IRVINE MEDICAL CENTER, Plaintiff-Appellant, v. Tommy G. THOMPSON, Secretary of the Department of Health & Human Services, Defendant-Appellee. Arizona Rehabilitation Hospital, Inc., (Medical Provider No. 3-3026), dba Novacare Valley of the Sun Rehabilitation Hospital; Arizona Rehabilitation Hospital, Inc. (Medical Provider No. 03-5212), dba Novacare Valley of the Sun Rehabilitation Hospital, Plaintiffs-Appellants, and Novacare Meridian Point Rehabilitation Hospital, Inc. (Medical Provider No. 03-3025); Tucson Regional Rehabilitation Hospital, Inc. (Medical Provider No. 03-3028); Novacare Rehab Agency of Georgia, Inc. (Medical Provider No. 11-6533); Novacare Rehab Agency of Illinois, Inc. (Medical Provider No. 14-6518); Novacare Tri-State Regional Rehabilitation Hospital, Inc. (Medical Provider No. 15-3025); Rehabilitation Corporation of Virginia (Medical Provider No. 49-3028) dba Novacare Rehabilitation Hospital of Virginia, Plaintiffs, v. Tommy G. Thompson, Secretary of the Department of Health and Human Services, Defendant-Appellee.
Nos. 99-56319, 00-15757
United States Court of Appeals, Ninth Circuit
Jan. 4, 2002
275 F.3d 823
Conclusion
GO2 does not violate any of the statutes invoked by Russell, nor does it violate his constitutional rights. Accordingly, the judgment of the district court is
AFFIRMED.
Argued and Submitted Feb. 8, 2001
Filed Jan. 4, 2002
Richard K. Waterman, Department of Health & Human Services, San Francisco, California, for the defendant-appellee.
Opinion by Judge CANBY; Dissent by Judge PREGERSON.
CANBY, Circuit Judge:
This is a consolidated appeal brought by Medicare service providers against the Secretary of the Department of Health and Human Services (“Secretary“). The plaintiffs contend that the Secretary acted unlawfully in repealing a regulation that had allowed providers to carry forward reasonable costs disallowed in a particular fiscal period to succeeding fiscal periods. In both actions, the district courts awarded summary judgment to the Secretary, on the ground that the repeal was based on a permissible interpretation of the underlying Medicare statute. We conclude that the repeal did not contravene a clearly expressed congressional mandate, was not based on an unreasonable interpretation of the Medicare statute, and was not an arbitrary or capricious agency action within the meaning of the Administrative Procedure Act,
Statutory Background1
The Medicare program, established by Title XVIII of the Social Security Act,
Medical care facilities, such as plaintiffs, receive reimbursement under Part A or Part B (or both) from a “fiscal intermediary,” such as Mutual of Omaha, that functions as the Secretary‘s agent in making payment on covered claims. At the close of each fiscal year, a provider must submit a “cost report” to the fiscal intermediary showing the costs it has incurred, and the appropriate portion of such costs to be allocated to the Medicare program during the fiscal period covered by the cost report.
When it was originally enacted in 1965, the Medicare program reimbursed providers on the basis of their “reasonable costs” for both inpatient and outpatient services. In 1972, Congress amended the Medicare Act to impose a limit on Medicare payments, restricting the annual reimbursement to a provider‘s aggregate reasonable costs or aggregate customary charges, whichever is lower. See Soc. Sec. Amendments of 1972, P.L. 92-603, § 233, codified at
The effect of the LCC restriction was to limit the amount of reimbursement so that,
In their reports on the 1972 amendments, both the House and Senate committees explained the rationale for the LCC restriction and the single exception for public providers. Both reports also contain an additional paragraph in which the committees acknowledged the potential negative effect of the restriction on institutions experiencing higher than normal costs for a limited period of time. The House Committee Report (like the Senate Committee Report) stated:
[Y]our committee recognizes the desirability of permitting a provider that was reimbursed under the medicare ... program[] on the basis of charges in a fiscal period to carry unreimbursed allowable costs for that period forward for perhaps two succeeding fiscal periods. Should charges exceed costs in such succeeding fiscal periods, the unreimbursed allowable costs carried forward could be reimbursed to the provider along with current allowable costs up to the limit of current charges.
