Lawrence & Memorial Hospital v. Sylvia Mathews Burwell et al

Filing 41

ORDER; Plaintiff's Motion 36 for Summary Judgment is DENIED and Defendants' Motion 35 for Summary Judgment is GRANTED. The Clerk is directed to close this case. Signed by Judge Janet Bond Arterton on 12/22/2014. (Morril, Gregory)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
LAWRENCE & MEMORIAL HOSPITAL,
Plaintiff,
v.
SYLVIA M. BURWELL, MARILYN TAVENNER,
and ROBERT G. EATON,
Defendants.

Civil No. 3:13cv1495 (JBA)

December 22, 2014

RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT
This is an action by Plaintiff Lawrence & Memorial Hospital for declaratory and
injunctive relief against Defendants Sylvia Burwell, Secretary of the Department of Health
and Human Services (“HHS”), Marilyn Tavenner, Administrator of the Centers for
Medicare and Medicaid Services (“CMS”), and Robert G. Eaton, Chairman of the
Medicare Geographic Classification Review Board (“MGCRB”), seeking a declaration that
the regulatory scheme governing the MGCRB violates the Medicare Act and the
Administrative Procedures Act, and a permanent injunction enjoining Defendants from
applying that scheme to Plaintiff’s current and future reclassification applications.
(Compl. [Doc. # 1].) On the same day it filed its Complaint, Plaintiff also filed a motion
[Doc # 4] for a preliminary injunction, enjoining Defendants from acting on Plaintiff’s
then-pending application for reclassification until the Court could hold a hearing on the
merits of the action. The Court denied [Doc. # 25] Plaintiff’s motion, finding that
Plaintiff had failed to demonstrate by clear and substantial evidence that it was likely to
succeed on the merits. Plaintiff [Doc. # 36] and Defendants [Doc. # 35] now each move
for summary judgment. For the following reasons, Defendants’ motion is granted and
Plaintiff’s motion is denied.

I.

Background
A. The Wage Index and the Medicare Geographic Classification Review Board
A detailed account of the relevant factual background is presented in the Court’s

Ruling [Doc. # 25] on Plaintiff’s Motion for Preliminary Injunction. Briefly, Medicare
payments to hospitals are made pursuant to the inpatient prospective payment system
(“IPPS”) for Medicare Part A and pursuant to the outpatient prospective payment system
(“OPPS”) for Medicare Part B. (See Compl. ¶¶ 18–19.) Under both systems, CMS sets a
standardized payment rate, which is then adjusted to account for the fact that labor costs
vary across the country. (See id. ¶¶ 18–22.) To effectuate this adjustment, CMS uses a
“wage index,” which represents the relation between the local average of hospital wages
and the national average of hospital wages.

(See id.); see also 42.U.S.C.

§ 1395ww(d)(3)(E).
In 1983, in order to effectuate the wage index adjustment, the Secretary of HHS
established standardized hospital labor markets by grouping hospitals according to their
location in Metropolitan Statistical Areas (“MSAs”). (See id. ¶ 23.) After the 2000 census,
the MSAs were replaced with Core Based Statistical Areas (“CBSAs”) that are roughly
equivalent to the previous groupings. (See id. ¶ 24.) Each hospital is reimbursed
according to the wage index of the CBSA in which it is physically located. (See id. ¶ 26.)
Since the late 1980s, Congress has periodically amended the Medicare Act to permit
hospitals to be reclassified from urban to rural, or to be reclassified to a CBSA other than
the one in which they are physically located in order to adjust those hospitals’ wage
indices to reflect the fact that the CBSAs do not always accurately reflect labor market
wage differences. (See id. ¶¶ 28–36.)
2

In 1989, Congress established the Medicare Geographic Classification Review
Board (“MGCRB”) to provide a mechanism by which a hospital could request to be
relocated from the geographical area in which it was located to another proximate area
for the purposes of determining its wage index and reimbursement rate. (See id. ¶ 38); see
also 42 U.S.C. § 1395ww(d)(10). In order to have its application for reclassification
approved by the MGCRB, a hospital must show that (1) its wages are higher than those of
other hospitals in the area where it is physically located; (2) its wages are comparable to
those of other hospitals in the area to which it seeks to be reclassified; and (3) it is
proximate to the area to which it seeks to be reclassified. (See Compl. ¶ 39.) If a hospital
has been designated as a rural referral center (“RRC”), the first and third elements of this
test are waived.

