Mercy Catholic Med. Ctr. v. Thompson

PRECEDENT IAL

UN ITED STATES
COURT OF APPEALS
FO R THE TH IRD CIR CU IT

No . 03 -2292

ME RC Y C AT HO LIC
MED ICAL CENTER ,
Appe l lan t

v .

TOMMY G . THOM P SON ,
SECRETARY OF HEALTH
AND HUM AN SERV ICES

On Appea l f rom the
Un i ted S ta te s D i s t ric t Cou r t fo r the
Easte rn D istrict of P enns ylvania
D .C . C iv i l Ac t ion No . 02 -cv -00419
(Hon orab le R ona ld L . Buckw a l ter)

A rgued Ap r i l 19 , 2004

Be for e: SCIR ICA , Ch ie f Judge,
GARTH an d BR IGHT * , C i rcu i t Judge s

(F i led : Augu s t 18 , 2004 )

*The Hono rab le M yron H . Brigh t,
Un i ted States C ircuit Judge for the Eigh th
Jud ic ia l C i rcu i t , s i tt ing by de s igna tion .

Ma rk H . Ga l lan t , E squ i re (A rgued )
Cozen & O ‘Conno r
The A t r ium
1900 Ma rke t S t reet
Ph i lade lph ia , Penn sy lvan ia 19103
A t to rney fo r Appe l lan t

M ichae l Leona rd , E squ i re (A rgued )
Depa r tmen t o f Hea lth & Human Se rv ice s
Of fice o f the G enera l Cou nsel,
Reg ion III
The Pub l ic Ledge r Bu i ld ing , Su i te 418
150 Sou th Independ ence M a l l Wes t
Ph i lade lph ia , Penn sy lvan ia 19106
A t to rney fo r Appe l lee

OP IN ION OF THE COURT

SC IRI CA , Ch ie f Judge.
A t issue is an acu te c are hosp i ta l’s
r e im b u r sem e n t
f r om M e d i c a r e
f o r
grad uate med ica l tra in ing . Me rcy Ca tholic
M ed ica l Cen te r1 seek s reve r sa l o f the
P rov ide r Re imbu r semen t Rev iew Board ’s
dec i s ion deny ing rec las s i f ica t ion of certain
grad uate med ical ed ucatio n cos ts2 and its
r e f u s a l
t o
a d j u s t M e d i c a r e ’ s
re imbu rs em en t o f ope ra ting co s ts . The

1M er cy Ca tho l ic Med ica l Cen te r i s an
acute care ho sp i ta l loca ted in Ph i lade lph ia .

2Gra duate M edica l Edu cation costs
re fe r to M edicare payme nts m ade to
ho sp itals to suppo r t Med ica re ’ s sha re o f
costs re la ted to med ica l t ra in in g pr og ram s
and
to sup port h igher p atient co sts
a s soc ia ted w i th the tra in ing and educa t ion
o f res iden ts .

Board a l so found Me rcy Ca tho l ic Med ica l
C e n t e r d i d n o t p ro v i d e
s u f f ic i e n t
documen ta t ion to ju st i fy a rec la s s i fica tion
and rec i s ion of cos ts . Th e D is tr ic t Cou r t
a f f i rmed the P rov ide r Re imbu rsemen t
Rev iew Boa rd ’ s dec is ion and g ran ted
summ ary judgm en t to the Sec re tary o f the
D e p ar tm en t o f H ea l th and Human
Se rv ice s. We w i l l reve r se and remand .
I.
A . S ta tu to ry Ba ckg round
The f e de ra l M e d ic a re p ro g ram ,
adm in i s te red by the Cen ters for M ed icare
and Med ica id Se rv ice s3 o f the Un i ted
S ta te s De partm ent of He alth and Human
Se rv ices , i s the la rges t pub lic p rog ram
f inanc ing health ca re se rv ice s fo r the aged
and d isab led . Ho sp i ta ls tha t p rov ide
s e r v ic e s
t o M e d i c a r e p a ti e n ts a re
re imbu r sed for the ir expe nses u nder Title
XV II of the Soc ial S e cu r i ty Ac t (the
“M ed icare Ac t” ) , 42 U .S .C . § 1395 e t seq.
Par t A o f the M ed i c are Ac t au tho r ize s
p a ym e n t
t o p a r t i c i p at i n g h o sp i t a ls
(“pro v ide r s” ) fo r the ir d i rec t and ind i rec t
costs o f p roviding
to
inpatie nt care
bene f ic ia r ies . 42 C .F .R . § 413.9 (a) , (b) .
M e d i c a r e a l s o
re im b u rs e s
t ea ch in g
hosp itals for the costs o f grad uate med ica l
educa t ion , inc lud ing phy s ic ian time fo r
in s truc t ing and supe rv is ing in te rn s and
re s iden t s . 42 U .S .C . § 1395ww (h ).

3Cen te rs for M edica re and M edica id
Se rv ice s wa s fo rme r ly known a s the
Hea l th Ca re F inanc ing Adm in i s tra t ion .

2

Me d icare serv ices are fu rn i shed by
“prov iders o f se rv ices”4 tha t have en te red
in to p rov ide r a greem ents w ith
th e
Secre tary o f the Un i ted S ta te s Depa r tmen t
o f He alth and Human Se rv ice s . 42 U .S.C .
§§ 1395x(u ), 1395 c c. To rece ive paymen t
f rom the Secre tary , prov iders are requ i red
to com ply with the p rov ide r ag reemen t , a s
we ll a s a l l Med ica re
s ta tu te s and
regu la t ions . 42 U .S .C . § 139 5cc(b)(2) .
incept ion , M ed icare
i t s
F rom
re imbu r sed ho sp i ta l s fo r a l l rea sonab le
incu r red co s t s re la ted to p rov id ing med ica l
care to pa t ien t s . The Med ica re Ac t de f ine s
“reaso nable cost” a s “the c ost a c tu ally
incu rred ,” less any costs “ unn ecess ary in
the effic ient d e l iv ery of ne eded health
serv ices .” 42 U .S .C . § 139 5x(v)(1)(A ) .
Unde r the h i sto r ica l sys tem o f reaso nable
cos t re imbu r semen t , no re imbu rsemen t
d i s tinc t ion tu rned on whe th er cos ts we re
repo r ted as op erating costs ( the day -to -day
expen se s incu r red in runn ing a bus iness )
o r g radua te med ica l educa t ion cos ts .
M edica re paid its fu l l pro ra ta share of all
a ll ow ab le g radua te med ica l educa t ion
costs and o peratin g co s t s actua l ly incu r red ,
con s i s ten t w i th the sta tu to ry requ i remen t
p reven t ing sh i f ting the co s t s o f se rv ices
i n c u r re d o n b e h a l f o f M e d i c a r e
bene f ic ia r ie s to o the r pa t ien t s o r th ird party
payers . 42 U .S .C . § 139 5x(v)(1)(A ) .

4A s de f ined by 42 U.S .C. § 139 5x( u), a
“p rov ide r o f se rv ice s” m eans “ a hos pital,
c r i tica l acc ess h osp ital, sk il led nu rs ing
f a c i l i t y , c o m p r e h e n s i v e o u t p a t i e n t
rehab il i ta t ion fa cil ity, h om e h ea lth ag en cy,
[or a] h osp ice p rog ram .”

In 1982 , Cong re s s mod i f ied the
Me d icare p rog ram to requ i re hosp i t als to
rende r serv ices mo re eco nom ically. In the
Tax E qu i ty and F i sca l Re spon s ib il i ty Ac t
o f 198 2 (“ TE FR A” ), Pu b. L . N o . 97 -248 ,
C ong ress amended the Med ica re Ac t by
impo s ing a ce i ling on the ra te -o f – inc rease
o f inpatie nt op erating costs recove rab le by
a hos pital . Un der T EF RA , costs w ere still
re imbu r sed on a rea sonab le co s t ba si s , bu t
sub ject to ra te -o f – inc rea se l im i t s . The ra te –
o f – inc rease limit wa s compu ted acco rd ing
to a “ ta rg e t amoun t ,” wh ich , in tu rn , wa s
ca lcu la ted accord ing
to a hosp i ta l’s
allow able ne t M ed icare oper ating c osts in
the hos pital ‘s bas e year . See 42 U.S .C. §
1395w w(b) ; 4 2 C .F .R . § 413 .40 (c) (2002) .
In 1983 , Cong re s s amended the
M ed icare Ac t aga in , e s tab li sh ing a
p r o s p e c t iv e p a y m e n t
s y s t e m
f o r
re imbur s ing inpa t ien t ope rat ing co st s o f
acute care hos pital s. See 42 U .S.C . §
1 3 95 w w ( d ) .
H o s p i t a ls n o w a r e
re imbu r sed on the ba s is of pro sp e c tively
de te rm ined na t ional and reg iona l ra te s fo r
each d i scha rge , ra the r than on the ba s i s o f
retrosp ective ly determ ined
re ason able
costs
incurr ed.
U nder
this sys tem ,
paymen t is mad e at a p redete rmine d rate
fo r each ho sp i ta l d ischarge , acco rd ing to
the pa t ien t ‘s d iagnos is .
T he p rospec t ive paymen t sys tem
wa s phas ed in ov e r fou r yea r s , du r ing
wh ich ho sp ita l s we re
re imbu r sed a
comb ina t ion o f the p ro spec t ive paymen t
sy stem hosp i ta l-spec if ic ra t e and
the
p ro spec tive payme nt system natio n a l and
reg iona l ra tes . A ho sp ita l’s spec ific rate is
ba sed on i t s ope ra t ing co s t s du ring a

3

particu lar b a se yea r. See 42 C .F .R . §§
412 .71 , 412 .73 . Fo r mo s t ho sp ita l s the
p ro spec tive paymen t sy stem ba se yea r wa s
FY 1983 . The re fo re , fo r the f i r st fou r
years o f the pro spe ctive paym ent s ystem , a
r e im b u r s em e n t w a s
h o s p i t a l ’ s
s t i l l
s ign if i c antly a f fec ted by
i ts a c tu al
ope ra t ing co s t s in the FY 1983 ba se year .
A s pa r t o f the p ro spec tive paymen t sy stem
t r an si t ion p e r iod ,
th e H e a l th C a r e
F inanc ing Adm in i st ra tion p romu lga ted the
Con s i s tency R u le , wh ich required gra duate
med ica l educ ation c osts fo r co s t repo r t ing
pe r iod s dur ing the p ro spec t ive paymen t
sy stem t ran si t ion pe r iod be de te rmine d in
a manne r “con s is ten t w i th the trea tmen t o f
these co s t s fo r pu rpo se s o f de te rm in ing the
hosp ital-spec ific . . . rate.” 42 C .F.R . §
412 .113 (b)(3) . In e f fec t , the Cons is tency
Ru le
locked
in
the c la s s i fica tion o f
grad uate med ica l educa t ion co s t s and
ope ra t ing co s t s from
the p ro spec t ive
paymen t sy stem ba se yea r (FY 1983 )
fo rwa rd .
The TEFRA and p ro spec tive
payment sy stem re imbu r semen t s app lied
only to inpa tient op erating costs. G radu ate
med ica l educa t ion co s t s we re spec if ically
exc luded f rom the de f in i t ion o f “ inpa tien t
o p e r a t i n g c o s t s . ”
4 2 U . S .C . §
1395w w(a)(4) , 1395w w (d ) (1 ) (A ) . Thus ,
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
con t inued to be re imbu r sed unde r the
p rev iou s rea sonab le co s t sy s tem until
1986 .