H.R. Rep. No. 92-231, at 102 (1971), reprinted in 1972 U.S.C.C.A.N. 4989, 5088; see also S.Rep. No. 92-1230, at 203 (1971) (using virtually identical language).
This admonition was not lost on the Secretary. In 1974, the Secretary issued a regulation implementing the LCC restriction. 39 Fed. Reg. 16,882 (May 10, 1974), adding a new section
In 1986, the Secretary published notice of a proposed rule to eliminate the carry-forward provision. 51 Fed. Reg. 33,074 (Sept. 18, 1986). The Secretary promulgated the final regulation in 1988, eliminating the carry-forward provision entirely, effective for fiscal periods beginning on or after April 28, 1988. 53 Fed. Reg. 10,077 (Mar. 29, 1988),
Factual Background
Plaintiffs in this case are nine Medicare health care providers that suffered an LCC disallowance for costs in excess of charges in a reporting year occurring after the LCC carry-forward provision was repealed. Eight of the nine plaintiffs fit within the agency‘s definition of “new provider” in the year in which they suffered the LCC disallowance. See
The district courts in both cases granted summary judgment to the Secretary, and denied the plaintiffs’ requests for summary judgment. Both courts reasoned that the
We have jurisdiction pursuant to
Discussion
At issue in this case is whether the Secretary‘s promulgation of
1. Congress Did Not Unambiguously Mandate a Carry-Forward Provision.
The plaintiffs first contend that the Secretary‘s repeal of the carry-forward provision must be invalidated under the first step of the Chevron analysis, because the repeal contravened a clearly expressed congressional directive requiring the Secretary to provide a carry-forward. While it is clear that Congress permitted the Secretary to implement a carry-forward provision, it is far from clear that Congress required such a provision.
Our interpretation of the Medicare statute begins, as it must, with its text. Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992). Significantly, the text nowhere even mentions a carry-forward.2 Although the plaintiffs urge us to treat this silence as inconsequential, or at least ambiguous, we interpret this silence as an indication that Congress deliberately chose not to mandate a carry-forward. When enacting the 1972 amendments, Congress considered the possibility of a carry-forward exception to the LCC principle. See H.R. Rep. No. 92-231, at 102; S.Rep. No. 92-1230, at 203. Had Congress intended to mandate such a carry-forward, it almost certainly would have included such a requirement in the text of the statute, as it has done in other instances in which an agency is required to permit a carry-for-
The plaintiffs attempt to draw a statutory command from the legislative history of the 1972 LCC amendment.3 Committees of the House and Senate included virtually identical language in their reports:
Your committee recognizes that a provider‘s charges may be lower than its costs in a given period as a result of miscalculation or special circumstances of limited duration, and it is not intended that providers should be penalized by such short-range discrepancies between costs and charges. Nor does the committee want to introduce any incentive for providers to set charges for the general public at a level substantially higher than estimated costs merely to avoid being penalized by [the LCC] provision. Thus, your committee recognizes the desirability of permitting a provider that was reimbursed under the medicare program[] on the basis of charges in a
fiscal period to carry unreimbursed allowable costs for that period forward for perhaps two succeeding fiscal periods.
H.R. Rep. No. 92-231, at 102; see also S. Rep. No. 92-1230, at 203 (using virtually identical language). This language, however, falls far short of amounting to a statutory mandate.
First, in the context of the statute‘s silence concerning a carry-forward provision, the committees’ statements that a carry forward would be “desirable” did nothing more than reflect Congress‘s understanding that the LCC provision could have some unnecessarily harsh consequences, and that the Secretary would have discretion to temper these effects by permitting a carry-forward. Without this language, there would have been a substantial question as to whether the Secretary even had discretion to consider implementing a carry-forward. These statements foreclosed that question, but they did not rise to the level of a mandate to the Secretary to implement a carry-forward exception to the LCC provision. The reports unquestionably encouraged the Secretary to allow a carry-forward, but they said nothing about requiring one; the reports say only that a carry-forward would be “desirable.” Cf. Portland Feminist Women‘s Health Ctr. v. Advocates For Life, Inc., 859 F.2d 681, 685 (9th Cir.1988) (recognizing that “desirable” does not mean “required“); Save Lake Washington v. Frank, 641 F.2d 1330, 1335 (9th Cir. 1985) (same). “Desir-
