Clarian Health West, LLC, Doing Business As Clarian West Medical Center v. Eric Hargan , Acting Secretary, U.s. Department of Health and Human Services

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 12, 2017 Decided December 26, 2017
No. 16-5307
C LARIAN HEALTH W EST, LLC, DOING BUSINESS AS C LARIAN
W EST M EDICAL C ENTER ,
APPELLEE
v.
ERIC HARGAN , ACTING S ECRETARY, U.S. DEPARTMENT OF
HEALTH AND HUMAN S ERVICES ,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:14-cv-00339)
Katherine Twomey Allen, Attorney, U.S. Department of
Justice, argued the cause for appellant. With her on the briefs
was Michael S. Raab, Attorney.
Z.W. Julius Chen argued the cause for appellee. With him
on the briefs were Christopher L. Keough and Stephanie A.
Webster.
Before: GARLAND , Chief Judge, H ENDERSON , Circuit
Judge, and EDWARDS , Senior Circuit Judge.

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Opinion for the Court filed by Senior Circuit Judge
EDWARDS .
EDWARDS , Senior Circuit Judge: This case involves a
challenge to the legality of a Department of Health and Human
Services (“HHS”) decision to set forth certain policies
regarding the means of calculating reimbursements for
Medicare providers in an instruction manual without engaging
in notice-and-comment rulemaking. Because we find that
nothing required the agency to proceed otherwise, we must
respect its selected approach. See Perez v. Mortg. Bankers
Ass’n, 135 S. Ct. 1199, 1206 (2015) (emphasizing that courts
may not “improperly impose[] on agencies an obligation
beyond the ‘maximum procedural requirements’ specified by
[statute or regulation]” (quoting Vermont Yankee Nuclear
Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 524
(1978))).
Under Part A of the Medicare program, hospitals are
compensated prospectively based on the estimated likely cost
of patient care. Prospective Payment for Medicare Inpatient
Hospital Services, 49 Fed. Reg. 234 (Jan. 3, 1984); 42 U.S.C.
§ 1395ww(d)(2). On some occasions, when the prospective
payments appear to have been insufficient, hospitals also
receive supplemental or “outlier” payments. 42 U.S.C.
§ 1395ww(d)(5)(A)(ii); see also Dist. Hosp. Partners, L.P. v.
Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015).
In 2003, the Secretary of HHS promulgated a regulation,
through notice-and-comment rule making, that altered the way
such “outlier payments” are calculated. Change in
Methodology for Determining Payment for Extraordinarily
High-Cost Cases (Cost Outliers) Under the Acute Care
Hospital Inpatient and Long-Term Care Hospital Prospective
Payment Systems, 68 Fed. Reg. 34,494 (June 9, 2003). As part

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of the regulation, HHS determined that the payments should be
subject to recalculation—or “reconciliation”—after certain
hospital cost reports were finalized in order to ensure that the
payments corresponded with the hospitals’ actual experienced
costs. See id. at 34,501; 42 C.F.R. § 412.84(i)(4). The
regulation did not determine how hospitals would be selected
for this reconciliation procedure.
In 2010, HHS established instructions governing the
selection process. Set forth in a manual for Medicare payment
contractors, the instructions provided two criteria for payments
that should be recalculated and reconciled. Medicare Claims
Processing Manual, ch. 3, § 20.1.2.5(A) (Dec. 3, 2010),
reprinted in Joint Appendix (“J.A.”) 129-30 [hereinafter CMS
Manual]. In 2012, HHS and its contractor determined that
Appellee Clarian Health West (“Clarian” or “Appellee”) met
the criteria for outlier payments made to it for services provided
in fiscal year 2007. The hospital was subjected to
reconciliation, and it was ultimately required to pay back over
$2 million in outlier payments.
Clarian challenged the 2010 Manual instructions before
the District Court. It asserted, inter alia, that both the
Administrative Procedure Act (“APA”), 5 U.S.C. § 553, and
the Medicare Act, 42 U.S.C. §§ 1395hh(a)(1), (b)(1), required
HHS to promulgate the criteria for selecting hospitals for
reconciliation by regulation after notice-and-comment rule
making. And because the Manual instructions were not
established in that manner, Clarian claimed that both the
instructions and the reconciliation taken pursuant to them were
procedurally invalid.
The District Court found merit in Clarian’s procedural
challenge and granted its motion for summary judgment.
Clarian Health West, LLC v. Burwell, 206 F. Supp. 3d 393

