Mercy Catholic Med v. Thompson

• Court: Court of Appeals for the Third Circuit
• Decided: August 18, 2004
• Docket: 03-2292
• Status: Published

Opinion

Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit

8-18-2004

Mercy Catholic Med v. Thompson Precedential or Non-Precedential: Precedential

Docket No. 03-2292

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004

Recommended Citation "Mercy Catholic Med v. Thompson" (2004). 2004 Decisions. Paper 368. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/368

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. PRECEDENTIAL Mark H. Gallant, Esquire (Argued) Cozen & O'Connor UNITED STATES The Atrium COURT OF APPEALS 1900 Market Street FOR THE THIRD CIRCUIT Philadelphia, Pennsylvania 19103 Attorney for Appellant

No. 03-2292 Michael Leonard, Esquire (Argued) Department of Health & Human Services Office of the General Counsel, MERCY CATHOLIC Region III MEDICAL CENTER, The Public Ledger Building, Suite 418 Appellant 150 South Independence Mall West Philadelphia, Pennsylvania 19106 v. Attorney for Appellee

TOMMY G. THOMPSON, SECRETARY OF HEALTH OPINION OF THE COURT AND HUM AN SERVICES

SCIRICA, Chief Judge. On Appeal from the At issue is an acute care hospital’s United States District Court for the reimbursement from Medicare for Eastern District of Pennsylvania graduate medical training. Mercy Catholic D.C. Civil Action No. 02-cv-00419 Medical Center1 seeks reversal of the (Honorable Ronald L. Buckwalter) Provider Reimbursement Review Board’s decision denying reclassification of certain graduate medical education costs2 and its Argued April 19, 2004 r e f u sa l t o a d j u st M e d i c a r e ’s reimbursement of operating costs. The Before: SCIRICA, Chief Judge, GARTH and BRIGHT * , Circuit Judges 1 Mercy Catholic Medical Center is an (Filed: August 18, 2004 ) acute care hospital located in Philadelphia. 2 Graduate Medical Education costs refer to Medicare payments made to hospitals to support Medicare’s share of costs related to medical training programs * The Honorable Myron H. Bright, and to support higher patient costs United States Circuit Judge for the Eighth associated with the training and education Judicial Circuit, sitting by designation. of residents. Board also found Mercy Catholic Medical Medicare services are furnished by Center did not provide sufficient “providers of services”4 that have entered documentation to justify a reclassification into provider agreements with the and recision of costs. The District Court Secretary of the United States Department affirmed the Provider Reimbursement of Health and Human Services. 42 U.S.C. Review Board’s decision and granted §§ 1395x(u), 1395cc. To receive payment summary judgment to the Secretary of the from the Secretary, providers are required Department of Health and Human to comply with the provider agreement, as Services. We will reverse and remand. well as all Medicare statutes and regulations. 42 U.S.C. § 1395cc(b)(2). I. From its inception, Medicare A. Statutory Background reimbursed hospitals for all reasonable The federal Medicare program, incurred costs related to providing medical administered by the Centers for Medicare care to patients. The Medicare Act defines and Medicaid Services3 of the United "reasonable cost" as “the cost actually States Department of Health and Human incurred,” less any costs “unnecessary in Services, is the largest public program the efficient delivery of needed health financing health care services for the aged services.” 42 U.S.C. § 1395x(v)(1)(A). and disabled. Hospitals that provide Under the historical system of reasonable services to Medicare patients are cost reimbursement, no reimbursement reimbursed for their expenses under Title distinction turned on whether costs were XVII of the Social Security Act (the reported as operating costs (the day-to-day “Medicare Act”), 42 U.S.C. § 1395 et seq. expenses incurred in running a business) Part A of the Medicare Act authorizes or graduate medical education costs. payment to participating hospitals Medicare paid its full pro rata share of all (“providers”) for their direct and indirect allowable graduate medical education costs of providing inpatient care to costs and operating costs actually incurred, beneficiaries. 42 C.F.R. § 413.9(a), (b). consistent with the statutory requirement Medicare also reimburses teaching preventing shifting the costs of services hospitals for the costs of graduate medical incurred on behalf of Medicare education, including physician time for beneficiaries to other patients or third party instructing and supervising interns and payers. 42 U.S.C. § 1395x(v)(1)(A). residents. 42 U.S.C. § 1395ww(h).

4 As defined by 42 U.S.C. § 1395x(u), a “provider of services” means “a hospital, critical access hospital, skilled nursing 3 Centers for M edicare and Medicaid fa cil ity, comprehensive outpatie nt Services was formerly known as the rehabilitation facility, home health agency, Health Care Financing Administration. [or a] hospice program.”

2 In 1982, Congress modified the particular base year. See 42 C.F.R. §§ Medicare program to require hospitals to 412.71, 412.73. For most hospitals the render services more economically. In the prospective payment system base year was Tax Equity and Fiscal Responsibility Act FY 1983. Therefore, for the first four of 1982 (“TEFRA”), Pub. L. No. 97-248, years of the prospective payment system, a Congress amended the Medicare Act by hospital’s reimbursement was still imposing a ceiling on the rate-of-increase significantly affected by its actual of inpatient operating costs recoverable by operating costs in the FY 1983 base year. a hospital. Under TEFRA, costs were still As part of the prospective payment system reimbursed on a reasonable cost basis, but transition period, the Health Care subject to rate-of-increase limits. The rate- Financing Administration promulgated the of-increase limit was computed according Consistency Rule, which required graduate to a “target amount,” which, in turn, was medical education costs for cost reporting calculated according to a hospital’s periods during the prospective payment allowable net Medicare operating costs in system transition period be determined in the hospital's base year. See 42 U.S.C. § a manner “consistent with the treatment of 1395ww(b); 42 C.F.R. § 413.40(c) (2002). these costs for purposes of determining the hospital-specific . . . rate.” 42 C.F.R. § In 1983, Congress amended the 412.113(b)(3). In effect, the Consistency Medicare Act again, establishing a Rule locked in the classification of p ro sp e c t ive payment s ys t e m f or graduate medical education costs and reimbursing inpatient operating costs of operating costs from the prospective acute care hospitals. See 42 U.S.C. § payment system base year (FY 1983) 1 3 95 w w(d). Hospitals now are forward. reimbursed on the basis of prospectively determined national and regional rates for The TEFRA and prospective each discharge, rather than on the basis of payment system reimbursements applied retrospectively determined reasonable only to inpatient operating costs. Graduate costs incurred. Under this system, medical education costs were specifically payment is made at a predetermined rate excluded from the definition of “inpatient for each hospital discharge, according to operating cos ts.” 4 2 U .S.C . § the patient's diagnosis. 1395ww(a)(4), 1395ww(d)(1)(A). Thus, grad uate medical education costs The prospective payment system continued to be reimbursed under the was phased in over four years, during previous reasonable cost system until which hospitals were reimbursed a 1986. combination of the prospective payment system hospital-specific rate and the In 1986, Congress enacted a prospective payment system national and separate prospective payment system for regional rates. A hospital's specific rate is graduate medical education costs for all based on its operating costs during a cost reporting periods beginning on or