(See Compl. ¶ 44); see also 42 C.F.R. §§ 412.230(a)(3) and

412.230(d)(1)(3)(C). If the MGCRB approves a hospital’s application, its reclassification
is valid for a period of three years. (See Compl. ¶ 45.)
B. 340B Drug Discount Program
Pursuant to the 340B Drug Discount Program, pharmaceutical manufacturers
must, as a condition of Medicaid covering their products, enter into a Pharmaceutical
Pricing Agreement with the Secretary of HHS, under which the manufacturers agree to
offer 340B “covered entities” “covered outpatient drugs” at a discounted price. (Pl.’s
Mem. Supp. Mot. Summ. J. [Doc. # 36] at 14); 42 U.S.C. §256b. Covered entities include
disproportionate share hospitals, children’s hospitals, free-standing cancer hospitals,
critical access hospitals, RRCs, and sole community hospitals. (Pl.’s Mem. Supp. at 14);
42 U.S.C. § 256b(a)(4)(M)–(O). While disproportionate share hospitals must have a
disproportionate share adjustment factor of greater than 11.75% to participate, RRCs may
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participate as long as they have a disproportionate share adjustment factor of greater 8%.
(Pl.’s Mem. Supp. at 14.)
C. Section 401
In 1999, Congress enacted Section 401, which provides a mechanism by which
hospitals in urban areas may be reclassified as rural for reimbursement purposes. (See
Compl. ¶ 48.) Section 401 provides:
(i)

For purposes of this subsection, not later than 60 days after the receipt
of an application . . . from a subsection (d) hospital described in clause
(ii), the Secretary shall treat the hospital as being located in the rural
area (as defined in paragraph (2)(D))[1] of the State in which the
hospital is located.
For purposes of clause (i), a subsection (d) hospital described in this
clause is a subsection (d) hospital that is located in an urban area (as
defined in paragraph (2)(D)) and satisfies any of the following criteria:
(I)
The hospital is located in a rural census tract of a metropolitan
statistical area . . . .
(II)
The hospital is located in an area designated by any law or
regulation of such State as a rural area (or is designated by such
State as a rural hospital).
(III) The hospital would qualify as a rural, regional, or national
referral center under paragraph (5)(C) or as a sole community
hospital under paragraph (5)(D) if the hospital were located in
a rural area.
(IV) The hospital meets such other criteria as the Secretary may
specify.

(ii)

42 U.S.C. § 1395ww(D)(8)(E).

A conference report accompanying the legislation

enacting Section 401 explains that pursuant to Section 401:

1

Pursuant to 42 U.S.C. § 1395ww(d)(2)(D) “the term ‘urban area’ means an area
within a Metropolitan Statistical Area . . . [and] the term ‘rural area’ means any area
outside such an area or similar area.”
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[A] hospital in an urban area may apply to the Secretary to be treated as if
the hospital were located in a rural area of the State in which the hospital is
located. Hospitals qualifying under this section shall be eligible to qualify
for all categories and designations available to rural hospitals, including
sole community, Medicare dependent, critical access, and referral centers.
Additionally, qualifying hospitals shall be eligible to apply to the Medicare
Geographic [C]lassification Review Board for geographic reclassification to
another area. The Board shall regard such hospitals as rural and as entitled
to the exceptions extended to referral centers and sole community hospitals,
if such hospitals are so designated.
H.R. Conf. Rep. No. 106-479, 512 (1999) (emphasis added).
In the preamble to the final rule HHS adopted pursuant to Section 401, the
Secretary expressed concern that Section 401 “might create an opportunity for some
urban hospitals to take advantage of the MGCRB process by first seeking to be reclassified
as rural under section 1886(d)(8)(E) (and receiving the benefits afforded to rural
hospitals) and in turn seek reclassification through the MGCRB back to the urban area
for purposes of their standardized amount and wage index and thus also receive the
higher payments that might result from being treated as being located in an urban area.”
Medicare Program: Changes to the Hosp. Inpatient Prospective Payment Sys. & Fiscal Year
2001 Rates, 65 Fed. Reg. 47054, 47087 (Aug. 1, 2000). In other words, “some hospitals
might inappropriately seek to be treated as being located in a rural area for some purposes
and as being located in an urban area for other purposes.” Id. at 47088. In the comments,
the Secretary also acknowledged the language of the conference report: “We agree with
the commenters that Congress contemplated that hospitals might seek to be reclassified
as rural under section 1886(d)[8](E) of the Act in order to become RRCs so that the

