United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 8, 2009 Decided September 11, 2009
No. 08-5407
ANNA JAQUES HOSPITAL, ET AL.,
APPELLEES
v.
KATHLEEN SEBELIUS, IN HER OFFICIAL CAPACITY AS
SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH
AND HUMAN SERVICES,
APPELLANT
Consolidated with 08-5529
Appeals from the United States District Court
for the District of Columbia
(No. 1:05-cv-00625)
Stephanie R. Marcus, Attorney, U.S. Department of
Justice, argued the cause for appellant. With her on the briefs
were Michael F. Hertz, Acting Assistant Attorney General,
Jeffrey A. Taylor, U.S. Attorney, and Mark B. Stern, Attorney.
R. Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.
2
Ankur J. Goel argued the cause for appellees. With him
on the brief were M. Miller Baker and Kelly M. Falls.
Before: HENDERSON, TATEL, and GRIFFITH, Circuit
Judges.
Opinion for the Court filed by Circuit Judge GRIFFITH.
GRIFFITH, Circuit Judge: The Secretary of the
Department of Health and Human Services appeals the
decision of the district court that she improperly excluded the
labor costs of certain types of hospitals from her calculation
of Medicare reimbursements due to appellees. Because we
conclude that the Secretary’s exclusion of these costs was
based on a reasonable interpretation of her statutory authority,
we reverse the judgment of the district court.
I.
In 1983, Congress created the Prospective Payment
System (PPS) as a new means to provide Medicare
reimbursements to hospitals for medical care requiring at least
one night’s stay. See Social Security Amendments of 1983,
Pub. L. No. 98-21, § 601, 97 Stat. 65, 149; see also Se. Ala.
Med. Ctr. v. Sebelius, 572 F.3d 912, 914–15 (D.C. Cir. 2009)
(describing how the PPS works); Transitional Hosps. Corp. of
La. v. Shalala, 222 F.3d 1019, 1020–21 (D.C. Cir. 2000)
(same). Hospitals that participate in the PPS are called
“subsection (d) hospitals,” named after the statutory provision
that identifies them. See 42 U.S.C. § 1395ww(d)(1)(B)
(2006). These facilities are best described as “short-term acute
care general hospitals.” Transitional Hosps., 222 F.3d at 1021
(quoting S. REP. NO. 98-23, at 54 (1983), reprinted in 1983
U.S.C.C.A.N. 143, 194). Of relevance to this appeal, critical
access hospitals, which are usually located in rural areas and
3
have fewer than twenty-five beds, are excluded from
subsection (d) and receive Medicare reimbursements under a
payment scheme different from the PPS. See 42 U.S.C.
§ 1395x(e), (mm); Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates, 68
Fed. Reg. 27,154, 27,190 (May 19, 2003) [hereinafter
Proposed FY 2004 Rates].
Under the PPS, a significant component of the Medicare
payment subsection (d) hospitals receive is reimbursement for
their “wages and wage-related costs.” 42 U.S.C.
§ 1395ww(d)(3)(E)(i). Because these costs vary widely across
the country, Congress requires the Secretary to adjust
Medicare reimbursements according to “area differences in
hospital wage[s].” Id. To do so, the Secretary calculates a
wage index for each area (employing the area classification
system used by the Office of Management and Budget) by
dividing the area’s average hourly hospital wage by the
national average. See id.; Changes to the Hospital Inpatient
Prospective Systems and Fiscal Year 2004 Rates, 68 Fed.
Reg. 45,346, 45,398–99 (Aug. 1, 2003) [hereinafter Final FY
2004 Rates]. She uses the wage index—referred to as the
“factor” by the statute—to adjust the labor cost component of
Medicare reimbursements.
Congress requires the Secretary “at least every 12
months . . . [to] update the factor . . . on the basis of a survey
conducted by the Secretary (and updated as appropriate) of
the wages and wage-related costs of subsection (d) hospitals
in the United States.” 42 U.S.C. § 1395ww(d)(3)(E)(i). The
Secretary conducts this survey by compiling wage data from
cost reports submitted annually by hospitals. See Changes to
the Hospital Inpatient Prospective Payment Systems and
Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916, 49,049 (Aug.
