United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 14, 1997 Decided December 23, 1997
No. 96-5215
Appalachian Regional Healthcare, Inc.,
Appellant
v.
Donna E. Shalala, Secretary of Health and Human Services,
Appellee
Appeal from the United States District Court
for the District of Columbia
(94cv1365)
Joe W. Fleming, II argued the cause and filed the briefs
for appellant.
Jeffrey G. Micklos, Attorney, United States Department of
Health and Human Services, argued the cause for appellee,
with whom Frank W. Hunger, Assistant Attorney General,
United States Department of Justice, Mary Lou Leary, Unit-
ed States Attorney, Harriet S. Rabb, General Counsel, United
States Department of Health and Human Services, Robert P.
Jaye, Acting Associate General Counsel, and Henry R.
Goldberg, Deputy Associate General Counsel, were on the
brief.
Before: Silberman, Sentelle, and Garland, Circuit
Judges.
Opinion for the Court filed by Circuit Judge Silberman.
Dissenting opinion filed by Circuit Judge Sentelle.
Silberman, Circuit Judge: Appalachian Regional Health-
care contends that the Provider Reimbursement Review
Board unreasonably interpreted the Medicare as Secondary
Payer provisions of the Social Security Act, 42 U.S.C.
s 1395y(b) (1994), in approving the reduction of Appalachian's
Medicare reimbursements for the fiscal years ending 1985
through 1991. The district court disagreed, and entered
summary judgment in favor of the Secretary of Health and
Human Services. We affirm the judgment.
I.
Appalachian Regional Healthcare, Inc., a nonprofit Ken-
tucky corporation, owns and/or operates 10 hospitals in Ken-
tucky, Virginia, and West Virginia. It has entered into
Medicare provider agreements with the Secretary of Health
and Human Services and its hospitals thus are qualified to
receive Part A reimbursement for the inpatient health care
services they provide to covered beneficiaries. Appalachian
is reimbursed under the Prospective Payment System (PPS)
created by section 601 of the Social Security Amendments of
1983, codified at 42 U.S.C. s 1395ww(d) (1994). Although a
detailed explanation of this rather complex system is not
required here, roughly, PPS requires the Secretary to classify
a covered beneficiary's discharge into one of approximately
500 Diagnosis Related Groups (DRG), "based on essential
data abstracted from the inpatient bill for that discharge."
42 C.F.R. s 412.60(c) (1996). Reimbursement depends on the
DRG to which a patient is assigned and the average cost of
treating such a diagnosis, "regardless of the [actual] number
of conditions treated or services furnished during the pa-
tient's stay." 42 C.F.R. s 412.60(c)(2) (1996). A provider,
therefore, is reimbursed the same amount for each similarly
classified patient discharge, even if the actual cost of caring
for patients in that DRG varies.1 Until PPS was enacted,
providers were reimbursed under a cost-based system,
whereby Medicare paid either a hospital's customary charge
for or the reasonable cost of a particular item or service,
whichever was lower. See Methodist Hosp. of Sacramento v.
Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994).
Appellant's annual reimbursement is calculated based on
the annual cost report it must submit to its so-called "fiscal
intermediary," Blue Cross/Blue Shield of Kentucky, which is
authorized, as the Secretary's agent, to audit and, if neces-
sary, adjust Appalachian's report. The intermediary thought
Appalachian's cost reports for fiscal years ending 1985, 1986,
1987, 1988, 1989, 1990, and 1991 reflected a misreading of
section 1862(b) of the Social Security Act, 42 U.S.C.
s 1395y(b) (1994), known as the Medicare as Secondary Pay-
er (MSP) provisions, and reduced Appalachian's reimburse-
ment by $1,010,414.2 It is the Secretary's reading of these
provisions, in light of the statutory change in method of
reimbursement, that gives rise to the parties' dispute.
Section 1862(b)(2) of the MSP provisions forbids the Secre-
tary from making payment under Part A "with respect to any
item or service" to the extent that payment has been or
__________
1 The effect of PPS is that if a hospital can treat a particular
diagnosis more efficiently than the average hospital, it will make
money, as it may keep the difference between its actual cost and the
PPS payment for a particular DRG. Conversely, if its costs are
above average, the hospital must accept a shortfall.
