Hardy Wilson Memorial Hospital, et al v. Michael Leavitt, Secretary, et al

Filing

Hardy Wilson Memorial Hospital, et al v. Michael Leavitt, Secretary, et al

Doc. 0

Case: 09-60312

Document: 00511209076

Page: 1

Date Filed: 08/19/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
N o . 09-60312 August 19, 2010 Lyle W. Cayce Clerk H A R D Y WILSON MEMORIAL HOSPITAL; SHARKEY-ISSAQUENA C O M M U N I T Y HOSPITAL; ALLIANCE HEALTHCARE SYSTEMS INC; J E F F E R S O N COUNTY HOSPITAL; CLAIBORNE COUNTY HOSPITAL, P la in t if f s - A p p e lla n t s v. K A T H L E E N SEBELIUS, SECRETARY, DEPARTMENT OF HEALTH & H U M A N SERVICES, In her official capacity as Secretary of the United States D e p a r t m e n t of Health and Human Services; CHARLENE FRIZZERA, In her o ffic ia l capacity as Acting Administrator of the Centers for Medicare and M e d ic a id Services, D e fe n d a n t s -A p p e lle e s

A p p e a l from the United States District Court fo r the Southern District of Mississippi

B e fo r e SMITH, GARZA, and CLEMENT, Circuit Judges. E M I L I O M. GARZA, Circuit Judge: A p p e lla n t s , five acute-care hospitals ("Providers"), sued the Secretary of t h e Department of Health and Human Services ("HHS") and the Centers for M e d ic a r e and Medicaid Services ("CMS"), alleging that CMS's method for c a lc u la t in g reimbursement payments for costs incurred by Providers' psychiatric u n it s between 2003 and 2005 violated 42 U.S.C. § 1395ww(b)(3)(A) and was in c o n s is t e n t with the agency's own regulations. The district court granted C M S 's motion for summary judgment, holding that the agency's interpretation

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o f the governing statutory and regulatory provisions was reasonable. For the r e a s o n s set forth below, we REVERSE and REMAND. I A brief review of the regulatory scheme governing Medicare

r e im b u r s e m e n t s for Providers is necessary to understand the parties' dispute. Hospitals participating in Medicare are typically compensated pursuant to the P r o s p e c t iv e Payment System ("PPS"), whereby they receive a fixed amount for s e r v ic e s rendered to each patient. However, psychiatric units within acute-care h o s p it a ls , such as Providers, were excluded from the PPS regime and paid p u r s u a n t to a reimbursement program enacted in the Tax Equity and Fiscal R e s p o n s ib ilit y Act of 1982 ("TEFRA") § 101, 42 U.S.C. § 1395ww. T E F R A reimbursements were determined through a two-step process. First, a "target amount" was calculated for each hospital. During a hospital's fir s t year under the system, the target amount consisted of "the allowable o p e r a t in g costs of inpatient hospital services . . . for the preceding 12-month cost r e p o r t in g period." 42 U.S.C. § 1395ww(b)(3)(A)(i). In subsequent years, the t a r g e t amount from the previous year was updated by the applicable percentage in c r e a s e specified by the statute. 42 U.S.C. § 1395ww(b)(3)(A)(ii). After

d e t e r m in in g the target amount for a particular year, a reimbursement ceiling w a s calculated by multiplying the target amount for a hospital by the number o f discharges from that hospital in the same year. See 42 C.F.R. § 413.40(a)(3). Reimbursements could not exceed the ceiling. CMS issued regulations

im p le m e n tin g TEFRA's scheme of calculating the "target amount" in a base year a n d updating it in subsequent years. See 42 C.F.R. § 413.40(c)(4)(i)­(ii).

TriSpan Health Services ("TriSpan"), one of CMS's fiscal intermediaries, c a lc u la t e d Providers' reimbursements pursuant to 42 C.F.R. § 413.40(c)(4)(ii), w h ic h set each hospital's target amount equal to the previous year's target a m o u n t increased by a statutory update factor.