11, 2004) [hereinafter Final FY 2005 Rates]. The Secretary
4
removes data from this survey that fail to meet certain criteria
for reasonableness, including data that are “incomplete[,]
inaccurate . . . , or otherwise aberrant.” Id. at 49,049–50; see
also Final FY 2004 Rates, 68 Fed. Reg. at 45,397. From this
scrubbed survey, the Secretary calculates each area’s
proposed wage index. Before putting the wage index in final
form, she solicits comments from the public. See Publication
of Schedules for Determining Prospective Payment Rates, 42
C.F.R. § 412.8 (2008). Because of the time required to scrub
the data, the Secretary calculates each year’s wage index
using data from the survey conducted three years earlier. See
Final FY 2005 Rates, 69 Fed. Reg. at 49,049; Final FY 2004
Rates, 68 Fed. Reg. at 45,397.
Prior to 2003, the Secretary included wage data for
facilities that were subsection (d) hospitals during the survey
year but were no longer classified as such by the time she
calculated the wage index. In May 2003, the Secretary
proposed a revision to this approach that would exclude wage
data for hospitals that were subsection (d) hospitals during the
survey year but became critical access hospitals before the
year the index was actually calculated. See Proposed FY 2004
Rates, 68 Fed. Reg. at 27,190. Commenters generally
supported removing data for critical access hospitals from the
wage index, and the Secretary implemented the proposal.
Final FY 2004 Rates, 68 Fed. Reg. at 45,397. One commenter
raised the issue that is now the centerpiece of this appeal,
arguing that the wage index should include data for facilities
that qualified as subsection (d) hospitals at the time of the
survey, including those later reclassified as critical access
hospitals. Id. The Secretary concluded, however, that
inclusion of data for these critical access hospitals has a
“substantial negative impact” on the wage index for
subsection (d) hospitals because they have “significantly
different labor costs.” Id. Specifically, “in 89 percent of all
5
labor market areas with hospitals that converted to [critical
access] status some time after FY 2000, the average hourly
wage for [critical access hospitals] is lower than the average
hourly wage for other [subsection (d)] hospitals in the area.”
Id. The Secretary continued to include wage data for other
facilities that converted to non-subsection (d) status, as long
as their data met her criteria for reasonableness. Id. She
explained, “[W]age data for these hospitals, unlike CAHs, are
not necessarily unique compared to other short-term hospitals,
and these terminating or converting hospitals provide an
accurate reflection of the labor market area.” Id. at 45,398.
The Secretary first applied this policy when calculating
the FY 2005 wage index. See Final FY 2005 Rates, 69 Fed.
Reg. at 49,049. In calculating the wage index for
Massachusetts, she excluded labor cost data from two
facilities that had become critical access hospitals after 2001,
the survey year: Nantucket Cottage Hospital and Martha’s
Vineyard Hospital. The Secretary also excluded the labor
costs of these hospitals from the FY 2006 wage index. See
Changes to the Hospital Inpatient Prospective Systems and
Fiscal Year 2006 Rates, 70 Fed. Reg. 47,278 (Aug. 12, 2005).
On March 25, 2005, a group of subsection (d) hospitals in
Massachusetts filed suit in the district court seeking, among
other things, injunctive relief requiring the Secretary to
recalculate the FY 2005 wage index using data from facilities
that qualified as subsection (d) hospitals in 2001, including
Nantucket Cottage Hospital, and to adjust Medicare
reimbursements to the Massachusetts hospitals accordingly.
The parties filed cross-motions for summary judgment. On
February 27, 2008, the district court granted appellees’
motion, concluding that the Secretary’s interpretation of
§ 1395ww(d)(3)(E)(i) failed at Chevron step one because the
statute requires that the wage index reflect the labor costs of
6
all subsection (d) hospitals whose cost reports were used to
conduct the annual survey, regardless of their status at the
time the index is calculated. See Anna Jaques Hosp. v.
