Council For Urological Interes v. Sylvia Mathews Burwell

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 24, 2014 Decided June 12, 2015

No. 13-5235

COUNCIL FOR UROLOGICAL INTERESTS,
APPELLANT

v.

SYLVIA MATHEWS BURWELL, IN HER OFFICIAL CAPACITY AS
SECRETARY OF THE DEPARTMENT OF HEALTH AND HUMAN
SERVICES AND UNITED STATES OF AMERICA,
APPELLEES

Appeal from the United States District Court
for the District of Columbia
(No. 1:09-cv-00546)

Gordon A. Coffee argued the cause for appellant. With
him on the briefs were Thomas L. Mills, Steffen N. Johnson,
and Erica E. Stauffer.

Jeffrey E. Sandberg, Attorney, U.S. Department of
Justice, argued the cause for appellees. With him on the brief
were Stuart F. Delery, Assistant Attorney General, Ronald C.
Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney.
Christine N. Kohl, Attorney, entered an appearance.
 2

Before: HENDERSON, ROGERS, and GRIFFITH, Circuit
Judges.

Opinion for the Court on Parts I, II.A, III, IV, and V filed
by Circuit Judge GRIFFITH.
Opinion for the Court on Part II.B filed by Circuit Judge
HENDERSON.
Opinion dissenting from Part II.A filed by Circuit Judge
HENDERSON.
Opinion dissenting from Part II.B filed by Circuit Judge
GRIFFITH.

I

The Secretary of Health and Human Services issued
regulations that effectively prohibit physicians who lease
medical equipment to hospitals from referring their Medicare
patients to these same hospitals for outpatient care involving
that equipment. The regulations accomplish this through two
separate provisions. The first prohibits physicians from
charging hospitals for leased equipment on a per-use basis
when the physicians also refer patients to the hospital for
procedures using that equipment. The second interprets the
relevant statute to apply to physician-groups that perform
procedures rather than only the entities that bill Medicare.
Challenging the regulations here is an association of
physicians who participate in leasing agreements with
hospitals, under which they charge hospitals for equipment on
a per-use basis and perform the procedures using the
equipment. The association argues that the regulations exceed
the Secretary’s statutory authority and violate both the
Administrative Procedure Act and the Regulatory Flexibility
Act. The district court granted the Secretary’s motion for
summary judgment. Although one majority agrees with the
 3

district court that the statute is ambiguous as to the regulation
of leases that charge on a per-use basis (Part II.A), a different
majority concludes that the Secretary’s explanation for
prohibiting these leases is unreasonable (Part II.B). The court
unanimously concludes that the Secretary’s interpretation of
the statute to apply to the physician-groups performing the
procedures is reasonable (Part III), and that the Secretary
complied with the Regulatory Flexibility Act (Part IV). We
therefore affirm in part, reverse in part, and remand to the
district court with instructions to remand the regulation
relating to leases charging by use to the Secretary for further
proceedings.

A

This case involves the interplay between complicated
statutory provisions and regulations. Resolving the questions
before us requires that we undertake a sometimes arduous
journey through the tangled regime. We begin our slog with a
look at the Medicare program.

Medicare provides federally funded health insurance to
disabled persons and those aged 65 or older for various
services, including the outpatient hospital procedures at issue
here. 42 U.S.C. §§ 1395 et seq. In addition to paying the
performing physician a fee that covers her services for the
outpatient care, see generally 42 U.S.C. §§ 1395w-4,
1395x(s)(1); 42 C.F.R. §§ 410.20, 414.32, Medicare also pays
the hospital a fee that covers charges for space, equipment,
supplies, diagnostic testing, and the services of any
non-physician personnel, 42 U.S.C. § 1395l(t); 42 C.F.R.
pt. 419. Typically a hospital will have an employee perform
the outpatient procedures using its own equipment, but
Medicare also permits hospitals to contract with third parties
 4

to provide such outpatient services. See 42 U.S.C.
§ 1395x(w)(1); 42 C.F.R. § 410.42(a). Under these
agreements, the third party provides equipment and
technicians for a procedure while the hospital provides space
and support services, pays for the lease of the equipment, and
bills Medicare.

The members of the association challenging the
regulations here have just this kind of relationship with
hospitals. These arrangements are attractive to them because
Medicare reimburses outpatient procedures that take place in
hospitals at higher rates than if they were performed
elsewhere. 1 Compare 42 C.F.R. § 419.2(b) (listing eighteen
categories of costs Medicare covers for outpatient hospital
procedures), with 42 C.F.R. § 416.61(a) (listing eight

1
For example, in 2010, the base Medicare reimbursement rate
for outpatient hospital prostate laser surgery was $3,138.81, 75 Fed.
Reg. 45,988 (Aug. 3, 2010), whereas the same procedure in an
ambulatory surgical center was reimbursed at $1,720.77, id. at
45,843. According to the hospitals, the higher rates are necessary to
subsidize their less profitable but necessary services, such as
emergency departments and trauma care. See Keeping the Promise:
Site-of-Service Medicare Payment Reforms: Hearing before the
Subcomm. on Health of the H. Comm. on Energy and Commerce,
113th Cong. 146-47 (2014) (statement of Reginald W. Coopwood,
Chief Executive Officer, Regional One Health, on Behalf of the
American Hospital Association). Even so, last year the Office of the
Inspector General released a report recommending that Medicare
eliminate this disparity by reducing outpatient payment rates. See
DEP’T OF HEALTH & HUMAN SERVS., OFFICE OF INSPECTOR GEN.,
MEDICARE AND BENEFICIARIES COULD SAVE BILLIONS IF CMS
REDUCES HOSPITAL OUTPATIENT DEPARTMENT PAYMENT RATES
FOR AMBULATORY SURGICAL CENTER-APPROVED PROCEDURES
TO AMBULATORY SURGICAL CENTER PAYMENT RATES 5, 7-8
(2014), http://oig.hhs.gov/oas/reports/region5/51200020.pdf.
 5

categories of costs Medicare covers in ambulatory surgical
centers).

This disparity creates a financial incentive for physicians
to make referrals based more on maximizing their income
than on maximizing the Medicare patient’s well-being. For
example, suppose a physician has an ownership interest in a
hospital laboratory that diagnoses various illnesses. The
physician profits by sending his Medicare patient to that
hospital to undergo the diagnostic tests. The patient, by
contrast, has little financial incentive to limit the cost of the
tests, as Medicare covers most of the costs. This imbalance in
interests can lead to a physician ordering a battery of
unnecessary tests. In fact, a 1991 study showed this very
outcome where Florida physicians had ownership interests in
diagnostic clinics. See Joint Ventures Among Health Care
Providers in Florida: Hearing Before the H. Subcomm. on
Health of the H. Comm. on Ways and Means, 102d Cong.
(1991). To address this problem, Congress enacted the Stark
Law (named for former Representative Pete Stark of
California). See generally 42 U.S.C. § 1395nn; see also
Medicare and Medicaid Programs; Physician’s Referrals to
Health Care Entities With Which They Have Financial
Relationships, 63 Fed. Reg. 1659, 1718 (proposed Jan. 9,
1998). The Stark Law places restrictions on both the referring
physicians and the hospitals. It prohibits a physician who has
a “financial relationship” with a hospital from referring
Medicare patients to that hospital. 2 It also bars hospitals from
2
The Law lists twelve specific “designated health services”
for which referrals are prohibited. These include clinical laboratory
services, physical therapy services, occupational therapy services,
radiology services, radiation therapy, durable medical equipment
and supplies, parenteral and enteral nutrients, prosthetic devices and
supplies, home health services, outpatient prescription drugs,
 6

receiving Medicare payments based on these prohibited
referrals. See 42 U.S.C. § 1395nn(a)(1)(A), (a)(1)(B),
(h)(6)(K). For the Stark Law’s purposes, a physician has a
“financial relationship” with a hospital if she owns or invests
in it, or if she has a compensation agreement with the hospital
covering services, equipment, and the like. Id.
§ 1395nn(a)(2)(A)-(B), (h)(1).

