ST. HELENA CLEAR LAKE HOSPITAL v. AZAR, II
MEMORANDUM OPINION. Signed by Judge Carl J. Nichols on March 31, 2021. (lccjn1)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ST. HELENA CLEAR LAKE HOSPITAL,
Civil Action No. 1:19-cv-00141 (CJN)
XAVIER BECERRA, Secretary, U.S.
Department of Health and Human Services,
St. Helena Clear Lake Hospital, a Medicare Critical Access Hospital, challenges the
Department of Health and Human Services’ decision denying the hospital’s claim for the
reimbursement of certain health care costs under the Medicare health insurance program. See
generally Compl., ECF No. 1. The Parties have cross-moved for summary judgment. See
generally Pl.’s Mot. Summ. J. (“Pl.’s Mot.”), ECF No. 10; Def.’s Mot. Summ. J. (“Def.’s CrossMot.”), ECF No. 12. For the reasons discussed below, the Court denies St. Helena’s Motion and
grants Defendant’s Cross-Motion.
St. Helena is a short-term acute care hospital located in California. Under the Medicare
program, it is designated as a Critical Access Hospital. These facilities differ from most other
short-term acute care hospitals in that they receive Medicare reimbursement under the reasonable
cost system. 42 C.F.R. § 413.1(d).
From 2005 to 2008, St. Helena contracted with physicians in certain specialties to
provide on-call coverage for inpatient hospital services. St. Helena sought reimbursement from
Medicare for those costs, which the Medicare contractor responsible for auditing St. Helena’s
Medicare cost reports disallowed. St. Helena appealed that decision to the Provider
Reimbursement Review Board, which concurred with the Medicare contractor.
The Court begins with a review of the Medicare insurance program and the system for
reimbursing Critical Access Hospitals, like St. Helena, for services provided to Medicare
A. Statutory and Regulatory Provisions
The Medicare Program
The Medicare program, established by Title XVIII of the Social Security Act, 42 U.S.C.
§ 1395, et seq., pays for covered medical care provided to eligible aged and disabled persons.
Congress entrusted the Secretary with determining proper Medicare payments to hospitals. And
the Secretary delegated that authority to the Centers for Medicare & Medicaid Services
(“CMS”). Under a “complex statutory and regulatory regime,” Good Samaritan Hosp. v.
Shalala, 508 U.S. 402, 404 (1993), known as Medicare Part A, the Secretary, through CMS, pays
participating hospitals for inpatient care they provide to Medicare beneficiaries.
At one time, Medicare reimbursed participating hospitals for the “reasonable costs”
actually incurred providing inpatient services to Medicare beneficiaries. Methodist Hosp. of
Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (quoting 42 U.S.C. § 1395f(b)
(1988)). But in 1983, Congress directed the Department of Health and Human Services to
implement a “prospective payment system.” 42 U.S.C. § 1395ww(d). Under this system,
hospitals generally receive fixed payments for different inpatient services, regardless of the
actual cost to the hospital. See id. CMS now pays most acute care hospitals for inpatient
services furnished to Medicare beneficiaries at fixed rates through something called the Inpatient
Prospective Payment System. See generally Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46,
49 (D.C. Cir. 2015).
Critical Access Hospitals and the Reasonable Cost System
In 1997, Congress exempted many rural hospitals from the Inpatient Prospective Payment
System when it created the Critical Access Hospital designation. Critical Access Hospitals
instead receive reimbursement for inpatient services under the reasonable cost system, 42 U.S.C.
§ 1395i-4(c)(2); 42 C.F.R. § 413.1(d), and receive payment at a rate of 101 percent of the
reasonable costs of furnishing inpatient and outpatient services to Medicare beneficiaries. See 42
U.S.C. §§ 1395f(l)(1), 1395m(g)(1).