In 1986 , Cong ress en ac ted a
sepa rate p ro s pe c ti ve p aym en t sys tem fo r
grad uate med ica l educa t ion costs f or all
cos t repo r ting pe r iod s beg inn ing on o r

a f te r July 1 , 198 5.
4 2 U .S.C . §
1395w w(h) . Cen t ra l to th is new paymen t
sys tem wa s the de term ina t ion o f the base
ave rage per-re siden t amou n t (“AP RA ”) .
The APRA i s de te rm ined by d iv id ing the
ho sp ita l’s ba se yea r g radua te med ica l
educa tion co s t s by the numbe r o f fu ll – time –
equ iva len t
the
re s iden t s wo rk ing a t
hosp ita l i n the ba se year. T he gr adua te
med ica l educa t ion ba se yea r
i s
the
hosp i ta l’s f i sca l yea r beg inn ing du ring the
fede ra l fisc al year 198 4. 42 U.S .C. §
1395w w(h)(2)(A ) . Fo r mos t Pen nsylvan ia
hosp i ta ls , th i s i s the f i scal yea r ended June
30 , 1985 . The APRA then se rve s a s the
base f ig u re in th e fo rm u la to calcu late
g r a d u a t e m e d i c a l
e d u c a t i o n
reimb ursem ents fo r 1985 and fu tu re cos t
yea rs . 42 U .S .C . § 139 5ww (h)(2)(C) , (D) ;
1395w w(h)(3) .
1 . D e te rm i ni ng th e APRA .
In 1990 ,
to a s su re max imum
accu racy o f each ho sp i t al ’s APRA
de te rm ina t ion , the Secretary requ ired fisca l
in te rmed ia r ie s5 to reau dit all ho sp i ta ls ’

5The Med ica re p rog ram u s e s “ f i sca l
i n t e r m e d i a r i e s , ” g e n e r a l l y p r i v a te
in su rance comp an ies , to perform many o f
the p rog ram ‘s adm in is t ra tive func t ions .
F i sca l in te rmed ia r ie s a re re spon s ib le fo r
de te rm in ing the am oun t of pa yments to be
made to p rov ide r s . In the p re sen t case ,
Me rcy Ca tho l ic Med ica l Cen te r’ s f isca l
in termed iary a t the re levan t t ime wa s
I n d e p e n d e n c e B l u e C r o s s .
T h e
I n t e rm e d i a r y ,
i n
t u rn , e n g a g e d a
th is ca se John ston ,
in
subcon trac tor ,

4

1985 g radua te med ica l educa t ion base year
cos ts . The reaud it wou ld ensure the f u ture
payme nts w ou ld be ba sed o n an a ccura te
de te rm ina t ion o f the ho sp it a ls ‘ gradu ate
med ica l educa t ion cos ts in the base-year .
the
To prev ent ov er-reim bursemen t,
regu la tion s
i ns tr uc t
i nt erm ed iaries
to
deduc t f rom each reaud i ted hosp i ta l ’s base
yea r g radua te med ic a l educa tion amoun t
any ope ra t ing cos ts m i sc la ss i f ied a s
4 2 C .F . R . §
e d u c a t io n c o s t s .
413 .86(e )(1)( i i)(B) . To pre ven t und er-
reimb ursem ent, the regu la tion s au tho r ize
i n t e rm e d i a r i e s , “ u p o n a h o s p i t a l ’ s
req ues t,” to inc lude in the ba se yea r
grad uate med ica l educa t ion amou n t any
teach ing co s t s m isc la ss i f ied a s ope ra ting
cos ts in the base -yea r co s t repo r t. 42
C .F.R . § 413 .86 (e )(1 ) ( ii ) (C ) .
A f te r
de te rm in ing the ho sp ita l ‘s APRA upon
reaud it,
the
in te rmed ia ry no ti f ies
the
ho sp i ta l o f the amoun t by a No t ice o f
A v e r a g e P e r R e s i d e n t A m o u n t
(“NA PRA ”) . 42 C .F .R . § 413 .86(e)(1)(v) .
The ho sp i ta l may ap peal th is amo unt to the
Secre tary w i th in 180 d ays of th e NA PRA .
Id.

f o r
c l a i m
a
s u p p o r t
T o
rec las s i f ica t ion o f m i sc las s i f ied g raduate
med ica l educa t ion co s ts , a hosp i ta l mus t
p re sen t th e in termed ia ry w i th ” su f f ic ien t
documen ta t ion” requ i ring a change in the
c la s si f ica t ion o f cos ts. 42 C.F .R. §
413 .86 ( l) (2 ) (i i ). The regu la t ion s requ i red
ac tua l documen ta tion deve loped dur ing the
ba s e yea r tha t wa s ma in ta ined in an

Young & O ’F r ia , to con duct th e grad uate
me dica l edu catio n re aud it.

 See 42 C .F.R . §
audita ble forma t.
405 .481 (g ) (1986 ) ; Med ica re P r og ram ;
Change s in Paymen t Po l icy fo r D i rec t
Gra duate Med ica l Educa t ion Co s ts , 54
Fed . R eg . 40 ,301 (Sep t . 29 , 198 9) .
The Secretary recogn ized , how ever ,
tha t some hosp i ta l s wou ld no longe r have
the
sup port a
to
requ ired
record s
rec las s i f ica t ion o f c os ts . A s su ch , the
Secre tary a l lowed aud i to rs to a cc e pt tim e
reco rd s from su bseque n t t ime per iod s a s
pr ox y. “G radua te Med ica l Educa tion :
Documen ta t ion to Suppo r t the Phy s ic ian
C o st /T im e A l loca tion” (1 9 90 ), JA 211 –
215 .6 Wh ere sub sequen t yea r records w ere
a lso unava i lab le , hosp itals we re allow ed to
perform
th ree -week
t ime s tud ie s7 o f
cu r ren t phys ic ian wo rk load s to p rov ide a
rough e s t ima te o f the time a l loca t ion o f
teach ing phy s ic ians in th e ba se yea r. See
Me d icare P rog ram ; Chang e s
the
to
Inpa t ien t Ho sp i ta l P ro spect ive Paymen t
Sys tem and F i sca l Yea r 1991 Ra te s , 55
Fed . Re g. 36 ,064 .
t h es e
n o t e d
T h e
Se c r e ta ry
a l terna t ive fo rm s o f documen ta t ion were
t h a n
r e l i a b l e
l e s s
i n h e r e n t l y
c o n t em p o r a n e o u s
reco rd s
f rom
th e

6T h e p o li cy w as la te r pub l ished in the
Fede ra l Reg i s te r a t 55 Fed . Reg . 35 ,990 ,
36 ,063-6 4 (Sep t . 4 , 199 0) .

7 I n p e rf o rm i ng a tim e s tudy, a phys ic ian
wou ld , on a da i ly ba si s , log t ime wo rked
fo r a p rov ide r ove r a pe r iod o f sev e ra l
week s a l loca t ing time to va riou s ac t iv i t ie s
such as adminis tra t ion , supe rv i s ion , o r
teach ing o f in te rns and res iden ts .

5

grad uate med ica l educa t ion bas e year . Id .
A lim i ted excep t ion wa s c rea ted re s tr ic ting
the use o f sub stitu te documen ta t ion f rom
la ter years
to v erify costs origina lly
c la imed a s g radua te med ica l educa t ion
costs in the g radua te med ica l educa tion
base yea r, bu t d isa l low ing th e u se o f
docu men ts f rom la te r years to inc rease the
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
origina lly c la imed . A s pub l i shed in the
F e d e r a l R e g i s t e r ,
t h e S e c r e t a r y ’ s
interpre tation re ad:
A s an equ itable so lution to
t h e p r o b l e m o f
t h e
nonex i s tence o f phy sic ian
a l loca t ion ag reem e n ts , t im e
r e c o r d s ,
a n d o t h e r
a r e
i n f o r m a t i o n , w e
a l l o w i n g p r o v i d e r s
t o
fu rn ish documen ta t ion f rom
r e p o r t i n g p e r i o d s
c o s t
sub sequen t
to
the base
pe r iod in suppo r t o f the
a l l o ca t i o n o f p h ys i c i a n
compen sa t ion co s t s in the
GM E b a se per iod . . . . In
no even t will the results
ob ta ined f rom the use o f the
r e c o r d s
f r o m
a
c o s t
repo r ting pe r iod la te r than
the base period serve to
inc rease o r add phys ic ian
compen sa t ion co s t s to the
co sts u sed to de te rm ine th e
pe r res iden t amoun ts .
55 Fed . Reg . a t 36 ,063 -64 .

2 . Ad ju s t ing Ho spital-S pecific
Rate and T arge t Amoun t for
M isc lass i f ied Cos ts .
A ho sp i ta l may a l so reque s t the
rec las s i f ica t ion o f m i sc las s i f ied ope ra t ing
cos ts . M i sc la s s if ied ope ra t ing co s t s are
costs that ha d bee n inclu ded a s grad uate
med ica l educ ation c osts in th e grad uate
med ica l educa t ion b a s e year , bu t were
rec las s i f ied by
the
in termed ia ry a s
ope ra t ing cos ts . 42 C .F .R . § 413 .86(e)(1) .
If the m i sc la s s i fied ope ra t ing cos ts w ere
t rea ted a s g raduate med ica l education c osts
in bo th the g radua te medi c a l educa t ion
base yea r and the p ro spec t ive paymen t
sy stem base year , an upwa rd ad ju s tmen t o f
the ho sp i ta l’ s s p ec if ic ra te o r TEFRA
ta rge t amoun t may be wa r ran ted s ince the
ho sp i ta l – spec ific rate and targe t amou n t are
de r ived f rom ope ra t ing cos ts in a base
year . 54 Fed . Reg . 40 ,286 , 40 , 289 (Se pt.
29 , 198 9) . Co nver sely, i f the rea udit
revealed m i sc la ss i f ied g radua te med ica l
educa t ion costs (wh ich w ould inc rease the
ARPA ) , a correspo nd ing d own ward
ad ju s tmen t o f ope ra t ing co s t s fo r the
grad uate med ica l educa t ion ba se yea r wa s
req uire d. Id .
The r eg u la ti on s a ll ow a hosp ital to
“ reques t tha t the in termed ia ry rev iew the
c la s si f ica t ion of th e affe cted c osts in its
ra te -o f – inc re a se ce i ling o r p ro spec t ive
paymen t ba se yea r fo r pu rpo se s o f
ad ju s ting the ho sp ita l ‘s ta rge t amoun t o r
hosp ital-spec ific
rate.” 42 C .F.R . §
413 .86( l)( 1 ) ( i ) . To rec lass i fy these cos ts ,
a ho sp i ta l mus t spec if ica l ly ” reques t
rev iew o f the c lass i f ica t ion o f i ts . . . costs
no la ter than 180 days a f te r the da te o f the

6

[NA PR A ]” an d “ i n c lu d e
s u f f i c ie n t
the
documen ta t ion
to
to demon s t ra te
in termed iary
that ad ju s tmen t o f
the
ho sp ita l’s ho sp i ta l – spec i f ic ra te o r ta rge t
I d . §
a m o u n t

i s w a r r a n t e d . ”
413 .86( l)(1)( i i) .
B . Fa cts
O n Decembe r 21 , 1989 , Me rcy
Cath olic Med ica l Cen te r receiv ed no t ice
the
In te rmed ia ry
(“ Independen t B lue
C ro s s” ) wa s reopen ing i t s co s t repo r t s fo r
FYE ( “F is ca l Y ea r Ended” ) 1985 , 1986 ,
1987 and 1 988 to perf orm the rea udit
unde r the g radua te med ica l educa t ion
regu la tion .
Du r ing
the reaud i t ,
the
In te rmed ia ry made severa l dow nwa rd
adjus tmen ts to Me rcy Ca tho l ic Med ica l
C en ter ‘s g radua te med ica l educ ation c osts
bu t re fused to make o the r ad jus tm ents to
i ts g radua te med ica l educa t ion co s t s and
ope ra t ing co sts .
T he In term ed iar y’s
dow nwa rd ad ju s tmen t o f g radua te med ica l
educa t ion costs a nd re fusa l to rec la s si fy
certain ope ra t ing cos ts a s g radua te med ica l
educa t ion c os ts re du ce d M e rcy Cath olic
Med ica l Cen te r ‘s APRA f rom $81 ,745 to
$73 ,657 . Me rcy Ca tho l ic Med ica l Cen te r
f i led a t ime ly appeal o f the N o t i c e o f
Ave rage Pe r Re s iden t Amoun t w i th the
Boa rd .

t ime , howeve r , Me rcy
the
A t
Cath olic Med ica l Cen te r no
longe r
po s se s sed a l l o f the o r ig ina l suppo r t ing
documen ta t ion o f i ts base year grad uate
med ica l educ ation c osts be caus e
th e
gov erning rules o nly require d ho spitals to

retain physicia n alloca tion ag reem ents 8
(a lso k n ow n a s “339 s” ) fo r fou r yea r s f rom
the clos e of FY E 1 985 (i.e., until June 30 ,
1989) .
Furth ermo re, M ercy Ca tholic
Med ica l Cen te r had expe r ienced a floo d in
the ba semen t s to rage a rea and d i s c arded
all damaged reco rd s that w ere be yond th eir
re ten tion da te.
Me rcy Cath olic Med ica l Cen ter d id ,
how ever , re ta in some of the 33 9s for th e
depa rtmen ts in que s t ion . A t o ra l a rgumen t
be fo re th i s Cou r t , bo th pa r t ie s s t ipu la ted
s ome 3 39 s w e r e
in c lud ed
in
th e
adm i n i s tr a t iv e
r e co rd , a l t hou gh no t
inc luded a s fo rma l exh ib i ts . The P rov ide r
Re imbu r semen t Rev iew Board , howe ver ,
did not ack now ledg e them. See M e r cy
Ca tholic Med . C t r . v . B lue C ro s s B lue
Sh ield Ass’n , PRR B D ec . No . 20 01-D 55
(Sep t. 28 , 2001) , M edica re and M edica id
Gu ide (CCH ) ¶ 80 ,747 , a t 202 ,481
( “PRRB Dec .” ) (“[T ]he re wa s in su f f ic ien t
ev idence
rega rd ing
fo rm s 339 and
phys ic ian a l loca t ion agre emen ts .”) .9
Du r ing l at e 1 9 90 , h owev e r , Me rcy
Cath olic Med ica l Cen te r conduc ted a
t h ree -week t ime s tudy tha t t racked wha t
po r t ion o f ea c h t ea c hi ng p hys ic ia n ‘s tim e

8A p hysician a l locat ion ag reemen t
spec i f ie s the re spec t ive amoun t o f t ime a
phys ic i a n
sp e nd s on
t ea ch in g and
supe rv is ion as op pose d to tim e spen t on
pa t ien t ca re. 55 Fed . Reg . a t 36 ,063 .

