CUDAHY, Circuit Judge.
We are asked in this appeal to decide whether the Secretary of Health and Human Services (the “Secretary”) abused his discretion by interpreting the “utilization control” provisions of the Medicaid statute, 42 U.S.C. §§ 1396a(a)(30), 1396b(g)(l), and accompanying regulations, 42 C.F.R. Parts 442 & 456, in an arbitrary and capricious manner.1 The district court ruled that he had and remanded the case to the HHS Grant Appeals Board. We reverse.
I.
Medicaid, a cooperative federal-state program established by Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., provides federal financial assistance to those states that choose to reimburse health care providers for certain costs of medical care given to needy persons. A state need not participate in Medicaid, but if it chooses to accept federal funds it must comply with the federal Medicaid statute and regulations, including the requirement that a state plan, describing the state’s program and assuring conformity with federal prescriptions, be submitted for approval by the Secretary. 42 U.S.C. § 1396a(b).
A state plan must provide for patient care in “skilled nursing facilities” (SNFs), 42 U.S.C. §§ 1396d(a)(4)(A); it may also at its option provide for care in “intermediate care facilities” (ICFs), 42 U.S.C. § 1396d(a)(15). A SNF is appropriate for patients who require constant care and the services of skilled nursing or rehabilitation personnel, 42 U.S.C. § 1396d(f); 42 C.F.R. § 440.40; an ICF provides a lower level of services for patients who nonetheless require institutional care, 42 U.S.C. § 1396d(c); 42 C.F.R. § 440.150. Both sorts of facilities must be licensed by the state and certified by the state Medicaid [393]*393agency as conforming to federal requirements. 42 C.F.R. §§ 442.12, 442.200-202, 442.250-254.
Services provided in SNFs and ICFs are subject to Medicaid’s “utilization control” requirements. Section 1902(a)(30) of the statute, 42 U.S.C. § 1396a(a)(30), requires that
[a] State plan for medical assistance ... provide such methods and procedures relating to the utilization of, and the payment for, care and services ... 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.
Towards this end, each state must demonstrate to the Secretary that it has an “effective program” of utilization control. Such a program should ensure inter alia that whenever a Medicaid patient is admitted to a nursing home or hospital “a physician certifies ... [and] recertifies, where such services are furnished over a period of time ... at least every 60 days ... that such services are or were required to be given on an inpatient basis because the individual needs or needed such services____” 42 U.S.C. § 1396b(g)(l)(A) (1983).2 If a state cannot make this demonstration, federal reimbursement for that quarter, called the federal medical assistance percentage (FMAP), is decreased according to a statutory formula. 42 U.S.C. § 1396b(g)(l). The Health Care Financing Administration (HCFA), an agency within HHS, periodically checks a state’s utilization control showing and, if it determines that a state is not in compliance, imposes as a penalty a reduction in FMAP. 42 U.S.C. §§ 1396b(g)(2), 1396b(g)(5).
In June 1982, March 1983 and September 1983 the HCFA surveyed the utilization control performance of the Wisconsin Department of Health and Social Services (Wisconsin) for the quarters ending March 1982, December 1982 and June 1983 and determined that Wisconsin was not in compliance with federal requirements. In each of the three surveys, the HCFA examined state records and found that a number of ICFs were treating at least one Medicaid patient certified for SNF care.3 In the second survey, the HCFA found that two SNFs were providing Medicaid services to patients certified as needing only ICF care. HCFA therefore disallowed a portion of Wisconsin’s FMAP for the relevant quarters, on grounds that Wisconsin did not have an effective program of utilization control.4
Wisconsin appealed each of these disallowances to the HHS Grant Appeals Board separately. In the first administrative proceeding, the Board issued a decision upholding the federal disallowance. In the two subsequent proceedings, Wisconsin relied solely upon the arguments it had [394]*394briefed for the first, and the Board also upheld these disallowances, incorporating its reasoning from the first decision.