Medicare hospitals subject to the reasonable cost system are paid the lesser of the
“reasonable cost” of or the “customary charges” for services they furnish to Medicare
beneficiaries. 42 U.S.C. § 1395f(b)(1). Congress defined “reasonable cost” broadly as “the cost
actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the
efficient delivery of needed health services.” 42 U.S.C. § 1395x(v)(1)(A).
Congress empowered the Secretary “to issue regulations defining reimbursable costs and
otherwise giving content to the broad outlines of the Medicare statute.” Thomas Jefferson Univ.
v. Shalala, 512 U.S. 504, 507 (1994). Specifically, Congress authorized the Secretary to further
define both the “reasonable cost” of health care services to be reimbursed, and the “items to be
included” in the category of reimbursable costs. 42 U.S.C. § 1395x(v)(1)(A).
Pursuant to this authority, the Secretary promulgated general regulations to better
articulate the items included in the reasonable costs category as “all necessary and proper costs
incurred in furnishing the [Medicare] services.” 42 C.F.R. § 413.9(a). And the Secretary defines
“necessary and proper” as “costs that are appropriate and helpful in developing and maintaining
the operation of patient care facilities and activities. They are usually costs that are common and
accepted occurrences in the field of the provider’s activity.” Id. § 413.9(b)(2). Such costs
include “both direct and indirect costs and normal standby costs.” 42 C.F.R. § 413.9(c)(3).
When it comes to the amount reimbursed under the reasonable cost system, the Secretary
has noted that medical costs “vary from one provider to another and the variations generally
reflect differences in scope of services and intensity of care.” 42 C.F.R. § 413.9(c)(2). The
reasonable cost regulations seek to reimburse each provider with its “actual costs, however
widely they may vary from one institution to another.” Id. But there are limits. For instance,
the reasonable cost system will not reimburse a provider’s actual costs if that “institution’s costs
are found to be substantially out of line with other institutions in the same area that are similar in
size, scope of services, utilization, and other relevant factors.” Id.
The regulations also specifically address inpatient and outpatient services provided at
Critical Access Hospitals. See 42 C.F.R. § 413.70(a), (b). Medicare reimburses, at a rate of 101
percent, all reasonable costs a Critical Access Hospital incurs while furnishing inpatient and
outpatient services to Medicare beneficiaries. See 42 U.S.C. §§ 1395f(l)(1), 1395m(g)(1).
After Congress created the Critical Access Hospital designation in 1997, CMS (then
known as the Health Care Financing Administration) issued the first series of the regulations
governing those hospitals. 63 Fed. Reg. 26318 (May 12, 1998). During the comment period for
that initial rulemaking, CMS explained, in response to a question regarding temporary substitute
physicians, that “Medicare does not recognize costs of ‘on-call’ physicians as allowable costs of
operating a [Critical Access Hospital].” Id. at 26353.
Only two years later, Congress, through the enactment of Section 204 of Public Law
106–554, carved out an exception to that general prohibition. The relevant part of the statute
provides that with regard to “reasonable costs of outpatient critical access hospital services . . .
the Secretary shall recognize as allowable costs, amounts . . . for reasonable compensation and
related costs for emergency room physicians who are on call.” 42 U.S.C. § 1395m(g)(5).
Based on this congressional directive, CMS implemented regulations relating to the
reimbursement of these on-call costs. The regulation stated:
Effective for cost reporting periods beginning on or after October 1, 2001, the
reasonable costs of outpatient [Critical Access Hospital] services under paragraph
(b) of this section may include amounts for reasonable compensation and related
costs for an emergency room physician who is on call but who is not present on
the premises of the [Critical Access Hospital] involved, is not otherwise
furnishing physician’s services, and is not on call at any other provider or facility.
42 C.F.R. § 413.70(b)(4). In the preamble to this final rule, the Secretary explained that prior to
Congress’s enactment of this exception, Critical Access Hospitals were not to include “any costs
of compensating physicians who are not present in the facility but are on call.” 66 Fed. Reg.
39828, 39922–23 (Aug. 1, 2001).
