Ashtabula County Medical Center v. TOMMY G. THOMPSON, Secretary of Health and Human Services

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0452P (6th Cir.)
File Name: 03a0452p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
ASHTABULA COUNTY
MEDICAL CENTER,
Plaintiff-Appellee/
Cross-Appellant,
v.
TOMMY G. THOMPSON,
Secretary of Health and
Human Services,
Defendant-Appellant/
Cross-Appellee.
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Nos. 02-3410/3425
Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 00-01895—Ann Aldrich, District Judge.
Argued: September 18, 2003
Decided and Filed: December 19, 2003
Before: BOGGS, Chief Judge; NORRIS and CLAY,
Circuit Judges.
2 Ashtabula County Med.
Ctr. v. Thompson
Nos. 02-3410/3425
_________________
COUNSEL
ARGUED: Anthony A. Yang, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellant. David M. Levine, BENESCH, FRIEDLANDER,
COPLAN & ARONOFF, Cleveland, Ohio, for Appellee.
ON BRIEF: Anthony A. Yang, Barbara C. Biddle, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C.,
for Appellant. David M. Levine, BENESCH,
FRIEDLANDER, COPLAN & ARONOFF, Cleveland, Ohio,
Mark D. Tucker, BENESCH, FRIEDLANDER, COPLAN &
ARONOFF, Columbus, Ohio, for Appellee.
_________________
OPINION
_________________
ALAN E. NORRIS, Circuit Judge. Plaintiff Ashtabula
County Medical Center (“ACMC”), a hospital located in
Ashtabula, Ohio, sought a higher rate of reimbursement for
the care provided in its skilled nursing facility (“SNF”) than
that allowed by the United States Department of Health and
Human Services (“HHS”). ACMC filed suit in federal court
seeking review of a final decision of the Provider
Reimbursement Review Board (“the Board”), which had
construed the applicable statutes and regulations in a manner
adverse to the hospital. The district court held that the
Secretary’s interpretation of the governing statute and
regulations was unreasonable and granted summary judgment
to ACMC. Ashtabula County Med. Ctr. v. Thompson, 191 F.
Supp. 2d 884 (N.D. Ohio 2002). The Secretary appeals from
that order and ACMC cross-appeals from the district court’s
failure to explicitly rule upon its motion for costs and interest.

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I.
This case presents us with a question of statutory
construction viewed through the lens of the Administrative
Procedure Act (“APA”), which cautions that agency decisions
may only be set aside if they are “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law”
or are “unsupported by substantial evidence . . . or otherwise
reviewed on the record of an agency hearing provided by
statute.” 5 U.S.C. § 706(2)(A), (E).
Because the parties do not contest the facts underlying this
dispute, we will rely upon the district court’s factual recitation
to set the stage:
. . . Both parties stipulated to the relevant facts in a
hearing before the Board, and the Court agrees with the
parties that there is no dispute as to any material factual
issues. ACMC is a hospital located in Ashtabula, Ohio.
In May, 1995, ACMC entered into an “Agreement for
Purchase of the Right to Operate Nursing Home Beds”
with the County Commissioners of Ashtabula County,
the owners of the Ashtabula County Home (“ACH”),
under which ACMC acquired the right, title, and interest
to fifteen of ACH’s 310 beds at a price of $7500 per bed.
ACMC and ACH are separate and unrelated health care
institutions, and ACMC acquired no other assets from
ACH. Under Ohio law, which has imposed a
moratorium on nursing facility beds in the state of Ohio,
ACMC was required to purchase existing beds from
another provider and apply for a certificate of need
(“CON”) before commencing operations. It applied in
June 1995 for a CON granting it authority to acquire,
relocate, and place into service fifteen long-term care
beds on its premises, and the application was granted in
October 1995. ACMC, which had not operated as a
nursing facility or a skilled nursing facility (“SNF”)
previously, became Medicare-certified on March 27,
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Ctr. v. Thompson
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1996. When ACMC began operating its SNF, no ACH
personnel became ACMC employees or managers. ACH
continued to operate as a distinct entity, without any
change in its licensure or certification. Furthermore, no
ACH residents were transferred to ACMC when ACMC
began operating the SNF. Rather, all of the admissions
and residents of ACMC’s distinct part SNF during the
first six months of operation had home addresses within
Health Service Area (“HSA”) # 10, one of the ten regions
into which Ohio is divided for the purposes of
administering the CON program. Both ACH and ACMC
are located within HSA # 10, about seven miles from one
another.
In July 1996, ACMC submitted a request for an
exemption under the new provider provision from the
routine cost limits (“RCLs”) applicable under the
Medicare statutes. The new provider provision is an
exemption from the statutory caps placed on Medicare
reimbursement for health care providers, who, under the
Medicare program, are generally reimbursed up to the
statutory limit for their reasonable costs in providing
necessary health care services. On July 25, 1996, the
Health Care Financing Administration (“HCFA”) [since
renamed “The Centers for Medicare and Medicaid
Services”] denied the request. ACMC appealed to the
PRRB [the Board], which affirmed HCFA’s decision.
The Board’s opinion became the final decision of the
Secretary pursuant to 42 U.S.C. § 1395oo(f)(1). ACMC
now seeks judicial review of the PRRB’s determination
that ACMC does not qualify for a new provider
exemption to the RCLs.
191 F. Supp. 2d at 886-87 (footnotes omitted).
The Social Security Act, which established the Medicare
program, provides payment to qualified hospitals and SNFs
(nursing homes) in return for the services that they provide to

