South Shore Hospital, Inc. v. Thompson ( 2002 )

United States Court of Appeals
For the First Circuit
No. 02-1284
SOUTH SHORE HOSPITAL, INC., D/B/A SOUTH SHORE HOSPITAL
TRANSITIONAL CARE CENTER,
Petitioner, Appellee,
v.
TOMMY G. THOMPSON, SECRETARY OF HEALTH AND HUMAN SERVICES,
Respondent, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Selya, Lynch and Lipez,
Circuit Judges.
Anthony A. Yang, Attorney, Appellate Staff, Civil Division,
United States Department of Justice, with whom Michael J. Sullivan,
United States Attorney, Robert D. McCallum, Jr., Assistant Attorney
General, and Barbara C. Biddle, Attorney, Appellate Staff, were on
brief, for appellant.
Donald R. Frederico, with whom Peter R. Leone and McDermott,
Will & Emery were on brief, for appellee.
October 16, 2002
SELYA, Circuit Judge. This appeal leads us into the
often surreal world of Medicare administration. It arises out of
efforts by South Shore Hospital (the Hospital), an acute care
hospital located in South Weymouth, Massachusetts, to obtain relief
for its transitional care center (the TCC) from Medicare's cost
limits on reimbursement of routine patient care expenses. The
Health Care Financing Administration (HCFA) denied the Hospital's
application on the ground that its purchase of determination of
need (DON) rights from an unaffiliated nursing home rendered
unavailable the so-called "new provider" exemption codified at 42
C.F.R. § 413.30(e)(2) (1994).1 The Provider Reimbursement Review
Board (the Board) of the United States Department of Health and
Human Services (HHS) affirmed this determination. See S. Shore
Hosp., No. 99-D38, 1999 WL 297452 (PRRB Apr. 21, 1999) (S. Shore
I). The federal district court, however, took a different view,
reversing the Board's decision. S. Shore Hosp. v. Thompson, 204 F.
Supp. 2d 76, 83 (D. Mass. 2002) (S. Shore II). This timely appeal
ensued.
We conclude that the new provider exemption is less than
pellucid; that the Secretary's interpretation of the relevant
1
Although the new provider exemption lately has migrated,
after certain amendments not relevant here, to 42 C.F.R. §
413.30(d) (2000), the previous version of the rule was in effect at
all times material hereto, and we will continue to refer to that
version. By like token, even though HCFA is now known as the
Centers for Medicare and Medicaid Services, we will continue to use
the original acronym.
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regulatory language is reasonable (although not inevitable); that
the Hospital has failed to show that the Secretary vacillated in
his interpretation; and that substantial evidence supports the
Board's finding that the now-defunct nursing home from which the
Hospital acquired the necessary DON rights operated as an
equivalent of the TCC. Consequently, we sustain the Secretary's
refusal to classify the TCC as a new provider, reverse the decision
of the district court, and direct the entry of judgment in favor of
the Secretary.
I. STATUTORY AND REGULATORY FRAMEWORK
The Medicare Act, 42 U.S.C. §§ 1395-1395ggg, provides
federal funding for a range of medical services for the elderly and
disabled, including reimbursement for the reasonable cost of
certain services provided by skilled nursing facilities (SNFs).
Id. § 1395f(b)(1); 42 C.F.R. § 413.1(a)(2)(ii), (b), (g). The Act
expressly vests in the Secretary of HHS the discretion to determine
reasonable costs by regulations that, inter alia, "may provide for
the establishment of limits on the [costs] to be recognized as
reasonable based on estimates of the costs necessary in the
efficient delivery of needed health services." 42 U.S.C. §
1395x(v)(1)(A). In this regard, the Act mandates routine cost
limits (RCLs) that restrict per diem reimbursement to 112% of the
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national average for similarly situated providers.2 Id. §
1395yy(a). Exemptions and exceptions that permit higher rates of
reimbursement are allowed "to the extent the Secretary deems
appropriate, based upon case mix or circumstances beyond the
control of the facility." Id. § 1395yy(c).
At issue here is an exemption for "new providers" of
skilled nursing services. 42 C.F.R. § 413.30(e)(2). The Secretary
promulgated this exemptive regulation in 1979 to ameliorate the
"initial underutilization" faced by many market entrants. 44 Fed.
Reg. 31,802. It authorizes an exemption when "[t]he provider of
inpatient services has operated as the type of provider (or the
equivalent) for which it is certified for Medicare, under present
and previous ownership, for less than three full years." 42 C.F.R.
§ 413.30(e)(2). This, then, permits the Secretary, under some
circumstances, to deny the exemption by tying together present and
previous ownership.
Although this phraseology makes previous ownership an
important datum, the regulation does not dictate how previous
ownership determinations should be made. The Secretary has
interpreted this phrase, more majorum, by reference to Part I of
HCFA's Provider Reimbursement Manual (the Manual). Pertinently,
2
Routine service costs include those costs, such as room and
board, basic medical supplies, ordinary dietary and nursing
services, and other quotidian expenses, for which an institution
typically would assess a single per diem service charge. 42 C.F.R.
