Borgess Medical Center, et al v. Kathleen Sebeliu

Filing

OPINION [1650194] filed (Pages: 12) for the Court by Judge Brown. [13-5330]

USCA Case #13-5330

Document #1650194

Filed: 12/09/2016

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 27, 2016

Decided December 9, 2016

No. 13-5330
BORGESS MEDICAL CENTER, A MICHIGAN NONPROFIT
CORPORATION, AND BRONSON METHODIST HOSPITAL, A
MICHIGAN NONPROFIT CORPORATION,
APPELLANTS
v.
SYLVIA MATHEWS BURWELL, SECRETARY OF THE UNITED
STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE

Appeal from the United States District Court
for the District of Columbia
(No. 1:12-cv-00144)

Geoffrey M. Raux argued the cause for appellants. With
him on the briefs was Lori A. Rubin.
Samantha L. Chaifetz, Attorney, U.S. Department of
Justice, argued the cause for appellee. On the brief were
Benjamin C. Mizer, Principal Deputy Assistant Attorney
General, and Michael S. Raab and Henry C. Whitaker,
Attorneys.

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Before: TATEL, BROWN and KAVANAUGH, Circuit
Judges.
Opinion for the Court filed by BROWN, Circuit Judge.

BROWN, Circuit Judge: Appellants are two hospitals
challenging the denial of reimbursements for the offsite
training expenses of their medical residents for several cost
reporting periods between 2000 and 2004 by the Secretary of
the Department of Health and Human Services (“Secretary”).
They argue the Secretary erroneously held they failed to
comply with the Secretary’s reimbursement regulations
requiring that they incur all or substantially all of the costs of
their offsite residency training programs and that they have a
written agreement detailing the financing of their offsite
programs. The district court granted summary judgment in
favor of the Secretary on the grounds that appellants failed to
comply with either of these requirements. Because we hold
appellants failed to comply with the Secretary’s “written
agreement” requirement, we affirm.
I
A
Under the Medicare Act, Congress created a system to
provide health insurance benefits to the elderly and disabled.
42 U.S.C. §§ 1395 et seq. This system is administered by the
Centers for Medicare and Medicaid Services (“CMS”) under
the authority of the Secretary. Id. § 1395kk; 42 C.F.R.
§§ 400.200 et seq.

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Medicare is divided into several parts; the most relevant
of those parts here is Part A, which relates to hospital
insurance benefits. Under the Medicare statute, CMS is
empowered to reimburse inpatient hospitals for costs
associated with “graduate medical education.” 42 U.S.C.
§ 1395ww(h). The amount reimbursed is determined based
on the number of “full-time-equivalent” (“FTE”) medical
residents in the hospital’s residency program each year. Id.
§ 1395ww(h)(2). For the time period relevant to this case, a
hospital’s FTE count is calculated based on the time residents
spend providing patient care activities “under an approved
medical residency training program . . . without regard to the
setting in which the activities are performed.”
Id.
§ 1395ww(h)(4)(E)(i); see id. § 1395ww(d)(5)(B)(iv)(I).
Thus, a hospital is eligible to count time its residents spend
performing patient care activities in nonhospital settings
towards its FTE count. Id. However, in order for this time to
count towards a hospital’s FTE, it must incur “all, or
substantially all, of the costs for the training program in that
setting.” Id.
For the relevant years here—2000 through 2004—CMS
enforced these requirements through regulations stating:
[T]he time residents spend in nonprovider
settings . . . may be included in determining the
number of FTE residents in the calculation of a
hospital’s resident count if the following
conditions are met—
(i) The resident spends his or her time
in patient care activities.
(ii) The written agreement between the
hospital and the nonhospital site must

