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March 31, 1993



The opinion of the court was delivered by: JUNE L. GREEN

In this action, plaintiff Grossmont Hospital Corporation (Grossmont) has asked the Court to overturn the Secretary's decision to deny Grossmont certain Medicare reimbursements claimed under the Medicare Act, 42 U.S.C. § 1395ww. Judicial review of the decision is established under 42 U.S.C. § 1395oo(f). The case is now before the Court on cross-motions for summary judgment, which have been fully briefed. The undisputed facts are set forth below.

 I. Factual Background

 Grossmont is an acute care hospital in La Mesa, California, certified by the federal government to provide hospital services to Medicare recipients. Pursuant to the Medicare Act, 42 U.S.C. § 1395ww, the federal government reimburses Grossmont and other hospitals for certain costs and services provided to recipients. There are two methods of reimbursement relevant to this case. Under the Prospective Payment System (PPS), hospitals are reimbursed according to a fixed-cost scheme that takes into account the number of Medicare recipients treated and the classification of services provided to those patients. Id. The hospitals' operating costs are factored in to this equation. 42 U.S.C. § 1395ww(a)(1)-(4). Capital-related costs, such as certain taxes, leases, and costs of improvements, are not reimbursed under the fixed-cost scheme, but on a reasonable cost basis. 42 U.S.C. § 1395ww(a)(4); 42 C.F.R. § 413.130(a). The issue here is whether Grossmont's "abandoned planning costs," described below, are non-capital-related for reimbursement purposes.

 In June of 1983, Grossmont initiated plans for an expansion project that would have added two new services and expanded existing ones. The cost of the project was estimated at $ 58,373,000. By June of 1986, Grossmont had incurred $ 2,559,378 in architectural fees and other planning costs. At that time, Grossmont's Board of Directors decided to abandon the project. Grossmont listed the $ 2,559,378 in abandoned planning costs as capital-related costs in its 1986 Medicare Cost Report, effectively requesting reimbursement under the reasonable-cost method.

 Aetna Life and Casualty Co., the fiscal intermediary responsible for auditing Grossmont's cost reports and determining the amount of Medicare reimbursement due to Grossmont, found that the abandoned planning costs should not be classified as capital-related and reclassified them accordingly as operational. Grossmont appealed Aetna's decision to the Provider Reimbursement Review Board responsible for reviewing such decisions, see 42 U.S.C. § 1395oo. The Board agreed with Grossmont that abandoned planning costs are capital-related and found that they should be reimbursed on a reasonable cost basis. Admin. Record (AR) at 23-36. The Secretary's Health Care Finance Administrator reversed that decision and held that Grossmont's abandoned planning costs should be treated as operating costs rather than capital-related costs. AR at 1-11. The Administrator's decision is the final decision of the Secretary, which Grossmont now challenges.

 II. Standard of Review

 The Medicare Act provides for judicial review of the Secretary's decision to reverse the Provider Reimbursement Review Board. 42 U.S.C. § 1395oo(f)(1). The Administrative Procedure Act, 5 U.S.C. § 706 (2), supplies the applicable standard of review. Memorial Hosp./Adair County Health Ctr. v. Bowen, 829 F.2d 111, 116 (D.C. Cir. 1987). The standard of review is a narrow one. An agency decision should only be overturned if unsupported by the evidence in the record, 5 U.S.C. § 706(2)(E), or if arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). The Court must consider whether the agency's decision is based on relevant factors, but "is not empowered to substitute its judgment for that of the agency." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814 .

 III. Analysis

 Grossmont presents a number of arguments in support of its claim. First, Grossmont argues that abandoned planning costs are capital-related within the plain meaning of that term. Second, Grossmont interprets the regulations to define abandoned planning costs as capital-related. Third, Grossmont asserts that the Secretary's decision would force an arbitrary distinction between costs incurred on projects that are not completed, as here, and costs spent on finished projects, which would be considered capital-related. Grossmont finally argues that if the regulations are read to classify abandoned planning costs as non-capital-related, the regulations should be struck down as inconsistent with the Medicare Act. The Secretary disagrees with each of these contentions. *fn1"

 A. The Meaning of Capital-Related Under the Regulations

 The regulations provide a definition of capital-related in 42 C.F.R. § 413.130(a) and list expenses that are not considered capital-related in 42 C.F.R. § 413.130(i). Neither section on its face conclusively establishes whether abandoned planning costs are capital-related. The definition states, in relevant part:

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