3 after July 1, 1985. 42 U.S.C. § 1985 graduate medical education base year 1395ww(h). Central to this new payment costs. The reaudit would ensure the future system was the determination of the base payments would be based on an accurate average per-resident amount (“APRA”). determination of the hospitals' graduate The APRA is determined by dividing the medical education costs in the base-year. hospital's base year graduate medical To prevent over-reimbursement, the education costs by the number of full-time- regulations instruct intermediaries to equivalent residents working at the deduct from each reaudited hospital’s base hospital in the base year. The graduate year graduate medical education amount medical education base year is the any operating costs misclassified as hospital’s fiscal year beginning during the education costs. 4 2 C .F.R . § federal fiscal year 1984. 42 U.S.C. § 413.86(e)(1)(ii)(B). To prevent under- 1395ww(h)(2)(A). For most Pennsylvania reimbursement, the regulations authorize hospitals, this is the fiscal year ended June intermediaries, “upo n a ho spital’s 30, 1985. The APRA then serves as the request,” to include in the base year base figure in the formula to calculate graduate medical education amount any grad uate medical education teaching costs misclassified as operating reimbursements for 1985 and future cost costs in the base-year cost report. 42 years. 42 U.S.C. § 1395ww(h)(2)(C), (D); C.F.R. § 413.86(e)(1)(ii)(C). After 1395ww(h)(3). determining the hospital's APRA upon reaudit, the intermediary notifies the 1. Determining the APRA. hospital of the amount by a Notice of In 1990, to assure maximum Average Per Resident Amount accuracy of each hospital’s APRA (“NAPRA”). 42 C.F.R. § 413.86(e)(1)(v). determination, the Secretary required fiscal The hospital may appeal this amount to the intermediaries5 to reaudit all hospitals’ Secretary within 180 days of the NAPRA. Id. To supp ort a claim for 5 The Medicare program uses “fiscal reclassification of misclassified graduate inter me diar ies,” ge ne ra lly p rivate medical education costs, a hospital must insurance companies, to perform many of present the intermediary with "sufficient the program's administrative functions. documentation" requiring a change in the Fiscal intermediaries are responsible for classification of costs. 42 C.F.R. § determining the amount of payments to be 413.86(l)(2)(ii). The regulations required made to providers. In the present case, actual documentation developed during the Mercy Catholic Medical Center’s fiscal base year that was maintained in an intermediary at the relevant time was Independence Blue Cross. The Interm ediary, in turn, engaged a Young & O’Fria, to conduct the graduate subcontractor, in this case Johnston, medical education reaudit.

4 auditable format. See 42 C.F.R. § graduate medical education base year. Id. 405.481(g) (1986); Medicare Program; A limited exception was created restricting Changes in Payment Policy for Direct the use of substitute documentation from Graduate Medical Education Costs, 54 later years to verify costs originally Fed. Reg. 40,301 (Sept. 29, 1989). claimed as graduate medical education costs in the graduate medical education The Secretary recognized, however, base year, but disallowing the use of that some hospitals would no longer have documents from later years to increase the the records required to support a grad uate medical education costs reclassification of costs. As such, the originally claimed. As published in the Secretary allowed auditors to accept time Federal Re giste r, the S ecreta ry’s records from subsequent time periods as interpretation read: proxy. “Graduate Medical Education: Documentation to Support the Physician As an equitable solution to Cost/Time Allocation” (1990), JA 211- t h e p r o b le m o f t h e 215.6 Where subsequent year records were nonexistence of physician also unavailable, hospitals were allowed to allocation agreements, time perform three-week time studies7 of record s, and other current physician workloads to provide a information, w e are rough estimate of the time allocation of allowing prov iders to teaching physicians in the base year. See furnish documentation from Medicare Program; Changes to the cost repo rting periods Inpatient Hospital Prospective Payment subsequent to the base System and Fiscal Year 1991 Rates, 55 period in support of the Fed. Reg. 36,064. allocation of physician compensation costs in the The Se creta ry noted these GME base period . . . . In alternative forms of documentation were no event will the results i n h e r e n t l y l e s s re l i ab l e t h an obtained from the use of the contemporaneous records from the r e c o r d s f r o m a c o st reporting period later than 6 The policy was later published in the the base period serve to Federal Register at 55 Fed. Reg. 35,990, increase or add physician 36,063-64 (Sept. 4, 1990). compensation costs to the costs used to determine the 7 In performing a time study, a physician per resident amounts. would, on a daily basis, log time worked 55 Fed. Reg. at 36,063-64. for a provider over a period of several weeks allocating time to various activities such as administration, supervision, or teaching of interns and residents.

5 2. Adjusting Hospital-Specific [NAPRA]” and “include sufficient Rate and Target Amount for documentation to demonstrate to the Misclassified Costs. intermediary that adjustment of the hospital’s hospital-specific rate or target A hospital may also request the a m o u n t i s w a r r an t e d .” Id. § reclassification of misclassified operating 413.86(l)(1)(ii). costs. Misclassified operating costs are costs that had been included as graduate B. Facts medical education costs in the graduate On December 21, 1989, Mercy medical education base year, but were Catholic Medical Center received notice reclassified by the intermediary as the Intermediary (“Independent Blue operating costs. 42 C.F.R. § 413.86(e)(1). Cross”) was reopening its cost reports for If the misclassified operating costs were FYE (“Fiscal Year Ended”) 1985, 1986, treated as graduate medical education costs 1987 and 1988 to perform the reaudit in both the graduate medical education under the graduate medical education base year and the prospective payment regulation. During the reaudit, the system base year, an upward adjustment of Intermediary made several downward the hospital’s specific rate or TEFRA adjustments to Mercy Catholic Medical target amount may be warranted since the Center's graduate medical education costs hospital-specific rate and target amount are but refused to make other adjustments to derived from operating costs in a base its graduate medical education costs and year. 54 Fed. Reg. 40,286, 40,289 (Sept. operating costs. The Intermediary's 29, 1989). Conversely, if the reaudit downward adjustment of graduate medical revealed misclassified graduate medical education costs and refusal to reclassify education costs (which would increase the certain operating costs as graduate medical ARPA), a corresponding downward education costs reduced Mercy Catholic adjustment of operating costs for the Medical Center's APRA from $81,745 to graduate medical education base year was $73,657. Mercy Catholic Medical Center required. Id. filed a timely appeal of the Notice of The regulations allow a hospital to Average Per Resident Amount with the “request that the intermediary review the Board. classification of the affected costs in its At the time, however, Mercy rate-of-increase ceiling or prospective Catholic Medical Center no longer payment base year for purposes of possessed all of the original supporting adjusting the hospital's target amount or documentation of its base year graduate hospital-specific rate.” 42 C.F.R. § medical education costs because the 413.86(l)(1)(i). To reclassify these costs, governing rules only required hospitals to a hospital must specifically "request review of the classification of its . . . costs no later than 180 days after the date of the