§ 413.53(b).
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the Manual has long defined "change of ownership" as including the
sale of "all or some portion of a provider's facility or assets
(used to render patient care)," so long as such sale "affects
licensure or certification of the provider entity." PRM-1 § 1500.7
(1976). The Manual eventually integrated change of ownership, so
defined, into determinations of previous ownership and, ultimately,
into the definition of new provider. See id. § 2533.1.E.1.b
(1997). It warns, however, that "[t]he mere existence of a [change
of ownership] does not in itself make an institution or
institutional complex eligible for a new provider exemption." Id.
§ 2533.1.E. Rather, the Secretary conducts a comparison of the
operations conducted by the previous and current owners in order to
decide whether the current owner qualifies. Equivalency plays an
important role in this comparison, for, generally speaking,
previous ownership will not be carried forward unless, at a bare
minimum, the previous owner's operations and the current owner's
operations are deemed equivalent.
II. PROCEDURAL BACKGROUND
The Hospital began to plan for the TCC in 1992, with an
eye toward supplementing its existing continuum of care. But there
was a rub: Massachusetts, like many states, titrates the provision
of health care by requiring various types of facilities to secure
determinations of need as a prerequisite to offering covered
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services.3 See Mass. Gen. Laws ch. 111, § 25C; Mass. Regs. Code
tit. 105, § 100.352. Because Massachusetts had placed a moratorium
on the issuance of DON rights for skilled nursing beds, the
Hospital's plans were stymied until it arranged to purchase the
necessary DON rights from Prospect Hill Manor Nursing Home
(Prospect Hill), a facility that had gone into receivership in
March 1993. No other transfers of property, patient records, or
assets accompanied the purchase, and the entity known as Prospect
Hill vanished shortly after transferring the DON rights.
The Commonwealth of Massachusetts approved the transfer
of DON rights on condition that the Hospital assume liability for
any and all Medicaid overpayments to Prospect Hill. Subsequently,
it approved a phantom "relocation" of Prospect Hill to the
Hospital's campus. Armed with these approvals, the TCC opened its
doors in January of 1995.
On May 17, 1995, the Hospital petitioned HCFA to classify
its nascent TCC as a new provider. The Hospital's continuing
interest in the exemption is easily grasped: in 1995 — its first
full year of operation — the TCC's routine service costs exceeded
the applicable RCLs by almost $900,000. And when Congress replaced
Medicare's existing cost-based reimbursement system with a
3
What Massachusetts calls determination of need rights are
known elsewhere as certificate of need (CON) rights. See, e.g.,
R.I. Gen. Laws § 23-15-1 to -10 (2001). We use the two terms
interchangeably.
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prospective payment system that looked to a facility's 1995
reimbursement levels as a basis for setting future rates, see
Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4432(a), 111
Stat. 251, 422 (codified as amended at 42 U.S.C. §
1395yy(e)(3)(A)(ii)), the lure of the new provider exemption became
irresistible.
In due course, HCFA rejected the Hospital's application
on the ground that the conveyance of DON rights required that
Prospect Hill's previous operations be imputed to the TCC.
Following an evidentiary hearing, the Board affirmed this
determination. S. Shore I, supra, at *18. In so holding, the
Board found that, in the circumstances of this case, the
transferred DON rights were a sufficient basis for imputation of
previous ownership to the purchaser and that Prospect Hill and the
TCC were equivalent providers. Id. at *16-*17. In regard to
equivalency the Board acknowledged that Prospect Hill had not
furnished the same level of nursing care that characterized the
operations of the TCC, but nonetheless concluded that Prospect Hill
had been operating as an SNF during the three years prior to the
conveyance. Id. at *17. The Secretary declined to intervene, thus
making the Board's decision administratively final. 42 U.S.C. §
1395oo(f)(1).
The Hospital petitioned for judicial review. See id.
The district court reversed, declaring that the TCC was a new
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provider in every relevant sense and that the Board could not
reasonably have ruled otherwise. S. Shore II, 204 F. Supp. 2d at
82. Accordingly, the court remanded the matter to the Board for a
determination of what level of reimbursement the TCC, as a new
provider, should receive. Id. at 83. This appeal followed.
III. STANDARD OF REVIEW
An inquiring court can set aside an agency's adjudicatory
decisions only if those decisions are "arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law," 5
U.S.C. § 706(2)(A), or "unsupported by substantial evidence in the
administrative record," id. § 706(2)(E). This standard tightly
circumscribes judicial review. See Citizens to Preserve Overton
Park, Inc. v. Volpe, 401 U.S. 402, 415-16 (1971); Henry v. INS, 74
F.3d 1, 4 (1st Cir. 1996).