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(D.D.C. 2016). It concluded that the Medicare statute’s
procedural requirement was broader than the APA’s and
determined that, because the instructions did not fall within any
of the APA’s exceptions to notice-and-comment rule making,
they were necessarily procedurally invalid under the Medicare
Act. See id. at 420. HHS appealed the District Court’s
judgment to this court.
We conclude that the Manual instructions embody a
general statement of policy, not a legislative rule, setting forth
HHS’s enforcement priorities. Policy statements do not
establish binding norms. Pac. Gas & Elec. Co. v. Fed. Power
Comm’n, 506 F.2d 33, 38 (D.C. Cir. 1974). And they are not
“rules” that must be issued through notice-and-comment rule
making. Perez, 135 S. Ct. at 1203. Nor are the instructions
subject to the Medicare Act’s independent notice-and-
comment requirement because they do not establish or change
a substantive legal standard. Because neither the APA nor the
Medicare Act required that the Manual instructions be
established by regulation, we reverse the decision of the
District Court.
I. Background
A. Statutory and Regulatory Background
Congress established the Medicare program in 1965 to
“provide[] federally funded health insurance for the elderly and
disabled.” Methodist Hosp. of Sacramento v. Shalala, 38 F.3d
1225, 1226-27 (D.C. Cir. 1994); 42 U.S.C. § 1395 et seq. HHS
administers the program through the Centers for Medicare and
Medicaid Services (“CMS”). It originally reimbursed hospitals
based on the “reasonable costs they incurred in providing
services to Medicare patients.” Cape Cod Hosp. v. Sebelius,
630 F.3d 203, 205 (D.C. Cir. 2011). Members of Congress

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became concerned that this system failed to effectively
incentivize hospitals to control their costs. To address this
issue, in 1983 Congress adopted a “prospective payment
system” under which hospitals receive a fixed payment for
inpatient services. Id. “Congress believed that [this system]
would encourage efficiency ‘by rewarding cost-effective
hospital practices.’” Id. (quoting Methodist Hosp. of
Sacramento, 38 F.3d at 1227).
Under the prospective payment system, CMS pays
hospitals a set amount per patient which is adjusted to roughly
reflect the average cost incurred by hospitals nationwide for
treating patients with the same diagnosis. 42 U.S.C.
§ 1395ww(d)(2), (4); see also Cape Cod Hosp., 630 F.3d at
205-06 (explaining the payment-calculation process). These
payments are calculated by private healthcare insurers, known
as Medicare Administrative Contractors (“MACs”), under
contract with CMS. See 42 U.S.C. § 1395h(a).
Congress recognized, however, that in some
circumstances, treatment for patients would be extraordinarily
costly. See Cty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009
(D.C. Cir. 1999). Congress thus authorized HHS to make
supplemental “outlier payments” to hospitals to account for
these disparate costs. 42 U.S.C. § 1395ww(d)(5)(A). Under the
statute, a hospital is eligible for an outlier payment “in any case
where charges, adjusted to cost, exceed . . . the sum of the
applicable [adjusted standardized prospective rate] plus a fixed
dollar amount determined by the Secretary.” Id.
§ 1395ww(d)(5)(A)(ii). This case deals with the manner in
which CMS calculates such payments.

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1. Outlier Payment Formula
The Medicare Act and HHS’s implementing regulations
establish the general formula for outlier payment calculations.
First, CMS instructs MACs to calculate the hospital’s “cost-to-
charge ratio,” which represents the amount the hospital on
average incurs in costs for every dollar that it bills. 42 C.F.R.
§ 412.84(i)(2). The MAC then multiplies the total amount
billed by the cost-to-charge ratio to determine the hospital’s
actual costs. Id. § 412.84(g). If the difference between this
number and the amount that the hospital received as a
prospective payment exceeds the “fixed-loss threshold” set by
the Secretary, the hospital can request an outlier payment. Id.
§ 412.84(k). The amount of the payment is calculated using the
amount by which the actual costs exceed the prospective
payment plus the fixed-loss threshold. That number is
multiplied by the “marginal cost factor,” which is set by
regulation at 80%. Id. Under this process, a hospital may
ultimately recover 80% of the difference between its cost-
adjusted charges and the outlier threshold. Id.; see also Dist.
Hosp. Partners, 786 F.3d at 49-51 (providing an example
calculation).
In the 2000s, HHS determined that hospitals were
manipulating their charges in order to inflate their cost-to-
charge ratios. See Proposed Change in Methodology for
Determining Payment for Extraordinarily High-Cost Cases
(Cost Outliers) Under the Acute Care Hospital Inpatient
Prospective Payment System, 68 Fed. Reg. 10,420, 10,423
(Mar. 5, 2003). This process of “turbocharging” was made
possible by the temporal disconnect between the time when the
costs were incurred and the time period used to determine the
hospital’s cost-to-charge ratio. See id. For many years, MACs
calculated the cost-to-charge ratio using the hospital’s most
recently settled cost report, which was typically three years old.

