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September 30, 1992



The opinion of the court was delivered by: GERHARD A. GESELL

This case is before the Court on cross-motions for summary judgment. Plaintiffs, several hospitals in Tennessee and North Carolina, have asked the Court to declare invalid certain Medicare regulations promulgated by the Secretary of Health and Human Services (the Secretary), alleging that the regulations are arbitrary and capricious and inconsistent with the Medicare Act. The issues have been fully briefed and no material facts are in dispute.

 I. Factual Background

 Plaintiffs challenge the method that the Secretary has implemented for determining regional classification of hospitals for purposes of standardized Medicare payments. Under Medicare's payment system, hospitals are not reimbursed for actual costs, but are funded according to standardized amounts determined in part by the hospitals' geographic classification. Plaintiffs challenge in particular the calculation of their "wage index," which is determined by a comparison of the wage level for hospitals in the geographic area in which the hospital is located to the national average wage level. 42 U.S.C. § 1395ww(d)(3)(E). The classification of hospitals in geographic areas is thus a key factor in reimbursement payments.

 Plaintiffs applied to the Medicare Geographic Classification Review Board (the Board) for reclassification into higher wage-index areas. The Board denied their petitions because they did not meet one of the requirements for the geographic classifications sought. Although plaintiffs met the proximity requirement, which mandates that a hospital must be located within thirty-five miles *fn1" of the area to which it seeks redesignation, 42 C.F.R. 412.230(b)(1), they did not meet the "adjacency requirement" of 42 C.F.R. 412.230(a).

 A hospital seeking redesignation to a different area must be located in a county or a metropolitan statistical area (MSA) "that is adjacent to the rural area or urban area to which it seeks redesignation." 42 C.F.R. § 412.230(a)(2). Although the word "adjacent" is not defined in the regulations, the Secretary defined it to mean "contiguous" in the preamble to the regulations as published in the Federal Register. 56 Fed. Reg. 25458, 25472 (June 4, 1991). Plaintiffs did not meet the adjacency requirement because their classification areas were separated from the higher wage-index areas by narrow portions of intervening counties.

 Plaintiffs contend that this adjacency requirement and its interpretation by the Secretary to mean contiguous are arbitrary and capricious in violation of 5 U.S.C. § 706(2)(A) and inconsistent with the Medicare Act, 42 U.S.C. §§ 1395 et seq., in violation of 5 U.S.C. § 706(2)(D). These claims are addressed in turn.

 II. The Medicare Act

 Plaintiffs claim that the adjacency requirement is inconsistent with the provision of the Medicare Act under which the regulations were promulgated. They contend that because the factors listed in the statutory guidelines for reclassification, 42 U.S.C. § 1395ww(d)(10)(D), do not include an adjacency requirement, it is not within the Secretary's authority to implement the requirement.

 This argument is very similar to Universal Health Servs. of McAllen v. Sullivan, 770 F. Supp. 704, 715 (D.D.C. 1991), appeal pending, No. 91-5320 (D.C. Cir.), where the plaintiff challenged the proximity requirement of the same regulations at issue here. In that case, Judge Flannery found that the promulgation of the proximity requirement was within the Secretary's authority and was consistent with the statute.

 The statute provides that the regulations "shall include" the listed factors, but does not exclude all other factors from consideration. Although the adjacency requirement was not mandated by the statute, it does not depart significantly from the considerations described. Subsection II of the statute calls for "guidelines for determining whether the county in which the hospital is located should be treated as being a part of a particular Metropolitan Statistical Area." 42 U.S.C. § 1395ww (d)(10)(D)(i)(II). The challenged regulation sets forth criteria for classifying individual hospitals, rather than counties, so it does not meet the letter of the statute, but it certainly comports with what Congress intended the agency to prescribe. Like the proximity requirement upheld in McAllen, supra, the adjacency requirement is a reasonable and valid exercise of the Secretary's authority. Chevron, USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984) ("If the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.").

 Plaintiffs also contend that the adjacency requirement is inconsistent with the statutory intent to group hospitals with similar costs together for purposes of establishing Medicare payment levels. According to the logic of this argument, the only valid regulations would require a cost analysis and comparison for every hospital and its reclassification destination. One purpose of the regulations is to avoid such painstaking calculations. While the adjacency requirement undoubtedly does advantage some hospitals and disadvantage others due to geographic irregularities, this alone is not a sufficient reason to find that it is inconsistent with the purposes of the reclassification scheme. In advocating "a reasonable and flexible proximity requirement" as sufficient to meet the statutory goals (Plaintiffs' Motion for Summary Judgment at 20), plaintiffs give little if any weight to the administrative burdens that "flexible" requirements often necessitate. The Court rejects plaintiffs' challenge and finds that the adjacency requirement is reasonable and consistent with the needs of the reclassification scheme outlined in the Medicare Act.

 II. Arbitrary and Capricious

 The standard of review of agency actions under the Administrative Procedure Act is a narrow one. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971). In determining whether an agency's action is arbitrary and capricious, the Court must consider whether an agency's rule is based on relevant factors, but ...

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