6 retain physician allocation agreements 8 was devoted to services that qualify as (also known as “339s”) for four years from graduate medical education costs. During the close of FYE 1985 (i.e., until June 30, the reaudit, Mercy Catholic Medical 1989). Furthermore, Mercy Catholic Center realized it had misclassified all of Medical Center had experienced a flood in the time spent by physicians in three the basement storage area and discarded Departments—OB/GYN, Laboratory, and all damaged records that were beyond their Radiology—as operating costs in the retention date. graduate medical education base year. Even though these physicians had in fact Mercy Catholic Medical Center did, been providing substantial graduate however, retain some of the 339s for the medical education services, it had been departments in question. At oral argument Mercy Catholic Medical Center’s historic before this Court, both parties stipulated practice to report as operating costs all some 339s were included in the costs for physicians whose duties were not administrative record, although not primarily teaching. Id. The 1990 time included as formal exhibits. The Provider studies included all of the physicians who Reimbursement Review Board, however, performed teaching duties in 1985, did not acknowledge them. See Mercy including those in the three “missing Catholic Med. Ctr. v. Blue Cross Blue departments.” In seeking graduate medical Shield Ass’n, PRRB Dec. No. 2001-D55 education credit, Mercy Catholic Medical (Sept. 28, 2001), Medicare and Medicaid Center timely requested the requisite Guide (CCH) ¶ 80,747, at 202,481 downward adjustment to its hospital- (“PRRB Dec.”) (“[T]here was insufficient specific rate and target amount under 42 evidence regarding forms 339 and C.F.R. § 413.86(l)(2). physician allocation agreements.”).9 In performing the reaudit, the During late 1990, however, Mercy Subcontractor (“Johnston, Young & Catholic Medical Center conducted a O’Fria”) accepted Mercy Catholic Medical three-week time study that tracked what Center's 1990 time studies as accurate and portion of each teaching physician's time compliant with the Health Care Financing Administration’s instructions of June 22, 8 A physician allocation agreement 1990, and relied upon them to reduce the specifies the respective amount of time a compensation and related teaching costs physician spends on teaching and Mercy Catholic Medical Center had supervision as opposed to time spent on claimed as graduate medical education patient care. 55 Fed. Reg. at 36,063. expenses. The Subcontractor advised Mercy Catholic Medical Center, however, 9 The 339s were not supported by that it had been instructed by the contemporaneous time sheets or “source Intermediary (“Independence Blue Cross”) documentation .” Ora l A rgument to strictly limit its reaudit to only those Transcript at 29-30.

7 FYE 1985 costs that Mercy Catholic include Mercy Catholic Medical Center’s Medical Center had reported as graduate misclassified operating costs, and is losing medical education costs in the graduate approximately $50,000 to $200,000 in medical education base year—to validate annual reimbursement for its psychiatric or reduce those costs—and to ignore unit as a result of the refusal to increase evidence of any other costs, including Mercy Catholic Medical Center’s target physician and support expenses, that had amount. previously been claimed in FYE 1985 as In addition to requesting credit for operating costs. Accordingly, the grad uate medical education costs Subcontractor declined to review time attributa ble to the three missing studies and other documentation pertaining departments, Mercy Catholic Medical to these three missing departments while, Center also asked the Intermediary to on the basis of the 1990 time studies, the increase its hospital-specific rate and target Intermediary reclassified $719,055 in amount to include any operating costs that, graduate medical education costs from based upon the 1990 time studies, had FYE 1985 as operating costs and excluded properly been determined to have been that amount from the APRA calculation. misclassified in FYE 1985 as graduate According to Mercy Catholic medical education costs. See 42 C.F.R. § Medical Center, the reclassifications 413.86(l). Mercy Catholic Medical Center reduced its total graduate medical also requested a corresponding downward education costs from $6,876,731 to adjustment to its hospital-specific rate and $6,157,676, and its APRA from $81,745 to targe t amo unt if a ny physic ian $73,657. Recognition of the misclassified compensation costs originally classified as graduate medical education costs from the operating costs were reclassified as three missing departments based on the graduate medical education costs. See 42 1990 time studies, which the Intermediary C.F.R. § 413.86(l)(2). Finally, Mercy refused, would have resulted in an APRA Catholic Medical Center asked the of $79,685.80. The retrospective Intermediary to increase the hospital- application of the disputed APRA reduced specific rate and the target amount of its Mercy Catholic M edical Center’s prospective payment system-exempt r e i m b u r se m e n t b y a p pr ox im a t e ly psychiatric unit to include the operating $2,500,000 from FY 1986-91, and by costs determined to have been erroneously approximately $250,000 to $500,000 reported in FY 1985 as graduate medical annually. Mercy Catholic Medical Center education costs under § 413.86(e)(1)(v) also lost approximately $275,000 in and (l)(1). The Intermediary refused to hospital-specific rate reimbursement make the requested hospital-specific rate during the prospective payment system and target amount adjustments. transition period as a result of the refusal to increase the hospital-specific rate to

8 C. The Provider Reimbursement 15. The HCFA instructions Review Board’s Decision reinforced this concept; however, an addendum Mercy Catholic Medical Center consisting of questions and appealed two issues to the Provider answers was incorrectly Reimbursement Review Board: (1) the interpreted by the Intermediary's refusal to recognize the Intermediary as meaning graduate medical education costs from the that no new GME costs three missing departments in the APRA could be added by the re- and; (2) the Intermediary's refusal to audit from OC. increase its hospital-specific rate and target amount to take into account those costs a. The Intermediary, IBC that were reclassified from graduate [Independence Blue Cross], medical education costs to operating costs wrongfully instructed the in the reaudit. The Board held a hearing audit subcontractor not to and issued its decision on September 28, increase the GME costs by 2001. reclassifying any 10 misclassified OC. The Board affirm ed th e Intermediary on both issues. As a The Board found nonetheless "there threshold matter, the Board agreed with [was] no creditable evidence in the record Mercy Catholic Medical Center that over- to reclassify the misclassified OC to GME allocations and under-allocations of base costs because of the lack of form 339's and year graduate medical education costs the fact that the 1990 time studies were not were properly subject to correction during audited by the Intermediary, nor is there the reaudit under 42 C.F.R. § 413.86(e), adequate documentation in the record because the statute and GME rule envision regarding these time studies." PRRB Dec. “a ‘two way street’ of changing at 202,481. erroneously claimed GME costs to On the second issue, the Board operating costs (‘OC’) and vice versa.” agreed Mercy Catholic Medical Center had PRRB Dec. at 202,480. In light of this, the timely requested revision of its hospital- Board found the Intermediary had specific rate and target amount. Id. It incorrectly instructed its Subcontractor to concluded, however, the Intermediary was ignore the time studies and other evidence of misclassified graduate medical education costs (as opposed to 10 We think the Board intended misclassified operating costs). PRRB Dec. “misclassified GM E” in this finding. But at 202,480-81. In fact, the Board’s the result is the same: The Board found decision included the following finding: originally claimed graduate medical education costs could be increased by adding misclassified costs.