Administration of Medicare Reimbursement
CMS contracts with private insurance companies to act as Medicare Administrative
Contractors, which assist in the day-to-day operations of the program. 42 U.S.C. §§ 1395u(a),
1395kk-1(a)(4). Each Medicare-participating hospital is assigned a contractor. The contractor
audits annual cost reports submitted by the provider to determine the Medicare reimbursement
payment to be made to the provider. See 42 C.F.R. §§ 413.20, 413.24(f)(4)(iii). To receive
payment from Medicare for services rendered, the provider must file a Medicare cost report with
its contractor at the end of each cost reporting period. 42 C.F.R. § 413.20. The contractor then
reviews that report and issues a Notice of Program Reimbursement setting forth the amount of
allowable Medicare payments. 42 C.F.R. § 405.1803.
If a provider disagrees with a contractor’s Notice of Program Reimbursement, the
provider may appeal the decision to the Provider Reimbursement Review Board—an
administrative tribunal within the Department of Health and Human Services. A Board decision
represents the final agency decision unless the Secretary, on his own motion, decides to reverse,
affirm, or modify the Board’s decision. 42 U.S.C. § 1395oo(f). And the Secretary has delegated
his authority to review Board decisions to the CMS Administrator. 42 U.S.C. § 1395oo(f)(1); 42
C.F.R. § 405.1875(a)(1). A provider may then seek judicial review of the Board’s or the CMS
Administrator’s decision. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877(b).
B. Procedural History
St. Helena submitted its Medicare cost reports for fiscal years 2005 through 2008 to its
Medicare contractor. See November 26, 2018 PRRB Decision, ECF No. 1-1, at 2. During these
years, St. Helena contracted with physicians in the specialties of surgery, obstetrics, pediatrics,
and cardiology to provide on-call coverage for inpatient hospital services. Id. at 3. On the cost
reports, St. Helena reported costs for compensating these physicians, which included providing
on-call services as part of furnishing inpatient care. Id. The Medicare contractor disallowed
these on-call costs on the grounds that they were not emergency costs and thus were not
allowable. See id.
St. Helena appealed to the Provider Reimbursement Review Board. See id. After
conducting a hearing, the Board affirmed the Medicare contractor’s decision. See id. at 8. The
Board reasoned that, under 42 C.F.R. § 413.70(b)(4), Medicare reimbursement “is only available
to [Critical Access Hospitals] for outpatient on-call services rendered in the emergency room
setting.” Id. at 6 (emphasis added). The Board determined that St. Helena’s “specialty on-call
services” were related to inpatient services and thus not eligible for reimbursement. Id.
The Board then analyzed St. Helena’s claims that the costs must be reimbursed because
they were necessary to comply with California law or to stabilize a hospital inpatient. See id. at
7. The Board concluded that California law did not require specialty physicians to be on-call and
that St. Helena’s emergency room physicians, trained in emergency medicine, would be capable
of stabilizing a hospital inpatient. Id. The Board therefore affirmed the Medicare contractor’s
determination disallowing St. Helena’s claimed specialty physician on-call expenses. Id.
The Secretary, through the CMS Administrator, declined to review the Board’s decision.
As a result, the Board’s decision became the final, reviewable decision of the Secretary, which
St. Helena challenges here.
Standard of Review
In this action proceeding under the Medicare statute, 42 U.S.C. § 1395oo(f)(1), judicial
review is governed by the standards of the Administrative Procedure Act (“APA”), 5 U.S.C.
§ 706, and is decided on the administrative record. Southeast Ala. Med. Ctr. v. Sebelius, 572
F.3d 912, 916–17 (D.C. Cir. 2009). Under the APA, a court will “hold unlawful and set aside
agency action, findings, and conclusions” if they are “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A), or “in excess of
statutory jurisdiction, authority, or limitations, or short of statutory right,” id. § 706(2)(C). The
arbitrary and capricious standard is “‘narrow’ . . . as courts defer to the agency’s expertise.” Ctr.
for Food Safety v. Salazar, 898 F. Supp. 2d 130, 138 (D.D.C. 2012) (quoting Motor Vehicle
Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. at 29, 43 (1983)). Under
this standard, the Court presumes the validity of agency action, see, e.g., Davis v. Latschar, 202
F.3d 359, 365 (D.C. Cir. 2000), and will not “substitute [its] judgment for that of the agency,”
Sioux Valley Rural Television v. F.C.C., 349 F.3d 667, 674 (D.C. Cir. 2003).
