Paragon Health Network, Inc. v. Thompson

In the
United States Court of Appeals
For the Seventh Circuit

No. 00-3707

Paragon Health Network, Inc., d/b/a Milwaukee
Subacute Center, a/k/a Milwaukee Subacute and
Rehabilitation Center,

Plaintiff-Appellant,

v.

Tommy G. Thompson,/* Secretary, Department
of Health and Human Services,

Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 98-C-0553--Rudolph T. Randa, Judge.

Argued April 12, 2001--Decided June 5, 2001

Before Flaum, Chief Judge, and Manion and
Kanne, Circuit Judges.

Flaum, Chief Judge. Plaintiff Paragon
Health Network, Inc. ("Paragon")/1
appeals from a district court decision
affirming a determination that its newly
opened skilled nursing facility ("SNF"),
Milwaukee Subacute Center ("MSC"), is not
eligible for an exemption from the
routine cost limits ("RCLs") of Medicare.
Paragon contends that the interpretations
by the Secretary of Health and Human
Services ("Secretary") of the relevant
regulation are arbitrary and unreasonable
and that the decision denying an
exemption to MSC is not supported by
substantial evidence. For the reasons
stated herein, we affirm.

I. Background

Wisconsin has adopted a set of statutes
regulating nursing facilities. Wis. Stat.
sec. 150.21, et seq. Wisconsin requires
each SNF to have Certificate of Need
("CON") rights for the beds it operates.
The state has a moratorium on the
issuance of new CON rights; thus, to open
a SNF, one must obtain CON rights from a
currently existing nursing provider.
Wisconsin permits the transfer of CON
rights, but only to a related entity that
will operate within the same Health
Service Area ("HSA") as the current owner
of the rights. The state is split into
eight HSAs.

Paragon opened MSC as a SNF in downtown
Milwaukee, Wisconsin on April 7, 1995,
with a capacity of thirty-five nursing
beds. MSC obtained the rights to these
thirty-five beds from Shores Transitional
Care and Rehabilitation Center
("Shores"), another facility owned by
Paragon. Shores is located in Glendale, a
northern suburb of Milwaukee, and the
distance between the two facilities is
about seven miles. Both MSC and Shores
are located in HSA Number Two, which is
approximately eighty miles long, forty to
fifty miles wide, and encompasses the
city of Milwaukee and seven counties. At
the time immediately before the transfer,
Shores had CON rights to four-hundred-
and-three beds. Shores continues to
operate as a separate facility after the
transfer of a fraction of its CON rights
to MSC. The only thing that MSC received
from Shores were the CON rights; no
residents, staff, or equipment were
transferred.

The RCLs are the maximum amount that the
federal government will pay for services
under the Medicare program. See generally
Good Samaritan Hosp. v. Shalala, 508 U.S.
402, 404-06 (1993) (providing a "rough
description" of the RCL regime). At the
time when MSC opened, 42 C.F.R. sec.
413.30(e) exempted "new providers" from
the RCLs for a period of up to two years.
MSC applied for this exemption on June
20, 1995, but the Health Care Financing
Administration ("HCFA"), the federal
agency through which the Secretary
administers the Medicare program, denied
this request. Paragon appealed to the
Provider Reimbursement Review Board
("PRRB"), which conducted an evidentiary
hearing and concluded that MSC was not
entitled to the new provider exemption.
The PRRB found that MSC was a relocated
portion of Shores rather than a new
facility, relying only on the transfer of
CON rights from Shores to MSC in reaching
this conclusion. The PRRB also considered
whether MSC would be granted the new
provider exemption as a relocated
provider serving a substantially
different inpatient population. The PRRB
stated that MSC could not qualify for the
exemption in this manner either because
MSC’s patients came from the same cities
and towns as Shores, which is to say that
almost all of the patients of both
facilities live in Milwaukee. The HCFA
Administrator declined to review the
adjudication, and so the PRRB’s decision
became the final decision of the
Secretary. 42 U.S.C. sec. 1395oo(f)(1).
Paragon filed suit in district court
claiming that the PRRB’s decision
unreasonably interpreted 42 C.F.R. sec.
413.30(e) and was not supported by
substantial evidence, but the court
rejected Paragon’s arguments and entered
summary judgment in favor of the
Secretary.