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1The PRM contains the interpretive rules regarding Medicare
reimb ursem ent.
older and disabled citizens. For the relevant period, the
Medicare program restricted payments to SNFs to an amount
equal to the lesser of the “reasonable cost” of or the
customary charge for its services:
The reasonable cost of any services shall be the cost
actually incurred, excluding therefrom any part of
incurred cost found to be unnecessary in the efficient
delivery of needed health services, and shall be
determined in accordance with regulations establishing
the method or methods to be used, and the items to be
included, in determining such costs for various types or
classes of institutions, agencies, and services . . . .
42 U.S.C. § 1395x(v)(1)(A). This “reasonable cost”
restriction applies to “routine service costs,” which include
things like a room, board, and nursing care. Whenever a
SNF’s routine service costs go over per diem cost limitations,
they are deemed unreasonable. The manner in which the
applicable routine service cost limits, referred to as “RCLs,”
are calculated has been adequately summarized elsewhere by
this court. See St. Francis Health Care Ctr. v. Shalala, 205
F.3d 937, 940-41 (6th Cir. 2000).
As the passage quoted from the district court’s opinion
makes clear, the central issue in this appeal is an exception to
the RCL restrictions, known as “the new provider
exemption.” As the Provider Reimbursement Manual
(“PRM”)1 explains, “42 C.F.R. § 413.30(e) provides for an
exemption from the SNF routine service cost limits for new
providers. This provision was implemented to recognize the
difficulties in meeting the applicable cost limits due to
underutilization during the initial years of providing skilled
nursing and/or rehabilitative services[.]” HCFA Pub. 15-1
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Ctr. v. Thompson
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§ 2533.1, at 25-12.1C2 (1997). The disputed regulation,
which has since been amended, defined a “new provider” in
these terms:
A new provider is a provider of inpatient services that
has operated as the type of provider (or the equivalent)
for which it is certified for Medicare, under present and
previous ownership, for less than three full years. An
exemption granted under this paragraph expires at the
end of the provider’s first cost reporting period beginning
at least two years after the provider accepts its first
patient.
42 C.F.R. § 413.30(e) (1995). The PRM provides the
following gloss on this exemption:
Although a complete change in the operation of the
institution . . . shall affect whether and how long a
provider shall be considered a “new provider,” changes
of the institution’s ownership or geographic location do
not in itself alter the type of health care furnished and
shall not be considered in the determination of the length
of operation.
However, for purposes of this provision, a provider
which relocates may be granted new provider status
where the normal inpatient population can no longer be
expected to be served at the new location. . . .
HCFA Pub. 15-1 § 2604.1, at 26-4 (1984).
As already mentioned, ACMC purchased the right to
operate fifteen nursing home beds from ACH in 1995. For its
part, ACH had provided skilled nursing care since 1989.
ACMC paid $112,500 to acquire the beds from ACH, which
it then relocated to its hospital complex. In the process, it
obtained a CON from the State of Ohio, as well as Medicare
certification.

