In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3460
A DVENTIST G LENO AKS H OSPITAL, et al.,
Plaintiffs-Appellants,
v.
K ATHLEEN S EBELIUS, Secretary,
United States Department of
Health and Human Services,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 09 C 5240—Ronald A. Guzmán, Judge.
A RGUED A PRIL 14, 2011—D ECIDED D ECEMBER 15, 2011
Before C UDAHY, M ANION, and S YKES, Circuit Judges.
S YKES, Circuit Judge. One of the factors affecting the
amount of Medicare reimbursement a hospital receives
from the Department of Health and Human Services
(“HHS”) is the average hourly wage of the employees
in its geographic region. HHS currently includes
paid lunch hours in that calculation. The plaintiffs
2 No. 10-3460
here —more than 80 hospitals in Rhode Island, Kentucky,
and greater Chicago—object to this practice because
some hospitals in their regions give employees paid
lunch breaks, which depresses the average area
hourly wage and, in turn, their Medicare reimbursements.
The Secretary of HHS responds that her agency counts
all paid hours, including all paid unworked hours, for
the sake of administrative simplicity, a valid and
nonarbitrary basis for the decision. The district
court granted summary judgment for the Secretary,
and the hospitals appealed. Because the Secretary’s
methodology is not arbitrary or capricious, we affirm.
I. Background
Medicare is the federal health-insurance program
that pays for medical care for the aged and disabled.
See generally 42 U.S.C. §§ 1395 et seq.1 Medicare Part
A, which covers inpatient hospital services and
other primary institutional care, reimburses hospitals
according to a Prospective Payment System (“PPS”).
See generally id. § 1395ww(d); 42 C.F.R. § 412, Subparts A
through H. The PPS uses a predetermined formula to
calculate the amount of reimbursement for each patient
discharge without regard to the actual cost incurred.
See generally 42 U.S.C. § 1395ww(d); 42 C.F.R. § 412,
1
The Secretary administers Medicare through the Centers for
Medicare and Medicaid Services, an agency within HHS. For
simplicity we refer to HHS’s and the Centers’ actions as the
Secretary’s.
No. 10-3460 3
Subpart D. Thus, the PPS is designed to encourage hospi-
tals to improve efficiency and reduce operating costs. If
a hospital can treat a patient for less than the pay-
ment amount, it can keep the savings; if the treatment
costs more, the hospital must absorb the loss. See
Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225,
1227 (D.C. Cir. 1994).
In simplified terms the PPS formula operates as
follows: The starting point is a standardized base-payment
amount that reflects the average cost per discharge for
all inpatient hospital services across the nation. See 42
U.S.C. § 1395ww(d)(2)(A)-(D). This amount consists of
a labor-related component and a nonlabor component.
See id. § 1395ww(d)(3)(E)(i); 42 C.F.R. § 412.64(h)(2).
The Secretary first multiplies the labor-related component
by a hospital’s “wage index,” a factor designed to account
for variations in labor costs across the country.
See 42 U.S.C. § 1395ww(d)(3)(E)(i); 42 C.F.R. § 412.63(x).
She then adds this amount to the nonlabor component.
Finally, she multiplies that sum by the weight assigned
to the Diagnostic Related Group (“DRG”) that best de-
scribes the treatment administered for the specific dis-
charge being reimbursed —for example, “heart transplant”
or “allergic reaction.” See generally 42 U.S.C.
§ 1395ww(d)(2); see also Methodist Hosp., 38 F.3d at 1227
(summarizing the PPS formula).
The dispute here concerns the “wage index” factor in the
PPS formula. To assign wage indices to hospitals, the
Secretary uses geographic areas called Metropolitan
Statistical Areas (“MSAs”), which are developed and
4 No. 10-3460
periodically revised by the Office of Management and
Budget. See 42 C.F.R. §§ 412.63(b), 412.64(b).2 Hospitals
annually report their employees’ wages and hours to
the Secretary. From these reports the Secretary computes
the average hourly wage within each MSA, as well as the
national average hourly wage. The wage index for an
MSA is the ratio of the MSA’s average hourly wage to
the national average. For example, if the average hourly
wage in an MSA is 20 percent higher than the national
average, its wage index is 1.2. Thus, the wages and hours
reported by a hospital directly affect the wage index for
all other hospitals in its MSA. And a higher wage index
results in greater reimbursements.