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indicate that the hospital will incur the
cost of the resident’s salary and fringe
benefits while the resident is training in
the nonhospital site and the hospital is
providing reasonable compensation to
the nonhospital site for supervisory
teaching activities.
The agreement
must indicate the compensation the
hospital is providing to the nonhospital
site for supervisory teaching activities.
(iii) The hospital must incur all or
substantially all of the costs for the
training program in the nonhospital
setting . . . .
42 C.F.R. § 413.86(f)(4) (2000); see also 42 C.F.R.
§ 413.78(d) (2014). Thus, independent contractors evaluating
a hospital’s eligibility for, and level of, reimbursement had to
assess (1) the residents’ patient care activities, (2) the
existence of a written agreement between the hospital and the
nonhospital site, and (3) whether the hospital is responsible
for “all or substantially all” of the costs of training. 42 C.F.R.
§ 413.86(f)(4) (2000). While not expressly required by the
Medicare statute, CMS determined the “written agreement”
requirement was necessary “in order to provide an
administrative tool . . . to assist in determining whether
hospitals would incur all or substantially all of the costs of the
training in the nonhospital setting in accordance with
Congressional intent.” Medicare Program; Changes to the
Hospital Inpatient Prospective Payment Systems and Fiscal
Year 2005 Rates, 69 Fed. Reg. 48,916, 49,179 (Aug. 11,
2004). CMS defined the “all or substantially all” requirement
to include “the residents’ salaries and fringe benefits
(including travel and lodging where applicable) and the

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portion of the cost of teaching physicians’ salaries and fringe
benefits attributable to direct graduate medical education.” 42
C.F.R. § 413.75(b)(1) (2014).
In order to expediently process reimbursement payments,
a hospital must submit a cost report to its contractor each year
in order to claim any Medicare reimbursements for residency
programs in nonhospital settings. See 42 C.F.R. §§ 413.20(b),
413.24. The contractor then reviews these reports to
determine the amount a hospital should be reimbursed under
Medicare and issues a Notice of Program Reimbursement
(“NPR”) to inform the hospital of the contractor’s
determination. Id. § 405.1803. This determination is not
necessarily final because the contractor has the option to
reopen a final cost report for up to three years. Id.
§ 405.1885.
If a hospital disagrees with either the contractor’s initial
determination or the determination made upon the reopening
of a prior decision, it can challenge the NPR before the
Provider Reimbursement Review Board (“PRRB”). See 42
U.S.C. § 1395oo(a). The PRRB’s decision is then subject to
review by the CMS Administrator. See id. § 1395oo(f)(1); 42
C.F.R. § 405.1875(a). The CMS Administrator’s decision
constitutes final agency action subject to judicial review. See
42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877(a).
B
Appellants Borgess Medical Center (“Borgess”) and
Bronson Methodist Hospital (“Bronson,” collectively “the
Hospitals”) are inpatient hospitals located in Kalamazoo,
Michigan. In 1973, the Hospitals entered into an agreement
to form a consortium to manage their health education
programs and to train their interns and residents. In this

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agreement, the Hospitals agreed to provide annual financing
to carry out the consortium’s purpose. The Hospitals then
joined Michigan State University in the late 1980s to
restructure this consortium into its current form as the
Michigan State University Kalamazoo Center for Medical
Studies (“KCMS”).
KCMS administered graduate medical programs for
various residency programs for the hospitals, including a
psychiatry program, a pediatrics program, and an infectiousdisease program. In order to ensure KCMS would receive the
financial support necessary to operate, the Hospitals entered
into various Affiliation Agreements with KCMS in which the
Hospitals agreed to incur “joint and equal responsibility for
providing [KCMS] with sufficient financing to carry out its
programs as negotiated on a yearly basis.” See, e.g., JA 67.
However, this was not the only source of funding for KCMS,
as it also received millions of dollars of revenue from other
sources, such as revenue from patient care, support from
Michigan State University, and funds from contracts and
grants. Thus, the arrangement required the Hospitals to
equally divide a lump-sum payment to cover any of KCMS’s
expenses exceeding what was available from other sources.
The Hospitals sought reimbursement on their Medicare
cost reports during fiscal years 2000–2004 for costs incurred
for residents’ training at KCMS’s nonhospital clinics. The
Hospitals’ Medicare contractor initially determined Borgess’s
claims from the cost reporting periods ending in June 2001
and June 2002 along with Bronson’s claims from 2000 and
2001 to be eligible for reimbursement, but, after reopening
these initial determinations, it ultimately denied them in 2007.
Additionally, the contractor denied the initial reimbursement
claim from Borgess for the cost reporting period ending in

