United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 4, 1999 Decided April 2, 1999
No. 98-5233
Presbyterian Medical Center
of the University of Pennsylvania Health System,
Appellant
v.
Donna E. Shalala, Secretary,
United States Department of Health and Human Services,
Appellee
Appeal from the United States District Court
for the District of Columbia
(No. 95cv01939)
Jennifer A. Stiller argued the cause for appellant. With
her on the briefs was L. Peter Farkas.
Carl E. Goldfarb, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Frank W. Hunger, Assistant Attorney General, Wilma A.
Lewis, U.S. Attorney, and Scott R. McIntosh, Attorney.
Before: Ginsburg, Henderson and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge: This case involves Medicare's
scheme for reimbursing teaching hospitals for the costs of
graduate medical education. After the Secretary of Health
and Human Services denied appellant teaching hospital's
petition for increased reimbursement of such costs, appellant
sued in federal district court, challenging the legality of an
interpretive rule requiring the requested increase to be sup-
ported by contemporaneous documentation, and alleging that
an error in the administrative proceedings prejudiced its
claims. Finding the interpretive rule consistent with the
Department's regulations, and finding no error in the admin-
istrative proceedings, we affirm the district court's grant of
summary judgment for the Secretary.
I
Medicare reimburses teaching hospitals for the cost of
graduate medical education ("GME"), including physician
time attributable to instruction and supervision of interns and
residents. See 42 U.S.C. s 1395ww(h) (1994). Prior to 1986,
teaching hospitals claimed GME reimbursement by preparing
annual cost reports showing the portions of physician time
attributable to research, patient care, and teaching and super-
vising interns and residents. To obtain approval of these
expenses, hospitals submitted cost reports to fiscal intermedi-
aries, usually insurance companies under contract with the
Department of Health and Human Services. The Depart-
ment required each hospital to support its claim for GME
reimbursement with "a written allocation agreement between
the [hospital] and the physician that specifies the respective
amounts of time the physician spends" on research, patient
care, and teaching and supervision. 42 C.F.R.
s 405.481(f)(1)(i) (1985). Each hospital also had to "[m]ain-
tain the time records or other information it used to allocate
physician compensation in a form that permits the informa-
tion to be validated by the intermediary," id. s 405.481(g)(1),
and to "[r]etain each physician compensation allocation, and
the information on which it is based, for at least four years
after the end of each cost reporting period to which the
allocation applies," id. s 405.481(g)(3).
In 1986, Congress created a new GME reimbursement
formula for cost reporting periods beginning on or after July
1, 1985. See Consolidated Omnibus Budget Reconciliation
Act of 1985, Pub. L. No. 99-272, 100 Stat. 82, 171-75 (1986)
(codified as amended at 42 U.S.C. s 1395ww(h) (1994))
("GME statute"). Under the new scheme, the Secretary
determines for each hospital "the average amount [of GME
costs] recognized as reasonable" per full-time resident during
a designated "base period," defined as "the hospital's cost
reporting period that began during fiscal year 1984." 42
U.S.C. s 1395ww(h)(2)(A). Applying a statutory formula to
each hospital's base-year per-resident amount, the Secretary
then calculates the hospital's GME reimbursement for subse-
quent cost-reporting periods. See id. s 1395ww(h)(2)-(3).
In 1989, the Department issued regulations establishing
procedures for determining the "reasonable" amount of base-
year GME costs for each hospital. See 54 Fed. Reg. 40,286
(1989) (codified at 42 C.F.R. s 413.86 (1998)). (From here on,
all "C.F.R." citations refer to current regulations unless
otherwise noted.) The GME regulations direct fiscal inter-
mediaries to reexamine the cost reports that hospitals had
submitted for the base year and to reaudit "hospitals whose
base-period GME costs appear to include misclassified or
nonallowable costs or whose per resident amounts appear to
be unreasonably high or low." Id. at 40,288; see 42 C.F.R.
s 413.86(e)(1). To prevent over-reimbursement, the regula-
tions instruct intermediaries to deduct from each reaudited
hospital's base-year GME amount any operating costs mis-
classified as GME costs. See id. s 413.86(e)(1)(ii)(B). To
prevent under-reimbursement--the issue in this case--the
regulations authorize intermediaries, "[u]pon a hospital's re-
quest," to include in the base-year GME amount any GME
costs misclassified as operating costs in the base-year cost
report. See id. s 413.86(e)(1)(ii)(C).