5

hospital would be exempt from the MGCRB proximity requirement and could be
reclassified by the MGCRB to another urban area.” Id. at 47089.
However, in order to address its policy concerns, the Secretary ultimately adopted
regulations (which Plaintiffs now challenge) providing that “[a]n urban hospital that has
been granted redesignation as rural under § 412.103 cannot receive an additional
reclassification by the MGCRB based on this acquired rural status for a year in which
such redesignation is in effect.” 42 C.F.R. § 412.230(a)(5)(iii). Further, a hospital must
maintain its rural status for at least one full twelve-month cost reporting period after
being reclassified pursuant to Section 401 before it can cancel that status and reapply for
reclassification by the MGCRB. See 42 C.F.R. § 412.103(g)(2). Finally, once a hospital
that has been redesignated as an RCC pursuant to Section 401 cancels its rural status, that
hospital also loses its RRC designation under § 412.96. (See Compl. ¶ 58.)
D.

Plaintiff’s Reclassification Efforts

On July 2, 2013, Plaintiff requested pursuant to Section 401 to be redesignated
from urban to rural status, and to be designated as an RRC. (Pl.’s Mem. Supp. at 15.)
Those requests were granted, and Plaintiff was treated as an RRC beginning October 1,
2013. (Id.) Shortly after being reclassified as rural under Section 401, Plaintiff filed an
application with the MGCRB to be reclassified to the (urban) Nassau-Suffolk, NY CBSA.
(Id.) On October 11, 2013, while Plaintiff’s application was pending, Plaintiff filed this
suit and sought a preliminary injunction enjoining Defendants from acting on its
application for reclassification until the Court could hold a hearing on the merits of
Plaintiff’s claims, which the Court denied.

In order to avoid the denial of its

reclassification application (pursuant to the Secretary’s regulation), Plaintiff cancelled its
6

Section 401 status (effective October 1, 2014). (Id. at 17.) As a result, its application for
reclassification was approved but Plaintiff will no longer be eligible for the 340B Program.
(Id.)
Plaintiff challenges Defendants’ regulatory scheme to the extent that it “provides
that Section 401 hospitals are ineligible for subsequent MGCRB reclassification to a
different CBSA for wage index purposes.” (Id. at 19.) Plaintiff contends that the
regulation is invalid under Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S.
837 (1984), as contrary to Congress’s intent and as an arbitrary and capricious exercise of
the Secretary’s power. Defendants, for their part, claim that because Congress has not
spoken directly to the question of whether “a hospital with acquired rural status . . . is
entitled to invoke the reclassification procedures . . . in the same manner as a
geographically rural hospital,” the Secretary’s regulation is entitled to deference. (Defs.’
Opp’n to Pl.’s Mot. Summ. J. [Doc. # 37] at 1.)
Legal Standard2

II.

Challenges to an agency’s interpretation of a statute that it administers are
governed by the two-pronged analysis laid out in Chevron, U.S.A., Inc. v. Natural Res.
2

“‘[W]hen a party seeks review of agency action under the [Administrative
Procedure Act], the district judge sits as an appellate tribunal. The entire case on review
is a question of law.’ Judicial review of agency action is often accomplished by filing
cross-motions for summary judgment. The question whether an agency’s decision is
arbitrary and capricious, however, is a legal issue, whether it is presented as a motion to
dismiss or for summary judgment.” State of Connecticut v. U.S. Dep’t of Commerce, No.
3:04CV1271 (SRU), 2007 WL 2349894, at *1 (D. Conn. Aug. 15, 2007) (quoting American
Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083–84 (D.C. Cir. 2001)). “Generally, a
court reviewing an agency decision is confined to the administrative record compiled by
that agency when it made the decision.” Nat’l Audubon Soc. v. Hoffman, 132 F.3d 7, 14
(2d Cir. 1997).
7