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June 2003 and the initial reimbursement claims from Bronson
for 2002, 2003, and 2004.
The Hospitals appealed these decisions to the PRRB,
which concluded the contractors erroneously denied
reimbursement for the Hospitals’ claims. Subsequently, the
CMS Administrator reviewed the PRRB’s decision and
reversed it on the grounds that the Hospitals failed to show
they incurred all or substantially all of the costs of their
residency programs and that they failed to comply with the
Secretary’s “written agreement” requirement. In response to
the Administrator’s decision, the Hospitals sought judicial
review of the Administrator’s denial of reimbursements
before the United States District Court for the District of
Columbia.
Both parties cross-motioned for summary
judgment, and the district court ultimately ruled in favor of
the Secretary on both motions. The Hospitals now appeal.
II
We review de novo the district court’s grant of summary
judgment. Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46,
54 (D.C. Cir. 2015). The Medicare Act authorizes judicial
review under the Administrative Procedure Act (“APA”). See
42 U.S.C. § 1395oo(f)(1). This Court can only set aside the
Secretary’s action if it is “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5
U.S.C. § 706(2)(A).
When reviewing an agency’s
interpretation of its own regulation, we give substantial
deference to the agency. Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 512 (1994). This is especially true when the
regulation concerns “a complex and highly technical
regulatory program” like Medicare. Id. Thus, this Court
“must defer to the Secretary’s interpretation [of a regulation]
unless an alternative reading is compelled by the regulation’s

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plain language or by other indications of the Secretary’s intent
at the time of the regulation’s promulgation.” Id.
First, we address the Secretary’s “written agreement”
requirement. The Secretary’s regulations require a written
agreement between the hospital and nonhospital showing the
hospital will incur the cost of the resident’s salary and fringe
benefits while working offsite along with reasonable
compensation to the nonhospital for supervisory teaching
activities. 42 C.F.R. § 413.86(f)(4)(ii) (2000).
The Hospitals argue the “written agreement” requirement
is an improper basis for denying reimbursement because the
contractor did not specifically identify it as a reason for
reopening their cost report. To support this view, they rely on
42 C.F.R. § 405.1887(a), which requires the reviewing entity
to “provide written notice to all parties to the determination or
decision that is the subject of the reopening.” Because the
notice for reopening did not cite 42 C.F.R. § 413.86(f)(4)(ii)
(2000), pertaining to the “written agreement” requirement,
they claim they did not receive adequate notice.
We disagree.
The reopening notices indicate the
reimbursement claims were reopened to “remove the
[residency] rotations which occur[ed] at [KCMS] in
accordance with 42 CFR [§] 413.86(f)(4) as the hospital did
not incur all or substantially all of the cost of training in that
setting.” See JA 179, 181, 183, 185. Thus, the provision
cited for reopening the reimbursement claims was not limited
to just 42 C.F.R. § 413.86(f)(4)(iii) (2000), which directly
addresses the “all or substantially all” requirement, but also
encompassed all subparts of 42 C.F.R. § 413.86(f)(4) (2000),
including the “written agreement” requirement. Because the
contractor cited to a provision encompassing both the “written
agreement” requirement and the “all or substantially all”