2. The Secretary‘s Interpretation of the Statute Is a Permissible One.
Our analysis under the second step of Chevron can be brief, because our conclusion follows from what we have already said about Congress‘s intent. The Secretary has taken the position that the LCC statute, in light of its legislative history, permits but does not require the Secretary to implement, or continue to implement, a carry-forward regulation. See 53 Fed. Reg. at 10,080. We have just explained why we view this interpretation to be the4 one that Congress intended. It is not necessary, however, that we conclude that the Secretary‘s interpretation is the one we would adopt. We are called upon to determine only whether the Secretary‘s interpretation “is based on a permissible construction of the statute.” Chevron, 467 U.S. at 843, 104 S.Ct. 2778. In light of the reports of the congressional committees expressing the desirability, but not the requirement, of a carry forward, and the silence of the statute, the Secretary‘s interpretation is certainly a permissible one.5 We therefore defer to it under Chevron.
3. The Secretary‘s Repeal of the LCC Regulation Was Not Arbitrary or Capricious.
The plaintiffs next contend that, even if the Secretary‘s repeal did not contravene an unambiguously expressed congressional mandate, the repeal was nonetheless arbitrary or capricious and cannot withstand review under the APA. See
In pressing their argument here, the plaintiffs face an uphill battle. Our review of whether the repeal was arbitrary or capricious is “highly deferential, pre-
The plaintiffs nonetheless point out that an agency regulation can be found to be arbitrary and capricious “if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Alvarado Cmty. Hosp. v. Shalala, 155 F.3d 1115, 1122 (9th Cir.1998). The record, however, does not support the view that the Secretary made any of these missteps.
In repealing the regulation, the Secretary followed a logical course, identifying the types of entities most likely to be the most significantly affected, and determining whether continuation of the carry-forward was necessary for those providers. Although some of the assertions offered by the Secretary in justifying the repeal were debatable, none of the assertions was “so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Id. Consequently, under the deferential standard of review implicated here, Indep. Acceptance Co., 204 F.3d at 1251, we cannot agree with the plaintiffs’ contentions that the repeal was arbitrary or capricious. We address in turn the plaintiffs’ specific challenges to the validity of the repeal.
a. The Secretary‘s Rationale for Eliminating the LCC Carry-Forward Was Not Irreconcilable with Promulgation of the Carry-Forward Regulation in 1974.
In the preamble to the final regulation that repealed the carry-forward provision, the Secretary indicated that retention of the carry-forward “would be contrary to ensuring Congress’ intent in enacting the LCC principle, which was that Medicare pay no more than the provider charges non-Medicare patients responsible for payment on a charge basis.” 53 Fed. Reg. at 10,081. The plaintiffs contend that, by this logic, the earlier regulation permitting the carry-forward “violated” the Medicare statute for fourteen years.
We find no irrationality on the part of the Secretary. The preamble to the repeal regulation merely acknowledged that elimination of the LCC carry-forward would give wider application to the LCC rule itself, and thereby more fully implement the primary purpose of the LCC rule: that Medicare pay no more than the provider charges non-Medicare patients responsible for payment on a charge basis. The carry-forward was an exception to
b. The Secretary Plausibly Concluded that the Carry-Forward Provision Could Result in Medicare Paying More than the Public for Medical Services.