2 The precise amounts in issue for each fiscal year are: FY
ending 1985: $49,112; FY ending 1986: $159,206; FY ending 1987:
$127,803; FY ending 1988: $79,853; FY ending 1989: $147,157; FY
ending 1990: $225,229; FY ending 1991: $222,054. Appalachian
seeks judgment in the total amount, plus interest on the judgment
as allowed by 42 U.S.C. s 1395oo(f)(2) (1994).
reasonably can be expected to be made by a primary payerC
other health insurance, such as worker's compensation, an
employer group health plan, or liability insurance. During
the fiscal years at issue, Appalachian's hospitals provided
services to Medicare beneficiaries who were also covered
under other health insurance--primarily coal miners covered
under the black lung benefits program administered by the
Division of Coal Mine Workers Compensation of the United
States Department of Labor. The black lung program, how-
ever, only pays for those medical services related to pneumo-
coniosis. Thus, the payments Appalachian received from
Labor--which included a markup over cost--were in full
satisfaction of the hospitals' charges for only certain items of
care, such as pulmonary x-rays or the use of a respirator.
Section 1862(b)(2), then, prohibited the Secretary from mak-
ing payment for those items or services paid for by the black
lung program, but was ambiguous as to how the Secretary
could keep from doing so under the PPS system.
Appellant thought it was entitled to keep its profit margin
on the payments received from the black lung program (and
other primary payers); it therefore offset only the portion of
those payments representing a hospital's costs against Medi-
care's PPS reimbursement. Blue Cross/Blue Shield inter-
preted the MSP provisions to require instead that the entire
primary payment be deducted from the total PPS reimburse-
ment that otherwise would have been due the provider. The
following example illustrates the difference. Assume that
Medicare's PPS reimbursement to Appalachian for having
provided six services to a covered beneficiary during an
inpatient stay was $20. Assume further that two of those
services fell within the coverage of the black lung program,
for which Labor paid $15. The intermediary would subtract
the full $15 primary payer payment from the $20 PPS
payment that would have been made had there been no other
insurance, leaving a PPS reimbursement of $5 to be made.
Appalachian, however, would offset only that portion of the
$15 payment attributable to the hospital's costs against the
$20 PPS payment. Using the fiscal year 1987 cost to charge
ratio (a number representing a hospital's average markup as
determined by the intermediary) for one of Appalachian's 10
hospitals--.658--Appalachian would have multiplied the $15
primary payer payment by the .658 cost to charge ratio, and
would deduct the product--$9.87--from the $20 PPS pay-
ment, leaving a PPS payment of $10.13 to be made. Under
its method, then, Appalachian would be reimbursed $10.13 +
$15 = $25.13, placing them in "substantially the same posi-
tion" with respect to primary payer payments as it was prior
to the enactment of PPS. Under the intermediary's ap-
proach, by contrast, the provider could never receive more in
combined payments than it would have received from Medi-
care in the absence of other insurance coverage.
Appalachian sought review of the intermediary's adjust-
ments by the Provider Reimbursement Review Board. The
Board issued five separate decisions, which were, Appalachian
informs us, identical in all material respects, affirming Blue
Cross/Blue Shield's adjustments in each fiscal year. The
Secretary's delegate, the Administrator of the Health Care
Financing Administration, declined to review the Board's
decision. Left undisturbed, the Board's decision constituted
final agency action reviewable by statute in the district court
for the District of Columbia. See 42 U.S.C. s 1395oo(f)(1)
(1994).
II.
We note at the outset the limited nature of appellant's
claim. Recognizing the statute's ambiguities, Appalachian
does not assert that its cost exclusion method is the only
permissible way to construe the MSP provisions in this
context.3 Rather, it argues that the Board's reading (in
effect, the Secretary's) of those provisions is unreasonable.
