Alaska Department of Health and Social Services v. Centers for Medicare

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 ALASKA DEPARTMENT OF
HEALTH AND SOCIAL SERVICES,
Petitioner,
v. No. 04-74204
CENTERS FOR MEDICARE AND HHS No.MEDICAID SERVICES, MARK B.  CMS 2003-14MCCLELLAN IN HIS OFFICIAL
CAPACITY AS ADMINISTRATOR OF THE OPINION
CENTERS FOR MEDICARE AND
MEDICAID SERVICES; MICHAEL O.
LEAVITT,* Secretary,
Respondents. 
On Petition for Review of an Order of the
Department of Health and Human Services
Argued and Submitted
July 12, 2005—Anchorage, Alaska
Filed September 12, 2005
Before: Alfred T. Goodwin, Melvin Brunetti, and
William A. Fletcher, Circuit Judges.
Opinion by Judge Brunetti
*Michael O. Leavitt is substituted for his predecessor, Tommy G.
Thompson, as Secretary of Health and Human Services of the United
States, pursuant to Fed. R. App. P. 43(c)(2).
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COUNSEL
Charles A. Miller, Covington & Burling, Washington, DC, for
the petitioner.
Gerard Keating, Office of the General Counsel, United States
Department of Health and Human Services, Washington, DC,
for the respondents.
OPINION
BRUNETTI, Circuit Judge:
The Alaska Department of Health and Social Services
(hereinafter the “State”) petitions for review of a final deter-
mination by the Administrator of the Centers for Medicare
and Medicaid Services (“CMS” or “Agency”) disapproving a
proposed Medicaid state plan amendment that would alter the
rate at which the federal government reimburses State expen-
ditures on behalf of patients at Indian tribal health facilities.
The Administrator rejected the proposed amendment on two
alternative grounds: (1) that it was inconsistent with the statu-
tory requirement of efficiency, economy, and quality of care;
and (2) that it failed to comply with a regulation governing
payment ceilings. The State challenges the Administrator’s
decision as arbitrary and capricious under the Administrative
Procedure Act. We conclude that the Administrator’s interpre-
tations of the statute and regulation were permissible and
deny the petition for review.
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I. BACKGROUND
A. Statutory Framework
Medicaid is a cooperative federal-state program through
which the federal government reimburses states for certain
medical expenses incurred on behalf of needy persons. Wilder
v. Va. Hosp. Ass’n, 496 U.S. 498, 502 (1990). Participation by
states is voluntary, but those that choose to participate must
comply both with statutory requirements imposed by the
Medicaid Act and with regulations promulgated by the Secre-
tary of Health and Human Services. Id.; see also Orthopaedic
Hosp. v. Belshe, 103 F.3d 1491, 1493 (9th Cir. 1997).
To qualify for federal assistance, participating states must
submit to the Secretary, and have approved, a “plan for medi-
cal assistance” that describes the nature and scope of the state
program. Wilder, 496 U.S. at 502. The Medicaid Act pre-
scribes a laundry list of requirements that this state plan
“must” satisfy, 42 U.S.C. § 1396a(a), and an extensive body
of regulations implements these requirements. The Secretary
“shall approve” any state plan (or amendment) that fulfills
these statutory and regulatory conditions, 42 U.S.C.
§ 1396a(b), and has delegated this authority to the CMS
Administrator. 42 C.F.R. § 430.15(b).
Under normal circumstances, if the Administrator approves
the state plan, the federal government reimburses the state for
a fixed percentage of certain expenses that the state incurs on
behalf of Medicaid-eligible individuals. This percentage,
known as the Federal Medical Assistance Percentage
(“FMAP”), varies from state to state. Health care providers
bill the state, the state pays the providers, and the federal gov-
ernment reimburses the state at the FMAP rate—which, for
Alaska in 2004, was 57.58%. The state is responsible for the
balance. In theory, this arrangement incentivizes states to
keep rates at efficient levels, because they share financial
responsibility for Medicaid costs with the federal government.