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I n the Balanced Budget Act of 1997 ("BBA"), Congress enacted additional lim it s on reimbursement payments, including those for the psychiatric units in P r o v id e r s ' hospitals. See 42 U.S.C. § 1395ww(b)(3)(H). For fiscal years ("FY") 1 9 9 8 through 2002, the target amounts for those hospitals could not exceed the 7 5 th percentile of target amounts for all hospitals in the same class of providers. See id. Much like TEFRA, the BBA provided that this capped amount must be m u lt ip lie d by update factors prescribed as part of the cap scheme for each year o f the five-year period. 42 U.S.C. § 1395ww(b)(3)(H)(i). C M S promulgated regulations implementing the BBA cap scheme. See 42 C .F .R . § 413.40(c)(4)(iii). The cap regulation specified the calculation of a

" h o s p it a l-s p e c ific target amount," defined as the "net allowable costs in a base p e r io d increased by the applicable update factors" for the subject period. 42 C .F .R . § 413.40(c)(4)(iii)(A). That amount was then to be compared to the 75th p e r c e n t i l e of the target amount for hospitals in the same class. 42 C.F.R.

§ 413.40(c)(4)(iii)(B). The final target amount for reimbursement "is the lower o f the amounts specified" in subsections (c)(4)(iii)(A) and (B). For the Providers in this case, the capped amount was the lesser of the two figures and thus, the B B A provisions resulted in significantly lower reimbursements. I n 1999, Congress enacted the Medicare, Medicaid, and SCHIP Balanced B u d g e t Refinement Act ("BBRA"), further refining the reimbursement rules for P r o v id e r s . Congress directed CMS, beginning at the end of the cap period in FY 2 0 0 3 , to make "payments for inpatient hospital services furnished by psychiatric h o s p it a ls or units . . . in accordance with the prospective payment system." Pub. L . No. 106-113, 113 Stat. 1501 (1999). However, CMS did not implement

C o n g r e s s 's directive until 2005. Thus, during the period from the expiration of t h e BBA cap provisions in 2002 until 2005, CMS had to determine how to c a lc u la t e target amounts under the existing statutory and regulatory fr a m e w o r k .

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I n 2003, after the BBA cap provisions expired, Providers submitted their r e im b u r s e m e n t requests to TriSpan on the basis of the hospital-specific target a m o u n t s under 42 C.F.R. § 413.40(c)(4)(iii)(A). TriSpan rejected those figures, a n d based on CMS's directives, calculated reimbursements pursuant to 42 C.F.R. § 413.40(c)(4)(ii), using the target amount actually applied to each Provider in t h e previous year, that is, a capped amount. Providers dispute this calculation, a r g u in g that by basing their FY 2003 target amounts on the FY 2002 capped a m o u n t , CMS has impermissibly extended the impact of the BBA cap provisions b e y o n d their 2002 expiration date. P r o v id e r s appealed TriSpan's calculation to the Provider Reimbursement R e v ie w Board, which granted expedited judicial review because resolution of the c la im required a decision on the legality of CMS's regulations. In the district c o u r t, Providers argued that their reimbursements in 2003, 2004, and 2005 s h o u ld have been calculated using an uncapped hospital-specific target amount b a sed on reasonable cost. CMS argued that under 42 U.S.C.

§ 1395ww(b)(3)(A)(ii) and 42 C.F.R. § 413.40(c)(4)(ii), the reimbursable target a m o u n t in subsequent years must be based on the previous year's amount, even if that amount resulted from BBA caps. The difference in the reimbursement m e t h o d s is illustrated as follows:

Fiscal Year

Hospital-Specific Target Amount $25,330.72 $25,330.72 $25,337.58 $25,507.64 $25,752.51 $25,958.53 $26,867.08

75th Percentile Capped Amount Under the BBA n/a $10,534.00 $10,787.00 $8,870.71 $9,323.93 $9,696.35 n/a

Final Target Amount Actually Reimbursed $25,330.72 $10,534.00 $10,787.00 $8,870.71 $9,323.93 $9,696.35 $10,035.72