The Secretary requires hospitals to report all “paid
hours,” including “paid lunch hours[], overtime hours,
paid holiday, vacation and sick leave hours, paid time-off
hours, and hours associated with severance pay.”
See C ENTERS FOR M EDICARE & M EDICAID S ERVICES,
PROVIDER R EIMBURSEMENT M ANUAL-P ART II, § 3605.2 (2005).
The plaintiff hospitals are located in three MSAs: Chicago,
Rhode Island, and rural Kentucky. Within these MSAs
some hospitals pay their employees for a half-hour lunch
2
Hospitals not located within a designated MSA are classified
as “rural” and share a statewide rural wage index. See Medicare
Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2005 Rates; Final Rule, 69
Fed. Reg. 48,916, 49,026 (Aug. 11, 2004) (codified at 42 C.F.R.
pts. 403, 412, et al.). But for our purposes we refer to a state-
wide grouping of rural hospitals as an MSA.
No. 10-3460 5
break each workday, contrary to common practice.3 When
calculating the average hourly wage in these MSAs,
including paid lunch hours results in a larger denominator,
and ultimately a lower wage index, than if the lunch hours
were not included. The hospitals estimate that the inclu-
sion of lunch hours over federal fiscal years 2003 to 2006
lowered their total Medicare reimbursements by about $20
million.
At various times over those years, many of the hospitals
that give paid lunch hours asked the Secretary to remove
those hours from the wage-index calculation. Each time,
she refused. The hospitals appealed to the Provider
Reimbursement Review Board, which held in favor of
the Secretary. See 42 U.S.C. § 1395oo(a)(1)(A)(ii) (authoriz-
ing the Board to review challenges to the Secretary’s
determination of reimbursement amounts). The hospitals
then sought judicial review in the district court. See
id. § 1395oo(f). The district judge granted the Secretary’s
motion for summary judgment, holding that substantial
evidence supported her decision, which was not arbitrary,
capricious, or otherwise unlawful.
3
The Secretary has identified five hospitals that give their
employees paid lunch breaks: St. Joseph Health Services,
Landmark Medical Center, and The Westerly Hospital in the
Rhode Island MSA; T.J. Samson Community Hospital in the
rural-Kentucky MSA; and John H. Stroger, Jr. Hospital in the
Chicago MSA. The plaintiffs have identified two additional
hospitals: Provident Hospital of Cook County and Oak Forest
Hospital of Cook County, both in the Chicago MSA.
6 No. 10-3460
II. Discussion
We review the district court’s grant of summary judg-
ment de novo. See Mt. Sinai Hosp. Med. Ctr. v. Shalala,
196 F.3d 703, 707 (7th Cir. 1999). But our review of the
Secretary’s decision is very limited. See 42 U.S.C.
§ 1395oo(f)(1) (providing that judicial review is governed
by the Administrative Procedure Act, 5 U.S.C. §§ 701
et seq.). We may overturn the decision only if it
was “arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(A); Bd. of Trs. of Knox Cnty. Hosp. v. Shalala,
135 F.3d 493, 499 (7th Cir. 1998). Among other things
a decision is arbitrary and capricious if the agency relies
on factors that Congress did not intend it to consider
or entirely fails to consider an important aspect of
the problem. Motor Vehicle Mfrs. Ass’n of U.S. v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). This stan-
dard of review gives considerable weight to an agency’s
construction of a statutory scheme it administers.
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.
837, 844 (1984).
The hospitals assert that the Secretary’s inclusion of paid
lunch hours in the wage index violates her statutory
mandate. Congress requires the Secretary to
adjust the proportion, (as estimated by the Secretary
from time to time) of hospitals’ costs which are attrib-
utable to wages and wage-related costs, of the DRG
prospective payment rates . . . for area differences in
hospital wage levels by a factor (established by the Secre-
tary) reflecting the relative hospital wage level in
No. 10-3460 7
the geographic area of the hospital compared to the national
average hospital wage level.
42 U.S.C. § 1395ww(d)(3)(E)(i) (emphasis added).
The dispute boils down to whether the Secretary’s inclu-
sion of paid lunch hours properly captures “the relative
hospital wage level.” Notably, the statute provides that
the “factor . . . reflecting the relative hospital wage level”
shall be “established by the Secretary.”
