Thomas Jefferson Univ. v. Shalala (93-120), 512 U.S. 504 (1994).
[ Thomas ]
[ Kennedy ]
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NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Wash ington, D.C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.


No. 93-120


on writ of certiorari to the united states court of appeals for the third circuit

[June 24, 1994]

Justice Kennedy delivered the opinion of the Court.

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

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

That brings us to the regulation here in question. Section 413.85(c) sets forth conditions governing the reimbursement of educational activities. [n.1] In a sentencereferred to by the parties as the "anti redistribution" principle, the regulation provides that "[a]lthough the intent of the [Medicare] program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units." Ibid. In a portion of the regulation known as the "community support" principle, §413.85(c) also states that the costs of educational activities "should be borne by the community," but that "[u]ntil communities undertake to bear these costs, the [Medicare] program will participate appropriately in the support of these activities." Ibid.

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

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

In 1983, Congress adopted a more restrictive method of reimbursing hospitals for inpatient medical services, see 42 U.S.C. § 1395ww(d) (1988 ed. and Supp. IV), but it retained the more lenient method of reimbursement for medical education costs. §1395ww(a)(4) (1988 ed.,Supp. IV). In 1984, when the new cost reimbursement regime was implemented, the Hospital reviewed its claim for costs associated with its GME programs to determine whether it was identifying all costs eligible for reimbursement. This review resulted in an increased claim reflecting clerical costs incurred by the Medical College for activities associated with its GME programs. [n.2]

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

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

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

Petitioner filed a petition for review in the District Court seeking reimbursement for the $2,861,247 in GME costs that the Secretary had disallowed. Id., at 10a. On cross motions for summary judgment, the court ruledin the Secretary's favor, accepting her interpretation of the anti redistribution and community support clauses as a reasonable construction of §413.85(c). Thomas Jefferson Univ. Hosp. v. Aetna Life Ins. Co., CCH Medicare & Medicaid Guide 38,276, p. 21,536 (ED Pa. 1989). The Third Circuit affirmed without opinion, judgment order reported at 993 F. 2d 879 (1993), thereby creating a conflict with the decision of the Sixth Circuit in Ohio State Univ. v. Secretary, Dept. of Health and Human Services, 996 F. 2d 122 (1993), cert. pending, No. 93-696, concerning the validity of the Secretary's interpretation of the anti redistribution clause. We granted certiorari, 510 U. S. ___ (1994), and now affirm.

Petitioner challenges the Secretary's construction of §413.85(c) under the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq. The APA, which is incorporated by the Social Security Act, see 42 U.S.C. § 1395oo(f)(1), commands reviewing courts to "hold unlawful and set aside" agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). We must give substantial deference to an agency's interpretation of its own regulations. Martin v. Occupational Safety and Health Review Comm'n, 499 U.S. 144, 150-151 (1991); Lyng v. Payne, 476 U.S. 926, 939 (1986); Udall v. Tallman, 380 U.S. 1, 16 (1965). Our task is not to decide which among several competing interpretations best serves the regulatory purpose. Rather, the agency's interpretation must be given " `controlling weight unless it is plainly erroneous or inconsistent with the regulation.' " Ibid. (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)). In other words, we must defer to the Secretary's interpretation unless an "alternative reading is compelled by the regulation's plain language or by other indications of the Secretary'sintent at the time of the regulation's promulgation." Gardebring v. Jenkins, 485 U.S. 415, 430 (1988). This broad deference is all the more warranted when, as here, the regulation concerns "a complex and highly technical regulatory program," in which the identification and classification of relevant "criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991).

Petitioner challenges the Secretary's construction of both the anti redistribution language and the community support language of §413.85(c). Because we conclude that the Secretary's interpretation of the anti redistribution clause is neither " `plainly erroneous [n]or inconsistent with the regulation,' " Tallman, supra, at 16-17, and because its application suffices to deny reimbursement of the disputed costs in this case, we need not pass upon the Secretary's interpretation of the community support language.

The anti redistribution clause is contained in the final sentence of §413.85(c), which states:

"Although the intent of the [Medicare] program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units." (emphasis added).

