into the statutes for payment under the Medicare outpatient PPS:

15
 The third instance cited by defendant, however, is

1886(d)(8)(E) itself, which allows for certain hospitals to

qualify as rural for purposes of inpatient PPS (subsection

1886(d)). As defendant concedes, in creating 1886(d)(8)(E),

Congress explicitly stated that it was to apply “for purposes of

this subsection [1886(d)].” Def.’s Reply 4. In the CRNA pass-

through provision, Congress stated its intent that rural be

applied “as defined in 1886(d),” which necessarily includes the

(d)(8)(E) expansion of subsection (d). Family Support Act of

1988.

Defendant questions why, if Congress intended for hospitals

under 1886(d)(8)(E) to qualify as rural for the CRNA pass-through

provision, it did not explicitly direct that such hospitals are

entitled to reimbursement, either in 1886(d)(8)(E) itself or

through a conforming change to the CRNA pass-through law, similar

to the conforming changes Congress made for outpatient PPS and

CAHs. As plaintiff points out, however, such an explicit

direction was not necessary to make the CRNA pass-through

provision apply to hospitals reclassified under 1886(d)(8)(E),

“If a hospital is being treated as being located in a rural area
under section 1886(d)(8)(E), that hospital shall be treated under
this subsection as being located in that rural area.” 42 U.S.C.
§ 1395l(t)(16)(A); and becoming a CAH: “A State may designate a
facility as a critical access hospital if the facility . . . is a
hospital that is located in a county . . . in a rural area (as
defined in section 1395ww(d)(2)(D) of this title) or is treated
as being located in a rural area pursuant to section
1395ww(d)(8)(E) of this title.” 42 U.S.C. § 1395i-4(c)(2)(B).

16
because the reclassification provision is already incorporated in

1886(d).10 In contrast, outpatient PPS and CAHs do not base

their definition on 1886(d) and thus, it was necessary to

explicitly state that 1886(d)(8)(E) would apply to those

provisions.

Defendant further argues that 1886(d)(8)(E) is a deeming

provision, not a definitional one, and that Congress did not

intend for it to alter the definition of rural in 1886(d)(2)(D).

Defendant asserts that Congress only intended for the Secretary

to treat a hospital qualifying under 1886(d)(8)(E) as rural for a

“specific limited purpose.” (That being for purposes of inpatient

PPS under 1886(d) itself.) Def.’s Reply 6. Plaintiff notes that

this would result in hospitals that are deemed rural being

treated inconsistently: rural for the purpose of qualifying as a

CAH, but urban for purposes of CRNA reimbursement. Pl.’s Mot.

for Summ. J. (Pl.’s Mot.) 31-32.

Defendant argues that a hospital qualifying under

1886(d)(8)(E) is only “treated” as if it were rural, but is still

not physically located in a rural area. Defendant’s position is

that the regulations at 42 C.F.R. § 412.113(c)(2)(A) limit the

application of CRNA pass-through to a “hospital or CAH that is

located in a rural area as defined in § 412.62(f).” AR at 8

10
As stated previously the CRNA pass-through provision
considers hospitals rural “as defined in 1886(d);” therefore, all
of 1886(d), including (d)(8)(E), is referenced in the provision.
Family Support Act of 1988.

17
(quoting C.F.R. § 412.113(c)(2)(A)). Thus, defendant argues

that the actual physical location of the hospital is

determinative under the CRNA regulations.

It is true that the physical location of the hospital does

not change; however, Congress has directed that a hospital

qualifying under 1886(d)(8)(E) be treated as if it were in a

rural location. The purpose of this is to overcome the actual

physical location and cause a hospital to qualify as rural.

Thus, the deeming provision does impact the definition of rural

at 1886(d). A regulation does not override a clearly stated

statute. See ACLU v. FCC, 823 F.2d 1554 (D.C. Cir. 1987); see

also Aerolineas Argentinas v. U.S., 77 F.3d 1564, 1575 (Fed. Cir.

1996) (“[A] regulation can not override a clearly stated

statutory enactment.”).

In ACLU, the court analyzed the FCC’s adoption of a

definition of the term “basic cable service” that differed

materially from the definition provided by statute. ACLU, 823

F.2d at 1565-67. The FCC argued that, while the adopted

definition did contradict the plain language of the statute, it

effectuated Congressional intent more effectively than the

statutory definition. Id. The Court, however, held that the

agency definition was contrary to law and the original statutory

definition must be applied “in all circumstances.” Id. at 1569.