1997 1998 1999 2000 2001 2002 2003

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P r o v id e r s believe that their 2003 target amount should be $26,867.08, which is d e r iv e d by applying the statutory update factor to the 2002 "hospital-specific t a r g e t amount" of $25,958.53. In other words, Providers argue that the "target a m o u n t " was always equal to the hospital-specific allowable costs from the base y e a r as adjusted to the current year. CMS, on the other hand, contends that the p r o p e r reimbursement in 2003 is $10,035.72, derived by applying the statutory u p d a t e factor to the previous year's final target amount of $9,696.35 actually p a id to the Providers under the 75th percentile cap. Thus, according to CMS, t h e capped amount becomes a hospital's "target amount" for purposes of c a lc u la t in g its subsequent year's reimbursement. T h e district court granted CMS's motion for summary judgment, c o n c l u d in g that the agency's method for calculating target amounts for p s y c h ia t r ic hospitals and units was consistent with the governing statutes and r e g u la tio n s . Applying the two-step test articulated in Chevron, U.S.A., Inc. v. N a tu r a l Resources Defense Council, Inc., 467 U.S. 837 (1984), the district court fir s t concluded that the statute was ambiguous. It then concluded that the m e t h o d CMS used to calculate reimbursement payments between 2003 and 2005 w a s permissible. The court also rejected Providers' argument that 42 C.F.R. § 4 1 3 .4 0 (c )(4 )(iii) compelled CMS to calculate Providers' target amount based on t h e hospital-specific target amount, rather than the actual target amount a p p lie d in the previous year, i.e., a capped amount. P r o v id e r s appeal, claiming that the court erred in (1) finding CMS's m e t h o d for calculating reimbursements permissible under the governing s t a t u t e s and (2) finding CMS's calculations consistent with its own regulations. II " W e review the district court's decision de novo, both because it is a s u m m a r y judgment, and because it requires us to answer issues of statutory in t e r p r e t a t io n ." S.D. ex rel. Dickson v. Hood, 391 F.3d 581, 585 (5th Cir. 2004).

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In

determining

whether

CMS's

interpretation

of

the

TEFRA

r e im b u r s em e n t provisions at issue is permissible, this court must first determine " w h e t h e r Congress has directly spoken to the precise question at issue." Chevron, 467 U.S. at 842. If the statute is clear, then the court must enforce it a s written. See id. However, if the statute is "silent or ambiguous with respect t o the specific issue," id. at 843, the court must assess the administrative d e c is io n -m a k in g process to determine whether the agency's action is entitled to C h e v r o n deference. United States v. Mead Corp., 533 U.S. 218, 226­31 (2001); s e e also BCCA Appeal Group v. EPA, 355 F.3d 817, 824­25 (5th Cir. 2003). "[A]dministrative implementation of a particular statutory provision qualifies fo r Chevron deference when it appears that Congress delegated authority to the a g e n c y generally to make rules carrying the force of law, and that the agency in t e r p r e t a t io n claiming deference was promulgated in the exercise of that a u t h o r it y ." Mead, 533 U.S. at 226­27. If the agency's decision resulted from a s u ffic ie n t ly formal process to warrant deference, see id. at 230, then we assess w h e t h e r the agency's interpretation is "based on a permissible construction of t h e statute," Chevron, 467 U.S. at 843. "[A] court may not substitute its own c o n s t r u c t io n of a statutory provision for a reasonable interpretation made by the a d m in is t r a t o r of an agency." Id. at 844; see also Tex. Office of Pub. Util. Counsel v . FCC, 265 F.3d 313, 320 (5th Cir. 2001) ("The question is not whether we might h a v e preferred another way to interpret the statute, but whether the agency's d e c is io n was a reasonable one."). A O u r first step is to determine whether the statute is ambiguous. Both P r o v id e r s and CMS argue that Congress directly spoke to the issue of how to c a lc u la t e hospital reimbursements during the disputed years. The district court d is a g r e e d . Although the district court found that Congress had specifically d e fin e d "target amount" in 42 U.S.C. § 1395ww(b)(3)(A), and Congress had 6

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e x p lic it ly defined how caps were to be calculated from 1998 to 2002, the court c o n c lu d e d that Congress had not spoken clearly about how CMS was to calculate r e im b u r s e m e n t s for any gap period between the expiration of the caps and the im p le m e n ta t io n of the new PPS payment regime. Accordingly, the district court d e t e r m in e d that the statute was silent as to the gap period. W e begin with the text of the statute. The reimbursable "target amount" is defined as follows: [T ]h e term "target amount" means, with respect to a hospital for a p a r t ic u la r 12-month cost reporting period ­ (i) in the case of the first s u c h reporting period for which this subsection is in effect, the a llo w a b le operating costs of inpatient hospital services . . . for such h o s p it a l for the preceding 12-month cost reporting period, and (ii) in t h e case of a later reporting period, the target amount for the p r e c e d in g 12-month cost reporting period, increased by the a p p lic a b le percentage increase under subparagraph (B) for that p a r t ic u la r cost reporting period. 4 2 U.S.C. § 1395ww(b)(3)(A). The BBA cap provision, governing reimbursements f r o m 1998 to 2002, specified that CMS was to "estimate the 75th percentile of t h e target amounts for such hospitals within such class" and "update the amount . . . for each cost reporting period . . . by a factor equal to the market basket p e r c e n ta g e increase." 42 U.S.C. § 1395ww(b)(3)(H). It further specified that "the t a r g e t amount for such a hospital or unit may not exceed the amount" calculated u n d e r the 75th percentile formula specified. Id. C M S argues that a straightforward reading of these provisions plainly s u p p o r t s its interpretation. Subsection (b)(3)(A)(ii) defines "target amount" for a n y reporting period after the first period as "the target amount for the p r e c e d in g 12-month cost reporting period." Since it is undisputed that 2003, 2 0 0 4 , and 2005 qualify as later reporting periods, the agency argues that s u b s e c t io n (b)(3)(A)(ii) unambiguously directed it to calculate Providers' r e im b u r s e m e n t s based on the preceding year's target amount. And, because s u b s e c t io n (b)(3)(H) requires that from 1998 to 2002, the target amount may not 7