Despite the general prohibition on potentially
self-interested referrals, the Stark Law permits referrals by
physicians to entities in which they have a financial interest in
certain limited circumstances. It does so by excluding some
forms of compensation agreements and ownership interests
from the definition of “financial relationship,” thus allowing
both the relationships and the referrals. See 42 U.S.C.
§ 1395nn(b)-(e). The provision at issue here is the equipment
rental exception, under which physicians may both lease
equipment to a hospital and refer their Medicare patients to
that hospital for procedures using the equipment so long as
the leasing agreement meets certain conditions. The lease
must (1) be in writing; (2) assign use of the equipment
exclusively to the hospital; (3) last for a term of at least one
year; (4) set rental charges in advance that are consistent with
fair market value and “not determined in a manner that takes
into account the volume or value of any referrals or other
business generated between the parties”; (5) satisfy the
standard of commercial reasonableness even absent any
referrals; and (6) meet “such other requirements as the
Secretary may impose by regulation as needed to protect
against program or patient abuse.” 42 U.S.C.
§ 1395(e)(1)(B)(i)-(vi).

inpatient and outpatient hospital services, and outpatient
speech-language pathology services. 42 U.S.C. § 1395nn(h)(6).
 7

In 1998, the Secretary proposed a rule that would prevent
a physician with an ownership interest in a group that leased
equipment and performed procedures under contract with a
hospital from referring Medicare patients to the hospital for
those procedures. The proposed rule accomplished this by
adopting a broader interpretation of the statutory language
that prevents physicians from referring Medicare patients to
an entity “for the furnishing of designated health services”
when the physician and the entity have a financial
relationship. 42 U.S.C. § 1395nn(a)(1)(A). Specifically, the
proposed rule expanded the definition of an entity
“furnishing” such services. The previous definition included
only the party billing Medicare, usually the hospital where the
procedures were performed. The new rule would extend to the
party performing the procedures, including the third parties
that contracted to perform outpatient procedures in hospital
facilities. 63 Fed. Reg. at 1706. The proposed rule also altered
the equipment rental exception by banning leases that charged
the hospital for each use of the equipment—also referred to as
leases with “per-click” payments—for patients referred by the
physician-lessor. Id. at 1714.

To give an example of the regulatory scheme at work,
prior to the proposed regulations, a single doctor could own
laser equipment that she leased to a hospital, refer patients to
that hospital for laser procedures, and profit each time the
laser equipment was used. Because Medicare gives greater
reimbursements for procedures performed at hospitals than
for those same procedures performed in physicians’ offices, it
would be more profitable for a doctor to enter into such
arrangements with a hospital than it would be for the doctor to
purchase the laser for use in her own office. The Secretary’s
proposal forbade this practice. While a doctor could still own
 8

laser equipment and lease it to the hospital to which she
referred her patients, she would only be permitted to receive
time-based payments from the hospital, such as yearly or
monthly charges. The frequency of laser usage would have no
bearing on the doctor’s profit, so she would no longer have a
financial incentive to refer patients to the hospital for laser
procedures. By the same token, a physician with an ownership
interest in a group that leased laser equipment and performed
laser procedures under contract with a hospital could no
longer refer patients to the hospital for such procedures. 3

After considering comments, the Secretary decided
against including either of these proposed alterations in the
rule promulgated in 2001. Instead, the final rule provided that
an entity is “furnishing designated health services” only if it is
the entity that actually bills Medicare for the services. See
Medicare and Medicaid Programs; Physicians’ Referrals to
Health Care Entities With Which They Have Relationships,
66 Fed. Reg. 856, 943 (Jan. 4, 2001). Physicians with an
ownership interest in a group that contracted with a hospital
could continue to refer patients to the hospital because any
such groups performing the procedures and supplying the
equipment were not billing Medicare. The 2001 rule also
continued to allow leases with per-click payment terms. Id. at
876. Even so, the preamble to the regulation explained that
the Secretary continued to be concerned that contractual
arrangements between physician-owned groups and hospitals
“could be used to circumvent” the Stark Law, id. at 942, and
also recognized the “obvious potential for abuse” in per-click
payments, id. at 878. In both cases, the Secretary advised that

3
That is, unless an ownership exception applies. See 42
U.S.C. § 1395nn(d).
 9

she would monitor the arrangements and reconsider the
decision if necessary. Id. at 942, 860.

That reconsideration came in 2007 with another notice of
proposed rulemaking. The Secretary again proposed banning
per-click leases and forbidding physicians from making
referrals to hospitals for procedures to be performed by a
group practice in which the physician has an ownership
interest. See Medicare Program; Proposed Revisions to
Payment Policies, 72 Fed. Reg. 38,122 (proposed July 12,
2007). This time, the Secretary adopted both proposed
regulations with minimal changes in 2008. See Medicare
Program; Changes to Disclosure of Physician Ownership in
Hospitals and Physician Self-Referral Rules, 73 Fed. Reg.
48,434 (Aug. 19, 2008). According to the new rule, an entity
that either performs or bills for designated health services is
considered to be “furnishing” such services, meaning that
physicians with ownership interests in groups that perform
outpatient services in hospitals cannot refer patients for the
procedures. See 42 C.F.R. § 411.351. With respect to the
equipment rental exception, the rule states that the lease may
not use per-click rates. 42 C.F.R. § 411.357(b)(4)(ii)(B).
Thus, under the regulations challenged here, a
physician-owned group that contracts to lease equipment to a
hospital cannot do so on a per-click basis while referring
patients to that hospital for procedures using the equipment.
Nor can a physician with an ownership interest in the group
refer patients for outpatient procedures in a hospital where the
group performs the procedures, unless she qualifies for one of
the narrow ownership exceptions. See, e.g., 42 U.S.C.
§ 1395nn(d)(2) (exempting rural providers).
 10

B

The Council for Urological Interests is made up of a
group of joint ventures principally owned by urologists. These
joint ventures lease laser technology to hospitals. Urologists
generally prefer to furnish their services in a hospital because
of the higher reimbursement rate available there. The Council
contends that the lower rate paid for its members’ services
outside a hospital is insufficient to cover the cost of the
equipment. Thus, to make the purchase of laser equipment
economically viable, the urologists enter into agreements with
a hospital, where the hospital pays the joint venture for the
equipment on a per-click basis. The new regulation the
Council challenges prohibits these arrangements.

C

The Council filed this action in March 2009, alleging that
the 2008 rule exceeded the Secretary’s authority under the
Administrative Procedure Act (APA) and violated the
procedural requirements of the Regulatory Flexibility Act
(RFA). The Secretary moved to dismiss the complaint for lack
of subject-matter jurisdiction, arguing that challenges to the
regulation must be raised through the agency’s administrative
procedures before they can be raised in court. The district
court granted the motion, but this court reversed. Because the
statute only permits Medicare “providers” who bill Medicare
to seek administrative review, the Council and other affected
parties who provided services but did not bill Medicare lacked
access to administrative review. Under these circumstances,
we held that requiring the use of administrative procedures
would result in the “complete preclusion of judicial review.”
See Council for Urological Interests v. Sebelius, 668 F.3d
704, 713-14 (D.C. Cir. 2011) (quoting Shalala v. Ill. Council
 11

on Long Term Care, Inc., 529 U.S. 1, 22-23 (2000)). On
remand, the parties filed cross-motions for summary
judgment. The district court granted the government’s motion,
concluding that the agency regulations were entitled to
Chevron deference and that the agency’s construction of the
statute was a reasonable one. See Council for Urological
Interests v. Sebelius, 946 F. Supp. 2d 91, 112 (D.D.C. 2013).
The district court also rejected the Council’s claims under the
RFA, finding that the Council had conceded a crucial portion
of the Secretary’s argument by failing to provide a response.
See id. The Council timely appealed both the APA and RFA
claims. On appeal, the Council argues that the text and
legislative history of the Stark Law preclude the Secretary
from banning physicians who refer patients to a hospital from
leasing equipment to that hospital on a per-click basis. The
Council also argues that the Secretary unreasonably
interpreted the statute to forbid physicians from referring
patients to a hospital for procedures performed by a group in
which the physician has an ownership interest. Finally, the
Council argues that the Secretary failed to complete the
requisite regulatory flexibility analysis called for by the RFA.
We have jurisdiction under 28 U.S.C. § 1291.

“We review a grant of summary judgment de novo
applying the same standards as those that govern the district
court’s determination.” Troy Corp. v. Browner, 120 F.3d 277,
281 (D.C. Cir. 1997).

II

When Congress gives an agency authority to interpret a
statute, we review the agency’s interpretation under the
deferential two-step test set forth in Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837
 12

(1984). See Troy Corp., 120 F.3d at 283. At step one, to
determine whether Congress has directly spoken to the precise
question at issue, we use “the traditional tools of statutory
interpretation.” Consumer Elecs. Ass’n v. FCC, 347 F.3d 291,
297 (D.C. Cir. 2003) (internal quotation marks omitted). If it
is clear that Congress has addressed the issue, we give effect
to congressional intent. If the statute is silent or ambiguous on
the matter, we move to a second step that asks whether the
agency’s interpretation is “based on a permissible
construction of the statute.” Chevron, 467 U.S. at 843. An
interpretation is permissible if it is a “reasonable explanation
of how an agency’s interpretation serves the statute’s
objectives.” Northpoint Tech., Ltd. v. FCC, 412 F.3d 145, 151
(D.C. Cir. 2005). If the agency’s construction is reasonable,
we defer. See Chevron, 467 U.S. at 842-43.