When the issue is whether an agency properly interpreted its own regulation, the Court
gives substantial deference to the agency’s interpretation. Thomas Jefferson Univ., 512 U.S. at
512. The agency’s interpretation is given “controlling weight unless it is plainly erroneous or
inconsistent with the regulation.” Id. (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S.
410, 414 (1945)). In Medicare cases such as this one, the “tremendous complexity of the
Medicare statute . . . adds to the deference which is due to the Secretary’s decision.” Dist. Hosp.
Partners, 786 F.3d at 60 (quoting Methodist Hosp., 38 F.3d at 1229).
A. Deference to the Agency’s Decision
At the outset, the Parties disagree about whether the Provider Reimbursement Review
Board’s decision disallowing on-call costs for physicians providing inpatient hospital services is
entitled to deference. St. Helena insists that it is not because Congress authorized only the
Secretary, and not the Board, to determine which costs qualify as reasonable. Pl.’s Reply, ECF
No. 15, at 6. And, Plaintiff argues, because the determination to disallow inpatient on-call costs
was made “only by the [Board] in a decision the Secretary’s designee did not review,” it should
not receive deference. Id. at 6.
But the Medicare statute is not so narrow. It “instructs the reviewing court to apply the
provisions of the Administrative Procedure Act, which requires federal courts to be ‘highly
deferential’ in their review of agency action,” regardless of whether the agency action is a
decision by the Board or the Secretary. Emanuel Med. Ctr., Inc. v. Sebelius, 37 F. Supp. 3d 348,
355 (D.D.C. 2014) (quoting Bloch v. Powell, 348 F.3d 1060, 1070 (D.C. Cir. 2003)). The fact
that the Board’s decision was not later altered or adopted by the CMS Administrator (or the
Secretary) does not alter the deference due.
B. General Reasonable Cost Provisions
Turning to the substance of St. Helena’s claims, it first argues that the Provider
Reimbursement Review Board’s decision to disallow on-call costs for physicians in an inpatient
setting was arbitrary and capricious. Those costs, St. Helena claims, are expressly allowable
under the Medicare Act and its implementing regulations. St. Helena begins by looking to
Medicare’s “reasonable cost” provisions. See 42 U.S.C. § 1395x(v)(1)(A); see also 42 C.F.R.
§ 413.9(a), (b), and (c). St. Helena insists that on-call costs for physicians in an inpatient setting
are necessarily “reasonable cost[s]” that therefore must be reimbursed.
But the general provisions on which St. Helena relies do not expressly allow
reimbursement for the costs of an on-call physician in an inpatient setting. And they do not
“permit reimbursement of all reasonable costs across the board.” See St. Luke Community
Health Care v. Sebelius, 2010 WL 1839411, at *7 (D. Mont. Apr. 14, 2010) (emphasis added).
Instead, reimbursable reasonable costs are “determined [by the Secretary] in accordance with
regulations establishing the method . . . and the items to be included, in determining such costs
for various types or classes of institutions, agencies, and services.” 42 U.S.C. § 1395x(v)(1)(A).
St. Helena cannot demonstrate that the plain text of these provisions compels the conclusion that
non-emergency room on-call costs are reasonable and therefore reimbursable. See Thomas
Jefferson Univ., 512 U.S. at 512.