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Id. By rapidly increasing the amount it charged for services, a
hospital could take advantage of the higher out-of-date cost-to-
charge ratio which, when multiplied by the inflated charges,
would result in a higher outlier payment divorced from any
increase in actual cost of care. See id.
2. The 2003 Rule
In 2003, HHS responded to the “turbocharging” problem
by promulgating a rule, after notice-and-comment rule making,
which included several changes to the methodology for
determining outlier payments. 68 Fed. Reg. 34,494. For
example, the rule permitted MACs to consider “the most recent
tentative settled cost report” to determine the applicable cost-
to-charge ratio, moderately reducing the lag time. Id. at 34,499;
42 C.F.R. § 412.84(i)(2).
Most relevant to this case, the 2003 rule also provided for
“reconciliation” of outlier payments. Reconciliation authorizes
MACs to revisit outlier payments for a specific year using the
cost report for the year in which the service was actually
provided once it has been finalized. 68 Fed. Reg. at 34,501; 42
C.F.R. § 412.84(i)(4). HHS indicated that reconciliation would
be done only on a limited basis, but the agency declined to
prescribe the precise circumstances when reconciliation would
be appropriate. 68 Fed. Reg. at 34,503.
3. The 2010 Guidance
In 2010, HHS adopted a policy for MACs to use when
administering the reconciliation process. The policy appeared
in published instructions in a CMS Manual that covers
Medicare claims processing. See CMS Manual, Ch. 3
§ 20.1.2.5, J.A. 129-30. According to the Manual,

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Subject to the approval of the CMS Central
Office, a hospital’s outlier claims will be
reconciled at the time of cost report final
settlement if they meet the following criteria:
1. The actual operating [cost-to-charge
ratio] is found to be plus or minus 10
percentage points from the [ratio] used
during that time period to make outlier
payments, and
2. Total outlier payments in that cost
reporting period exceed $500,000.
Id., J.A. 129. The Manual instructs MACs to calculate a revised
cost-to-charge ratio for the hospital. “If the criteria for
reconciliation are not met, the cost report shall be finalized. If
the criteria for reconciliation are met, [MACs] shall follow [the
procedures to perform and record outlier reconciliation
adjustments].” Id. It also provides that “[e]ven if a hospital does
not meet the criteria for reconciliation, subject to approval of
the Regional and Central Office, the [MAC] has the discretion
to request that a hospital’s outlier payments . . . be reconciled
if the hospital’s most recent cost and charge data indicate that
the outlier payments to the hospital were significantly
inaccurate.” Id., J.A. 129-30.
HHS did not engage in notice-and-comment rule making
procedures before issuing the instructions in the Manual.

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B. Facts and Procedural History
Clarian West Medical Center is a hospital located in Avon,
Indiana that began operating in December 2004. Because
Clarian treated relatively few patients in its first years, its
outlier payments from 2007 were based on a 92.2% cost-to-
charge ratio from 2005 that differed significantly from its final
ratio of 50.5% for 2007. As a result, Clarian’s MAC
determined upon a retrospective evaluation that the hospital
was eligible for reconciliation under the 2010 Manual
instructions. The MAC concluded that although Clarian had
received approximately $2.8 million in outlier payments for
that period, it was actually owed less than $700,000. Following
approval from CMS, the MAC issued a Notice of Program
Reimbursement stating that Clarian was required to repay $2.4
million (including $200,000 for the time value of the money).
Clarian filed a petition for review with HHS’s Provider
Reimbursement Review Board (“Board”). Clarian alleged,
inter alia, the reconciliation was unlawful because the Manual
instructions were procedurally invalid. Although the Board has
authority to affirm, modify, or reverse a MAC’s reimbursement
decision, it lacks authority to declare statutes or regulations
invalid. 42 C.F.R. § 405.1842(f)(1)(ii), (g)(1)(iii). However, a
provision of the Medicare Act permits a provider to bring suit
in district court without proceeding through the full Board
review process when the Board certifies that it does not have
authority to resolve a provider’s challenge. 42 U.S.C.
§ 1395oo(f)(1). Clarian thus sought certification for expedited
judicial review of the reconciliation decision. The Board
granted Clarian’s request for expedited review, concluding that
it lacked authority to grant the relief sought “with respect to
those issues involving the validity of 42 C.F.R. § 412.84(h).”
Dep’t of Health & Human Servs., Provider Reimbursement