9 not required to revise the hospital-specific three missing departments. The Court rate or target amount because Mercy wrote: “[t]he record indicates that Mercy Catholic Medical Center had not provided no longer had any of the 339s and that the required documentation directly to the Mercy did not submit any other evidence Intermediary within 180 days of the Notice [to support a reclassification of costs], of Average Per Resident Amount. other than the time study conducted in 1990.” Id. at *24-25. Although D. District Court Decision recognizing Mercy Catholic Medical The District Court affirmed the Center was not notified of a reaudit until Board. Mercy Catholic Med. Ctr. v. after the record retention period had Thompson, No. 02-419, 2003 U.S. Dist. expired, the District Court nonetheless LEXIS 4688 (E.D. Pa. Mar. 5, 2003). concluded Mercy Catholic Medical Center Reviewing the first issue, the District could be penalized for failing to maintain Court determined the limited exception to its 339 forms because it had received the requirement for contemporaneous “constructive notice” that those costs documentation restricted the use of “would likely be the subject of ongoing substitute documentation from later years review.” Id. at *27. to verify costs originally claimed as On the second issue, the District graduate medical education costs in the Court affirmed the Board’s ruling that graduate medical education base year, and Mercy Catholic Medical Center was not did not serve to add or increase costs to the entitled to increases in its hospital-specific original graduate medical education costs rate and target amount because it failed to claimed. Id. at *22-23. For support, the present documentation comparing Mercy Court cited the Secretary’s representations Catholic Medical Center’s FY 1983 and that later year records “were inherently 1985 graduate medical education programs less reliable,” and that providers had directly to the intermediary, noting that it “significant incentives to inflate their was the hospital’s “burden . . . to present GME costs in the base year under the new sufficient evidence.” Id. at *33. methodology.” Id. at *24 (quoting Presbyterian Med. Ctr., No. 95-1939, II. 1998 U.S. Dist. LEXIS 6254, at 12-13 We have jurisdiction under 28 (D.D.C. April 21, 1998), aff’d, 170 F.3d U.S.C. § 1291. We review the grant of 1146 (D.C. Cir. 1999)). summary judgment de novo. Fertilizer The District Court also affirmed on Inst. v. Browner, 163 F.3d 774, 777 (3d the basis of lack of documentation. The Cir. 1998). Like the District Court, we Court found Mercy Catholic Medical review a final decision of the Secretary11 Center’s claims suspect because the a d m i n i s tr a t iv e record la c k e d 11 contemporaneous evidence of 339's in the In this case, the Board’s decision was the final decision of the Secretary.

10 under 42 U.S.C. § 1395oo(f)(1), which determine the level of deference, if any, to incorporates the standard of review of the afford the Secretary’s interpretation of the Administrative Procedure Act, 5 U.S.C. § graduate medical education reaudit rule.12 706. Under the APA, we will affirm As noted, when it became clear unless the Secretary’s decision is providers did not always retain "arbitrary, capricious, an abuse of contemporaneous time records to facilitate discretion, or otherwise not in accordance the reaudit, the Secretary issued a special with law; [or] unsupported by substantial grad uate m edical education c o st evidence." 5 U.S.C. § 706(2)(A),(E); documentation rule for reaudits as an Robert Wood Johnson Hosp. v. Thompson, official instruction to fiscal intermediaries, 297 F.3d 273, 280 (3d Cir. 2002). But “ G r a d u a t e M e d i c a l E d u c a t io n : when applying this standard, a reviewing Documentation to Support the Physician court may not merely rubber-stamp the Cost/Time Allocation” (1990), JA 211- Secretary’s actions, but must ensure that 215. The Secretary’s written interpretation the agency’s ruling is neither clearly provides that later-year time studies, of the erroneous nor inconsistent with applicable sort relied on by Mercy Catholic Medical regulations. Thomas Jefferson Univ. Center, could only serve to verify costs Hosp. v. Shalala, 512 U.S. 504, 512 that were originally claimed as graduate (1994). Further, we may affirm the medical education costs in the base year, agency’s decision only on grounds on and could not support the addition of costs which the agency actually relied, and not not originally claimed as graduate medical on the basis of alternative rationales or education costs. The limited exception to justifications put forward by counsel on the record-keeping policy provides: appeal. SEC v. Chenery Corp., 318 U.S. 80, 87 (1943). As an equitable solution to the problem o f the III. nonexistence of physician A. Graduate Medical Education Costs allocation agreements, time records, and other 1. As Applied to the Facts of this information, we are C ase , t h e S e c re t ar y ’s allowing pr ovide rs to Interpretive Rule is Arbitrary furnish the documentation and Capricious. from cost reporting periods Mercy Catholic Medical Center subsequent to the base contends the Secretary’s failure to consider period in support of the its 1990 time studies to the extent they supported a positive adjustment to its reported FY 1985 graduate medical 12 The District Court did not explicitly education costs was arbitrary and address the level of deference it warranted capricious. As a threshold matter, we must the Secretary’s interpretive rule.

11 allocation of physician Following its interpretation, the compensation costs in the Secretary now argues the limited exception GM E base period . . . . It is to the rule requiring contemporaneous only in the absence of base documentation only allows the use of period documentation that records from subsequent cost reporting subsequent documentation periods to verify costs and allocations should be considered as a claimed as graduate medical education proxy for base period costs during the graduate medical documentation for purposes education base year—not to support of determining the per increases to those costs in the base year. resident amount. In no We owe no deference to an agency event will the results interpretation plainly inconsistent with the obtained from the use of the relevant statute. See Pub. Employees r e c o rds from a cos t Retirement Sys. v. Betts, 492 U.S. 158, 171 reporting period later than (1989) (“[N]o deference is due to agency the base period serve to interpretations at odds with the plain increase or add physician language of the statute itself.”). In the compensation costs to the same vein, an agency’s interpretation of its costs used to determine the own regulations is not entitled to per resident amounts. substantial deference by a reviewing court 55 Fed. Reg. at 36,063-64 (emphasis where “‘an alternative reading is added).13 compelled by the regulation’s plain meaning or by other indications of the Secretary’s intent at the time of the 13 The Agency supplemented its rule regulation’s promulgation.’” Thomas with the following question and answer:

Question: If a provider did in HCFA’s instructions, the n o t c h a r g e p hy s ic ia n use of subsequent period compensation to GME in documentation to support the base period, can it the allocation of physician request that documentation costs may not be used to from a subsequent period be increase the amount of used, at this time, to revise physician compensa tion its base period costs for the originally claimed by the purpose of calculating its provider in its GME base a v e r a g e p e r r e si d e n t period. Graduate Medical amount? Education: Questions and Answers (Nov. 8, 1990), JA Answer: No. As explained 872.

12 Jefferson Univ. Hosp., 512 U.S. at 512 (A) Verifies the hospital’s (quoting Gardebring v. Jenkins, 485 U.S. base-p eriod graduate 415, 430 (1988)). Mercy Catholic Medical medical education costs and Center contends the graduate medical the hospital’s average education rule is written in neutral number of FTE residents; language that compels intermediaries to (B) Excludes from the base- accurately calculate graduate medical period graduate medical education costs, and to correct all e d u c atio n c o s t s an y misclassified costs, operating costs and nonallowable or graduate medical education costs, to arrive m i s c l a ss i f ie d costs , at the most accurate APRA possible. We including those previously a g r e e a n d find the S e cre tar y’s allowed under § interpretation directly contradicts the plain 4 1 2 .113( b)( 3 ) o f t h is language of the graduate medical chapter; and education regulation and cannot be upheld. (C) Upon a hospital’s The plain language of the graduate request, includes graduate medical education rule does not support medical education costs that limiting corrections upon reaudit to were misc lassifie d as misclassified operating costs, but rather operating costs during the anticipates corrections of misclassified hospital’s pros pectiv e graduate medical education costs and payment base year and were operating costs. not allowable under § 42 C.F.R. § 413.86(e) and (l) 4 1 2 . 1 1 3 (b )( 3 ) o f t h is provide: chapter during the graduate medical education base (e) Determining per resident period. These costs may be amounts for the base period included only if the hospital – (1) For the base period. requests an adjustment of its (i) . . . the intermediary prosp e c t iv e p a yment determines a base-period per hospital-specific rate or resident amount for each target amount as described hospital as follows . . . in paragraph [(l)(2)] of this (ii) In determining the base section. period amount under (l) Adjustment of a paragraph (e)(1)(i) of this hospital’s target amount or section, the intermediary – . prospective payment .. hospital-specific rate – (1)