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66 Fed. Reg. 3148, 3175 (2001). The tribal facilities at issue
in this case are unique, however, and by statute receive 100%
FMAP. See 42 U.S.C. § 1396d(b).1 There are seven such
facilities—one in Anchorage and six in rural areas.
Assuming that its plan meets federal requirements, a state
has considerable discretion in administering its Medicaid pro-
gram, including setting reimbursement rates. See Lewis v.
Hegstrom, 767 F.2d 1371, 1373 (9th Cir. 1985). The statutory
requirement at issue here provides that a state plan must
provide such methods and procedures relating to the
utilization of, and the payment for, care and services
available under the plan . . . as may be necessary to
safeguard against unnecessary utilization of such
care and services and to assure that payments are
consistent with efficiency, economy, and quality of
care[.]
42 U.S.C. § 1396a(a)(30)(A) [hereinafter “§ 30(A)”]. Neither
the Medicaid Act, nor its implementing regulations, define the
terms “efficiency,” “economy,” or “quality of care.” How-
ever, since 1997, § 30(A) has been the principal statutory
authority for a series of upper payment limit (“UPL”) regula-
tions that cap state reimbursement rates to “promote economy
and efficiency.” 66 Fed. Reg. at 3148. These regulations have
1Historically, Indian Health Service (“IHS”) facilities were funded
directly and entirely by the federal government and did not participate in
Medicaid reimbursement. To improve services, Congress in 1976
amended the Medicaid Act to permit reimbursement of state expenditures
on behalf of eligible Native Americans at IHS facilities. Pub. L. No. 94-
437, 90 Stat. 1400 (1976). But, because services at these facilities previ-
ously were funded wholly by the federal government, this amendment pro-
vided for 100% FMAP so that no additional burden would fall on the
states. In 1996, the Agency broadened its definition of “Indian Health Ser-
vice facilities” to include not only IHS facilities (which are federally
owned and operated) but also tribal facilities (which are owned and oper-
ated by tribes but receive funding from the IHS).
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been modified several times in recent years to respond to con-
cerns about states’ inappropriate use of intergovernmental
transfers to fund their Medicaid programs.
B. Regulatory Framework
An intergovernmental transfer (“IGT”) is a mechanism by
which states use local, rather than state, dollars to fund the
state share of Medicare expenditures. Such transfers—which
typically require that public entities at the city or county level
transfer funds to the state—are specifically sanctioned by the
Medicare Act, which grants states the flexibility to fund up to
60% of their share of Medicare expenditures with local dol-
lars. 66 Fed. Reg. at 3148. Although the Agency recognizes
that the use of IGTs is protected by statute, in its view “that
flexibility has been used in recent years to establish funding
arrangements that are excessive and abusive and do not assure
that federal Medicaid funding is spent for Medicaid covered
services provided to Medicaid eligible individuals.” Id. at
3164.
In 2001, audits by the Office of the Inspector General and
the General Accounting Office revealed a relationship
between IGT misuse and excessive federal Medicaid spend-
ing. The Agency, concluding that its UPL regulations created
a financial incentive for IGT abuse, modified them by rule. Id.
at 3148. In short, the then-existing UPLs placed a single upper
limit on aggregate payments made to several categories of
providers, including (i) state government-owned facilities, (ii)
non-state (i.e., city and county) government-owned facilities,
and (iii) private facilities. 65 Fed. Reg. 60151, 60151-52
(2000). This allowed states to set reimbursement rates for city
and county facilities at relatively high levels, and other facili-
ties at relatively low levels, while still complying with the
overall aggregate UPL. 66 Fed. Reg. at 3149-50. Because the
federal government reimburses states for a fixed percentage of
their Medicaid expenses, the higher rates at local facilities led
to higher federal matching payments. Id. at 3150. And, as
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these local facilities are public entities, the majority of excess
federal matching payments could be returned, via IGTs, from
local providers to the states. The states ultimately used the
excess federal dollars to fund their own share of Medicaid
expenses—and sometimes for wholly unrelated purposes. Id.
