## Facts

- Seventy-six New York City–area public and not-for-profit hospitals challenged HHS’s Medicare inpatient prospective payment system (IPPS) wage-index rules under the Administrative Procedure Act (APA).
- Medicare’s IPPS pays hospitals fixed amounts per discharge, with the base rate split into labor-related and non-labor-related portions; the labor-related portion is adjusted by a wage index intended to reflect area wage differences and operate in a budget-neutral manner.
- For decades, CMS defined wage-index “geographic areas” using OMB Metropolitan Statistical Areas (MSAs).
- OMB revised MSAs in 2003; CMS adopted the revisions for FY 2005, expanding the New York City MSA to include certain northern New Jersey hospitals, which lowered the MSA’s average wage level and reduced the New York City wage index.
- The hospitals alleged the revised MSA configuration would materially reduce their Medicare reimbursements over time.
- Separately, Congress required an “occupational mix” adjustment to the wage index to account for hospitals’ differing staffing patterns; CMS implemented the adjustment at only 10% of its computed effect for the first year due to concerns about limited and potentially unreliable survey data.
- The district court upheld CMS’s MSA-based geographic definitions but held the 10% occupational-mix implementation unlawful and ordered immediate full implementation; both sides appealed.

## Issues

1. Whether the statutory term “geographic area” in 42 U.S.C. § 1395ww(d)(3)(E)(i) is ambiguous and, if so, whether CMS reasonably interpreted it by using OMB MSAs to set wage-index areas, including the revised New York City MSA boundaries.
2. Whether CMS’s decision to implement the occupational-mix adjustment at only 10% effectiveness was authorized by statute and was not arbitrary and capricious under the APA.
3. If the 10% occupational-mix implementation was unlawful, what remedy was appropriate.

## Decision

- The court affirmed the use of OMB MSAs as “geographic areas” for wage-index calculations, holding the interpretation reasonable and entitled to Chevron deference.
- The court rejected the argument that including lower-wage New Jersey hospitals in the New York City MSA made the wage index irrational, noting the statutory scheme necessarily relies on area averaging and budget neutrality.
- The court agreed that the 10% occupational-mix implementation was unauthorized and arbitrary and capricious because it did not meaningfully implement the congressionally required adjustment.
- The court modified the district court’s remedy, declining to require immediate full implementation based on incomplete data.
- The court ordered HHS to obtain adequate occupational-mix data and fully implement the adjustment by September 30, 2006.
- The judgment was affirmed in part and modified in part.

## Legal Principles

- When a Medicare payment statute uses an open-ended term such as “geographic area” without specifying boundaries, the agency may fill the gap through reasonable definitions; long-standing administrative practice can support reasonableness at Chevron step two.
- Use of external statistical units (such as OMB MSAs) to approximate labor markets may be a rational method of implementing wage-related payment adjustments where the statute relies on geographic averaging.
- Under the APA, an agency action is unlawful if it is contrary to a statutory command or if the agency’s implementation choice lacks a rational explanation consistent with the statute’s required effect.
- Equitable relief in APA cases may be tailored to both enforce the statutory requirement and avoid compelling agency action based on demonstrably inadequate data.

## Conclusion

The Second Circuit held that CMS reasonably used OMB MSAs to define Medicare wage-index geographic areas, but it invalidated CMS’s token 10% occupational-mix adjustment as inconsistent with Congress’s directive and required full implementation by a specified deadline after adequate data collection.


Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163 (2d Cir. 2006)