13 M isclassified oper ating Additionally, the intent of the rule costs . . . supp orts our inter pre tatio n. In promulgating § 413.86, the Secretary (2) Misclassification of determined a reaudit of FY 1985 cost graduate medical education reports was warranted because hospitals costs – (i) General rule. If may not have accurately distinguished costs that should have been between teaching time and administrative classified as graduate and other time spent by teaching medical education costs physicians in FY 1985, since at that point were treated as operating in time there were no real reimbursement costs during both the c o n s e q u e n c e s e i t h er w a y , a n d graduate medical education Intermediaries had applied the audit rules base period and the rate-of- inconsistently. 54 Fed. Reg. 40,286, increase ceiling base year or 40,288-89, 40,301-02. In this vein, the prospective payment base Secretary noted: “In establishing the base- year and the hospital wishes period per resident amount for a specific to receive benefit for the hospital . . . it is important that the amount appropriate classification of determined be an accurate determination these costs as graduate of providers’ 1984 GME costs.” 54 Fed. medical education costs in Reg. 40,286, 40,288. The goal of an t h e g radu ate m edic a l accurate determination of costs supports education base period, the both increases and decreases to 1984 hospital must request that graduate medical education costs. The the intermediary review the Secretary’s intent is particularly relevant to classification of the affected this case where Mercy Catholic Medical costs in the rate-of-increase Center is not seeking to add additional ceiling or pro spec tive costs not audited in 1985, but rather, seeks payment base year for to reallocate operating costs as graduate purposes of adjusting the medical education costs based on the same hospital’s target amount or time studies the Intermediary relied on to hospital-specific rate. reclassify costs in the opposite direction. 42 C.F.R. § 413.86(e), (l) (emphasis Our position is consistent with the added). Supreme Court’s interpretation of the The regulation’s plain language graduate medical education reaudit rule in requires the Intermediary to correct all Regions Hosp. v. Shalala, 522 U.S. 448 misclassified costs, not just misclassified (1998). In upholding the reaudits, the graduate medical education costs. The Court wrote, the audits were required “to Secretary’s restrictive approach conflicts catch errors that, if perpetual, could with the regulatory language. grossly distort future reimbursement.” 522

14 U.S. at 457-58. To make the APRA interpretation “‘qualifies for Chevron accurate and avoid perpetrating errors, the deference when it appears that Congress reaudit requires correcting all relevant delegated authority to the agency generally classification errors, not merely those that to make rules carrying the force of law, result in a reduction of graduate medical and that the agency interpretation claiming education costs. deference was promulgated in the exercise of that authority.’” George Harms Constr. As noted, we find the reaudit rule Co. v. Chao, 371 F.3d 156, 161 (3d Cir. envisions a two-way street. The 2004) (quoting United States v. Mead Secretary’s interpretation is at odds with Corp., 533 U.S. 218, 226-27 (2001)). this principle. Significantly, the Provider Agency statements contained in opinion Reimbursement Review Board agreed, letters, policy statements, agency manuals, holding the graduate medical education and enforcement guidelines lack the force rule r e q uired reclassification o f of law and “do not warrant Chevron-style misclassified graduate medical education deference.” Christensen v. Harris County, costs and operating costs. PRRB Dec. at 529 U.S. at 587; Madison v. Res. for 202,480. In doing so, the Board explicitly Human Dev., Inc., 233 F.3d 175, 185 (3d discredited the interpretation of the rule Cir. 2000). “To grant Chevron deference adopted by the Secretary in this litigation. to informal agency interpretations would Even if th e S ec re ta r y’ s unduly validate the results of an informal interpretation were not at odds with the process.” Madison, 233 F.3d at 186. We plain language of the rule, his have made clear that agency interpretive interpretation is still not entitled to guidelines “do not rise to the level of a Chevron-level deference.14 An Agency regulation and do not have the effect of law.” Id. (quoting Brooks v. Village of Ridgefield Park, 185 F.3d 130, 135 (3d 14 Cir. 1999)). In Presbyterian Medical Center, 1998 U.S. Dist. LEXIS 6254, aff’d, 170 F.3d As for the persuasiveness of agency 1146, the District Court for the District of interpretive guidelines, we continue to rely Columbia held the Secretary’s instruction on the framework laid out in Skidmore v. on the use of later time-records was an Swift, 323 U.S. 134 (1944). See “interpretive rule,” and afforded the rule Christensen, 529 U.S. at 587; Madison, Chevron deference. Id. at *9. We note Presbyterian was decided before Christensen v. Harris County, 529 U.S. instruction at issue is an interpretive rule. 576 (2000), where the Supreme Court See 5 U.S.C. § 553(b)(A) (discussing clarified the deference due agency opinion informal rule-making without notice and letters. See id. at 587 (declining to afford comment). But we disagree with the level Chevron deference to Department of of deference granted in Presbyterian Labor’s opinion letter). We believe the Medical Center.

15 233 F.3d at 186. The Skidmore Court the base year.15 The HCFA Administrator explained: determined that subsequent year time studies may be used to increase physician We consider that the rulings, compensation in excess of amounts interpretations and opinions originally claimed in the graduate medical of the Administrator under education cost center if the time studies t h i s A c t , w h i le n o t were consistent with contemporaneous controlling upon the courts data. The Administrator subsequently by reason of their authority, repudiated his earlier position, see do constitute a body of Presbyterian Med. Ctr., 1998 U.S. Dist. experience and informed LEXIS 6254, and adopted his current judgment to which courts position, that the amount claimed in the and litigants may properly graduate medical education cost center resort for guidance. The could only be increased based on weight of such a judgment contemporaneous documentation, not in a particular case will subsequent period time studies. “The depend upon the Secretary is not estopped from changing a thoroughness evident in its view . . . believe[d] to have been grounded consideration, the validity of upon a mistaken legal interpretation,” its reasoning, its consistency Good Samaritan Hosp. v. Shalala, 508 with earlier an d later U.S. 402, 417 (1993), but this pronouncements, and all inconsistency can affect the level of those factors which give it d e f e r e n ce af fo rd ed an ag en cy’ s power to persuade, if interpretation. See Skidmore, 323 U.S. at lacking power to control. 140. The Secretary’s internally conflicting 323 U.S. at 140. positions on this issue militate against affording deference to the interpretive Under Skidmore analysis, we find rule.16 the Agency has inconsistently applied the Secretary’s instructions concerning what costs can be recognized in the reaudit 15 As noted, M ercy Catholic Medical process. In Abbott v. NW Mem’l Hosp., Center did retain some of its 339 allocation PRRB Dec. No. 95-D10, Medicare & agreements, and these were included in the Medicaid Guide (CCH) ¶ 42, 970 (Dec. 7, administrative record. 1994) aff’d, HCFA Adm’r Dec., Medicare 16 & Medicaid Guide (CCH) ¶ 43,136 (Feb. Mercy Catholic Medical Center also 2, 1995), the provider presented base year argues the Secretary endorsed a position physician allocation agreements, but did inconsistent with that taken in the current not produce supporting time records from case when defending the validity of the graduate medical education rule before the Supreme Court in Regions, 522 U.S. 448.