The meaning of this sentence is straightforward. Its introductory clause defines the scope of educational activities for which reimbursement may be sought: To be eligible for reimbursement, the activity must be one that is "customarily or traditionally carried on by providers in conjunction with their operations." It is the language that follows, however, that imposes the relevant restriction on cost redistribution. The second clause provides that, notwithstanding the activity for which reimbursement is sought, the Medicare program will not participate in the "redistribution of costs from educational institutions or units to patient care institutions or units."

The Secretary's interpretation gives full effect to both clauses of the relevant sentence. The Secretary interprets the regulation to allow reimbursement for costs of educational programs traditionally engaged in by hospitals, but, at the same time, to deny reimbursement for "cost[s] previously incurred and paid by a medical school." Brief for Respondent 26 (emphasis deleted); see also §413.85(b) (defining "approved educational activities" which are eligible for reimbursement as "programs of study usually engaged in by providers in order to enhance the quality of patient care"). The Secretary's reading is not only a plausible interpretation of the regulation; it is the most sensible interpretation the language will bear.

The circumstance addressed by the anti redistribution clause is a hospital's submission of "increased costs" arising from approved educational activities. The regulation provides, in unambiguous terms, that the "costs" of these educational activities will not be reimbursed when they are the result of a "redistribution," or shift, of costs from an "educational" facility to a "patient care" facility, even if the activities that generated the costs are the sort "customarily or traditionally carried on by providers in conjunction with their operations." §413.85(c). The Secretary's reliance on a hospital's own historical cost allocations, along with those of an affiliated medical school, is a simple and effective way of determining whether a prohibited "redistribution of costs" has occurred. Indeed, one would be hard pressed to come up with an alternative method to identify the shifting of costs from one entity to another.

Petitioner advances three separate arguments for not deferring to the Secretary's interpretation of the antiredistribution clause. None is persuasive.

First, petitioner asserts that the "clear meaning" of the anti redistribution clause is to allow reimbursement for the costs of activities traditionally carried on by hospitals (e.g., clinical training of residents and interns), but to deny reimbursement for costs incurred in activities traditionally carried on by educational institutions (e.g., classroom training). Pet. for Cert. 14. In other words, according to petitioner, the redistribution that is prohibited is the redistribution of activities, not the redistribution of costs. Brief for Petitioner 20.

This argument is mistaken, for it ignores the second clause of the critical sentence, which refers, on its face, to the "redistribution of costs," not the "redistribution of activities." The term "costs," moreover, is used without condition. Nothing in the plain language suggests that the prohibition on "redistribution of costs" is limited to the costs of certain activities (such as classroom instruction) carried on by an educational unit. The clear inference from the language is that the shift of any reimbursable costs from a "educational institutio[n] or uni[t]" to a "patient care institutio[n] or uni[t]" is prohibited. The Secretary's interpretation of the antiredistribution principle is thus far more consistent with the regulation's unqualified language than the interpretation advanced by petitioner. But even if this were not so, the Secretary's construction is, at the very least, a reasonable one, and we are required to afford it "controlling weight." Bowles v. Seminole Rock & Sand Co., 325 U. S., at 414.

Second, petitioner argues that the Secretary has been inconsistent in her interpretation of the anti redistribution provision. While it is true that an agency's interpretation of a statute or regulation that conflicts with a prior interpretation is " `entitled to considerably lessdeference' than a consistently held agency view," INS v. Cardoza Fonseca, 480 U.S. 421, 446, n. 30 (1987) (quoting Watt v. Alaska, 451 U.S. 259, 273 (1981)), that maxim does not apply here because petitioner fails to present persuasive evidence that the Secretary has interpreted the anti redistribution provision in an inconsistent manner. [n.3]

In an attempt to find an inconsistency, the petitioner points to a 1978 internal operating memorandum issued by the Health Care Financing Administration (HCFA) that addressed the reimbursement of costs incurred by medical schools affiliated with providers. Intermediary Letter No. 78-7 (Feb. 1978), App. to Pet. for Cert. 64a-66a. The intermediary letter detailed various categories and amounts of educational expenses incurred by affiliated medical schools that might be allowable to providers, but did not mention the anti redistribution limitation. Petitioners' attempt to infer from that silence the existence of a contrary policy fails because the intermediary letter did not purport to be a comprehensive review of all conditions that might be placed on reimbursement of educational costs. By its own terms, the intermediary letter attempted to review only a "number of situations" relating to the reimbursement of educational costs--namely "situations rais[ing] questions about the reasonableness of [medical school faculty] costs as allowable hospital costs and the appropriateness of the bases used in allocating them to the hospital." Id., at 64a. It is not surprising, then, that the letter did not address the anti redistribution principle, and the merefailure to address it here hardly establishes an inconsistent policy on the part of the Secretary. [n.4]