A

“We begin, as always, with the plain language of the
statute in question.” Citizens Coal Council v. Norton, 330
F.3d 478, 482 (D.C. Cir. 2003). The Council argues that the
Stark Law expressly permits per-click rates for equipment
rentals and that the Secretary thus lacked authority to ban
per-click leases. The Council points to language in a clause of
the equipment rental exception that permits equipment lease
arrangements when “rental charges over the term of the lease
are set in advance, are consistent with fair market value, and
are not determined in a manner that takes into account the
volume or value of any referrals or other business generated
between the parties.” 42 U.S.C. § 1395nn(e)(1)(B)(iv). This
rental-charge clause, the Council argues, means that per-click
rates are necessarily permissible so long as they meet these
requirements. Per-click charges pass muster, according to the
Council, because a charge based on use can be set in advance
 13

and be consistent with fair market value, and the charge
would not take into account volume or value of referrals when
the per-use charge is stable across the leasing period, rather
than increasing after a certain number of uses. The Council is
wrong. Its argument ignores the remaining requirements of
the equipment rental exception. Importantly, the final clause
states that the lease must also “meet[] such other requirements
as the Secretary may impose by regulation as needed to
protect against program or patient abuse.” 42 U.S.C.
§ 1395nn(e)(1)(B)(vi). The Secretary explicitly relied on this
authority in promulgating the regulation forbidding per-click
payments. See 42 C.F.R. § 411.357(b)(4)(ii)(B). Because any
lease must comply with the listed rental charge requirements
and any further requirements the Secretary adds, the fact that
per-click leases comply with the rental charge requirements
alone is insufficient. The text of the statute does not
unambiguously preclude the Secretary from using her
authority to add a requirement that bans per-click leases. See
42 U.S.C. § 1395nn(e)(1)(B). To the contrary, the statutory
text of the exception clearly provides the Secretary with the
discretion to impose any additional requirements that she
deems necessary “to protect against program or patient
abuse.” See id. § 1395nn(e)(1)(B)(vi).

Nevertheless, the Council argues that because the
statute’s text already lists specific requirements for rental
charges, the Secretary cannot add further requirements related
to rental charges because these cannot properly qualify as
“other” requirements under the final clause of the exception.
The Council relies on Financial Planning Ass’n v. SEC, 482
F.3d 481 (D.C. Cir. 2007), which involved a statute regulating
investment advisers. The statute defined the category of
regulated investment advisers broadly to include any person
who is paid to advise others regarding securities. 15 U.S.C.
 14

§ 80b-2(a)(11). The statute then exempted several categories
of persons from regulation and gave the SEC authority to
exclude “such other persons not within the intent of this
paragraph, as the Commission may designate.” Id.
§ 80b-2(a)(11)(H). 4 One of the statutory exemptions applied
to broker-dealers who gave investment advice incidental to
their normal business activities and “receive[d] no special
compensation therefor.” Id. § 80b-2(a)(11)(C). The SEC
issued a final rule that broadened the exemption for
broker-dealers to apply even when they did receive special
compensation. We held that this rule violated both limitations
on the SEC’s rulemaking authority: The rule was outside the
intent of the statute because the text already provided an
exemption for broker-dealers and there was no intent that the
exemption’s reach should be broadened. Moreover, because
broker-dealers were already specifically addressed in the
statutory text, they did not constitute “other persons.” See
Financial Planning, 482 F.3d at 488. The Council argues that
the outcome should be the same here. We disagree. The
Secretary does not face the same limitations on her
rulemaking authority as did the SEC in Financial Planning.
The Stark Law gives the Secretary power to add requirements
“as needed to protect against program or patient abuse,” even
if Congress did not anticipate such abuses at the time of
enactment. While Congress may not have originally intended
the ban of per-click leases, it empowered the Secretary to
make her own assessment of the needs of the Medicare
program and regulate accordingly. And, as distinct from the
statute in Financial Planning, the text of the Stark Law makes
no reference to per-click rates. In other words, the statute

4
At the time we decided Financial Planning, this portion of
the statute appeared at 15 U.S.C. § 80b-2(a)(11)(F). It has since
been amended.
 15

explicitly permits the Secretary to impose additional
conditions on equipment rental agreements and nowhere
expressly states that per-click rates are permitted. Thus, the
Secretary’s regulation can properly be classified as an “other”
requirement.

The Secretary’s freedom to ban per-click leases is all the
more clear when the equipment rental exception is compared
to other provisions within the Stark Law. For example, the
statute elsewhere expressly permits charging per-click fees in
other contexts, showing that Congress knew how to authorize
such payment terms when it wanted to. In 42 U.S.C.
§ 1395nn(e)(7)(A) Congress created an exception to the Stark
Law that allows the continuation of certain group practice
arrangements with a hospital. Under the Law, a group practice
is defined to include a group of physicians who join together
to perform the full range of medical services in one office,
billing Medicare under one provider number. See 42 U.S.C.
§ 1395nn(h)(4). 5 The provision states that “[a]n arrangement
between a hospital and a group under which designated health
services are provided by the group but are billed by the
hospital” is excepted from the ban on referrals if, among other
things, “the compensation paid over the term of the agreement
is consistent with fair market value and the compensation per
unit of services is fixed in advance and is not determined in a
manner that takes into account the volume or value of any
referrals or other business generated between the parties.” Id.

5
As the Council acknowledges, the kinds of joint ventures its
members form do not qualify as group practices. These joint
ventures are formed solely to purchase and lease equipment and
cannot bill Medicare on their own. Physicians forming group
practices actually perform substantially all of their medical services
within that group and have their own provider number. 42 U.S.C.
§ 1395nn(h)(4).
 16

§ 1395nn(e)(7)(A)(v) (emphasis added). Comparing this
provision to the equipment rental exception shows that
Congress knew how to permit per-click payments explicitly,
suggesting that the omission in this particular context was
deliberate. Cf. Central Bank of Denver v. First Interstate
Bank, N.A., 511 U.S. 164, 176-77 (1994). In other words,
Congress’s decision not to include similar language in the
equipment rental exception supports our conclusion that the
statute is silent regarding the permissibility of per-click leases
for equipment rentals.

Yet another provision of the Stark Law shows that
Congress knew how to limit the Secretary’s authority to
impose additional requirements to the various exceptions. In
42 U.S.C. § 1395nn(e)(2), Congress excludes bona fide
employment relationships from the definition of
compensation arrangements. This provision states that the
employment relationship must comply with various
requirements, including that the pay not be determined “in a
manner that takes into account (directly or indirectly) the
volume or value of any referrals by the referring physician.”
This employment exception also allows the Secretary to
impose “other requirements,” just as the equipment rental
exception. Id. But the statute then goes on to say that the
listed requirements “shall not prohibit the payment of
remuneration in the form of a productivity bonus based on
services performed personally by the physician.” Id. This
language shows that Congress knew how to cabin the
Secretary’s authority to impose “other” requirements and that
it knew how to further clarify what it meant by compensation
that does not take into account the volume of business
generated between parties. That Congress employed neither of
these tools with reference to the equipment rental exception
 17

again supports reading the statute as giving the Secretary
broad discretion as she regulates in this area.

The Council next argues that even if the text is
ambiguous, the legislative history makes plain that the
Secretary must allow per-click leases. The Council points to a
portion of the House Conference Report which explains, in
reference to the rental-charge clause of the equipment rental
exception, that “[t]he conferees intend that charges for space
and equipment leases may be based on . . . time-based rates or
rates based on units of service furnished, so long as the
amount of time-based or units of service rates does not
fluctuate during the contract period.” H.R. REP. NO. 103-213,
at 814 (1993). This expression of congressional intent should,
the Council thinks, bind the Secretary’s hands here and forbid
the new regulation.

In Catawba County, N.C. v. EPA, we stated that “a statute
may foreclose an agency’s preferred interpretation despite
such textual ambiguities if its structure, legislative history, or
purpose makes clear what its text leaves opaque.” 571 F.3d
20, 35 (D.C. Cir. 2009). But we then went on to hold that the
legislative history at issue there did not even come close to
providing the clarity necessary to decide the case at step one.
See id. So too here. The conference report the Council points
to states only that rental charges “may” be based on units of
service. The language is not obligatory. 6 Instead, it simply

6
Judge Henderson argues that Congress is not required to use
obligatory language to limit an agency’s discretion. It is true that
courts should not presume a delegation of power anytime such
power is not withheld. But we make no such presumption here.
Congress has expressly delegated to the Secretary the authority to
promulgate additional requirements, as she has done here, and the
 18

indicates that, as written, the rental-charge clause does not
preclude per-click leases. But, as we have already explained,
there is more to the statute than this clause, and to qualify for
the exception, a rental agreement must comply with all six
clauses, not merely the rental-charge clause alone. The final
clause gives the Secretary the authority to add further
requirements. Nothing in the legislative history suggests a
limit on this authority. We conclude that the statute does not
unambiguously forbid the Secretary from banning per-click
leases as she evaluates the needs of the Medicare system and
its patients. 7