16 In Regions, the Supreme Court considered there are some pieces of the broader issue of whether the paper and other evidence Secretary’s enactment of the rule that are no longer around, providing for a retrospective reaudit of the Secretary will permit the graduate medical education costs was a hospital to introduce – reasonable interpretation of the graduate medical education amendment, 42 U.S.C. Ms. Blatt [government § 1395ww(h), under Chevron. The Court counsel]: Yes conditioned its affirmance of the graduate m e d i c a l e d ucatio n rule o n th e Question: – other evidence, understanding that hospitals would not be later evidence, or anything penalized for lack of documentation which that – they were no longer required to maintain. Id. at 465. The Secretary overcame this Ms. Blatt: That’s correct, problem through the “equitable solution” and ironica lly, Justice discussed above. According to Mercy Breyer, the petitioner did Catholic Medical Center, Government present subsequent year data counsel suggested the Secretary would . . . because the [old] time allow providers to add to, as well as records did not break . . . decrease, base-year graduate medical down the costs [sufficiently] education costs based on the following . . . they were allowed to use discussion at oral argument: a new time study, and that’s why there was a settlement Question [Breyer, J.]: I in this case, the petitioner would just like to be clear in actually got an increase in my own mind. What the per-resident average . . . petitioner said . . . [is] that . they have changed the classification of certain Oral Argument Transcript at 16, Regions fixed costs, the Hospital v. Shalala, No. 96-1375, 1997 administrative costs, from WL 751915 (U.S.S.Ct. Dec. 1, 1997). education costs to operating Based on this interchange, Mercy Catholic costs, not because of new Medical Center argues that the principle of e v i dence but b e c a u se judicial estoppel should prevent the petitioner no longer had Secretary from switching positions in this audit documentation . . . . litigation. Because we find the Secretary’s Am I right in thinking that interpretive rule contrary to the plain isn’t the problem, because if language of the regulation, inconsistently

17 Nonetheless, the Secretary argues GME costs . . . reasonably its interpretative rule is reasonable and f u r t h e r s — n o t entitled to deference. Contending later frustr a t e s — accurate year records are inherently less reliable, determination of GME the Secretary argues it is reasonable to costs.” limit the weight afforded to these records. Id. at 1150-51 (internal quotations and According to the Secretary, hospitals may citations omitted). We respectfully attempt to manipulate graduate medical disagree. education costs with documentation developed after the base year, for purposes We see no valid reason to generally of increasing their APRA. ascribe to teaching hospitals wrongful over-reporting of teaching costs. Because In Presbyterian Medical Center v. of the Consistency Rule, hospitals had no Shalala, 170 F.3d 1146 (D.C. Cir. 1999), opportunity to change classification of the Court of Appeals for the D.C. Circuit costs in FY 1985 from that reported in FY noted the Secretary’s interpretive rule was 1983, the prospective payment system base reasonable because: year. 42 C.F.R. § 412.113(b)(3). Nor did GME costs claimed in the teaching hospitals have a financial base year have already gone incentive to misallocate either graduate through a verif icatio n medical education costs or operating costs process requiring in the prospective payment system base contemporaneous year, 1983, as Medicare reimbursed both documentation. Additional education costs and operating costs on a GME costs claimed during reasonable cost basis during that period. reaudit have not. Because Consequently, there is no reason to expect later year record are errors in cost reporting in 1984-85 would inherently less reliable, and have favored reporting costs in one because hospitals have category or the other. Additionally, since significant incentives to § 1395ww(h) was enacted in 1986 and inflate their GM E costs in mandated the use of FY 1985 as the the base year . . . we think graduate medical education base year—a the interpretive rule, by year which predated this change in the p r o h i b i t i n g law— to set the APRA, providers had no noncontemporaneous notice or opportunity to “game the system” records from supporting by over-reporting teaching costs.17

17 applied, and lacking valid reasoning, we The Secretary’s Interpretive Rule does do not reach Mercy Catholic Medical not clarify the difference between adding Center’s judicial estoppel argument. graduate medical education costs not

18 previously claimed, and reclassifying had previously claimed. There, the misclassified graduate medical education Provider Reimbursement Review Board costs previously classified as operating noted: costs. The district court in Presbyterian The provider is not noted the specific question before the court attempting to increase or was “whether later year records can be add the physician used to support an increase in GME costs compensation cost to the over what was originally claimed in the costs claimed on its 1984 base year.” 1998 U.S. Dist. LEXIS 6254, cost report which was used at *9. In discussing the Secretary’s to determine the Provider’s interpretive rule, the court noted: “In [the per resident amount. All of Secretary’s] judgment, however, she did the costs that the Provider not think it appropriate for hospitals to be has claimed were claimed in able to use later year records to support an the base year, although they increase in GME costs over what hospitals may not have been claimed had originally claimed.” Id. at *12-13; see specifically in the Intern and also Cleveland Clinic Found. v. Shalala, Resident cost center. No. 1:94 CV 2414, 1996 WL 636135, at Abbott, Medicare & Medicaid Guide *2 (N.D. Ohio, Aug. 28, 1996) (rejecting (CCH) ¶ 42, 970, at 42,898. provider’s “attempts to claim additional The Agency supplemented its costs no[t] previously claimed in the base interpretive rule with the following year period”). question and answer: Unlike the situation in Presbyterian Question: If a provider did and Cleveland Clinic, Mercy Catholic n o t c h a r g e p h ys i c i a n Medical Center’s requested reclassification compensation to GME in of misclassif ied gra duate medical the base period, can it education costs would serve only to request that documentation partially offset the graduate medical from a subsequent period be education costs that were found by the used, at this time, to revise Intermediary to have been misclassified on its base period costs for the reaudit, and would not raise Mercy purpose of calculating its Catholic Medical Center’s graduate a v e r a g e p e r r e si d en t medical education costs above the amount amount? contemporaneously claimed in FY 1985. Answer: No. As explained In Abbott as well, the graduate in HCFA’s instructions, the medical education cost additions did not use of subsequent period result in total graduate medical education documentation to support costs in excess of the amount the hospital the allocation of physician

