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THOMAS JEFFERSON UNIVERSITY v. DONNA E. SHALALA (06/24/94)

decided: June 24, 1994.

THOMAS JEFFERSON UNIVERSITY, DBA THOMAS JEFFERSON UNIVERSITY HOSPITAL, PETITIONER
v.
DONNA E. SHALALA, SECRETARY OF HEALTH AND HUMAN SERVICES



ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT.

Kennedy, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Blackmun, Scalia, and Souter, JJ., joined. Thomas, J., filed a dissenting opinion, in which Stevens, O'connor, and Ginsburg, JJ., joined.

Author: Kennedy

JUSTICE KENNEDY delivered the opinion of the Court.

Although Medicare reimburses provider hospitals for the costs of certain educational activities, the program is forbidden by regulation from "participating in increased costs resulting from redistribution of costs from educational institutions . . . to patient care institutions." 42 CFR § 413.85(c) (1993) (emphasis added). In denying reimbursement for the disputed costs in this case, the Secretary of Health and Human Services interpreted this provision to bar reimbursement of educational costs that were borne in prior years not by the requesting hospital, but by the hospital's affiliated medical school. The dispositive question is whether the Secretary's interpretation is a reasonable construction of the regulatory language. We conclude that it is.

I

A

Established in 1965 under Title XVIII of the Social Security Act, 79 Stat. 291, as amended, 42 U.S.C. § 1395 et seq. (1988 ed. and Supp. IV), Medicare is a federally funded health insurance program for the elderly and disabled. Subject to a few exceptions, Congress authorized the Secretary of Health and Human Services (Secretary) to issue regulations defining reimbursable costs and otherwise giving content to the broad outlines of the Medicare statute. § 1395x(v)(1)(A). That authority encompasses the discretion to determine both the "reasonable cost" of services and the "items to be included" in the category of reimbursable services. Ibid. Acting under the statute, the Secretary, by regulation, permits reimbursement for the costs of "approved educational activities" conducted by hospitals. 42 CFR § 413.85(a)(1). The regulations define "approved educational activities" as "formally organized or planned programs of study usually engaged in by providers in order to enhance the quality of patient care." § 413.85(b).

Graduate medical education (GME) programs are one category of approved educational activities. GME programs give interns and residents clinical training in various medical specialties. Because participants learn both by treating patients and by observing other physicians do so, GME programs take place in a patient care unit (most often in a teaching hospital), rather than in a classroom. Hospitals are entitled to recover the "net cost" of GME and other approved educational activities, a figure "determined by deducting, from a provider's total costs of these activities, revenues it receives from tuition." § 413.85(g). A hospital may include as a reimbursable GME cost not only the costs of services it furnishes, but also the costs of services furnished by the hospital's affiliated medical school. § 413.17(a).

That brings us to the regulation here in question. Section 413.85(c) sets forth conditions governing the reimbursement of educational activities.*fn1 In a sentence referred to by the parties as the "anti-redistribution" principle, the regulation provides that "although the intent of the [Medicare] program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units." Ibid. In a portion of the regulation known as the "community support" principle, § 413.85(c) also states that the costs of educational activities "should be borne by the community," but that "until communities undertake to bear these costs, the [Medicare] program will participate appropriately in the support of these activities." Ibid.

B

Thomas Jefferson University Hospital (Hospital) is a 700-bed teaching hospital in Philadelphia, Pennsylvania. The Hospital has been a qualified Medicare provider since the program took effect in 1966. Petitioner Thomas Jefferson University (University) is a private, not-for-profit educational institution that operates the Hospital and other entities, including the Jefferson Medical College (Medical College). As a teaching facility, the Hospital provides Medicare-approved GME programs for postgraduate interns and residents in numerous medical specialties. The programs are conducted at the Hospital by Medical College faculty. Because of their common ownership by the University, the Hospital and the Medical College are considered affiliated or "related" organizations under Medicare regulations. 42 CFR § 413.17(a) (1993). As a result, the Hospital is entitled to reimbursement for all eligible patient-care, educational, and administrative costs carried on the books of the Medical College. Ibid.

Nevertheless, for reasons not clear from the record, the Hospital did not seek reimbursement for any GME costs during the first eight years of the Medicare program's existence. During the next 10 years, however, from 1974 through 1983, the Hospital sought and received reimbursement for three categories of salary-related GME costs: (1) salaries paid by the Hospital to Medical College faculty for services rendered to the Hospital's Medicare patients; (2) salaries paid by the Hospital to residents and interns; and (3) funds transferred internally from the Hospital to the Medical College as payment for faculty time devoted to the Hospital's GME program. The Hospital did not seek reimbursement during that period for its other, nonsalary-related GME costs (namely, the costs of administering the Hospital's GME programs), and those costs were borne by the Medical College.