The operative portion of the Board's decision interpreting the
statute is as follows:
The Board finds that s 1862(b)(2) of the Act provides
that payment may not be made with respect to any item
__________
3 Appellant in fact concedes that the Secretary has discretion to
adopt a reasonable method of excluding primary payer payments
for items or services from the PPS payment.
or service to the extent payment has been made or can
reasonably be made from a primary payer. Section
1862(b)(4) of the Act makes provision for coordination of
benefits when the payment by a primary payer for an
item or service is less than the full charge. The Board
finds this permits payment by the Medicare program for
the remainder of such charge, but may not exceed the
amount Medicare would pay if there were no primary
payer. Therefore, the Board concludes the amount
Medicare would pay ... was properly reduced by pri-
mary payer payments.
Appalachian asserts that in this passage, the Secretary has
taken the position perforce that all items and services provid-
ed during an inpatient stay constitute a single item or service
for purposes of the MSP provisions. This construction, Appa-
lachian contends, is plainly contrary to the statute, or alterna-
tively, is unreasonable, because the statute defines the term
"inpatient hospital services" as something composed of the
several individual items and services furnished to a hospital
inpatient during a particular hospital stay. See 42 U.S.C.
s 1395x(b) (1994). All the items and services provided during
a hospital admission, therefore, may not be considered one
single item or service.4
The district court agreed that the Secretary had interpret-
ed "item or service" to mean the entire inpatient hospital
admission. Nevertheless, the judge thought that the Secre-
tary's construction, although awkward, was not unreasonable
__________
4 As additional support, Appalachian points to this statement by
counsel for Blue Cross/Blue Shield made before the Board: "The
approach that ... the Intermediary uses, and we believe the statute
really contemplates, is that the hospital admission, that's a service."
Of course, the intermediary's position is not the Secretary's--it is
the Board's interpretation that matters. In any event, we think it
plain that a statement by intermediary's counsel in the course of an
internal quasi-adjudicatory proceeding "is not the sort of 'fair and
considered judgment' that can be thought of as an authoritative
departmental position." Paralyzed Veterans of Am. v. D.C. Arena
L.P., 117 F.3d 579, 587 (D.C. Cir. 1997) (quoting Auer v. Robbins,
117 S. Ct. 905, 912 (1997)).
in light of the enactment of PPS and the design of the statute
as a whole, and therefore was entitled to Chevron 5 deference.
We think the district judge was correct in concluding that the
statute is ambiguous and that Chevron governed, although we
are not sure the Board's decision actually construed the
phrase "item or service."
The Board recognized that s 1862(b)(2) prohibits Medicare
from duplicating payments made by a primary payer. But
the truth of the matter is that when PPS replaced the cost-
based reimbursement system, s 1862(b)(2) became ambigu-
ous as applied to this sort of situation. It is easy to see how
this provision operated when Medicare's payment directly
corresponded to charges for particular items or services, as it
did under the cost-based system. If a primary payer paid for
a particular item or service, Medicare did not. A PPS
payment is instead in full satisfaction of the bundle of covered
items and services provided during a single inpatient hospital
stay. It is certainly in some sense payment for each of the
individual items or services that compose the bundle. But
because a PPS payment is calculated without regard to a
hospital's actual cost, it cannot be easily separated and allo-
cated to particular items or services. The Secretary, then,
had to figure out a way not to make "payment ... with
respect to any item or service" covered by a primary payer
given that its PPS reimbursement payment is not cost-based
and not directly connected to items or services.
Faced with this ambiguity, the Board understandably
looked to the MSP provisions as a whole for guidance. The
Board derived the general principle that the sum of all
payments should not exceed the amount Medicare would pay
if it were the only insurer from the (b)(4) coordination of
benefits provision. We think it entirely reasonable in inter-
preting the statute for the Board to have done so. As the
government points out, we have said that the MSP provisions
were enacted as a cost-cutting measure, Health Ins. Ass'n of
Am. v. Shalala, 23 F.3d 412, 414 (D.C. Cir. 1994), and the
__________
5 Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984).