B

The per-click ban falters, however, at Chevron step two.
Although Chevron’s second step largely “overlaps” with
arbitrary-and-capricious review under the APA, Nat’l Ass’n of
Reg. Util. Comm’rs v. ICC, 41 F.3d 721, 726 (D.C. Cir. 1994),
the overlap is not complete. We primarily assess the agency’s

legislative history does not clearly impose a constraint on that
power.
7
Judge Henderson likewise errs in equating Congress’s intent
for the original rental-charge clause to allow per-click leases with
an intent to preclude the Secretary from creating an additional
requirement banning them. But the rental-charge clause, read with
the legislative history, states only that rental charges for equipment
leases must not be “determined in a manner that takes into account
the volume or value of any referrals” and that per-click leases do
not “take[] into account the volume” of patient referrals. See 42
U.S.C. § 1395nn(e)(1)(B)(iv); H.R. REP. NO. 103-213, at 814. A
statement that per-click charges are not precluded by the statutory
clause as it is written is not equivalent to a statement that the
Secretary must continue to permit such charges as she reevaluates,
in light of experience, the operation of the statute.
 19

statutory interpretation to determine whether it is a
“permissible” and “reasonable” view of the Congress’s intent.
Chevron, 467 U.S. at 843–44; see also Cont’l Air Lines, Inc. v.
DOT, 843 F.2d 1444, 1449 (D.C. Cir. 1988) (Chevron step two
is determined “by reference both to the agency’s textual
analysis (broadly defined, including where appropriate resort
to legislative history) and to the compatibility of that
interpretation with the Congressional purposes informing the
measure”); Nat’l Ass’n of Reg. Util. Comm’rs, 41 F.3d at 727
(“although Chevron’s second step sounds closely akin to plain
vanilla arbitrary-and-capricious style review, interpreting a
statute is quite a different enterprise than policy-making”
(quotation marks and ellipsis omitted)). In making this
assessment, we look to what the agency said at the time of the
rulemaking—not to its lawyers’ post-hoc rationalizations.
See SEC v. Chenery Corp., 332 U.S. 194, 196 (1947) (“[A]
reviewing court . . . must judge the propriety of [agency] action
solely by the grounds invoked by the agency. If those grounds
are inadequate or improper, the court is powerless to affirm the
administrative action by substituting what it considers to be a
more adequate or proper basis.”); see also Bus. Roundtable v.
SEC, 905 F.2d 406, 417 (D.C. Cir. 1990) (Chenery principle
applies to Chevron statutory analysis).

In the preamble to the per-click ban, the Secretary
identified the 1993 Conference Report as an important locus of
statutory interpretation. See 73 Fed. Reg. at 48,715. This is
unsurprising as the Secretary felt completely bound by the
Conference Report in 2001. See 66 Fed. Reg. at 878 (“given
the clearly expressed congressional intent in the legislative
history, we are permitting ‘per use’ payments”). The
Secretary now believes the Conference Report is ambiguous
but her explanation in the 2008 rulemaking borders on the
incomprehensible. According to the Secretary:
 20

Where the total amount of rent (that is, the rental charges)
over the term of the lease is directly affected by the
number of patients referred by one party to the other, those
rental charges can arguably be said to . . . “fluctuate during
the contract period based on” the volume or value of
referrals between the parties. Thus, . . . the Conference
Report can reasonably be interpreted to exclude from the
space and lease exceptions leases that include per-click
payments for services provided to patients referred from
one party to the other.

73 Fed. Reg. at 48,716 (emphasis added) (quoting H.R. REP.
NO. 103-213, at 814). This jargon is plainly not a reasonable
attempt to grapple with the Conference Report; it belongs
instead to the cross-your-fingers-and-hope-it-goes-away
school of statutory interpretation. The Conference Report
makes clear that the “units of service rates” are what cannot
“fluctuate during the contract period,” not the lessor’s total
rental income. H.R. REP. NO. 103-213, at 814 (emphasis
added). The Secretary’s interpretation reads the word “rates”
out of the Conference Report entirely. If a “reasonable”
explanation is “the stuff of which a ‘permissible’ construction
is made,” Northpoint, 412 F.3d at 151, the Secretary’s tortured
reading of the Conference Report is the stuff of caprice.

On appeal, counsel for the Secretary minimizes the
Conference Report, noting that its language does not appear in
the statutory text and does not limit the Secretary’s “other
requirements” authority. See Appellee’s Br. 28–29. We
cannot consider this argument, however, because the Secretary
did not articulate it during the 2008 rulemaking and, in fact,
contradicted it by treating the Conference Report as a key
interpretive roadblock. See 73 Fed. Reg. at 48,715. What is
 21

left is the Secretary’s bewildering statutory exegesis—one we
cannot affirm even under Chevron’s deferential standard of
review. See Burlington Truck Lines, Inc. v. United States, 371
U.S. 156, 168–69 (1962) (“Chenery requires that an agency’s
discretionary order be upheld, if at all, on the same basis
articulated in the order by the agency itself . . . . For the courts
to substitute their or counsel’s discretion for that of the
[agency] is incompatible with the orderly functioning of the
process of judicial review.”); Inv. Co. Inst. v. Camp, 401 U.S.
617, 628 (1971) (“Congress has delegated to the administrative
official and not to appellate counsel the responsibility for
elaborating and enforcing statutory commands.”). 8

On this record, the per-click ban fails at Chevron step two.
We remand 42 C.F.R. § 411.357(b)(4)(ii)(B) to the district
court with instructions to remand to the Secretary for further
proceedings consistent with this opinion. On remand, the
Secretary should consider—with more care than she exercised
here—whether a per-click ban on equipment leases is
consistent with the 1993 Conference Report.

8
Judge Griffith believes the Council failed to make a Chenery
challenge to the per-click ban. The Council’s reply brief,
however, argues that “the government makes no effort to defend
HHS’s position [articulated during the rulemaking process] on
appeal.” Appellant’s Reply Br. 10. This assertion “implicitly
raise[s] the Chenery issue,” Mitchell v. Christopher, 996 F.2d 375,
378 n.2 (D.C. Cir. 1993), and is sufficient for us to consider it.
See id. at 379; accord Utah Envtl. Cong. v. Troyer, 479 F.3d 1269,
1287–88 (10th Cir. 2007) (majority op.). Plainly, the Council did
not need to raise a Chenery argument preemptively in its opening
brief, before it knew whether the Secretary’s litigation strategy
would deviate from the reasoning she used during the rulemaking.
 22

III

The Council also challenges the Secretary’s new
definition of an “entity furnishing designated health services,”
which expands the regulation to apply to joint ventures, like
those the Council members participate in, that lease
equipment and perform outpatient procedures under contract
with hospitals. Under the 2008 regulations, physicians cannot
have an ownership interest in a joint venture that leases
equipment to a hospital and simultaneously refer patients to
the hospital for procedures the physician performs using the
leased equipment. 9 The Council concedes that there is
sufficient ambiguity in this part of the statute to move to
Chevron step two. The Council argues that the Secretary’s
definition nonetheless violates the APA because her definition
renders another provision of the Stark Law superfluous, is not
necessary to protect against abuse, and is impermissibly
vague. We disagree.

As before, our deferential analysis under Chevron step
two is limited to determining whether the regulation is
rationally related to the goals of the Stark Law. See
Northpoint, 412 F.3d at 151. Here, defining the “entity
furnishing designated health services” to include the entity
providing the services is a permissible construction of the
statute. This is apparent from a simple reading of the statute

9
There is an ownership exception. As explained previously,
the statute provides exceptions applicable to compensation
agreements, ownership interests, or both. The equipment rental
exception is an exception for a compensation agreement created by
an equipment lease. A physician with an ownership interest in a
joint venture that contracts to perform services in a hospital would
need to qualify for an ownership exception, like the one exempting
rural providers. See 42 U.S.C. § 1395nn(d)(2).
 23

itself: the terms “provide” and “furnish” are used
interchangeably. Compare 42 U.S.C. § 1395nn(a)(2) (stating
that an ownership or investment interest subject to the referral
prohibition includes “an interest in an entity that holds an
ownership or investment interest in any entity providing the
designated health service”), with id. § 1395nn(b)(3) (referring
to “services furnished by an organization” under a prepaid
plan); see also id. § 1395nn(e)(7)(A) (using “provided” and
“furnished” to describe services rendered by a physician
group practice operating under contract with a hospital).
Moreover, this definition furthers the purpose of the statute by
closing a loophole otherwise available to physician-owned
entities that would allow circumvention of the purpose of the
Stark Law merely by having the hospital bill Medicare for the
services. See 73 Fed. Reg. at 48,724.

Despite the apparent reasonableness of defining a term by
use of its synonym, the Council advances several arguments
in an attempt to show that the regulation is arbitrary and
capricious and therefore fails at Chevron step two. See
Northpoint, 412 F.3d at 151. None is persuasive.

