Thomas Jefferson University v. Shalala

B

Thomas Jefferson University Hospital (Hospital) is a 700-bed teaching hospital in Philadelphia, Pennsylvania. The Hospital has been a qualified Medicare provider since the program took effect in 1966. Petitioner Thomas Jefferson University (University) is a private, not-for-profit educational institution that operates the Hospital and other entities, including the Jefferson Medical College (Medical College). As a teaching facility, the Hospital provides

Nevertheless, for reasons not clear from the record, the Hospital did not seek reimbursement for any GME costs during the first eight years of the Medicare program’s existence. During the next 10 years, however, from 1974 through 1983, the Hospital sought and received reimbursement for three categories of salary-related GME costs: (1) salaries paid by the Hospital to Medical College faculty for services rendered to the Hospital’s Medicare patients; (2) salaries paid by the Hospital to residents and interns; and (3) funds transferred internally from the Hospital to the Medical College as payment for faculty time devoted to the Hospital’s GME program. The Hospital did not seek reimbursement during that period for its other, non-salary-related GME costs (namely, the costs of administering the Hospital’s GME programs), and those costs were borne by the Medical College.

In 1983, Congress adopted a more restrictive method of reimbursing hospitals for inpatient medical services, see 42 U. S. C. § 1395ww(d) (1988 ed. and Supp. IV), but it retained the more lenient method of reimbursement for medical education costs. 42 U. S. C. § 1395ww(a)(4) (1988 ed., Supp. IV). In 1984, when the new cost reimbursement regime was implemented, the Hospital reviewed its claim for costs associated with its GME programs to determine whether it was identifying all costs eligible for reimbursement. This review resulted in an increased claim reflecting clerical costs

The Secretary also relied on the community support language in § 413.85(c) as an independent ground for denying the requested reimbursement. According to the Secretary, this language prohibits Medicare reimbursement for educational activities that “have been historically borne by the community.” Ibid. That the Hospital had failed to seek reimbursement for the disputed costs in previous years was, in the Secretary’s view, “evidence of the communit[y’s] support for these activities.” Ibid. “To allow the community to withdraw that support and pass these costs to the Medicare program” would violate the community support principle and would “encourage the community to abdicate its commitment to education to an insurance program intended to provide care for the elderly.” Ibid.

Petitioner filed a petition for review in the District Court seeking reimbursement for the $2,861,247 in GME costs that the Secretary had disallowed. Id., at 10a. On cross-motions for summary judgment, the court ruled in the Secretary’s favor, accepting her interpretation of the anti-redistribution and community support clauses as a reasonable construction of § 413.85(c). Thomas Jefferson Univ. v. Sullivan, CCH Medicare & Medicaid Guide ¶ 40,294, p. 30,959 (ED Pa. 1992). The Third Circuit affirmed without opinion, judgment order reported at 993 F. 2d 879 (1993), thereby creating a conflict with the decision of the Sixth Circuit in Ohio State Univ. v. Secretary, Dept. of Health and Human Services, 996 F. 2d 122 (1993), cert. pending,

Petitioner challenges the Secretary’s construction of § 413.85(c) under the Administrative Procedure Act (APA), 5 U. S. C. § 551 et seq. The APA, which is incorporated by the Social Security Act, see 42 U. S. C. § 1395oo(f )(1), commands reviewing courts to “hold unlawful and set aside” agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U. S. C. §706 (2)(A). We must give substantial deference to an agency’s interpretation of its own regulations. Martin v. Occupational Safety and Health Review Comm’n, 499 U. S. 144 , 150-151 (1991); Lyng v. Payne, 476 U. S. 926 , 939 (1986); Udall v. Tallman, 380 U. S. 1 , 16 (1965). Our task is not to decide which among several competing interpretations best serves the regulatory purpose. Rather, the agency’s interpretation must be given “‘controlling weight unless it is plainly erroneous or inconsistent with the regulation.’” Ibid, (quoting Bowles v. Seminole Rock & Sand Co., 325 U. S. 410 , 414 (1945)). In other words, we must defer to the Secretary’s interpretation unless an “alternative reading is compelled by the regulation’s plain language or by other indications of the Secretary’s intent at the time of the regulation’s promulgation.” Gardebring v. Jenkins, 485 U. S. 415 , 430 (1988). This broad deference is all the more warranted when, as here, the regulation concerns “a complex and highly technical regulatory program,” in which the identification and classification of relevant “criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.” Pauley v. BethEnergy Mines, Inc., 501 U. S. 680 , 697 (1991).

Petitioner challenges the Secretary’s construction of both the anti-redistribution language and the community support

The anti-redistribution clause is contained in the final sentence of § 413.85(c), which states:

“Although the intent of the [Medicare] program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units.” (Emphasis added.)