The Agency determined that this practice, which effectively
replaced state Medicaid dollars with federal Medicaid dollars,
was “not consistent with the statutory requirements that Med-
icaid payments be economical and efficient.” Id. To remedy
this problem, and to reduce the incentive for abuse, the
Agency revised the UPL regulations. Specifically, it retained
the upper limit on overall aggregate payments to all facilities,
and implemented separate aggregate limits for both state
government-owned facilities and non-state government-
owned facilities. Id.; 42 C.F.R. § 447.272; 42 C.F.R.
§ 447.321.
However, “Indian Health Services facilities and tribal facil-
ities” were specifically excepted from the scope of these new
regulations. Instead, these facilities were made subject to a
separate UPL for “other” facilities, which provides:
The [state] agency may pay the customary charges of
the provider but must not pay more than the prevail-
ing charges in the locality for comparable services
under comparable circumstances.
42 C.F.R. § 447.325; see 66 Fed. Reg. at 3159. In proposing
this exception, the Agency explained that “we excluded IHS
facilities because we believe there is little incentive for States
to pay enhanced rates to these facilities. Rates to these facili-
ties are generally set by the State in accordance with rates
published by the Federal government.” 65 Fed. Reg. at 60153.
Its concern, rather, was that categorizing them as “public
facilities within the UPLs may enable States to set lower pay-
ments for the IHS and tribal facilities, and set payments for
government operated providers at higher levels and still com-
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ply with the aggregate UPLs.” 66 Fed. Reg. at 3159. There-
fore, “to avoid these types of incentives, [the Agency]
excluded IHS facilities from the UPLs.” Id.
C. The State Plan Amendment
Shortly after the 2001 amendments to the UPLs, Alaska
submitted state plan amendment 01-009 to the Agency. It pro-
vided:
Under agreement with a Tribal Health Facility pro-
vider the [Alaska] Department [of Health and Social
Services] may pay the customary charges of the pro-
vider but must not pay more than the prevailing
charges in the locality for comparable services under
comparable circumstances. Such a payment . . . is
subject to the payment limits at 42 CFR 447.325.
The text of the proposed amendment thus tracks verbatim the
UPL that the 2001 amendments made applicable to the tribal
facilities at issue. In response to the Agency’s request for clar-
ification, the State explained that, to receive the additional
federal revenue generated by the amendment, the tribal facili-
ties “will be expected” to enter into an IGT with the State,
under which the facilities would retain just 10% of the addi-
tional federal monies. Finally, the State indicated that, should
the proposed amendment take effect, additional federal pay-
ments would amount to nearly $50 million a year.
The Agency disapproved the proposed amendment as
inconsistent with § 30(A), primarily because the “proposed
rates would substantially exceed the IHS published rates” on
which federal payments have historically been based. It fur-
ther explained that the IHS rates are “based on an analysis of
statewide costs of the Alaska IHS facilities” and that, while
it “might consider a request for a higher rate if supported by
data showing costs that were not considered by IHS in setting
the published rates, Alaska provided no such data to substanti-
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ate its proposed rates.” The Agency concluded that, absent
such data, the proposed rates “are not consistent with effi-
ciency, economy, and quality of care” under § 30(A).
The State petitioned for reconsideration and, after briefing
and a formal hearing, the hearing officer recommended that
the disapproval of the proposed amendment be affirmed
because it was not consistent with either § 30(A) or 42 C.F.R.
§ 447.325. The Administrator agreed and, in a reasoned opin-
ion, affirmed disapproval of the amendment. In re The Disap-
proval of the Alaska State Plan Amendment No. 01-009, No.
2003-14 (CMS Administrator June 22, 2004).
II. STANDARD OF REVIEW
Under the Administrative Procedure Act, we may set aside
formal agency action only if “arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law.” 5
U.S.C. § 706(2)(A); Wilderness Soc’y v. United States Fish &
Wildlife Serv., 353 F.3d 1051, 1059 (9th Cir. 2003) (en banc),
amended by 360 F.3d 1374 (9th Cir. 2004). Factual findings
are reviewed for substantial evidence. Bear Lake Watch, Inc.
v. FERC, 324 F.3d 1071, 1076-77 & n.8 (9th Cir. 2003).