Wisconsin’s position before the Board was that it did have an effective program of utilization control, as defined by Medicaid and the federal regulations, because the state had approved a system of “variances,” under which a SNF-certified patient might remain in an ICF, or an ICF-certified patient in a SNF, upon a request from and supporting materials submitted by a patient’s family, physician, the facility administrator and a state evaluator.5 It argued that the primary goal of utilization control is cost efficiency and that the Secretary’s authority over placement decisions is limited to that aspect of patient placement. Since it actually saves money to keep SNF-certified patients in ICFs, which charge less for services,6 Wisconsin asserted, the variance program complied with Medicaid utilization control requirements. In the alternative, Wisconsin argued that its variance program was in the best medical interest of the patients because of the risk that a patient might suffer “transfer trauma,” that is, “trauma brought about by being separated from a spouse residing in the same facility and not needing the different level of care, or by being removed from familiar surroundings after living for a length of time in a particular facility.” Appellee’s Brief at 6. Wisconsin did not present any medical evidence supporting the existence of “transfer trauma,” instead relying on judicial recognition of the phenomenon. See Appellant’s Brief, Wisconsin Department of Health and Social Services, No. 83-20 (Grant Appeals Board November 30, 1983), at 6.
The HCFA contended that a state variance system was irrelevant to the question of compliance with federal law because the Secretary had interpreted the statute and regulations as justifying a prophylactic rule that SNF-certified patients be treated only in SNFs and ICF-certified patients only in ICFs. It argued that the Secretary had the discretion to read the statute and regulations in this way because the utilization control provisions have a dual purpose — saving money and ensuring quality of care. Allowing SNF-certified patients to remain in ICFs jeopardizes quality of care. And allowing ICF-certified patients to remain in SNFs, which charge higher rates, is not cost efficient. Finally, the HCFA argued that Wisconsin had notice of the Secretary’s interpretation of the recertification requirement through two “action transmittals,” sent to state Medicaid agencies to clarify the matter. See HCFA, Medicaid Action Transmittal No. 75-122 [395]*395(November 1975); HCFA, Medicaid Action Transmittal No. 80-68 (September 1980); infra note 9. The Board agreed with the HCFA and ruled that the variances did not cure the state’s lack of compliance; in dicta, it expressed doubt about whether Wisconsin had in fact followed its own variance system in each case.
The three cases were consolidated for review by the district court, which reversed the Grant Appeals Board. It found that, in administering the utilization control provisions of Medicaid, “the Secretary’s concern should be primarily focused on financial rather than medical matters,” Wisconsin Department of Health and Social Services v. Heckler, Nos. 84-C-75-S, 84-C-334-S, 84-C-682-S (W.D.Wis. December 11, 1984), at 9-10, and that “in penalizing the State for a nursing home placement decision based on patient treatment considerations, the Secretary is overstepping the boundary between Federal and State responsibility that has been understood since the institution of this program,” id. at 7. It noted that Wisconsin defended the legitimacy of its variances on the basis of transfer trauma, which it ruled had “enough logical force” to
justify requiring the Secretary to point to more specific legislative authorization for rejecting the State’s position than she has shown. It would seem rational and reasonable to suggest that, at the margin between the arbitrary line separating patients who belong in facilities denominated ICF’s from those who belong in SNF’s, transfer trauma may provide sufficient justification to grant a variance for legitimate medical reasons. The State’s policy has the added benefit of saving both State and Federal dollars which ... is the primary purpose of the very statutes and regulations on which the Secretary depends for her decision in this matter.
Id. at 6-7. Because there was insufficient evidence before it to rule on the question of transfer trauma, the district court remanded the case to the Board for fact-finding. The Secretary has appealed from this order.
II.
In his appeal to this court, the Secretary contends that the district court erred in three different aspects of its analysis: (1) in finding that the Secretary lacks the statutory authority to address quality of care concerns arising out of nursing home placement; (2) in shifting the burden to the Secretary to prove that his interpretation of the utilization control provisions was more reasonable than Wisconsin’s; and (3) in concentrating only on the placement of SNF-certified patients in ICFs and ignoring Wisconsin’s other purported violation, the retention of ICF-certified patients in SNFs.7 We will address each of these in turn.
A.
In 1967 Congress added to Title XI of the Social Security Act a voluntary program of federal financial participation in vendor payments to “intermediate care facilities” on behalf of institutionalized beneficiaries of the categorical assistance programs for the aged, the blind and the disabled. Pub.L. No.. 90-248, § 250, 81 Stat. 821 (1967). At that time, Medicaid offered unlimited federal matching funds for those [396]*396recipients in SNFs; if an eligible recipient was receiving a less intensive level of care, Medicaid would not cover his expenses and a much heavier financial burden fell onto the state. Congress was concerned that this led the states to retain in SNFs patients who did not need the more sophisticated (and more expensive) care a SNF provided. See S.Rep. No. 744, 90th Cong., 1st Sess. (1967), reprinted in [1967] U.S. Code Cong. & Ad. News, 2834, 3026-27.