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Review Board, Case No. 12-0629, J.A. 31 [hereinafter
P.R.R.B. Decision].
On March 3, 2014, Clarian filed suit in the District Court,
alleging, inter alia, that “the Secretary’s 2012 [reconciliation]
determination, and the agency rules governing that
determination, are invalid and should be set aside” because
they violate the APA and the Medicare statute’s procedural
requirements. Complaint ¶¶ 58, 60, J.A. 20-21. As is relevant
on appeal, Clarian sought recoupment of the $2.4 million and
invalidation of the 2010 Manual instructions. Id. ¶ 64, J.A. 23-
24. The parties filed cross-motions for summary judgment.
The District Court concluded that, under the Medicare Act,
HHS was required to promulgate the 2010 instructions through
notice-and-comment rule making. Clarian Health West, LLC,
206 F. Supp. 3d at 420. It granted Clarian’s summary judgment
motion, denied the Secretary’s, and remanded the matter to
HHS for further proceedings. Id. The Government then filed an
appeal with this court.
The parties’ initial briefs to this Court addressed only
whether the 2010 Manual instructions were procedurally
invalid. In its reply brief, the Government for the first time
raised a potential jurisdictional issue. It asserted that the
Board’s expedited judicial review certification did not cover
the question Clarian had ultimately pressed before the District
Court, and that as a result the District Court lacked jurisdiction
to hear the case. Clarian then filed an unopposed motion for
leave to file a supplemental brief addressing the court’s
jurisdiction, which the court granted on September 15, 2017.
While the case was pending, this court resolved a similar
jurisdictional issue in Allina Health Servs. v. Price, 863 F.3d
937, 941 (D.C. Cir. 2017), on July 25, 2017.

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II. Discussion
A. Standard of Review
This Court reviews the District Court’s grant of summary
judgment de novo. See Southeast Alabama Med. Ctr. v.
Sebelius, 572 F.3d 912, 916 (D.C. Cir. 2009). In determining
what procedures an agency was required to employ in adopting
a specific policy, we may consider the agency’s
characterization of its own rule or statement, but we are not
compelled to defer on this question. Am. Hosp. Ass’n v. Bowen,
834 F.2d 1037, 1056 (D.C. Cir. 1987).
B. Jurisdiction
Before we address Clarian’s procedural challenge to the
Manual instructions, we must determine whether this court and
the District Court may properly assert jurisdiction over the
matter. Clarian asserted jurisdiction under 28 U.S.C. § 1331
and the expedited judicial review provision of the Medicare
Act, 42 U.S.C. § 1395oo(f)(1). See Complaint ¶ 12, J.A. 9.
However, the Medicare Act expressly forecloses jurisdiction
under § 1331. Your Home Visiting Nurse Servs., Inc. v. Shalala,
525 U.S. 449, 456 (1999) (“42 U.S.C. § 405(h) [is] applicable
to the Medicare Act by operation of § 1395ii, which provides
that ‘[n]o action against . . . the [Secretary] or any officer or
employee thereof shall be brought under section 1331 . . . .”).
The Government contends that the expedited judicial review
provision is equally inapplicable to Clarian’s claims. We
disagree.
The Medicare Act’s expedited judicial review provision
states, in relevant part, that,

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Providers shall also have the right to obtain
judicial review of any action of the fiscal
intermediary which involves a question of law
or regulations relevant to the matters in
controversy whenever the Board determines (on
its own motion or at the request of a provider of
services as described in the following sentence)
that it is without authority to decide the
question[.] . . . The Board shall render such
determination in writing within thirty days after
the Board receives the request . . . . If the Board
fails to render such determination within such
period, the provider may bring a civil action
(within sixty days of the end of such period)
with respect to the matter in controversy
contained in such request for a hearing.
42 U.S.C. § 1395oo(f)(1). In the motion that Clarian submitted
to the Board pursuant to this provision, it requested expedited
judicial review over “Question 2.” Question 2 asked:
Whether the reconciliation process established
under outlier regulation, 42 C.F.R. § 412.84(h),
is procedurally and substantively invalid
because the regulation establishes no standards
governing the exceptions process and related
program instructions were not adopted in
accordance with the notice and comment
rulemaking requirements mandated by the
Administrative Procedure Act and Medicare
Act.
Provider’s Petition for Expedited Review at 14 (Dec. 5, 2013),
J.A. 48. In its decision, the Board concluded that “questions 1,
2 and 4, regarding the validity of 42 C.F.R. § 412.84(h)

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properly fall[] within” the Medicare Act’s expedited review
provision, and it “grant[ed] the Provider’s request for expedited
judicial review with respect to those matter[s].” P.R.R.B.
Decision at 7, J.A. 32.
The Government’s first argument focuses on its
interpretation of the Board’s decision. It reads the decision to
grant review over only the validity of the 2003 regulation itself,
not the 2010 Manual instructions. Because Clarian’s challenge
before this court and the court below asserted the illegality of
the latter, the Government argues that the challenge falls
outside of the “specific legal question” covered by the Board’s
limited grant of expedited judicial review. The Government
next argues, in the alternative, that even if the court understands
the Board’s decision to have granted review over Clarian’s
challenge to the Manual instructions, the court still lacks
jurisdiction on the ground that the “the Board’s decision was
erroneous because the Board did have authority to decide that
challenge.” Gov’t Reply Br. 6. Under both theories, the
Government asserts that the District Court should have
dismissed Clarian’s claim for lack of subject-matter
jurisdiction and that we must now vacate that court’s decision
and dismiss.
As Clarian notes in its supplemental brief, the
Government’s second argument is squarely foreclosed by this
court’s recent decision in Allina Health Servs., 863 F.3d at 941.
There, the court held that the Medicare Act does not permit
courts to revisit the Board’s decision to grant expedited judicial
review, or to question the Board’s determination that it lacked
authority over a question or claim. See id. It is thus irrelevant
whether the Board correctly determined that it lacked authority
over Clarian’s challenge to the Manual instructions.