18
A similar reasoning applies here because the statute is clear and

the regulation cannot overcome the statute.

Moreover, plaintiff’s argument in the instant case is even

stronger than in ACLU, because in ACLU there was some indication

that the legislative history supported the defendant’s

alternative definition. Id. at 1567-68. The ACLU court declined

to turn to the legislative history, reasoning that the clear

language of the statute met the standards of the first step of

Chevron and thus, there was no need to look to the legislative

history for interpretation of Congressional intent. Id. (citing

Chevron, 467 U.S. at 843). Similarly, the statutory language in

the instant case is clear and unambiguous; therefore, the first

step of Chevron is met and it is not necessary to delve into

legislative history in order to interpret that meaning. In

contrast to ACLU, however, the legislative history in the instant

case only serves to bolster plaintiff’s argument because Congress

supported the statutory language with its statement that the

reclassification provision was to apply “for all categories and

designations.” See H.R. Rep. No. 106-479, at Title IV § 401

(1999)(Conf. Rep.); AR at 121.

Defendant further contends that if plaintiff’s assertions

are true, “one of Congress’s explicitly enumerated uses of

section 1886(d)(8)(E), that of becoming a CAH under 42 U.S.C. §

1395i-4(c)(2)(B), would be unnecessary because deemed rural

19
status would apply for all purposes, including becoming a CAH.”

Def.’s Reply 8. This argument, however, does not acknowledge

that the CAH provision applies to a hospital that is “in a rural

area (as defined in section 1395ww(d)(2)(D) of this title) or is

being treated as being located in a rural area pursuant to

section 1395ww(d)(8)(E) of this title...” 42 U.S.C. § 1395i-

4(c)(2)(B). Thus, unlike the CRNA provision, the CAH provision

specifically cites the definition of rural at 1886(d)(2)(D).11

It is, therefore, necessary for the CAH designation to also

specifically include the reclassification provision at

1886(d)(8)(E). In other words, the CAH statute specifically

refers to (d)(2)(D), then adds (d)(8)(E), unlike CRNA, which

refers to (d) generally. Congress’s explicit clarification that

the CAH statute would apply to hospitals under both the original

definition of rural and the new one added by (d)(8)(E) does not

negate the fact that the CRNA provision continues to rely on the

overall subsection 1886(d) definition, which merely includes both

definitions captured by the CAH statute.

In further support of its position, plaintiff points to the

legislative history of the reclassification provision, where

Congress stated that “hospitals qualifying under this section

shall be eligible to qualify for all categories and designations

11
As discussed supra, the CRNA provision relies on the
definition of rural at 1886(d) as a whole.

20
available to rural hospitals...” See H.R. Rep. No. 106-479, at

Title IV § 401 (1999)(Conf. Rep.); AR at 121. While in the

Court’s view the first step of Chevron deference is already met

because the language in the statute is clear, analysis of the

legislative history only serves to further support this

conclusion.

Defendant asserts that Congress could not have intended

for CRNA pass-through payments to apply to CAHs reclassified as

rural under 1886(d)(8)(E) because 1886(d)(8)(E) was passed in

1999, after Congress indefinitely extended CRNA pass-through

payments in 1988. Congress, however, clearly stated its intent

that, for purposes of the pass-through provision, rural was to be

considered as defined in 1886(d). Family Support Act of 1988.

Therefore, when Congress added 1886(d)(8)(E) to 1886(d), Congress

expressed its intent to include hospitals reclassified as rural

in the overall 1886(d) definition. The Court “assumes Congress

is aware of existing law when it passes legislation.” Miles v.

Apex Marine Corp., 498 U.S. 19, 32 (1990). Therefore, the Court

assumes that Congress was aware of the CRNA pass-through

provision when it added 1886(d)(8)(E) to the Act and the logical

effect that the reclassification provision would have on CRNA

pass-through reimbursement.

21
 2. The Secretary’s Previous Statements and Decisions
Relating to the CRNA Provision

As further support for its position that the Secretary’s

determination in this case is incorrect, plaintiff points to

several instances in which the Secretary has taken a position

that is inconsistent with defendant’s position in this case that

plaintiff is not entitled to reasonable cost reimbursement for

CRNA services.

First, plaintiff points to a similarly situated hospital

located in California. Pl.’s Mot. 32. Like the plaintiff

hospital, this hospital is a CAH located in a rural census tract

of an MSA. Id. The California hospital, however, was determined

to be entitled to CRNA reasonable cost reimbursement. Id.