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e x c e e d the 75th percentile capped amount, CMS was required to use the final c a p p e d target amount paid in 2002 rather than the full hospital-specific amount t o calculate the 2003 target amount. P r o v id e r s counter that the relevant statutory provisions unambiguously s u p p o r t their interpretation. Providers first argue that CMS's reading only m a k e s sense if § 1395ww(b)(3)(A)(ii) is read in isolation, and that an inquiry into t h e meaning of the statutory language must bear in mind "the Act's structure or r e la t io n s h ip to other statutes." See Amoco Prod. Co. v. Vill. of Gambell, 480 U.S. 5 3 1 , 552 (1987). Accordingly, Providers contend that § 1395ww(b)(3)(A)(ii) must b e read in light of the immediately preceding subsection. Subsection (b)(3)(A)(i) d e fin e s "target amount" for the first reporting period as "the allowable operating c o s t s of inpatient hospital services." Subsection (b)(3)(A)(ii) defines the target a m o u n t for subsequent periods as the "target amount for the preceding 12-month c o s t reporting period," which, according to Providers, ties the definition for later r e p o r t in g periods in subsection (b)(3)(A)(ii) to the initial "target amount" defined in subsection (b)(3)(A)(i). In other words, a hospital's "target amount" equals its h o s p it a l-s p e c ific allowable costs from the base year trended forward to the c u r r e n t year. T o bolster that contention, Providers point out that § 1395ww(b)(3)(J) r e fe r s to the amount calculated under § 1395ww(b)(3)(H) as "the limiting or cap a m o u n t ," while the "target amount" is the amount determined under § 1395ww(b)(3)(A). Although § 1395ww(b)(3)(H) states that the "target amount" m a y not exceed the 75th percentile, according to Providers, Congress's choice of la n g u a g e in § 1395ww(b)(3)(J) makes clear that it intended to distinguish b e tw e e n a "cap amount" under § 1395ww(b)(3)(H) and the "target amount" under § 1395ww(b)(3)(A). Thus, Providers argue, the use of the words "target amount" in subsection (b)(3)(A)(ii) could not have referred to a capped amount even if that c a p p e d amount was the amount actually paid in the preceding year.

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F in a lly , and perhaps most persuasively, Providers make two arguments b a s e d on legislative intent. First, they argue that Congress's intent in passing T E F R A was that reimbursements always be based on hospital-specific cost. In § 1395ww(b)(3)(A)(i), Congress directed that the target amount be based on a h o s p it a l-s p e c ific number, and then updated each year from that original number. And, although Congress did not intend hospitals above the 75th percentile of c o s t s to be reimbursed based on their actual costs during the BBA cap period, C o n g r e s s intended that the BBA cap exception to the usual scheme of r e im b u r s in g based on hospital-specific cost was to be time-limited. Additionally, P r o v id e r s argue that CMS's interpretation thwarts Congress's clear intent that t h e BBA caps end in 2002. CMS's interpretation has the contrary effect of p e r p e t u a t in g the caps beyond the cap period by using the 2002 cap r e i m b u r s e m e n t amount as the basis for reimbursement calculations in s u b s e q u e n t years. In fact, under CMS's interpretation, Congress could have a c h ie v e d the same result by enacting BBA caps for only a single year. But it did n o t do so. Rather, it imposed caps for a limited time period of five years. A lth ou g h both sides make persuasive points, we need not determine which is the better argument. Rather, we are tasked with determining whether