First, the Council argues that the Secretary’s new
definition of an “entity furnishing designated health services”
is contrary to legislative intent because it deprives the
exception for group practices of all effect. The Stark Law
defines group practices to include groups of physicians who
provide a full range of medical services “through the joint use
of shared office space, facilities, equipment and personnel.”
42 U.S.C. § 1395nn(h)(4)(A)(i). The statute permits certain
group practices that operated under contract with hospitals
prior to the passage of the Law to continue to do so if specific
conditions are met. Id. § 1395nn(e)(7). However, this special
consideration extended to group practices only excludes the
 24

financial arrangement from being considered a compensation
agreement. Under the new rule, a group practice will now be
considered an entity “furnishing” the services it performs
under contract with the hospital. This means that physicians
with ownership interests in the group practice will not be
permitted to refer patients to hospitals for these procedures
unless an ownership exception also applies.

The Council argues that requiring group practices to meet
an ownership exception would render the original
compensation exception meaningless. Not so. It is true that
the new definition of “furnishes” significantly narrows the
exception for group practices, but it hardly renders the group
practice provision meaningless. For example, a group practice
that qualifies as a rural provider can continue operating under
contract with hospitals. See 42 U.S.C. § 1395nn(d)(2).
Although this will not apply to all group practices, nothing in
the statute suggests that the Secretary may not require a group
to meet both an ownership exception and a compensation
agreement exception. And even without an ownership
exception, the group practice exception still allows employees
with no ownership interest in the group practice to refer
patients to a hospital where the group performs the
procedures. Employees of a group practice are still involved
in a compensation arrangement with a hospital, albeit an
indirect one. See 42 U.S.C. § 1395nn(h)(1)(A) (defining a
compensation arrangement as including “any arrangement
involving any remuneration between a physician . . . and an
entity”); 42 C.F.R. § 411.354(a)(2) (defining a financial
relationship to include direct or indirect relationships).
Because of this, absent an exception, the Stark Law would
preclude the employees of a group practice from referring
patients to the hospital. The group practice exception permits
such employees to refer patients, rendering the exception
 25

meaningful. The Council claims that there are already
regulations providing exceptions for indirect compensation
arrangements, resulting in a redundancy. See 42 C.F.R.
§ 411.357(p). But the principle of statutory interpretation
advising courts to avoid surplusage only speaks to statutory
language, not the content of regulations. Cf. United States v.
Menasche, 348 U.S. 528, 538-39 (1955) (“It is our duty to
give effect, if possible, to every clause and word of a statute.”
(internal quotation marks omitted)).

Next, the Council argues that the new definition is not
needed to prevent urologists from evading the Stark Law. The
Council claims that the regulation of urological procedures is
not within the purpose of the Stark Law because they are
regulated only when they are performed as outpatient
procedures in hospitals. The Council argues that this shows
that Congress did not consider urological procedures
susceptible to abuse. However, this argument misapprehends
the purpose of the statute. The Stark Law is intended to
prevent physicians’ financial interests from affecting whether
they refer patients for outpatient procedures and where the
patient is referred. See 144 Cong. Rec. E4-03 (daily ed. Jan.
27, 1998) (statement of Rep. Stark) (noting that the Stark Law
was “designed to reduce or eliminate the incentives for
doctors to over-refer patients to services in which the doctor
has a financial relationship”). That purpose is fulfilled by
regulating third-party relationships with hospitals regardless
of whether the underlying procedure itself would be
categorized as a designated health service if performed
elsewhere. Urologists who participate in joint ventures receive
a greater financial benefit from Medicare when they perform
the procedure in a hospital and they are therefore given an
incentive to refer patients there. The extra compensation
might deter the urologists from treating the patients elsewhere
 26

or prescribing different treatments altogether. This incentive
brings the procedures within the scope of the purpose of the
Stark Law. The Secretary determined that defining
“furnishes” to include only the entity billing Medicare would
allow abusive practices to evade regulation. We find this
determination reasonable.

Finally, the Council argues that defining “furnishes” to
include an entity that “performs” the services is impermissibly
vague. We disagree. The Secretary provided guidance on the
meaning of the regulation within the preamble and gave
examples as to where it would apply. See 73 Fed. Reg. at
48,726 (explaining that a physician performs a service “if the
physician or physician organization does the medical work for
the service and could bill for the service,” but not where an
entity merely “leases or sells space or equipment used for the
performance of the service”); see also Howmet Corp. v. EPA,
614 F.3d 553-54 (D.C. Cir. 2010) (recognizing that an agency
may provide “fair notice” of its interpretation through
“published agency guidance”). Moreover, even if the precise
contours of the definition are not clear, the Secretary “has
authority to flesh out its rules through adjudications and
advisory opinions.” Shays v. Fed. Election Comm’n, 528 F.3d
914, 930 (D.C. Cir. 2008).

We therefore conclude that the Secretary’s regulation
redefining an “entity furnishing designated health services” is
a reasonable construction of the statute that is entitled to
deference.

IV

The Council argues that the promulgation of the 2008
rule violated the Regulatory Flexibility Act. Congress enacted
 27

the Act in response to concerns with the burdens of federal
regulation, especially on small businesses. See Paul R.
Verkuil, A Critical Guide to the Regulatory Flexibility Act,
1982 DUKE L.J. 213. Although the Act does not require rules
that are less burdensome for small businesses, agencies must
explain why any such alternatives were rejected. 5 U.S.C.
§ 604(a)(6). This process is aimed at “assur[ing] that such
proposals are given serious consideration.” 5 U.S.C. § 601
app. at 124 (Supp. IV 1980). An agency implementing policy
changes through rulemaking must complete an
analysis—referred to as a regulatory flexibility analysis—of
the rule’s impact and publish it in the Federal Register along
with the final rule. See 5 U.S.C. § 604(a). The analysis must
contain several components, including a statement of the need
for the rule, the agency’s response to any significant
comments, an estimate of the number of small entities to
which the rule will apply, a description of the rule’s
compliance requirements, and a description of the steps the
agency has taken to minimize the economic impact on small
entities. Id. § 604(a)(1)-(6). Alternatively, an agency can
forego this analysis “if the head of the agency certifies that
the rule will not, if promulgated, have a significant economic
impact on a substantial number of small entities.” Id.
§ 605(b). The Secretary must publish the certification and its
factual basis in the Federal Register. Id. The Secretary
acknowledges that HHS did not perform a regulatory
flexibility analysis of the 2008 rule; however, she argues that
she properly certified that it will not have a significant impact
on small businesses.
 28

We agree that the Secretary’s certification satisfied the
RFA. 10 In the appendix to the larger rule that included the
changes at issue here, the Secretary discussed each portion of
the rule and stated that “the analysis discussed throughout the
preamble of this final rule constitutes our final regulatory
flexibility analysis.” 73 Fed. Reg. at 49,063. In explaining the
changes in regulating per-click charges and physicians’
agreements to operate within hospitals, the Secretary stated
that “[w]e do not anticipate these final policies will have a
significant impact on physicians, other health care providers
and suppliers, or the Medicare or Medicaid programs and
their beneficiaries.” Id. at 49,077. Although this statement
nowhere uses the word “certify,” that omission alone does not
constitute a violation of the RFA. See Motor & Equip. Mfrs.
Ass’n v. Nichols, 142 F.3d 449, 467 (D.C. Cir. 1998)
(upholding a certification as sufficient where the EPA stated
only that the rule would “not have a significant adverse
economic impact on a substantial number of small
businesses”). And the preamble to the rule, which the
Secretary incorporated as part of the analysis, fulfills the
RFA’s requirement that the Secretary include a statement
providing a factual basis for her certification. The Secretary
stated her belief that existing arrangements “can be
restructured” to comply with new requirements. See 73 Fed.
Reg. at 48,717, 48,733. Indeed, the Secretary delayed the
effective date of the regulations “to afford parties adequate
time to restructure arrangements.” Id. at 48,714; see also id. at
48,721, 48,729. The Secretary’s belief that entities could
10
The district court held that the Council conceded the
adequacy of the certification by failing to challenge the Secretary’s
argument at summary judgment. See Council for Urological
Interests, 946 F. Supp. 2d at 112. We need not consider whether
this treatment was appropriate because we hold that the certification
was adequate in any event.
 29

restructure and the provision of additional time to allow them
to do so provides a factual basis for the certification.

The Council argues that the Secretary was incorrect in
believing that existing arrangements could be “easily
restructured.” So long as the procedural requirements of the
certification are met, however, this court’s review is “highly
deferential” as to the substance of the analysis, particularly
where an agency is predicting the likely economic effects of a
rule. See Helicopter Ass’n Int’l, Inc. v. FAA, 722 F.3d 430,
438 (D.C. Cir. 2013). Because we find that the Secretary
demonstrated a “reasonable, good-faith effort” to comply with
the RFA’s “[p]urely procedural” requirements, we uphold the
certification as satisfactory. U.S. Cellular Corp. v. FCC, 254
F.3d 78, 88 (D.C. Cir. 2001) (internal quotation marks
omitted).