Soon after the reauditing process began in 1989, it became
clear that many hospitals no longer had contemporaneous
physician time records to support GME costs claimed in the
base year. Applicable regulations had required hospitals to
keep such records for only four years after the relevant cost-
reporting period. See 42 C.F.R. s 405.481(g) (1985). The
Department therefore issued a special GME documentation
policy for reaudits, first as an official instruction to fiscal
intermediaries, see Health Care Financing Admin., Graduate
Medical Education: Documentation to Support the Physician
Cost/Time Allocation (1990) ("HCFA Instruction"), and then
as a published notice in the Federal Register, see 55 Fed.
Reg. 35,990, 36,063-64 (1990). The parties agree that this
documentation policy is an interpretive rule. See 5 U.S.C.
s 553(b)(A).
The interpretive rule provides the following "exception to
the established record-keeping policy":
As an equitable solution to the problem of the nonexis-
tence of physician allocation agreements, time records,
and other information, we are allowing providers to
furnish documentation from cost reporting periods subse-
quent to the base period in support of the allocation of
physician compensation costs in the GME based peri-
od.... It is only in the absence of base period docu-
mentation that subsequent documentation should be con-
sidered as a proxy for base period documentation....
55 Fed. Reg. at 36,063-64. Where a hospital legitimately
explains the absence of base-year documentation, the inter-
mediary must advise the hospital that "it may request the
special exception described above." Id. at 36,064 col.1. Hos-
pitals requesting the exception must submit "the documenta-
tion from the subsequent cost reporting period closest to the
direct GME base period." Id. If such records are also
unavailable, the hospital may support its base-year GME
costs by "perform[ing] a 3-week time study of all physicians'
time for a period to be specified by the intermediary." Id.
Of particular importance to this case, the interpretive rule
states as follows: "In no event will the results obtained from
the use of the records from a cost reporting period later than
the base period serve to increase or add physician compensa-
tion costs to the costs used to determine the per resident
amounts." Id. The rule concludes:
We would stress that the use of documentation from
the current year or a subsequent year is, at best, persua-
sive evidence rather than conclusive evidence [of base-
year GME costs]. Accordingly, if the intermediary be-
lieves that any of the changes or modifications distort the
reliability of the data, it will make whatever adjustments
are necessary to ensure an accurate cost allocation. In
addition, the intermediary will prepare a written state-
ment documenting the facts and its conclusions concern-
ing how the information distorts the realiability [sic] of
the data and why the data should not be relied upon.
Also, the intermediary will explain why its adjustments
are appropriate. This statement will become part of the
record as it may be used to support any action taken in
subsequent reviews and appeals.
55 Fed. Reg. at 36,064 col.2.
Appellant Presbyterian Medical Center is a teaching hospi-
tal whose GME base period is the fiscal year that ended on
June 30, 1985. Presbyterian received notice of reimburse-
ment for that cost-reporting period in September 1988. The
notice stated that the Department could re-examine the 1984-
85 cost-reporting period at any time up to three years after
the date of the notice (i.e., until September 1991).
Acting pursuant to the GME statute and regulations, Pres-
byterian's fiscal intermediary, Aetna Life Insurance Co.,
reaudited the hospital's 1984-85 cost report in 1990. Aetna
mailed Presbyterian a copy of the HCFA Instruction. Short-
ly thereafter, Aetna sent Presbyterian a progress report,
noting that the hospital failed to provide any documentation
supporting its 1984-85 cost report. Attaching a second copy
of the HCFA Instruction, Aetna warned that without docu-
mentation, it would remove all physician compensation from
Presbyterian's base-year GME costs. This time Presbyterian
responded. It sent Aetna two types of non-contemporaneous
documentation: physician time records for fiscal years 1986-
88 and a three-week physician time study for the period from
October 1 to October 21, 1990.
After completing the reaudit, Aetna set Presbyterian's
base-year GME reimbursement rate at the level the hospital
originally claimed in its 1984-85 cost report. In doing so it
rejected, without written explanation, Presbyterian's request
for an additional $828,000 in GME costs that had allegedly
been misclassified as operating costs in the base-year cost
report. Beyond the 1986-88 time records and the 1990 time
study, the hospital failed to submit any documentation to
support its request.
The Provider Reimbursement Review Board reversed Aet-
na's determination. See Presbyterian Med. Ctr., 95-D41,
Docket No. 91-2779M (PRRB 1995). Holding that the inter-
pretive rule violates the GME statute and regulations, the
Board refused to enforce the prohibition on using non-
contemporaneous records during reaudit to support GME
costs exceeding those originally claimed in the base year.
See id. at 8-9. According to the Board, Presbyterian's "later
period proxy data"--in particular, the 1990 time study--
adequately supported the GME increase. Id. at 9.
The Health Care Financing Administration, acting on be-
half of the Secretary, reversed the Board. See Presbyterian
Med. Ctr., Review of PRRB Decision No. 95-D41 (HCFA
1995). Reaffirming the policy that additional base-year GME
costs claimed during reaudit must be supported by contempo-
raneous documentation, and finding no such documentation in
the record, HCFA denied Presbyterian's requested GME
increase. See id. at 11-12.