C o n g r e s s has spoken clearly. Based on the plausible, competing arguments put fo r t h by the parties, we are compelled to find the statute ambiguous. See, e.g., U n ite d States v. Valle, 538 F.3d 341, 345 (5th Cir. 2008) ("A statute is ambiguous if it is susceptible to more than one reasonable interpretation or more than one a c c e p t e d meaning." (quotations omitted)). C o n g r e s s did not specify how CMS was to calculate reimbursements after t h e expiration of the caps because Congress had directed CMS to implement a P P S regime. However, because the PPS regime was not in place by 2002, CMS w a s left to calculate reimbursements in the gap. As CMS points out,

§ 1395ww(b)(3)(A)(ii) defines "target amount" for "later reporting periods" as the t a r g e t amount for the preceding twelve months. 9 And although Providers

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a t t e m p t to persuade us that the (b)(3)(A)(ii) definition must be read in light of ( b ) ( 3 )(A )(i), it is not, on the face of the statute, completely obvious that the a llo w a b le operating cost language in (b)(3)(A)(i) should be read into (b)(3)(A)(ii). On the other hand, although CMS's textual argument is strong, the structure of t h e provision indicates that reimbursements in a later reporting period should b e a r significant relation to the initial cost-based amount. Moreover, Providers p r e s e n t a strong argument that CMS's reading of the statute is contrary to C o n g r e s s 's intent that the BBA caps exist only from 1998 to 2002. But, on the o t h e r hand, Congress enacted the 1999 BBRA reforms to shift Providers to the fix e d -a m o u n t PPS system at the end of the BBA cap period. Thus, Congress's in t e n t changed as to the type of reimbursements Providers were entitled to-- from a model of cost-based reimbursements to fixed-amount

r e im b u r s e m e n t s -- w h ic h Congress expected would be in place at the end of the c a p period. B e c a u s e neither side is able to demonstrate that Congress unambiguously s p o k e to the precise issue of how to calculate the target amount in 2003, 2004, a n d 2005, we find that under the first step of Chevron analysis, the statute is a m b ig u o u s . See also Ark. State Hosp. v. Leavitt, No. 4:07CV00624, 2008 WL 4 5 3 1 7 1 4 , at *4­5 (E.D. Ark. Oct. 8, 2008) (finding the statute "somewhat unclear . . . as to the factors to be taken into account in calculating the target amounts a ft e r . . . 2002"); Chalmette Med. Ctr., Inc. v. Dep't of Health & Human Servs., N o . 08-4027, 2009 WL 2488265, at * 4­5 (E.D. La. Aug. 11, 2009) (finding the s t a t u t e unambiguously directed CMS to calculate the 2003 target amount based o n the 2002 capped amount because "when the hospital-specific target amount e x c e e d e d the cap, the target amount became the cap amount," but assuming a r g u e n d o that the statute was silent and proceeding to the second step of the C h e v r o n analysis).

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T h e parties agree that CMS's regulations are entitled to Chevron deference if the statute is ambiguous. Indeed, courts have long recognized Congress's d e le g a t io n of extremely broad regulatory authority to the agency in the Medicare a n d Medicaid area. Wis. Dep't of Health & Family Servs. v. Blumer, 534 U.S. 4 7 3 , 497 n.13 (2002). Congress has delegated general rulemaking authority with r e s p e c t to Medicare to the Secretary, who in turn has delegated that authority t o CMS. See, e.g., 42 U.S.C. § 1395hh(a)(1) ("The Secretary shall prescribe such r e g u la tio n s as may be necessary to carry out the administration of the insurance pro g ra m s under this subchapter."). Furthermore, CMS's regulations

im p le m e n tin g both Congress's initial directive to base reimbursements on a " t a r g e t amount" as defined in § 1395ww(b)(3)(A) and Congress's later cap p r o g r a m under § 1395ww(b)(3)(H) were the product of notice and comment r u le m a k in g . See Medicare Program; Changes to the Hospital Inpatient

P r o s p e c t iv e Payment Systems and Fiscal Year 1998 Rates; Final Rule, 62 Fed. R e g . 45,966, 46,018 (Aug. 29, 1997) (final rule implementing 42 U.S.C. § 1395ww(b)(3)(H)); Medicare Program; Limitations on Reimbursable Hospital C o s ts and the Rate of Hospital Cost Increases; Final Rule, 48 Fed. Reg. 39,412, 3 9 ,4 1 7 ­ 1 9 (Aug. 30, 1983) (final rule implementing 42 U.S.C.