II. Discussion

A. Standard of Review

42 U.S.C. sec. 1395oo(f)(1) states that
we review the Secretary’s decision under
the Administrative Procedure Act. Thus,
we will reverse the Secretary’s
determination only if it is arbitrary,
capricious, not supported by substantial
evidence, or otherwise deficient under
the standards set forth in 5 U.S.C. sec.
706. In addition, we normally defer to
the Secretary’s reasonable construction
of the Medicare regulations. See Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504,
512 (1994). We first consider whether the
regulation is ambiguous. See Christensen
v. Harris County, 529 U.S. 576, 588
(2000). If not, then we apply the
regulation according to its plain
meaning; if so, then the Secretary’s
interpretation is entitled to
"controlling weight unless it is plainly
erroneous or inconsistent with the
regulation." Thomas Jefferson, 512 U.S.
at 512 (internal quotation marks
omitted); see also Bowles v. Seminole
Rock & Sand Co., 325 U.S. 410, 414
(1945).

B. Secretary’s Interpretation

42 C.F.R. sec. 413.30(e) contains an
exemption to the Medicare RCLs for a "new
provider." A new provider is defined as
"a provider of inpatient services that
has operated as the type of provider (or
the equivalent) for which it is certified
for Medicare, under present and previous
ownership, for less than three full
years."/2 The Provider Reimbursement
Manual ("PRM"), a set of instructions
issued by the Secretary that constitutes
an administrative interpretation of the
Medicare statute and regulations, see
Shalala v. Guernsey Mem’l Hosp., 514 U.S.
87, 101-02 (1995) (referring to PRM
provisions as interpretive rules),
provides further guidance on new provider
exemptions. PRM sec. 2604.1 reiterates
the definition of new provider contained
in the regulation, and then states that a
provider which relocates could be granted
new provider status if it meets certain
conditions./3

In denying that MSC was a new provider,
the PRRB relied solely on the fact that
MSC had acquired CON rights from Shores.
In determining the length of time a
provider has "operated," the Secretary
considers the "previous ownership" of the
SNF’s CON rights. The operating history
of the SNF from which any CON rights were
obtained is imputed to the acquiring
provider. In the instant case, this
interpretation caused the PRRB to
conclude that MSC had been operating
since 1979, the year Shores opened, since
MSC and Shores provide the same type of
service. Instead of MSC being a new
provider, the PRRB decided that MSC was a
relocated part of Shores.

C. New Provider

1. Challenges to Seminole Rock
deference.

Paragon has a number of arguments as to
why the Secretary’s interpretation is
incorrect, but the contentions we will
initially consider regard the weight that
should be given to the Secretary’s
construction of 42 C.F.R. sec. 413.30(e).
Paragon claims that the deference
normally accorded agency interpretations
of their own regulations is warranted
only where the interpretation is both
contemporaneous with the regulation and
consistently applied. Appellant claims
that the contemporaneity requirement for
deference is not satisfied here because
the Secretary’s interpretation relying
solely on the transfer of CON rights to
deny that a SNF is a new provider was not
made until 1995, while the regulation was
promulgated in 1979. Paragon also
contends that the interpretation has not
been consistent, relying on PRM sec.
2154.2.C., which defines "relocate" as
"[t]o move an existing provider to a new
location and close the old provider."
Paragon claims that this is the only
definition of "relocate" in the PRM, and
so should be applied whenever that word
appears in the Medicare statute,
regulations, or PRM provisions. Paragon
seizes upon the last part of this
definition to argue that MSC cannot be a
relocated provider since the old
provider, Shores, has not closed. Thus,
the PRRB was inconsistent in labeling MSC
as a relocated provider since this
decision ignored the definition of
"relocate" contained in the PRM.

The Secretary claims that the current
interpretation of 42 C.F.R. sec.
413.30(e) is not new, but does not cite
any decision construing that regulation
in the manner at issue here until 1995.
The Secretary also cites a number of
post-1995 PRRB decisions that have
consistently applied the proffered
interpretation. Appellee claims that the
definition of "relocate" contained in PRM
sec. 2154.2.C. has never been applied to
new provider exemptions and concerns a
completely different subject. HCFA has
long recognized the concept of a partial
relocation in applying new provider
exemptions from the RCLs.