9The 339 s we re no t su ppo r ted by
con tempo raneou s t ime sheet s o r “sou rce
d o c u m e n t a t i o n . ”
O r a l A r g u m e n t
T ran sc r ip t a t 29 -30 .

7

wa s devo ted to se rv ice s tha t qua li fy a s
grad uate med ica l educa t ion co s t s . Du r ing
the reaud i t, Me rcy C a tho l ic Med ica l
C en t e r rea l ized i t had m i sc las s i f ied a l l o f
the t ime spen t by phys ic ians in th ree
D e pa rtme nt s—OB /GYN , Labo ra to ry , and
Rad io logy—a s ope ra t ing co s t s in the
g raduate med ica l educa t ion b ase year .
Even thou gh th ese p hysician s had in fac t
been p rov id ing
sub s t antial grad uate
m ed i c al educa t ion se rv ice s , it had been
Me rcy Cath olic Med ica l Cen ter’s histo ric
p rac t ice to repo rt as op erating costs a ll
costs fo r phys ic ian s who se du t ie s we re no t
pr imar i ly teac hin g. Id . T h e 19 9 0 t im e
s tud ie s inc luded a l l o f the phy s ic ian s who
pe r fo rmed
t e ach ing du t ie s
in 1985 ,
inc lud ing tho se in the th ree “m is s ing
depar tmen ts.” In seek ing g radua te m ed ical
educa t ion c red i t, Me rcy Ca tho l ic Med ica l
Cen ter
timely req uested the req uisite
d ownw ard adjus tmen t to its hos pital-
spec ific ra te and ta rge t amoun t unde r 42
C.F .R. § 413 .86( l)(2) .
In per formin g
th e
th e rea udi t,
Subcon t rac to r
(“ John s ton , Young &
O’Fr ia”) accep ted Me rcy Ca tho l ic M ed ical
C en ter ‘s 1990 t ime s tud ie s a s accu ra te and
comp l ian t w i th the H ea l th Care F inanc ing
Adm in is tra t ion’s in s truc t ion s o f June 22 ,
1990 , and re l ied upon them to reduce the
compen sa t ion and re lated teach ing co sts
Me rcy Ca tho l ic Med ica l Cen te r had
c la imed a s g radua te med ica l educa t ion
expen se s . The Subcon t rac to r adv i sed
Me rcy Ca tho l ic Med ica l Cen ter , how ever ,
tha t
the
in s t ructed by
i t had been
In termediary (“Independence B lue C ro s s”)
to strictly limit its reau dit to on ly those

FYE 1985 co s ts that M ercy Ca tholic
Med ica l Cen ter had repo rted as grad uate
med ica l educ ation c osts in th e grad uate
med ica l ed u cation base year— to valid ate
o r reduce tho se co s ts—and to ignore
evid en c e o f any o the r co s ts , inc lud ing
phy s ic ian and suppo r t expen se s, tha t had
prev iously b e e n c la im ed in FYE 1985 a s
op e ra t ing cos ts .
Ac co rd ing ly ,
th e
Sub contra cto r d e c li ne d to re v iew tim e
stud ie s and o the r documen ta t ion pertain ing
to th e s e th ree m is s ing depar tmen t s wh i le ,
on the ba s is o f the 1990 t im e stud ie s, the
In termed iary reclass ified $ 719 ,055
in
grad uate med ica l educa tion co s t s from
FYE 1985 a s ope ra ting co s ts and exc luded
tha t amoun t f rom the APRA ca lcu la tion .
to M ercy Ca tholic
Acco rd ing
Med ica l C en te r ,
the
recla s s if ica tion s
r edu c e d
i ts
to ta l g raduat e m ed i c al
educa t ion costs
to
f rom $6,87 6,731
$6 ,157 ,676 , and its A PRA f rom $81 ,745 to
$73 ,657 . Recogn i t ion o f the m i scla s s if ied
grad uate med ica l educa t ion co s t s from the
th ree m iss ing depa r tmen ts based on the
1990 t im e s tud ies , wh ich the In termed iary
re fu sed , wou ld have resulted in a n APRA
o f $ 7 9 , 6 8 5 .80 .
T he
re t ro spec t ive
app l ica t ion o f th e di sp u te d APRA reduced
M e r c y C a t h o l ic M e d ic a l C e n t e r ’ s
r e i m b u r s e m e n t b y
a p p r o x i m a t e l y
$2 ,500 ,000 f rom FY 1986 -91 , and by
appr oxim ately $250 ,000
to $500 ,000
an nu all y. M ercy Ca tholic Med ica l Cen te r
lo s t app roxim ately $27 5,000
a lso
in
h o s p i t a l -sp e c if i c
r a t e
re im b u r s em e n t
du r ing the p ro spec t ive paymen t sy stem
t ran si t ion period as a res ult o f the re fu sa l
to inc rease the ho sp i ta l- spec if ic rate to

8

inc lude M e rcy Ca tho l ic M ed ica l Cen ter’s
m i sc la ss i f ied ope ra t ing cos ts , and i s lo s ing
appr oxim ately $50 ,000 to $20 0,000 in
annua l re imbursem en t for i ts psychiatric
un i t as a resu l t o f the re fusa l to inc rease
Me rcy Cath olic Med ica l Cen te r’ s targe t
amo unt.
In add i t ion to reque st ing c red i t fo r
g r a d u a t e m e d i c a l e d u c a t i o n c o s t s
a t t r i b u t a b l e
t o
t h e
t h r e e m i s s in g
depa r tmen ts , M e r cy C a tho l ic Med ica l
Cen te r a l so a sked the In te rm ediary to
increase i t s ho sp i ta l – spec i f ic ra te and target
amoun t to inclu de an y operatin g cos ts that,
based upon the 1990 t ime s tud ie s, had
prop erly b e en d et erm in ed to have been
m i sc la ss i f ied in FY E 19 85 as grad uate
med ica l edu catio n co sts. S e e 42 C .F.R . §
413 .86( l) . M ercy Ca tholic Med ica l Cen te r
a lso reque s ted a correspon d ing downw ard
ad ju s tmen t to its hosp ital-spec ific ra te and
t a r g e t
a m o u n t
i f
a n y p h y s i c i a n
compen sa t ion costs origina lly c la s si f ied a s
ope ra t ing co s t s we re
rec las s i f ied a s
grad uate med ica l educa t ion cos ts. See 42
C .F.R . § 413 .86 ( l)(2) . F ina l ly , Me rcy
Cath olic Med ica l Cen te r a sked
the
In term ed iary to incre ase the hosp ital-
specif ic rate an d the ta rget am oun t o f i t s
p r o s p e c ti v e p a ym e n t
s ys tem -e x em p t
p sych ia tr ic un i t to inc lude the ope rat ing
costs determ ined to have been erron eous ly
repo r ted in FY 1985 a s g radua te med ica l
educ ation co s t s under § 413 .86 (e ) (1 )(v )
and (l)(1). Th e Interm ediary ref used to
make the req uested hosp ital-spec ific rate
and ta rge t amoun t ad jus tmen ts .

C . The Prov ider R e imbu rsemen t
Rev iew B oard ’ s Dec i s ion
Me rcy Ca tho l ic Med ica l Cen te r
appea led
two
i s sue s
to
the P rov id e r
Re imbu r semen t Rev iew Boa rd : (1 ) the
In term ed iar y’s re fu sa l to recogn ize the
grad uate med ica l educa t ion co s t s from the
th r e e m i ss in g de p ar tm e n ts in th e APRA
and ; (2 ) the In te rmed ia ry’ s re fu sal to
increase i t s ho sp i ta l – spec i f ic rate and target
amoun t to take into ac coun t tho se co sts
tha t we re rec la s s i fied f rom g radua te
med ica l educ ation c osts to o peratin g cos ts
in the reaud i t . The Boa rd he ld a h e a r ing
and i s sued it s dec is ion on Sep tembe r 28 ,
200 1.

a f f i r m e d
t h e
T h e B o a r d
In termed iary on bo th
As a
issues .
thresh old matte r, the B oard agree d w ith
Me rcy Cath olic Med ica l Cen te r tha t over-
a l loca t ions and unde r -a l loca t ions o f base
yea r grad uate m edica l educ ation c osts
were prop erly subje ct to co r rec tion du r ing
the reaud it under 42 C .F .R . § 413 .86(e) ,
because the s ta tu te and GM E ru le env is ion
“ a
‘ two w a y
s t ree t ’ o f c hang ing
erron eous ly claim ed GM E co sts
to
oper ating costs (‘O C’) and vice ver sa.”
PRRB Dec . a t 20 2 ,480 . In l igh t o f th i s, the
Board
In te rmed ia ry had
the
found
incorr ectly instruc ted its Sub contra ctor to
ignore the t ime s tud ie s and o the r ev idence
o f m i s c l a s s if i e d g r ad u a t e m e d i c a l
e d u c a t io n c o s t s
( a s o p p o s e d
t o
m i sc la ss i f ied ope ra t ing costs). PRRB D ec .
a t 20 2 ,480-81 . In fac t , the Boa rd’s
decisio n inclu ded th e followin g find ing:

15 . The HCFA in s truc t ion s
re in fo rc ed
th is con c ep t;
how ev e r , a n a d d endum
cons isting o f que s t ion s and
inco rrectly
a nsw er s wa s
i n t e r p r e t e d b y
t h e
In te rmed iary a s mean ing
tha t no new G ME cos ts
cou ld be added by the re –
a u di t f rom OC .
a . The In te rmed ia ry, IBC
[ Independence B lue C ross] ,
wro ngf ully
in s truc ted
the
audit subc ontrac tor no t to
inc rease the GME co s t s by
r e c l a s s i f y i n g
a n y
m i sc la ss if ie d OC .1 0
The Board found none the less ” there
[was ] no cr editab le ev idence in the record
to rec las s i fy the m is cl as si fi ed OC to GM E
costs becau se o f the lack o f fo rm 339 ‘ s and
the fac t tha t the 1990 t ime s tud ie s we re no t
aud i ted by the In te rmed ia ry, no r i s there
adeq uate documen ta t ion in the r e cord
rega rd ing t he se tim e stud ies.” PRRB Dec .
at 20 2,48 1.
O n the s eco nd i ssu e, th e Board
ag reed Me r cy Cath olic M ed ica l Cen te r had
timely requ ested r evision of its h ospital-
spec ific r a t e and targ et am oun t. Id . I t
conc luded , howeve r , the In te rmed ia ry wa s

1 0We th ink the B oa rd in tended
“misc lassified GM E” in th i s f ind ing . Bu t
the re su lt i s the same : The B oa rd found
o r ig inally c la imed g radua te med ica l
educa t ion cos ts cou ld b e incre a s ed by
add ing mis clas sifie d co sts.