No doubt there are economically sound reasons for
excluding paid lunch hours. Suppose MSA A and MSA
B are identical in every respect (including their markets),
each containing one hospital that employs one kind
of employee, who works an eight-hour day (including
lunch). If MSA A’s hospital pays $10 per hour and treats
a half-hour lunch break as paid, and MSA B’s hospital
pays $10.67 per hour and treats a half-hour lunch break
as unpaid, both hospitals will attract an equal supply
of employees because either way they earn $80 for doing
seven-and-a-half hours of work. But under the Secretary’s
methodology, MSAs A and B have average hourly
wages of $10 and $10.67, respectively. As a result, MSA
A has a lower wage index than MSA B. The hospitals claim
that this system fails to “reflect[] . . . relative hospital wage
level[s].” 4
4
So why don’t hospitals like the one in MSA A just eliminate
paid lunch breaks and raise their hourly wages? The hospitals
tell us that the “compelled reliance on an archaic county payroll
system” prevents them from taking this course. The Secretary,
(continued...)
8 No. 10-3460
The Secretary does not challenge the logic of the hospi-
tals’ argument.5 Rather, she argues that the policy
of counting all paid hours, including paid unworked
hours, serves the important purpose of administrative
simplicity. Lunch hours are just one example of paid
unworked hours that count towards the wage in-
dex. Hospitals must also report paid annual leave, sick
leave, holidays, continuing-education time, military-duty
leave, jury-duty leave, maternity leave, and bereavement
leave. The same economic principles we have just dis-
cussed would dictate that none of these hours should
enter into the Secretary’s calculation; that is, a pure hours-
worked system should be used. Yet the hospitals
only advocate for the elimination of paid lunch breaks.
Moreover, the Secretary explains that converting to an
hours-worked system would raise a host of administrative
4
(...continued)
however, suggests that the hospitals’ unionized employees have
collective-bargaining agreements that require compensated meal
periods.
5
The Secretary briefly questions the hospitals’ “assumption
that the daily wage at [a] hospital compensating its employees
for a meal period would remain the same if the paid meal period
were eliminated” and suggests instead that “elimination of the
paid meal period could result in a lower daily wage.” Not so. In
a perfectly competitive market, an employer cannot lower total
wages without losing employees. And if the market is instead
imperfect and allows for an employer to eliminate paid lunch
breaks without losing employees, competitors should be able to
lower their wages accordingly.
No. 10-3460 9
complications. For example, in 2003 after several hospitals
requested exclusions for paid lunch breaks, military-duty
leave, or jury-duty leave in the wage index, the Secretary
solicited public comment on the issue. See Medicare
Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2004 Rates, 68 Fed.
Reg. 45,346, 45,396 (Aug. 1, 2003) (codified at 42 C.F.R.
pts. 412, 413). Many commenters opposed changes, ex-
plaining that because “most payroll systems do not
capture this data,” hospitals would have to expend
“additional data collection effort [that] . . . might outweigh
any benefits achieved through [the] changes.” Id. Another
commenter stated that if paid lunch hours were excluded,
other paid breaks should also logically be excluded,
but payroll systems typically do not track this time. Id.
And yet another commenter suggested that only sick
leave should be counted in the wage index because it
is “consistently offered among hospitals,” unlike vacation
hours and maternity and bereavement leave. Id. at 45,397.
In light of the substantial disagreement in the public
commentary, the Secretary decided not to adjust the
“longstanding policy” of including all paid hours in the
wage-index calculation. Id.6
6
The Secretary points out that even though Congress amends
the PPS statutes “frequently,” it has never corrected her use of
paid hours to calculate the wage index. Thus, she claims that
Congress has tacitly endorsed her methodology. Without some
evidence that Congress is aware of the issue, we hesitate to
agree. See Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 214 (D.C. Cir.
2011).
10 No. 10-3460
Because the paid-hours policy is more readily adminis-
trable than alternatives, the Secretary has “consider[ed] an
important aspect of the problem,” Motor Vehicle Mfrs.
Ass’n, 463 U.S. at 43, and “adequately explained her
decision,” Anna Jaques Hosp. v. Sebelius, 583 F.3d 1, 6
(D.C. Cir. 2009). The all-paid-hours approach is a “reason-
able and statutorily permissible” —if not totally accu-
rate —way of measuring relative wage levels. See Wis.
Dep’t of Health & Soc. Servs. v. Bowen, 797 F.2d 391, 397
(7th Cir. 1986). Furthermore, any artificial depression in
the hospitals’ wage indices ultimately may be ameliorated
if hospitals in other MSAs also offer paid lunch breaks or
more paid leave in other categories.