[A]n agency rule [is] arbitrary and capricious if the
agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an
important aspect of the problem, offered an explana-
tion for its decision that runs counter to the evidence
before the agency, or is so implausible that it could
not be ascribed to a difference in view or the product
of agency expertise.
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983).
III. DISCUSSION
The Administrator rejected the proposed amendment on
two alternative grounds: (1) that it was inconsistent with the
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statutory requirement of efficiency, economy, and quality of
care under § 30(A); and (2) that it failed to comply with the
UPL set forth in 42 C.F.R. § 447.325. Examining each ground
in turn, we conclude that either is independently adequate to
support disapproval.
A. Section 30(A)
In concluding that the amendment was inconsistent with
§ 30(A), the Administrator first determined that the UPL reg-
ulations promulgated pursuant to that section are not that sec-
tion’s sole requirement; rather, the statute requires that rates
be consistent with efficiency and economy notwithstanding
compliance with the UPL regulations. She found that the State
failed to meet the statutory standard because it submitted no
data—let alone an assertion—that the current IHS rates were
inadequate. Moreover, she viewed the State’s insistence that
tribal facilities return to the State 90% of the increased federal
payments, via IGTs, as an “implicit acknowledgment” that the
current IHS rates are sufficient.
The State argues that § 30(A) cannot be an independent
basis for disapproval of an amendment that complies with
UPL regulations promulgated pursuant to that section.
Instead, it urges that compliance with UPL regulations con-
clusively establishes that rates meet the statutory mandate of
efficiency and economy.2 It argues that there is no basis what-
soever for cost-based review of state rate setting, and there-
fore that case-by-case review of rates is an encroachment on
state discretion. Accordingly, it suggests that it was inappro-
priate for the Administrator to request cost data justifying the
rate increase. Finally, it emphasizes that IGTs are protected
by statute and fit within current regulations.
2As discussed in Part B, infra, the Agency disagrees, as do we, that the
State has complied with the UPL regulation at 42 C.F.R. § 447.325. For
the purposes of the discussion in Part A, however, we accept arguendo
that it has so complied.
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1. Chevron Deference
The parties initially disagree about the degree of deference
owed to the Administrator’s interpretation of the statutory text
—namely, the terms “efficiency” and “economy.” Although
we generally afford Chevron deference to the Agency’s inter-
pretations of the Medicaid Act, see, e.g., Folden v. Wash.
State Dep’t of Social & Health Servs., 981 F.2d 1054, 1058
(9th Cir. 1992), the State contends that Skidmore deference is
instead appropriate because the Agency’s interpretation is
contrary to existing regulations and “does not . . . bespeak the
legislative type of activity that would naturally bind more
than the parties to the ruling.” United States v. Mead Corp.,
533 U.S. 218, 226-27 (2001). Compare Chevron U.S.A. Inc.
v. Nat. Res. Defense Council Inc., 467 U.S. 837, 842-45
(1984), with Skidmore v. Swift & Co., 323 U.S. 134, 139-40
(1944).
[1] We disagree. Chevron deference is required “when it
appears that Congress delegated authority to the agency gen-
erally to make rules carrying the force of law.” Mead, 533
U.S. at 226-27. Mead recognized that “Congress contemplates
administrative action with the effect of law when it provides
for a relatively formal administrative procedure tending to
foster the fairness and deliberation that should underlie a pro-
nouncement of such force,” and noted that the “fruits of
notice-and-comment rulemaking or formal adjudication”
receive Chevron deference. Id. at 230; see also INS v.
Aguirre-Aguirre, 526 U.S. 415, 425 (1999) (giving Chevron
deference to the BIA’s construction, through case-by-case
adjudication, of ambiguous statutory terms). Here, the formal
administrative process afforded the State included the oppor-
tunities to petition for reconsideration, brief its arguments, be
heard at a formal hearing, receive reasoned decisions at multi-
ple levels of review, and submit exceptions to those decisions.