§ 1395ww(b)(3)(A)). So too was CMS's regulation directing the calculation of r e im b u r s e m e n t s following the expiration of the cap period. Medicare Program; C h an g es to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2 0 0 3 Rates; Final Rule, 67 Fed. Reg. 49,982, 50,103­04 (Aug. 1, 2002) (directing t h a t "for cost reporting periods beginning in FY 2003, the hospital or unit should u s e its previous year's target amount, updated by the appropriate rate-ofin c r e a s e percentage"). Accordingly, the regulations at issue here are entitled to C h e v r o n deference, see Mead, 533 U.S. at 226­27, and we will not overturn C M S 's interpretation so long as it is not "arbitrary, capricious, or manifestly c o n t r a r y to the statute," Chevron, 467 U.S. at 844. 11

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C M S 's decision to base reimbursements in 2003, 2004 and 2005 on the a m o u n t of the previous year's reimbursement is not "manifestly contrary to the s t a t u t e ." Id. Indeed, § 1395ww(b)(3)(A)(ii) directs CMS to calculate the target a m o u n t for any year after the base year as "the target amount for the preceding 1 2 -m on th cost reporting period, increased by the applicable percentage increase." In 2002, Providers' target amounts exceeded the 75th percentile and thus had t o be reduced because, under § 1395ww(b)(3)(H), "the target amount . . . may not e x c e e d " that cap. Thus, basing the 2003 to 2005 reimbursements on the capped a m o u n t s rather than the Providers' individual costs is not manifestly contrary t o the statutory language, because the previous year's target amount was not p e r m it t e d to exceed the cap amount. c a p ric io u s . Nor is CMS's position arbitrary or

Under CMS's regulations, the "target amount" is equal to "the

h o s p it a l's target amount for the previous cost reporting period increased by the u p d a t e factor." 42 C.F.R. § 413.40(c)(4)(ii). Although Providers' arguments a b o u t the proper way to interpret the statute are persuasive, Providers a c k n o w le d g e that at the second step of the Chevron analysis, arguing that one in t e r p r e t a t io n is "better" than another is a losing game. Thus, although

P r o v id e r s may offer a "better" interpretation by taking into account the structure a n d purpose of the statute, CMS's reading finds substantial support in the text o f § 1395ww(b)(3)(A)(ii) and is backed by solid reasoning. CMS's interpretation, t h e r e fo r e , falls within the range of permissible interpretations. IV I n reviewing Providers' claim that the agency's interpretation of its own r e g u la t io n is contrary to the text of the regulation, we must first determine w h e t h e r the regulation is ambiguous. See Christensen v. Harris Cnty., 529 U.S. 5 7 6 , 588 (2000). "Our task is not to decide which among several competing in t e r p r e t a t io n s best serves the regulatory purpose. Rather, the agency's

in t e r p r e t a t io n must be given `controlling weight unless it is plainly erroneous or in c o n s is t e n t with the regulation.'" Thomas Jefferson Univ. v. Shalala, 512 U.S. 12

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5 0 4 , 512 (1994) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1 9 4 5 )). However, where a regulation is unambiguous, "[t]o defer to the agency's p o s it io n would be to permit the agency, under the guise of interpreting a r e g u la tio n , to create de facto a new regulation." Christensen, 529 U.S. at 588. A P u r s u a n t to its authority under TEFRA, CMS promulgated 42 C.F.R. § 413.40(c)(4)(i)­(ii), defining the calculation of target amounts, and § 413.40(c)(4)(iii), implementing the BBA caps for the period from 1998 to 2002.1 U n d e r subsection (c)(4)(i), CMS directed its fiscal intermediaries to calculate the t a r g e t amount as "the hospital's allowable net inpatient operating costs per case fo r the hospital's base period increased by the update factor for the subject p e r io d ." For subsequent cost periods, subsection (c)(4)(ii) defined the target a m o u n t as the "hospital's target amount for the previous cost reporting period in c r e a s e d by the update factor . . . ." Both subsections (c)(4)(i) and (ii) were " s u b je c t to provisions of paragraph (c)(4)(iii)," the provision implementing the B B A caps. Subsection (c)(4)(iii) provided for the calculation of the target amount d u r in g the cap period as follows: I n the case of a psychiatric hospital or unit, rehabilitation hospital o r unit, or long-term care hospital, the target amount is the lower o f the amounts specified in paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of t h is section. (A) The hospital-specific target amount. (1 ) In the case of all hospitals and units . . . the h o s p it a l-s p e c ific target amount is the net allowable costs in a b a s e period increased by the applicable update factors. *** (B) One of the following for the applicable cost reporting period­ (1) For cost reporting periods beginning during fiscal year 1 9 9 8 , the 75th percentile of target amounts for hospitals in t h e same class (psychiatric hospital or unit, rehabilitation

We note that the current version of the regulations contains some changes to the relevant language. Thus, for the purposes of this discussion, we refer to the 2002 version of the regulations which were in force at the time that the BBA caps ended.