Secretary's interpretation is consistent with this cost-cutting
objective. While the Board's interpretation of s 1862(b)(2)
may have had the same effect as if it had explicitly interpreted
"item or service" in the way that Appalachian suggests, the
Board did not explicitly adopt that rationale. Even if it had
done so we do not think it much matters. The statutory
amendment authorizing the PPS reimbursement method cre-
ated inevitable tension with the concept of payment for items
and services, and the Secretary's general resolution of the
resulting ambiguity is a permissible interpretation of the
statute. To be sure, this case would be easier had the Board
provided a more thorough explanation for its decision. But
the Board's decision is nevertheless "tolerably terse," Greater
Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir.
1970), and a reading which we can accept, especially in light
of the particular deference we afford the Secretary given the
tremendous complexity of the Medicare statute. See Method-
ist Hosp., 38 F.3d at 1229.
Appellant nevertheless asserts that the Secretary's position
is merely a litigating one and therefore is not entitled to
deference. See Bowen v. Georgetown Univ. Hosp., 488 U.S.
204 (1988). First, the hospital claims that the Secretary's
position is unsupported by regulations, rulings, or administra-
tive practice. We do not understand this since we do have
the Board's adjudicatory decision, and we have already con-
cluded that its statutory interpretations are entitled to defer-
ence. Marymount Hosp. v. Shalala, 19 F.3d 658, 661 (D.C.
Cir. 1994). Appellant also claims that the Secretary's coun-
sel's interpretation of the Board's decision is not entitled to
deference in this litigation. We agree that the Board's
decision must stand on its ownCcounsel cannot justify the
Board's decision before us with an explanation that the Board
itself did not rely upon. But the fact that we think the
Secretary's explanation is the better reading of the Board's
brief opinion does not, of course, mean that we are deferring
to government counsel's explanation.
The district court's judgment is affirmed.
Sentelle, Circuit Judge, dissenting: As the majority
makes clear, the validity of the Secretary's action in this case,
and therefore of the district court decision upholding it,
depends upon the validity of the interpretation of s 1862(b) of
the Social Security Act, 42 U.S.C. s 1395y(b) (1994), by the
Provider Reimbursement Review Board. The relevant por-
tion of that statute provides that
payment under this subchapter may not be made ...
with respect to any item or service to the extent that ...
payment has been made or can reasonably be expected to
be made promptly ... under a workmen's compensation
law or plan of the United States or a State....
42 U.S.C. s 1395y(b)(2)(A). The administration of this sec-
tion may have been fairly straightforward before the 1983
amendments to the Social Security Act, which switched the
reimbursement system from a cost-based system in which the
troublesome phrase "item or service" had an evident meaning
and relevance, to the present Prospective Payment System
("PPS") described in the majority opinion in which the mean-
ing and relevance of that phrase is, as the majority estab-
lishes, not at all apparent. We are all in agreement that to
survive the two-step analysis drawn from Chevron U.S.A. Inc.
v. Natural Resources Defense Council, Inc., 467 U.S. 837
(1984), the Board's ruling (as applied by the Secretary) need
not be perfect, or even the best, but only reasonable. The
Secretary's counsel, the district court, and the majority have
all done yeoman's work in demonstrating the possible reason-
ableness of an interpretation of a statute whose critical
wording is probably the result of a congressional oversight in
failing to amend by deletion a no longer sensible operative
phrase. My difficulty lies in the fact that neither the Board
nor the Secretary did the same yeoman's work.
Our review at the second step of Chevron partakes of a
nature similar to the arbitrary and capricious review under
the Administrative Procedure Act, 5 U.S.C. s 706(2)(A). In-
dependent Petroleum Ass'n of America v. Babbitt, 92 F.3d
1248, 1258 (D.C. Cir. 1996). Therefore, even under our
deferential review, an agency's interpretation of an ambigu-
ous statute must at least be a reasoned one in order for us to
determine if it is reasonable. Again, the majority and I are
not in disagreement as to the standard employed. The
majority expressly upholds the Board's (and therefore the
Secretary's) decision because it finds the Board's recorded
reasoning to be "tolerably terse," a styling drawn, quite
properly, from Greater Boston Television Corp. v. FCC, 444
F.2d 841, 852 (D.C. Cir. 1970). That decision, pre-dating
Chevron, recognized in the context of administrative proce-
dure review that "reasoned decision-making remains a re-
quirement of our law." Id. My disagreement with the
majority is a narrow one. That is, although I believe the
majority is correct in the framework of its review, I part
company with it only at the point of whether the agency
action has "cross[ed] the line from the tolerably terse to the
intolerably mute." Id.
