UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


PRESBY MED CTR

v.

SHALALA, DONNA E.


98-5233a

D.C. Cir. 1999


*	*	*


Tatel, Circuit Judge: This case involves Medicare's  scheme for
reimbursing teaching hospitals for the costs of  graduate medical
education. After the Secretary of Health  and Human Services denied
appellant teaching hospital's  petition for increased reimbursement of
such costs, appellant  sued in federal district court, challenging the
legality of an  interpretive rule requiring the requested increase to
be sup- ported by contemporaneous documentation, and alleging that  an
error in the administrative proceedings prejudiced its  claims.
Finding the interpretive rule consistent with the  Department's
regulations, and finding no error in the admin- istrative proceedings,
we affirm the district court's grant of  summary judgment for the


I


Medicare reimburses teaching hospitals for the cost of  graduate
medical education ("GME"), including physician  time attributable to
instruction and supervision of interns and  residents. See 42 U.S.C. s
1395ww(h) (1994). Prior to 1986,  teaching hospitals claimed GME
reimbursement by preparing  annual cost reports showing the portions
of physician time  attributable to research, patient care, and
teaching and super- vising interns and residents. To obtain approval
of these  expenses, hospitals submitted cost reports to fiscal
intermedi- aries, usually insurance companies under contract with the 
Department of Health and Human Services. The Depart- ment required
each hospital to support its claim for GME  reimbursement with "a
written allocation agreement between  the [hospital] and the physician
that specifies the respective  amounts of time the physician spends"
on research, patient  care, and teaching and supervision. 42 C.F.R.  s
405.481(f)(1)(i) (1985). Each hospital also had to "[m]ain- tain the
time records or other information it used to allocate 


physician compensation in a form that permits the informa- tion to be
validated by the intermediary," id. s 405.481(g)(1),  and to "[r]etain
each physician compensation allocation, and  the information on which
it is based, for at least four years  after the end of each cost
reporting period to which the  allocation applies," id. s


In 1986, Congress created a new GME reimbursement  formula for cost
reporting periods beginning on or after July  1, 1985. See
Consolidated Omnibus Budget Reconciliation  Act of 1985, Pub. L. No.
99-272, 100 Stat. 82, 171-75 (1986)  (codified as amended at 42 U.S.C.
s 1395ww(h) (1994))  ("GME statute"). Under the new scheme, the
Secretary  determines for each hospital "the average amount [of GME 
costs] recognized as reasonable" per full-time resident during  a
designated "base period," defined as "the hospital's cost  reporting
period that began during fiscal year 1984." 42  U.S.C. s
1395ww(h)(2)(A). Applying a statutory formula to  each hospital's
base-year per-resident amount, the Secretary  then calculates the
hospital's GME reimbursement for subse- quent cost-reporting periods.


In 1989, the Department issued regulations establishing  procedures for
determining the "reasonable" amount of base- year GME costs for each
hospital. See 54 Fed. Reg. 40,286  (1989) (codified at 42 C.F.R. s
413.86 (1998)). (From here on,  all "C.F.R." citations refer to
current regulations unless  otherwise noted.) The GME regulations
direct fiscal inter- mediaries to reexamine the cost reports that
hospitals had  submitted for the base year and to reaudit "hospitals
whose  base-period GME costs appear to include misclassified or 
nonallowable costs or whose per resident amounts appear to  be
unreasonably high or low." Id. at 40,288; see 42 C.F.R.  s
413.86(e)(1). To prevent over-reimbursement, the regula- tions
instruct intermediaries to deduct from each reaudited  hospital's
base-year GME amount any operating costs mis- classified as GME costs.
See id. s 413.86(e)(1)(ii)(B). To  prevent under-reimbursement--the
issue in this case--the  regulations authorize intermediaries, "[u]pon
a hospital's re- quest," to include in the base-year GME amount any


costs misclassified as operating costs in the base-year cost  report.
See id. s 413.86(e)(1)(ii)(C).


Soon after the reauditing process began in 1989, it became  clear that
many hospitals no longer had contemporaneous  physician time records
to support GME costs claimed in the  base year. Applicable regulations
had required hospitals to  keep such records for only four years after
the relevant cost- reporting period. See 42 C.F.R. s 405.481(g)
(1985). The  Department therefore issued a special GME documentation 
policy for reaudits, first as an official instruction to fiscal 
intermediaries, see Health Care Financing Admin., Graduate  Medical
Education: Documentation to Support the Physician  Cost/Time
Allocation (1990) ("HCFA Instruction"), and then  as a published
notice in the Federal Register, see 55 Fed.  Reg. 35,990, 36,063-64
(1990). The parties agree that this  documentation policy is an
interpretive rule. See 5 U.S.C.  s 553(b)(A).