Def. Council, Inc., 467 U.S. 837 (1984). A court must first determine whether “Congress
has directly spoken to the precise question at issue. If the intent of Congress is clear, that
is the end of the matter; for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress.” Id. at 842–43. However, “if the statute is
silent or ambiguous with respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible construction of the statute.” Id. at
843. An agency’s interpretation will be given controlling weight at step two unless it is
arbitrary and capricious. Id. at 844; see also Natural Resources Defense Council, Inc. v.
Muszynski, 268 F. 3d 91, 98 (2d Cir. 2001) (“[C]onsiderable weight should be accorded to
an executive department’s construction of a statutory scheme it is entrusted to
administer.” (internal citations and quotation marks omitted)).
III.

Discussion
There do not appear to be any genuine issues of material fact here. The parties

simply disagree as to the proper interpretation of Section 401. Because this case can
therefore be resolved as a matter of law, summary judgment is appropriate.
A.

Chevron Step One

At Chevron step one, the Court considers whether Congress has clearly spoken in
Section 401 as to whether the Secretary is required to treat hospitals with acquired rural
status as “rural” for the purposes of an application to the MGCRB for geographic
reclassification. See Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 116 (2d Cir. 2007).
“To ascertain Congress’s intent, we begin with the statutory text. . . . If the statutory
language is ambiguous, . . . we will resort first to canons of statutory construction, and, if

8

the statutory meaning remains ambiguous, to legislative history.” Id. (internal citations
and quotation marks omitted).
Plaintiff asserts that Section 401 is “a model of clarity” that leaves no room for the
Secretary’s interpretation of it. (Pl.’s Mem. Supp. at 30.) Plaintiff puts great emphasis on
Section 401’s use of the word “shall” in the phrase: “the Secretary shall treat [an urban]
hospital [reclassified under Section 401 as rural] as being located in the rural area . . . of
the State in which the hospital is located.”

(See id. at 26 (citing 42 U.S.C.

§ 1395ww(d)(8)(E)(i)).) According to Plaintiff, by prefacing this command with the
words “for purposes of this subsection,” Congress made clear its intent that the mandate
apply to the whole of subsection (d) of the Medicare Act. (Id. at 22–23, 29–30.) Since
subsection (d) encompasses the “rules for paying . . . hospitals for inpatient services,
including wage index payments [as well as] the MGCRB reclassification process,” Plaintiff
reasons that the statute unambiguously contemplates that Section 401 hospitals will be
treated like any other rural hospital in the MGCRB reclassification process. (Id.)
As Defendants emphasized at oral argument, they agree that “shall” is mandatory
(Defs.’ Opp’n at 2); that “this subsection” refers to subsection (d), (id. at 5); and that
subsection (d) includes rules regarding the wage index and the MGCRB reclassification
process (see id. at 3–5). However, Defendants contend that “[t]here is nothing in this
bare statutory command that unambiguously requires the Secretary to allow a hospital
with acquired rural status to apply for reclassification to an urban area under the
MGCRB.” (Defs.’ Mem. Supp. Mot. for Summ. J. [Doc. # 35-1] at 16.) Defendants argue
that Section 401’s use of the word “treat” (“the Secretary shall treat a hospital as being
located in [a] rural area”) is ambiguous and does not clearly “resolve the issue of whether
9

