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February 28, 1983

THOMAS DONNELLY, Acting Secretary of Health and Human Services, Defendant

The opinion of the court was delivered by: PENN

 Plaintiff, Los Alamitos General Hospital, is a certified provider of services under Title XVIII of the Social Security Act ("Medicare Act"), 42 U.S.C. § 1395 et seq. To participate in the Medicare program a provider must enter into an agreement with the Secretary of Health and Human Services *fn1" (Secretary) whereby the Secretary agrees to reimburse the provider for the reasonable costs of providing services to Medicare patients and the provider agrees not to charge the patients directly.

 In 1973 Los Alamitos opened a five-bed postcoronary care unit (PCU) which it alleges was established to reduce the high incidence of sudden death among patients with serious heart conditions. Plaintiff filed cost reports with its fiscal intermediary, *fn2" Blue Cross of Southern California, for the fiscal years ending on November 30, 1973, April 30, 1974, April 30, 1975 and April 30, 1976, in which it treated its PCU as a special care unit pursuant to 42 C.F.R. § 405.452(d)(10). Accordingly, it calculated its reasonable costs in the PCU based solely on the ratio of Medicare beneficiary charges to total patient charges within that department. 42 C.F.R. § 405.452(a).

 In 1969 Los Alamitos entered into an agreement with the Vocational Nursing School of Southern California to operate a nursing school on the hospital's premises. The overall responsibility for running the school was assumed by the hospital and both classroom instruction and clinical training occurred there. The nursing school was operated at the hospital until 1976. Los Alamitos claimed the costs associated with the nursing school as part of its reasonable costs pursuant to 42 C.F.R. § 405.421.

 The fiscal intermediary determined that the PCU did not qualify as a special care unit for purposes of Medicare reimbursement, and also disallowed all of the hospital's nursing school costs. After consulting with the Medicare Bureau, however, the intermediary modified its finding as it related to the nursing school to allow that portion of the instructor's salary attributable to supervision of clinical training.

 Los Alamitos requested a hearing before the Provider Reimbursement Review Board ("Board"), which was held on June 13, 1978. See 42 C.F.R. § 405.1835. On October 27, 1978 the Board issued a decision reversing the intermediary's finding and specifically holding that the PCU qualified as a special care unit and that the nursing school costs were allowable.

 On November 9, 1978 the Secretary, through the Health Care Financing Administration elected to review the Board's decision. 42 U.S.C. § 1395 oo (f). Shortly thereafter, on January 2, 1979, the Secretary issued an order reversing the Board's decision and reinstating the adjustments made by the intermediary.

 Plaintiff filed this action on March 1, 1979, pursuant to 42 U.S.C. § 1395 oo (f). See also 42 C.F.R. § 405.1877. The case is presently before the Court on defendant's motion to affirm the Secretary's decision and plaintiff's cross-motion for summary judgment.

 Judicial review of the Secretary's determination is limited by 5 U.S.C. § 706. The Secretary's decision must be upheld unless upon reviewing the administrative record ("Rec.") it is found to be unsupported by substantial evidence, arbitrary, capricious, or otherwise not in accordance with law.

 I. The Nursing School.

 According to the affidavit of Earl Feiwell, Chairman of the Board of Directors of Los Alamitos, the hospital agreed to operate the nursing school on its premises due to the great need for nurses in the community and at Los Alamitos in particular, the shortage of trained nurses and the lack of programs for training nurses in the community, the belief that the school would remedy this shortage of qualified nurses at the hospital and elsewhere, and the belief that the school would enhance the quality of nursing care at Los Alamitos. Rec. 333-334. Moreover, without the agreement between Los Alamitos and the Vocational Nursing School the hospital may have been required to operate its own school at greater expense. Id. These reasons are consistent with the prescription in 42 C.F.R. § 405.421.

 The nursing school was approved by the State Board of Vocational Nurses and Psychiatric Technician Examiners, Department of Consumer Affairs, the organization vested with authority to approve the program. See 42 C.F.R. § 405.421(e); Rec. 81. It was also sanctioned by the Joint Commission on Accreditation of Hospitals. Rec. 81.

 The Secretary found that Los Alamitos was not "engage[d] in educational activities" as that term is defined by the regulation and legislative history because the nursing program was not exclusively provider-based. Rather, the funding contributed by the hospital was tantamount to contributions to an educational program operated by someone other than the provider, which are not reimbursable. See 42 C.F.R. § 405.421(c); Rec. 17-19. The Secretary also held that the "costs ...

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