Likewise, contrary to the dissent's suggestion, post, at 4-5, the mere fact that in 1974 a fiscal intermediary may have allowed reimbursement to petitioner for GME costs that appear to have violated the anti redistribution clause does not render the Secretary's interpretation of that clause invalid. For even if petitioner could show that such allowance was approved by--or even brought to the attention of--the Secretary or her designate at the time, "[t]he Secretary is not estopped from changing a view she believes to have been grounded upon a mistaken legal interpretation." Good Samaritan Hosp. v. Shalala, 508 U.S. ___, ___ (1993) (slip op., at 14). And under the circumstances of this case, "where the agency's interpretation of [its regulation] is at least as plausible as competing ones, there is little, if any, reason not to defer to its construction." Id., at ___ (slip op., at 15).

Finally, petitioner contends that we should ignore the Secretary's interpretation of the anti redistribution clause because the language of the regulation is "precatory" and "aspirational" in nature, and thus lacking in operative force. See Brief for Petitioner 31-32. We do not lightly assume that a regulation setting forth specific limitations on the reimbursement of costs under a federal program is devoid of substantive effect. That is especially so when, as here, the language in question speaks not in vague generalities but in precise terms about the conditions under which reimbursement is, and is not, available. Whatever vagueness may be found in the community support language that precedes it, the anti redistribution clause lays down a bright line for distinguishing permissible from impermissible reimbursement: educational costs will not be reimbursed if they are the result of a "redistribution of costs from educational institutions or units to patient care institutions or units." §413.85(c). The Secretary was well within her discretion to interpret this language as imposing a substantive limitation on reimbursement.

In sum, the Secretary's construction of the anti redistribution principle is faithful to the regulation's plain language, and the application of this language suffices to bar reimbursement of the costs claimed in this case. For these reasons, we affirm the judgment of the Court of Appeals.

It is so ordered.


1 Title 42 CFR § 413.85(c) provides in full:

"Educational Activities. Many providers engage in educational activities including training programs for nurses, medical students, interns and residents, and various paramedical specialties. Theseprograms contribute to the quality of patient care within an institution and are necessary to meet the community's needs for medical and paramedical personnel. It is recognized that the costs of such educational activities should be borne by the community. However, many communities have not assumed responsibility for financing these programs and it is necessary that support be provided by those purchasing health care. Until communities undertake to bear these costs, the [Medicare] program will participate appropriately in the support of these activities. Although the intent of the program is to share in the support of educational activities customarily or traditionally carried on by providers in conjunction with their operations, it is not intended that this program should participate in increased costs resulting from redistribution of costs from educational institutions or units to patient care institutions or units."

The language in §413.85(c) has been in effect since the beginning of the Medicare program, although it was formerly designated 42 CFR § 405.421 (1977) and 20 CFR § 405.421 (1967).

2 The fiscal intermediary allowed these clerical costs at first, but later determined that such allowance was in error.

3 The dissent seeks to demonstrate that the Secretary has been inconsistent in her application of the community support principle. See post at 4-5. We see no need to dispute that proposition; as indicated above, we express no view on the validity of the Secretary's interpretation of the community support clause.

4 Petitioner further relies on an exchange of memoranda within HCFA in 1982 regarding the University of Oregon's health training programs. App. 22-26. In response to an internal agency memorandum identifying the anti redistribution clause and requesting additional clarification on the scope of reimbursable educational activities, the Director of HCFA's Division of Institutional Services responded, in part, that "[t]he allocation of costs to a hospital from a related medical school is governed by Intermediary Letter 78-7," and failed to discuss the redistribution issue. Id., at 25. This omission likewise fails to manifest a contrary policy. Indeed, a subsequent memorandum issued in 1985 from the Director of HCFA's Division of Hospital Payment Policy stated that "[t]he fact that [the redistribution issue] is not mentioned in the subject memorandum does not change the basic policy as espoused in 42 CFR [§413.85(c)]" which provides "that where costs for items and services were previously borne by a medical school, their allocation to a university hospital represents a redistribution of costs from an educational institution to a patient care institution." Id., at 27.