Here, there is a further gloss on this familiar
formulation. Where Congress has entrusted rulemaking and
administrative authority to an agency, courts normally accord the
agency particular deference in respect to the interpretation of
regulations promulgated under that authority. Bowles v. Seminole
Rock & Sand Co., 325 U.S. 410, 414 (1945); Johnson v. Watts
Regulator Co., 63 F.3d 1129, 1134-35 (1st Cir. 1995). Courts
withhold such deference only when the agency's interpretation of
its regulation is "plainly erroneous or inconsistent with" its
language. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
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(1994). This deference is at its apex when, as in this instance, a
regulation concerns "a complex and highly technical regulatory
program in which the identification and classification of relevant
criteria necessarily require significant expertise and entail the
exercise of judgment grounded in policy concerns." Id. (citation
and internal quotation marks omitted).
Both the district court and the court of appeals are
bound by these principles. Therefore, we review the district
court's resolution of such a case de novo, applying essentially the
same standards as pertained in that court. Assoc. Fisheries of
Me., Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997); Mass. DPW v.
Sec'y of Agric., 984 F.2d 514, 520 (1st Cir. 1993). That the
parties brought the issues forward on cross-motions for summary
judgment is not significant; substance must prevail over form, and
the fact remains that the parties have presented this matter as a
case stated, on a fully developed administrative record. Our
review proceeds accordingly.
IV. ANALYSIS
We turn now to the Secretary's construction and
application of the new provider exemption, 42 C.F.R. §
413.30(e)(2). Our analysis proceeds in three steps. First, we
discuss the reasonableness of the Secretary's interpretation of the
exemption. Second, we address the Hospital's related claim that
the Secretary has applied the regulation willy-nilly. Finally, we
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scrutinize the Board's finding that Prospect Hill and the TCC were
equivalent providers.
A. Interpretation of the Exemption.
Despite the fact that Medicare rules fall squarely within
the Secretary's domain, deference is due to the Secretary's
interpretation of a particular regulation only when the language of
the regulation either (1) compels that interpretation or (2) admits
of differing interpretations, and the Secretary chooses reasonably
among them. Christensen v. Harris County, 529 U.S. 576, 588
(2000); Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467
U.S. 837, 842-43 (1984). Here, the Hospital's main argument is
that the new provider exemption is unambiguous and demands an
interpretation at odds with the Secretary's rendition.
We find the new provider provision vague (and, therefore,
manifestly ambiguous). This case hinges on the meaning of the
phrase "previous ownership," and section 413.30(e)(2) neither
defines nor explains that phrase. To complicate matters, the terms
"provider" and "institution" are central to an understanding of the
exemption, and those terms subsume any number of components,
changes in one or all of which might, depending on the context,
lead one to deduce that a new provider has (or has not) been
created. Because the regulation is not drawn in blacks and whites
but leaves significant gray areas unresolved, it is ambiguous. See
Paragon Health Network, Inc. v. Thompson, 251 F.3d 1141, 1148 (7th
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Cir. 2001) (discussing the same regulation and reaching the same
conclusion).
To state the obvious, the fact that the regulation is
ambiguous means that some interpretation is inevitable. The
question reduces, therefore, to whether using the transfer of DON
rights as a basis for ascribing Prospect Hill's operations to the
Hospital comes within a reasonable interpretation of the
regulation. We think that this question must be answered in the
affirmative.
In this case, the Secretary relied on section 1500.7 of
the Manual for guidance. Noting that Prospect Hill's DON rights
were virtually the only assets it owned at the time of the
transfer, he determined that the sale of the rights qualified as a
purchase of assets affecting licensure or certification (and,
therefore, constituted a change of ownership). S. Shore I, supra,
at *13. In this connection, the Secretary explained that there
need not be a high degree of operational continuity between
providers in order for the operation of one to be imputed to the
other. Following this train of thought and citing section 2604.1
of the Manual, the Secretary determined that the relocation of beds
from Prospect Hill to the TCC did not substantially change the
population served or the number of inpatient days accumulated. Id.
at *15. Concomitantly, the Secretary "looked back" at Prospect
Hill's operational history and determined that it had functioned as
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the equivalent of an SNF during the previous three years because it
had furnished some skilled nursing rehabilitation services, as
identified in 42 C.F.R. § 409.33(b) and (c). S. Shore I, supra, at
*14. Accordingly, he denied the Hospital's application for a new
provider exemption.
The Hospital, ably represented, attempts to discredit the
Secretary's reasoning in several different ways. First, it
emphasizes the genesis of the change of ownership definition
contained in PRM-1 § 1500.7 (which originally addressed the
obligations of facilities leaving the Medicare program) and argues
that the Secretary arbitrarily applied this definition to the new
provider exemption. But the Secretary, through HCFA, historically
has defined change of ownership differently in different contexts,4
and we see no reason why the Secretary, in the exercise of his
broad authority to interpret regulations that he himself has
promulgated, cannot choose to apply section 1500.7's dilucidation
in this context, regardless of the provision's origins.