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Furthermore, it is apparent from the face of the Medicare
Act that the Government’s primary jurisdictional argument is
similarly unavailing. The expedited judicial review provision
makes it clear that “if the Board fails to render [a]
determination” on its authority within 30 days, “the provider
may bring a civil action . . . with respect to the matter in
controversy contained in such request for a hearing.” 42 U.S.C.
§ 1395oo(f)(1). Because the Government does not contend that
Clarian failed to raise its argument that the 2010 Manual
instructions were procedurally invalid in its motion before the
Board, and the Board has not since held a hearing on that
question, there is no reading of the Board’s Order that could
deprive this court, or the District Court of jurisdiction. Either
the Board granted expedited review over the question
presented, or it failed to decide Clarian’s request for expedited
judicial review of the question within thirty days. In either
event, Clarian had a right to seek review in the District Court,
and we have appellate jurisdiction over that court’s decision
pursuant to 28 U.S.C. § 1291. We accordingly may proceed to
the merits of Clarian’s challenge.
C. Clarian’s Claim Under the Medicare Act
The Medicare Act provides that “[n]o rule, requirement or
other statement of policy . . . that establishes or changes a
substantive legal standard governing . . . the payment for
services . . . shall take effect unless it is promulgated by the
Secretary by regulation.” 42 U.S.C. § 1395hh(a)(2).
Regulations become final only after the Secretary provides an
opportunity for public notice and comment. Id. § 1395hh(b)(1).
The District Court concluded that the Manual instructions were
invalid under this provision because HHS did not issue them
by regulation after providing opportunity for notice and
comment. Clarian Health West, LLC, 206 F. Supp. 3d at 420.
As it did before that court, the Government argues on appeal

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that the instructions fall outside of § 1395hh(a)(2)’s procedural
requirement. It does not dispute that the Manual instructions
constitute a “rule, requirement, or other statement of policy”
governing “the payment of services.” Rather, it argues only that
the instructions do not “establish[] or change[] a substantive
legal standard.”
This court has defined a “substantive legal standard” under
the Act to include “at [] minimum . . . a standard that creates,
defines, and regulates the rights, duties, and powers of parties.”
Allina Health Servs., 863 F.3d at 943. The Government asserts
two reasons that HHS’s Manual instructions do not qualify
under that standard: First, it argues that the instructions “do not
alter the substantive legal standard for determining whether an
outlier payment is warranted or the amount of an outlier
payment” because the 2003 regulation subjected all outlier
payments to reconciliation and set forth the formula for
calculating payments during the reconciliation process. Gov’t
Br. 14. On this theory, the Manual instructions “merely instruct
Medicare contractors to identify hospitals whose outlier
payments in a given year meet certain criteria . . . [and] seek
approval from the agency to recalculate those payments,”
therefore “reflect[ing] the agency’s policy about how best to
deploy its contractors’ limited resources.” Id. at 14-15. Second,
the Government argues that “the [M]anual instructions do not
compel the agency to order reconciliation in any particular
case” and, thus, “are not binding on the agency.” Id. at 15. Both
assertions cast the instructions as guidelines that amplify the
agency’s enforcement discretion—discretion that stems from
the statute, the 2003 legislative rule, and 42 C.F.R.
§ 412.84(i)(4).
Clarian, in turn, responds that the 2003 rule merely set
forth the data that should be used in a reconciliation, but it
failed to determine which outlier payments would be subjected

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to retroactive adjustment. In its view, only the 2010
instructions make that determination and, thus, they establish
the substantive legal standard that determines the amount that
the providers will ultimately be reimbursed. This type of “gap-
filling” in the reconciliation scheme, Clarian urges, is covered
by § 1395hh(a)(2). Further, Clarian argues that the Manual
instructions are mandatory and binding, as they employ the
words “will” and “shall.”
It cannot be seriously disputed that HHS’s authority to
reconcile outlier payments alters providers’ legal rights. As in
this case, the decision to recalculate a provider’s
reimbursement pursuant to the reconciliation method may
mean that a hospital receives millions of dollars less in
payments than it otherwise would. But this change in
providers’ rights results from the Medicare Act and its
implementing regulations—not the 2010 Manual instructions.
Together, the Act and the regulations establish the
standard that governs hospitals’ eligibility for outlier
payments: The Act authorizes hospitals to request outlier
payments in cases where “charges, adjusted to cost” exceed
certain specified amounts. 42 U.S.C. § 1395ww(d)(5)(A)(ii). It
also authorizes the Secretary to determine the amount of such
payments, and establishes that they shall “approximate the
marginal cost of care beyond the [applicable] cutoff point.” Id.
§ 1395ww(d)(5)(A)(iii). The regulations, in turn, set forth the
criteria for calculating those payments. See 42 C.F.R.
§§ 412.80(a)(1), 412.84. The 2003 rule specifically authorizes
the agency to adjust the payments pursuant to the reconciliation
calculation procedures set forth at 42 C.F.R. 412.84(i)(4). See
68 Fed. Reg. at 34,504 (“We are adding § 412.84(i)([4]) to
provide that, effective 60 calendar days after the date of
publication of this final rule, outlier payments will become
subject to adjustment when hospitals’ cost reports coinciding