Defendant acknowledges this inconsistency, but notes that it

has since reversed that decision. Def.’s Mot. 20; Ex. A.

(stating that the fiscal intermediary “reversed its earlier

decision, concluding that ‘[a]fter further review and

consultation with CMS, we believe those approvals were made in

error and are not consistent with the correct interpretation of

the relevant regulations per 42 C.F.R. [§] 412.113’”).12

12
Plaintiff asserts that this treatment is a violation of
its Equal Protection rights under the Fourteenth Amendment,
requiring that “no State shall deny to any person within its
jurisdiction the equal protection of the laws, which is
essentially a direction that all persons similarly situated
should be treated alike.” City of Cleburne v. Cleburne Living
Ctr., 473 U.S. 432, 439 (1985) (citation omitted). Because the
Court has determined that plaintiff is entitled to reasonable

22
 Defendant relies in part on Thomas Jefferson University for

the proposition that conflicting decisions by the Secretary do

not require less deference. 512 U.S. at 517. The court in

Thomas Jefferson University, however, held that the decisions

were, in fact, not contradictory, but noted that “an agency’s

interpretation of a statute or regulation that conflicts with a

prior interpretation is ‘entitled to considerably less deference’

than a consistently held agency view.” Id. at 515 (quoting INS

v. Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987) (additional

quotations omitted)). While defendant cites a statement made in

dictum in response to the dissent that “even if petitioner could

show that such allowance was approved by-or even brought to the

attention of-the Secretary or her designate at the time, ‘[t]he

Secretary is not estopped from changing a view she believes to

have been grounded upon a mistaken legal interpretation.” Id. at

517 (quoting Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 417

(1993)). This statement indicates that the Secretary may not be

estopped from making a conflicting decision; however, where, as

here, the decision made was directly contradictory and only

reversed as a result of litigation, that decision may be afforded

less deference than a “consistently held view.” Id. at 515.

Defendant also cites Washington Hospital Center v. Bowen,

795 F.2d 139, 144 n.5 (D.C. Cir. 1986) and St. Francis Hospital

cost reimbursement, there is no need to reach this argument.

23
v. Heckler, 714 F.2d 872, 874 (7th Cir. 1983), in support of her

assertion that conflicting decisions by the Secretary do not

require less deference. In Washington Hospital Center, however,

the inconsistency resulted from two different sets of

regulations; thus the conflicting findings were not in direct

opposition. 795 F.2d at 144 n.5. In contrast, the decisions

made by the Secretary in the instant case result in the exact

opposite decision when applying the same statutory and regulatory

framework to two identically situated hospitals. Furthermore,

St. Francis Hospital involved a reversal by the Secretary of the

PRRB’s decision. 714 F.2d at 874. The St. Francis Hospital

court rejected plaintiff’s argument that the Secretary’s decision

was entitled to less deference because it contradicted the PRRB.

Id. That is not plaintiff’s argument in this case.

While defendant may be correct that the Court should not

find the Secretary’s initial decision to be determinative of an

inconsistency, the fact that the Secretary’s decisions regarding

these two hospitals are directly contradictory is troubling,

particularly where it appears the decision with respect to the

California hospital was only reversed after this litigation was

commenced and plaintiff’s counsel notified the defendant of the

inconsistency. Pl.’s Mot. 32-33; Def.’s Mot. 19-20. Moreover,

the fact that defendant initially reached the opposite decision

in relation to the California hospital further supports

24
plaintiff’s position that it is a “rural” hospital for purposes

of the CRNA pass-through provision and, therefore, that the

Secretary’s decision regarding the plaintiff hospital is not in

accordance with law.

Second, plaintiff argues that the Secretary’s treatment of

hospitals falling under the “deeming” provisions of 1886(d)(8) is

inconsistent with the defendant’s position advanced in this case.