St. Helena also argues that the costs must be allowable under 42 C.F.R. § 413.9 because
they are “necessary and proper.” See Pl.’s Mot. at 21–25. Necessary and proper costs are
defined by regulation as “costs that are appropriate and helpful in developing and maintaining
the operation of patient care facilities and activities.” 42 C.F.R. § 413.9(b)(2). They are also
those costs that are “common and accepted occurrences” in the provider’s field. Id.
St. Helena insists that the costs at issue here were necessary because: (1) California state
licensing and certification required the hospital to have these physician services on call; and (2)
specialty on-call physicians were needed to stabilize patients upon inpatient admission in
compliance with the Emergency Medical Treatment and Labor Act (“EMTALA”), 42 U.S.C.
§ 1395dd. See Pl.’s Mot. at 21–25. The Board examined these justifications, but ultimately
disagreed that they supported a finding that the claimed costs were “necessary and proper.” See
PRRB Decision at 7. With regard to the argument that California state licensing and certification
requirements necessitated the on-call costs at issue, the Board concluded, after a review of the
relevant California statutes, that those sections merely state the ideal physician qualifications.1
They did not dictate that St. Helena must have certain specialty physicians on-call to provide
As for St. Helena’s argument that the on-call costs were necessary to stabilize inpatients
in compliance with the EMTALA, the Board noted that the EMTALA requires hospitals to
stabilize the medical condition of a patient before the patient can be transferred to another
facility, 42 U.S.C. § 1395dd(b)(1)(B), but does not require on-call specialty physicians to do so.
In fact, the statute requires only that a hospital use “the staff . . . available at the hospital” to
stabilize a patient. Id. § 1395dd(b)(1)(A). After reviewing St. Helena’s emergency room
staffing contracts, the Board reasoned that St. Helena’s emergency room physicians had “the
necessary skills to stabilize a patient and, if necessary, transfer the patient to another hospital.”
PRRB Decision, ECF No. 1-1, at 7. The on-call specialty physicians were, the Board concluded,
unnecessary to comply with the EMTALA. Id.
St. Helena has not demonstrated that the Board’s examination and ultimate dismissal of
these justifications was arbitrary and capricious. See 5 U.S.C. § 706(2)(A). The Board
articulated a rational connection between the facts found and its ultimate decision. And it
appropriately considered the relevant facts in making that decision. See Marsh v. Or. Nat. Res.
The Board reviewed several provisions of California Title 22, including Sections 70225 (Surgical Services), 70415
(Emergency Medical Services), 70417 (Basic Emergency Medical Services Physician on Staff), 70495 (Intensive
Care Service Staff), 70549 (Perinatal Unit Staff), and 70653 (Standby Emergency Medical Service, Physicians on
Call). See PRRB Decision, ECF No. 1-1, at 7 n.29.
Council, 490 U.S. 360, 378 (1989). Nor can the hospital demonstrate that the Board’s
interpretation of “necessary and proper” costs to exclude on-call specialty physicians was plainly
erroneous. Thomas Jefferson Univ., 512 U.S. at 512. St. Helena has therefore failed to
demonstrate that the Medicare Act and its implementing regulations compel the conclusion that
on-call costs for specialty inpatient are reimbursable as reasonable costs.
C. The Board’s Reliance on 42 C.F.R. § 413.70(b)(4)
St. Helena next argues that the Board’s decision was arbitrary and capricious because it
relied on 42 C.F.R. § 413.70(b)(4). That regulation provides that “the reasonable costs of
outpatient [critical access hospital] services . . . may include amounts for reasonable
compensation . . . for an emergency room physician who is on call.” 42 C.F.R. § 413.70(b)(4)(i).
It is the only Medicare regulation expressly permitting reimbursement for the cost for on-call
The Board, relying on the fact that neither Congress nor the Secretary has expressly
permitted other on-call costs, interpreted § 413.70(b)(4) to mean that the only reimbursable oncall costs are for physicians in an emergency room setting. See PRRB Decision at 6. St.
Helena’s claim for on-call costs for physicians assisting in inpatient settings was therefore
excluded from reimbursement. See id.