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with the discharge are settled.”). As Clarian’s counsel agreed,
see Recording of Oral Arg. 27:30-29:12, these statutory and
regulatory provisions, of their own force, provide the agency
with authority to engage in reconciliation for any outlier
payment. Therefore these provisions establish the substantive
legal standards governing provider reimbursement.
The Manual instructions do not alter the applicable legal
standards. This is not to say that they have no practical effect.
Rather, the important point is that the agency maintains the
same authority to reconcile any outlier payment that it had prior
to the adoption of the Manual instructions. The instructions
merely set forth an enforcement policy that determines when
MACs will report hospitals for reconciliation. They do not
change the legal standards that govern the hospitals, and they
do not change the legal standards that govern the agency.
Indeed, the instructions bind neither CMS nor the Board in
adjudications. In adjudicated cases, CMS and the Board apply
the formulas described in the regulations, not the thresholds
contained in the Manual instructions, in determining hospitals’
outlier-payment totals. See CMS Manual at 34-35, J.A. 129-30
(“Even if a hospital does not meet the criteria . . . the Medicare
contractor has the discretion to request that a hospital’s outlier
payments in a cost reporting period be reconciled . . . .”); id. at
34, J.A. 129 (“Subject to the approval of the CMS Central
Office, a hospital’s outlier claims will be reconciled . . . if they
meet the . . . criteria.”); 42 C.F.R. § 405.1867 (explaining that
the Board must “afford great weight” to CMS policy
statements, but is not bound by such statements as it is by
regulations).
To put it simply, reconciliation can be initiated in any
situation in which CMS deems it appropriate, irrespective of
whether the criteria in the Manual instructions are met. When

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read in context, it is clear that the Manual’s use of the words
“will” and “shall” does not indicate otherwise. See CMS
Manual at 34-35, J.A. 129-30. The agency’s authority is
accordingly exactly as it would be if the Manual instructions
did not exist. The hospitals’ legal entitlement to outlier
payments is likewise unchanged. A hospital may pursue an
action with the Board to challenge an agency decision to
subject it to reconciliation without regard to whether it
allegedly satisfied the criteria in the 2010 Manual instructions.
The instructions thus did not alter or establish a substantive
legal standard and the Medicare Act did not require HHS to
promulgate the instructions by regulation.
D. Clarian’s Claim Under the Administrative Procedure
Act
Clarian also argues that the Manual instructions are
procedurally invalid because they fail to comply with the
APA’s independent notice-and-comment procedural
requirements. See 5 U.S.C. § 553. The APA mandates that
substantive, legislative rules be promulgated only after public
notice and comment, but it does not extend that requirement to
“interpretive rules, general statements of policy, or rules of
agency organization, procedure, or practice.” Id.
§ 553(b)(3)(A). The Government argues that the Manual
instructions fall within each of those exempted categories and
so were not subject to the APA’s constraint. Clarian responds
that the instructions fall within none of them.
In addition to arguing that HHS’s instructions are
encompassed by § 553(b)(3)(A)’s non-legislative rule
exemptions, the Government appears to make an additional
threshold argument that the APA’s procedural requirements do
not apply to this case at all. For this assertion, it points to a
separate exception for “matter[s] relating to . . . benefits,” 5

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U.S.C. § 553(a)(2), which has been interpreted to cover
Medicare reimbursement determinations, see Humana of S.
Carolina v. Califano, 590 F.2d 1070, 1082 (D.C. Cir. 1978).
The Government recognizes that, in 1971, the Secretary
voluntarily waived the § 553(a)(2) exception and subjected
itself to the statute’s procedural requirements. Public
Participation in Rule Making, 36 Fed. Reg. 2532 (Feb. 5,
1971). Yet, it appears to contest the assertion that this waiver
binds the agency. See Gov’t Reply Br. 8 & n.3. The
Government provides no basis for this argument, however, and
it fails to address this court’s and the Supreme Court’s cases
treating this or other such waivers as binding. See Samaritan
Health Serv. v. Bowen, 811 F.2d 1524, 1529 & n.14 (D.C. Cir.
1987); Humana of S. Carolina, 590 F.2d at 1084; Rodway v.
U.S. Dep’t of Agric., 514 F.2d 809, 814 (D.C. Cir. 1975)
(“[T]he regulation fully bound the Secretary to comply
thereafter with the procedural demands of the APA.”); see also
Service v. Dulles, 354 U.S. 363, 388 (1957).
Nonetheless, to the extent that, and in whatever form the
APA’s procedural rulemaking requirements bind HHS, they
did not require that the Manual instructions be promulgated
after notice and comment. As noted above, the instructions
constitute a general statement of policy setting forth the
agency’s enforcement priorities that binds neither CMS nor the
Board. They are accordingly exempt from § 553’s notice-and-
comment requirement.
The distinguishing line between legislative rules and
general statements of policy has long been described as
“fuzzy.” See Pac. Gas & Elec. Co., 506 F.2d at 37 (quoting 1
K. Davis, Administrative Law Treatise § 5.01, at 290 (1958)).
Indeed, we have noted that “know[ing] how to classify an
agency action as a legislative rule, interpretive rule, or general
statement of policy . . . turns out to be quite difficult and