The Hospital also argues that a transfer of DON rights
alone cannot constitute a continuation of ownership for purposes of
this case because Prospect Hill closed its doors for unrelated
4
To cite one example, HCFA has regarded a transfer of
corporate stock as a change of ownership for some purposes but not
for others. See Las Encinas Hosp., No. 95-0303, 1998 WL 611452(PRRB Sept. 11, 1998). To cite another, HCFA defines changes of
ownership for Medicare certification purposes differently than for
Medicare payment purposes. See N. Fla. Physical Therapy Serv., No.
98-D10, 1998 WL 119693 (HCFA Feb. 3, 1998).
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reasons (and, thus, the transfer did not contribute to the loss of
its licensure and certification). The district court found merit
in this argument, see S. Shore II, 204 F. Supp. 2d at 81-82, but we
do not. Fairly read, section 1500.7 requires only that the
transfer "affect" licensure or certification, not that it be the
dispositive factor. Here, the DON rights were a sine qua non for
the operation of a nursing home (whether Prospect Hill or the TCC)
— and the handsome price that the Hospital paid for them (which
appears to have been in the range of $125,000 - $150,000) attests
to their materiality. We cannot say that the Secretary acted
unreasonably in rejecting the conceit that the significance of DON
rights should be measured solely by the happenstance of when the
original owner of the rights went out of business.
In a related vein, we question the emphasis placed by the
lower court on the fact that Prospect Hill's DON rights were out of
circulation at the time of the purchase. See id. at 82. The
court's implication is that Medicare ought to spend more
reimbursement dollars for routine service costs because the
Hospital has "rescued" these dormant beds from the scrap heap. Id.Even if we credit the district court's characterization of the
Hospital as a rescuer, however, that would not impugn the
Secretary's discretionary decision to treat all purchasers of DON
rights alike. See Arkansas v. Oklahoma, 503 U.S. 91, 113-14 (1992)
(affirming that, within wide limits, agencies may decide for
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themselves what factors pertain to their decisionmaking). The
Secretary's vision of the transfer as simply relocating the beds in
question is not impermissible.
This reasoning also defeats the Hospital's
"fragmentation" argument, in which it points out that a previous
owner may sell its DON rights to one party, its site to a second
party, and a third pivotal asset (say, its equipment) to yet
another party. According to the Hospital, this threatens to create
a situation where one previous owner can spawn a multitude of
successors, none of whom will be regarded as a new provider.
Unlike the Hospital, we find this result to be
acceptable. After all, we would not hesitate to use the term
"previous ownership" in reference to three 100-bed hospitals
resulting from the split of a single 300-bed facility. Cf. Md.
Gen. Hosp., Inc. v. Thompson, 155 F. Supp. 2d 459, 462-65 (D. Md.
2001) (finding that "previous ownership" precluded a new provider
exemption when a nascent facility bought CON rights from three
different institutions). Consequently, the fragmentation argument
fails.
The Hospital next asserts that its actions were guided by
the plain meaning of the regulation and that "[a]ny contrary
interpretation of the regulation would require a gross distortion
of the English language." Appellee's Br. at 38. This approach is
doubly flawed. In the first place, it overlooks the patent
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ambiguity of the regulation. In the second place, accepting it
would make a mockery of the deference due to the Secretary's
interpretation of his own regulations. As the Hospital itself
acknowledges, change of ownership is a term of art in the Medicare
context. As such, interpretation of the term lies peculiarly
within the compass of the Secretary's expertise. See Thomas
Jefferson, 512 U.S. at 512; Pauley v. BethEnergy Mines, Inc., 501
U.S. 680, 697 (1991).
In a variation on this theme, the Hospital maintains that
the Secretary's interpretation of the new provider exemption
oppugns the underlying policy of the exemption when applied to
states, such as Massachusetts, that have imposed moratoria on new
nursing home beds. As the Seventh Circuit explained, however,
moratoria on DON rights effectively limit the number of permitted
beds and thus reduce competition among such facilities. Paragon,
251 F.3d at 1150. This means that any given facility in a
moratorium state will be less likely to experience and sustain a
high vacancy rate during its early years. Consequently, new or
expanded facilities in moratorium states have less need for special
swaddling to prevent the financial drain of initial
underutilization. See id.The district court attempted to distinguish Paragon as a
change of ownership between related corporations. S. Shore II, 204
F. Supp. 2d at 81. But the court never explained how this
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circumstance compromised the underlying policy of the new provider
exemption. Insofar as we can discern, relationship through a
common corporate parent will have little effect on whether the
transfer of DON rights does (or does not) ameliorate a facility's
initial underutilization. Once that is understood, there is no
principled reason why the facility discussed in Paragon should have
any diminished claim to improved reimbursement by virtue of being
a related subsidiary.5
In a further endeavor to blunt the force of Paragon, the
Hospital notes that the language of the regulation at issue does
not distinguish between facilities in states with and without
moratoria. For this reason, it muses, the Secretary's
interpretation inevitably will lead to non-uniformity. Relatedly,
5
The Hospital has called to our attention through successive
post-argument letters, see Fed. R. App. P. 28(j); 1st Cir. R.