V

The district court’s order granting summary judgment to
the Secretary is affirmed in part and reversed in part. We
remand the per-click regulation to the district court with
instructions to remand to the Secretary.
 1
KAREN LECRAFT HENDERSON, Circuit Judge, dissenting
in part: In my view, the Congress unambiguously intended
to authorize per-click equipment leases. I therefore do not
believe the per-click ban, 42 C.F.R. § 411.357(b)(4)(ii)(B),
satisfies the first step of Chevron and respectfully dissent
from Part II.A of the majority opinion.

The Stark Law broadly prohibits self-referrals: if a doctor
has a financial interest in an entity, he cannot refer patients to
that entity for designated health services. 42 U.S.C.
§ 1395nn(a). Nevertheless, the Stark Law contains multiple
exceptions. Id. § 1395nn(b)–(e). This case involves the
equipment exception. Id. § 1395nn(e)(1)(B). A physician
can lease equipment to an entity—and refer patients to it—if:

(i) the lease is set out in writing, signed by the
parties, and specifies the equipment covered by
the lease,
(ii) the equipment rented or leased does not exceed
that which is reasonable and necessary for the
legitimate business purposes of the lease or
rental and is used exclusively by the lessee when
being used by the lessee,
(iii) the lease provides for a term of rental or lease of
at least 1 year,
(iv) the rental charges over the term of the lease are
set in advance, are consistent with fair market
value, and are not determined in a manner that
takes into account the volume or value of any
referrals or other business generated between
the parties,
(v) the lease would be commercially reasonable
even if no referrals were made between the
parties, and
 2
(vi) the lease meets such other requirements as the
Secretary may impose by regulation as needed
to protect against program or patient abuse.

Id. (emphases added). The Centers for Medicare and
Medicaid Services (CMS or Agency) relied on subsection (vi)
to enact the per-click ban, which ban specifies that an
equipment lease can no longer utilize “[p]er-unit of service
rental charges.” 42 C.F.R. § 411.357(b)(4)(ii)(B) (emphasis
added). The question is whether the CMS can use its “other
requirements” authority to ban per-click leases. I think not.

An agency cannot use its delegated authority in a way
that contradicts the Congress’s unambiguous intent. See
Maislin Indus., U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116,
134–35 (1990) (“Although the [agency] has both the authority
and expertise generally to adopt new policies when faced with
new developments in the industry, it does not have the power
to adopt a policy that directly conflicts with its governing
statute.” (citation omitted)); cf. AFL-CIO v. Chao, 409 F.3d
377, 384 (D.C. Cir. 2005) (“Even when Congress has stated
that the agency may do what is ‘necessary,’ ” the agency
“cannot render nugatory restrictions that Congress has
imposed.” (citation omitted)). As a matter of first principles,
an agency is not entitled to Chevron deference unless the
Congress “has left a gap for the agency to fill.” Am. Bar
Ass’n v. FTC, 430 F.3d 457, 468 (D.C. Cir. 2005). If the
Congress has “directly spoken” to the issue in question, there
is no such gap. Ry. Labor Execs.’ Ass’n v. Nat’l Mediation
Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (en banc) (quoting
Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842 (1984));
see also Util. Air Reg. Grp. v. EPA, 134 S. Ct. 2427, 2445
(2014) (“Agencies exercise discretion only in the interstices
created by statutory silence or ambiguity; they must always
give effect to the unambiguously expressed intent of
 3
Congress.” (quotation marks omitted)). An agency crosses
an impermissible line when it moves from interpreting a
statute to rewriting it. See La. Pub. Serv. Comm’n v. FCC,
476 U.S. 355, 376 (1986) (“As we so often admonish, only
Congress can rewrite [a] statute.”); NRDC v. Adm’r, EPA, 902
F.2d 962, 977 (D.C. Cir. 1990) (“It hardly bears noting that
[the agency’s] discretion cannot include the power to rewrite
a statute and reshape a policy judgment Congress itself has
made.”), vacated in other part, 921 F.2d 326 (D.C. Cir. 1991).
Even if the Congress wanted to authorize agency rewrites, the
Constitution would stand in its way. See Util. Air Reg. Grp.,
134 S. Ct. at 2446 (“Under our system of government,
Congress makes laws and the President, acting at times
through agencies . . ., faithfully executes them.” If agencies
could “modify unambiguous requirements imposed by a
federal statute,” it “would deal a severe blow to the
Constitution’s separation of powers.” (quotation marks and
alteration omitted)); see also id. at n.8 (“[W]e shudder to
contemplate the effect that such a principle would have on
democratic governance.”).

The CMS contends that it can always use its “other
requirements” authority to narrow the scope of the equipment
exception, prohibit more conduct and remain consistent with
the Stark Law. But the Agency takes an overly simplistic
view of congressional intent. Legislation is often the
product of “compromise between groups with . . . divergent
interests,” reflecting a “careful balance” between two
extremes. Ragsdale v. Wolverine World Wide, Inc., 535 U.S.
81, 93–94 (2002). “[A]gencies must respect and give effect
to these sorts of compromises.” Id. at 94. The Stark Law,
for example, begins with a broad prohibition on physician
self-referrals. See 42 U.S.C. § 1395nn(a). The bulk of the
provision, however, consists of exceptions to that general ban.
See id. § 1395nn(b)–(e); see also Steven D. Wales, The Stark
 4
Law: Boon or Boondoggle? An Analysis of the Prohibition on
Physician Self-Referrals, 27 LAW & PSYCHOL. REV. 1, 11
(2003) (“What cannot be done [under the Stark Law] is
explained in one sentence. . . . Exceptions, however, fill
nearly nine pages of the statute.”). The exceptions reflect
the Congress’s judgment that certain arrangements are net
beneficial to patients, regardless of the risks associated with
self-referrals. See United States ex rel. Kosenske v. Carlisle
HMA, Inc., 554 F.3d 88, 96 (3d Cir. 2009). Thus, when the
CMS circumscribes a statutory exception to the Stark Law, it
can do as much violence to the Congress’s intent as when it
broadens one. See Am. Bankers Ass’n v. SEC, 804 F.2d 739,
754 (D.C. Cir. 1986) (agency cannot “change basic decisions
made by Congress” (emphasis added)); Guardians Ass’n v.
Civil Serv. Comm’n of N.Y., 463 U.S. 582, 615 (1983)
(O’Connor, J., concurring in the judgment) (“[W]e would
expand considerably the discretion and power of agencies
were we . . . to permit [them] to proscribe conduct that
Congress did not intend to prohibit.”).

Moreover, the text of subsection (vi)—authorizing the
CMS to promulgate “other requirements”—contains its own
limitation. The word “other” means “existing besides, or
distinct from, that already mentioned or implied.” Fin.
Planning Ass’n v. SEC, 482 F.3d 481, 489 (D.C. Cir. 2007)
(quoting II THE SHORTER OXFORD ENGLISH DICTIONARY 1391
(2d ed. 1936, republished 1939)). The CMS cannot use its
“other requirements” authority to “redefine” or “override” the
statutory conditions set out in the equipment exception. Id.
For example, subsection (iii) requires equipment leases to be
“at least 1 year” long. 42 U.S.C. § 1395nn(e)(1)(B)(iii).
The CMS plainly could not change “1 year” to “6 months”
because such a regulation would redefine a statutory
requirement, instead of adding a new one. See Fin. Planning
Ass’n, 482 F.3d at 489 (“[C]ourts have hesitated to allow
 5
[agencies] to use language structurally similar to the ‘other
[requirements]’ clause . . . to redefine . . . specific
requirements in existing statutory exceptions.” (citing
Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847,
863 n.11 (1988)).

Applying these principles here, we first determine
whether another provision of the equipment exception already
addresses the propriety of per-click leases. Subsection (iv),
which discusses rent, is the most natural candidate. Under
subsection (iv), “the rental charges over the term of the lease”
must not be “determined in a manner that takes into account
the volume or value of any referrals or other business
generated between the parties.” 42 U.S.C.
§ 1395nn(e)(1)(B)(iv) (emphases added). The key inquiry,
then, is whether the “rental charges” in a per-click lease
“take[] into account the volume” of patient referrals. The
per-click ban cannot stand unless the answer is “Yes” or “It’s
ambiguous.”