Before we address the legal issues, we
set forth the history of the
interpretation of 42 C.F.R. sec.
413.30(e) as best we can determine from
the submissions of both parties. That
regulation has been given the same
consistent interpretation since 1995, but
neither party has provided evidence of
any construction prior to that time.
Thus, we assume that the regulation was
first authoritatively construed in 1995.
We also accept that the definition of
"relocate" contained in PRM sec.
2154.2.C. has not been applied to the
regulations concerning exemptions and the
concept of a partial relocation has been
recognized by HCFA.

We first conclude that the apparent lack
of contemporaneity between the
promulgation of the regulation and the
Secretary’s interpretation of it does not
affect the high level of deference we owe
to the Secretary. In the context of
judicial deference to agency
interpretations of administrative
statutes under Chevron, U.S.A., Inc. v.
Natural Resources Defense Council, Inc.,
467 U.S. 837 (1984), an agency
construction formulated well after the
statute’s enactment is still entitled to
deference. See Smiley v. Citibank (South
Dakota), N.A., 517 U.S. 735, 740-41
(1995). Smiley explained that the
rationale of Chevron is a presumption
that Congress intended for ambiguities in
a statute primarily to be resolved by the
agency charged with administering that
statute, and so deference is warranted
regardless of whether the agency
officials interpreting the law have any
special knowledge of Congress’s specific
intentions at the time the statute was
passed. Id. The rationale for Seminole
Rock deference is similar to that for
Chevron. Martin v. Occupational Safety &
Health Review Commission, 499 U.S. 144,
151 (1991) explains that regulatory
deference is justified by the presumption
that the power to authoritatively
interpret the agency’s own regulations is
part of the lawmaking powers delegated by
Congress. Thus, just as with Chevron,
deference to regulatory interpretations
does not depend on contemporaneity, since
no demonstration that the agency
officials had special insight into the
intentions behind the passage of the
regulation is required. Instead, Congress
is presumed to have delegated the primary
power to fill regulatory ambiguities to
the agency, and courts owe deference to
agency decisions that clarify a
regulation regardless of the fact that
the agency waited to exercise this power.

Moving on to the consistency question,
we initially note that Paragon is not
arguing that the Secretary has in the
past used the PRM sec. 2154.2.C.
definition of "relocate" in new provider
determinations under 42 C.F.R. sec.
413.30(e) and PRM sec. 2604.1, but now
refuses to do so. A HCFA witness at the
PRRB hearing stated that HCFA had always
recognized the concept of partial
relocations, where the original provider
does not close its doors, and Paragon has
not brought forth any evidence to contest
that assertion. Rather, Paragon contends
that HCFA and the PRRB should have used
the PRM sec. 2154.2.C. in making new
provider determinations, contrary to the
actual practice. Paragon relies on the
canon that "identical words used in
different parts of the same act are
intended to have the same meaning,"
Commissioner v. Keystone Consol. Indus.,
Inc., 508 U.S. 152, 159 (1993) (internal
quotation marks omitted), to argue that
the definition in PRM sec. 2154.2.C.
should be applied to new provider
determinations under PRM sec. 2604.1.

The PRM, while a useful guide to
interpreting the Medicare statute and
regulations, is not strictly binding on
the Secretary; we will uphold a decision
despite certain variations from the
manual. See Howard Young Med. Ctr. Inc.
v. Shalala, 207 F.3d 437, 442-43 (7th
Cir. 2000); Adventist Living Ctrs., Inc.
v. Bowen, 881 F.2d 1417, 1423-24 & n.10
(7th Cir. 1989). Thus, Paragon’s argument
that the Secretary is required to use the
PRM definition has less weight than if
that definition appeared in the Medicare
statutes or regulations. Moreover, the
canon Paragon relies on has reduced force
when the identical word is used in
different provisions which address
disparate subjects. See Atlantic Cleaners
& Dyers, Inc. v. United States, 286 U.S.
427, 433 (1932); see also United States
v. Cleveland Indians Baseball Co., 121 S.
Ct. 1433, 1441 (2001). PRM sec. 2154.2.C.
is contained in a section of the PRM
discussing when planning costs will be
incorporated into the historical cost of
a facility, while the issue in this case
is exemptions from the RCLs for new
providers, which is discussed in a wholly
different chapter of the PRM. As noted
above, the Secretary has consistently
labeled a transfer of less than an entire
facility as a partial relocation for
purposes of the new provider exemption.
Given all of these circumstances, we find
nothing untoward in the Secretary’s
declining to rely on the definition of
"relocate" in PRM sec. 2154.2.C. in
making new provider determinations under
42 C.F.R. sec. 413.30(e) and PRM sec.
2604.1. Thus, we conclude that Seminole
Rock deference is owed to the Secretary’s
interpretation of 42 C.F.R. sec.
413.30(e) despite the lack of
contemporaneity and refusal to apply PRM
sec. 2154.2.C./4