9

no t requ ired to rev i se the hosp ital-spec ific
rate o r ta rge t amoun t becau se M e r cy
Cath olic Med ica l Cen te r had no t p rov ided
the requ i red documen ta t ion d i rec tly to the
In termed iary w i th in 180 days o f the No t ice
of A verag e Per Res ident A mo unt.
D . D i s tr ic t Cour t Dec i s ion
The Distric t Cou rt affirm ed th e
Boa rd . Me rcy Ca tho l ic Med . C t r. v .
Thomp son , No . 02 -419 , 2003 U .S. D ist.
LEX IS 4688 (E .D . Pa . M ar . 5 , 2003) .
Rev iew ing the f irst iss ue, t h e D i s t ric t
Cou r t de te rm ined the l im i ted excep tion to
the requ i rem en t fo r con tempo raneou s
do cumen ta t ion
re s tr ic ted
the u se o f
subs titute documen ta t ion f rom la ter years
to ve r i fy co s t s o rig ina lly c la imed a s
grad uate med ica l educa t ion co s t s in the
grad uate med ica l educa t ion base yea r, and
did no t se rve to add o r inc rea se co s t s to the
o r ig ina l g ra du ate m edica l educ ation c osts
c l a im e d . Id . a t *22 -23 . Fo r suppo r t, the
Cou r t c i ted the Sec reta ry’ s rep re sen ta tion s
tha t la ter ye a r recor ds “w ere inh erently
less re l iab le ,” and tha t p rov ide r s had
“ s ign if ican t incen tive s to in f late their
GM E costs in the base yea r unde r the new
Id . at *24 (quo t ing
me tho dol ogy.”
Pres byte r ia n Med . C tr . , No . 95 -1939 ,
1998 U .S . D i s t. LEX IS 6254 , a t 12 -13
(D .D .C . Ap ril 21 , 199 8), aff ’d , 170 F .3d
1146 (D .C . C ir . 1999 )) .
The D i s t r ic t Cou r t a lso a f f i rmed on
the bas is of lack of d ocume ntati on. T he
Cou r t found Me rcy Ca tho lic Med ica l
Cen ter’s c la im s su spect becau se
the
a d m i n i s t r a t i v e
r e c o r d
l a c k e d
con tempo raneou s ev idence o f 339 ‘s in the

th ree m iss ing depa r tmen ts . The C our t
w ro te : “ [ t ]he reco rd ind ica te s tha t Me rcy
no longe r had any o f the 339 s and tha t
Me rcy d id no t subm i t any o the r ev idence
[to suppo r t a rec lassi f ica t ion of cos ts] ,
o the r than the tim e study co ndu cted in
Id . a t *24 -25 .
199 0.”

A l though
recogn izing Me rcy Ca tho lic Med ica l
Cen te r wa s no t no tified o f a rea udit un til
a f te r the reco rd re ten tion pe r iod had
exp ir ed , the D is t r ic t Cou r t none the less
conc luded Me rcy Ca tho lic Med ica l Cen te r
could be pena l ized fo r fa il ing to ma intain
its 339 fo rm s becau se it had rece ived
“con s t ruc t ive notice ” that t ho se co sts
“w ould l ike ly be the sub jec t o f ongo ing
rev iew .” Id . at *2 7.
O n the second is sue , the D i s tr ic t
Cou r t a f f i rmed the Boa rd ’ s ru l ing th a t
Me rcy C ath olic Med ica l Cen te r wa s no t
en t i tled to incre ases in its hosp ital-spec ific
rate and ta rget amoun t beca use it failed to
p re sen t documen ta t ion compa r ing M e rcy
Cath olic M ed i c al Cen te r’ s FY 1983 and
1985 g radua te med ical educa t ion programs
directly to the in te rmedia ry, noting that it
w as th e ho sp i ta l ’ s “bu rden . . . to p re sen t
su f f ic ien t ev idence .” Id . a t *33 .
II .
W e have jur isd ic t ion u nder 28
U .S.C . § 12 91. W e review th e g ran t o f
summ ary j ud gm en t de n ovo . Fe r t i li ze r
Inst. v . B rowne r , 163 F .3d 774 , 777 (3d
C ir . 1998 ) . L ike th e D is tr ic t C o ur t, we
rev iew a f ina l dec is ion o f the Secre tary1 1

1 1 In th is ca se , the Boa rd ’ s dec i s ion wa s
the f inal d ecis ion of th e Se creta ry.

10

unde r 42 U . S.C . § 1395oo ( f ) (1 ) , wh ich
incorpora tes the s tandard o f rev iew o f the
Ad min istrati ve P roc edu re A ct, 5 U.S .C. §
706 . U nder the A PA , we w i l l aff irm
un l e s s
is
th e Se c r e t a ry ’ s d e c i s io n
“ar bi tra ry, capr ic iou s , an abu s e of
d i sc re t ion , o r o the rw i se no t in acco rdance
with law; [ or] un supp orted by sub stan t ia l
evid enc e.” 5 U .S .C . § 7 06(2)(A ) ,(E) ;
Rober t Wood John son Ho sp . v . Thomp son ,
29 7 F.3 d 27 3, 28 0 (3 d C ir. 20 02) . B u t
when app lying th is sta nda rd, a rev iew ing
cour t may no t me re ly rubbe r -s tamp the
Secre tary’s ac t ion s , bu t mu s t en su re tha t
the agency’ s ru ling is n either c learly
e r roneou s no r incon si s ten t with applic able
Thoma s Je f fe rson Un iv .
regu la t ions .
Ho sp . v. Sha lala , 512 U .S . 504 , 512
(19 9 4) . Fu r the r, we may a f f irm the
agency’s dec i s ion on ly on g round s on
wh ich the agency ac tua lly re l ied , and no t
on the bas is o f a lte rna tive ra tiona les o r
ju s t if ica tion s put fo rwa rd by co unse l on
appe al. SEC v . Chene ry Co rp ., 318 U .S .
80 , 87 (19 43) .

III .
A . G radu ate M ed ica l E duca t ion Co sts
1 . A s Ap plied to the Fac ts of th is
C a s e ,
t h e S e c r e t a r y ’ s
In terpre tive Ru le i s Arb i trary
and C apr ic ious .
Me rcy Ca tho l ic Med ica l Cen te r
con tend s the Secretary’s fai lu re to con s ide r
its 1990 t ime s tud ie s to the ex ten t they
suppo r ted a pos itive ad justm ent to its
repo r ted FY 1985 g radua te med ica l
ed u c a t ion co s t s w a s a rb i t r a ry and
cap r ic ious . As a thresh old ma t te r , we mus t

de te rm ine the leve l o f de fe rence , if any, to
afford the Sec re tary’ s in te rp re ta t ion o f the
g radua te med ica l educa t ion reaud i t ru le .1 2
A s no ted , when i t became c lea r
p r o v i d e r s d i d n o t a lw a y s
r e t a in
con tempo raneou s t ime reco rd s to facilitate
the reaud i t, the Sec re tary i s sued a spec ia l
g r a d u a t e m e d i c a l e d u c a t i o n
c o s t
documen ta t ion ru le fo r reaud i ts a s an
o f f ic ia l instruc tion to f isca l in te rmed ia r ies ,
“ G r a d u a t e M e d i c a l E d u c a t i o n :
Documen ta t ion to Suppo r t the Phy s ic ian
Co s t /T im e A l loca tion” (1990 ) , JA 211 –
215 . The Secr etary’s w ritten in terp re ta tion
p rov ide s tha t la te r -yea r t ime s tud ie s , o f the
sor t re l ied on by Me rcy Ca tho l ic Med ica l
Cen ter , cou ld on ly se rve to ve r i fy costs
tha t we re orig inally claim ed as grad uate
med ica l educa t ion co s t s in the base year ,
and cou ld no t suppo r t the additio n of costs
no t origina lly c la imed a s g radua te med ica l
educa t ion co s t s . The l im i ted exce ption to
the reco rd -keep ing po l icy p rov ides :
A s an equ i tab le so lu tion to
t h e p r o b l e m o f
t h e
nonex i s tence o f phy sic ian
allo ca t ion a g re em en ts , t im e
a n d o t h e r
r e c o r d s ,
i n f o r m a t i o n , w e
a r e
a l l o w i n g p r o v i d e r s
t o
fu rn ish the documen ta tion
f rom co s t repo r t ing pe r iod s
sub sequen t
the base
to
pe r iod in suppo r t o f the

1 2Th e Distric t Cou rt did no t explic itly
add ress the leve l o f de fe rence i t wa r ran ted
the S ecre tary’s in terp retiv e ru le.

11

a l loca t ion
o f
phy s ic ian
compen sa t ion co s t s in the
GM E b ase per iod . . . . It is
only in the absence o f base
pe r iod documen ta t ion tha t
sub sequen t documen ta t ion
shou ld be cons ide red as a
p r o x y
fo r b a s e p e r iod
documen ta t ion fo r pu rpo ses
the per
o f de te rm in ing
In no
re s iden t am oun t.
e v e n t w i l l
r e su l t s
th e
ob ta ined f rom the use o f the
r e c o r d s
f r o m a
c o s t
repo r t ing pe r iod la te r than
the base perio d serv e to
increase o r add phy s ician
compen sa t ion co s t s to the
costs used to dete rm ine the
per res iden t amoun ts .
55 Fed . Reg . at 36,0 63-6 4 (em phas is
added ) .1 3

1 3Th e A ge nc y supp leme nted its ru le
w i th the fo l low ing q ues t ion and answ er :

Fo l low ing it s in te rp re ta tion , the
S ecretary now a rgue s the l im ited excep tion
to the ru le requ ir ing c on temp oran eou s
d o cum en ta t ion on ly a l low s the u se o f
reco rd s f rom sub sequen t co s t repo r t ing
pe r iod s to ve r ify cos ts and a l loca t ion s
c la imed a s g radua te med ica l educa t ion
th e g r adu a te m ed i c a l
costs du r ing
educa tion base year— no t
to supp or t
increases to those cos ts in the base year .
W e owe no de fe rence to an agency
in te rp re ta tion plainly incon s is ten t w i th the
re levan t s tatute . See Pub . Emp loyee s
Re t i remen t Sys. v. B etts , 492 U .S . 158 , 171
(1989 ) (“ [N ]o de ference i s due to agency
in te rp re ta tion s at odd s with th e plain
language o f th e s ta tu te i t se l f .” ) . In the
s am e vein, a n age ncy’s interp retation of its
ow n
regu lations
is n ot en titled
to
sub s tan tia l deferen ce by a rev iew ing cour t
wh e r e “ ‘ an a l t e rn a t i v e
is
r e a d i n g
compe l led by
the
regu la t ion’s p lain
mean ing or by o the r ind ica tion s o f the
Secre tary ’ s in ten t a t the t ime o f the
Thoma s
regu la t ion’s p romu lga tion . ’”

Que s t ion : If a pr ovid er did
n o t
c h a r g e p h y s i c i a n
compen sa t ion to GME in
the ba se pe r iod , can
i t
reque st tha t documen ta t ion
f rom a sub sequen t pe r iod be
u sed , at thi s tim e, to rev ise
its ba se pe r iod co s t s fo r the
pu rpose o f ca lcu la t ing its
a v e r a g e p e r
r e s i d e n t
amo unt?

Answ er : No . As e xpla in ed

12

in HCFA ’ s in st ruc tion s , the
use of su bseq uent p e r iod
documen ta t ion to suppo r t
the allo c a t ion o f phy s ic ian
costs may no t be us ed to
inc rease
the amoun t o f
p h y s ic i a n c om p e n s a t i o n
origin a lly c la imed by the
p rov ide r in i ts GME base
pe r iod . G radua te Med ica l
Educa t ion : Que s t ion s and
Answers (Nov . 8 , 1990 ) , JA
872 .

Je f fe r son U n i v . Ho sp ., 512 U .S . at 512
(quo t ing Ga rdeb r ing v . Jenk in s, 485 U .S .
415 , 430 (1988 ) ) . Me rcy Ca tho l ic Med ica l
Cen te r con tend s the g radua te m ed ica l
educa t ion ru le
in neu tra l
is w r i t ten
language that comp els interm ediarie s to
accu rately calcu late gra duate med ica l
educa t ion cos ts , and
to co rrec t all
miscla s s i f ied co s t s , ope ra t ing co s t s and
grad uate med ica l educ ation c osts, to a r r ive
a t th e m os t a cc ura te AP RA po ss ib le . W e
a g r e e
t h e S e c r e t a r y ’ s
f i n d
a n d
in te rp re ta tion directly contra dicts the pla in
l a ng u a g e o f
th e g r adu a t e m e d i c al
educa t ion regu la tion and canno t be uphe ld .

The plain langu age o f the g radu ate
med ica l educa t ion ru le does no t suppor t
l im it ing corre c t ions u pon
to
reaud it
m i sc la ss i f ied oper ating co s t s , bu t ra the r
an t ic ipa te s co r rec tion s o f m i sc la s si f ied
g rad u ate med ica l educa t ion co s t s and
ope ratin g co sts.
42 C .F.R. § 413 .86(e) a nd (l)
p rov ide :
(e ) De te rm in ing pe r re s iden t
amoun t s fo r the ba se pe r iod
– (1 ) Fo r the ba se pe r iod .
( i) . . . the interm edia ry
de term ines a base -pe riod pe r
re s iden t amoun t fo r each
hos pital as f ollows . . .
(ii) In dete rm in ing the base
p e r i o d
a m o u n t u n d e r
paragra ph (e)(1)(i) o f this
sec t ion , the in termed iary – .
. .

