## Facts

- Two newly opened hospitals were designed to treat patients with medically complex conditions requiring extended inpatient stays and sought classification as long-term care hospitals (LTC hospitals) for Medicare reimbursement purposes.
- Medicare generally pays hospitals under the Prospective Payment System (PPS), but exempts certain categories, including a hospital with an average inpatient length of stay greater than 25 days, “as determined by the Secretary.”
- HHS regulations required a new hospital to operate for at least six months before it could qualify as an LTC hospital, so that average length-of-stay data could be collected.
- The hospitals requested LTC hospital status and reasonable-cost reimbursement from the first day of operation.
- HHS denied immediate LTC classification and reimbursed the hospitals under PPS during the initial operating period.
- The hospitals sued, arguing the statute required LTC classification from day one and that HHS lacked authority to impose any initial data-collection period.
- The district court agreed with the hospitals and invalidated the regulations; the Secretary appealed.

## Issues

1. Whether the Medicare statute unambiguously requires new hospitals seeking LTC status to be exempt from PPS and reimbursed on a reasonable-cost basis from the first day of operation.
2. If the statute is ambiguous, whether Congress delegated discretion to the Secretary to decide how a hospital must demonstrate that its average inpatient length of stay exceeds 25 days.
3. Whether the six-month operating-experience regulation could stand where HHS adopted it on the belief that the statute required an initial data-collection period.

## Decision

- The D.C. Circuit reversed the district court’s judgment invalidating the regulations.
- The court held the statute does not clearly compel either immediate LTC status for new hospitals or a mandatory six-month data-collection period.
- Congress intended the Secretary to have discretion to determine the manner by which the length-of-stay requirement is established.
- The case was remanded to HHS because the Secretary adopted the six-month rule under the mistaken view that the statute left no choice, and the agency had to reconsider the rule while recognizing available options.

## Legal Principles

- When a statute conditions a classification on a metric “as determined by the Secretary,” and the statute does not specify timing or method, it can confer discretion on the agency to decide how the metric is established.
- A court will not sustain an agency rule as a discretionary policy choice where the agency acted on the premise that the policy was compelled by statute, rather than selected from permissible alternatives.
- Where an agency misapprehends the scope of its statutory discretion, the proper remedy may be reversal of a contrary judicial construction and remand to permit a legally correct exercise of agency judgment.

## Conclusion

The D.C. Circuit held that Medicare’s LTC hospital provision does not dictate either immediate exemption from PPS for new hospitals or a required initial operating period; it instead leaves the Secretary discretion over the method of determining average length of stay, requiring remand because HHS treated the six-month rule as mandatory rather than discretionary.


Transitional Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019 (D.C. Cir. 2000)