1

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Document: 00511209076 Page: 14 No. 09-60312

Date Filed: 08/19/2010

h o s p it a l or unit, or long-term care hospital) for cost reporting p e r io d s ending during FY 1996, increased by the applicable m a r k e t basket percentage up to the first cost reporting period b e g in n in g on or after October 1, 1997. (2 ) For cost reporting periods beginning during fiscal year 1 9 9 9 , the amount determined under paragraph (c)(4)(iii)(B)(1) o f this section, increased by the market basket percentage up t h r o u g h the subject period, subject to the provisions of p a r a g r a p h (c)(4)(iv) of this section. (3) For cost reporting periods beginning during fiscal year 2000 . . . *** (4 ) For cost reporting periods beginning during fiscal years 2 0 0 1 and 2002 . . . *** 2 4 2 C.F.R. 413.40(c)(4)(iii) (2002). After the expiration of the caps, CMS reverted t o calculating hospital reimbursements according to subsection (c)(4)(ii). CMS c o n t e n d s that the only reasonable interpretation of the regulations is that all of su bsection (c)(4)(iii) expired in 2003 because the statutory authority under which it was promulgated (the BBA) expired at that time. CMS further contends that t h e Secretary made unequivocal contemporaneous statements at the time of p r o m u lg a t io n that the entire subsection would have no effect beyond 2002. P r o v id e r s argue that CMS's interpretation is contrary to the text of the r e g u la tio n . They argue that § 413.40(c)(4)(iii) unambiguously directs how

r e im b u r s e m e n t s were to be calculated following the expiration of the caps. Providers argue that each part of (c)(4)(iii)(B) refers to an explicit year during t h e time period from 1998 to 2002, and thus, has no effect after 2002. They point o u t, however, that subsection (c)(4)(iii)(A) contains no such time limits and, b e c a u s e CMS did not revoke subsection (c)(4)(iii) at the expiration of the caps p e r io d , the calculations for 2003 to 2005 must be conducted exclusively under t h a t section. They further argue that their reimbursements must be based on

Omitted ("* * *") are the particulars of each formula applicable to the calculation of the 75th percentile cap from 1998 to 2002, which are unimportant to the resolution of the issue here.

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Case: 09-60312

Document: 00511209076 Page: 15 No. 09-60312

Date Filed: 08/19/2010

t h e ir reasonable costs, not the capped amounts, because subsection (c)(4)(ii) is " s u b je c t to provisions of paragraph (c)(4)(iii)" and the only provision of (c)(4)(iii) in effect after 2002 was subsection (A), directing the calculation of the " h o s p it a l-s p e c ific target amount (the net allowable costs in a base period in c r e a s e d by the applicable update factors)." W e reject CMS's argument that the regulation is ambiguous. When CMS p r o m u lg a t e d (c)(4)(iii), it added the qualifier "[s]ubject to the provisions of p a r a g r a p h (c)(4)(iii) of this section . . ." to subsections (c)(4)(i) and (ii). That " s u b je c t to" qualifier in the two subsections is an unambiguous requirement that t h e target amount be calculated according to subsection (c)(4)(iii), and only s u b s e c t io n (c)(4)(iii). To read the regulation otherwise would require us to ignore t h e "subject to" language. Heaven v. Gonzales, 473 F.3d 167, 176 (5th Cir. 2006) (" W e are to construe [regulations] to give effect to all words and phrases, if p o s s ib le ." ) . The regulation twice defines "target amount" as "subject to"

s u b s e c t io n (c)(4)(iii), and subsection (c)(4)(iii) instructs that the "target amount" is the lower of the "hospital-specific target amount" or the capped amount during t h e capped years only. After the caps expired in 2002, the only way to calculate r e im b u r s e m e n t s was the "hospital-specific target amount" under (c)(4)(iii)(A) b e c a u s e (c)(4)(iii)(B), by its terms, no longer applied. C M S 's contention that the Secretary's contemporaneous statements made c le a r that the entirety of subsection (c)(4)(iii) would expire at the end of the cap p e r io d is without support. To be sure, the Secretary did state, when the

r e g u la tio n s were promulgated, that the BBA was enacted "to establish caps on t h e target amounts for excluded hospitals or units for cost reporting periods b e g in n in g on or after October 1, 1997, through September 30, 2002." Final Rule, 6 2 Fed. Reg. 45,966, 46,018 (Aug. 29, 1997). But that statement is merely a r e c it a t io n of the time-limited regulation as it appears in subsection (c)(4)(iii)(B), n o t an "unequivocal contemporaneous statement" that the entire section would h a v e no effect beyond 2002. 15