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2As a reminder, the new provider exemption reads, “A new provider
is a provider of inpatient services that has operated as the type of provider
(or the equivalent) for which it is certified for Medicare, under present
and previous ownership, for less than three full years.” 42 C.F.R.
§ 413.30 (e) (1995).
ACMC sought the new provider exemption described
above for its facility. After the HCFA determined that the
SNF did not qualify as a new provider, the hospital appealed
to the Board, which affirmed the denial in a decision rendered
on June 29, 2000. In its decision, the Board relied upon the
factual stipulations recited by the district court. The Board
based its denial on the theory that a change of ownership had
occurred with respect to the fifteen long term care beds and,
because ACH had operated those beds as part of a
participating nursing facility under the Medicare and
Medicaid programs since 1989, ACMC could not be deemed
a new provider.
ACMC appealed to the district court pursuant to 42 U.S.C.
§ 1395oo(f). Both parties filed motions for summary
judgment. The district court reversed the Board and granted
judgment to ACMC. After substantial preliminary
discussion, the district court attempted to determine whether
the term “provider” as used in the regulation at issue was
ambiguous.2 The district court viewed the following as the
crucial question: By purchasing ACH’s CON rights to the
fifteen beds, did ACMC simply take over ownership of an
existing provider and thereby undermine its entitlement to
“new” provider status, or did ACMC’s establishment of a
SNF in a new location, with new personnel, and new patients
constitute the kind of break in operations that entitled it to the
exemption?
The district court first determined that the term “provider”
as used in the regulation was unambiguous and that the
Secretary had erred in applying it:
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. . . The Court . . . concludes that the term “provider” is
unambiguous and must refer to an institution (or distinct
part of an institution), not merely to a characteristic or
attribute of such an institution. Furthermore, the
statutory definitions and the PRM interpretation effective
during the relevant period indicate that Congress and the
Secretary intended the term provider to refer to an
institution or distinct part thereof and that the Secretary’s
new twist on that definition is contrary to “other
indications of the Secretary’s intent at the time of the
regulation’s promulgation.” Thomas Jefferson Univ.
Hosp. [v. Shalala], 512 U.S. [504,] 512, 114 S.Ct. 2381.
Applying the plain meaning of the regulation, the term
provider refers to the institution applying for the
exemption – ACMC’s new distinct part SNF – not
merely to its intangible characteristics or attributes – the
CON rights purchased from ACH, which allowed it to
come into existence. Because ACMC’s distinct part SNF
did not exist until ACMC purchased the CON rights
from ACH, it qualified as a new provider under the
provisions of the new provider exemption regulation.
The Board’s decision was therefore contrary to the plain
meaning of the regulation.
191 F. Supp. 2d at 893.
In the alternative, the district court assumed arguendo that
the term “provider” was ambiguous. If so, then the
Secretary’s position must be affirmed unless it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law[.]” 5 U.S.C. § 706(2)(A) (APA). The
district court concluded that the Secretary’s interpretation was
arbitrary and capricious. 191 F. Supp. 2d at 893-97. Because
we agree with the district court that the term was
unambiguous, we need not reach its alternative holding.