Leavitt, 537 F. Supp. 2d 24, 31 (D.D.C. 2008). The court also
rejected as arbitrary and capricious the Secretary’s
explanation that the wage data from critical access hospitals
and subsection (d) hospitals were so different that they
justified her new policy of excluding the former from the
wage index. See id. at 34–35. As a remedy, the court ordered
the Secretary to recalculate the FY 2005 wage index for
Massachusetts using data from all facilities that qualified as
subsection (d) hospitals in 2001, including data from
Nantucket Cottage Hospital. See Anna Jaques Hosp. v.
Leavitt, No. 05-625, at 2 (D.D.C. Feb. 27, 2008) (order
accompanying opinion).1 The Secretary filed a motion for
reconsideration, which the district court denied. Anna Jaques
Hosp. v. Leavitt, No. 05-625, at 4 (D.D.C. July 15, 2008). In a
related lawsuit, appellees also challenged the Secretary’s
calculation of the FY 2006 wage index for Massachusetts on
the same grounds. On November 13, 2008, the district court
granted summary judgment for the hospitals in light of its
previous decision. Anna Jaques Hosp. v. Leavitt, No. 06-767
(D.D.C. Nov. 13, 2008). The Secretary appealed each
decision.
We have jurisdiction to consider this consolidated appeal
under 28 U.S.C. § 1291 (2006). “Because the district court
entered a summary judgment, we review its decision de novo
and therefore, in effect, review directly the decision of the
Secretary.” St. Luke’s Hosp. v. Thompson, 355 F.3d 690, 693
1
Although appellees did not challenge the exclusion of wage data
from Martha’s Vineyard Hospital, the Secretary included this data
when recalculating the FY 2005 and FY 2006 wage indexes
pursuant to the district court’s orders.
7
(D.C. Cir. 2004) (quoting Lozowski v. Mineta, 292 F.3d 840,
845 (D.C. Cir. 2002)).
II.
This appeal turns on three issues raised by the Secretary:
(1) whether her interpretation of § 1395ww(d)(3)(E)(i), the
statutory provision requiring annual calculation of the wage
index, is permissible under Chevron; (2) whether she acted
arbitrarily by failing to adequately explain her approach to
calculating the wage index; and (3) whether she acted
arbitrarily by treating data from similarly situated facilities
differently. The Secretary raises a fourth issue, which we need
not reach because our resolution of the others renders it moot.
We review the Secretary’s interpretation of
§ 1395ww(d)(3)(E)(i) under Chevron’s two-step framework.
When “Congress has directly spoken to the precise question at
issue . . . , that is the end of the matter.” Chevron U.S.A. Inc.
v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–43
(1984). But if we determine the statute is “silent or ambiguous
with respect to the specific issue,” we will uphold the
Secretary’s interpretation so long as it is “based on a
permissible construction of the statute.” Id. at 843. We begin
with the statute’s plain language. Congress directs the
Secretary to “update the [wage index] . . . on the basis of a
survey . . . of the wages and wage-related costs of subsection
(d) hospitals in the United States.” 42 U.S.C.
§ 1395ww(d)(3)(E)(i). This command requires the Secretary
to adjust the wage index using data collected from subsection
(d) hospitals. There is no question that the Secretary
conducted a survey that gathered data from all subsection (d)
hospitals, including those that later became critical access
hospitals.
8
The dispute is over which data from the survey she must
use to update the wage index. Appellees argue that the phrase
“on the basis of a survey . . . of subsection (d) hospitals”
means that the wage index must be calculated using all the
survey data. In their view, the statute requires both the survey
and the wage index to account for all facilities classified as
subsection (d) hospitals at the time of the data collection,
including those that later became critical access hospitals.
Discarding data for a category of hospitals after having
gathered it, so the argument goes, is no different from failing
to gather it in the first place. The Secretary reads the statute
differently. Rather than directing the inclusion of data
collected from every subsection (d) hospital in the survey, she
argues that the phrase “on the basis of” is ambiguous and
gives her the discretion to remove data found wanting to the
calculation of a meaningful wage index. According to the
Secretary, such a reading is permissible at Chevron step two.