The interpretive rule provides the following "exception to  the
established record-keeping policy":


As an equitable solution to the problem of the nonexis- tence of
physician allocation agreements, time records,  and other information,
we are allowing providers to  furnish documentation from cost
reporting periods subse- quent to the base period in support of the
allocation of  physician compensation costs in the GME based peri-
od.... It is only in the absence of base period docu- mentation that
subsequent documentation should be con- sidered as a proxy for base
period documentation....


55 Fed. Reg. at 36,063-64. Where a hospital legitimately  explains the
absence of base-year documentation, the inter- mediary must advise the
hospital that "it may request the  special exception described above."
Id. at 36,064 col.1. Hos- pitals requesting the exception must submit
"the documenta- tion from the subsequent cost reporting period closest
to the  direct GME base period." Id. If such records are also 
unavailable, the hospital may support its base-year GME 


costs by "perform[ing] a 3-week time study of all physicians'  time
for a period to be specified by the intermediary." Id.


Of particular importance to this case, the interpretive rule  states as
follows: "In no event will the results obtained from  the use of the
records from a cost reporting period later than  the base period serve
to increase or add physician compensa- tion costs to the costs used to
determine the per resident  amounts." Id. The rule concludes:


We would stress that the use of documentation from  the current year or
a subsequent year is, at best, persua- sive evidence rather than
conclusive evidence [of base- year GME costs]. Accordingly, if the
intermediary be- lieves that any of the changes or modifications
distort the  reliability of the data, it will make whatever
adjustments  are necessary to ensure an accurate cost allocation. In 
addition, the intermediary will prepare a written state- ment
documenting the facts and its conclusions concern- ing how the
information distorts the realiability [sic] of  the data and why the
data should not be relied upon.  Also, the intermediary will explain
why its adjustments  are appropriate. This statement will become part
of the  record as it may be used to support any action taken in 


55 Fed. Reg. at 36,064 col.2.


Appellant Presbyterian Medical Center is a teaching hospi- tal whose
GME base period is the fiscal year that ended on  June 30, 1985.
Presbyterian received notice of reimburse- ment for that
cost-reporting period in September 1988. The  notice stated that the
Department could re-examine the 1984- 85 cost-reporting period at any
time up to three years after  the date of the notice (i.e., until


Acting pursuant to the GME statute and regulations, Pres- byterian's
fiscal intermediary, Aetna Life Insurance Co.,  reaudited the
hospital's 1984-85 cost report in 1990. Aetna  mailed Presbyterian a
copy of the HCFA Instruction. Short- ly thereafter, Aetna sent
Presbyterian a progress report,  noting that the hospital failed to
provide any documentation  supporting its 1984-85 cost report.


of the HCFA Instruction, Aetna warned that without docu- mentation, it
would remove all physician compensation from  Presbyterian's base-year
GME costs. This time Presbyterian  responded. It sent Aetna two types
of non-contemporaneous  documentation: physician time records for
fiscal years 1986- 88 and a three-week physician time study for the
period from  October 1 to October 21, 1990.


After completing the reaudit, Aetna set Presbyterian's  base-year GME
reimbursement rate at the level the hospital  originally claimed in
its 1984-85 cost report. In doing so it  rejected, without written
explanation, Presbyterian's request  for an additional $828,000 in GME
costs that had allegedly  been misclassified as operating costs in the
base-year cost  report. Beyond the 1986-88 time records and the 1990
time  study, the hospital failed to submit any documentation to 
support its request.


The Provider Reimbursement Review Board reversed Aet- na's
determination. See Presbyterian Med. Ctr., 95-D41,  Docket No.
91-2779M (PRRB 1995). Holding that the inter- pretive rule violates
the GME statute and regulations, the  Board refused to enforce the
prohibition on using non- contemporaneous records during reaudit to
support GME  costs exceeding those originally claimed in the base
year.  See id. at 8-9. According to the Board, Presbyterian's "later 
period proxy data"--in particular, the 1990 time study-- adequately
supported the GME increase. Id. at 9.


The Health Care Financing Administration, acting on be- half of the
Secretary, reversed the Board. See Presbyterian  Med. Ctr., Review of
PRRB Decision No. 95-D41 (HCFA  1995). Reaffirming the policy that
additional base-year GME  costs claimed during reaudit must be
supported by contempo- raneous documentation, and finding no such
documentation in  the record, HCFA denied Presbyterian's requested GME
 increase. See id. at 11-12.