2. Ambiguity.

Having found that Seminole Rock
deference is warranted, we next determine
whether 42 C.F.R. sec. 413.30(e) is
ambiguous. Paragon argues that the
regulation has a plain meaning, which is
contradicted by the Secretary’s
interpretation. Paragon focuses on the
phrase "provider of inpatient services
that has operated" in the regulation and
its relation to "present and previous
ownership." According to the appellant,
the question of ownership must be decided
with respect to the "provider" as a
whole. A "provider" consists of all those
attributes necessary for a SNF to
"operate[ ]"-- that is, not just CON
rights, but physical beds, employees,
administrators, equipment, patients,
referral sources, etc. Paragon backs this
up with a citation to PRM sec. 2604.1,
which states that a "new provider is an
institution that has operated . . . ."
Paragon claims that the use of the word
"institution" in the PRM underscores the
fact that "provider" in 42 C.F.R. sec.
413.30(e) refers to the facility as a
whole, rather than just CON rights. Thus,
only when the SNF as an entire operating
institution is transferred to a new owner
can the exemption for a new provider be
denied.

Despite Paragon’s arguments, we conclude
that the regulation is ambiguous on what
constitutes a "provider." Paragon is
correct that a nursing "provider" is
composed of many different attributes,
but changing one or more of these
characteristics does not mean that the
SNF becomes a different "provider." For
example, if a facility fires all its
staff and hires a new one, but makes no
other changes, an ordinary user of the
English language probably would consider
the SNF with the new staff to be the same
"provider" as it was before. Similarly, a
SNF that replaced all of its old
equipment with new models would still be
the same "provider" as it was before the
modernization. Even if a SNF both fired
its staff and replaced all of its
equipment, one might still call it the
same "provider" if the administration and
physical plant remained the same. Of
course, if all the various things that
make up a SNF were new in the sense that
they had not been part of another
facility, then one would have to call
that SNF a "new provider." Conversely, if
a nursing facility did not change any of
its aspects, it would unquestionably
continue to be the same provider rather
than a new one. The difficulty in drawing
a line between these two extremes is what
makes the word "provider" ambiguous as
used in the regulation.

3. Reasonableness.

Since the regulation is ambiguous, we
next examine whether the Secretary’s
interpretation is plainly erroneous or
inconsistent with the text. We begin with
what is basically an extension of
Paragon’s argument for the clarity of the
regulation’s language. Even if words like
"provider" and "operate[ ]" are
ambiguous, these must refer to more than
just a provider’s CON rights. In
determining whether a SNF operated "under
. . . previous ownership," the Secretary
should not rely on CON rights alone but
also take account of whether the staff,
referrals, equipment, etc. of the
facility are the same as the one from
which the CON rights were obtained.

Paragon’s argument does have a degree of
merit--terms like "operate[ ]" and
"provider" suggest that one should look
to whether a group of attributes making
up the institution have changed such that
the SNF may be described as new, rather
than just focusing on a single
characteristic, such as CON rights.
Nevertheless, we conclude that the
Secretary’s interpretation is not so much
at variance with the language of the
regulation as to be deemed plainly
erroneous or inconsistent with the text.
Medicare is a highly complex and
technical program, and so deference to
the Secretary’s determinations in the
course of administering the system is
especially warranted. Thomas Jefferson,
512 U.S. at 512. Furthermore, an agency
need not adopt the most natural reading
of the regulation, but only a reasonable
one. Pauley v. BethEnergy Mines, Inc.,
501 U.S. 680, 702 (1991). The Secretary
explains that a transfer of CON rights
does not result in the provision of any
new services. Even though the transferee
might have new equipment, staff, etc., it
will provide the same kind of services as
the transferor of the CON rights, just at
a different location. We cannot say that
the Secretary’s interpretation that
because no new services are being
provided there is not a new provider is
unreasonable.