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After entry of judgment, ACMC filed a motion for costs
and an award of interest pursuant to 42 U.S.C. § 1395oo(f)(2).
The Secretary responded by moving for a stay. He conceded
that the statute provided for the taxing of costs but urged the
court “in the interest of judicial economy” to postpone its
ruling on the matter until “any appeal of the judgment . . . has
been finally resolved.” The district court granted the stay
without explicitly ruling on the motion for costs and interest.
II.
Deference to the Secretary’s interpretation of the regulation
only comes into play if its plain language is ambiguous.
Recognizing this fact, the Secretary explains why, in his view,
ambiguity calling for interpretation (and deference) exists.
Pointing to Paragon Health Network, Inc. v. Thompson, 251
F.3d 1141 (7th Cir. 2001), he contends that the term
“provider” is ambiguous.
Paragon is one of several cases bearing a remarkable
similarity with the one now before us. Paragon Health
Network obtained 35 nursing home beds for a new SNF from
Shores Transitional Care and Rehabilitation Center via
Wisconsin’s CON process. As in the instant case, the two
facilities were located in the same health care service area and
the only asset transferred between the two facilities “were the
CON rights; no residents, staff, or equipment were
transferred.” Id. at 1144. With respect to the ambiguity
question, the Seventh Circuit reasoned as follows:
. . . Paragon argues that the regulation has a plain
meaning, which is contradicted by the Secretary’s
interpretation. Paragon focuses on the phrase “provider
of inpatient services that has operated” in the regulation
and its relation to “present and previous ownership.”
According to the appellant, the question of ownership
must be decided with respect to the “provider” as a
whole. A “provider” consists of all those attributes
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necessary for a SNF to “operate[ ]” – that is, not just
CON rights, but physical beds, employees,
administrators, equipment, patients, referral sources, etc.
Paragon backs this up with a citation to PRM § 2604.1,
which states that a “new provider is an institution that
has operated. . . .” Paragon claims that the use of the
word “institution” in the PRM underscores the fact that
“provider” in 42 C.F.R. § 413.30(e) refers to the facility
as a whole, rather than just CON rights. Thus, only when
the SNF as an entire operating institution is transferred to
a new owner can the exemption for a new provider be
denied.
. . . [W]e conclude that the regulation is ambiguous on
what constitutes a “provider.” Paragon is correct that a
nursing “provider” is composed of many different
attributes, but changing one or more of these
characteristics does not mean that the SNF becomes a
different “provider.” For example, if a facility fires all its
staff and hires a new one, but makes no other changes, an
ordinary user of the English language probably would
consider the SNF with the new staff to be the same
“provider” as it was before. Similarly, a SNF that
replaced all of its old equipment with new models would
still be the same “provider” as it was before the
modernization. Even if a SNF both fired its staff and
replaced all of its equipment, one might still call it the
same “provider” if the administration and physical plant
remained the same. Of course, if all the various things
that make up a SNF were new in the sense that they had
not been part of another facility, then one would have to
call that SNF a “new provider.” Conversely, if a nursing
facility did not change any of its aspects, it would
unquestionably continue to be the same provider rather
than a new one. The difficulty in drawing a line between
these two extremes is what makes the word “provider”
ambiguous as used in the regulation.

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Id. at 1148. The district court considered, and rejected, this
analysis:
This Court respectfully disagrees with the Seventh
Circuit’s analysis. That analysis appears to conflate the
questions whether the term “new provider” is ambiguous
and whether the term “provider” as used in the phrase
“provider of inpatient services” is ambiguous. The
Seventh Circuit’s reasoning actually focuses on the
difficulty of drawing the line between the “same
‘provider’” and a “new provider.” This inquiry relates
more to the ambiguity of the term “new” than the
ambiguity of the term “provider.” The regulation is
entirely unambiguous about the meaning of the term
“new,” however. Under the plain terms of the regulation,
a “new” provider is one that has existed “under present
and previous ownership, for less than three full years.”
The inquiry should focus instead on the meaning of the
term “provider,” which this Court finds to be
unambiguous. Relevant definitions elsewhere in the
statute and PRM as well as ordinary English usage lead
this Court to conclude that the term provider can only be
understood to refer to an institution or distinct part of an
institution, not to a mere characteristic or attribute of
such an institution. The relevant inquiry is simply
whether a second, new institution has come into
existence as a result of the transaction.
Ashtabula County Medical Ctr., 191 F. Supp. 2d at 892-93
(footnote omitted).
Although the term “provider” is not defined in § 413.30(e),
its meaning is made clear by referencing related statutes: the
term “provider of services” includes a “skilled nursing
facility,” 42 U.S.C. § 1395x(u); “skilled nursing facility,” in
turn, is “an institution (or a distinct part of an institution),”
that is primarily engaged in providing skilled nursing care to
its residents, 42 U.S.C. § 1395i-3(a). Given these definitions,
12 Ashtabula County Med.
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the term “provider” as used in 42 C.F.R. § 413.30(e) refers to
a Medicare-certified institution (or Medicare-certified distinct
part) that furnishes specified services (here, SNF services).
In this case, ACMC represents the “provider of inpatient
services” contemplated by § 413.30(e).
The Fourth Circuit has likewise concluded that § 413.30(e)
is not ambiguous, and explicitly rejected the reasoning of
Paragon. Maryland Gen. Hosp., Inc. v. Thompson, 308 F.3d
340 (4th Cir. 2002). In that case, the court confronted a
factual scenario similar to the one before us: Maryland
General Hospital had purchased nursing home beds from an
unrelated entity and established a “distinct part” SNF within
its hospital facility. The Board, which was upheld by the
district court, denied “new provider” status for the reasons
urged by the Secretary in the instant case. The Fourth Circuit
reversed and concluded that the regulation was unambiguous
and supported a conclusion “that ‘provider’ as used in section
413.30(e) unambiguously refers to the business institution
providing the skilled nursing services. It therefore follows
that the regulation permits consideration of the institution’s
past and current ownership, but not the past and current
ownership of a particular asset [i.e., beds] of that institution.”
Id. at 347. The court provided the following reasoning in
reaching its judgment:
. . . Section 413.30(e) does not define “provider,” but the
structure and wording of the regulation suggest that the
provider is the business entity or institution providing the
skilled nursing services. This reading is consistent with
the meaning attached to a similar term in another part of
the Medicare Act. See 42 U.S.C.A. § 1395x(u) (defining
“provider of services” as “a hospital, critical access
hospital, skilled nursing facility, comprehensive
outpatient rehabilitation facility, home health agency,
[or] hospice program”). This business-entity-specific
reading of the regulation is also supported by the
explanation of the “new provider” exemption contained