Presbyterian filed suit in the United States District Court  for the
District of Columbia, arguing (1) that the interpretive  rule violates
the GME statute and regulations; (2) that the  administrative
proceedings were tainted by prejudicial error 


due to Aetna's failure to provide Presbyterian a written  report
explaining why it denied the requested GME increase;  and (3) that the
decision was arbitrary and capricious because  no statute or
regulation required the hospital to keep its 1984  records more than
four years. The district court rejected  each claim and granted
summary judgment for the Secretary.  See Presbyterian Med. Ctr. v.
Shalala, No. 95-1939 (D.D.C.  Apr. 21, 1998) (memorandum opinion &
order) ("Mem. Op.").  Applying Chevron deference, the district court
concluded that  the interpretive rule conflicts with neither the GME
statute  nor the GME regulation. See id. at 7-12. Although "some- what
troubled by the intermediary's failure to provide the  hospital with a
written report" explaining its denial of Presby- terian's requested
increase, the court determined that the  hospital "ha[d] not
demonstrated any way in which it was  harmed" by the alleged error.
Id. at 7. The court also said  that Presbyterian "logically should
have kept its 1984 records  until at least September 1991," pointing
out that in Septem- ber 1988 the hospital had received a reimbursement
notice for  the base-year cost-reporting period which stated that the 
Department could reopen this period for review at any time  within the


On appeal, Presbyterian challenges the district court's rul- ing that
the interpretive rule does not violate the GME  regulations, as well
as its determination that Aetna's failure  to issue a written report
was not prejudicial. Reviewing the  district court's decision de novo,
see Independent Bankers  Ass'n of America v. Farm Credit Admin., 164
F.3d 661, 666  (D.C. Cir. 1999), we consider each claim in turn.


II


In evaluating whether an agency has permissibly interpret- ed its own
regulation, we owe the agency "substantial defer- ence." Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512  (1994). We give the
agency's interpretation "controlling  weight unless it is plainly
erroneous or inconsistent with the  regulation." Bowles v. Seminole
Rock & Sand Co., 325 U.S.  410, 414 (1945).


The regulations nowhere specify what documentation is  required to
support a requested increase in base-year GME  costs. Although the
Department asserts that section  413.86(j)(2)(ii) (now codified at 42
C.F.R. s 413.86(k)(2)(ii))  requires "sufficient documentation" to
support a GME in- crease in the reaudited base year, that requirement
actually  applies to requests for adjustments in reimbursement rates 
for "the rate-of-increase ceiling base year or prospective  payment
base year." 42 C.F.R. s 413.86(k)(2)(i). Presbyteri- an claims that
the interpretive rule, by allowing non- contemporaneous records to
support GME costs claimed in  the base-year cost report, while
requiring contemporaneous  records to support GME costs misclassified
as operating  costs, frustrates the regulatory goal of ensuring "an
'accurate'  determination of providers' 1984 GME costs." Regions Hosp.
 v. Shalala, 118 S. Ct. 909, 914 (1998) (citing Department's  proposed


We disagree. GME costs claimed in the base year have  already gone
through a verification process requiring contem- poraneous
documentation. See 42 C.F.R. s 405.481(f)(1)(i)  (1985). Additional
GME costs claimed during reaudit have  not. Because "later year
records [are] inherently less reli- able," and because "hospitals
ha[ve] significant incentives to  inflate their GME costs in the base
year," Mem. Op. at 10;  see 55 Fed. Reg. at 35,064 col.2
(non-contemporaneous rec- ords are, "at best, persuasive evidence
rather than conclusive  evidence"), we think the interpretive rule, by
prohibiting non- contemporaneous records from supporting GME costs
never  supported by contemporaneous records, reasonably fur-
thers--not frustrates--" 'accurate' determination" of GME  costs.
Regions Hosp., 118 S. Ct. at 914. Because nothing in  "the
regulation's plain language or ... the Secretary's intent  at the time
of the regulation's promulgation" compels an  alternative reading, we
defer to the agency's interpretation.  Thomas Jefferson, 512 U.S. at
512; see id. ("This broad  deference is all the more warranted when,
as here, the  regulation concerns 'a complex and highly technical
regulato- ry program,' in which the identification and classification


entail the exercise of judgment grounded in policy con- cerns.' ")
(citations omitted).


Relying on the Department's acknowledgment that "in  many cases ...
[contemporaneous] records no longer exist  for the (GME) base period,"
HCFA Instruction at 1; see 55  Fed. Reg. at 36,063 col.3 (noting that
42 C.F.R. s 405.481(g)  (1985) "only require[d] the retention of [such
records] for four  years after the end of each cost reporting
period"), Presbyte- rian next argues that the interpretive rule
effectively nullifies  the regulatory provision allowing hospitals to
claim base-year  GME costs misclassified as operating costs, see 42
C.F.R.  s 413.86(e)(1)(ii)(C). We agree with the district court that
on  the facts of this case, this argument is without merit. Pres-
byterian's September 1988 notice of reimbursement for the  base-year
cost-reporting period clearly stated that the De- partment could
re-examine this period at any time within the  next three years. The
hospital "logically should have kept its  1984 records until at least
September 1991." Mem. Op. at 12.


