Saint Francis Medical Center v. Alex M. Azar Ii, Secretary of Health and Human Services

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 12, 2018 Decided June 29, 2018
No. 17-5098
S AINT FRANCIS M EDICAL C ENTER , ET AL.,
APPELLANTS
v.
A LEX M. AZAR II, S ECRETARY OF HEALTH AND H UMAN
S ERVICES ,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:15-cv-01659)
Edgar C. Morrison, Jr. argued the cause for appellants.
With him on the briefs were Stephen A. Calhoun, Tim S.
Leonard, and Barron P. Bogatto.
Melissa N. Patterson, Attorney, U.S. Department of
Justice, argued the cause for appellee. With her on the brief
were Chad A. Readler, Acting Assistant Attorney General,
Jessie K. Liu, U.S. Attorney, and Michael S. Raab, Attorney.
Before: GARLAND , Chief Judge, and K AVANAUGH and
KATSAS , Circuit Judges.
Opinion for the Court filed by Circuit Judge KATSAS .

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Concurring opinion filed by Circuit Judge K AVANAUGH .
KATSAS , Circuit Judge: In 2013, the Secretary of Health
and Human Services promulgated a regulation that bars
hospitals from seeking additional Medicare payments by
challenging factual determinations that are relevant to the
payment year at issue, but that were made many years earlier.
By its terms, the 2013 regulation applies only to reopenings,
which are proceedings through which various administrative
actors within HHS may reconsider their own prior decisions.
We consider whether the regulation also applies to appeals
from one set of administrative actors to another.
I
A
The Medicare program provides federally-funded health
insurance to qualifying elderly and disabled individuals. 42
U.S.C. § 1395 et seq. As originally enacted, Medicare paid
hospitals for any “reasonable costs” of providing covered
services to beneficiaries. See Methodist Hosp. of Sacramento
v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994). In 1983,
however, Congress created a new Prospective Payment
System, under which hospitals are paid a fixed amount for each
beneficiary treated, regardless of their actual costs. See id.
Prospective payment amounts are determined annually,
under a statutory formula that depends in part on base rates
known as “standardized amounts.” See 42 U.S.C.
§ 1395ww(d)(2)(C). In turn, the standardized amounts
depend in part on the “allowable operating costs per discharge
of inpatient hospital services.” See id. § 1395ww(d)(2)(A).
Although prospective payment amounts are adjusted over time
in various ways, the standardized amounts themselves are not.

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See id. § 1395ww(d)(3). Those amounts were calculated in
1983, based on hospitals’ cost-reporting data from 1981. See
Prospective Payments for Medicare Inpatient Hospital
Services, 48 Fed. Reg. 39,752, 39,763–67 (Sept. 1, 1983). To
this day, therefore, Medicare payments for inpatient services
depend in part on factual determinations derived from 1981
data and embedded in 1983 calculations, including the
calculation of “allowable operating costs per discharge.”
In the first instance, decisions about how much to pay
individual hospitals are made by fiscal intermediaries (now
called “Medicare administrative contractors”) acting on behalf
of the Centers for Medicare & Medicaid Services (“CMS”), the
component within HHS that administers Medicare for the
Secretary. See 42 U.S.C. § 1395h; Sebelius v. Auburn Reg’l
Med. Ctr., 568 U.S. 145, 150 (2013). At the end of every year,
participating hospitals submit a cost report to an intermediary,
which reviews the report, determines appropriate payments for
the services rendered, and then issues a Notice of Program
Reimbursement. See id.
A dissatisfied hospital has two ways to challenge such an
annual reimbursement decision. First, under the Medicare
Act, the hospital may appeal as of right to the Provider
Reimbursement Review Board (“PRRB” or “Board”), an
administrative tribunal appointed by the Secretary, within 180
days of receiving notice of the fiscal intermediary’s final
decision. 42 U.S.C. § 1395oo(a)(3). After an adverse PRRB
decision, a hospital may seek further review by the Secretary
and then by a federal district court. See id. § 1395oo(f)(1).
Second, under HHS regulations, a hospital may request the
“reopening” of a “Secretary determination, a contractor
determination, or a decision by a reviewing entity.” 42 C.F.R.
§ 405.1885(a)(1). Such a request must be received “no later
than 3 years after the date of the determination or decision that