28(j), the recent decisions in Mercy Med. SNF v. Mut. of Omaha Ins.
Co., No. 97-0135, 2002 WL 1906219 (PRRB Aug. 7, 2002), and
Peninsula Reg'l Med. Ctr. v. BCBS Assoc., No. 97-2659, 2002 WL ___
(PRRB Sept. 27, 2002). In both instances the Board, relying in
large part on the district court's opinion in this case, rejected
the Secretary's interpretation of the new provider exemption.
Mercy Med., supra, at *17; Peninsula Reg'l, supra, at *__. As the
dissent in Mercy Med. observed, however, six PRRB decisions, eight
reported HCFA determinations, five district court opinions, and a
court of appeals opinion (Paragon) all have upheld the Secretary's
interpretation of the new provider exemption. Mercy Med., supra,
at *19 (dissenting op.). Moreover, the Board recently granted the
Secretary's motion to reconsider Mercy Med., and that
reconsideration is presently underway. (The time for
reconsideration has not yet run in Peninsula.) Given this mise-en-
scène, we regard these decisions as founded upon a mistaken legal
interpretation and, therefore, entitled to little weight. See Good
Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993).
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it suggests that the Secretary ought to bear the burden of adducing
sufficient evidence or analysis to show that the putative oligopoly
effect in moratorium states will help relieve initial costs.
In asserting these propositions, the Hospital leans
heavily on the decision in Ashtabula County Med. Ctr. v. Thompson,
191 F. Supp. 2d 884, 895-96 (N.D. Ohio 2002). We think that
Ashtabula — a case that is currently on appeal to the Sixth Circuit
— erects the wrong decisional framework. The court's opinion
appears to place the burden on the Secretary to show that his
interpretation of a regulation is reasonable. See id. That is not
the law. The burden is on the party challenging the Secretary's
reasoning to show that it fails to pass muster under the
reasonableness standard. See Save Our Heritage, Inc. v. FAA, 269
F.3d 49, 60 (1st Cir. 2001); St. Mary of Nazareth Hosp. Ctr. v.
Schweiker, 718 F.2d 459, 466 (D.C. Cir. 1983). Hence, it is the
Hospital that must show that the Secretary unreasonably relied on
the oligopoly effect theory. The Hospital has not done so (and,
indeed, there is evidence in the record suggesting that the TCC did
in fact enjoy a relatively high level of patient utilization from
the start).
As to the charge of non-uniformity, it suffices to say
that discretion, such as that specifically conferred upon the
Secretary to establish limits on routine care costs, almost
invariably involves line-drawing (and, thus, inevitably entails
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some level of variation). See Sprandel v. Sec'y of HHS, 838 F.2d
23, 27 (1st Cir. 1988) (per curiam) (observing that it is
impossible to block out administrative categories that do not
"chafe at the outer edges"). We need find only that, from some
plausible standpoint, the Secretary had an organizing primum mobile
sufficient to justify his actions. The Secretary's proffered
oligopoly effect theory passes this test.
The Hospital's rejoinder is that the Secretary's
interpretation of section 1500.7 effectively obviates new provider
status for many (or even all) "new" SNFs within Massachusetts.
Even if true, this lament does not call the Secretary's judgment
into serious question. The goal of regulation is not to provide
exact uniformity of treatment, but, rather, to provide uniformity
of rules so that those similarly situated will be treated alike.
In addition, as the Seventh Circuit suggested, the Secretary
reasonably may have concluded that, in states that have imposed
moratoria because they no longer need additional nursing beds,
subsidizing the start-up costs of new SNFs is unnecessary for the
efficient delivery of health-care services. Paragon, 251 F.3d at
1149.
To sum up, we find no plausible reason to discredit the
Secretary's rationale that, when one facility purchases another's
DON rights in a moratorium state, lessened competition will enhance
initial utilization (and, thus, will help defray costs in the
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transferee facility's early years). On that rationale, it makes
sense, for purposes of construing the new provider exemption, to
attribute the operations of the seller to the acquirer of the DON
rights. After all, "[w]hen Congress entrusts an agency with the
responsibility for drawing lines, and the agency exercises that
authority in a reasonable way, neither the fact that there are
other possible places at which the line could be drawn nor the fact
that the administrative scheme might occasionally operate unfairly
from a particular participant's perspective is sufficient, standing
alone, to undermine the scheme's legality." Mass. DPW, 984 F.2d at
522. We therefore follow Paragon and uphold the Secretary's
interpretation of the disputed regulation as against the Hospital's
"reasonableness" challenge.
B. Consistency.
The Hospital has a fallback position: even if the
Secretary's interpretation of the new provider exemption is not
arbitrary and capricious, its thesis runs, his interpretation
flouts prior practice. The theoretical foundation on which this
position rests is sound: if, over time, an agency interprets a
regulation erratically, that inconsistency may warrant a court in
declining to defer to the agency in a particular situation. See
Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993); INS v.
Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987). In this case,
however, the Hospital's thesis fails.
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Once proffered, agency interpretations are not chiseled
in stone. See Good Samaritan Hosp., 508 U.S. at 417 ("An
administrative agency is not disqualified from changing its mind.")
(citation omitted). As we have pointed out, "[e]xperience is often
the best teacher, and agencies retain a substantial measure of
freedom to refine, reformulate, and even reverse their precedents
in the light of new insights and changed circumstances." Davila-
Bardales v. INS, 27 F.3d 1, 5 (1st Cir. 1994).
This does not mean that an agency may change positions
with the same ease that an actor changes costumes. For example, an
agency may not, without rhyme or reason, create conflicting lines
of precedent governing materially identical situations. Shaw's
Supermarkets, Inc. v. NLRB, 884 F.2d 34, 36-37 (1st Cir. 1989).
But an agency may learn from its mistakes and decide to discard one
interpretation in favor of another, as long as it thereafter
consistently applies the new interpretation. See, e.g., Rust v.
Sullivan, 500 U.S. 173, 186-87 (1991); Motor Vehicle Mfrs. Ass'n v.
State Farm Mut. Auto Ins. Co., 463 U.S. 29, 42 (1983).
The Hospital complains that the Secretary has only
sporadically denied new provider exemptions to facilities that have
acquired DON rights from other providers. To support this plaint,
the Hospital cites a single incident, involving a facility known as
Meridian-Spa Creek, in which HCFA granted a new provider exemption
despite the facility's use of transferred CON rights. This
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citation is unpersuasive. The incident occurred well before the
TCC applied for its exemption, and it is impossible to tell from
the scanty record why HCFA granted Meridian-Spa Creek an exemption.
It is incumbent on a party complaining of inconsistency
in administrative action "to bring before the reviewing court
sufficient particulars of how the appellant was situated, how the
allegedly favored party was situated, and how such similarities as
may exist dictate similar treatment and how such dissimilarities as
may exist are irrelevant or outweighed." P.I.A. Mich. City, Inc.
v. Thompson, 292 F.3d 820, 826 (D.C. Cir. 2002). While the
Hospital speculates that the unexplained grant of an exemption to
Meridian-Spa Creek betrays a pervasive inconsistency in HCFA
decisions, it has not supported this conjecture with proof. Nor
has the Hospital shown that its circumstances bear a substantial
similarity to those of Meridian-Spa Creek in all (or nearly all)
relevant aspects. Hence, we cannot say that the Meridian-Spa Creek
scenario demonstrates administrative inconsistency.6
6
In all events, the Meridian-Spa Creek determination may be no
more than a waif in the wilderness. It was not appealed to the
Board, much less to the HCFA Administrator or the Secretary. Thus,
the determination may well be explained as the decision of a lower-
level agency employee that cannot bind either the Board or the
Secretary. See Irving v. United States, 162 F.3d 154, 166 (1st
Cir. 1998) (en banc) ("To determine what is agency policy, courts
customarily defer to the statements of the official policymaker,
not others, even though the others may occupy important agency
positions."); Henry, 74 F.3d at 5-6 (recognizing that in large,
bureaucratic agencies, "different officials may not act identically
in every case," but, nevertheless, "[a] certain amount of asymmetry
is lawful") (citation and internal quotation marks omitted).
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That ends this aspect of the matter. Because the
Hospital has failed to show that the Secretary's interpretation of
the new provider exemption constitutes a reversal of position, its
argument fails. Although patently inconsistent applications of
agency standards to similar situations are by definition arbitrary,
the law does not demand perfect consistency in administrative
decisionmaking. See Ill. Bell Tel. Co. v. FCC, 740 F.2d 465, 470-
71 (7th Cir. 1984).
Along somewhat the same lines, the Hospital urges what
amounts to an ex post facto theory. It asseverates that HHS
published its new guideline, PRM-1 § 2533.1, in August of 1997,
more than two years after the Hospital first submitted its
application for new provider status. Thus, the Hospital asserts,
the Secretary should not be able to change the rules by applying
the new guideline retroactively. This is especially so, it
maintains, because the prior guideline, PRM-1 § 2604.1, stated that
"changes of the institution's ownership or geographic location do
not in itself [sic] alter the type of health care furnished and
shall not be considered in the determination of the length of
operation."
This argument is unavailing. The Manual is merely an
interpretive guide, and interpretive guides generally do not have
the force of law. See, e.g., Arnold v. United Parcel Serv., Inc.,
136 F.3d 854, 864 (1st Cir. 1998) (collecting cases). In any
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event, the Board's decision in S. Shore I did not rely upon (and,
indeed, never cited) PRM-1 § 2533.1. Last — but far from least —
even though the Manual did not specifically incorporate change of
ownership into the definition of new provider until 1997, there is
ample evidence that HCFA did apply the more limited concept of
change of ownership involving DON rights to new provider
determinations prior to 1995 (the time when the Hospital initially
requested the exemption). See Appellee's Br. at 43 (conceding that
HCFA previously had denied new provider exemptions on the basis of
transferred DON rights); see also Larkin Chase Nursing &
Restorative Ctr. v. Shalala, No. 99-00214, 2001 U.S. Dist. LEXIS
23655 (D.D.C. Feb. 6, 2001). Consequently, we see no basis for
characterizing the 1997 implementation of PRM-1 § 2533.1 as a post
hoc rationalization.