13

(A ) Ver i f ies the hosp i ta l’s
b a s e – p e r i o d g r a d u a t e
med ica l educ ation c osts and
t h e h o s p i t a l ’ s a v e r a g e
numbe r o f FT E res iden ts ;
(B ) Exc lude s f rom the ba se –
pe riod g radua te med ica l
a n y
e d u c a t i o n
c o s t s
n o n a l l o w a b l e
o r
m i s c l a s s i f i e d
c o s t s ,
inc lud ing those prev iously
u n d e r
a l l o w e d
§
4 1 2 . 1 1 3 ( b ) ( 3 ) o f
t h i s
chap te r; and
(C ) Upo n a hosp i ta l’s
reque st, includ es gra dua te
med ica l educa t ion co s t s tha t
w e r e m i s c l a s s i f i e d a s
ope ra t ing co s t s du ring the
h o s p i t a l ’ s p r o s p e c t i v e
paymen t base year and w ere
no t allowab l e under §
4 1 2 . 1 1 3 ( b ) ( 3 ) o f
t h i s
chap te r durin g the g radu ate
m ed i ca l edu ca tion ba se
pe r iod . These co s t s may be
inc luded only if the ho sp ita l
requ ests an ad ju s tmen t of its
p r o s p e c t i v e p a y m e n t
ho sp i ta l – s pecif ic
r a t e or
ta rge t amoun t a s de sc ribed
in parag raph [(l)(2)] o f this
sec tion .
( l ) A d j u s tm e n t
a
o f
hosp i ta l’s ta rge t amoun t o r
p r o s p e c t i v e p a y m e n t
ho sp i ta l – spec i f ic ra te – (1 )

o p e r a t i n g

M i s c l a s s i f ie d
cos ts . . .
(2 ) M i sc la s s if ica tion o f
grad uate med ica l educa t ion
co sts – ( i) Gene ra l ru le . If
costs that shou ld have been
c l a s s if i e d a s g r a d u a t e
med ica l educa t ion cos ts
were t rea ted a s ope ra ting
c o s t s d u r i n g b o th
th e
grad uate med ica l educa t ion
base per iod and the ra t e -o f –
inc rease ce i l ing base yea r o r
p ro spec tive paymen t base
yea r and the ho sp i ta l w i she s
to rece ive bene f i t fo r the
appr opriate c la s si f ica t ion o f
these costs a s grad uate
med ica l educa t ion costs in
t h e g r a d u a t e m e d i c a l
educa t ion ba se pe r iod , the
ho sp i ta l mu s t reque s t tha t
the in te rmed ia ry rev iew the
c la s si f ica t ion o f the a f fec ted
costs in th e ra te -o f – inc rease
c e i l i n g o r p r o s p e c t i v e
p a ymen t ba se yea r
fo r
pu rpo se s o f ad ju s ting th e
hosp i ta l’s ta rge t amoun t o r
ho sp i ta l – spec i f ic ra te.
42 C.F .R. § 4 13.86 (e), (l) (em phas is
add ed) .
The regu la tion ’ s p la in language
r equ i re s the Inte rmed iary to corre ct a l l
m isc la ss i f ied co s t s , no t ju st m i sc la s s i fied
grad uate med ica l educa t ion co s t s . The
Secre tary’s re strictive a ppro ach c onf licts
w i th the regu la to ry language .

A dd itio na lly, the intent o f the ru le
s u p p o r t s o u r
I n

i n t e r p r e t a t i o n .
p romu lga t ing § 413 .86 , the Secre tary
de te rm ined a reaud i t o f FY 1985 co s t
repo rts w a s w a r ranted beca use h ospitals
may not h av e accu ra te ly d i s tingu i shed
b e tw e e n t ea c hi ng tim e and adm in i s tra t ive
and o ther
teach ing
spen t by
t ime
phy s ic ian s in FY 1985 , s ince a t tha t po in t
in t ime the re we re no real re imbu r s em en t
c o n s e q u e n c e s
e i t h e r w a y ,
a n d
In te rmed ia r ie s had app l ied the aud it ru le s
in co ns ist en tly. 54 F ed . Reg . 40 ,286 ,
40 ,288 -89 , 40 ,301 -02 . In th is ve in , the
Secre tary no ted : “In e s tab l i sh ing the ba se –
pe r iod pe r re siden t amoun t fo r a sp e c ific
ho sp i ta l . . . it is impo r tan t tha t the amoun t
de te rm ined be an accu ra te de te rm ina t ion
o f prov iders ’ 1984 GM E co s t s .” 54 Fed .
Reg . 40 ,286 , 40 ,288 . The go a l o f an
accu rate determ ination of co sts sup ports
both in c rea se s and dec rea se s to 1984
grad uate med ical edu ca t ion co s t s . The
Secr eta ry’s intent is p articular ly relevan t to
this ca se whe re Me rcy Ca tho l ic Med ica l
Cen te r i s no t seek ing to add add i tiona l
costs not au dited in 1985 , bu t ra the r , seek s
to rea l loca te ope ra t ing costs a s grad uate
med ica l educ ation c osts b a se d on th e sam e
t im e s tud ie s the In te rmed iary relied o n to
rec las s i fy co s t s in the oppo s ite d i rec t ion .
Ou r po s i tion is con s i s ten t w i th the
S u p rem e Cou r t ’ s in te rp re ta tion o f the
grad uate med ical ed ucatio n reau dit rule in
Reg ion s Ho sp. v. Sh alala , 522 U .S . 448
(1998) . In upho ld ing the reaud i t s, the
C our t w ro te , the aud i ts we re requ ired “ to
ca tch errors th at, if perp etual, co uld
gross ly d is tor t fu ture re imbu r semen t .” 522

14

U .S . a t 457 -58 . T o m a k e t he APRA
accu rate and avo id pe rpe t ra t ing e r ro rs , the
reaud it requ i re s co r rec t ing a l l re levan t
c la s si f ica t ion e r ro rs , no t me re ly tho se tha t
result in a reduct ion o f g radua te med ica l
educa t ion cos ts .
A s no ted , we f ind the reaud i t rule
env i s ion s a
The
st ree t.
two -way
S ecre tary’s in te rp re ta t ion is a t odds w i t h
this p r incip le . S ign i f ican t ly , the P rov ide r
Re imbu r semen t Rev iew Boa rd ag reed ,
ho ld ing the g raduate med ica l educa t ion
r u l e
r e q u i r e d
r e c l a s s i f i c a t i o n o f
m i sc la ss i f ied g radua te med ica l educa t ion
co s ts and ope ratin g co sts. P RR B D ec. a t
202 ,480 . In do ing so, the B oard explic itly
d i sc red i ted the inte rpretatio n of the rule
adop ted by the Secr etary in this l i tiga t ion .
E v e n
i f
t h e
S e c r e t a r y ’ s
in te rp re ta tion we re no t a t odd s w i th the
r u l e , h i s
l a n g u a g e o f
p l a i n
t h e
in te rp re ta tion
is still no t entitled
to
Chev ron – leve l de fe rence .1 4 A n Agency

1 4 In P re sby te rian Med ica l Cen te r , 1998
U .S . Dis t. LE XI S 6 254 , a f f’d , 170 F .3d
1146 , the D is tr ic t Cou r t fo r the D i s tr ic t o f
Co lumb ia he ld the Sec re tary’ s in st ruc tion
on the u s e o f la te r t ime – reco rd s wa s an
“ in terp re tive ru le ,” and a f fo rd ed the ru le
Chev ron def eren ce. Id . a t *9. We note
P r e s b y t e r i a n w a s d e c i d e d b e f o r e
Chr is ten sen v . Ha r r is Coun ty , 529 U .S .
576 (2000 ), wh e re th e Sup reme C our t
c la r if ied the de fe rence due agency op in ion
letter s. See id . a t 587 (decl in ing to afford
Chev ron de fe rence to Depa r tment o f
Labo r’s opi nio n lett er). W e b e l ieve the

15

in te rp re ta tion “ ‘qual i f ies fo r Chev ron
de fe rence when i t app ea rs tha t Cong ress
de lega ted autho rity to the agen cy gene rally
to m a ke ru le s c ar ryi ng th e f or ce of law ,
and tha t the agency in te rp re ta tion c la im ing
de fe rence wa s p romu lga ted in the exe rc ise
o f tha t au tho r ity. ’” Geo rge Harm s Cons tr .
Co . v. C hao , 371 F .3d 156 , 161 (3d C ir .
2004 ) (quo t ing U n ite d S ta te s v . M ead
Co rp., 533 U .S . 218 , 2 26-27 (2 001)) .
Agency s ta temen t s con ta ined in op in ion
le t te rs , po l icy sta temen ts , agency manua ls ,
and en fo rcemen t gu ide l ines lack the fo rce
o f law and “do no t wa rrant Chev ron -style
def eren ce.” Ch r i s ten sen v . Ha rris C oun ty ,
529 U.S . at 587 ; Mad i son v . R es . fo r
Human Dev . , Inc ., 233 F .3d 175 , 185 (3d
C ir . 2000 ) . “To gran t Chev ron de fe rence
to in fo rma l agency in te rp re ta tions w ould
und uly va l idate the re su lt s o f an in fo rm a l
pro ces s.” Mad i son , 2 33 F.3 d a t 1 86 . W e
have made c lea r tha t agency in te rp re t ive
gu ide l ine s “do no t r ise to th e leve l o f a
regu la tion and do no t have th e e f fec t o f
law .” Id . (quo t ing Bro oks v . Village o f
Ridg efield Park , 185 F .3d 130 , 135 (3d
Cir . 199 9)).
A s fo r the per sua s ivene s s o f agency
in te rp re t ive gu ide l ines , we contin ue to re ly
on the f ramewo rk la id ou t in Sk idmo re v .
Sw ift, 323 U.S . 134
See
(19 44) .
Ch r i s ten sen , 529 U .S . a t 587 ; Mad i son ,

in s truc t ion a t i ssue i s an in terp re tive ru le .
See 5 U .S.C . § 553 (b ) (A ) (d i scu s sing
in fo rma l ru le -mak ing w i thou t no t ice and
comm en t) . Bu t we d i sag ree w i th the leve l
o f d e fe rence g ran ted in P re sby te rian
Med ica l Cen te r.

233 F .3d a t 186 . The Sk idmore Cou r t
exp la ined :
W e cons ide r tha t the ru l ings ,
in te rp re ta tion s and op in ion s
o f the Adm in i s tra to r unde r
t h i s A c t , w h i l e n o t
con t ro ll ing upo n the c ourts
by rea son o f th eir au th or ity,
do con s t itu te a body o f
expe r ience and
in fo rmed
judgmen t to wh ich courts
and lit igants m ay prop erly
reso r t fo r gu idance . The
we igh t o f such a judgmen t
in a partic ular ca se w ill
d e p e n d
u p o n
t h e
tho roughness evide nt in its
considera t ion , the va lid i ty o f
its rea son ing , i ts con s i stency
w i t h e a r l i e r a n d
l a t e r
p ronounceme n ts , and a ll
those fa c tors w hich g ive it
p ow e r
t o p e r s uad e ,
i f
lack ing pow er to con trol.
323 U .S . a t 140 .
Unde r Sk idmore ana lys is , we f ind
the Ag ency ha s inco nsiste n t ly app l ied the
Secre tary’s in s truc t ion s conce rn ing wha t
costs can b e reco gnize d in the reaud it
p rocess . In Abbo t t v. NW Mem ’ l Ho sp . ,
PRRB Dec . No . 95 -D10 , Med ica re &
M edica id G u id e (CCH ) ¶ 42 , 970 (Dec . 7 ,
1994 ) a f f’d , HC FA Ad m’r De c., Me d icare
& M e d ic a id G u id e (CCH ) ¶ 43 ,136 (Feb .
2 , 1995 ) , the p rov ide r p resen ted base yea r
phy s ic ian allo c ation a greem ents, bu t did
no t p roduce suppo r t ing t ime reco rd s f rom

the base year .1 5 The HCFA Adm in i s t ra to r
de t e rm ined t ha t s u bs eq u en t ye a r t im e
s tud ie s m ay be u sed to increa se phys ic ian
compen sa t ion
in excess of amo unts
origina lly c la imed in the g radu ate med ica l
educa t ion co s t cen te r i f the t ime s tud ie s
were con s i s ten t w i th con tempo raneou s
da ta . T h e A dm inistrator s ubse quen tly
se e
repud ia ted his e arlie r po sition ,
P re sby te rian Med . C tr . , 1998 U.S . Dist .
LEX IS 625 4, and adop ted his cu r ren t
po s i tion , tha t the amoun t c la imed in the
grad uate med ica l educa t ion co s t cen te r
could only b e
inc rea sed ba sed on
con tem po ra neou s documen ta tion , not
sub sequen t pe r iod time s tud ie s . “The
Secre tary i s no t e s topped f rom chang ing a
v iew . . . be lieve [d ] to have been g rounded
upon a m istak en le gal in terp retat ion ,”
G ood Sam aritan Ho sp. v. Sh alala , 508
U . S . 4 0 2 , 4 1 7
t h is
(19 93 ) , b u t
incon s is tency can a f fec t the leve l o f
d e f e r e n c e
a f f o r d e d
a n
a g e n c y ’ s
in te rp re ta tion . See Sk idmore , 323 U .S . at
140 . The Sec re ta ry ’s in te rna l ly con f lic t ing
po s i tion s on th is issue m i l ita te aga ins t
a f fo rd ing defe rence to the in te rp re tive
ru le .1 6

1 5As not ed, M er cy C a tho l ic Med ica l
Cen te r d id re ta in some o f it s 339 a l loca t ion
ag reemen ts , and the se we re inc luded in the
adm inistr ative reco rd.