III


We turn to Presbyterian's claim of prejudicial error. It  argues that
the Department's interpretive rule required Aet- na to explain in
writing why it denied the hospital's requested  GME increase.
According to the hospital, had it known that  Aetna considered its
1990 time study and 1986-88 time rec- ords inadequate, it would have
submitted physician time  allocation agreements, so-called "339s,"
from the base-year  cost-reporting period instead. The absence of a
written  explanation, Presbyterian claims, caused it to forgo
producing  the 339s during the administrative proceedings. Relying on 
the rule of prejudicial error, see 5 U.S.C. s 706; Small  Refiner Lead
Phase-Down Task Force v. EPA, 705 F.2d 506,  521 (D.C. Cir. 1983)
(requiring courts to reverse agency  actions if there is "a
possibility that the error would have  resulted in some change in the
final rule") (emphasis omit- ted), the hospital argues that the
district court should have  reversed the Secretary's decision.


Presbyterian's argument fails for several reasons. To be- gin with, we
find nothing inappropriate in Aetna's failure to  issue a written
explanation. The interpretive rule requires  intermediaries to prepare
written statements when they de- termine that non-contemporaneous
documentation submitted  in a particular case is inadequate due to
specific defects that  "distort the reliability of the data." 55 Fed.
Reg. at 36,064  col.2. According to the rule, the written statement
"docu- ment[s] the facts and [the intermediary's] conclusions con-
cerning how the information distorts the realiability [sic] of  the
data and why the data should not be relied upon," and  "explain[s] why
[the intermediary's] adjustments [to the data]  are appropriate." Id.
As Presbyterian acknowledges,  Aetna denied its request for additional
base-year GME  costs because the supporting documents were non-
contemporaneous--not because they incorporated "changes  or
modifications [that] distort the reliability of the data" or  because
they needed "adjustments" to improve their accura- cy. Id. We agree
with the Department that the written  statement requirement is
inapplicable where, as here, an  intermediary finds a set of records
categorically inadequate  to support an increase in base-year GME


Equally unpersuasive is Presbyterian's claim that without a  written
explanation, it had no way of knowing that its failure  to produce
contemporaneous base-year records was the rea- son Aetna denied its
requested GME increase. As the dis- trict court pointed out, Aetna
twice sent the hospital a copy of  the HCFA Instruction during the
reaudit. See Mem. Op. at  4-5. That Instruction states, in the only
underlined sentence  on the first page: "In no event will the results
obtained from  the use of time studies or a subsequent year's data
serve to  increase the amount of physicians' cost originally allocated
to  the GME cost center." HCFA Instruction at 1. Moreover,  the
district court found that "the reasons for the intermedi- ary's
decision were repeatedly explained to the hospital dur- ing the
administrative process." Mem. Op. at 7.


In direct tension with its claim that it had no idea why  Aetna denied
its requested GME increase, Presbyterian fur- ther argues that its
failure to submit base-year 339s resulted 


from Aetna's erroneous assertions that 339s are insufficient 
contemporaneous documentation to support an increase in  base-year GME
costs. But whether or not 339s are suffi- cient, if Presbyterian in
fact believed during the reaudit that  339s could support base-year
GME costs, then it should have  put those documents into the
administrative record in order  to preserve its claim. In doing so it
could have relied on  Abbott Northwestern Memorial Hospital v. Blue
Cross &  Blue Shield Ass'n, Medicare & Medicaid Guide (CCH) p 43,- 136
(Feb. 2, 1995). Issued four months prior to the Provider 
Reimbursement Review Board's decision in this case and  seven months
prior to the Secretary's reversal, Abbott deter- mined that 339s
together with a later-year time study could  support a hospital's
base-year GME costs that were misclassi- fied as operating costs. See
id. at 43,653. Presbyterian's  reliance on Abbott in this appeal is
too little too late. Not  only does the hospital fail to cite the case
until its reply brief,  see Doolin Sec. Sav. Bank v. Office of Thrift
Supervision, 156  F.3d 190, 191 (D.C. Cir. 1998) (refusing to consider
arguments  raised only in the reply brief), but Abbott establishes at
most  only that Presbyterian was potentially harmed by its failure  to
submit 339s, not that the harm flowed from anything other  than the


IV


The district court's grant of summary judgment for the  Secretary is
affirmed.


So ordered.