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requirement, the Hospitals were put on notice that either of
these requirements could serve as a basis for denying
reimbursement.
Turning now to the merits, the Hospitals argue the
“written agreement” requirement is satisfied by a collection of
documents executed over the years, including a 1973
Agreement between the Hospitals establishing a non-profit
organization that served as KCMS’s predecessor, the
Hospitals’ and KCMS’s Affiliation Agreements, and KCMS’s
financial statements. The Hospitals argue these documents,
taken together, show they were “contractually obligated to
provide all financing necessary” for the managing and
operating of resident training at KCMS. Appellants’ Opening
Br. 31. However, the record clearly shows that none of these
documents meet the regulatory criteria for written agreements.
As noted by the district court, the 1973 Agreement is not
an agreement between a hospital and a nonhospital, as
required by 42 C.F.R. § 413.86(f)(4)(ii) (2000), but is rather
an agreement between the Hospitals to create the predecessor
to KCMS. Borgess Med. Ctr. v. Sebelius, 966 F. Supp. 2d 1,
7 (D.D.C. 2013). This alone is grounds to exclude this
document from consideration, but it is not the only reason for
doing so. The 1973 Agreement also fails to contain the level
of specificity required to meet the “written agreement”
requirement’s standards.
The regulation requires the
agreement to indicate the hospital will incur the cost of the
resident’s salary and fringe benefits while working offsite
along with reasonable compensation to the nonhospital for
supervisory teaching activities. 42 C.F.R. § 413.86(f)(4)(ii)
(2000). The only thing the 1973 Agreement says about
financing is “[t]he parties shall provide [KCMS’s
predecessor] with financing to carry out its purpose as
negotiated on a yearly basis.” JA 65. This fails to specify

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that either hospital will incur the cost of the resident’s salary,
fringe benefits, or other required expenses under the
regulation for any of the residency programs. Thus, it is
insufficient to serve as a written agreement under the
governing regulation.
The Affiliation Agreements are similarly inadequate.
While these annual agreements are between the Hospitals and
KCMS—and are therefore between a hospital and
nonhospital—they too lack specificity.
The Affiliation
Agreements simply state the Hospitals will share “joint and
equal responsibility for providing [KCMS] with sufficient
financing to carry out its programs as negotiated on a yearly
basis.” See, e.g., JA 112. These Agreements obligate the
Hospitals to provide lump-sum payments to finance KCMS’s
programs, but they fail to specify which programs the
Hospitals are financing or how the funds will be used.
Because KCMS receives millions of dollars of support from
other sources, like revenue from patient care, support from
Michigan State University, and revenue from contracts and
grants, it is impossible to know which source is funding the
residency programs.
Our conclusion is buttressed by
decisions of our sister circuits who, after examining
comparable agreements, found them to be lacking. See
Covenant Med. Ctr., Inc. v. Sebelius, 424 F. App’x 434, 438
(6th Cir. 2011) (holding written agreements requiring two
hospitals to “mak[e] lump sum payments to cover [residency
program costs] and other costs” did not satisfy the “written
agreement” requirement); Medcenter One Health Sys. v.
Sebelius, 635 F.3d 348, 350 (8th Cir. 2011) (holding a letter
obligating two hospitals to cover the operating deficits of a
nonhospital was not sufficient to meet the “written
agreement” requirement). Thus, the district court correctly
held these agreements “fail[ed] to sufficiently detail the
compensation scheme for supervisory teaching activities and

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the amounts the Hospitals will actually pay for these
activities.” Borgess, 966 F. Supp. 2d at 8.
As a last ditch effort, the Hospitals claim either their
understanding of the Agreements or their conduct should
show they complied with the underlying purpose of the
“written agreement” requirement. However, the regulation
provides no option for satisfying the “written agreement”
requirement through conduct.
See 42 C.F.R.
§ 413.86(f)(4)(ii) (2000).
Even if we did look to the Hospitals’ conduct, the record
does not clearly indicate they complied. The Hospitals rely
upon KCMS’s financial records from 2000–2004 to show
they did pay for the expenses required under the Secretary’s
regulation. However, much like the Affiliation Agreements,
these financial records lack the required specificity. While
these records do show the total support given to KCMS from
the Hospitals along with KCMS’s total expenses for each
year, they fail to provide any details regarding how the funds
were allocated to the residency programs. Furthermore, the
records make no mention of the Hospitals incurring the costs
for their residents’ salaries and fringe benefits while working
at KCMS or of the compensation KCMS received for
supervisory teaching activities.
The Hospitals’ failure to comply with the “written
agreement” requirement alone is sufficient grounds to affirm
the district court. Therefore, we need not decide whether the
Hospitals’ cost-sharing arrangement complied with the “all or
substantially all” requirement.

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III
For the foregoing reasons, the district court’s grant of
summary judgment is
Affirmed.

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