1 6Me rcy Ca tho l ic Med ica l Cen te r a lso
a rgue s the Sec reta ry endo r sed a po si t ion
incon s is ten t w i th tha t taken in the cu r ren t
c ase when de fend ing the va lid i ty o f the
grad uate med ica l educa t ion ru le be fo re the
S u p rem e Cou r t in Reg ion s , 522 U .S . 448 .

16

In Reg ion s, the Suprem e Cou r t con s ide red
the b roader
i s su e o f whe the r
the
S e c r e ta ry ’ s enac tm e n t o f
r u le
th e
p rov id ing fo r a re tro spec tive reaud i t o f
grad uate med ica l educa t ion cos ts was a
reaso nable in terpre ta t ion of the g raduate
med ica l educa t ion ame ndm ent, 4 2 U .S .C .
§ 1395 ww (h) , under Chev ron . The C our t
cond i t ioned i t s a f f i rmance o f the grad uate
m e d i c a l
e d u c a t i o n
r u l e o n
t h e
unde r s tand ing that ho spitals w ould no t be
pena l ized fo r lack o f documen ta t ion wh ich
they we re no longe r requ i red to ma in ta in .
Id . a t 465 . The Sec re ta ry ove rcame this
p ro b lem th rough the “equ i tab le so lu t ion”
d is cu s sed above . Acco rd ing to Me rcy
Cath olic M edica l C en te r , Gove rnmen t
coun se l sugge sted the Secr etary wo uld
a l low p rov ide rs to add to , a s we l l a s
dec rea se, b a se -yea r g raduate med ica l
educa t ion co s t s based on the fo l low ing
discu ssion a t oral arg um ent:

I
[B reyer, J .]:
Que s t ion
wo uld just like to be cle ar in
m y own min d.
W ha t
p e t i tione r sa id . . . [i s ] tha t
they have changed
the
c l a s si f i ca t ion o f ce r t a in
f i x e d
c o s t s ,
t h e
adm in i s tra t ive co s t s , f rom
educa t ion co s t s to ope ra t ing
cos ts , no t becau se o f new
e v i d e n c e b u t b e c a u s e
pe t i tione r no
longe r had
audit doc um enta tion . . . .
Am I right in th ink ing tha t
isn’ t the p ro b lem , beca use if

there a re some p iece s o f
pape r and o the r ev idence
tha t a re no longer a round ,
the Secr etary will pe rm i t the
ho sp i ta l to in t roduce –

Ms . B l a tt
coun se l ]: Ye s

[gove rnmen t

Que s t ion : – o the r ev idence ,
la ter ev idence , o r anyth ing
that –

Ms . Blatt: T hat’s c orrect,
a n d
i r o n i c a l l y ,
J u s t i c e
Breyer , the pe titioner d id
p re sen t subsequen t year data
. . . becau se the [ old] tim e
reco rd s d id no t b reak . . .
d own th e c os ts [ su ff ici en tly]
. . . they were a l lowed to use
a new tim e s tu dy, and tha t’s
why the re was a se t tlemen t
in th i s case , the pe t it ione r
actua lly go t an inc rease in
the p er-re side nt av erag e . . .
.

O ra l Ar gum ent T ran scrip t at 16 , Reg ion s
Ho sp i ta l v. Sha lala , No . 96 -1375 , 1997
W L 751915 (U .S .S .C t . Dec . 1 , 1997) .
Ba sed on th is in te rchange , M ercy Ca tholic
Med ica l Cen te r a rgue s tha t the p r inc ip le o f
jud ic ia l e s toppe l shou ld p reven t
the
Secr etary from switc hing positio ns in th is
l i tiga t ion . Becau se we f ind the Sec re tary’s
in te rp re t ive rule co ntrary to the plain
langu age of the regu lation, inc onsiste ntly

17

None the less , the Sec reta ry a rgue s
its in te rp re ta tive ru le i s rea sonab le and
en t i tled to de fe rence . Con tend ing la te r
yea r re co rd s a re inhe ren t ly le s s re liab le,
the Se cr eta ry a rg ues it is re ason able to
limit the we igh t affo rded to these reco rds .
Acco rd ing to the Secre ta ry , ho sp i ta l s may
a t temp t to man ipu la te g radua te med ica l
educa t ion cos ts w i th documen ta t ion
deve loped a f te r the ba se yea r , fo r pu rpo se s
o f i nc re as in g th ei r A PRA .
In P re sby te rian Med ica l Cen te r v .
Sha lala , 170 F .3d 1146 (D .C . C ir . 1999) ,
the Co urt of A ppea ls for th e D .C. C ircu i t
no ted the Secre tary’s in te rp re t ive ru le wa s
rea sonab le becau se :
GM E co s t s cla imed in th e
base yea r have a l ready gone
t h r o u g h a v e r i f i c a t i o n
p r o c e s s
r e q u i r i n g
c o n t e m p o r a n e o u s
documen ta t ion . Add i t iona l
GM E cos ts c la imed du ring
reaud it hav e no t. B e c ause
l a t e r y e a r
r e co r d a r e
inhere ntly le s s re l iab le , and
b e c a u s e h o s p i t a ls h av e
s ign if ican t
in c entives
to
inflate the ir GM E co sts in
the ba se yea r . . . we th ink
in te rp re t ive ru le , by
the
p r o h i b i
t
i n g
n o n c o n t e m p o r a n e o u s
reco rd s
f rom
suppo r ting

GM E cos ts . . . reason ably
f u r t h e r s — n o t
f r u s t r a t e s — a c c u r a t e
d e t e rm i n a t io n o f G M E
co s t s .”
Id . a t 1150-51 ( in te rna l quo ta t ion s and
c i tat ion s om itted ).
W e
respe ctfully
disa gre e.
W e see no valid re ason to gen erally
a sc r ibe to teach ing ho sp i ta l s w rong fu l
ove r – repo r t ing of te ach ing cos ts. Because
o f the Con s i stency Ru le , ho sp ita l s had no
opp ortun ity to cha nge c lassifica tion o f
costs in FY 1985 from tha t repo r ted in FY
1983 , th e p ro sp ec tiv e p aym en t sys tem base
year . 42 C .F.R . § 41 2.113 (b)(3). N or did
teach ing hosp i ta l s have a
financ ia l
incen tive to m i sa lloca te e i ther grad uate
med ica l educa t ion co s t s o r ope ra t ing costs
in the p rospec t ive paymen t sys tem base
year , 1983, as M edica re reim burse d bo th
educa t ion co s t s and ope ra t ing co s t s on a
reaso nable co s t ba si s du r ing that pe r iod .
C on se qu en tly, the re is no rea son to expec t
errors in cos t repor ting in 1 984 -85 w ould
have favo red repo r ting co s ts
in one
ca tegory o r the o the r . Add i tiona l ly , s ince
§ 1395ww (h ) wa s enac ted in 1986 and
manda ted th e u se o f FY 1985 a s the
grad uate med ica l educa t ion b ase year— a
ye a r wh ich p reda ted th i s change in th e
law— to se t the AP RA , prov id e r s had no
no t ice o r o p po rt un it y t o “ g am e t he sys tem ”
by ove r – repo r ting teach ing cos ts .1 7

app l ied , and l ac ki ng v al id re as on in g , w e
do not rea ch M ercy Ca tho l ic Med ica l
Ce nter ’s jud icial e stop pel a rgume nt.

1 7The Sec re ta ry ’s In terp re tive Ru le doe s
no t c la r ify the d i f fe rence be tween add ing
grad uate med ica l educa t ion co s ts no t

18

prev iously c la imed , and rec la s s i fy ing
m i sc la ss i f ied g radu a te med ical educa tion
costs p rev iou sly c la s si f ied a s ope ra ting
cos ts . The d i s t ric t cou r t in P re sby te rian
no ted the spec if ic ques t ion b efore the co ur t
wa s “whe th er la te r yea r reco rd s can be
u sed to suppo r t an increa se in GM E co sts
ove r wh at w a s o r ig ina l ly c la imed in the
base yea r.” 1998 U .S . D i s t . LEX IS 6254 ,
a t *9 . In d iscuss ing the Secre tary’s
in te rp re t ive rule, the cour t noted : “In [ the
Sec re ta ry ’s ] judgmen t, how ever, sh e did
not thin k it app ropria te for h ospitals to be
able to use la ter yea r reco rd s to suppo r t an
inc rease in GM E co sts ove r wh at hos pitals
had orig inall y claim ed.” Id . at *12 -13; see
a lso Clev eland Clin ic Fo und . v. Sha lala ,
No . 1 :9 4 CV 2414 , 1996 WL 636135 , a t
*2 (N .D . Oh io , Aug . 28 , 1996 ) ( reje c ting
prov ider’s “a t temp t s to c la im add i tiona l
costs no[ t] p re v ious ly c la imed in the base
year p erio d”) .
Un l ike the s itua t ion in Presby ter ian
and Clev eland Clin ic , Me rcy Cath olic
Med ica l Center’s reques ted reclass ification
o f m i s c l a s s i f i e d g r a d u a t e m e d i c a l
educ a tion costs w ould serve only to
partially o f f se t
the g radua te med ic a l
educa t ion co s t s tha t we re found by the
In termed iary to have been m i sc la s s i fied on
reaud it , an d wou ld no t ra ise Me rcy
C a tho l ic M ed i c a l C en ter’s gra duate
med ica l educa t ion co s t s above the amoun t
contemp oran eous ly c la ime d in FY 198 5.
In Abb o t t a s w e l l , th e g r adu a te

med ica l edu c a t ion co st add i tion s d id no t
result in to ta l g raduate med ica l educa t ion
cos ts in exce s s o f the amoun t the ho sp i ta l

19

h ad pre vio usly cla ime d.
th e
T her e,
P rov ide r Re imbu r sement Rev iew Board
noted :
T h e
n o t
is
p ro v i d e r
a t temp t ing to inc rease o r
a d d
p h y s i c i a n
t h e
compen sa t ion co s t to the
cos ts c la imed on i t s 1984
cos t r ep o rt w hich wa s u sed
to d e term ine the P rov ider’s
pe r r es id en t am ou n t. All o f
the costs th at th e P rov ide r
ha s claim ed w ere cla imed in
the ba se yea r , al though they
m ay no t have been c la imed
spec ifically in the In te rn and
Res iden t cos t cen ter .
Abb ott , Med i c a re & Med ica id Gu ide
(CCH ) ¶ 42 , 970 , a t 42 ,898 .
The Agency supplem ented
its
in terp re t ive
fo llow ing
ru le w i th
the
ques t ion an d answ er :
Que s t ion : I f a p rovid er did
n o t
c h a r g e p h y s i c i a n
compen sa t ion to GME in
the ba se per iod, can
it
reque st tha t documen ta t ion
f rom a sub sequen t pe r iod be
u sed , a t th is t ime , to rev ise
its ba se pe r iod co s t s fo r the
pu rpose o f ca lcu la t ing its
a v e r a g e p e r
r e s i d e n t
amo unt?
Answ er : N o . A s exp la ined
in HCFA ’ s in st ruc tion s , the
use of su bseq uent p e r iod
documen ta t ion to suppo r t
the a lloca tion o f phys ic ian

The Sec re tary’ s
in te rp re ta t ion
requ i re s the In te rmed ia ry to app ly the
grad uate med ical ed ucatio n reau dit rule in
a one – s ided fa sh ion . An agency a c ts
arbitrarily and c apricio usly wh en
it
con s t rue s o r app l ie s a regu la t ion in an
incon s is ten t ma nne r. See W alte r B osw ell
Me m’ l Ho sp. v . H e c k le r, 749 F .2d 788 ,
799 (D .C . C ir . 1984 ) (“ It wou ld be
arb i trary and c apricio us fo r HH S to b r ing
va rying interpre tations o f the sta tute to
bea r [ in a lloca ting cos ts to M ed icare] ,
depend ing on whe the r the re su lt he lp s o r
hurts the Med ica re ’s ba lance shee ts . . . .”) .

t h e S e c r e t a r y ’ s
F u r t h e rm o r e ,
in te rp re ta tion e schew s the fundamen ta l
goa l of n eutral a ccura cy in a rea udit. See ,
e.g., Bos well , 749 F.2 d at 79 9; Coun ty o f
Lo s Ang e le s v. Sh alala , 192 F .3d 1005
(D .C . Cir . 199 9). In C oun ty o f Lo s
Ange le s, the Cou r t o f Appea l s fo r the D .C .
C i rcu it re jected the Secretary’s exp lana tion
fo r s e lectively ign oring data w here it
wo uld inc rease Med ica re paymen t s ba sed

costs may no t be us ed to
increase
the amoun t o f
p h y s i c ia n c o m p e n s a t i o n
origin ally c la imed by the
p rov ide r in i ts GME ba se
pe r iod.
Gra dua te Med ica l Educa t ion : Que s t ion s
and A nswers (Nov . 8 , 1990 ), JA 872
(emp hasis adde d). A s this c a se conce rn s
m i sc la s si f ied g radua te med ica l educ a t ion
cos ts , we f ind the Sec re ta ry’ s po si t ion
conce rn ing co s t s no t o r ig ina l ly c la imed ,
d o e s no t
su pp o r t
th e S ec re ta r y ’ s
in te rp re ta tion a s app lied to th i s ca se .