The meaning of this sentence is straightforward. Its introductory clause defines the scope of educational activities for which reimbursement may be sought: To be eligible for reimbursement, the activity must be one that is “customarily or traditionally carried on by providers in conjunction with their operations.” It is the language that follows, however, that imposes the relevant restriction on cost redistribution. The second clause provides that, notwithstanding the activity for which reimbursement is sought, the Medicare program will not participate in the “redistribution of costs from educational institutions or units to patient care institutions or units.”

The Secretary’s interpretation gives full effect to both clauses of the relevant sentence. The Secretary interprets the regulation to allow reimbursement for costs of educational programs traditionally engaged in by hospitals, but, at the same time, to deny reimbursement for “cost[s] previously incurred and paid by a medical school.” Brief for

The circumstance addressed by the anti-redistribution clause is a hospital’s submission of “increased costs” arising from approved educational activities. The regulation provides, in unambiguous terms, that the “costs” of these educational activities will not be reimbursed when they are the result of a “redistribution,” or shift, of costs from an “educational” facility to a “patient care” facility, even if the activities that generated the costs are the sort “customarily or traditionally carried on by providers in conjunction with their operations.” § 413.85(c). The Secretary’s reliance on a hospital’s own historical cost allocations, along with those of an affiliated medical school, is a simple and effective way of determining whether a prohibited “redistribution of costs” has occurred. Indeed, one would be hard pressed to come up with an alternative method to identify the shifting of costs from one entity to another.

Petitioner advances three separate arguments for not deferring to the Secretary’s interpretation of the anti-redistribution clause. None is persuasive.

First, petitioner asserts that the “clear meaning” of the anti-redistribution clause is to allow reimbursement for the costs of activities traditionally carried on by hospitals (e. g., clinical training of residents and interns), but to deny reimbursement for costs incurred in activities traditionally carried on by educational institutions (e. g., classroom training). Pet. for Cert. 14. In other words, according to petitioner, the redistribution that is prohibited is the redistribution of activities, not the redistribution of costs. Brief for Petitioner 20.

Finally, petitioner contends that we should ignore the Secretary’s interpretation of the anti-redistribution clause because the language of the regulation is “precatory” and “aspirational” in nature, and thus lacking in operative force. See Brief for Petitioner 31-32. We do not lightly assume that a regulation setting forth specific limitations on the reimbursement of costs under a federal program is devoid of substantive effect. That is especially so when, as here, the language in question speaks not in vague generalities but in precise terms about the conditions under which reimbursement is, and is not, available. Whatever vagueness may be found in the community support language that precedes it, the anti-redistribution clause lays down a bright line for distinguishing permissible from impermissible reimbursement: Educational costs will not be reimbursed if they are the result of a “redistribution of costs from educational institutions or units to patient care institutions or units.” § 413.85(c). The Secretary was well within her discretion to interpret this language as imposing a substantive limitation on reimbursement.

It is so ordered.

with whom Justice Stevens, Justice O’Connor, and Justice Ginsburg join, dissenting.

The Court’s opinion reads as if this were a case of model agency action. As the Court views matters, 42 CFR § 413.85 (c) (1993) is “unambiguous,” ante, at 514, and respondent Secretary of Health and Human Services (Secretary) has always been “faithful to the regulation’s plain language,” ante this page. That plain language, according to the Court, required the Secretary to disallow the reimbursement petitioner sought. The Court’s account is hardly an accurate portrayal of this case. When the case is properly viewed, I cannot avoid the conclusion that the Secretary’s construction of § 413.85(c) runs afoul of the plain meaning of the regulation and therefore is contrary to law, in violation of the Administrative Procedure Act, 5 U. S. C. § 706 (2)(A). I therefore respectfully dissent.

The Court holds that § 413.85(c) has substantive content, reasoning that “the language in question speaks not in vague generalities but in precise terms about the conditions under which reimbursement is, and is not, available.” Ante, at. 517. In my view, however, § 413.85(c) is cast in vague aspirational terms, and it strains credulity to read the regulation as imposing any restriction on the reimbursability of the costs of graduate medical education (GME) or other approved educational expenses. On the contrary, subsection (c) appears to be nothing more than a precatory statement of purpose that imposes no substantive restrictions.

Interestingly enough, for the first two decades of the Medicare program’s operation, the Secretary’s fiscal intermediaries, with her acquiescence (if not approval), gave § 413.85(c) precisely the same substantive effect as I would — none. During that entire period, the Secretary never invoked the subsection to deny reimbursement for previously unreimbursed costs, and providers were actually reimbursed for such costs despite § 413.85(c). Indeed, contrary to the Court’s baffling assertion that “petitioner fails to present persuasive evidence that the Secretary has interpreted the anti-redistribution provision in an inconsistent manner,” ante, at 515, one need look no further than petitioner’s brief, see Brief for Petitioner 21-24, to find evidence of such interpretive inconsistency as to both the anti-redistribution and community support principles.