However, many states did not accept this 1967 invitation to set up intermediate care programs under Title XI, so in 1971 Congress moved the authorization for ICF reimbursement into the Medicaid statute. Now Medicaid would reimburse both SNF and ICFs for caring for Medicaid-eligible patients. Pub.L. No. 92-223, § 4, 85 Stat. 802. See H.R.Rep. No. 231, 92d Cong., 1st Sess. (1972), reprinted in [1972] U.S.Code Cong. & Ad. News, 4989, 5097-98. The next Congress enacted the utilization control requirements, Pub.L. No. 92-603, § 207, 86 Stat. 1329, the purpose and scope of which are at issue here.
The district court agreed with Wisconsin’s contention that the federal interest in — and therefore the Secretary’s authority in the enforcement of — the utilization control provisions was limited to fiscal concerns. It stressed that Congress in amending Title XIX in 1972 to allow Medicaid reimbursement for intermediate care evinced a great interest in saving federal money. As the preceding history shows, we cannot disagree that Congress in 1972 was concerned with an inefficient use of federal funds and wished by reimbursing ICFs through Medicaid to save money. But it does not follow that merely because cost efficiency is a goal of a program — or even, as the district court found, the “primary” goal — Congress was not concerned about the quality of care each patient would receive: “[Intermediate care] was not intended as a placement device whereby States could reduce costs through wholesale and indiscriminate transfer of patients from skilled nursing homes to intermediate care without careful and independent medical review of each patient’s health care needs.” H.R.Rep. No. 231, 92d Cong., 1st Sess. (1972), reprinted in [1972] U.S.Code Cong. & Ad. News 5097.
The language of the 1972 utilization control addition suggests a dual federal concern: a state plan must address “utilization of, and payment for, care and services ... to safeguard against unnecessary utilization of süch care and services and to assure that payments are consistent with efficiency, economy, and quality of care.” 42 U.S.C. § 1396a(a)(30) (emphasis added). Utilization control, as mandated by Congress, clearly speaks not only to the utilization of federal funds, as the district court ruled, but also to the utilization of medical care and services. Further, the utilization control requirements as elaborated at 42 U.S.C. § 1396b(g)(l) buttress this conclusion. Besides requiring the periodic recertification of appropriate level of care, 42 U.S.C. § 1396b(g)(l)(A), an “effective program of utilization control” also requires written patient “plans of care,” periodically reviewed by a physician, § 1396b(g)(l)(B); a continuous program of utilization review under which the admission or continued stay of patients is evaluated by “medical and other professional personnel ... not directly responsible for the care of the patient involved ...,” § 1396b(a)(l)(C); and annual independent professional reviews of each case, § 1396b(g)(l)(D), to examine “with respect to each of the patients receiving care, the adequacy of the services ... to meet current health needs and promote maximum physical well-being,” § 1396a(a)(26).8 As [397]*397the Tenth Circuit commented recently, in ruling on the Secretary’s duties under Medicaid’s “look-behind” provisions, 42 U.S.C. § 1396a(a)(33), “the federal government has more than a passive role in handing out money to the states____ The Secretary must insure that states comply with the congressional mandate to provide high quality medical care.” Estate of Smith v. Heckler, 747 F.2d 583, 589-90 (10th Cir.1984). Thus, we hold that the Secretary may, in administering the utilization control provisions of Medicaid, consider quality of care as well as cost efficiency without abusing his discretion or overstepping the bounds of federal responsibility.
B.
Given that quality of care as well as cost efficiency is a valid concern of the Secretary in this context, it remains to examine whether he abused his discretion in interpreting the utilization control requirements as he did.