19 The Secretary’s interpretation on “[a] long line of precedent requires the Intermediary to apply the [establishing] . . . that an agency action is graduate medical education reaudit rule in arbitrary when the agency offers a one-sided fashion. An agency acts insufficient reasons for treating similar arbitrarily and capriciously when it situations differently.” Id. at 1022 construes or applies a regulation in an (quoting Transactive Corp. v. United inconsistent manner. See Walter Boswell States, 91 F.3d 232, 237 (D.C. Cir. 1996)). Mem’l Hosp. v. Heckler, 749 F.2d 788, The court held the Secretary’s discretion, 799 (D.C. Cir. 1984) (“It would be although broad, “is not a license to . . . arbitrary and capricious for HHS to bring treat like cases differently.” Id. at 1023 varying interpretations of the statute to (quoting Airmark Corp. v. FAA, 758 F.2d bear [in allocating costs to Medicare], 685, 691 (D.C. Cir. 1985)). depending on whether the result helps or By allowing non-contemporaneous hurts the Medicare’s balance sheets . . . .”). records to verify graduate medical F u r thermore, the Secre tar y’s education costs or deduct graduate medical interpretation eschews the fundamental education costs claimed in the base-year goal of neutral accuracy in a reaudit. See, cost report, but not allowing such records e.g., Boswell, 749 F.2d at 799; County of to support the inclusion of graduate Los Angeles v. Shalala, 192 F.3d 1005 medical education costs misclassified as (D.C. Cir. 1999). In County of Los o p e r a ting co sts , th e S ec re tar y’ s Angeles, the Court of Appeals for the D.C. interpretive rule frustrates the regulatory Circuit rejected the Secretary’s explanation goal of ensuring an accurate determination for selectively ignoring data where it of a provider’s graduate medical education would increase Medicare payments based costs. The Secretary either credits or ignores later year time studies depending on whether the correction of errors will costs may not be used to result in a reduction or increase in a increase the amount of hospital’s graduate medical education physician compensation reimbursement. The Secretary’s restrictive originally claimed by the interpretive rule is arbitrary and capricious provider in its GME base because it contradicts the plain language of period. the rule, has not been applied consistently, Graduate Medical Education: Questions and is unreasonable.18 and Answers (Nov. 8, 1990), JA 872 (emphasis added). As this case concerns 18 misclassified graduate medical education The Secretary’s rule may also effect costs, we find the Secretary’s position an illegal cost-shifting of Medicare costs concerning costs not originally claimed, to non-Medicare patients, as it will shift does not su pp ort the S ecretary’s costs properly borne by Medicare to other interpretation as applied to this case. patients. See 42 U.S.C.

20 2. Evidentiary Issues Support Mercy no longer had any of the 339s and Remand. that Mercy did not submit any other evidence, other than the time study Mercy Catholic Medical Center conducted in 1990.” Mercy Catholic Med. contends the District Court and the Board Ctr., 2003 U.S. Dist. LEXIS 4688, at *24- erred in rejecting its appeal on the added 25. ground that Mercy Catholic Medical Center failed to produce form 339 At oral argument, and in a physician allocation agreements for the subsequent letter to this Court, Mercy three missing departments. We recognize Catholic Medical Center proved that some the able District Court was presented with or iginal 339s from the missin g a confusing administrative record. departments had been included in the Nonetheless, we reverse and remand based administrative record, though, apparently, o n t h e a lt e r n a ti v e g ro u n d t h at not as formal exhibits.19 To the extent the contemporaneous evidence of teaching Provider Reimbursement Review Board programs, including 339 forms, was and the District Court grounded their presented to the Provider Reimbursement decisions on Mercy Catholic Medical Review Board. Center’s inability to produce copies of the 339 forms for the three missing There is no dispute that Mercy departments, it is clear that at least some of Catholic Medical Center conducted these forms were produced in the accredited medical residency programs in administrative record.20 Therefore, we will its Laboratory, OB/GYN, and Radiology Departments in 1984-85. Before the Board, Mercy Catholic Medical Center 19 According to Mercy Catholic Medical introduced contemporaneous Center’s letter to this Court dated May 4, documentation verifying its graduate 2004, a “departmental 339 allocation” medical education activities. The Board form for the Radiology Department was found: “In fiscal year 1985, the provider introduced as PRRB Exhibit 32. conducted GME teaching programs in its OB/GYN, Laboratory, and Radiology 20 Although no 339 forms for individual Departments.” PRRB Dec. at 202,480. doctors were included in the appendix to Yet, the Board noted, “[t]here is no this Court, a “departmental 339 allocation” creditable evidence in the record to form for all teaching physicians in the reclassify the misclassified OC to GME Radiology Department in 1985 was costs because of the lack of form 339's . . included. JA 381. Health Care Financing . .” Id. at 202,481. The District Court also A d m i n i s t r a t i o n ’ s i n s t r u c t io n s t o concluded, “[t]he record indicates that in te r me dia r ie s specify that suc h “departmental time allocations may be accepted” on reaudits. Instructions for § 1395(x)(v)(1)(A). Implementing Program Payments for

21 reverse and remand on the alternative The District Court affirmed, noting, “[t]he ground that sufficient contemporaneous fact that the Subcontractor may have the documentation of teaching programs in the documents in its possession does not “missing departments” was produced to satisfy the requirements set forth by the support the reclassification of costs and regulations.” Mercy Catholic Med. Ctr., should have been considered by the Board. 2003 U.S. Dist. LEXIS 4688, at *33-34. We cannot agree. In sum, the Secretary’s position that later year time studies may only be used to As noted, an increase in the correct misclassified operating costs, and hospital-specific rate and target amount is not misclassified graduate medical anticipated by the Secretary’s own education costs, is arbitrary and capricious. regulations to achieve consistent We will reverse and remand with classification of costs where costs i n s tr u c t io n s to th e P r o v i d er originally classified as graduate medical Reimbursement Review Board to order the education costs should have been reported Intermediary to recalculate Mercy Catholic as operating costs. See 42 C.F.R. § Medical Center’s graduate medical 413.86(l)(1). Additionally, because of the education costs after auditing the time Consistency Rule, allowable operating studies and other available documentation costs involved in setting the hospital- from the three missing departments. specific rate and target amount must be treated consistently through out the B. Hospital-Specific Rate and Target prospective payment transition period (i.e. Amount Mercy Catholic Medical Center’s FY Mercy Catholic Medical Center also 1985-1989). 42 C.F.R. § 412.113(b)(3).21 contends the District Court failed to order Once it is determined that misclassified the Intermediary to increase its hospital- specific rate and TEFRA target amount. 21 As noted, the Board declined to order the Mercy Catholic Medical Center also Intermediary to increase Mercy Catholic contends that because its Target Amount Medical Center’s hospital-specific rate and applied only to a psychiatric unit not in target amount in an amount corresponding operation until FY 1985, there was no to the Intermediary’s reduction of the same rational basis to require Mercy Catholic costs from the APRA because Mercy M e d i c a l C e n t e r to i n t ro d u c e Catholic Medical Center had not provided d o c u m e n t a t io n e v i d e n c i n g t h e d o c u m e n t a t io n d i r e c t l y t o t h e comparability of its FY 1983 and FY 1985 I n t e rm e d iary, but rath er to th e costs as a precondition to increasing the Subcontractor. PRRB Dec. at 202,481. t a rg e t am oun t. T he r e f o r e , n o “comparability data” was necessary to adjust the target amount, and the Board’s Graduate Medical Education Costs, JA finding on insufficient documentation was 341. irrelevant to the target amount adjustment.