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is the subject of the requested reopening.” Id.
§ 405.1885(b)(2)(i). Reopenings are considered by the entity
whose decision is at issue. See id. § 405.1885(a)(1). The
decision whether to reopen is purely discretionary, and it thus
“is not subject to further administrative review or judicial
review.” Id. § 405.1885(a)(6).
B
A recurring issue under this scheme has been whether a
hospital, in the course of pursuing a timely-filed reopening or
PRRB appeal, may contest so-called “predicate facts”—factual
determinations that are relevant to the payment year at issue,
but that were made in earlier years. The Secretary has argued
that the three-year limitations period in the reopening
regulation bars hospitals from challenging—in either
reopenings or appeals to the PRRB—any predicate facts
determined more than three years before the reopening or the
appeal was begun.
We addressed such a contention in Kaiser Foundation
Hospitals v. Sebelius, 708 F.3d 226 (D.C. Cir. 2013).
Although Kaiser involved an appeal to the PRRB, we rejected
the Secretary’s argument under the plain terms of the reopening
regulations in effect at the time. We reasoned that the
“determination of an intermediary” subject to reopening was
the bottom-line “determination of the amount of total
reimbursement.” Id. at 230–31 (quoting 42 C.F.R.
§§ 405.1801(a), .1885(a) (2001)). We further reasoned that
reopenings examined only “findings on matters at issue,” a
term that we construed to mean findings as relevant to the
payment year for which the hospital was seeking additional
reimbursement. Id. at 231–32 (quoting 42 C.F.R.
§ 405.1885(a) (2001)). We therefore held that “the reopening
regulation allows for modification of predicate facts in closed

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years provided that the change will only impact the total
reimbursement determination in open years.” Id. at 232–33.
In response to Kaiser, the Secretary promulgated the 2013
amendments to the reopening regulation directly at issue here.
Provider Reimbursement Determinations and Appeals, 78 Fed.
Reg. 74,826, 75,162–69 (Dec. 10, 2013). The amended
regulation provides that a decision may be reopened “with
respect to specific findings on matters at issue”—a term now
defined to “include a predicate fact” that was “first determined
for a cost reporting period that predates the period at issue.”
42 C.F.R. § 405.1885(a)(1), (a)(1)(iii). Moreover, the
regulation now provides that the three-year limitations period
for seeking a reopening “applies to, and is calculated separately
for, each specific finding on a matter at issue.” Id.
§ 405.1885(b)(2)(iv). Thus, in the context of reopenings, a
predicate fact now must be challenged within three years of
when it is first determined.
C
Appellants in this case are 277 hospitals seeking to
challenge various payment decisions spanning the last two
decades. The hospitals contend that these decisions rest on
errors in the 1981 cost-reporting data that were used to
calculate the standardized amounts in 1983. Specifically, they
argue that this data erroneously characterized transfers of
patients from one hospital to another as patient discharges, thus
overstating the number of discharges and understating the
allowable operating costs per discharge. Because that
determination was embedded in the standardized amount in
1983, it has affected payment decisions ever since.
The hospitals pursued this issue in various appeals to the
PRRB filed as early as 2005. As permitted by Kaiser, the

