Select Specialty Hospital—bloomington, Inc. v. Burwell, s. 12–5355

• Decision Date: 08 July 2014
• Docket Number: Nos. 12–5355,12–5358.,s. 12–5355
• Citation: 757 F.3d 308
• Parties: SELECT SPECIALTY HOSPITAL—BLOOMINGTON, INC., et al., Appellants v. Sylvia Mathews BURWELL, Secretary, United States Department of Health and Human Services, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

757 F.3d 308

SELECT SPECIALTY HOSPITAL—BLOOMINGTON, INC., et al., Appellants

v.Sylvia Mathews BURWELL, Secretary, United States Department of Health and Human Services, Appellee.

Nos. 12–5355, 12–5358.

United States Court of Appeals,District of Columbia Circuit.

Argued March 14, 2014.

Decided July 8, 2014.

Appeals from the United States District Court for the District of Columbia (No. 1:09–cv–02008) (No. 1:09–cv–02362).

David J. Bird argued the cause for appellants. With him on the briefs were Andrew C. Bernasconi and Daniel Z. Herbst.

Joshua P. Waldman, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Stuart F. Delery, Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: ROGERS, BROWN and MILLETT, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge.

A group of long-term care hospitals challenges the Secretary's determination that, because the organizations operate out of buildings previously owned by hospital entities, they are not “new hospitals.” Because we cannot tell how the Secretary arrived at this conclusion, we find it arbitrary and capricious.

I

Hospitals are costly to build. Medicare has traditionally provided for a “return on equity capital” for the construction of such buildings, which includes “depreciation, interest, taxes, insurance and similar expenses ... for plant and fixed equipment, and for moveable equipment.” Capital Payments Under the Inpatient Hospital Prospective Payment System, 52 Fed.Reg. 33,168, 33,168 (Sept. 1, 1987). Up until the late 1980s, capital reimbursements were provided on a reasonable cost basis—that is, “on the basis of current costs of the individual provider, rather than costs of a past period or fixed negotiated rate.” 42 C.F.R. § 413.5(a) (explaining the reasonable-cost reimbursement scheme); 52 Fed.Reg. at 33,168.

In 1987, Congress directed the Secretary of Health and Human Services to develop a capital recovery scheme for hospitals through the inpatient prospective payment system,¹ rather than the reasonable-cost reimbursement method. SeeOmnibus Budget Reconciliation Act of 1987, Pub.L. No. 100–203, § 4006(b)(1), 101 Stat. 1330 (1987); see also42 U.S.C. § 1395ww(g)(1). It also authorized the Secretary to provide for appropriate exceptions to the capital prospective payment system. 42 U.S.C. § 1395ww(g)(1)(B)(iii). To comply with the congressional directive, the Secretary implemented a ten-year plan, which transitioned the Department from the old reasonable-cost capital payment system to capital repayments made through the new inpatient prospective payment system. SeeProspective Payment System for Inpatient Hospital Capital–Related Costs, 56 Fed.Reg. 43,358 (Aug. 30, 1991).

Under this scheme, the Secretary exempted “new hospitals” from the inpatient prospective payment system for the first two years of existence. Instead, such hospitals would be entitled to 85% of their reasonable capital-related costs, harking back to the old system. See56 Fed.Reg. at 43,362, 43,453. A “new hospital” is a “hospital that has operated (under previous or present ownership) for less than 2 years.” SeeChanges to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1993 Rates, 57 Fed.Reg. 39,746, 39,827 (Sept. 1, 1992); see also42 C.F.R. § 412.300(b). About a year after the scheme was established, the following language was added to the existing regulations:

The following hospitals are not new hospitals:

(1) A hospital that builds new or replacement facilities at the same or another location even if coincidental with a change of ownership, a change in management, or a lease arrangement.

(2) A hospital that closes and subsequently reopens.

(3) A hospital that has been in operation for more than 2 years but has participated in the Medicare program for less than 2 years.

(4) A hospital that changes its status from a hospital that is excluded from the prospective payment systems to a hospital that is subject to the capital prospective payment systems.

57 Fed.Reg. at 39,827; see also42 C.F.R. § 412.300(b)(1)-(4) (codifying the exceptions). In adding these exceptions, the Secretary explained the exemption was intended only for “new entrants into the hospital field that do not have a historic asset base.” See57 Fed.Reg. at 39,790.