22 graduate medical education costs should adjustments on the technicality that Mercy have been reimbursable as operating costs, Catholic Medical Center provided the data an increase to the hospital-specific rate and supporting comparability within the 180 target amount is required not merely for day period to the Intermediary’s consistency purposes, but also in light of Subcontractor rather th an dire ctly Medicare’s cost-shifting prohibition. 42 providing it to the Intermediary. PRRB U.S.C. § 1395x(v)(1)(A). For these Dec. at 202,481. We do not find this reasons, the hospital-specific rate/target distinction legally significant. amount adjustment is critical. Mercy Providing data to the on-site Catholic Medical Center’s request for a Subcontractor is the legal equivalent of revision of both its hospital-specific rate providing the data to the Intermediary and target amount was appropriate and under Centers for Medicare and Medicaid timely. Services Manuals and principles of As discussed, the Provider agency. In collecting data for an audit, the Reimbursement Review Board did not Subcontractor steps into the shoes of the deny the adjustments for substantive Intermediary. See Medicare Intermediary reasons. See PRRB Dec. at 202,481. Manual, JA 919. A subcontracted audit Mercy Catholic Medical Center had firm is authorized to receive cost reports provided the appropriate and sufficient and make its working papers available to documentation to the Intermediary’s the Intermediary for review and to obtain Subcontractor.22 JA 161. The Board, necessary information. See id. pt. F (“The however, refused to order the hospital- independent audit firm’s [Subcontractor’s] spec ific rate and targ et amount working papers, including permanent files and reviews of internal control, are to be made available to representatives of the 22 The record demonstrates the evidence Secretary and the intermediary, at all provided by Mercy Catholic Medical reasonable times, for review and obtaining Center was sufficient to make the any necessary information.”). Under the adjustments to the hospital-specific rate Medicare Intermediary Manual, the and target amount. The Board found “the Intermediary and the Subcontractor are Subcontractor . . . had received adequate interchangeable in the function of information for . . . revisions to the receiving documents. The Board’s HSR/TEFRA target amount.” PRRB Dec. decision also described the Intermediary at 202,481. In fact, the “best evidence” of p e r f o r m i n g a u d i t s “ t h r o ug h i t s comparability between the prospective Subcontractor.” PRRB Dec. at 202,466. payment system and graduate medical Under these circumstances, we find education base years was the cost reporting the documents were plainly within the data and supporting audit records that were control of the “prime contractor” (in this already in the Intermediary’s possession case, the Intermediary). In the context of until at least 1992. JA 156.

23 Fed. R. Civ. P. 34(a), so long as the party § 413.86, it does not follow that the has the legal right or ability to obtain the provider may not supply the data to the documents from another source upon Interm edia ry throug h the o n-site demand, that party is deemed to have Subcontractor. The Subcontractor was control. See Fed R. Civ. P. 34(a) entitled to receive cost documentation (allowing “[a]ny party [to] serve on any from Mercy Catholic Medical Center as other party a request . . . any designated the Intermediary’s agent. An agency documents . . . which are in the possession, relationship may be established by: (1) custody or control of the party upon whom express authority; (2) implied authority, to the request is served); see also Poole v. do all that is proper, usual and necessary Textron, 192 F.R.D. 494, 501 (D. Md. for the authority actually granted; (3) 2000) (“[A] party is charged with apparent authority, as where the principal knowledge of what its agents know or holds one out as agent by words or what is in the records available to it.”) conduct; and (4) agency by estoppel. See (internal quotation omitted). In the Rule SEI Corp. v. Norton & Co., 631 F. Supp. 34 context, control is defined as the legal 497, 501 (E.D. Pa. 1986). right to obtain required documents on Based on the relationship between demand. See Gerling Int’l Ins. Co. v. the Subcontractor and Intermediary, the Comm’r, 839 F.2d 131, 140 (3d Cir. subcontractor likely had express or implied 1988); 8A Charles Alan Wright & Arthur authority to receive documents from R. Miller, Federal Practice and Procedure Mercy Catholic Medical Center. See § 2210 (2d ed. 1994). The Medicare Medicare Intermediary Manual pts. D-F. Intermediary Manual specifically requires The Subcontractor undoubtably possessed the Subcontractor’s working papers and the authority to conduct the reaudit of the files be made available to the Intermediary graduate medical education costs. JA 153. and Secretary at all “reasonable times.” As noted, adjustment of the hospital- Medicare Intermediary Manual pt. F. specific rate and target amount is tied to Because the record demonstrates Mercy the classification of hospitals’ costs. See Catholic Medical Center provided the 42 C.F.R. § 413.86(l). Rationally, the necessary documents to the Subcontractor, Subcontractor should be authorized to and the Intermediary employed the receive documents for both cost Subcontractor to conduct the audit and reclassifications and adjustments to a receive documents, the documents were hospital’s specific rate and target amount. accessible to the Intermediary and within Alternatively, if the subcontractor lacked its control. express authority to receive documents, the While there is no question the fact that it had conducted the graduate Intermediary determines the APRA and medical education reaudit, and had corresponding adjustments to the hospital- conducted all of Mercy Catholic Medical specific rate and the Target Amount under Center’s audits since the “mid 70s,” JA

24 153, demonstrates the Subcontractor had payment system and the graduate medical apparent authority to receive the education base years—to effect an documents. “It is well settled that apparent adjustment of the hospital-specific authority (1) ‘results from a manifestation rate—until the Board has determined by a person that another is his agent’ and whether to approve a reaudit classification (2) ‘exists only to the extent that it is of operating costs to graduate medical reasonable for the third person dealing education costs. with the agent to believe that the agent is The Secretary maintains Mercy authorized.’” Taylor v. People’s Natural Catholic Medical Center’s reliance on 42 Gas Co., 49 F.3d 982, 989 (3d Cir. 1995) U.S.C. § 1395oo(d) is unavailing. We (quoting Restatement (Second) of Agency agree. This statute does not require the § 8 cmts. a & c (1958)). Mercy Catholic Board to receive additional evidence not Medical Center reasonably believed the considered by the Intermediary, but only Subcontractor had the authority to receive confers discretion on the Board as to what the relevant documentation. The will be allowed into the administrative Intermediary and the Subcontractor were record. Taking Mercy Catholic Medical jointly obligated to safeguard the Center’s argument to its logical hospital’s documents. Therefore, Mercy conclusion, all statutory or regulatory Catholic Medical Center fulfilled its deadlines imposed on providers for burden by providing appropriate data to purposes of Medicare reimbursement the Intermediary’s agent. would be inconsequential, since providers Mercy Catholic Medical Center also could proffer all required reports and contends it was entitled to present documents by the time of the hearing. evidence not submitted to the Intermediary Nevertheless, because we find to the Provider Reimbursement Review Mercy Catholic Medical Center to have Board for de novo review, and that the fulfilled its burden by presenting sufficient Board violated 42 U.S.C. § 1395oo(d) by data for adjusting its hospital-specific rate not considering this evidence.23 In this and target amount to the Subcontractor, we vein, Mercy Catholic Medical Center will reverse the Board and the District argues it should be allowed to present Court on this issue. We will remand to the evidence comparing the prospective District Court to remand to the Provider Reimbursement Review Board with 23 instructions to order the Intermediary to 42 U.S.C. § 1395oo(d) provides in adjust Mercy Catholic Medical Center’s relevant part: “A decision by the Board hospital-specific rate and target amount to shall be based upon the record made at correspond to reclassified operating costs such hearing, which shall include the and graduate medical education costs. evidence considered by the intermediary and such other evidence that may be obtained or received by the Board . . . .”

25 IV. For the reasons stated, we will reverse and remand the judgment of the District Court for proceedings consistent with this opinion.