Paragon also has a few policy arguments
as to why the Secretary’s construction of
42 C.F.R. sec. 413.30(e) should be
invalidated, but none of these are
convincing. The first is that the purpose
of the new provider exemption is "to
allow a provider to recoup the higher
costs normally resulting from low
occupancy rates and start-up costs during
the time it takes to build its patient
population." San Diego Physicians &
Surgeons Hosp. v. Aetna Life Ins. Co.,
[1990-1991 Transfer Binder] Medicare &
Medicaid Guide (CCH) para. 39,007, at
25,061 (HCFA Administrator 1991). When
MSC opened, it incurred large start-up
costs and had a very low occupancy rate,
resulting in high costs per patient. The
receipt of CON rights from Shores did
nothing to ameliorate these expenses.
Thus, CON rights alone should not be used
to deny that a SNF is a new provider
since these rights have no relation to
the purposes of the exemption.

However, the Secretary has an adequate
response to this argument. At the time in
question, SNFs were reimbursed under
Medicare the lesser of the reasonable
cost of or the customary charge for the
service in question./5 42 U.S.C. sec.
1395f(b)(1) (1994). The definition of
"reasonable cost" excludes any "cost
found to be unnecessary in the efficient
delivery of needed health services." 42
U.S.C. sec. 1395x(v) (1)(A). The
Secretary contends, as with the textual
argument above, that the transfer of CON
rights simply shifts around SNF services.
Creating a new facility and moving
services to it, as Paragon did between
MSC and Shores, is costly, but no benefit
is gained in the overall delivery of
health services if the new facility is
providing the same services to the same
populace as the old one. Thus, the
Secretary’s judgment that the high start-
up costs of MSC were "unnecessary in the
efficient delivery of needed health
services" is a reasonable one that will
not be disturbed by this court.

Paragon’s next arguments focus upon the
effect of making a new provider
determination depend upon CON rights. The
first is that several states do not have
CON or similar programs, and that a HCFA
witness at the PRRB hearing admitted that
in such a state MSC would have been
considered a new provider. To make a new
provider determination depend solely on
which state the SNF happens to be in is
unreasonable and arbitrary. The second is
that under the Secretary’s interpretation
a new provider cannot exist in Wisconsin
because the state has imposed a
moratorium on issuing new CON rights. Any
SNF that begins operations will have to
obtain its CON rights from an already
existing provider and have the transferor
provider’s history imputed to it,
preventing it from being a new provider
under 42 C.F.R. sec. 413.30(e).

We again find the Secretary’s responses
to these arguments to be sufficiently
convincing so as to prevent us from
declaring the interpretation to be
plainly erroneous. Regarding the first,
the Secretary points out that a CON
program provides benefits for SNFs. More
specifically, institutions like MSC are
insulated from the effects of competition
with new entrants. This fact reduces the
need for new SNFs to obtain extra funds
from Medicare in order to stay afloat. As
for the second argument, the Secretary
can rely in part on the state’s
determination that no new nursing
facilities are needed to support a
decision that additional beds are
unnecessary to the efficient delivery of
health care services in that state.
Paragon complains that Wisconsin also ap
proved the movement of beds from Shores
to MSC, indicating that the state thought
that the move was necessary to serve the
area of inner-city Milwaukee. However,
there is no evidence that Wisconsin’s
approval of the transfer of beds was made
under the strict standard imposed by 42
U.S.C. sec. 1395x(v)(1)(A). Wisconsin
might approve such relocations even
though the cost is not necessary to the
efficient delivery of health care. Thus,
the Secretary could reasonably use
Wisconsin’s decisions about the state’s
need for nursing care to set an upper
limit on the costs that are necessary for
Medicare to bear, while denying
reimbursement of costs in areas where the
Secretary believes Wisconsin is too
lenient.