These hallmarks of “fairness and deliberation” are clear evi-
dence that Congress intended the Administrator’s final deter-
mination to “carry[ ] the force of law.” Mead, 533 U.S. at
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226-27; see Pharm. Rsch. Mfrs. of Am. v. Thompson, 362 F.3d
817, 821-22 (D.C. Cir. 2004) (holding that the Secretary’s
duty to “ensur[e] that each state plan complies with a vast net-
work of specific statutory requirements” constitutes an “ex-
press delegation of specific interpretative authority” that
evidences Congress’s intent to imbue the “Secretary’s deter-
minations [with] the force of law”); see also Texas v. United
States Dep’t of Health & Human Servs., 61 F.3d 438 (5th Cir.
1995) (applying Chevron deference in the context of the dis-
approval of a Medicaid state plan amendment); Georgia v.
Shalala, 8 F.3d 1565 (11th Cir. 1993) (same).
[2] Accordingly, to the extent that the State challenges the
Administrator’s interpretation of ambiguities in § 30(A), we
apply the familiar Chevron framework. Under Chevron, “ ‘[i]f
the intent of Congress is clear, that is the end of the matter;
for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress.’ ” Wilderness
Soc’y, 353 F.3d at 1059 (quoting Chevron, 467 U.S. at 842-
43). But, if the statute is silent or ambiguous with respect to
the issue at hand, then the reviewing court must defer to the
agency so long as “ ‘the agency’s answer is based on a per-
missible construction of the statute.’ ” Id. (quoting Chevron,
467 U.S. at 843).
2. Construction of § 30(A)
[3] Before reaching the propriety of the Administrator’s
interpretation of § 30(A), we first conclude that she permissi-
bly relied on that section as an independent basis for disap-
proval of the proposed amendment, notwithstanding its
compliance with the applicable UPL. The statutory text makes
clear that the Secretary has the authority—indeed, the
obligation—to ensure that each of the statutory prerequisites
is satisfied before approving a Medicaid state plan amend-
ment. 42 U.S.C. § 1396a(b) provides: “The Secretary shall
approve any plan which fulfills the conditions specified in
subsection (a) . . . .” One such condition is: “A State plan for
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medical assistance must” “provide such methods and proce-
dures . . . as may be necessary . . . to assure that payments are
consistent with efficiency, economy, and quality of care.” 42
U.S.C. § 1396a(a)(30)(A). Because the Secretary is charged
with ensuring that the State complies with this statutory man-
date, it follows that he cannot approve a state plan that does
not provide such methods and procedures—even if it com-
plies with other regulations.
[4] Contrary to the State’s argument that the UPL regula-
tions leave “no gap to fill,” and thus that there is no role here
for Chevron deference, it is, in fact, possible to violate the
broad statute while complying with the UPL regulations.
Although the UPL regulations are clearly grounded in eco-
nomic concerns, in that they proscribe payment levels that
exceed certain limits, the terms “efficiency” and “economy”
are nowhere defined in the Medicaid Act or its implementing
regulations. Thus, we cannot equate mere compliance with the
UPL regulations as conclusive proof of compliance with the
broader statutory requirement.
In her decision, the Administrator concluded that the pro-
posed amendment—which, by all accounts, would at least
double payments to the facilities at issue, while the facilities
would retain only 10% of the additional payments—is not
consistent with efficiency and economy. The authority to elu-
cidate the meaning of the statute in this manner, via case-by-
case adjudication, is well within the Secretary’s mandate. See
Pharm. Rsch., 362 F.3d at 821-22; see also Shalala v. Guern-
sey Mem’l Hosp., 514 U.S. 87, 96 (1995) (“[There is no] basis
for suggesting that the Secretary has a statutory duty to pro-
mulgate regulations that . . . address every conceivable ques-
tion in the process of determining equitable reimbursement.”).
[5] Thus, the undefined terms “efficiency” and “economy”
leave a gap that the Administrator permissibly filled via case-
by-case adjudication. We have no doubt that her interpretation
is “based on a permissible construction of the statute.” Wil-
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derness Soc’y, 353 F.3d at 1059 (internal quotation omitted);
see also Penn. Pharm. Ass’n v. Houston, 283 F.3d 531, 537
(3rd Cir. 2002) (en banc) (“What sort of payments would
make a program inefficient and uneconomical? Payments that
are too high.”). Therefore, we must defer to it.