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hospitals sought to challenge the predicate determination of
allowable operating costs per discharge, as relevant to open
cost years for which they had filed timely administrative
appeals. The PRRB consolidated the various appeals and
dismissed them in light of the 2013 amendments to the
reopening regulation. According to the PRRB, the 2013
amendments applied to these pending appeals and barred the
hospitals’ challenges to the much-earlier determination of
allowable operating costs per discharge.
The hospitals sought further review in the district court.
They raised three arguments: (1) the reopening regulation does
not cover administrative appeals to the PRRB; (2) the 2013
amendments were arbitrary and capricious because they
require the perpetual use of even demonstrably erroneous
predicate factual determinations; and (3) application of the
amendments to appeals pending on their effective date would
be impermissibly retroactive.
The district court rejected all of these contentions and
granted summary judgment to the Secretary. St. Francis Med.
Ctr. v. Price, 239 F. Supp. 3d 237 (D.D.C. 2017). On the first
question, the court reasoned that although the hospitals had
filed timely appeals to the PRRB, they nonetheless “sought to
challenge a predicate fact that was established much earlier
than 180 days (or 3 years) before their filing.” Id. at 247.
According to the court, the PRRB appeals therefore involved
“‘reopening’ a ‘matter at issue,’ which is subject to the time
limitation of § 405.1885.” Id.
II
On summary judgment, the district court held that the
regulation governing challenges to predicate facts in
reopenings also governs challenges to predicate facts in

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administrative appeals to the PRRB. We review that legal
conclusion de novo. See Methodist Hosp., 38 F.3d at 1229.
In Kaiser, we held that there was no untimely reopening
when a hospital challenged predicate facts as relevant to
payments for the open years at issue. Our decision turned on
what constituted the “determination of an intermediary,” and
what constituted “findings on matters at issue,” under the terms
of the reopening regulation then in effect. See 708 F.3d at
230–33. Accordingly, we had no occasion to address the
distinct question whether the reopening regulation applies to
administrative appeals in the first place. We now hold that it
does not.
A
In common legal usage, nobody would confuse an appeal,
which involves one entity reviewing the decision of another,
with a reconsideration or reopening by the same entity that
made the decision at issue. That basic distinction resolves this
case: The reopening regulation applies only to
reconsideration by the entity that made the decision at issue.
It does not apply to administrative appeals.
As amended in 2013, the reopening regulation, titled
“[r]eopening of a contractor determination or reviewing entity
decision” (42 C.F.R. § 405.1885), begins as follows:
A Secretary determination, a contractor
determination, or a decision by a reviewing
entity (as described in § 405.1801(a)) may be
reopened, with respect to specific findings on
matters at issue in a determination or decision,
by CMS (with respect to Secretary
determinations), by the contractor (with respect

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to contractor determinations), or by the
reviewing entity that made the decision (as
described in paragraph (c) of this section).
Id. § 405.1885(a)(1). The regulation thus contemplates three
kinds of possible reopenings. First, a Medicare administrative
“contractor” (i.e., a fiscal intermediary) may reopen its own
prior decision. Second, a “reviewing entity that made the
decision” (including the PRRB, see id. § 405.1801(a)) may
reopen that decision. Third, “CMS” may reopen a “Secretary
determination,” consistent with its role of administering the
Medicare program for the Secretary. To be sure, CMS and the
Secretary of HHS are distinct administrative actors. But
because CMS reports to the Secretary, and “administers
Medicare on the Secretary’s behalf,” St. Elizabeth’s Med. Ctr.
v. Thompson, 396 F.3d 1228, 1230 (D.C. Cir. 2005), this kind
of reopening cannot fairly be described as an appeal from the
Secretary to CMS—and certainly not as an appeal from a fiscal
intermediary to the PRRB.
Paragraph (c) of the reopening regulation, referenced in
the opening provision quoted above, reinforces this analysis.
It provides:
Jurisdiction for reopening a contractor
determination or contractor hearing decision
rests exclusively with the contractor or
contractor hearing officer(s) that rendered the
determination or decision (or, when applicable,
with the successor contractor), subject to a
directive from CMS to reopen or not reopen the
determination or decision. Jurisdiction for
reopening a Secretary determination, CMS
reviewing official decision, a Board decision, or
an Administrator decision rests exclusively with