To summarize, the lack of the
contemporaneity between the regulation’s
promulgation and the adoption of the
Secretary’s current construction does not
eliminate the deference we owe to the
Secretary. Likewise, this deference is
also not affected by the Secretary’s
decision to use a definition of
"relocate" for the new provider exemption
other than the one stated in the PRM for
use on a different subject. The
regulation is ambiguous, and the
Secretary’s interpretation of the
regulation is not plainly erroneous on
either textual or policy grounds.

D. Relocated Provider

The Secretary has interpreted the
exemption for new providers in 42 C.F.R.
sec. 413.30(e) to be available to certain
relocated providers. PRM sec. 2604.1
discusses when a relocated provider will
be granted the status of a new provider,
stating in part:

[F]or purposes of this provision, a
provider which relocates may be granted
new provider status where the normal
inpatient population can no longer be
expected to be served at the new
location. The distance moved from the old
location will be considered but will not
be the determining factor in granting new
provider status. For example, a specialty
hospital may move a considerable distance
and still care for generally the same
inpatient population, while the
relocation of a general hospital a
relatively short distance within a
metropolitan area may greatly affect the
inpatient population served. A provider
seeking such new provider status must
apply to the intermediary and demonstrate
that in the new location a substantially
different inpatient population is being
served.

MSC’s request for new provider status
based on its relocation was denied by the
PRRB. In interpreting the phrase
"substantially different inpatient
population," the PRRB applies a "same
cities and towns" standard: if the
relocated provider’s current patients
came from the same cities and towns as at
its old location, then the exemption will
be denied. The vast majority of patients
for both MSC, the relocated provider, and
Shores, the original location, come from
the city of Milwaukee, and thus the PRRB
denied the exemption.

1. Retroactivity.

Paragon’s first challenge is that the
PRRB’s decision retroactively applied a
new rule, violating Bowen v. Georgetown
University Hospital, 488 U.S. 204 (1988).
Paragon claims that current PRM sec.
2533.1.B.3, which did not come into
effect until after MSC’s application for
the new provider exemption, was used to
dispose of its request. PRM sec.
2533.1.B.3 states that the new provider
exemption may be granted to a relocated
provider only if the SNF relocates to a
different state-defined HSA. Paragon
relies primarily on the fact that a HCFA
witness at the PRRB hearing admitted that
the agency applied this new standard in
rejecting MSC’s application.

However, the evidence does not support
Paragon’s position. What the HCFA witness
said is irrelevant to our review, since
the PRRB’s adjudication stands as the
final decision of the Secretary under 42
U.S.C. sec. 1395oo(f)(1). The PRRB simply
did not apply the standard contained in
PRM sec. 2533.1.B.3. The PRRB’s
discussion of MSC’s request for new
provider status as a relocated provider
never mentions the fact that Shores and
MSC are both located in HSA Number Two.
Instead, the opinion relies on the fact
that "practically 100 percent" of MSC’s
admissions come from the same cities and
towns as Shores’ admissions. Thus, the
PRRB did not retroactively apply PRM sec.
2533.1.B.3.

2. Arbitrary and capricious.

Paragon’s next argument is that the
same-cities-and-towns standard is
arbitrary and capricious since it contra
dicts the language of PRM sec. 2604.1.
That PRM section states that relocation
"a relatively short distance within a
metropolitan area" can be sufficient for
new provider status. Paragon claims that
the same-cities-and-towns standard means
that a provider that moves within a
metropolitan area cannot qualify for new
provider status, contradicting this
portion of the PRM’s text.

We reject Paragon’s textual argument. A
metropolitan area can contain many
different municipal corporations. If a
provider primarily serving one town
relocates within the same metropolitan
area to a different town and begins to
serve mostly residents of the new town,
then that relocated provider could attain
new provider status under the Secretary’s
interpretation of PRM sec. 2604.1. Thus,
there is no contradiction between stating
that movement within a metropolitan area
can be sufficient for granting new
provider status while also dictating that
the new location must serve patients from
different cities and towns than the old
location.