See Pl.’s Reply 9-10.13 In a final rule announcement revising

the CRNA fee schedule, the Secretary addressed the application of

CRNA pass-through payment to hospitals that are in the exact

opposite position as plaintiff: those that are rural hospitals

that have been reclassified as urban under 1886(d)(8)(B).14 The

Secretary stated that:

[s]ince for purposes of payment under section 1886(d)
of the Act, these [rural-to-urban] hospitals are no
longer classified as rural, we proposed that these
hospitals also would not qualify as rural hospitals
under section 9320(k) of Public Law 99-509 [i.e., the

13
Defendant asserts that this argument is moot because it
was not raised during administrative appeals or in the
plaintiff’s moving brief. See Def.’s Reply 11. While the
Court’s decision does not rest on this argument and, therefore,
the Court need not analyze the mootness argument, the Court does
find the discussion useful in analyzing the Secretary’s position.
14
Section 1886(d)(8)(B) of the Act contains a provision
allowing certain hospitals otherwise located in a rural area to
be considered located in an urban area for purposes of the
inpatient PPS. 42 U.S.C. § 1395ww(d)(8)(B). This provision is
essentially the counter provision to the one at issue in this
case: hospitals that qualify under 1886(d)(8)(B) are physically
located in rural areas, but are treated as urban for payment
purposes. Id.

25
 CRNA pass-through law] and would not be eligible to
continue to receive payment on a reasonable cost basis
for CRNA services...

57 Fed. Reg. at 33,882.

This conclusion by the Secretary reached essentially the

same conclusion as in the instant case: that the hospital is not

entitled to CRNA pass-through reimbursement. That reasoning,

however, applies the exact opposite logic as the Secretary

applies in the instant case: that the physical location of a

hospital is overcome by qualification under the reclassification

provisions under 1886(d)(8). Defendant counters that these

decisions, while applying opposite reasoning, are consistent with

the intent behind CRNA pass-through payment: to “provide small

rural hospitals with low surgical volumes with relief from the

difficulties they might otherwise have in furnishing CRNA

services for their patients.” Def.’s Reply 12; AR at 3, 24. The

Court agrees with plaintiff that defendant’s position is

inconsistent in that it takes a logically opposite position with

respect to the same statutory construction and results in

hospitals under both provisions being denied CRNA reimbursement.

These inconsistent approaches support plaintiff’s argument that

the Secretary’s decision was arbitrary and capricious.

Plaintiff also argues that the Secretary’s current

interpretation of the CRNA pass-through provision is inconsistent

with the Secretary’s past statements made about the provision. A

26
court shall “defer to the Secretary’s interpretation unless an

‘alternative reading is compelled by the regulation’s plain

language or by other indications of the Secretary’s intent at the

time of the regulation’s promulgation.’” Thomas Jefferson Univ.,

512 U.S. at 512 (quoting Gardebring v. Jenkins, 485 U.S. 415, 430

(1988)). The Secretary’s current position is that the CRNA

provisions only apply to a hospital or CAH located in a rural

area as defined in § 412.62(f), but “[does] not include rural

designations under § 412.103.”15 AR at 8 (citing 42 C.F.R. §

412.113(c)(2)(A)). The Secretary therefore contends that the

original definition of rural at § 412.63(f) must be applied for

purposes of determining CRNA status.

In a final rule statement discussing eligibility for CRNA

pass-through reimbursement, however, the Secretary stated that “a

rural area would be defined in the same way it is defined for

purposes of the inpatient hospital prospective payment system (in

accordance with section 1886(d) of the Act)...” 57 Fed. Reg. at

33,882. The language of § 412.62(f) tracks the language of

1886(d); therefore, the Secretary acknowledged that the

definition in the regulations is intended to be the same for both

purposes. The Secretary’s statements indicate her intent that

the term rural as defined in the regulations should conform to

15
42 C.F.R. § 412.103 was amended by the Secretary to
incorporate the “deemed rural” provisions of section
1886(d)(8)(E) of the Act.

27
the definition found in 1886(d), which was expanded to include

1886(d)(8)(E). This indication of the Secretary’s intent at the

time the regulation was promulgated further supports the Court’s

conclusion that the Secretary’s decision to deny reasonable cost

reimbursement to plaintiff is not entitled to deference.

V. Conclusion

Congress passed the Family Support Act to allow rural

hospitals to be reimbursed for the costs associated with

attracting CRNAs to a rural location. Family Support Act of 1988

§ 608. In so doing, Congress stated that “rural” was to be

considered “as defined in 1886(d).” Id. CMS acknowledged this

when it stated that “[t]he purpose of the pass-through

legislation is to provide small rural hospitals with low surgical

volumes with relief from the difficulties they might otherwise

have in furnishing CRNA services for their patients.” 66 Fed.

Reg. 39,922. CMS went on to state that “CAHs are by definition

limited-service facilities located in rural areas and, as such,

they serve a population much like those served by hospitals

eligible for the pass-through payments.” Id. As the PRRB

pointed out in its decision, no distinction was made between CAHs

that are located in rural areas and those that are being treated

as rural. AR at 24.