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CMS, the CMS reviewing official, Board or
Administrator, respectively.
42 C.F.R. § 405.1885(c). Thus, only a Medicare
administrative contractor may reopen its own decisions
(subject to direction from superiors within CMS); only CMS
(acting on behalf of the Secretary) may reopen determinations
of the Secretary; only a CMS reviewing official may reopen his
or her own decisions; only the PRRB may reopen its own
decisions; and only the Administrator of CMS may reopen her
prior decisions. None of these options covers appeals from a
Medicare administrative contractor to the PRRB.
Section 405.1885 also repeatedly distinguishes reopenings
from appeals. It provides that “[a] request to reopen does not
toll the time in which to appeal an otherwise appealable
determination or decision.” 42 C.F.R. § 405.1885(b)(2)(ii).
Moreover, “[i]f a matter is reopened and a revised
determination or decision is made, [the] revised determination
or decision is appealable.” Id. § 405.1885(a)(5). Finally, a
Medicare administrative contractor may “reopen” one of its
own decisions “that is currently pending on appeal before the
Board.” Id. § 405.1885(c)(3). This would make little sense
if an appeal from the decision of a Medicare administrative
contractor to the PRRB were simply a species of reopening.
Nothing in the limitations provisions of the reopening
regulation changes this analysis. Before and after the 2013
amendments, the limitations rule stated that “[a] reopening
made upon request is timely only if the request to reopen is
received … no later than 3 years after the date of the
determination or decision that is the subject of the requested
reopening.” 42 C.F.R. § 405.1885(b)(2)(i) (emphases added).
The 2013 amendments made this limitations period run
separately for each “specific finding on a matter at issue,” id.

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§ 405.1885(b)(2)(iv), and they defined “specific finding on a
matter at issue” to include any “predicate fact,” id.
§ 405.1885(a)(1)(iii). These changes impact how the
limitations period applies to predicate-fact challenges in
reopenings, but they do not extend the limitations period
beyond any “reopening.” Accordingly, the limitations period
does not apply to PRRB administrative appeals.
B
Just as the regulations governing reopenings do not extend
to appeals, the statutes and regulations governing appeals do
not incorporate the rules for reopenings. The governing
statute states that “[a]ny provider of services” to Medicare
beneficiaries may “obtain a hearing” before the PRRB if it is
“dissatisfied with a final determination of the organization
serving as its fiscal intermediary … as to the amount of total
program reimbursement due the provider.” 42 U.S.C.
§ 1395oo(a), (a)(1)(A)(i). To obtain such a review, the
provider must have timely filed with the fiscal intermediary the
“required cost report” for the year at issue, id. § 1395oo(a); the
amount in controversy must be at least $10,000 for individual
appeals, id. § 1395oo(a)(2), or $50,000 for group appeals, id.
§ 1395oo(b); and the provider must “file[] a request for a
hearing within 180 days after notice of the intermediary’s final
determination,” id. §1395oo(a)(3). If those requirements are
met, the PRRB “shall have the power to affirm, modify, or
reverse a final determination of the fiscal intermediary with
respect to a cost report.” Id. § 1395oo(d). Implementing
regulations track and build upon these provisions. 42 C.F.R.
§ 405.1835 (“Right to Board hearing”); id. § 405.1837 (“Group
appeals”). These statutes and regulations neither reference the
limitations rules that apply to reopenings nor otherwise limit
the kinds of arguments that a provider may make in challenging