We agree with the Secretary. The statute is silent about
whether she must use all of the survey data. It says only that
her calculation of the wage index must be made “on the basis
of” the survey. The dictionary defines “basis” to mean “the
principal component of anything” or the “fundamental
ingredient.” WEBSTER’S THIRD NEW INTERNATIONAL
DICTIONARY 182 (2d ed. 1981). “Basis” does not mean
“entire” or “only.” Calculation “on the basis of a survey” does
not require use of all the data collected. Because it may mean
less than all, “on the basis of” could reasonably be interpreted
to permit a variety of methods for using the survey data to
calculate the wage index—hence, the ambiguity. Under the
statute, the Secretary has the discretion to remove some data
from the survey so long as the remaining data constitute the
principal component of the final wage index calculation. And
that is what the Secretary did here. She scrubbed from the
survey data she determined would not reasonably help
9
calculate a meaningful wage index. Applying her criteria for
reasonableness, data that were “incomplete[,] inaccurate . . . ,
or otherwise aberrant” were not used to calculate the wage
index. Final FY 2005 Rates, 69 Fed. Reg. at 49,049–50; see
Final FY 2004 Rates, 68 Fed. Reg. at 45,397.
We faced similar arguments in Sierra Club v. EPA, 356
F.3d 296, 305–06 (D.C. Cir. 2004), in which we parsed the
phrase, “based on,” and concluded it was ambiguous. Both
phrases use a variant of the word “base,” which means in this
context “to use as a base or basis for.” WEBSTER’S THIRD
NEW INTERNATIONAL DICTIONARY 180 (2d ed. 1981). In
Sierra Club, Congress had directed EPA to determine state
compliance with national ambient air quality standards “based
on photochemical grid modeling or any other analytical
method determined . . . to be at least as effective.” 42 U.S.C.
§ 7511a(c)(2)(A) (emphasis added). The agency argued that
the phrase “based on” was ambiguous and did not require
EPA to rely “solely on” environmental modeling results.
Sierra Club, 356 F.3d at 305–06. Instead, the phrase gave
EPA the discretion to correct the mandated model’s
inaccurate projections of ozone levels by adjusting the results
before making compliance decisions. The petitioners argued
that “based on” required EPA to use only the results from the
required environmental model. We agreed with EPA and held
the agency’s compliance determinations could still be “based
on” the required modeling so long as EPA did “not wholly
abandon” the modeling. Id. at 306. Here, there is no question
that the Secretary did “not wholly abandon” the survey data.
She merely refined it to arrive at a more accurate wage index.
Appellees next argue that the Secretary acted arbitrarily
by failing to provide a reasoned explanation for her departure
from the previous policy that used data for facilities that
qualified as subsection (d) hospitals at the time of the survey.
10
But appellees’ argument is based on the flawed premise that it
has been the Secretary’s policy to use all of the subsection (d)
hospital data to calculate the wage index. The Secretary has
never done that. She has maintained a longstanding policy of
scrubbing data that fail to meet her criteria for reasonableness,
particularly those found to be aberrant. See Changes to the
Hospital Inpatient Prospective Payment Systems and Fiscal
Year 2003 Rates, 67 Fed. Reg. 49,982, 50,023 (Aug. 1, 2002)
(“As in past years, we performed an intensive review of the
wage data, mostly through the use of edits designed to
identify aberrant data.”). In 2004, the Secretary first removed
critical access hospital data from the 2001 survey because she
determined they have a “substantial negative impact” on the
wage indexes for subsection (d) hospitals. Final FY 2004
Rates, 68 Fed. Reg. at 45,397. This was not a change in
policy. Rather, it was a new application of her policy to
remove aberrant data.
In any event, the Secretary has adequately explained her
decision to exclude critical access hospital data from
calculation of the wage index. “[A]n agency is free to change
its mind so long as it supplies ‘a reasoned analysis.’” Nat’l
Cable & Telecomms. Ass’n v. FCC, 567 F.3d 659, 667 (D.C.
Cir. 2009) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm,
463 U.S. 29, 57 (1983)). Explanation of a change in policy is
not subject to a heightened standard of review. See FCC v.
Fox Television Stations, Inc., 129 S.Ct. 1800, 1811 (2009).