Case: 09-60312

Document: 00511209076 Page: 16 No. 09-60312 B

Date Filed: 08/19/2010

H a v in g determined that the regulation is unambiguous, we conclude that C M S 's interpretation of the regulation is not entitled to deference. The plain t e x t of subsection (c)(4)(iii) does not support CMS's contention that "the only r e a s o n a b le interpretation of the regulations is that all of subsection (c)(4)(iii) e x p ir e d in 2003 because the statutory authority under which it was promulgated (t h e BBA) expired at that time." Tellingly, until 2005, only subsection Section

(c )(4 )(iii)(B )-- w h ic h contains the caps--had explicit time limits.

(c )(4 )(iii) and subsection (A) contained no time limits. If CMS intended its r e g u la tio n in subsection (c)(4)(iii) to apply only from 1998 to 2002, it should have e x p r e s s ly limited the time period of the whole section, not just subsection (c )(4 )(iii)(B ). But CMS did not do so when it initially promulgated subsection (c )(4 )(iii). O n ly after the expiration of the caps, and in the face of criticism from P r o v id e r s and other similarly situated hospitals that they should be paid based o n their hospital-specific target amount, not the capped amount, did CMS amend s u b s e c t io n (c)(4)(iii) to expressly limit the entire subsection to "cost reporting p e r io d s beginning on or after October 1, 1997 through September 30, 2002." 42 C .F .R . § 413.40(c)(4)(iii) (effective October 1, 2005). CMS stated that it intended t h e 2005 amendment to "clarify the language in § 413.40(c)(4(iii) [] to emphasize t h a t because § 413.40(c)(4)(iii) was no longer applicable for cost reporting periods b e g in n in g on or after October 1, 2002 . . . the target amount for FY 2003 would b e the cap amount paid in FY 2002, updated to FY 2003." Final Rule, 70 Fed. R e g . 47,278, 47,465 (Aug. 12, 2005). CMS's "clarification," however, is a

s u b s t a n t iv e change to the regulatory text, one that imposes express time limits on the whole of subsection (c)(4)(iii) where previously only subsection (c)(4)(iii)(B) w a s time-limited. CMS's reversal of course came too late: "The Secretary is b o u n d by her own regulations and rulings until she changes them." Pope v. S h a la la , 998 F.2d 473, 486 (7th Cir. 1993); see also North Ga. Bldg. & Constr. 16

Case: 09-60312

Document: 00511209076 Page: 17 No. 09-60312

Date Filed: 08/19/2010

T r a d e s Council v. Goldschmidt, 621 F.2d 697, 710 (5th Cir. 1980) ("[T]he agency is bound to comply with the regulations it promulgates."). F u rth er, the 2005 amendment betrays CMS's contemporaneous

u n d e r s t a n d in g that subsection (c)(4)(iii), as it existed in fiscal years 2003, 2004, a n d 2005, did not expire according to its own terms. If CMS is correct that the w h o le of subsection (c)(4)(iii) reasonably could be viewed as having no further e ffe c t after 2002, then there would have been no need to amend the regulation in 2005. FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 143 (2000) (" T h e classic judicial task of reconciling many laws enacted over time, and g e t tin g them to make sense in combination, necessarily assumes that the im p lic a t io n s of a statute may be altered by the implications of a later statute.") (q u o tin g United States v. Fausto, 484 U.S. 439, 453 (1988) (internal quotation m a r k s omitted)). "Despite our substantial deference to an agency's

in t e r p r e t a t io n of the scope or application of its own regulations, . . . we cannot a llo w [CMS] to ignore its own regulation in an attempt to save its im p e r fe c t /u n s a tis fa c t o r y decision-making in this case." Transactive Corp. v. U n ite d States, 91 F.3d 232, 238 (D.C. Cir. 1996) (citation omitted). V F o r the foregoing reasons, we REVERSE the district court's grant of s u m m a r y judgment and REMAND for proceedings consistent with this opinion.

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