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confused” and that, “given all of the consequences that flow”
from that determination, “[i]t should not be that way.” Nat’l
Mining Ass’n v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014).
Here, however, it is clear that the Manual instructions
constitute a policy statement for the same reason that they do
not create or amend a substantive legal standard—they have no
binding legal effect.
Our case law sets out “two lines of inquiry” to guide the
determination of whether an action constitutes a legislative rule
or a general statement of policy. Wilderness Soc’y v.
Norton, 434 F.3d 584, 595 (D.C. Cir. 2006). “One line of
analysis considers the effects of an agency’s action, inquiring
whether the agency has ‘(1) impose[d] any rights and
obligations, or (2) genuinely [left] the agency and its
decisionmakers free to exercise discretion.’” Ctr. for Auto
Safety v. Nat’l Highway Traffic Safety Admin., 452 F.3d 798,
806 (D.C. Cir. 2006) (quoting CropLife Am. v. EPA, 329 F.3d
876, 883 (D.C. Cir. 2003)). The second “looks to the agency’s
expressed intentions,” including “consideration of three
factors: ‘(1) the [a]gency’s own characterization of the action;
(2) whether the action was published in the Federal Register or
the Code of Federal Regulations; and (3) whether the action has
binding effects on private parties or on the agency.’” Id. at 806-
07 (quoting Molycorp, Inc. v. EPA, 197 F.3d 543, 545 (D.C.
Cir. 1999)). As we have noted, the two lines of analysis overlap
at the inquiry into whether the action has binding effect, see
General Elec. Co. v. EPA, 290 F.3d 377, 382 (D.C. Cir. 2002),
and we have consistently emphasized that this factor is the most
important, see Nat’l Mining Ass’n, 758 F.3d at 252 (collecting
cases).
Applying these criteria, it is clear that the Manual
instructions are a general statement of policy. Under the first
line of inquiry, the Manual instructions “impose[] [no] rights

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[or] obligations” on providers. CropLife Am., 329 F.3d at 883.
As explained above, the legal effects on providers stem from
the Medicare Act and its implementing regulations as well as
the reconciliation actions taken pursuant to those authorities.
Under the second line of inquiry, it is noteworthy that HHS has
characterized its instructions as mere guidance, see 68 Fed.
Reg. at 34,504. The instructions were not published in either
the Federal Register or the Code of Federal Regulations. And,
finally, critical under both lines of analysis, the instructions
have no binding effect on either CMS or the Board. The agency
is free to determine that reconciliation is or is not appropriate
regardless of whether the criteria in the instructions are met.
CMS Manual at 34-35, J.A. 129-30. The agency is “genuinely
le[ft] . . . free to exercise discretion.” CropLife Am., 329 F.3d
at 883.
Put simply, the Manual instructions “merely explain[] how
the agency will enforce a statute or regulation—in other words,
how it will exercise its broad enforcement discretion.” Nat’l
Mining Ass’n, 758 F.3d at 252. Namely, they describe the way
in which CMS, through its MACs, will implement the
reconciliation authority from the 2003 rule. They provide that,
as a general matter, the agency believes that it will best
accomplish its goal of ensuring that outlier payments
“approximate the marginal cost of care,” 42 U.S.C.
§ 1395ww(d)(5)(A)(iii), by focusing its limited resources on
reconciling payments for hospitals whose actual cost-to-charge
ratio for the period of service is at least 10% higher or lower
than its cost-to-charge ratio for the time period used to calculate
the outlier payment, and whose total outlier payments for that
period exceed $500,000. But HHS has expressly retained
discretion to deviate from these criteria where it determines
that doing so would further the aims of the statute. See CMS
Manual at 34-35, J.A. 129-30.