The hospitals nevertheless attempt to analogize their case
to other instances in which the Secretary has adjusted
the wage index. They first point to fictional “hours” that
the payroll systems at some hospitals initially tabulate
when computing overtime wages or bonus payments.
For example, an employee who makes $10 per hour
but earns time and a half for overtime might register
1.5 hours of work on the payroll system. Similarly, if
that employee receives a $1,000 bonus, the system might
log 100 hours of work. The Secretary allows hospitals
to remove the fictional half-hour of overtime or the 100
bonus hours from the wage-index data. But these examples
are distinguishable because unlike lunch hours and other
paid leave, the phantom “hours” associated with overtime
and bonus pay do not directly correspond to real periods
of time during which an employee does not work yet
receives pay.
No. 10-3460 11
The hospitals also seek support from Sarasota Memorial
Hospital v. Shalala, 60 F.3d 1507 (11th Cir. 1995), which
concerned a wage-index disparity arising out of Federal
Insurance Contributions Act (“FICA”) taxes. Ordinarily,
employers withhold FICA taxes from employees’ gross
wages, lowering their take-home pay. Id. at 1509. Sarasota
Memorial, however, paid FICA taxes on behalf of its
employees. Id. The Secretary decided to classify Sarasota
Memorial’s FICA payments as fringe benefits, rather than
salary; consequently, the payments did not enter into the
numerator when she calculated average hourly wages.
Id. Sarasota Memorial challenged the Secretary’s decision,
and the Eleventh Circuit ruled in the hospital’s favor.
In Sarasota Memorial, however, the Secretary argued
unconvincingly that the hospital’s payments met HHS’s
definition of fringe benefits and that “the uniformity of the
wage index would be compromised if she were required to
determine which, if any, fringe benefits could be reclassi-
fied as wages.” Id. at 1512. Under the HHS definition, a
payment must be something “in addition to direct salary
or wages” to be considered a fringe benefit. Id. But the
Secretary failed to explain why the FICA payments were
not considered salary or wages in the first place. She relied
solely on an FICA statute that “exclude[d] employer-paid
employee FICA taxes from the definition of wages only for
purposes of calculating FICA taxes.” See id. (citing 26 U.S.C.
§ 3121(a)(6) (emphasis added)). The court therefore saw
“no reasonable basis for classifying the same FICA pay-
ments as wages when deducted from an employee’s gross
pay, but as fringe benefits when paid directly by the
employer.” Id. at 1513.
12 No. 10-3460
Here, by contrast, the Secretary has provided a coherent
and reasonable justification for her policy of counting
all paid hours: It is a bright-line rule that is comparatively
easy to administer. It avoids the costs associated with
tracking certain kinds of paid unworked time that
payroll systems do not record. And it avoids the
slippery slope that comes with trying to exclude
certain types of paid leave but not others. 7 In sum, the
Secretary’s justifications for the paid-hours policy are
“ ’rational and consistent with the statute.’ ” See Bd. of Trs.
of Knox Cnty. Hosp. v. Sullivan, 965 F.2d 558, 564 (7th
7
The hospitals also cite two district court cases, Centra Health,
Inc. v. Shalala, 102 F. Supp. 2d 654 (W.D. Va. 2000), and ViaHealth
of Wayne Cnty. v. Johnson, No. 07-CV-6638T, 2009 WL 995611
(W.D.N.Y. Apr. 14, 2009). We need not discuss the latter because
the court vacated its ruling after the parties entered into a
settlement agreement. See ViaHealth v. Johnson, No. 07-CV-6638T,
slip op. at 1 (W.D.N.Y. July 20, 2010). Centra Health involved a
different provision of the wage-index statute. The directive at
issue there provided that "'[t]o the extent determined feasible by the
Secretary,’” the wage-index calculation “ ’shall exclude data with
respect to the wages and wage-related costs incurred in furnish-
ing skilled nursing facility services.’ ” Centra Health, 102 F. Supp.
2d at 657 (quoting 42 U.S.C. § 1395ww(d)(3)(E)) (emphasis in
Centra Health). Here, there is no analogous statutory provision
requiring the Secretary to remove the hours at issue wherever
“feasible,” nor is there evidence that the inclusion of the hours
distorts the hospitals’ wage index as drastically as in Centra
Health. See id. at 660.
No. 10-3460 13
Cir. 1992) (quoting Sullivan v. Everhart, 494 U.S. 83, 89
(1990)).
A FFIRMED.
12-15-11