Greater Boston establishes that in drawing the line be-
tween tolerable terseness and intolerable muteness the court
will uphold an agency where its reasoning, "though of less
than ideal clarity," is such that "the agency's path may
reasonably be discerned." Id. at 851. Here, the Board's
decision required it to interpret the concededly ambiguous
statute governing payment for "any item or service to the
extent that ... payment has been made or can reasonably be
expected to be made," by a plan contemplated in the statute
in a context in which items and services were no longer key to
agency payment, but payment was being made by a covered
plan where that collateral source might or might not cover all
the costs of a patient's treatment depending upon whether
the patient had medical needs supplied that were not directly
encompassed within the pneumoconiosis diagnosis. In com-
mon with appellant, I do not see how the Board could have
accomplished this task without construing the meaning of the
term "any item or service" in the PPS context.
As the majority suggests, appellant understands the
Board's decision as having construed the phrase to mean that
"item or service" encompassed the entire inpatient hospital
admission, an understanding shared by the district court.
Although the question is not free from doubt, I also think that
is what the Board did. I understand the majority's disagree-
ment with appellant, however, because I find it impossible to
determine with any certainty from the "operative portion of
the Board's decision interpreting the statute," Maj. op. at 5,
precisely what the Board did. As the portion the Board's
decision excerpted in the majority opinion reveals, the key
sentence of the operative portion in construing s 1862(b)(4)
reads: "the Board finds this permits payment by the Medi-
care Program for the remainder of this charge, but may not
exceed the amount Medicare would pay if there were no
primary payer." (Emphasis in the original.) This is the
whole of the Board's reasoning. Not only do I not know what
it means, it doesn't even make grammatical or syntactical
sense. Either the clause "but may not exceed the amount
Medicare would pay if there were no primary payer," has no
subject, or the subject of the subordinate clause is the same
as the subject of the independent clause to which it is
appended, to wit "this." The antecedent of the pronoun
"this" comes from the immediately preceding sentence which
reads: "s 1862(b)(4) of the Act makes provision for coordina-
tion of benefits when the payment by a primary payer for an
item or charge is less than the full charge." Therefore,
reading the questionable clause with "this" as its subject,
makes it read "this may not exceed the amount Medicare
would pay if there were no primary payer," where "this" is
the entire preceding sentence--a sentence which neither ex-
ceeds nor equals any payment. In short, I find the Board's
statement of its reasons meaningless. A meaningless state-
ment is intolerably mute, not tolerably terse.
I am further troubled that the Board's statement, whatever
it means, does not provide reasoning supportive of the inter-
pretation of the statute which it and the Secretary seem to
have adopted. It is true that something "may not exceed the
amount Medicare would pay if there were no primary payer."
For example, the amount paid by Medicare may not exceed
that amount. It does not necessarily follow that the sum of
Medicare reimbursement for an "item or service" and the
workmen's compensation primary payment for an admission
inclusive of that "item or service" cannot exceed the amount
Medicare would pay if there were no primary payer. The
latter formulation is not inconsistent with the Board's opinion;
it is simply not supported by it. Thus, I find that the Board's
reasoning is at best opaque and at worst a non sequitur.
I am not suggesting that the Board's interpretation, accept-
ed by the Secretary, is inherently an impermissible one.
Further, I agree with the majority that the Board was faced
with an ambiguity that rendered it entirely reasonable for the
Board to "look[ ] to the [Medicare as Secondary Payer]
provisions as a whole for guidance." Maj. op. at 7. Further,
I am prepared to join with the majority in deferring to a
reasoned interpretation that does just that. However, on the
present record, I do not find such a reasoned interpretation
to which we can defer. Therefore, I would vacate and
remand to the district court for further remand to the Secre-
tary to provide a reasoned decision, lacking on the present
record.