Mathematically, a per-click lease can be expressed as Y =
R∙X, with Y as the physician’s total rental income, R as the
charge per patient and X as the number of patients served.
The term “rental charges” in subsection (iv) can have two
meanings. On the one hand, “rental charges” may refer to
the variable Y. If “rental charges” means “rental income,”
then per-click leases do not qualify for the equipment
exception. A per-click lease would “take[] into account the
volume” of referrals because the physician’s rental income
would depend directly on the number of patients he refers.
On the other hand, “rental charges” may refer to the variable
R in the equation above (i.e., the per-patient rate). If a
per-click lease charges a flat per-patient rate over the term of
the lease, it does not “take into account the volume” of
referrals and is therefore eligible for the equipment exception.
 6
But if a per-click lease adopts a tiered system—e.g., $1,000
for the first 20 patients, $2,000 for the next 20 patients,
$3,000 for the next 20 patients, and so on—it would not
qualify. Because the text of the equipment exception is
“reasonably susceptible” to either of these interpretations, it is
ambiguous. McCreary v. Offner, 172 F.3d 76, 82 (D.C. Cir.
1999). 1

If the text is ambiguous, we do not automatically move to
Chevron Step Two. Instead, “a statute may foreclose an
agency’s preferred interpretation . . . if its structure,
legislative history, or purpose makes clear what its text leaves
opaque.” Catawba Cnty., NC v. EPA, 571 F.3d 20, 35 (D.C.
Cir. 2009) (emphasis added); see also Sierra Club v. EPA,
551 F.3d 1019, 1027 (D.C. Cir. 2008) (“Although Chevron
step one analysis begins with the statute’s text, the court must
. . . exhaust the traditional tools of statutory construction,
including examining the statute’s legislative history . . . .”
(emphasis added) (quotation marks omitted)); Am. Bankers
Ass’n v. NCUA, 271 F.3d 262, 268, 271 (D.C. Cir. 2001)
(finding text ambiguous but resolving case at Chevron Step
One due to “pellucid” legislative history). In Chevron itself,
the Supreme Court did not stop once it found the text
ambiguous; it marched on to consider the legislative history
as well. See 467 U.S. at 862; see also FDA v. Brown &
Williamson Tobacco Corp., 529 U.S. 120, 147 (2000)
(legislative history is “certainly relevant” at Chevron Step

1
Nevertheless, the latter interpretation is plainly the stronger one.
The word “charge” means “expense,” “cost,” or the “price required or
demanded for service rendered.” Charge, III OXFORD ENGLISH
DICTIONARY 36 (2d ed. 1989); see also MCGRAW–HILL ESSENTIAL
DICTIONARY OF HEALTH CARE 159 (1988) (“charge” means the “price
assigned to a unit of medical service”). It more naturally refers to the
rental rate charged to the lessee, not the rental income earned by the
lessor.
 7
One); PBGC v. LTV Corp., 496 U.S. 633, 649 (1990)
(“legislative history” is one of the “traditional tools of
statutory construction” at Chevron Step One).

Much ink has been spilled on the propriety of using
legislative history to cloud a clear text under Chevron. See,
e.g., Zuni Pub. Sch. Dist. No. 89 v. Dep’t of Educ., 550 U.S.
81, 90 (2007); id. at 105–06 & n.2 (Stevens, J., concurring);
id. at 108 (Scalia, J., dissenting); see also Halbig v. Burwell,
758 F.3d 390, 406 (D.C. Cir. 2014) (identifying “a fork in our
precedent” on this issue), reh’g en banc granted, judgment
vacated, No. 14-5018, 2014 WL 4627181 (D.C. Cir. Sept. 4,
2014). But the converse—consulting legislative history to
clarify an ambiguous text—ought to be uncontroversial. The
chief objection to legislative history is that it can be
undemocratic: the Congress qua Congress approves only the
text of a statute and the legislative history might reflect a
distinctly minority view. See Exxon Mobil Corp. v.
Allapattah Servs., Inc., 545 U.S. 546, 568 (2005). In the
Chevron context, however, a failure to consult legislative
history would leave the text ambiguous and thereby transfer
authority to an administrative agency, whose democratic
accountability is nil. See Free Enter. Fund v. PCAOB, 561
U.S. 477, 499 (2010) (“The growth of the Executive Branch
. . . heightens the concern that it may slip from the
Executive’s control, and thus from that of the people.”).
And at least some types of legislative history “shed a reliable
light on” the views of a majority of the enacting Congress.
Allapattah Servs., 545 U.S. at 568; see also Simpson v. United
States, 435 U.S. 6, 17 (1978) (Rehnquist, J., dissenting)
(“[S]ome types of legislative history are substantially more
reliable than others. The report of a joint conference
committee of both Houses of Congress, for example, . . . is
accorded a good deal more weight than the remarks . . . on the
floor of the chamber.”). Legislative history is also criticized
 8
for being “murky, ambiguous, and contradictory,” an exercise
of “looking over a crowd and picking out your friends.”
Allapattah Servs., 545 U.S. at 568. But again, this criticism
loses force under Chevron. If legislative history is
“ambiguous”—i.e., if both the petitioner and the agency have
“friends” they can pick out—then, by definition, the agency
prevails under Chevron Step One. See, e.g., Catawba Cnty.,
571 F.3d at 38. Sometimes, however, the legislative history
is clear, reliable and uncontroverted; if it is, we would be
wrong to ignore it.

This is one such case. The Conference Report on the
1993 amendments to the Stark Law resolves the textual
ambiguity in the equipment exception. According to the
Conference Report:

The conferees intend that charges for . . . equipment
leases may be based on daily, monthly, or other
time-based rates, or rates based on units of service
furnished, so long as the amount of the time-based or
units of service rates does not fluctuate during the
contract period based on the volume or value of
referrals between the parties to the lease or
arrangement.

H.R. REP. NO. 103-213, at 814 (1993) (Conf. Rep.) (emphases
added). This legislative history makes clear that the term
“rental charges” in subsection (iv) refers to rental “rates,” not
total rental income. Thus, so long as the per-patient rate is
fixed over the course of the lease, a per-click lease qualifies
for the equipment exception. The Conference Report could
not have been clearer on this point and the CMS has identified
nothing to controvert it. Conference reports, moreover, are
the gold standard when it comes to legislative history. See
Moore v. Dist. of Columbia, 907 F.2d 165, 175 (D.C. Cir.
 9
1990) (en banc) (unanimous) (“conference committee report
is the most persuasive evidence of congressional intent after
statutory text” (quotation marks omitted)); Planned
Parenthood Fed’n of Am., Inc. v. Heckler, 712 F.2d 650, 657
n.36 (D.C. Cir. 1983) (statements in conference reports are
“particularly weighty indicators of congressional intent”
because they “represent[] the final word on the final version
of a statute” and “must be signed by a majority of both
delegations from the House and Senate who have resolved the
differences between the two chambers” (quotation marks
omitted)).

In short, the Conference Report demonstrates that the
“rental charges” in a per-click equipment lease do not “take[]
into account the volume . . . of any referrals . . . between the
parties.” 42 U.S.C. § 1395nn(e)(1)(B)(iv). Per-click leases
are therefore eligible for the equipment exception and the
CMS lacks the authority to say otherwise.

Contrary to my colleagues, I do not believe the physician
group–practice exception reintroduces any ambiguity. That
exception requires that a group’s “compensation per unit of
services” not be “determined in a manner that takes into
account the volume or value of any referrals or other business
generated between the parties.” Id. § 1395nn(e)(7)(A)(v)
(emphasis added). My colleagues contend that the
emphasized language shows the Congress “knew how to
permit per-click payments explicitly, suggesting that the
omission in [the equipment exception] was deliberate.” Maj.
Op. 15–16. But the group-practice exception speaks only to
“compensation” and, thus, does nothing to illuminate the term
“rental charges” in the equipment exception. The
interpretative value of this wholly separate exception is
therefore minimal. See Weaver v. U.S. Info. Agency, 87 F.3d
1429, 1437 (D.C. Cir. 1996) (discounting this canon of
 10
statutory construction when “the subject-matter to which the
words refer is not the same” (quoting Atl. Cleaners & Dyers
v. United States, 286 U.S. 427, 433 (1932))); see also United
States v. Wells Fargo Bank, 485 U.S. 351, 357 (1988) (“We
cannot attribute to Congress an intent . . . by comparing two
unrelated provisions of the [statute].”). More importantly,
the Conference Report speaks directly to the equipment
exception and uses the exact language my colleagues believe
is missing: “unit[] of service[s].” H.R. REP. NO. 103-213, at
814. In my view, this crystalline legislative history
supersedes whatever oblique inference is attempted to be
teased out of a distinct exception in the Stark Law. See
United States v. Stauffer Chem. Co., 684 F.2d 1174, 1184 (6th
Cir. 1982) (“conference report” can rebut “presumption” that
“a difference in language reflects a difference in meaning”
(citing Moore v. Harris, 623 F.2d 908, 914 (4th Cir. 1980));
see also Neuberger v. CIR, 311 U.S. 83, 88 (1940) (“The
maxim ‘expressio unius est exclusio alterius’ . . . can never
override clear and contrary evidences of Congressional
intent.”). As this Court has explained before, the argument
that the “Congress knows how to say thus and so, and would
have written thus and so if that is what it really intended” is
“weak.” Doris Day Animal League v. Veneman, 315 F.3d
297, 299 (D.C. Cir. 2003). “It may be countered by arguing
that if Congress wanted to exclude [per-click leases] from the
[equipment exception] it easily could have said as much.”
Id. (emphasis added). The text’s “failure to speak with
clarity signifies only that there is room for disagreement,”
id.—disagreement that, here, the legislative history resolves.