Presbyterian filed suit in the United States District Court
for the District of Columbia, arguing (1) that the interpretive
rule violates the GME statute and regulations; (2) that the
administrative proceedings were tainted by prejudicial error
due to Aetna's failure to provide Presbyterian a written
report explaining why it denied the requested GME increase;
and (3) that the decision was arbitrary and capricious because
no statute or regulation required the hospital to keep its 1984
records more than four years. The district court rejected
each claim and granted summary judgment for the Secretary.
See Presbyterian Med. Ctr. v. Shalala, No. 95-1939 (D.D.C.
Apr. 21, 1998) (memorandum opinion & order) ("Mem. Op.").
Applying Chevron deference, the district court concluded that
the interpretive rule conflicts with neither the GME statute
nor the GME regulation. See id. at 7-12. Although "some-
what troubled by the intermediary's failure to provide the
hospital with a written report" explaining its denial of Presby-
terian's requested increase, the court determined that the
hospital "ha[d] not demonstrated any way in which it was
harmed" by the alleged error. Id. at 7. The court also said
that Presbyterian "logically should have kept its 1984 records
until at least September 1991," pointing out that in Septem-
ber 1988 the hospital had received a reimbursement notice for
the base-year cost-reporting period which stated that the
Department could reopen this period for review at any time
within the next three years. Id. at 12.
On appeal, Presbyterian challenges the district court's rul-
ing that the interpretive rule does not violate the GME
regulations, as well as its determination that Aetna's failure
to issue a written report was not prejudicial. Reviewing the
district court's decision de novo, see Independent Bankers
Ass'n of America v. Farm Credit Admin., 164 F.3d 661, 666
(D.C. Cir. 1999), we consider each claim in turn.
II
In evaluating whether an agency has permissibly interpret-
ed its own regulation, we owe the agency "substantial defer-
ence." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994). We give the agency's interpretation "controlling
weight unless it is plainly erroneous or inconsistent with the
regulation." Bowles v. Seminole Rock & Sand Co., 325 U.S.
410, 414 (1945).
The regulations nowhere specify what documentation is
required to support a requested increase in base-year GME
costs. Although the Department asserts that section
413.86(j)(2)(ii) (now codified at 42 C.F.R. s 413.86(k)(2)(ii))
requires "sufficient documentation" to support a GME in-
crease in the reaudited base year, that requirement actually
applies to requests for adjustments in reimbursement rates
for "the rate-of-increase ceiling base year or prospective
payment base year." 42 C.F.R. s 413.86(k)(2)(i). Presbyteri-
an claims that the interpretive rule, by allowing non-
contemporaneous records to support GME costs claimed in
the base-year cost report, while requiring contemporaneous
records to support GME costs misclassified as operating
costs, frustrates the regulatory goal of ensuring "an 'accurate'
determination of providers' 1984 GME costs." Regions Hosp.
v. Shalala, 118 S. Ct. 909, 914 (1998) (citing Department's
proposed rule).
We disagree. GME costs claimed in the base year have
already gone through a verification process requiring contem-
poraneous documentation. See 42 C.F.R. s 405.481(f)(1)(i)
(1985). Additional GME costs claimed during reaudit have
not. Because "later year records [are] inherently less reli-
able," and because "hospitals ha[ve] significant incentives to
inflate their GME costs in the base year," Mem. Op. at 10;
see 55 Fed. Reg. at 35,064 col.2 (non-contemporaneous rec-
ords are, "at best, persuasive evidence rather than conclusive
evidence"), we think the interpretive rule, by prohibiting non-
contemporaneous records from supporting GME costs never
supported by contemporaneous records, reasonably fur-
thers--not frustrates--" 'accurate' determination" of GME
costs. Regions Hosp., 118 S. Ct. at 914. Because nothing in
"the regulation's plain language or ... the Secretary's intent
at the time of the regulation's promulgation" compels an
alternative reading, we defer to the agency's interpretation.
Thomas Jefferson, 512 U.S. at 512; see id. ("This broad
deference is all the more warranted when, as here, the
regulation concerns 'a complex and highly technical regulato-
ry program,' in which the identification and classification of
relevant 'criteria necessarily require significant expertise and
entail the exercise of judgment grounded in policy con-
cerns.' ") (citations omitted).