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the fiscal intermediary’s “final determination” regarding the
“amount … due” for the year at issue.
One provision in the statute governing PRRB appeals
makes “[c]ertain findings not reviewable”—those determined
under two separate sections of the Medicare Act. 42 U.S.C.
§ 1395oo(g). Neither of those sections addresses predicate
facts. See id. § 1395y; id. § 1395ww(d)(7). Accordingly,
§ 1395oo(g) provides no support for barring predicate-fact
challenges in administrative appeals.1
The implementing regulations governing PRRB appeals
contain one reference to reopenings, and it supports our
analysis. In 2016, those regulations were revised to clarify
that “[i]f a final contractor determination is reopened under
§ 405.1885, any review by the Board must be limited solely to
those matters that are specifically revised in the contractor’s
revised final determination.” See 42 C.F.R. § 405.1835(a)(1).
That statement reinforces the conclusion that the reopening of
a “final contractor determination” is different from its “review
by the Board.”
The provisions we have surveyed establish these basic
points: A fiscal intermediary reopening its own decision is
one thing, and the PRRB reviewing that decision on appeal is
quite another. Reopenings and administrative appeals are
conceptually different, are governed by different statutory and
regulatory provisions, and, most importantly here, are
governed by different limitations rules. Accordingly, there is
1 The hospitals argue that any regulation barring such challenges
would be inconsistent with § 1395oo(g), which enumerates only two
categories of “findings not reviewable” in PRRB appeals. Because
we conclude that the reopening regulation does not bar such
challenges, we need not address that broader contention.

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no basis for extending to PRRB appeals the limitations rules
that govern reopenings.
C
The countervailing arguments adopted by the district court
and advanced by the Secretary are unpersuasive.
The district court reasoned that “challenging a predicate
fact”—even in an administrative appeal to the PRRB—“is
‘reopening’ a ‘matter at issue,’ which is subject to the time
limitations of § 405.1885.” 239 F. Supp. 3d at 247.
However, the cited provision merely states that a “predicate
fact” may constitute a “specific finding on a matter at issue” in
a reopening, 42 C.F.R. § 405.1885(a)(1)(iii), where the “3-year
period” of limitations “separately” applies to each such finding,
see id. § 405.1885(b)(2)(iv). These provisions impact the
operation of a limitations rule that governs only the time for
filing a “reopening.” See id. § 405.1885(b)(2)(i). They in no
way suggest that an appeal to the PRRB is such a reopening.
The Secretary attempts to bridge the gap between appeals
and reopenings by highlighting a parallel reference to the two
kinds of proceedings in the regulation defining a “predicate
fact” as:
a finding of fact based on a factual matter that
first arose in or was first determined for a cost
reporting period that predates the period at issue
(in an appeal filed, or a reopening requested by
a provider or initiated by a contractor, under this
subpart), and once determined, was used to
determine an aspect of the provider’s
reimbursement for one or more later cost
reporting periods.

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42 C.F.R. § 405.1885(a)(1)(iii) (emphases added). However,
all this shows is that a predicate fact may have first been
determined in an earlier appeal or reopening. It does not show
that the limitations rules for reopenings also govern appeals.
To the contrary, it undercuts that conclusion, by suggesting yet
again that an “appeal” and a “reopening” are different.
The district court and the Secretary also highlight excerpts
from the preamble to the 2013 amendments. At various points
in the preamble, the Secretary asserted or assumed that the
amendments covered both reopenings and appeals. See, e.g.,
78 Fed. Reg. at 75,168 (“application of the revised rules … to
appeals and reopenings (including requests for reopening) that
are pending on or after the same effective date, is not
impermissibly retroactive”); id. at 75,169 (“[a] predicate fact is
subject to change only through a timely appeal or reopening of
the [notice of program reimbursement] for the fiscal period in
which the predicate fact first arose or the fiscal period for which
such fact was first determined”). However, the preamble
contained no analysis explaining that assumption. Moreover,
the preamble stated that although HHS had proposed and
considered making amendments to the regulations governing
“appeals to the Board at [42 C.F.R.] § 405.1835,” it decided
not to do so. See id. at 75,165, 75,169. Because the
regulation itself is clear, we need not evaluate these mixed
signals from the preamble, which itself lacks the force and
effect of law. See, e.g., Wyeth v. Levine, 555 U.S. 555, 575–
577 (2009); Nat. Res. Def. Council v. EPA, 559 F.3d 561, 565
(D.C. Cir. 2009).
Finally, the Secretary asks us to defer to his interpretation
of the reopening regulation. However, we do not defer when
an agency’s interpretation of its own regulations is “plainly
erroneous or inconsistent with the regulation.” See, e.g., Auer