Paragon also argues that the same-
cities-and-towns standard is arbitrary
since it does not take account of the
fact that such incorporated areas can
vary widely in size. That the standard
applied by the PRRB treats disparately
sized towns and cities the same is true,
but agencies are permitted to rely on
broad categorizations that may not
perfectly reflect the underlying facts.
Cf. Heckler v. Campbell, 461 U.S. 458,
467-68 (1983) (holding that using
guidelines rather than a completely
individualized inquiry to determine what
kinds of jobs a disabled person can
perform is not arbitrary or capricious).
The same-cities-and-towns standard has a
reasonable connection to determining
whether a substantially different
inpatient population is being served by a
relocated provider, and is more efficient
and less costly than a more detailed
method.

3. Substantial evidence.

Paragon’s next argument is that the
PRRB’s decision is not supported by
substantial evidence. Paragon cites
patient referral and zip code data to
support its claim that MSC was serving a
substantially different inpatient
population from Shores’. Paragon’s
contention here seems to be premised on
the same-cities-and-towns standard being
invalid. However, we have already upheld
that standard, and so the only question
for purposes of substantial evidence is
whether MSC’s patients came from the same
cities and towns as Shores’. The PRRB
found that patients for both facilities
came overwhelmingly from Milwaukee, and
Paragon has not challenged this finding.
Therefore, the PRRB’s decision is
supported by substantial evidence.

III. Conclusion

Seminole Rock deference is owed to the
Secretary’s construction of 42 C.F.R.
sec. 413.30(e). Relying on the operating
history of the transferor of CON rights
to deny the new provider exemption to the
transferee is not plainly erroneous.
Using the same-cities-and-towns standard
to find that a relocated SNF is not
serving a substantially different
inpatient population is not arbitrary or
capricious. Since the Secretary’s
interpretations are reasonable, we Affirm
the district court’s decision upholding
the PRRB’s decision denying new provider
status to MSC.

FOOTNOTES

/* Pursuant to Fed. R. App. P. 43(c), Tommy G.
Thompson is automatically substituted for the
original defendant, Donna E. Shalala.

/1 After filing the instant action, Paragon changed
its name to Mariner Post-Acute Network, Inc. This
opinion will use appellant’s name at the time it
commenced the case.

/2 After MSC’s request, the language defining a new
provider was modified by replacing "provider"
with "SNF" and moved to 42 C.F.R. sec. 413.30(d).
We will refer to the language and location of the
older version in effect when MSC applied for the
exemption.

/3 PRM sec. 2604.1 was removed from the manual after
MSC applied for its exemption and has been re-
placed by PRM sec. 2533, which is substantially
different, as partially described below in Part
D.1.

/4 We wish to make clear that, for the reasons
provided in the preceding discussion, we find
that the Secretary has consistently interpreted
42 C.F.R. sec. 413.30(e) and did not reverse a
prior interpretation in denying MSC’s request. If
the parties’ submissions had demonstrated that
the Secretary had in fact reversed course, we
would be confronted with a different case pre-
senting a number of issues we need not address.
For example, in such circumstances, the interpre-
tive change could be considered arbitrary and
capricious if it "does not take account of legit-
imate reliance on [the] prior interpretation."
Smiley, 517 U.S. at 742. Similarly, since MSC
opened prior to HCFA’s 1995 decisions establish-
ing the interpretation at issue here, the Sec-
retary’s current interpretation could have been
impermissibly retroactive if MSC would have been
considered a new provider under a prior interpre-
tation of the regulation. Id. at 744 n.3; Bowen
v. Georgetown Univ. Hosp., 488 U.S. 204 (1988).
Finally, we need not consider the D.C. Circuit’s
position that to change a previously established
interpretation of a regulation an agency must
follow notice and comment procedures. See Alaska
Prof’l Hunters Ass’n, Inc. v. FAA, 177 F.3d 1030,
1033-34 (D.C. Cir. 1999); Paralyzed Veterans of
Am. v. D.C. Arena L.P., 117 F.3d 579, 586 (D.C.
Cir. 1997). But see Warder v. Shalala, 149 F.3d
73, 81-82 (1st Cir. 1998) (holding and collecting
cases stating that notice and comment is not
required solely because a new interpretive rule
contradicts an old one).

/5 Beginning on July 1, 1998, SNFs are reimbursed on
a prospective payment system. 42 U.S.C.
sec. 1395yy(e).