Relying on the Department's acknowledgment that "in
many cases ... [contemporaneous] records no longer exist
for the (GME) base period," HCFA Instruction at 1; see 55
Fed. Reg. at 36,063 col.3 (noting that 42 C.F.R. s 405.481(g)
(1985) "only require[d] the retention of [such records] for four
years after the end of each cost reporting period"), Presbyte-
rian next argues that the interpretive rule effectively nullifies
the regulatory provision allowing hospitals to claim base-year
GME costs misclassified as operating costs, see 42 C.F.R.
s 413.86(e)(1)(ii)(C). We agree with the district court that on
the facts of this case, this argument is without merit. Pres-
byterian's September 1988 notice of reimbursement for the
base-year cost-reporting period clearly stated that the De-
partment could re-examine this period at any time within the
next three years. The hospital "logically should have kept its
1984 records until at least September 1991." Mem. Op. at 12.
III
We turn to Presbyterian's claim of prejudicial error. It
argues that the Department's interpretive rule required Aet-
na to explain in writing why it denied the hospital's requested
GME increase. According to the hospital, had it known that
Aetna considered its 1990 time study and 1986-88 time rec-
ords inadequate, it would have submitted physician time
allocation agreements, so-called "339s," from the base-year
cost-reporting period instead. The absence of a written
explanation, Presbyterian claims, caused it to forgo producing
the 339s during the administrative proceedings. Relying on
the rule of prejudicial error, see 5 U.S.C. s 706; Small
Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506,
521 (D.C. Cir. 1983) (requiring courts to reverse agency
actions if there is "a possibility that the error would have
resulted in some change in the final rule") (emphasis omit-
ted), the hospital argues that the district court should have
reversed the Secretary's decision.
Presbyterian's argument fails for several reasons. To be-
gin with, we find nothing inappropriate in Aetna's failure to
issue a written explanation. The interpretive rule requires
intermediaries to prepare written statements when they de-
termine that non-contemporaneous documentation submitted
in a particular case is inadequate due to specific defects that
"distort the reliability of the data." 55 Fed. Reg. at 36,064
col.2. According to the rule, the written statement "docu-
ment[s] the facts and [the intermediary's] conclusions con-
cerning how the information distorts the realiability [sic] of
the data and why the data should not be relied upon," and
"explain[s] why [the intermediary's] adjustments [to the data]
are appropriate." Id. As Presbyterian acknowledges,
Aetna denied its request for additional base-year GME
costs because the supporting documents were non-
contemporaneous--not because they incorporated "changes
or modifications [that] distort the reliability of the data" or
because they needed "adjustments" to improve their accura-
cy. Id. We agree with the Department that the written
statement requirement is inapplicable where, as here, an
intermediary finds a set of records categorically inadequate
to support an increase in base-year GME costs.
Equally unpersuasive is Presbyterian's claim that without a
written explanation, it had no way of knowing that its failure
to produce contemporaneous base-year records was the rea-
son Aetna denied its requested GME increase. As the dis-
trict court pointed out, Aetna twice sent the hospital a copy of
the HCFA Instruction during the reaudit. See Mem. Op. at
4-5. That Instruction states, in the only underlined sentence
on the first page: "In no event will the results obtained from
the use of time studies or a subsequent year's data serve to
increase the amount of physicians' cost originally allocated to
the GME cost center." HCFA Instruction at 1. Moreover,
the district court found that "the reasons for the intermedi-
ary's decision were repeatedly explained to the hospital dur-
ing the administrative process." Mem. Op. at 7.
In direct tension with its claim that it had no idea why
Aetna denied its requested GME increase, Presbyterian fur-
ther argues that its failure to submit base-year 339s resulted
from Aetna's erroneous assertions that 339s are insufficient
contemporaneous documentation to support an increase in
base-year GME costs. But whether or not 339s are suffi-
cient, if Presbyterian in fact believed during the reaudit that
339s could support base-year GME costs, then it should have
put those documents into the administrative record in order
to preserve its claim. In doing so it could have relied on
Abbott Northwestern Memorial Hospital v. Blue Cross &
Blue Shield Ass'n, Medicare & Medicaid Guide (CCH) p 43,-
136 (Feb. 2, 1995). Issued four months prior to the Provider
Reimbursement Review Board's decision in this case and
seven months prior to the Secretary's reversal, Abbott deter-
mined that 339s together with a later-year time study could
support a hospital's base-year GME costs that were misclassi-
fied as operating costs. See id. at 43,653. Presbyterian's
reliance on Abbott in this appeal is too little too late. Not
only does the hospital fail to cite the case until its reply brief,
see Doolin Sec. Sav. Bank v. Office of Thrift Supervision, 156
F.3d 190, 191 (D.C. Cir. 1998) (refusing to consider arguments
raised only in the reply brief), but Abbott establishes at most
only that Presbyterian was potentially harmed by its failure
to submit 339s, not that the harm flowed from anything other
than the hospital's own inaction.
IV
The district court's grant of summary judgment for the
Secretary is affirmed.
So ordered.