hospitals with acquired rural status are limited to taking advantage of special payment
policies or designations applicable to geographically rural, subsection (d) hospitals, or
whether they can also be reimbursed under the wage index of an urban area.” (Defs.’
Opp’n at 6.)
The Court finds Defendants’ analysis persuasive. As previously held in the Ruling
on Plaintiff’s Motion for a Preliminary Injunction, when the Court was presented with
essentially the same arguments and evidence offered by the parties now:
The text of Section 401 itself . . . does not discuss the intersection of
redesignation and geographic reclassification under the Medicare Act.
Section 401 also does not address the standards by which the MGCRB
should evaluate a hospital’s eligibility for geographic classification. Thus,
Section 401 is effectively silent as to whether hospitals that have been
redesignated as rural must be eligible for geographic reclassification.
(Ruling [Doc. # 25] at 16.)
Plaintiff asks the Court to find that Section 401, which itself makes no mention of
the MGCRB reclassification process, unambiguously commands Defendants to permit
Section 401 hospitals to apply for reclassification, on the basis of the words: “for purposes
of this section,” where “this section” encompasses 42 pages (replicated in Plaintiff’s brief)
of detail regarding how the PPS works. Buried within those 42 pages are the following
lines, which Plaintiff conceded at oral argument constitute the only reference to the
MGCRB reclassification in the section:
(10)(A) There is hereby established the Medicare Geographic
Classification Review Board . . . .
(B) [omitted; describes composition of the Board]
(C)(i) The Board shall consider the application of any subsection (d)
hospital requesting that the Secretary change the hospital’s
geographic classification for purposes of determining for a
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fiscal year –
(I)
the hospital’s average standardized amounts under
paragraph (2)(D) [which directs the Secretary to
compute different averages for urban and rural
areas]
(II)
the factor used to adjust the DRG [diagnosis-related
group] prospective payment rate for area differences
in hospital wage levels that applies to such hospital
under paragraph (3)(E).
(ii) [omitted; sets deadline for application submissions]
(iii)[omitted; describes the decision-making and appeals
process]
(D)(i) The Secretary shall publish guidelines to be utilized by the
Board in rendering decisions on applications submitted
under this paragraph. . . . [rest of (D), (E), and (F) omitted;
(D) lists types of guidelines the Secretary must create; (E)
gives the Board broad power to make rules and establish
procedures to carry out the paragraph; and (F) dictates
compensation for Board members].
42 U.S.C. § 1395ww(d)(10). If Congress intended this language, in conjunction with
Section 401, to require the Board to accept reclassification applications from Section 401
hospitals, it certainly chose an obscure way to express that intent. The least that can be
said is that Congress has not clearly and unambiguously spoken to the question of
whether the Secretary must allow Section 401 hospitals to reclassify as urban.
Nor does the District of D.C.’s decision in Bayside, to which Plaintiff points as
support for its reading of the statute, compel a different conclusion. (Pl.’s Opp’n to Defs.’
Mot. Summ. J. [Doc. # 38] at 24 (citing Bayside Cmty. Hosp. v. Sebelius, No. CV 07-1562
(EGS), 2009 WL 9536725 (D.D.C. Sept. 30, 2009).) The district court in Bayside held that
the Secretary’s refusal to permit a hospital with acquired rural status to claim a
reimbursement reserved for rural hospitals, conflicted with the clear statutory mandate in

11

Section 401. See Bayside Cmty. Hosp., 2009 WL 9536725, at *11–12. That is not, however,
the question before this Court. While Section 401 is clear that the Secretary shall treat
hospitals with acquired rural status as rural hospitals for purposes of the prospective
payment system (PPS), it is not clear that implicit in this directive is a mandate that
Defendants permit an urban hospital to acquire rural status and then immediately turn
around and use that status to leapfrog back into an urban status with a higher wage index.
To support its proposed construction of Section 401, Plaintiff relies on the text of
the conference report published in conjunction with the adoption of the legislation
enacting Section 401:
[A] hospital in an urban area may apply to the Secretary to be treated as if
the hospital were located in a rural area of the State in which the hospital is
located. Hospitals qualifying under this section shall be eligible to qualify
for all categories and designations available to rural hospitals, including
sole community, Medicare dependent, critical access, and referral centers.
Additionally, qualifying hospitals shall be eligible to apply to the Medicare
Geographic Reclassification Review Board for geographic reclassification to
another area. The Board shall regard such hospitals as rural and as entitled
to the exceptions extended to referral centers and sole community hospitals,
if such hospitals are so designated.
H.R. Conf. Rep. No. 106-479, 512 (1999) (emphasis added).
As this Court explained in its Ruling on Plaintiff’s Motion for a Preliminary
Injunction when faced with the same argument by Plaintiff:
While the Second Circuit has considered legislative history at step one of
Chevron, see Cohen, 498 F.3d at 116, it has also noted that “the Supreme
Court has issued mixed messages as to whether a court may consider
legislative history at . . . step one of Chevron,” Coke v. Long Island Care At
Home, Ltd., 376 F.3d 118, 137 (2004) vacated and remanded on other
grounds by 546 U.S. 1147 (2006); see also id. at 137 n.3 (collecting and
comparing cases). Here, adopting Plaintiff’s analysis would require the
12