My colleagues minimize the Conference Report because
it “states only that rental charges ‘may’ be based on units of
service.” Maj. Op. 17 (emphasis added). This Court has
repeatedly held, however, that the Congress need not speak in
obligatory terms to constrain an agency’s discretion. See Ry.
 11
Labor Execs.’ Ass’n, 29 F.3d at 671 (“To suggest . . . that
Chevron step two is implicated any time a statute does not
expressly negate the existence of a claimed administrative
power (i.e. when the statute is not written in ‘thou shalt not’
terms), is both flatly unfaithful to the principles of
administrative law . . . and refuted by precedent.” (emphasis
in original)); Ethyl Corp. v. EPA, 51 F.3d 1053, 1059–60
(D.C. Cir. 1995) (rejecting argument that “Congress’s use of
the word ‘may’ ” gives agency unbridled discretion and
noting that “[w]e refuse . . . to presume a delegation of power
merely because Congress has not expressly withheld such
power”). Otherwise, “agencies would enjoy virtually
limitless hegemony, a result plainly out of keeping with
Chevron and quite likely with the Constitution as well.”
Michigan v. EPA, 268 F.3d 1075, 1082 (D.C. Cir. 2001).
Here, the Congress said that an equipment lease “may” charge
a per-click rate; the CMS is therefore not free to say it “may
not.”

My colleagues also note that “the text of the Stark Law
makes no reference to per-click rates.” Maj. Op. 14
(emphasis added). But this is just another way of saying that
legislative history is irrelevant at Chevron Step One. It
assumes that legislative history cannot disambiguate the
meaning of the text itself—an assumption that runs contrary
to precedent. See supra pp. 6–7; see also, e.g., Cohen v.
United States, 650 F.3d 717, 730 (D.C. Cir. 2011) (en banc)
(consulting “single paragraph” of “surprisingly
straightforward” legislative history to determine meaning of
“intrinsically ambiguous” text); Elec. Indus. Ass’n Consumer
Elecs. Grp. v. FCC, 636 F.2d 689, 696 (D.C. Cir. 1980)
(finding legislative history that “limited the [agency’s]
power”). It also blinks reality. The Congress often uses
legislative history, rather than the text, to restrain agencies in
the exercise of their delegated authority. See Abbe R. Gluck
 12
& Lisa Schultz Bressman, Statutory Interpretation from the
Inside—An Empirical Study of Congressional Drafting,
Delegation, and the Canons: Part I, 65 STAN. L. REV. 901,
965–78 (2013). Here, for example, the CMS felt completely
bound by the Conference Report in 2001, see Maj. Op. 19–20,
and viewed the Conference Report as a substantial hurdle to
be overcome in 2008, see 73 Fed. Reg. at 48,715 (“we agree
that Congress specifically intended to permit certain per-click
leases”). This Court likewise consulted legislative history in
Financial Planning Association, 482 F.3d at 488–90 &
n.6—the case my colleagues cite for their text-only
proposition. See Maj. Op. 14.

In sum, the Conference Report demonstrates that the
Congress addressed per-click leases with a “level of
specificity” that “effectively close[d] any gap the Agency
s[ought] to find and fill.” Ethyl Corp., 51 F.3d at 1060.
Because subsection (iv) sanctions per-click leases, the
per-click ban is not an “other” requirement the CMS can
promulgate under subsection (vi). “[A]gencies whose
jurisdictional boundaries are defined in the statute [cannot]
alter by administrative regulation those very jurisdictional
boundaries. To suggest otherwise is to sanction
administrative autonomy beyond the control of either
Congress or the courts.” Am. Bankers Ass’n, 804 F.2d at
754. The CMS’s ban on per-click equipment leases
therefore fails at Chevron Step One. Because my colleagues
hold otherwise, I respectfully dissent on this issue.
 1
GRIFFITH, Circuit Judge, dissenting in part: The majority
holds that the per-click rule fails at Chevron step two because
the Secretary’s discussion of the legislative history is
unreasonable. The Conference Report states that “[t]he
conferees intend that charges for space and equipment leases
may be based on . . . rates based on units-of-service furnished,
so long as the amount of the . . . units-of-service rates does
not fluctuate during the contract period based on the volume
or value of referrals between the parties to the lease or
arrangement.” H.R. REP. NO. 103-213 at 814. In the
rulemaking, the Secretary responded to comments that
pointed to this legislative history and agreed that it showed
that “Congress specifically intended to permit certain
per-click leases,” however, she “disagree[d] that Congress
intended an unqualified exception for per-click leases.” 73
Fed. Reg. at 48,715. The Secretary reached this conclusion by
adopting a reading of the legislative history that did not
prohibit her from banning per-click leases:

Where the total amount of rent (that is, the rental charges)
over the term of the lease is directly affected by the
number of patients referred by one party to the others,
those rental charges can arguably be said to “take into
account” or “fluctuate during the contract period based
on” the volume or value of referrals between the parties.

Id. at 48,716. Thus, under the Secretary’s reading during
rulemaking, the legislative history could be read to preclude
per-click leases because the total amount paid to the lessor
depends on the number of uses of the equipment, even if the
per-click rate itself does not. On appeal, however, the
Secretary has pressed a different view of the legislative
history. Here, she has argued that “the legislative history
invoked by the Council does not speak at all to the scope of
the Secretary’s . . . power to add ‘other requirements’ to the
equipment rental exception. . . . It is thus beside the point
 2
whatever light the legislative history might shed on [the
rental-charge clause].” Appellee’s Br. 28.

The majority insists that the Secretary cannot rely on the
reasoning she has put forth on appeal because it was not set
out in the rulemaking and Chenery therefore bars us from
considering it now. Although the Council raised the Chenery
argument before the district court, see Pl.’s Rep. in Supp. of
Mot. for Sum. J. (Dkt. 32) at 2-4, it has not pursued the point
on appeal. The majority cites an excerpt from the Council’s
reply brief that it argues “implicitly” raises the issue.
Generally, we do not consider arguments raised for the first
time in a reply brief. See Russell v. Harman Int’l Indus., Inc.,
773 F.3d 253, 255 n.1 (D.C. Cir. 2014). The majority
contends that looking to the reply brief here is not problematic
because the Council did not need to raise Chenery in its
opening brief before it knew the Secretary’s litigation
strategy. But the majority ignores the fact that this appeal
comes to us from the district court, where the Secretary relied
on the same rationale she does here and the Council disputed
her reasoning based on Chenery. The Council was therefore
well aware of the Secretary’s litigating position and should
have raised Chenery as a basis for overturning the district
court in its opening brief. See Corson & Gruman Co. v.
NLRB, 899 F.2d 47, 50 n.4 (D.C. Cir. 1990) (“We require
petitioners and appellants to raise all of their arguments in the
opening brief to prevent ‘sandbagging’ of appellees and
respondents and to provide opposing counsel the chance to
respond.”).

In any event, the excerpted language does not raise a
Chenery argument, implicitly or otherwise. It states only that
the Secretary has not defended the interpretation of the
legislative history that was set forth in the rulemaking. See
Appellant’s Reply Br. 10. This is entirely different from an
 3
argument that the Secretary’s current analysis was not raised
in the rulemaking—the argument that “implicitly raised the
Chenery issue” in the case on which the majority relies.
Mitchell v. Christopher, 996 F.2d 375, 378 n.2 (D.C. Cir.
1993). The majority’s strained reading of the brief is
especially suspect given the clarity with which the Council
raised the Chenery argument before the district court. See
Pl.’s Rep. in Supp. of Mot. for Sum. J. (Dkt. 32) at 2-4. By
sua sponte considering an argument the Council has elected to
omit from either its opening or reply brief, the majority
remands a federal regulation based on an argument not before
this court—an action at odds with our precedent. See, e.g.,
Doe by Fein v. District of Columbia, 93 F.3d 861, 875 n.14
(D.C. Cir. 1996) (holding that the appellant waived an
argument not raised on appeal). Cf. Byers v. C.I.R., 740 F.3d
668, 681 (D.C. Cir. 2014) (refusing to consider a Chenery
argument where the appellant failed to pursue the claim in the
court below); see also Utah Envtl. Cong. v. Troyer, 479 F.3d
1269, 1288-92 (10th Cir. 2007) (McConnell, J. concurring in
part and dissenting in part) (arguing that the majority’s
consideration of Chenery claims not raised on appeal
“violates well-established principles of appellate review”).
The Council is a sophisticated litigant, represented by
attorneys familiar with the appellate process. We cannot know
why it chose not to bring this particular challenge on appeal,
and we should not address what is not before us.

If the argument were properly before us, I would be
inclined to agree that the Secretary’s interpretation of the
legislative history in the rulemaking was unreasonable. But
that approach is foreclosed because the Council has declined
to raise the Chenery argument on appeal. I find the arguments
the Council actually briefed at Chevron step two
unpersuasive, and would thus uphold the per-click rule based
 4
on the Secretary’s reasoning on appeal. On those grounds, I
respectfully dissent.