3. Statutory Context
[6] The Administrator’s interpretation of § 30(A) is also
consistent with the broader statutory scheme. See Wilderness
Soc’y, 353 F.3d at 1060-61 (noting that the court, in discern-
ing congressional intent, may also look to the overall purpose
and structure of the statutory scheme). Specifically, we find
no merit in the State’s claim that there is no basis for cost-
based review of state ratesetting. To the contrary, our prece-
dent plainly requires a state to set reimbursement rates “that
bear a reasonable relationship to efficient and economical
hospitals’ costs of providing quality services, unless the
[state] shows some justification for rates that substantially
deviate from such costs.” Orthopaedic Hosp., 103 F.3d at
1496. Thus, we reject the contention, urged by the State, that
the Secretary no longer plays any role in overseeing the rea-
sonableness of the relationship between costs and reimburse-
ment rates.
The State questions the continuing vitality of our opinion
in Orthopaedic Hospital, suggesting that subsequent amend-
ments to the Medicaid Act—specifically, the repeal of the
Boren Amendment—have rendered it inapplicable. We are
not persuaded. As discussed at length in Orthopaedic Hospi-
tal, in 1981 Congress deleted from § 30(A) the requirement
that Medicaid payments not be “in excess of reasonable
charges,” but left intact the separate mandate that they be
“consistent with efficiency, economy, and quality of care.”
Orthopaedic Hosp., 103 F.3d at 1497; Pub. L. No. 97-35,
§ 2174, 95 Stat. 357, 809 (1981). As part of the same bill, in
a provision dubbed the Boren Amendment, it amended 42
U.S.C. § 1396a(a)(13)(A) [“§ 13(A)”] to require states to
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reimburse hospitals at rates that are “reasonable and adequate
to meet the costs which must be incurred by efficiently and
economically operated facilities.” Orthopaedic Hosp., 103
F.3d at 1498 n.2 (quoting Boren Amendment); see also S.
Rep. No. 97-139, at 431 (1981), reprinted in 1981
U.S.C.C.A.N. 396, 697.
As we noted in Orthopaedic Hospital, this change was
intended to ameliorate states’ administrative burdens and to
allow them “more flexibility in devising ways to make ser-
vices available, while at the same time containing costs.” 103
F.3d at 1497. Over time, however, it became clear that it had
quite the opposite effect. Specifically, the Supreme Court’s
recognition in Wilder, 496 U.S. at 524, that the Boren Amend-
ment was enforceable in a § 1983 action by health care pro-
viders against states, led to a great deal of litigation over the
reasonableness of state rate setting. See Evergreen Presbyte-
rian Ministries Inc. v. Hood, 235 F.3d 908, 919 n.12 (5th Cir.
2000) (noting problem). In response to this unintended conse-
quence, in 1997 Congress repealed the Boren Amendment,
and replaced it with the notice-and-comment rulemaking
requirements in place today. Pub. L. No. 105-33, 111 Stat.
251, 507 (1997). In doing so, Congress intended that there be
no “cause of action for [providers] relative to the adequacy of
the rates they receive.” Evergreen, 235 F.3d at 919 n.12 (cit-
ing H.R. Rep. No. 105-149, at 1230 (1997)).
[7] The State attaches great significance to the repeal of the
Boren Amendment, suggesting that Congress thereby
intended “to terminate . . . judicial oversight” of reimburse-
ment rates and “to remove any basis for cost-based review of
provider reimbursement.” While we agree that in repealing
the Boren Amendment, as in enacting it, Congress sought to
increase states’ flexibility in ratesetting, this change did not
eviscerate the Secretary’s oversight role. During the Boren
era, courts recognized that “the Secretary is obliged to ensure
that each state complies with the statute by requesting data
justifying an individual state’s assurances when those assur-
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ances are suspect.” Erie County Geriatric Ctr. v. Sullivan, 952
F.2d 71, 79 (3rd Cir. 1991). Though we recognize that such
assurances are no longer part of the regulatory scheme, noth-
ing in the statutory history convinces us that the Secretary’s
oversight authority has changed, or that more flexibility than
was originally intended under the Boren Amendment was
intended by its repeal. In any event, its repeal, like its enact-
ment, modified § 13(A) alone; it effected no change to
§ 30(A). Moreover, the relevant language of § 30(A) remains
unchanged since Orthopaedic Hospital, and thus our interpre-
tation of its purpose, and the State’s obligations thereunder,
still holds.3 See Orthopaedic Hosp., 103 F.3d at 1496-98
(describing these obligations).