The Board’s interpretation of the agency’s own regulation is entitled to substantial
deference. See supra, Part IIIA. St. Helena must therefore demonstrate either that the Board’s
interpretation is inconsistent with the regulation or that an alternative interpretation is compelled
by the regulation’s plain language (or the intent behind its promulgation). See Thomas Jefferson
Univ., 512 U.S. at 512.
St. Helena has not done so here. The hospital claims that the regulation is inapposite
because the regulation does not “explicitly or implicitly, positively or negatively” affect
“Medicare reimbursement for [critical access hospitals] in an inpatient setting.” Pl.’s Mot. at 2.
But St. Helena cannot show that the plain language of the regulation compels its alternative
interpretation. Instead, the Secretary’s determination that the negative implications of 42 C.F.R.
§ 413.70(b)(4) disallow reimbursement for on-call costs for physicians in an inpatient setting is
entirely consistent with the governing statute and regulations. It reflects a reasonable
determination to which deference is due.
The only court to previously address this issue agreed. It concluded, as this Court now
does, that the agency reasonably interpreted § 413.70(b)(4) to limit reimbursable on-call costs to
those costs that relate to emergency room care. In St. Luke Community Health Care v. Sebelius,
a hospital argued that 42 C.F.R. § 413.70(b)(4) applied only to on-call costs for emergency room
physicians and was therefore inapplicable to the hospital’s request for the reimbursement of its
costs for the on-call services of nurse anesthetists. 2010 WL 1839411, at *10 (D. Mot. Apr. 14,
2010), adopted by, 2010 WL 1839405 (D. Mont. May 5, 2010). The court disagreed and
deferred to the Secretary’s decision interpreting § 413.70(b)(4) to “identify emergency room
physician on-call costs as the only on-call costs that are reimbursable under Medicare.” Id.
Here too, St. Helena has failed to demonstrate that the Board’s interpretation was “plainly
erroneous or inconsistent” with 42 C.F.R. § 413.70(b)(4). Thomas Jefferson Univ., 512 U.S.
512. The Court therefore holds that the Board did not err when it relied on that regulation in
disallowing reimbursement for non-emergency room on-call costs.
D. Procedural Validity
Finally, St. Helena argues that because there is no statutory or regulatory prohibition
specifically excluding the reimbursement of costs for on-call physicians in an inpatient setting,
the Secretary cannot disallow those costs until such a regulation has been through the notice and
comment rulemaking process. See Pl.’s Mot. at 26–27. But St. Helena ignores that the
Secretary, in the absence of a binding rule promulgated through notice and comment procedures,
is entitled to determine what constitutes a reasonable cost through the adjudicatory process. See
SEC v. Chenery Corp., 332 U.S. 194, 202–03 (1943) (holding that agencies can make policy
through rulemaking or adjudication). The Secretary is not required to address every conceivable
reasonable cost policy through notice-and-comment rulemaking. See Shalala v. Guernsey Mem’l
Hosp., 514 U.S. 87, 96 (1995). And the Secretary is therefore certainly not required to address
every potential medical service to be excluded from reimbursement.
Even if the Secretary were required to address potential exclusions through the notice and
comment process, the Secretary’s position excluding on-call costs has already been articulated
through that process. In 1998, in response to a comment relating to a proposed rule, CMS stated
that “Medicare does not recognize costs of ‘on-call’ physicians as allowable costs of operating a
[critical access hospital].” 63 Fed. Reg. at 26353. This policy remains unaltered, except for the
narrow exception to allow for the reimbursement of on-call physicians in an emergency room
setting. See 42 U.S.C. § 1395m(g)(5); 42 C.F.R. § 413.70(b)(4).
For the foregoing reasons, the Court grants the Secretary’s Motion for Summary Judgment,
ECF No. 12, and denies St. Helena’s Motion for Summary Judgment, ECF No. 10. An Order will
be issued contemporaneously with this Memorandum Opinion.
DATE: March 31, 2021
CARL J. NICHOLS
United States District Judge
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