Court to rely on the conference report to expand on the . . . terms of
Section 401 and create a conflict with the challenged regulation where
none exists on the face of the statute. Other courts have rejected such
attempts by plaintiffs to create statutory [conflict] via legislative history
when confronted with an otherwise permissible agency interpretation.
See, e.g., San Bernardino Mountains Cmty. Hosp. v. Sec’y, 63 F.3d 882, 887
(9th Cir. 1995) (“[B]ecause the Secretary’s interpretations fall squarely
within her statutorily granted discretion, legislative history such as the
Senate committee report cannot defeat the regulation.”); Clinton Mem.
Hosp. v. Shalala, 10 F.3d 854, 858 (D.C. Cir. 1993) (“It is far from clear to
us that anything in a Senate committee report . . . could condemn as
impermissible an interpretation fitting squarely within statutory
language.”); Macon Cnty. Samaritan Mem. Hosp. v. Shalala, 7 F.3d 762,
767 (8th Cir. 1993) (suggesting that an attempt to create an ambiguity via
legislative history “puts the cart before the horse.”)
(Ruling [Doc. # 25] at 16.)
In rejecting Plaintiff’s invitation to afford greater weight to the legislative history
than to the text of the statute itself, this Court is merely heeding the Supreme Court’s oftrepeated admonition that “the best evidence of [the] purpose [of a statute] is the statutory
text adopted by both Houses of Congress and submitted to the President.” W. Virginia
Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 98 (1991); see also Cont’l Can Co. v. Chicago
Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund, 916 F.2d
1154, 1157–58 (7th Cir. 1990) (“The text of the statute . . . is the law. Only the text
survived the complex process for proposing, amending, adopting, and obtaining the
President’s signature (or two-thirds of each house). . . . [T]he Constitution gives force
only to what is enacted.”).
Moreover, as the Court observed in its Ruling, and Defendants point out now,
“even if the conference report is accepted as a persuasive indicator of congressional

13

intent, it is by no means clear that the regulation would be contrary to the statute.”
(Defs.’ Mem. Supp. at 21.) That is so for two reasons.
First, the impetus behind the statement at issue in the congressional report is
unclear. Defendants contend that Congress’s intent was to ensure that a narrow category
of hospitals that had once had, but since lost, RRC status (when their counties were
reclassified as urban) were able to regain RRC status for purposes of reclassifying. (Id. at
25–26.) If that is the case, the Secretary’s regulation does not present a conflict because in
creating the regulation, the Secretary also permitted any hospital that was once an RRC to
be reinstated as such.
Second, application of the regulation does not prevent hospitals like Plaintiff with
acquired RRC status from applying for reclassification. As Defendants explain, a hospital,
like Plaintiff, “that utilized its acquired rural status under Section 401 to become an RRC”
and then cancelled “that status for the next fiscal year,” would still retain the benefits of
RRC status for purposes of reclassification (because the cancellation of RRC status would
not be effective until after the MGCRB issued its decision). (Id. at 21.) Indeed, Plaintiff
did retain its RRC benefits for purposes of reclassification, as evidenced by its successful
bid to be reclassified to the Nassau-Suffolk, NY urban area. Because neither the language
of the statute nor the legislative history yields a clear and unambiguous picture of
Congressional intent, the issue cannot, contrary to Plaintiff’s steadfast belief, be resolved
at step one.
B.