Petitioner received no Medicare reimbursement for any GME costs from 1966 to 1973. Even though the anti-

Yet under the Secretary’s present interpretation of § 413.85(c), petitioner should never have received any GME cost reimbursement because it had not obtained such reimbursement from the beginning of the Medicare program. To the extent the Hospital’s GME costs were previously borne by the Medical School, providing petitioner reimbursement for those costs violated the anti-redistribution principle, as presently construed. See ante, at 513 (“The Secretary interprets the regulation ... to deny reimbursement for ‘costs previously incurred and paid by a medical school’”) (editorial revisions omitted). Indeed, the Provider Reimbursement Review Board (PRRB) explicitly recognized this fact, finding that, on the fiscal intermediary’s interpretation of “redistribution” (adopted by the Secretary below), “[i]n 1974, the [Hospital] commenced shifting costs ... to the Medicare program” and that “[additional cost shifting occurred in 1984 when certain clerical costs of the Medical School were included in the [Hospital’s] cost report.” App.

Moreover, in 1982, the Secretary answered a query from a fiscal intermediary concerning the relationship between the anti-redistribution principle and Intermediary Letter 78-7 with the statement that “allocation of costs to a hospital from a related medical school is governed by Intermediary Letter 78-7.” App. 25. The Court makes much of the fact that the 1982 memorandum did not explicitly mention the anti-redistribution principle. Ante, at 516, n. 4. In so doing, however, the Court overlooks the fact that the fiscal intermediary’s inquiry presented the Secretary with a specific binary choice: Axe approved educational activities previously paid for by an affiliated educational unit either allowable (i. e., reimbursable) hospital costs (as Intermediary Letter No. 78-7 advised) or a prohibited redistribution of costs under § 413.85(c)? By answering the fiscal intermediary’s pointed query with the statement that Intermediary Letter No. 78-7 is controlling on the reimbursability of the costs associated with such activities, see App. 25, the Secretary quite clearly (albeit implicitly) afforded the anti-redistribution principle no substantive effect whatsoever.

To be sure, in 1985 the Secretary issued a memorandum stating, without elaboration, that “[t]he fact that [the anti-redistribution principle] is not mentioned in the [1982] memorandum does not change the basic policy as espoused in [§ 413.85(c)].” Id., at 27 . The 1985 memorandum’s bare reference to the “policy” of § 413.85(c), however, neither disavowed the Secretary’s past interpretation of the regulation nor set forth any alternative interpretation. The Court thus considerably overstates matters in its suggestion that

In view of its unbelabored conclusion that § 413.85(c) imposes substantive limits on the reimbursability of approved educational costs, the Court’s discussion focuses primarily on what substantive import §413.85(c)’s anti-redistribution principle should be read to have. The Court finds the anti-redistribution principle “straightforward” in its meaning— any costs that, at some previous point in time, were carried on the books of an affiliated educational institution cannot subsequently be reimbursed by Medicare. Ante, at 513. For the reasons previously discussed, I would hold that § 413.85(c) cannot reasonably be construed to impose substantive restrictions on the reimbursability of approved educational costs. Nevertheless, if I had to give the principle substantive effect, I could not agree with the Court’s sweeping construction of the principle. In my view, the Court’s reading is premised on a distortion of the text of the regulation enunciating the anti-redistribution principle, and it is the text, of course, which must be given controlling effect. See Bowles, 325 U. S., at 414 (holding that an agency’s interpretation of its own regulation must comport with “the plain words of the regulation”).

Under the relevant portion of § 413.85(c), it is the type of educational activity engaged in that determines whether or not reimbursement is proper: “[T]he intent of the [Medicare] program is to share in the support of educational activities customarily or traditionally carried on by providers in

A prohibition against shifting the costs of educational units (for example, medical or nursing schools) to patient care units was necessary because of the Medicare program’s related-organization rule, which provides that “costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are includable in the allowable cost of the provider.” 42 CFR § 413.17 (a) (1993). In light of the related-organization rule, §413.85(a)’s recognition of educational costs as reimbursable costs created the distinct possibility that many, if not most, of the costs arising from educational unit activities could be shifted to affiliated Medicare providers (and therefore to the Medicare program) because, by definition, such units engage in educational activities. Cf. 57 Fed. Reg. 43659 , 43668 (1992) (expressing the Secretary’s concern that “Medicare payment for medical education costs should not result in a redistribution of costs from the educational institution to the provider”). Since Medicare is primarily intended to fund health care for the elderly and

The Court therefore errs in reading the term “redistribution” wholly divorced from the context in which it appears. See ante, at 513 (suggesting the first clause of the anti-redistribution principle is not even “relevant” to an understanding of the second phrase). In my view, “redistribution” can only be properly understood in light of the remainder of the sentence in which it appears and in light of the related-organization rule, because interpreting a statute or regulation “is a holistic endeavor.” United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U. S. 365 , 371 (1988). Viewed in the proper textual context, §413.85(c)’s anti-redistribution principle simultaneously expresses an intent to fund educational activities customarily conducted by teaching hospitals and disallows reimbursement for costs incurred by their affiliated educational units in conducting educational programs not customarily or traditionally engaged in by such hospitals. The Secretary’s contrary interpretation, in my view, is unworthy of deference. Cf., e. g., Bowles, supra, at 414.