The Secretary found that critical access hospitals have
significantly different labor costs from subsection (d)
hospitals and concluded that including them in her
calculations would skew wage indexes for subsection (d)
hospitals. Such aberrational data fail to meet the Secretary’s
criteria for reasonableness. See Final FY 2004 Rates, 68 Fed.
Reg. at 45,397. Excluding them, in the expert view of the
Secretary, would “improve[] the overall equity of the wage
11
index.” Id. at 45,398. We believe this explanation is
sufficient.
Among all the types of hospitals that lost their subsection
(d) status, the Secretary excluded only the data from critical
access hospitals. Appellees argue that singling out this data
for exclusion was arbitrary because the Secretary treated data
for similarly situated hospitals differently. To be consistent,
they contend, the Secretary must treat the data from all
hospitals that no longer qualify as subsection (d) hospitals the
same. “Where an agency applies different standards to
similarly situated entities and fails to support this disparate
treatment with a reasoned explanation and substantial
evidence in the record, its action is arbitrary and capricious
and cannot be upheld.” Burlington N. & Santa Fe Ry. Co. v.
Surface Transp. Bd., 403 F.3d 771, 777 (D.C. Cir. 2005); see
also 5 U.S.C. § 706(2)(A) (2006) (requiring a reviewing court
to set aside agency action that is “arbitrary” or “capricious”).
But appellees have failed to provide any support for their
argument that critical access hospitals are similarly situated to
other hospitals that have recently lost their subsection (d)
status. Instead, they simply assert that other non-subsection
(d) hospitals may have significantly different labor costs than
those of subsection (d) hospitals. Appellees made no showing
that hospitals that lost their subsection (d) status are, by
reason of that change, outliers like critical access hospitals.
Put simply, they have not demonstrated that other new non-
subsection (d) hospitals are like the new critical access
hospitals when it comes to labor costs. Unsupported
allegations of arbitrary treatment are insufficient for us to
render a judgment on the merits of such a claim. Federal Rule
of Appellate Procedure 28(a)(9)(A) requires parties to provide
“citations to the authorities and parts of the record on which
[they] rel[y]” to bolster their arguments. We will not consider
12
“asserted but unanalyzed” arguments because “appellate
courts do not sit as self-directed boards of legal inquiry and
research, but essentially as arbiters of legal questions
presented and argued by the parties before them.” Carducci v.
Regan, 714 F.2d 171, 177 (D.C. Cir. 1983). In the absence of
such a showing, we need not decide whether the Secretary
acted arbitrarily by treating data from new non-subsection (d)
hospitals differently.
Finally, our resolution of the case makes it unnecessary
to reach the last issue raised by the Secretary on appeal.
Under section 4410 of the Balanced Budget Act of 1997, Pub.
L. No. 105-33, § 4410, 111 Stat. 251, 402 (codified at 42
U.S.C. § 1395ww note), the Secretary must calculate a “rural
wage floor” for each state using data from its rural subsection
(d) hospitals. The wage index for urban subsection (d)
hospitals may not fall below the rural wage floor. See id. The
Secretary has never read section 4410 as requiring her to
calculate rural wage floors for states without rural subsection
(d) hospitals. On appeal, the Secretary argues that even if we
were to rule that she must include in the wage index called for
by § 1395ww(d)(3)(E)(i) the labor costs of rural facilities that
lost their subsection (d) status (Nantucket Cottage Hospital
and Martha’s Vineyard Hospital), she would not be required
to calculate a rural wage floor for Massachusetts. Because
section 4410, unlike § 1395ww(d)(3)(E)(i), makes no
reference to “a survey,” the Secretary maintains that she is
free to use only data from facilities that are rural subsection
(d) hospitals at the time she calculates the wage index. But the
Secretary only raised this issue in anticipation of a holding
that we have now decided against. Because we have ruled that
the Secretary may exclude data from Nantucket Cottage
Hospital and Martha’s Vineyard Hospital, we need not
consider an issue addressing a contingency that never
materialized.
13
III.
For the foregoing reasons, the judgment of the district
court is
Reversed.