Basic principles of administrative law limit the scope of a court’s review of agency action. An agency’s interpretation of the statute it is charged to administer is “entitled to a presumption of regularity,” Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971), and may not be disturbed unless it is “arbitrary, capricious, or constitute[s] an abuse of discretion,” id. at 416, 91 S.Ct. at 823; St. Mary of Nazareth Hospital Center v. Department of Health and Human Services, 698 F.2d 1337, 1346 (7th Cir.1983). The district court rejected the Secretary’s contention that his interpretation warranted “legislative effect” because, with the extremely complex Medicaid scheme, “Congress entrusts to the Secretary rather than to the courts the primary responsibility for interpreting” the statute in question. See Schweiker v. Gray Panthers, 453 U.S. 34, 44, 101 S.Ct. 2633, 2640, 69 L.Ed.2d 460 (1981) (quoting Batterton v. Francis, 432 U.S. 416, 426, 97 S.Ct. 2399, 2406, 53 L.Ed.2d 448 (1977)). The district court was correct in refusing to give the Secretary’s interpretation here “legislative effect”— this case, unlike Schweiker and Batterton, does not involve regulations promulgated, upon an express delegation from Congress, by formal rulemaking. But the district court was still bound to defer to his interpretation if reasonable and statutorily permissible. See, e.g., Commonwealth of Massachusetts v. Department of Health and Human Services, 749 F.2d 89, 95-96 (1st Cir.1984). This, we feel, the district court did not do and its failure constituted error.
The statutory utilization control language requires that a state show, through periodic recertification, that “services are or were required to be given on an inpatient basis because the individual needs or needed such services____” 42 U.S.C. § 1396b(g)(l)(A). The regulations addressing recertification of patients in ICFs requires that “[a] physician ... must recertify for each ... recipient that ICF services are needed.” 42 C.F.R. § 456.360(b). Wisconsin reads these provisions together as requiring only that a patient need at least the level of care for which he is certified; that is, it argues that a SNF-eertified patient can be placed in an ICF because the patient demonstrably needs that level of services. This would comport with the federal interest because it would be less expensive than SNF placement. The state would assume the responsibility for making “arrangements to attend to the patient’s changed medical needs.” Appellee’s Brief at 16. Wisconsin appears to agree that such a patient might not be ideally suited medically for an ICF but it wishes to reserve the right to make the medical decision as to placement and any necessary special arrangements itself:
No federal Medicaid law or regulation mandates automatic transfer from an ICF to an SNF upon skilled care recertification, or a transfer from an SNF to an ICF upon intermediate care recertifica[398]*398tion, and no law or regulation prohibits the State from carefully reviewing the facts surrounding a recertification to determine whether a patient’s interests might best be served by granting a variance and allowing the patient to remain in a particular facility subject to the conditions imposed by the State. All that [the regulations] require is that patients be recertified periodically and that the State make a showing that such recertifications have occurred.
Appellee’s Brief at 15.9
The Secretary, however, has interpreted these same provisions differently and more strictly, as requiring that SNF-certified patients be admitted to and retained in SNFs only and that ICF-certified patients be admitted to and retained in ICFs only. He has made that interpretation in two action transmittals. HCFA, Medicaid Action Transmittal No. 75-122 (November 1975); HCFA, Medicaid Action Transmittal No. 80-68 (September 1980).10 An action transmittal is an interpretative publication of the HCFA. It does not create law but rather contains an agency’s interpretation of the law it is charged to administer. Colorado Department of Social Services v. Department of Health and Human Services, 558 F.Supp. 337, 352, 353 (D.Colo.1983); Seniors United for Action v. Ray, 529 F.Supp. 55, 60 n. 2 (N.D.Iowa 1981). Mindful that our review is limited to whether the Secretary’s position is reasonable, and venturing no opinion as to Wisconsin’s interpretation or the legal or medical significance of transfer trauma, we hold that the Secretary’s interpretation is a rational attempt to balance the cost efficiency and quality of care concerns of the federal government and is fully compatible with the statute, regulations and legislative history. We are by no means insensitive to Wisconsin’s concern with transfer trauma, but, as our analysis suggests, where federal aid is at issue, Wisconsin must persuade federal authorities at an appropriate time and in an appropriate forum of the soundness of its point of view on this medical question. As noted, Wisconsin did not present evidence on this question at the proceedings before the HHS Grant Appeals Board in the instant matter.
The language of sections 1396a(a)(30) and 1396b(g)(l)(A), see supra, while not overly specific, is certainly susceptible to the interpretation the Secretary has given it, and his reading of the regulations that implement those sections is less strained than Wisconsin’s. The regulation governing recertification of patients in ICFs requires that “[a] physician ... recertify for each ... recipient that ICF services are needed.” 42 C.F.R. § 456.360(b), and defines ICF services as “those services furnished in an intermediate care facility.” [399]*399Id. § 456.351. It is reasonable that a recipient certified to receive services that are furnished in an ICF facility should be treated in one. SNF services are defined as “daily skilled services ... that, as a practical matter, can only be provided in a SNF____” Id. § 409.31. It also seems quite reasonable that a recipient certified to receive services that can only be provided in a SNF ought to be treated in a SNF, not in an ICF. The general structure of the statute and regulations further suggests a distinction between ICF and SNF services that was not to be obliterated at a state’s pleasure: the exhaustive requirements for facility certification as a SNF, see 42 U.S.C. §§ 1396a(a)(28), 1395x(j), would lose their meaning if a state were free to place SNF-certified patients in ICFs.
