MILTON S. HERSHEY MEDICAL CENTER v. AZAR II, 1:19-cv-02680

Plaintiffs are teaching hospitals that receive Medicare DGME (direct graduate medical education) payments based on a hospital’s PRA, Medicare patient load, and a weighted 3‑year average of full‑time‑equivalent (FTE) residents.
The Medicare statute requires weighting of residents in their initial residency period at 1.0 and physicians beyond that period (fellows) at 0.5, and (via a 1997 amendment) caps the unweighted number of FTEs a hospital may count at its 1996 level.
42 C.F.R. § 413.79(c)(2)(iii) (the regulation at issue) reduces a hospital’s weighted FTEs proportionally when the hospital’s unweighted FTEs exceed the 1996 cap (i.e., it scales down the weighted FTE total when unweighted FTEs exceed the cap).
The hospitals at issue exceeded their 1996 caps and employed fellows; CMS (through its contractor) applied § 413.79(c)(2)(iii) and reduced their DGME payments; the hospitals exhausted administrative review and obtained expedited judicial review.
The consolidated suits challenge the regulation as contrary to the Medicare statute and arbitrary and capricious under the APA; the district court granted plaintiffs’ summary judgment, held the regulation unlawful as applied, and remanded for recalculation consistent with the opinion.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Waiver: Did plaintiffs waive statutory challenges by not commenting during rulemaking?	No — application challenge preserved; plaintiffs raised issue via Board and timely judicial review.	Yes — parties should have raised objections in notice‑and‑comment rulemaking.	Not waived — courts allow challenges to a regulation’s application; Board review preserved claims.
Statutory interpretation: Does § 413.79(c)(2)(iii) conflict with statute by effectively altering resident/fellow weighting when a hospital exceeds the cap?	The regulation, when applied to hospitals exceeding the cap and employing fellows, changes the statutory weights (1.0 and 0.5) and thus conflicts with § 1395ww(h)(4)(C).	The statute is ambiguous about computing weighted FTEs when the unweighted cap is exceeded; the regulation is a permissible exercise of agency discretion consistent with the statute.	Chevron step one: statute unambiguous about weights; regulation unlawful as applied because it effectively overrides Congress’s mandated weights.
Remedy / Relief	Plaintiffs seek recalculation of DGME payments without the unlawful weighting effect.	Defendant defends the regulation and the payment calculations.	Grant plaintiffs’ summary judgment, deny defendant’s motion, remand to agency to recalculate reimbursements consistent with the opinion.

Chevron v. Nat. Res. Def. Council, 467 U.S. 837 (1984) (framework for judicial review of agency statutory interpretations)
Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002) (start statutory interpretation with text)
City of Clarksville v. FERC, 888 F.3d 477 (D.C. Cir. 2018) (Chevron deference discussion)
Weaver v. Fed. Motor Carrier Safety Admin., 744 F.3d 142 (D.C. Cir. 2014) (permitting challenges to a regulation’s application)
United States v. Monzel, 641 F.3d 528 (D.C. Cir. 2011) (‘‘shall’’ is mandatory)
U.S. Sugar Corp. v. EPA, 830 F.3d 579 (D.C. Cir. 2016) (tools of statutory construction at Chevron step one)
Anna Jacques Hosp. v. Burwell, 797 F.3d 1155 (D.C. Cir. 2015) (recognizing broad statutory delegations when Congress so intends)
Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) (interpret statute in context of whole law)