4. IGTs
We acknowledge, as has the Agency, that the use of IGTs
has a statutory basis. See 42 U.S.C. § 1396b(w)(6)(A) (pro-
viding that, subject to certain exceptions, “the Secretary may
not restrict States’ use of funds where such funds are derived
from State or local taxes . . . transferred from . . . units of gov-
ernment within a State as the non-Federal share of expendi-
tures”); see also 66 Fed. Reg. at 3148-49. Thus, there is
perhaps some tension, as the State suggests, between the
Agency’s recognition that IGTs are generally permissible and
“fit within the structure of . . . current regulations,” id. at
3164, and its conclusion that their “excessive and abusive”
use is “not consistent with the statutory requirements that
Medicaid payments be economical and efficient,” id. at 3150.
This does not, however, change our decision here.
[8] In this case, the Administrator did not disapprove the
State’s use of IGTs as a financing mechanism; rather, she
concluded, based partly on the fact that tribal hospitals would
3Section § 30(A) was amended in 1989 to include what is known as the
“equal access to care” provision. Orthopaedic Hosp., 103 F.3d at 1498.
That amendment is not directly relevant to this case.
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retain just 10% of the increased federal payments, that the
proposed amendment was not consistent with efficiency and
economy. See Louisiana v. United States Dep’t of Health &
Human Servs., 905 F.2d 877, 881 (5th Cir. 1990) (applying a
similar analysis to reject Louisiana’s contention that the
Administrator’s ruling was a “veiled attempt” to prohibit the
use of average wholesale price as a proxy for the estimated
acquisition cost of Medicaid-covered drugs). We note that,
following its investigation into financing schemes similar to
this one, the General Accounting Office testified before Con-
gress that such uses of IGTs “violate the basic integrity of
Medicaid as a joint Federal/State program” and allow states
effectively “to replace State Medicaid dollars with Federal
Medicaid dollars.” 66 Fed. Reg. at 3150. Even assuming that
under these circumstances an IGT would fall within the pro-
tection of § 1396b(w)(6), the State is not relieved from com-
plying with the numerous other requirements of the Medicaid
Act, such as those in § 30(A) that were the basis for disap-
proval here.
[9] In sum, because the Administrator’s construction of
§ 30(A) is consistent with its text, context, and purpose, it
merits Chevron deference. She did not rely on inappropriate
factors or overlook an important aspect of the problem, and
her decision was not implausible or counter to the evidence.
See State Farm, 463 U.S. at 43. Thus, we hold that her disap-
proval of the State’s proposed amendment based on § 30(A)
was not arbitrary, capricious, an abuse of discretion, or other-
wise not in accordance with law. See 5 U.S.C. § 706(2)(A).
B. Section 447.325
[10] The Administrator alternatively ruled that the State
failed to set prevailing charges consistent with 42 C.F.R.
§ 447.325, which provides: “The [state] agency may pay the
customary charges of the provider but must not pay more than
the prevailing charges in the locality for comparable services
under comparable circumstances.” Although the proposed
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amendment tracks the regulatory language verbatim, it is not
the amendment’s text but its underlying ratesetting methodol-
ogy to which the Agency objects. Specifically, the Adminis-
trator determined that the State violated § 447.325 because, in
calculating prevailing charges, (1) it based its rates for both
localities on a single hospital in Anchorage, and (2) its com-
parison of private facilities to tribal facilities, which histori-
cally are funded under a unique scheme, fails to account for
“comparable services under comparable circumstances.”