The plaintiffs next contend that the Secretary‘s rationale for eliminating the carry-forward—that continuation of the carry-forward could result in Medicare paying more than the provider charges the public—was factually incorrect. According to the plaintiffs, the LCC carry-forward provision, as it operated under the former regulation, could never result in Medicare paying more for services than the general public pays because reimbursement in the succeeding year was limited to the charges paid by the public. See
The flaw in the plaintiffs’ argument is that costs that are carried forward result in a reimbursement in the succeeding year that exceeds the amount otherwise payable (lowest of cost or charges). As a consequence, the reimbursement for carried-over costs amounts to a Medicare payment for services that were rendered in the previous year—services for which Medicare has already paid the provider‘s full reimbursable amount. Viewing the carry-forward in this light, for any single year in which costs were carried over and reimbursed, Medicare can be seen as “paying more than the provider charged non-Medicare” patients for that year‘s services.7 As a result, the Secretary‘s view was at least plausible, and we must defer to it. See Motor Vehicle, 463 U.S. at 43, 103 S.Ct. 2856.
c. Repeal of the LCC Carry-Forward Regulation Did Not Clearly Violate Congressional Intent to Avoid Any Incentive for Providers to Raise Charges Substantially Higher than Costs.
The plaintiffs next contend that the Secretary acted arbitrarily by failing to follow the desire of the congressional committees not “to introduce any incentive ... to set charges for the general public at a level substantially higher than estimated
The Secretary pointed to a number of reasons why he did “not expect providers to raise charges unnecessarily.” 53 Fed. Reg. at 10,800; see also 51 Fed. Reg. at 33,077. The Secretary explained that providers would be exempt from the LCC principle if they met the nominal charge provisions, and that, in light of the impact analysis undertaken by the Secretary,8 most providers would in any event not be greatly affected by the change. 53 Fed. Reg. at 10,080-81; 51 Fed. Reg. at 33,077. Further, the Secretary explained that providers that incurred unreimbursed costs on a nonrecurrent basis may be able to reduce or eliminate these costs through various sound financial practices, and thereby avoid raising charges. 53 Fed. Reg. at 10,080-81. Finally, the Secretary acknowledged that those providers who experience unreimbursed costs on a recurrent basis would not be greatly affected by the repeal, because they were unable to recoup costs even with the carry-forward. Id. at 10,080. The Secretary‘s reasoning provides a rational basis for concluding that repeal was unlikely to result in an unnecessary increase in charges.
d. It Was Not Irrational for the Secretary to Conclude that the Health Care Industry‘s Experience with the LCC Reduced the Need for a Carry-Forward Provision.
The Secretary did not act arbitrarily in concluding that the need for the carry-forward no longer justified its costs. The Secretary pointed out that health care providers by 1988 had significant experience adjusting the relationship between charges and costs. Id. at 10,081. That Medicare stood to save an estimated $130 million over five years as a result of the repeal did nothing to change this fact.9 See id. at 10,084.
e. Elimination of the LCC Carry-Forward for New Providers Was Not Arbitrary.
The plaintiffs’ next challenge is that the repeal was particularly arbitrary and unfair for new providers. At a bare minimum, they contend, the Secretary should have preserved the carry-forward exception for new providers, who have high start-up costs, and who lack the experience helpful in dealing with the LCC limit. As the Secretary points out, however, new providers are not necessarily inexperienced with Medicare and medical costs and charges.10
The Secretary concluded that: 1) with the steady growth of HHAs participating in Medicare during the ten years leading up to 1988, there was no longer a need to attract additional providers in an effort to increase patients’ access to services, and thus a carry-forward was no longer necessary for that purpose;12 2) average capital-related costs for an HHA represent less than 3% of its total operating costs, so the carry-forward was not needed to protect against large capital start-up costs; 3) obtaining financing for start-up costs was no longer a significant obstacle to HHAs’ entrance into the marketplace, because by the end of Fiscal Year 1985, 81.1% of new HHAs entering the Medicare program were either hospital-based or proprietary facilities which have access to alternative sources of financing, unlike the nonprofit HHAs that had previously dominated the industry; and 4) the nature of home health services permits HHAs to adopt flexible staffing and maintain minimal fixed assets, giving them more control over early-year costs than other types of providers and enabling them to align their costs with charges. Id. at 10,083-85. These considerations are more than sufficient to demonstrate the lack of arbitrariness in the Secretary‘s action.