20

o n “ [ a ]
lo n g
l i n e o f p r ec e d e n t
[e s tab li sh ing ] . . . th at an a genc y action is
a rb i t r a ry w h e n
t h e a g e n cy o f f e rs
in su f f ic ien t re a son s fo r trea t ing s im i la r
Id . a t 1022
s i tua t ion s d i f fe ren t ly.”
(quo t ing T ran sac t ive Co rp . v . Un i ted
S ta te s, 91 F .3d 232 , 237 (D .C . C ir . 1996 )) .
The cour t held the Sec reta ry’ s d i sc re t ion ,
a l though bro ad, “ is no t a lice nse to . . .
t rea t l ike ca se s d if feren t l y .” Id . a t 1023
(quo t ing A i rma r k Corp . v . FAA , 758 F .2d
685 , 691 (D .C. C ir. 19 85) ).
B y a l low ing non -con tempo raneou s
reco rd s
to ve r ify g radua te medica l
educ ation costs or deduc t g radua te med ica l
educa t ion costs c laime d in the ba se -yea r
cos t repo rt, bu t no t a llow ing such reco rd s
to suppo r t the inc lu s ion of grad uate
med ica l edu ca t ion co s t s m isc la ss i f ied a s
o p e r a t in g
c o s t s ,
t h e S e c r e t a r y ’ s
in terp re t ive ru le frus tra tes the regu la tory
goa l o f en su r ing an accu ra te de te rm ina t ion
o f a prov ider’s grad uate med ica l educa t ion
cos ts . The Sec re ta ry e ithe r c red i t s o r
igno re s la ter year t ime s tud ie s depend ing
on whe the r the co r rec tion o f e rrors w ill
result in a reduc t ion o r increa s e in a
ho sp i ta l’s g radua te med ica l educa t ion
reimb ursem ent. The Secretary’s res trictive
in te rp re t ive ru le is arb i trary and cap r ic iou s
because i t con trad ic ts the p la in language o f
the ru le , ha s no t be en ap pl ied co ns ist en tly,
and i s un rea sonab le.1 8

1 8The S ecre tary’s ru le may a l so e f fec t
an i l lega l co s t- sh i ft ing o f Med ica re co sts
to non -Med ica re pa tien t s, a s it w i l l sh i f t
costs p rope r ly bo rne by Med ica re to o ther
S e e
4 2 U . S . C .
p a t i e n t s .

2 . Ev iden t iary I s sue s Suppor t
R emand .
Me rcy Ca tho l ic Med ica l Cen te r
con tend s the D is tr ic t Co ur t and the B oard
e r red in re jec t ing i t s appea l on the added
g round
tha t Me rcy Ca tho l ic Med i c a l
Cen te r
fa i led
to p ro duce
fo rm 339
phy s ic ian a l loca t ion agreem en ts for the
th ree missin g dep artme nts . W e recogn ize
the able D istrict Co urt w as pre sented with
a c o n f u s i n g a dm i n i s tr a t iv e
r e c o r d .
None the less , w e reve r se and remand ba sed
o n
t h e
a l t e r n a t i v e g r o u n d
t h a t
con tempo raneou s ev idence o f teach ing
p rog rams ,
i nc lu d in g 33 9 fo rm s , wa s
p re sen ted to the P rov ide r Re imbu r semen t
Re view Bo ard .
There i s no d ispu te tha t Me rcy
Cath olic M ed i c a l C en t e r condu c ted
acc red ited med ical resid ency pro gram s in
its Lab orator y, OB/G YN , and R adio logy
De partm ents in 1 984 -85 . B e fo re the
B o a rd , Me rcy Ca tho lic Med ica l Cen te r
c o n t e m p o r a n e o u s
i n t r o d u c e d
documen ta t ion verifying
its grad uate
med ica l edu catio n ac tivitie s. The B oard
found : “ In f i sca l yea r 1985 , the p rov ide r
conduc ted GM E teach ing prog rams in its
OB /GYN , Labo ra to ry , and Rad io logy
De par tme nts.” PRRB Dec . a t 202 ,480 .
Ye t, the Boa rd no ted , “ [ t ]he re i s no
c red i t able evide nce
in
the rec ord
to
rec las s i fy the m i sc la s s if ie d O C to GM E
costs bec aus e of the la ck o f fo rm 3 39 ‘s . .
. .” Id . at 20 2,48 1. The D is t r ic t Cou r t a lso
conc luded , “ [ t ]he reco rd ind ica te s tha t

§ 13 95( x)(v )(1)(A) .

21

Me rcy no long er had any o f the 339 s and
tha t M er cy d id no t su bm it a ny o the r
ev idence , other
th an
the
t ime s tudy
conduc ted in 1990 .” Me rcy Ca tho l ic Med .
C tr ., 2003 U .S . D i s t. LEX IS 4688 , a t *24 –
25.

A t o ra l a rgumen t , and
in a
sub sequen t le t te r to th i s Cou rt , Me rcy
Cath olic Med ica l Cen te r p ro v ed th a t s ome
o r i g i n a l 3 3 9 s
f r o m
t h e m i s s i n g
depa rtmen ts had been inc luded in the
adm in i s tra t ive reco rd , though , ap pa re nt ly,
no t a s fo rma l exh ib i ts .1 9 To the ex ten t the
P rov ide r R e im b u rs em en t Rev iew Board
and the D istrict Co urt gro und ed the ir
dec i s ion s on Me rcy Ca tho lic Med i c al
Cen ter’s inab i li ty to p roduce cop ie s o f the
3 3 9
th ree m iss in g
the
f o r
f o rms
depa r tmen ts , it is c lea r tha t a t leas t some o f
these
form s w e re p roduced
in
the
adm inistrativ e reco rd .2 0 T h er ef or e, we w ill

1 9Acco rd ing to Me rcy Ca tho l ic Med ica l
C en te r ’ s le t te r to th i s Cou r t da ted May 4 ,
2004 , a “de partm ental 339 a l loca t ion”
fo rm fo r the Rad io logy Depa r tmen t wa s
intro duc ed a s PR RB Ex hib it 32 .

2 0A l though no 339 fo rm s fo r ind iv idua l
doc tors we re inclu ded in the ap pend ix to
this Co urt, a “d epartm enta l 339 a l loca t ion”
form fo r a l l teach ing phys ic ian s in the
Rad io logy Depa r tmen t
in 1985 wa s
inc luded . JA 381 . Hea l th Ca re F inanc ing
A d m i n i s t r a t i o n ’ s
i n s t r u c t i o n s
t o
i n t e r m e d i a r i e s
s u c h
th a t
s p e c i f y
“depa r tmen ta l t ime a l loca t ion s may be
accep ted” on r eau dits. In s t ruc t ion s fo r
fo r
Imp lemen t ing P rog ram Paymen t s

reve rse and remand on the a lte rna tive
g round that suf ficien t con tempo raneou s
documen ta t ion o f teach ing p rog ram s in the
“m i s s ing depa rtmen ts” w as pro duce d to
suppor t the rec las s i f ica t ion o f co s t s and
shou ld have been con s ide red by the Boa rd .
In sum , the Sec re ta ry’s pos i tion tha t
la ter yea r t ime s tud ie s may on ly be used to
co r rec t m isc lass i f ied ope ra t ing cos ts , and
no t m i s c l a ss i f ie d g r a d u a te m e d i c al
educa t ion co s t s , i s a rb i t ra ry and capr ic ious.
rev erse an d
W e will
rem and w ith
i n s t r u c t i o n s
t o
t h e P r o v i d e r
Re imbu r semen t Rev iew Boa rd to o rde r the
In te rmed iary to recalc ula te M ercy Ca tholic
M ed i c a l C en t e r ’ s g ra d u a t e m e d ic a l
educa t ion co s t s af te r aud it in g th e tim e
s tud ie s and o the r availa ble documen ta t ion
from th e thr ee m issin g de par tme nts.
B . Ho spital-S pecific Ra te and Targe t
Amoun t
Mercy Cath olic Med ica l Cen ter a lso
con tend s the D istrict Co urt faile d to o rde r
the In termed iary to incre a se its ho spital-
spec ific rate an d TE FRA tar get am oun t.
A s no ted , the Board dec l ined to o rde r the
In termed iary to inc reas e M ercy Ca tholic
M ed ica l Center’s hosp i ta l- spec if ic rate and
ta rge t amoun t in an amoun t co rre spond ing
to the In te rmed ia ry’ s reduct ion o f th e sam e
costs f rom th e APRA b ecau se Me rcy
Cath olic Med ica l Cen te r had no t p rov ided
t h e
t o
d o c u m e n t a t i o n d i r e c t l y
I n t e rm e d i a r y , b u t
r a t h e r
t o
t h e
S ubcon trac tor . PR RB De c. at 2 02,4 81 .

Gra dua te Med ica l Educa t ion Co sts , JA
341 .

22

The D i s t r ic t Cou r t a f f i rmed , no t ing , “ [ t ]he
fac t that th e Subcon t rac to r may have the
docu men ts in i ts possess io n doe s no t
sa t is fy the requ i remen t s se t fo r th by the
reg ulati ons .” Mercy C a tho l ic Med . C tr .,
2003 U .S . D is t . LEX IS 4688 , a t *33 -34 .
We canno t ag ree .
the
in
inc rea se
A s no ted , an
hosp ital-spec ific ra te and ta rge t amoun t is
an t icipa ted b y
t he S ec re ta ry’ s ow n
r e g u l a t i o n s
t o a c h i e v e c o n s i s t e n t
classific a t ion o f costs w here c osts
o r iginally c la s si f ied a s g radua te med ica l
educa t ion costs sh ould have been repo rted
a s ope ratin g co sts. See 42 C .F.R . §
413 .86( l)(1) . Add i t iona l ly, because o f the
Con s i s tency Ru le , a llowab le ope ra t ing
costs invo lved in se t ting th e hosp ital-
spec ific rate an d targe t amo unt m ust b e
t r e a te d c o n s i s t en tly
th rough ou t
th e
p ro spec tive paymen t t ran si t ion pe r iod (i .e.
M e rcy C a tho li c M ed ic a l C en t e r’ s FY
1985-1 989) . 42 C .F .R . § 4 12 .113(b )(3) .2 1
Once it is d e te rm ined tha t m i sc la s s i fied

2 1M ercy Ca tho l ic Med ica l Cen te r a lso
con tend s tha t becau se i ts Ta rge t Amoun t
app l ied only to a p sychiatr i c un it not in
ope ra t ion unt il FY 198 5, th ere wa s no
ra t iona l basis to requ ire M ercy Ca tholic
M e d i c a l C e n t e r
t o
i n t r o d u c e
d o c u m e n t a t i o n
e v i d e n c i n g
t h e
com parab ility o f i t s FY 1983 and FY 1985
costs a s a p recond it ion to inc reas ing the
t a r g e t
a m o u n t .
T h e r e f o r e , n o
“com parab ility da ta” wa s nece ssa ry to
ad jus t the targe t amoun t, and th e B oard’s
f ind ing on in su f f ic ien t documen ta t ion wa s
i r re levan t to the targ et am oun t adjustm ent.

grad uate med ical educa tion co sts sho uld
have been reimb ursab le as ope ra t ing cos ts ,
an increa se to the hosp ital-spec i f ic ra te and
ta rge t am oun t i s requ i red no t me re ly fo r
cons isten c y pu rpo se s , bu t a l so in l igh t o f
Me d icare’s cos t- sh i f t ing p roh ib it ion . 42
U.S .C . § 1395x (v ) (1 ) (A ) .
Fo r these
reasons , the ho sp i ta l- spec if ic rate / ta rge t
amoun t adju stm ent is critic al. M e rcy
Cath olic Med ica l Cen te r’ s reques t for a
rev i sion of b oth its h ospital-s pecif ic rate
and ta rget amoun t wa s app rop ria te and
time ly.
P rov id er
t h e
d isc uss ed ,
A s
Re imbu r semen t Rev iew Boa rd d id no t
deny
the ad ju s tmen t s fo r sub s tan tive
reasons . See PRRB Dec . a t 202 ,481 .
Me rcy Ca tho l ic Med ica l Cen te r had
p rovid ed the app rop ria te and su f f ic ien t
documen ta t ion
to
th e
In termed iary’s
Subcon trac tor .2 2 JA 161 . The Boa rd ,
how ever , refus ed to o rder th e hos pital-
s p e c i f i c
r a t e a n d
t a r g e t a m o u n t

2 2The reco rd demon s tra te s the ev idence
p rov ided by Me rcy Ca tho l ic Med ica l
Cen te r wa s su f f ic ien t
to make
the
adjus tmen ts to the h ospital-s pecif ic rate
and ta rge t amoun t . The Board found “ the
Subcon t rac to r . . . had receiv ed ade quate
in fo rma tion fo r . . . rev is ion s to the
HSR /TEFRA ta rge t amoun t .” PRRB Dec .
a t 202 ,481 . In fac t, the “be s t ev idence” o f
compa rabi lity be tween the p ro spec t ive
paymen t sy stem and g radua te med ica l
educa t ion ba se yea r s wa s the cost repo rt ing
data and sup por t ing aud i t records tha t we re
a l ready in the In te rm ed ia ry’ s po s ses s ion
un t i l a t lea s t 1992 . JA 156 .