We accord substantial deference to an agency’s interpreta-
tion of its own regulations. See Anaheim Mem’l Hosp. v. Sha-
lala, 130 F.3d 845, 849-50 (9th Cir. 1997). As the Supreme
Court has instructed, “Our task is not to decide which among
several competing interpretations best serves the regulatory
purpose. Rather, the agency’s interpretation must be given
controlling weight unless it is plainly erroneous or inconsis-
tent with the regulation.” Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 512 (1994) (citations and internal quotation
marks omitted).
1. “Prevailing Charges” and “Locality”
In response to the Agency’s request for clarification, the
State explained that it would identify a tribal facility’s “cus-
tomary charges” from the “charge schedule used by the facil-
ity for the regular rates for inpatient services that are charged
to both beneficiaries and other paying patients.” To determine
“prevailing charges,” the State would divide Alaska into two
localities: urban (Anchorage) and rural (everywhere else).
Then, for each locality, it would identify all hospitals offering
“a comparable array of services under comparable circum-
stances” to the tribal facilities. Using only those facilities, it
would divide the total charges by the total inpatient days to
arrive at the prevailing rate.
Testimony at the evidentiary hearing indicated, however,
that the State used charges from a single private hospital in
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Anchorage to determine the prevailing charges for all tribal
facilities in both localities. The hearing officer issued her rec-
ommended decision on this understanding, which the State, in
its exceptions to the hearing officer’s recommendations, in
fact reinforced. Admin. R. at 17 (“The State has provided evi-
dence that due to the unique nature of health care services in
Alaska, there is only one hospital that provides services that
are comparable to those provided in the relevant tribal health
centers.”).
Although the State now suggests that this finding is factu-
ally incorrect, it is nowhere contradicted in the record, and we
conclude that it is supported by substantial evidence. See Bear
Lake, 324 F.3d at 1076-77 & n.8 (explaining standard). Thus,
to the extent that the State calculated prevailing charges for
the rural locality based only on charge information from a
hospital in Anchorage, its methodology is inconsistent with
§ 447.325, which plainly requires that the State “must not pay
more than the prevailing charges in the locality” (emphasis
added).
2. “Prevailing Charges” and “Comparable
Circumstances”
The Agency additionally objects to the State’s use of rates
from a private hospital to determine the prevailing charges at
tribal facilities, which currently are tied to IHS published
rates. The State argues that tribal facilities are not bound to
charge, nor must the State limit payment to, the IHS rates.
Moreover, noting that neither “customary charges” nor “pre-
vailing charges” is defined within the Medicaid Act or its
implementing regulations, but that both are defined in Medi-
care regulations, it argues that its methodology for determin-
ing these charges is fully consistent with the Medicare
regulations. The Agency concedes that the IHS rates are not
mandatory, but argues that, in this context, “comparable cir-
cumstances” must mean other facilities that are federally
funded and receive 100% FMAP reimbursement. It stresses
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that tribal facilities operate under markedly different circum-
stances than private hospitals—namely, they are largely
funded by the federal government, and their Medicaid
expenses are reimbursed fully by the federal government.
On this point, the Administrator’s construction is focused
not on the “locality” requirement, but rather on the distinct
requirement that, within each locality, prevailing charges
must be tuned to “comparable circumstances.” This distinc-
tion is fully supported by the regulatory text. Thus, we decline
to decide whether it is the Agency’s or the State’s interpreta-
tion that best serves the regulatory purpose; rather, under the
limited scope of our appellate review, we must give the Agen-
cy’s interpretation “controlling weight.” See Thomas Jeffer-
son Univ., 512 U.S. at 512; Anaheim Mem’l Hosp., 130 F.3d
at 849-50.
[11] Thus, we conclude that the State’s methodology for
determining prevailing charges is inconsistent with the appli-
cable UPL, and hold that the Administrator’s disapproval of
the proposed amendment based on 42 C.F.R. § 447.325 was
not arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law. See 5 U.S.C. § 706(2)(A).
CONCLUSION
For the foregoing reasons, the petition for review of the
Administrator’s disapproval of Alaska’s state plan amend-
ment 01-009 is DENIED.
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