It also did not render the repeal arbitrary for the Secretary to observe that new providers could simply charge more to defer the losses represented by the disallowed costs resulting from the repeal. Id. at 10,082. The Secretary considered the point that some new providers would experience losses resulting from disallowed costs, but noted that the losses that new providers incurred stemmed largely from their failure to establish charges at a level sufficient to cover costs from all patients, non-Medicare and Medicare.13 Id. at 10,
f. The Secretary Adequately Considered the Negative Impact that the Repeal Could Have on Medicare Beneficiaries.
There was nothing about the Secretary‘s rulemaking statement regarding Medicare recipients that would render the repeal arbitrary. The Secretary indicated that, as a general matter, the repeal would not cause Medicare recipients to seek other facilities. See 53 Fed. Reg. at 10,082. This point was supported by evidence in the record that most health care providers had considerable experience adjusting the relationship between costs and charges, that the repeal of the LCC would not significantly affect most health care providers, and that there was ample access to HHAs. Id. at 10,081, 10,083-84. The Secretary further indicated that in those instances in which a medical provider increased its charges, Medicare beneficiaries might seek health care services from other providers, who had not substantially increased their charges. Id. at 10,082. The Secretary did recognize that, in a limited number of cases, no suitable alternatives would be available to Medicare beneficiaries, but that in some of these cases, providers could possibly avoid increasing charges by reducing their costs. Id.
It is true that the Secretary acknowledged that some Medicare beneficiaries would possibly have to shoulder an additional financial burden as a result of the repeal of the carry-forward provision. Id. This acknowledgment did not render the Secretary‘s rulemaking statement or reliance upon it arbitrary, however. In the absence of a congressionally-imposed requirement, we must conclude that the Secretary had some flexibility to fashion a rule that would possibly affect some Medicare beneficiaries in an adverse manner.14
Conclusion
The repeal of the LCC provision did not contravene a clearly expressed congressional mandate, nor was it based on an impermissible interpretation of the governing statute. The repeal was not otherwise arbitrary or capricious. The judgments of the district courts accordingly are
AFFIRMED.
PREGERSON, Circuit Judge, dissenting:
I agree with the majority that, under step one of Chevron analysis, courts are required to consider “traditional tools of statutory interpretation.” Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. 2778. Thus, the majority correctly considers the legislative history when determining if Congress has clearly spoken on the issue of whether a carry-forward provision is required under the Medicare statute.
Step one of Chevron analysis begins with a consideration of the language of the statute itself,
Because the text of the statute is silent on this issue, courts next consider other manifestations of congressional intent, including the structure of the statute, the purpose of the statute, and legislative history to determine whether Congress clearly expressed an intent concerning adoption of a carry-forward (or similar) provision. In this case, all parties agree that the only other relevant manifestation of Congress’ intent is the legislative history.
The majority cites the Senate and House Reports that accompanied the 1972 legislation. Although these reports raise serious concerns over the potential negative consequences of the implementation of the “lower costs or charges” principle, the majority ultimately concludes that this legislative history does not clearly express Congress’ intent that the Secretary adopt provisions to respond to these concerns. I disagree. The report clearly identifies Congress’ concerns with the LCC rule: that providers might be “penalized by such short-range discrepancies between costs and charges” and that there might be an “incentive for providers to set charges for the general public at a level substantially higher than estimated costs merely to avoid being penalized by this provision.” H.R. Rep. No. 92-231, 92d Cong., 1st Sess. 102 (1971); S. Rep. No. 92-1230, 92d Cong., 2d Sess. 203 (1972). Thus, Congress “recognize[d] the desirability of permitting a provider ... to carry un-reimbursed allowable costs.” Id.
This language evinces Congress’ clear intent to avoid penalizing providers for short-range discrepancies between costs and charges and prevent creating incentives for providers to set charges higher to avoid being penalized by the LCC provision. Although Congress did not mandate that a carry-forward provision be adopted, the legislative history identifies two serious congressional concerns and proposes a solution: the adoption of a carry-forward provision.