C. Equivalency.
Previous ownership aside, an applicant is not
disqualified from access to the new provider exemption unless it
"has operated as the [same] type of provider (or the equivalent)"
for the prescribed period. 42 C.F.R. § 413.30(e)(2). In a last-
ditch effort to ward off disqualification, the Hospital asks us to
rule that the Board erred in finding that Prospect Hill had
operated as the equivalent of an SNF (and, thus, as an equivalent
of the TCC). The district court did not reach this issue, and the
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Secretary requests us to remand it to the lower court for specific
findings. The Hospital, however, urges us to decide it.
Although we sometimes decline to pass upon issues not
first vetted by the district court, e.g., N.E. Reg'l Council of
Carpenters v. Kinton, 284 F.3d 9, 19 (1st Cir. 2002), that is by no
means an inflexible rule. Where, as here, we are called upon to
view a static administrative record through the same prism as the
lower court, deciding the case fully is often the option of choice.
See, e.g., Trustees of Mich. Laborers' Health Care Fund v. Gibbons,
209 F.3d 587, 595 & n.5 (6th Cir. 2000) (collecting cases). This
is a paradigmatic case for the application of such a principle:
the facts are straightforward and fully developed, and the parties
have had notice of, and ample opportunity to respond to, the merits
of the unaddressed issue. We turn, then, to the Board's
equivalency finding.
The Hospital's argument on this point amounts to an
attack upon the sufficiency of the evidence. This is an uphill
climb, for courts ordinarily do not afford plenary review to
administrative factfinding. So it is here: our review is limited
to whether the equivalency finding is supported by substantial
evidence in the administrative record. See 5 U.S.C. § 706(2)(E);
see also 42 U.S.C. § 1395oo(f)(1) (conforming judicial review in
Medicare matters to the standards set forth in section 706 of the
APA). So long as the Board reasonably could have credited those
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witnesses and reports supporting its finding that Prospect Hill had
operated as the equivalent of an SNF, we must sustain its
equivalency finding. See Mass. DPW, 984 F.2d at 525-26; Concerned
Citizens on I-190 v. Sec'y of Transp., 641 F.2d 1, 7 (1st Cir.
1981). It is immaterial how we, if sitting as a court of first
instance, would have resolved the disputed questions of fact.
Generally speaking, substantial evidence comprises proof
that a reasonable mind might find adequate, in light of the record
as a whole, to support a particular conclusion. NLRB v. Beverly
Enters.-Mass., Inc., 174 F.3d 13, 21-22 (1st Cir. 1999). Such
proof suffices even if the evidence also might support some other,
inconsistent conclusion. Posadas de P.R. Assocs., Inc. v. NLRB,
243 F.3d 87, 90 (1st Cir. 2001). So viewed, "substantial evidence"
is an objective standard that gives the agency the benefit of the
doubt as to disputed facts. See Beverly Enters.-Mass., 174 F.3d at
21-22. This sets the bar fairly low.
In its original denial of the Hospital's application for
an exemption, HCFA found that Prospect Hill had satisfied the
definition of an SNF because it had furnished skilled nursing care
and related services for qualified persons as set forth in 42
C.F.R. § 409.33(b) and (c). HCFA based this finding in part on
services that Prospect Hill provided only sporadically (as
documented in that facility's periodic activity reports) as well as
on the testimony of various witnesses presented at the Board's
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hearing. The Hospital argues that the record contains conflicting
evidence and that the witnesses favorable to the Hospital
outnumbered those favorable to the Secretary. These observations
are true as far as they go — but neither goes very far. Within
wide limits, the weight and credibility of the evidence are for the
Board to determine. See Am. Textile Mfrs. Inst. v. Donovan, 452
U.S. 490, 523 (1981); Posadas, 243 F.3d at 90. Here, the Board's
finding is supported by substantial evidence in the record. No
more is exigible.
Taking a slightly different tack, the Hospital seizes on
an undisputed fact: that Prospect Hill typically furnished
custodial services, performing more sophisticated services only
rarely. Extrapolating from this fact, it contends that Prospect
Hill could not have operated as the equivalent of an SNF (which
offers sophisticated nursing care as a staple). This strikes us as
an oversimplification.