Chevron Step Two

Plaintiff argues that even if the regulation did not clearly conflict with the plain
meaning of Section 401, the Secretary’s interpretation of Section 401 is arbitrary and
14

capricious. Plaintiff bases this argument on the Secretary’s comments in adopting the
regulations, in which she acknowledged the language of the conference report and noted
that “Congress clearly intended hospitals that become rural under [Section 401] of the
Act to receive some benefit as a result,” but then adopted regulations that “fly in the face
of the Secretary’s own expressed understanding of Section 401 and its intent.” (Pl.’s
Mem. Supp. at 35.) Plaintiff concludes: “By interpreting Section 401 so that a Section 401
hospital is never treated by the MGCRB as being located in the rural area of the State, and
ignoring Congress’s clear direction that the ‘Board shall regard such hospitals as rural,’
the Secretary ceases to implement law and seeks to create her own. In doing so she has
acted arbitrarily, capriciously, and contrary to statutory requirements.” (Id. at 36.)
However, the record before the Court leads it to a different conclusion. Contrary
to Plaintiff’s allegations, the record shows that the Secretary’s decision was deliberate,
logical, and considered. During the rulemaking, the Secretary expressed concern “that
some hospitals might inappropriately seek to be treated as being located in a rural area for
some purposes and as being located in an urban area for other purposes,” 65 Fed. Reg.
47054, 47088, and that such a scenario could have unintended consequences permitting
some hospitals to receive inappropriate reimbursements, see id. at 47089. The Secretary
explained:
This policy is consistent not only with the statutory language but also with
the policy considerations underlying the MGCRB process. The MGCRB
process permits a hospital to be reclassified from one geographic area to
another if it is significantly disadvantaged by its geographic location and
would be paid more appropriately if it were reclassified to another area.
We believe that it would be illogical to permit a hospital that applied to be
reclassified from urban to rural under section 1886(d)(8)(E) of the Act
because it was disadvantaged as an urban hospital to then utilize a process
15

that was established to enable hospitals significantly disadvantaged by
their rural or small urban location to reclassify to another urban location.
If an urban hospital applies under section 1886(d)(8)(E) of the Act in
order to be treated as being located in a rural area, then it would be
anomalous at best for the urban hospital to subsequently claim that it is
significantly disadvantaged by the rural status for which it applied and
should be reclassified to an urban area.
Id. at 47088.
Further, the Secretary considered alternative proposals to limit the potential for
inappropriate payments and concluded that the proposed regulation, combined with the
changes to the RRC policy described above, would best address its concerns regarding the
interplay of Section 401 and the MGCRB reclassification process. Id. at 47089; (Defs.’
Mem. Supp. at 25–27.) Such a deliberative and well-reasoned approach can hardly be
considered arbitrary or capricious. See Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 174
(2d Cir. 2006) (a finding that agency action is arbitrary and capricious can be made only
where 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.” (internal
citations and quotation mark omitted)).
Moreover, as discussed in the step one analysis, there is nothing in either the text
of the statute or the legislative history to suggest that the Secretary’s regulations are based
on an impermissible construction of the statute. Certainly the statute and legislative
history do not compel the Secretary’s interpretation, but nor do they prohibit it. The
statute requires that the MGCRB to “treat” a subsection d hospital “as being located in the
16

rural area . . . of the State in which the hospital is located.” 42 U.S.C. § 1395ww(D)(8)(E).
The conference report adds a mandate (not included explicitly in the statute) that
subsection d hospitals “be eligible to apply to the [MGCRB] for geographic
reclassification to another area” and that “[t]he Board shall regard such hospitals as rural
and as entitled to the exceptions extended to referral centers . . . if such hospitals are so
designated. H.R. Conf. Rep. No. 106-479, 512 (1999). Consistent with both of these
mandates, the Secretary’s regulations, as demonstrated clearly in this case, permit
subsection d hospitals to be reclassified and in doing so, to take advantage of their RRC
status. The agency’s regulations simply prohibit those hospitals from maintaining RRC
status after they are reclassified (at their request) as urban. The Secretary here did little
more than use the discretion, explicitly granted to her by Congress to “publish guidelines
to be utilized by the Board in rendering decisions on applications.”

42 U.S.C.

§ 1395ww(d)(10)(D)(i). Defendants’ actions were neither arbitrary nor capricious.
IV.

Conclusion
For the foregoing reasons, Plaintiff’s Motion [Doc. # 36] for Summary Judgment

is DENIED and Defendants’ Motion [Doc. # 35] for Summary Judgment is GRANTED.
The Clerk is directed to close this case.

IT IS SO ORDERED.

/s/
Janet Bond Arterton, U.S.D.J.

Dated at New Haven, Connecticut this 22nd day of December, 2014.
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