In 1983, Congress adopted a more restrictive method of reimbursing hospitals for inpatient medical services, see 42 U.S.C. § 1395ww(d) (1988 ed. and Supp. IV), but it retained the more lenient method of reimbursement for medical education costs. § 1395ww(a)(4) (1988 ed., Supp. IV). In 1984, when the new cost reimbursement regime was implemented, the Hospital reviewed its claim for costs associated with its GME programs to determine whether it was identifying all costs eligible for reimbursement. This review resulted in an increased claim reflecting clerical costs incurred by the Medical College for activities associated with its GME programs.*fn2

The following year, in an effort to further refine its cost allocation techniques, the Hospital retained an accounting firm to compute the Hospital's total GME costs for fiscal year 1985, the year here in question. Fiscal year 1985 later became especially significant because, under a new reimbursement scheme enacted in 1986, it is considered the Hospital's base period, to which all later claims for GME cost reimbursement will be tied. See 42 U.S.C. § 1395ww(h). After completing the cost study, the accounting firm reported that the Hospital had incurred GME program costs totaling $8.8 million, a figure that included direct and indirect administrative costs not previously claimed by the Hospital. The report was submitted to petitioner's assigned fiscal intermediary, whose function is to review petitioner's annual cost reports and to calculate the appropriate level of reimbursement under applicable statutes and regulations. See 42 CFR § 405.1803 (1993). Although petitioner sought reimbursement for the full $8.8 million, the fiscal intermediary allowed only those salary-related costs that had been reimbursed earlier (after adjustment for inflation). The fiscal intermediary disallowed reimbursement for all nonsalary-related GME costs that the report identified (amounting to approximately $2.9 million). App. to Pet. for Cert. 10a. Petitioner then appealed to the Provider Reimbursement Review Board, an intermediate appellate tribunal within the Department, which reversed the decision of the fiscal intermediary in part and allowed reimbursement for all of the GME costs documented in the cost study.

The Secretary, acting through the Administrator of the Health Care Financing Administration, modified the Board's decision and reinstated the fiscal intermediary's ruling. The Secretary concluded that the anti-redistribution clause of § 413.85(c) prohibits the shift of approved educational costs from an educational unit to a patient care unit, even if the educational activities for which reimbursement is sought are the kind of activities traditionally engaged in by Medicare providers. Id., at 35a. Since the nonsalary GME costs here in issue were borne in prior years by the Medical College, the Secretary ruled that reimbursement of these costs would constitute an impermissible "redistribution of costs" under § 413.85(c). Ibid.

The Secretary also relied on the community support language in § 413.85(c) as an independent ground for denying the requested reimbursement. According to the Secretary, this language prohibits Medicare reimbursement for educational activities that "have been historically borne by the community." Ibid. That the Hospital had failed to seek reimbursement for the disputed costs in previous years was, in the Secretary's view, "evidence of the communit[y's] support for these activities." Ibid. "To allow the community to withdraw that support and pass these costs to the Medicare program" would violate the community support principle and would "encourage the community to abdicate its commitment to education to an insurance program intended to provide care for the elderly." Ibid.

Petitioner filed a petition for review in the District Court seeking reimbursement for the $2,861,247 in GME costs that the Secretary had disallowed. Id., at 10a. On cross-motions for summary judgment, the court ruled in the Secretary's favor, accepting her interpretation of the anti-redistribution and community support clauses as a reasonable construction of § 413.85(c). Thomas Jefferson Univ. Hosp. v. Sullivan, CCH Medicare & Medicaid Guide P 40,294, p. 30,959 (ED Pa. 1992). The Third Circuit affirmed without opinion, judgment order reported at 993 F.2d 879 (1993), thereby creating a conflict with the decision of the Sixth Circuit in Ohio State Univ. v. Secretary, Dept. of Health and Human Services, 996 F.2d 122 (1993), cert. pending, No. 93-696, concerning the validity of the Secretary's interpretation of the anti-redistribution clause. We granted certiorari, 510 U.S. (1994), and now affirm.

II

Petitioner challenges the Secretary's construction of § 413.85(c) under the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq. The APA, which is incorporated by the Social Security Act, see 42 U.S.C. § 1395 oo (f)(1), commands reviewing courts to "hold unlawful and set aside" agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). We must give substantial deference to an agency's interpretation of its own regulations. Martin v. Occupational Safety and Health Review Comm'n, 499 U.S. 144, 150-151, 113 L. Ed. 2d 117, 111 S. Ct. 1171 (1991); Lyng v. Payne, 476 U.S. 926, 939, 90 L. Ed. 2d 921, 106 S. Ct. 2333 (1986); Udall v. Tallman, 380 U.S. 1, 16, 13 L. Ed. 2d 616, 85 S. Ct. 792 (1965). 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 inconsistent with the regulation.'" Ibid. (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 89 L. Ed. 1700, 65 S. Ct. 1215 (1945)). In other words, we must defer to the Secretary's interpretation unless an "alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation." Gardebring v. Jenkins, 485 U.S. 415, 430, 99 L. Ed. 2d 515, 108 S. Ct. 1306 (1988). This broad deference is all the more warranted when, as here, the regulation concerns "a complex and highly technical regulatory program," in which the identification and classification of relevant "criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697, 115 L. Ed. 2d 604, 111 S. Ct. 2524 (1991).

Petitioner challenges the Secretary's construction of both the anti-redistribution language and the community support language of § 413.85(c). Because we conclude that the Secretary's interpretation of the anti-redistribution clause is neither "'plainly erroneous nor inconsistent with the regulation,'" Tallman, supra, at 16-17, and because its application suffices to deny reimbursement of the disputed ...


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