The majority argues that Congress’ expressed “desire” for the implementation of a carry-forward provision does “nothing more than reflect Congress’ understanding that the LCC provision could have some unnecessarily harsh consequences, and that the Secretary would have discretion to temper these effects by permitting a carry-forward provision.” This argument is undercut by the Secretary‘s remarks in the Federal Register. When the Secretary repealed the carry-forward provision in 1988, he published a response to the universal opposition expressed during the public comment period. See 53 Fed. Reg. at 10079-083. He initially noted that
Even if I were to accept that Congress has not expressed a clear intent that the Secretary provide a carry-forward provision, I would conclude that the Secretary‘s interpretation does not pass step two of Chevron analysis because it is not a “permissible construction of the statute.” Chevron, 467 U.S. at 843, 104 S.Ct. 2778. Congress unequivocally expressed its intent in the legislative history that the LCC provision neither penalize providers for short-range discrepancies between costs and charges nor create incentives for providers to set higher charges. Because the Secretary failed to adequately consider Congress’ intent when he repealed the carry-forward provision, I conclude that his interpretation is impermissible.
The Secretary first argues that, after 14 years, providers should be used to the LCC and should have tightened their financial practices. The Secretary asserts (in his brief):
[a]ccordingly, it was eminently rational for the Secretary to conclude in 1974 that an LCC carry-forward was needed to give providers time to adjust their charge structures and tighten up their accounting practices. Presumably even Irvine would concede that 14 years elapsed from 1974 to 1988. It was, then, not irrational for the Secretary to conclude in 1988 that the health care provider industry had “long-term experience” in making the adjustments to its charge structures in response to establishment of the LCC limit.
This explanation, at best, supports an argument that the Secretary‘s decision to repeal the carry-forward was not irrational. The explanation does not refute the proposition that without a carry-forward provision—or some similar mechanism—providers will not be penalized for short range discrepancies. The appellants cite to the rich record of public comments describing the short-range discrepancy problem and refuting the Secretary‘s suggestion that “experience” with the LCC will avert the problem. See, e.g., American College of Physicians, Letter to HCFA, Nov. 17, 1986 (“We believe that the reasons which prompted formulation of the carry-forward provisions are as valid today as they were in 1968“). The Secretary fails to demonstrate that repealing the carry-forward provision—in the absence of another mechanism—is not contrary to the clear congressional intent to avoid penalizing providers for short term discrepancies.
Next, the Secretary argues that the repeal will not result in higher charges to the beneficiaries because: (1) providers could reduce costs, and (2) beneficiaries might select another provider. Contrary to these arguments, the Secretary conceded, in the Federal Register “comment and response” section, that beneficiaries would seek other facilities only “in a few instances,” and that in cases where other facilities are not available, “the imposition of higher charges would result in a higher coinsurance
I conclude that Congress expressed a clear intent concerning the precise question at issue: whether the LCC provision should be implemented in a manner that did not penalize providers for short-range discrepancies or create incentives for providers to set higher charges. The Secretary‘s repeal of the carry-forward provision is contrary to this clear intent. Moreover, even accepting the majority‘s position that Congress has not clearly expressed such an intent, the Secretary‘s interpretation of the statute is contrary to the congressional directive evidenced in the legislative history and therefore impermissible. I decline to defer to the agency‘s interpretation of the Medicare statute in this instance and respectfully dissent.
Notes
The amount paid to any provider of services ... shall be: (1) except as provided in paragraph (3), the lesser of (A) the reasonable cost of such services, as determined under section 1395x(v) of this title and as further limited by section 1395rr(b)(2)(B) of this title, or (B) the customary charges with respect to such services[.]
| Reasonable Costs | Customary Charges | Medicare Payment | |
| Year 1 | $200 | $150 | $150 |
As a result, $50 can be carried forward. Then:
| Year 2 | $200 | $225 | $225 (including $25 of the carry-forward) |
In Year 2, when the provider receives not only full Medicare reimbursement for its Year 2 costs but also receives a Medicare payment of $25 of carry-forward, that $25 payment is not for the services furnished or the costs incurred in Year 2 because, by definition, the provider has already been reimbursed the maximum amount for all those services when it was reimbursed its entire reasonable costs. The $25 reimbursement therefore may plausibly be viewed as constituting a $25 payment for Year 1, in excess of the charges paid by the public for such services in that year.