23

adjus tmen ts on the techn ica l ity tha t Me rcy
Cath olic Med ica l Cen te r p rov ided the data
suppo r t ing compa rab i li ty w i th in the 180
d a y p e r i o d
to
th e
I n t e r m ed ia r y ’ s
S u b c o n t r a c t o r
t h a n d i r e c t l y
r a t h e r
p rov id ing i t to the In te rm e d ia ry. PRRB
Dec . a t 202 ,481 . We do no t f ind th is
distin ction lega lly sign ifica nt.
P rov id ing data
to
the on -site
Subcon t rac to r is th e lega l equ iva len t o f
p rov id ing the da ta to the In te rmed i a ry
unde r Cen ters fo r M edica re and M edica id
Serv ice s Manua l s and p r incip le s o f
ag en cy. In co l lec t ing data fo r an aud i t , the
Subcon t racto r s tep s in to the shoe s o f the
In term ed iar y. See Med icare In termed iary
Manua l , JA 9 19. A subc ontrac ted au dit
f irm is autho rized to receiv e cos t repor ts
and make its wo rking pape rs ava ilable to
the In te rmed ia ry fo r rev iew and to ob tain
necessary info rma tion . See id . pt. F (“The
independen t aud i t f irm ’s [Subcon tracto r ’s ]
wo rk ing pape rs , inc lud ing pe rmanen t f ile s
and rev iew s o f in te rna l con t ro l, a re to be
made ava i lab le to rep re sen ta t ives o f the
Secre tary and th e interm ediary, at all
reaso nable t imes , fo r rev iew and ob ta in ing
any nece s sa ry in fo rma t ion .” ) . Unde r the
Med icare
In termed iary M anua l,
the
In termed iary and the S ubcon trac tor are
the
in t e rch ang e ab le
f unctio n o f
in
rece iv ing docum en ts .
The B oard’s
dec is ion a lso descr ibed the In termed iary
p e r f o r m i n g
i t s
“ t h r o u g h
a u d i t s
Su bco ntra ctor .” PR RB De c. at 2 02,4 66.
Unde r these c i rcums tances , we f ind
the documen t s we re p la in ly w i th in th e
con t ro l of the “prim e con tractor” (in this
ca se , the In te rmed ia ry ). In the con tex t o f

Fed . R . C iv . P . 3 4 (a), so lo ng as the pa rty
ha s the lega l r igh t o r ab i l i ty to ob ta in the
docu men ts from a no ther sou rce upon
demand , tha t par ty i s deemed to have
See F e d R . C iv . P . 34 (a )
contro l.
(a l low ing “[a]n y party [ to ] se rve on any
o the r pa rty a r equ es t . . . any de signa ted
docu men ts . . . which are in the po s se s s ion ,
cu s tody o r con t ro l of the party upon whom
the requ est is serv ed); s e e a l so Poo l e v .
Tex t ron, 192 F.R .D. 4 94, 5 01 (D . Md .
2000 )
is cha rged with
(“[A ] party
know ledge o f wha t i ts agen ts kn ow o r
wha t i s in the reco rd s ava ilab le to i t.” )
( in te rna l quo ta t ion om i t ted ). In the R ule
34 conte xt , con trol is def ined a s the le g a l
r igh t to ob ta in requi red documen t s on
demand . See Ge r l ing In t ’ l In s . Co . v .
Com m’r , 839 F .2d 131 , 14 0 (3d C ir .
1988) ; 8A C ha r le s A lan W r igh t & A r thu r
R . M i l ler , Fede ra l Prac t ice and P rocedure
§ 22 10 (2d ed . 1994 ). The Med icare
In termed iary Manua l spec ifically requ i re s
the Subcon t rac to r ’ s wo rk ing p ape r s and
f i les be made ava i lab le to the In term ed iary
and Sec retar y at all “ reas ona ble time s.”
Med icare In te rmed ia ry Manua l p t . F .
Because the reco rd demon s t ra te s Me rcy
Cath olic Med ica l Cen te r p rov ided the
necessary docu men ts to the Subco n trac tor ,
and
the
In te rmed ia ry emp loyed
the
Subcon t rac to r to con duct t h e aud i t and
rece ive documen ts , the documen ts w ere
acce ssible to the In terme diary and with in
its contro l.
Wh ile the re is no que s t ion th e
In termed iary d et erm in es th e A PRA and
co r re spond ing adjus tmen ts to the ho spital-
spec ific ra te and the Ta rge t Amoun t unde r

§ 413 .86, it do es no t follow that th e
p rov ide r may no t supp ly the da ta to the
I n t e rm e d i a r y
t h r o u g h
t h e o n – s i t e
Sub contra cto r . The Subcon t rac to r wa s
en t i tled to receive co s t documen ta t ion
f rom Me rcy C a tho l ic Med ica l Cen te r a s
the In te rmed ia ry’ s agen t. An agency
relation ship may be e s tab l i shed by : (1 )
exp ress au th or ity; (2) im plied a utho rity , to
do a l l tha t is prop e r , usua l and n ecessary
fo r the au tho r i ty ac tua l ly g ran ted ; (3 )
appa ren t au tho r ity, a s wh e re the p rinc ipal
ho ld s one ou t a s agen t by wo rd s o r
cond uct; and (4 ) agency by e stop pel. See
SE I Co rp . v . N o r ton & Co ., 631 F . Supp .
497 , 501 (E.D . Pa. 1 986 ).
Ba sed on the re la t ion sh ip be tween
the Sub contra ctor an d Inte rmed ia ry, the
subc ontr ac tor l ike ly had exp re s s o r imp l ied
autho rity
to receive documen t s f rom
Me rcy C atho lic M edic al C ente r. See
Med icare In te rmed ia ry Manua l p t s. D -F .
The Subcon t rac to r undoub tab ly po s se s sed
the au tho r i ty to conduc t the reaud it o f the
grad uate med ica l educa t ion cos ts . JA 153 .
A s no ted , adjus tmen t of the hosp ital-
spec ific rate an d targe t amo unt is t ied to
the c la s si f ica t ion of h osp itals’ c osts . See
42 C .F .R . § 413 .86 ( l ). Ra t iona l ly , the
Subcon t rac to r shou ld be a utho rized to
r e c e iv e d o c um e n t s
f o r b o t h c o s t
rec las s i f ica t ion s and ad ju s tmen t s to a
hosp i ta l’s spec ific rate and target amo unt.
Alte rna tiv ely, i f the subcon t rac to r lacked
express a u th o ri ty t o r ec e iv e do c um ents, the
fac t that it had cond ucted the g ra duate
med ica l educa t ion
reaud i t, and had
conduc ted a ll o f Me rcy Ca tho lic Med ica l
Cen ter’s aud i t s s ince th e “mid 70s ,” JA

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153 , demon s t ra te s the Subcon trac to r had
a p p a r e n t a u t h o r i t y
th e
r e c e i v e
t o
documen ts . “It is we ll se t tled that appa ren t
autho rity (1 ) ‘ re su lt s f rom a man i fe s ta t ion
by a pe rson tha t ano the r is h i s agen t ’ and
(2 ) ‘ex i st s on ly to the ex tent tha t it is
reason able fo r the th i rd pe rson dea l ing
with t h e agent to b elieve that the agen t is
au thor ized .’” Tay lo r v . Peop le ’ s Na tu ra l
Ga s Co . , 49 F .3d 982 , 989 (3d C i r . 1995 )
(quo t ing Re s ta temen t (Second ) o f Agency
§ 8 cm ts . a & c (1958 )) . Merc y C a tholic
Med ica l C en ter re as on ab ly b e l ieved the
Subcon t rac to r had the au thority to receive
t h e
T h e
r e l e v an t docu men ta t io n .
In termed iary and the Subcon trac tor we re
jo in t ly o b l ig a ted
to
s a f e gu a r d
th e
hosp ita l’s documen t s . The re fo re , Me rcy
Cath olic M edica l Cen ter fulf illed
its
bu rden by prov iding a ppro pria t e data to
the I nterme diar y’s ag ent.
Mercy C a tholic Med ica l Cen ter also
con tend s
i t was en t i t led
to p re sen t
ev idence no t subm i tted to the In termed iary
to the P rov ide r Re imbu r semen t Rev iew
Board fo r d e novo rev iew , and tha t the
Board v io la ted 42 U .S .C . § 1395oo (d ) by
no t cons idering this evid en ce .2 3 In this
ve in , Me rcy Ca tho lic Med ica l Cen te r
a rgue s i t shou ld be a llowed to p re sen t
the p ro spec tive
evid ence compa r ing

2 342 U .S.C . § 139 5oo(d ) prov ides in
re levan t pa rt : “A d ec is ion by the Bo ard
shall be ba sed upon th e reco rd made a t
such h e a r ing , wh ich sha l l inc lude the
ev idenc e cons idered by the in termed iary
and such o the r ev idence th a t may be
obt aine d or rece ived by the Bo ard . . . .”

25

paymen t sy stem and the g radua te med ica l
educa t ion base years— to eff ect a n
a d j u s tm e n t o f
th e h o s p i ta l – sp e c i f ic
ra te— un t i l the Boa rd ha s dete rm ined
whe the r to app rove a reaud it c la s si f ica t ion
o f ope ra t ing co s ts to g radua te med ical
edu catio n co sts.
The Sec re tary ma in ta in s Me rcy
Cath olic M ed ica l Cen te r ’ s re l iance on 42
U .S.C . § 13 95o o(d) is u nava iling . W e
ag ree . This statute d oes n ot requ ire the
Board to receive add it iona l ev idenc e no t
con s ide red by the Inte rmed iary, but on ly
confers discre tion on the B oard as to wha t
will be allowe d into th e adm inis tra t ive
reco rd . Tak ing Me rcy Ca tho lic Med ica l
C e n t e r ’ s a r g u m e n t
t o
it s
lo g i c a l
conc lu s ion , all sta tu to ry o r regu la tory
dead l ine s
impo sed on p rov ide r s
fo r
pu rpo se s o f Med i c a re re imbu r semen t
wo uld be incon sequ ential, s ince prov iders
cou ld p ro f fe r a l l requ i red repo r ts and
doc um ents by the time of th e he arin g.
Ne verth e less , becau se we f ind
Me rcy Ca tho l ic Med ica l Cen te r to have
fu l f il led i t s bu rden by p re sen t ing su f f ic ien t
data for ad justing its hosp ital-spec ific rate
and ta rge t amoun t to the S u bc on tr ac to r, we
will reve r se the Boa rd and the D i s t ric t
Cou r t on t his is sue . We will remand to the
D i s t r ic t C ou r t to remand to the P rov ide r
R e im bu r semen t Rev iew Boa rd w i t h
in s truc t ion s to ord er the In terme diary to
ad jus t Me rcy Ca tho l ic M ed ica l Cen ter’s
hosp ital-spec ific ra te and ta rge t amo unt to
co r re spond to rec la s s i fied oper a ting co sts
and g radua te med ica l educa t ion cos ts .

IV .
Fo r the rea sons stated, w e w ill
reve rse and remand the judgmen t o f the
D i s t r ic t Cou r t fo r p roceed ing s con s i sten t
w i th th is op in ion .

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