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Clarian argues that the instructions cannot qualify as a
policy statement because they “do not invite the Secretary’s
exercise of informed discretion as to a subset of otherwise
retroactively adjustable outlier payments; they define the scope
of outlier payments that are subject to retroactive adjustment in
theory and in practice.” Appellee Br. 45. But, as we have
already explained, Clarian acknowledges that the Act and
regulations provided CMS with authority to reconcile
payments prior to the Manual instructions’ issuance, and the
Manual itself makes clear that the agency retains the discretion
to deviate from the criteria that it set forth. Thus, the
instructions are not, as Clarian asserts, “a so-called policy
statement [that] in purpose or likely effect . . . narrowly limits
administrative discretion, [which must] be taken for what it
is—a binding rule of substantive law.” Guardian Fed. Sav. &
Loan Ass’n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658, 666-
67 (D.C. Cir. 1978). To the contrary, they do not cabin the
agency’s discretion.
Finally, Clarian argues that HHS has forfeited the
argument that the instructions are merely a policy statement
because it relied only on the interpretive and procedural rule
exceptions under § 553(b)(3)(A) in its arguments before the
District Court. However, the Government argued below that its
instructions were “guidance” that “need not go through []
notice-and-comment rulemaking.” Gov’t Memo. in Supp. of
Mot. Summ. J. at 25. The District Court rejected that argument.
See Clarian Health West, LLC, 206 F. Supp. 3d at 420. A
litigant may “adduce[] additional support for [its] side of an
issue upon which the district court did rule.” Koch v. Cox, 489
F.3d 384, 391 (D.C. Cir. 2007); see Yee v. City of Escondido,
503 U.S. 519, 534 (1992) (“Once a federal claim is properly
presented, a party can make any argument in support of that
claim; parties are not limited to the precise arguments they
made below.”). The Government’s reliance on the general

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policy statement exception is within the scope of the argument
it made below that the instructions were procedurally valid
under § 553. The claim was therefore preserved for our review.
The APA leaves to agencies the decision of how to
establish policy. If the agency so chooses, it may forego notice-
and-comment procedures and announce through a policy
statement its intentions for future adjudications. It is not up to
the court to second-guess the agency’s decision to proceed in
that manner, so long as the policy statement is not, in truth, a
legislative rule. Because we conclude that the Manual
instructions are not, the APA, like the Medicare Act, poses no
procedural barrier to the course that HHS took here.
E. This Appeal Does Not Present a Challenge to the
Validity of the Manual Instructions on Substantive
Grounds
Lest there be any confusion on this point, we want to make
it clear that this appeal merely involves a challenge to the
agency’s failure to follow notice-and-comment procedures
when it adopted its Manual instructions. The Government has
appealed the District Court’s determination that the
instructions were procedurally invalid. The District Court did
not assess the validity of the Manual instructions or the
agency’s reconciliation determination on substantive grounds.
Therefore, these matters are not in issue on this appeal.
The adoption of the Manual instructions without notice-
and-comment rule making did not pretermit any possibility of
judicial scrutiny of the disputed criteria. An agency election to
adopt a policy statement rather than promulgate a legislative
rule simply determines how, when, and under what standard
the criteria might be reviewed. See M. Elizabeth Magill,
Agency Choice of Policymaking Form, 71 U. C HI. L. R EV.

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1383, 1395-97 (2004); see also Christensen v. Harris Cty., 529
U.S. 576, 587-88 (2000). When an agency adopts a legislative
rule after notice-and-comment rule making, it may be subject
to challenge for only a specified period of time. See, e.g., Sierra
Club de Puerto Rico v. EPA, 815 F.3d 22, 26-28 (D.C. Cir.
2016); Mendoza v. Perez, 754 F.3d 1002, 1018 (D.C. Cir.
2014); Harris v. FAA, 353 F.3d 1006, 1009-10 (D.C. Cir.
2004). In contrast, although a policy statement is not subject to
review upon adoption, it may be challenged if it is applied in
an enforcement action against a regulated party. Nat’l Mining
Ass’n, 758 F.3d at 253 (quoting Pac. Gas & Elec. Co, 506 F.2d
at 38). If this appeal had concerned a claim by Clarian that the
agency’s reconciliation determination was invalid on
substantive grounds, we might have been required to determine
whether HHS’s criteria and their application were arbitrary and
capricious. See, e.g., ExxonMobil Oil Corp. v. FERC, 487 F.3d
945, 950-51 (D.C. Cir. 2007); U.S. Telephone Ass’n v. FCC, 28
F.3d 1232, 1235 (D.C. Cir. 2004); Bechtel v. FCC, 10 F.3d 875,
878 (D.C. Cir. 1993) (“Sooner or later, the agency must meet
its obligation to respond to criticisms.”).
This appeal presents only the procedural claim, however.
And because neither the APA nor the Medicare Act mandated
that HHS promulgate the reconciliation selection criteria in the
2010 Manual instructions through regulation after notice and
comment, the agency’s decision not to go that route was
permissible.
III. Conclusion
For the reasons stated above, we reverse the decision of
the District Court and remand for further proceedings
consistent with this opinion.
So ordered.

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