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v. Robbins, 519 U.S. 452, 461 (1997); Bowles v. Seminole Rock
& Sand Co., 325 U.S. 410, 414 (1945). Here, for the reasons
given, the Secretary’s interpretation is inconsistent with the
text of the reopening regulation, as well as with the separate
statutes and regulations governing administrative appeals.
Moreover, deference would be even more inappropriate
because the preamble fails to offer any reasoned explanation
about how the reopening regulations might extend to PRRB
appeals. See, e.g., AT&T Corp. v. FCC, 841 F.3d 1047, 1049
(D.C. Cir. 2016) (declining to defer under Auer because
agency’s interpretation of its own order “does not disclose the
Commission’s reasoning with the requisite clarity to enable us
to sustain its conclusion”).
III
We hold that 42 C.F.R. § 405.1885 does not apply to
appeals from a fiscal intermediary to the PRRB. Accordingly,
we have no occasion to address whether the 2013 amendments
to that regulation were arbitrary and capricious or whether
applying the amendments to proceedings pending on their
effective date would be impermissibly retroactive.
The judgment of the district court is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
So ordered.

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KAVANAUGH , Circuit Judge, concurring: I join the
Court’s excellent opinion. The Court agrees with the hospitals
that HHS’s 2013 regulation applies only to reopenings, not to
appeals. I add this concurring opinion to also express my
agreement with the hospitals’ broader argument that the 2013
regulation is arbitrary and capricious, and therefore should be
vacated.
HHS calculates hospitals’ Medicare reimbursements by
employing a formula predicated on statistics for hospital
discharges in 1981. The hospitals believe that the 1981
statistics are faulty. In Kaiser Foundation Hospitals v.
Sebelius, 708 F.3d 226 (D.C. Cir. 2013), we ruled that hospitals
could challenge erroneous predicate facts used by HHS to
calculate hospitals’ Medicare reimbursements for open cost
years. In the wake of Kaiser, hospitals could not reopen closed
cost years, but they could challenge erroneous predicate facts –
such as the 1981 statistics on hospital discharges – used to
calculate their ongoing reimbursements for open cost years.
In 2013, seeking to override the result in Kaiser, HHS
promulgated the rule at issue here to bar hospitals from
challenging the predicate facts used to calculate Medicare
reimbursements for open cost years. Even assuming that
HHS’s regulation does not contravene the Medicare statute, the
regulation is arbitrary and capricious. As the Supreme Court
stated in a related case – where HHS was defending a different
rule allowing hospitals to challenge erroneous predicate facts –
it is not reasonable for HHS to “cement misclassified” costs
into “future reimbursements, thus perpetuating literally
million-dollar mistakes.” Regions Hospital v. Shalala, 522
U.S. 448, 462 (1998).
In the district court’s decision in Kaiser, Judge Boasberg
labeled HHS’s approach of barring challenges to erroneous
predicate facts as an “absurdity.” Kaiser Foundation Hospitals
v. Sebelius, 828 F. Supp. 2d 193, 203 (D.D.C. 2011). Sounds

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about right. Indeed, it would seem to be the very definition of
arbitrary and capricious for HHS to knowingly use false facts
when calculating hospital reimbursements. That is particularly
so when those erroneous facts cost hospitals hundreds of
millions of dollars. That is real money.
HHS contends that its rule barring hospitals from
challenging erroneous predicate facts is reasonable because of
the agency’s interest in finality. That argument makes little
sense here. The hospitals are not seeking to reopen closed cost
years. If they were, then HHS’s finality argument would make
a good deal of sense. The hospitals are merely challenging the
factual inputs for the ongoing calculations of reimbursements
for open cost years. The finality defense is makeweight.
HHS’s apparent goal, as Judge Boasberg explained in Kaiser,
is to save money by paying out less in reimbursements to
hospitals. Saving money is a laudable goal, but not one that
may be pursued by using phony facts to shift costs onto the
backs of hospitals. The HHS regulation is arbitrary and
capricious, and therefore should be vacated.

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