To be sure, Prospect Hill, in its heyday, was a Medicaid-
certified Level III nursing home that provided custodial care
primarily to psychiatric patients — but it also periodically
delivered skilled nursing, restorative care, and other therapeutic
services. The TCC has a different orientation: it is a Level II
nursing home providing mostly rehabilitative care (and,
-26-
occasionally, custodial care) to a wide variety of patients.7
Based on these and other differences, the Hospital suggests three
ways in which the Board may have embarrassed the substantial
evidence standard. First, the Hospital asserts that because the
new provider exemption makes no explicit allowance for facilities
as disparate as Prospect Hill and the TCC, such facilities
necessarily must lie outside the ambit of the equivalency rubric.
Second, the Hospital contends that in order to be an equivalent of
an SNF, a facility would have to meet the definition of an SNF —
and Prospect Hill did not. Third, the Hospital posits that, given
the underlying policy of the new provider exemption, Prospect
Hill's sporadic deployment of skilled nursing services simply does
not justify a finding of equivalency.
All three of these arguments miss the essential point.
The Secretary, in his discretion, reasonably could have looked not
7
These levels are part of a taxonomy developed by the
Commonwealth with respect to its administration of the Medicaid
program. The Commonwealth defines a Level III nursing home as a
supportive nursing care facility "that provide[s] routine nursing
services and periodic availability of skilled nursing, restorative
and other therapeutic services, as indicated, in addition to the
minimum, basic care and services required for patients whose
condition is stabilized to the point that they need only supportive
nursing care, supervision and observation." S. Shore II, 204 F.
Supp. 2d at 78 n.12 (quoting Mass. Regs. Code tit. 105, § 151.020).
It defines a Level II nursing home as a skilled nursing care
facility "that provide[s] continuous skilled care and meaningful
availability of restorative services and other therapeutic services
in addition to the minimum, basic care and services required for
patients who show potential for improvement or restoration to a
stabilized condition or who have a deteriorating condition
requiring skilled care." Id.
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at the particular level of care provided by a nursing facility,
but, rather, at a broader definition of equivalency. Although our
review is geared to whether the Secretary's decision rests on
substantial evidence, we must in the process defer to what the
Secretary reasonably found to be relevant. To do otherwise would
fetter the Secretary's discretion in an unwarranted manner. See
Villa View Cmty. Hosp., Inc. v. Heckler, 728 F.2d 539, 543 (D.C.
Cir. 1984); see also Mass. DPW, 984 F.2d at 527 (reiterating that
the court cannot substitute its judgment for that of the agency).
The Board accepted this premise — and reasonably so. In
the process, it cited specifically to the nursing home reform
provisions of the Omnibus Budget Reconciliation Act of 1987
governing the certification of long-term care facilities under
Medicare and Medicaid. See Omnibus Budget Reconciliation Act of
1987 (Revenue Reconciliation Act of 1987), Pub. L. No. 100-203, §§
4211(a)(3) & (c), 4212(a) & (b), 4213(a), 4216, 101 Stat. 1330-182,
-196, -204, -207, -212, -213, -220 (1987) (codified as amended at
42 U.S.C. § 1395r). These provisions indicate that both Medicare
SNFs and Medicaid nursing facilities provide the same basic range
of services. See S. Shore I, supra, at *14, *17 (explaining that
these provisions require both Medicare SNFs and Medicaid nursing
facilities to provide the range of services described in sections
1819(b)(4) and 1919(b)(4) of the Social Security Act). Thus,
Prospect Hill, as a Medicaid facility, "would have already incurred
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the start-up costs associated with the development of the capacity
to furnish inpatient SNF services, by meeting the requirements for
participation." Id. at *2.
This is a convincing argument. Faced with it, we decline
to substitute our judgment for the Secretary's as to whether so
broad-gauged a comparison contradicts the underlying purpose of
either the challenged regulation or the enabling statute. In the
last analysis, Medicare is a complex and highly technical
regulatory scheme, and courts should be hesitant to second-guess
the Secretary in such matters. See Thomas Jefferson, 512 U.S. at
512; Cheshire Hosp. v. N.H.-Vt. Hosp'n Serv., Inc., 689 F.2d 1112,
1117 (1st Cir. 1982); see also Villa View, 728 F.2d at 543(explaining that a court cannot reverse the Secretary's decision in
such a case when doing so would require displacement of the
Secretary's policy). We therefore uphold the Board's finding of
equivalency.
V. CONCLUSION
We need go no further. Generic perceptions of reality
are not the gold standard when administrative discretion is in
play. Where Congress has chosen to cede substantial discretion to
an agency, a reviewing court should scrutinize the administrative
record with due regard for that discretion and weigh the
reasonableness of the Secretary's action accordingly. Mass. DPW,
984 F.2d at 522. That respectful approach is especially
-29-
appropriate when the challenged action — here, the interpretation
of the new provider exemption — plainly calls for a delicate
balancing of a melange of factors within the scope of the
Secretary's expertise. Hewing to these precepts, we affirm the
Board's denial of the Hospital's application for a new provider
exemption, reverse the district court's contrary decision, and
direct the entry of judgment in favor of the Secretary.
Reversed and remanded for the entry of judgment.
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