There can be no question that the GME activities for which petitioner seeks reimbursement are customarily or traditionally engaged in by teaching hospitals. As the District Court cogently explained in Ohio State Univ. v. Secretary, U. S. Dept. of Health and Human Services, 777 F. Supp. 582 (SD Ohio 1991), aff’d, 996 F. 2d 122 (CA6 1993), cert. pending, No. 93-696:

“In the case of graduate medical education, it would be customary and traditional for a teaching hospital to employ qualified physicians in various medical specialties to select and supervise the interns and residents

enrolled in the educational program. These physicians would need clerical and administrative staff, office space and supplies to carry out their function[s]. Their salaries, the salaries of their clerical and administrative staffs, and the cost of their office space and supplies would all be part of the cost of the educational activity which ultimately contributes to the quality of patient care in the hospital.” 777 F. Supp., at 587 .

As a result, the anti-redistribution principle provides no basis for denying petitioner Medicare reimbursement for the full level of its GME costs, less tuition revenues. See §§ 413.85(a), (g).

I therefore wholeheartedly agree with the PRRB that “[t]he fact that [the Hospital] did not fully identify all of the costs associated with its GME programs in prior years does not prohibit the correction of this [cost accounting] error in the cost reporting period in contention.” App. to Pet. for Cert. 58a-59a. In ruling to the contrary, the Court arbitrarily subjects similarly situated Medicare providers, with identical levels of reimbursable GME costs, to disparate reimbursement, simply because one provider may have forgone reimbursement to which it was plainly entitled as a consequence of its cost accounting procedure’s failure to identify all of the provider’s reimbursable costs. Although “[m]en must turn square corners when they deal with the Government,” Rock Island, A. & L. R. Co. v. United States, 254 U. S. 141 , 143 (1920) (Holmes, J.), the manifest injustice of the Court’s result should be apparent.

B

Because, unlike the Court, I do not believe the anti-redistribution principle may reasonably be read to bar petitioner’s claim for reimbursement for non-salary-related GME costs, I must also address petitioner’s challenge to the Secretary’s construction of the community support principle. Petitioner argues that interpreting the term “community

Section 413.85(a) authorizes a provider to “include its net cost of approved educational activities” in its allowable Medicare costs and provides that the “net cost” of such activities is to be “calculated under paragraph (g) of this section.” Section 413.85(g), in turn, defines “[n]et cost of approved educational activities” as the provider’s “total costs of these activities,” less “revenues it receives from tuition.” Section 413.85(g) therefore clearly establishes the level of reimbursement a provider may expect for approved educational costs, and the only source of funding that is to be offset against such costs is tuition revenues. No other potential sources of funding for GME activities are included in the offset required by § 413.85(g). Thus, the Secretary’s interpretation of the community support principle as requiring, in effect, all non-Medicare sources of funding to be offset against total educational cost is flatly inconsistent with §§ 413.85(a) and (g).

The plain implication of § 413.85(g) is confirmed by its regulatory history. Cf. Payne, 476 U. S., at 941 . In 1984, the Secretary amended the subsection’s predecessor to eliminate the requirement that “grants” and “specific donations” be offset against educational costs actually incurred. See 49 Fed. Reg. 234 , 296, 313 (1984) (amending 42 CFR § 405.421 (g) (1983)). See also 48 Fed. Reg. 39752 , 39797, 39811 (1983) (withdrawing 42 CFR § 405.423 (1982) relating to offsets for certain grants and gifts). The Secretary’s construction of the community support principle essentially reintroduces grants and specific donations into the reimbursement calculus. The Secretary has thus rendered the 1984 amend

Consequently, the Secretary’s construction of the community support principle to impose a substantive restriction on the reimbursability of approved educational expenses is inconsistent with the regulation. As such, the construction is unworthy of deference. See, e. g., Stinson, 508 U. S., at 45 .

Ill

For the foregoing reasons, the Secretary acted contrary to law, within the meaning of 5 U. S. C. § 706 (2)(A), in construing 42 CFR § 413.85 (c) (1993) as denying Medicare providers the right to receive reimbursement for otherwise eligible educational costs simply because the costs had not previously been reimbursed by Medicare. I would therefore reverse the judgment of the Court of Appeals. I respectfully dissent.