Finally, we note that the legislative history also supports the Secretary’s position. The legislative history of the 1967 addition of ICF services to Title XI states that the bill would provide reimbursement for “individuals whose condition does not require care in a skilled nursing home____” H.Conf.Rep. No. 1030, 90th Cong., 1st Sess. (1967), reprinted in [1967] U.S.Code Cong. & Ad. News 3216. The history of the bill that added utilization control to Medicaid explained that intermediate care is for persons “who require care ... up to, but not including, the skilled nursing home level.” H.R.Rep. No. 321, 92d Cong., 2d Sess. (1972), reprinted in [1972] U.S.Code Cong. & Ad. News. 5097 (emphasis added). Congress obviously meant for appropriateness as well as cost of care to be a federal issue, see supra, and clearly viewed placement as a matter not to be relegated solely to state discretion.
Wisconsin argues that such a regime is arbitrary and capricious because it “completely undercuts the physician’s judgment,” stressing that “[t]he physician certification and recertification requirement is based on the concept that the physician is a key figure in determining appropriate utilization of health services.” Appellee’s Brief at 17 (quoting 45 Fed.Reg. 48,558 (1981)). This argument ignores the fact that the Secretary has created a prophylactic interpretative rule which treats the physician’s determination as the sole and decisive factor.11 The variance process also involves the physician’s judgment, at a later date, but there is no reason to believe that the physician’s second decision should be treated as more sound than his first.
Further, the fact that this is a prophylactic rule, and may not provide the optimal result in some small number of cases, does not make it arbitrary and capricious. See Schweiker v. Gray Panthers, 453 U.S. at 48, 101 S.Ct. at 2642 (“The administration of public assistance based on a formula is not inherently arbitrary.”); cf. Weinberger v. Salfi, 422 U.S. 749, 777, 95 S.Ct. 2457, 2472, 45 L.Ed.2d 522 (1975) (Congress could establish prophylactic rule in social security statute for a legitimate purpose and in situations where “the expenses and other difficulties of individual determinations justified the inherent imprecision” of the rule).
C.
Up to now, we have been concentrating on the district court’s treatment of the issues raised by the retention of SNF-certified patients in ICFs. We now turn briefly to the issues raised by Wisconsin’s retention of ICF-certified patients in SNFs. As might be expected, the considerations are similar but their significance quite different. Thus, we believe that the district court erred in failing to discuss separately the disallowances resulting from the HCFA’s discovery of ICF patients in SNFs. [400]*400When a patient is kept in a facility that provides services more intensive than his condition demands, questions of cost efficiency come to the fore and those of quality of care recede. Yet in its second appeal to the Grant Appeals Board (the only appeal raising this issue), Wisconsin relied solely upon the brief it had submitted for the first appeal (which had dealt only with SNF patients in ICFs). The Board found against Wisconsin, stating:
[T]he State’s argument concerning the cost efficiency of retaining SNF patients in the presumably lower cost ICFs is neither applicable or persuasive here____ There is no evidence showing that retaining intermediate care patients in SNFs was cost efficient. At best, the cost was the same because the State paid the lower ICF rates; at worst, the cost was higher because the State continued to pay higher SNF rates____ Arguably, the patients needing intermediate care who were in SNFs were receiving the medical care they needed. However, this is not dispositive of the question whether there were utilization control violations____ It is axiomatic that when a patient needing intermediate care is in a SNF, the patient either receives excessive services or does not make full use of the services that the facility can provide.
Wisconsin Department of Social Services, No. 83-229 (Grant Appeals Board March 30, 1984). The Board was correct in its ruling. The Secretary’s authority to regulate nursing home placement to the end of cost efficiency has been unquestioned throughout this litigation. Wisconsin failed even to advance arguments why these disallowances should not be affirmed.
For all of the foregoing reasons the judgment of the district court is Reversed.