While the “new hospitals” exemption was originally conceived as a temporary measure, the Secretary made it a permanent one about ten years later. See67 Fed.Reg. 31,404, 31,488–89 (May 9, 2002) (proposed rule); see also67 Fed.Reg. 49,982, 50,101 (Aug. 1, 2002) (final rule). The provision was intended to be a “special protection to new hospitals,” given concerns that “prospective payments ... may not be adequate initially to cover the capital costs of newly built hospitals.” See67 Fed.Reg. at 50,101. But, the Secretary said, the exemption would “only be available to those hospitals that have not received reasonable cost-based payments under the Medicare program in the past, and would need special protection during their initial period of operation.” Id.

A group of long-term care hospitals (“the Hospitals”), all associated with the Select Specialty Hospitals organization, identified themselves as “new hospitals” within the meaning of 42 C.F.R. § 412.300(b). They claimed capital-cost reimbursements under the 85% “reasonable cost basis” rule, rather than the formulae provided by the prospective payment system. See J.A. at 155, 232. Most of the hospitals are “hospitals-within-hospitals”—independent entities that operate in the same building or campus as an established “host” hospital. J.A. at 154, 231. In contrast, some are freestanding hospitals. J.A. at 154–55.

An intermediary disagreed with the Hospitals' self-determined “new hospital” designation and reduced the amount of capital recovery. J.A. at 155, 232. The Hospitals appealed the intermediary's decision to the Provider Reimbursement Review Board (“the Board”). In considering the appeal, the Board determined the meaning of “hospital” under § 412.300(b) was ambiguous, as it was unclear whether the term referred to the institutional entity, the brick-and-mortar asset, or both. J.A. at 161, 237. As the parties stipulated that “all of the [leased] buildings ... were operated by [a] hospital for more than 2 years prior to the lease arrangement,” the Board determined the designation did not apply. J.A. at 162, 238; see also J.A. at 156, 232. Two board members dissented, arguing the majority unceremoniously disregarded the newly-formed nature of the business entity and the enormous capital expenditures involved in rehabilitating and reconstructing the facilities. See J.A. at 167–68, 242–43. The Medicare Administrator upheld the Board's decision.

The Hospitals challenged the Board's decision in district court, but the same outcome awaited them.² When presented with the Government's motion for summary judgment, the district court concluded both sides offered plausible interpretations of 42 C.F.R. § 412.300(b): one that permitted consideration of physical assets, and one that precluded it. See J.A. at 330. It also found the exceptions of § 412.300(b)(1)-(4) added to the interpretive disarray. Calling the prefatory language “regrettably ... ambiguous,” the court suggested “the ensuing examples [could be] merely examples, but also could be interpreted as enumerating an exclusive list.” See Select Specialty Hosp.-Bloomington, Inc. v. Sebelius, 774 F.Supp.2d 332, 340 (D.D.C.2011). In light of the ambiguity, it proceeded to uphold the Board's determination as both reasonable and supported by substantial evidence. The Hospitals appealed.

II

We review a district court's grant of summary judgment de novo, “which is to say we ‘review the administrative action directly, according no particular deference to the judgment of the District Court.” ’ Roberts v. United States, 741 F.3d 152, 157–58 (D.C.Cir.2014) (quoting Holland v. Nat'l Mining Ass'n, 309 F.3d 808, 814 (D.C.Cir.2002)). While we generally give “substantial deference” to an agency's interpretation of its own regulation, deference is unwarranted if the interpretation is “plainly erroneous or inconsistent with the regulation.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994) (citation and internal quotation mark omitted); Kaiser Found. Hosps. v. Sebelius, 708 F.3d 226, 230–31 (D.C.Cir.2013).

III

The question before us is whether the Board's interpretation of the Secretary's regulation—specifically, her definition of “new hospital”—is arbitrary and capricious. The parties begin at a curious starting point: the meaning of the word “hospital.” The Hospitals suggest the meaning is clear—42 U.S.C. § 1395x(e) indicates “hospital” means the institutional entity, not the physical facility. See Appellants' Br. at 38, 42. As none of the Hospitals—independent offshoots of an overarching corporation—existed prior to the cost period at issue, they maintain their institutions are all “new.” See Appellants' Br. at 42. But the meaning of “hospitals” is beside the point—the Government does not contest that a “hospital” could be the organizational entity. See Appellee's Br. at 31–33. Instead, the crux of the Government's concern is the meaning of the word “new”—a question to which § 1395x(e) does not speak. Unfortunately, neither does the Board's decision.

The Hospitals' disorientation is understandable; it was the Board that first puzzlingly emphasized the interpretation of “hospital,” instead of “new.” See J.A. at 161, 237 (“The Board finds that the regulation defining a ‘new hospital’ ... is ambiguous, in that it is not clear if the term ‘hospital’ means the individual physical assets ... or the business entity as a whole, which would include both bricks and mortar and the operations.”). On appeal, the Government attempts...