When the CRNA pass-through law was passed in 1988, rural was

defined within 1886(d) at 1886(d)(2)(D) as “any area outside such

28
an area [urban or large urban] or a similar area.” 42 U.S.C. §

1395ww(d)(2)(D). In 1999, however, the BBRA added 1886(d)(8)(E)

to the Act. Pub. L. No. 106-113, Title IV § 401, 113 Stat 1501A-

323, 1501A-369, (as codified at 42 U.S.C. § 1395ww(d)(8)(E)

(2009)). In so doing, Congress crafted 1886(d)(8)(E) to state

that:

[f]or purposes of this subsection [1886(d)], not
later than 60 days after the receipt of an
application . . . from a subsection (d) hospital .
. . the Secretary shall treat the hospital as being
located in the rural area (as defined in paragraph
(2)(D)) of the State in which the hospital is
located.

42 U.S.C. § 1395ww(d)(8)(E).

“This subsection” refers to subsection 1886(d), which

includes both the original definition at 1886(d)(2)(D) and the

expanded meaning at 1886(d)(8)(E). Therefore, Congress intended

for rural hospitals eligible for CRNA pass-through to be those

hospitals defined as rural in 1886(d); Congress did not specify

the specific definition at subsection 1886(d)(2)(D). Thus, when

1886(d) was expanded to include hospitals located in rural census

tracts of MSAs, the concept of “rural” under 1886(d) was expanded

to include hospitals such as the plaintiff.

Section 1886(d)(8)(E) directs that “the Secretary shall

treat the hospital as being located in the rural area” for

purposes of 1886(d). 42 U.S.C. § 1395ww(d)(8)(E). Therefore,

because plaintiff hospital is qualified under 1886(d)(8)(E) it

29
must be treated as rural for all purposes to which 1886(d)

applies. This includes CRNA pass-through reimbursement because

Congress relied on the definition of rural as stated in 1886(d)

when drafting the CRNA provisions. To ignore the portion of

1886(d) added in 1886(d)(8)(E) would be contrary to Congress’s

clear intent in creating it. The D.C. Circuit has held that

“[i]n making the threshold determination under Chevron, ‘a

reviewing court should not confine itself to examining a

particular statutory provision in isolation.’” Cement Kiln

Recycling Coal. v. EPA, 493 F.3d 207, 223 (D.C. Cir. 2007)

(quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,

132 (2000)). When examined as a whole, the statutory framework

clearly indicates that hospitals reclassified as rural under

1886(d)(8)(E) are included in the reimbursement provisions of the

CRNA pass-through law.

There is, therefore, no ambiguity: the statute clearly

states that, for purposes of CRNA pass-through payments, rural is

“as defined in 1886(d).” Any potential ambiguity, however, was

further clarified by Congress in the legislative history of the

law when it stated that “hospitals qualifying under this section

shall be eligible to qualify for all categories and designations

available to rural hospitals...” See H.R. Rep. No. 106-479, at

Title IV § 401 (1999)(Conf. Rep.); AR at 121 (emphasis added).

Thus, Congress has “directly spoken to the precise question at

30
issue.” Chevron, 467 U.S. at 842. The intent of Congress is

clear; both within the wording of the statue itself, and in the

legislative history of the statute. As the Supreme Court stated

in Chevron,

[t]he judiciary is the final authority on issues of
statutory construction and must reject administrative
constructions which are contrary to clear congressional
intent. If a court, employing traditional rules of
statutory construction, ascertains that Congress had an
intention on the precise question at issue, that
intention is the law and must be given effect.

Chevron, 467 U.S. at 843 n.9 (internal citations omitted).

Congress’s statements, along with the language of the

statutes at issue, indicate its intent that hospitals such as

plaintiff be considered rural under 1886(d) and this Court “must

give effect to the unambiguously expressed intent of Congress.”

Id. at 843. The Court, therefore, agrees with the Report and

Recommendation and concludes that plaintiff hospital is “rural”

for purposes of the CRNA pass-through provision and is entitled

to reasonable cost reimbursement.

31
 Accordingly, for the reasons stated herein, the Court adopts

the Report and Recommendation, GRANTS plaintiff’s motion for

summary judgment, and DENIES defendant’s motion for summary

judgment. An appropriate Order accompanies this Memorandum

Opinion.

SO ORDERED.

Signed: Emmet G. Sullivan
United States District Judge
September 30, 2009

32