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in the version of Medicare’s “Provider Reimbursement
Manual” . . . in effect at the time MGH purchased the
beds . . . . These repeated references to an “institution”
indicate that application of the new provider exemption
depends upon the ownership and operation of the
business entity that is providing the skilled nursing
services. There is no dispute that neither MGH nor any
previous owner of MGH had provided inpatient skilled
nursing services before the Transitional Care Center was
established. Thus, it would appear that MGH meets the
requirements for a “new provider” as set forth in 42
C.F.R. § 413.30(e).
Id. at 343-44. After distinguishing Paragon, the court
suggests the following analysis:
Notwithstanding the absence of a definition of
“provider,” we simply cannot conclude that section
413.30(e) is ambiguous. Given the ordinary meaning of
the word “provider” and the manner in which it is used
in the regulation, section 413.30(e) can only be
understood as focusing on the business institution that is
providing the skilled nursing services. If that institution,
whether under its current or prior ownership, has
operated as a skilled nursing facility for more than three
years, then it is not entitled to the new provider
exemption. If that institution under current or prior
ownership has not previously operated as a skilled
nursing facility, then it is entitled to the new provider
exemption, even if the institution has purchased some of
its assets from skilled nursing facilities that have
operated for more than three years.
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3Shortly after the Fourth Circuit reached its conclusion, the First
Circuit came out precisely the other way. South Shore Hosp., Inc. v.
Thompson, 308 F.3d 9 1 (1st Cir. 2002) (citing Paragon with approval).
Id. at 346 (emphasis in original).3
The fact that a circuit split exists on this question indicates
that it is a very close call and, in one sense, supports the
Secretary’s contention that the regulation is ambiguous.
However, we conclude that the language of section 413.30(e)
has a plain meaning. As the Fourth Circuit held, a “provider”
is nothing more than a “business institution that is providing
. . . skilled nursing services.” Maryland General, 308 F.3d at
346. Everything about ACMC’s facility is new except for the
CON rights. It is housed in a new building and has new
patients, a new staff, and a new corporate identity. The kind
of corporate shenanigans feared by the Secretary did not
occur here. Rather, ACMC set up a SNF in its hospital. In
order to do so, it purchased a single asset from ACH in the
form of a CON for fifteen nursing home beds, just as if it had
bought a used x-ray machine or kitchen oven. Such a
purchase does not make ACMC into ACH repackaged.
Accordingly, we hold that ACMC is entitled to “new
provider” status pursuant to section 413.30(e).
III.
Having affirmed the judgment of the district court, we turn
to ACMC’s motion for costs and interest filed pursuant to
42 U.S.C. § 1395oo(f). The costs sought are negligible:
$399.10; interest, which is yet to be determined, will
presumably be more significant. As mentioned earlier, the
district court did not explicitly rule on this matter when it
granted a stay.

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While it appears that ACMC is entitled to costs and
interest, we shall remand the matter to permit the district
court to make that determination in the first instance.
IV.
The judgment of the district court is affirmed and the cause
remanded for further proceedings consistent with this
opinion.

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