Thomas Jefferson Univ. v. Shalala

United States Supreme Court
512 U.S. 504 (1994)

ELI5:

Rule of Law:

A court must give an agency's interpretation of its own regulations controlling weight unless that interpretation is plainly erroneous or inconsistent with the regulation's text. This deference is particularly warranted when the regulation concerns a complex and highly technical regulatory program.

Facts:

Thomas Jefferson University operates both the Thomas Jefferson University Hospital (Hospital), a qualified Medicare provider, and the Jefferson Medical College (Medical College).
Due to their common ownership, the Hospital and Medical College are considered 'related' organizations under Medicare regulations.
From 1966 to 1973, the Hospital did not seek Medicare reimbursement for any of its Graduate Medical Education (GME) costs.
From 1974 to 1983, the Hospital sought and received reimbursement for salary-related GME costs, but the Medical College continued to bear the non-salary-related administrative costs of the GME programs.
In 1985, following an accounting study, the Hospital identified and sought Medicare reimbursement for approximately $2.9 million in non-salary GME administrative costs for that fiscal year.
These non-salary costs were the same type of costs that the Medical College had borne in all prior years.

Procedural Posture:

A Medicare fiscal intermediary disallowed reimbursement for approximately $2.9 million in Graduate Medical Education (GME) costs claimed by Thomas Jefferson University Hospital for fiscal year 1985.
The Hospital appealed to the Provider Reimbursement Review Board, which reversed the intermediary's decision.
The Secretary of Health and Human Services reviewed the Board's decision and reinstated the denial of the costs.
Thomas Jefferson University, as the Hospital's parent, sued the Secretary in the U.S. District Court for the Eastern District of Pennsylvania to review the Secretary's final decision.
The District Court granted summary judgment in favor of the Secretary.
The University, as appellant, appealed to the U.S. Court of Appeals for the Third Circuit, and the Secretary was the appellee. The Third Circuit affirmed the district court's judgment.
The University petitioned the U.S. Supreme Court for a writ of certiorari, which was granted to resolve a conflict among the circuit courts.

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Issue:

Does the Secretary of Health and Human Services' interpretation of the Medicare 'anti-redistribution' regulation, 42 CFR § 413.85(c), to prohibit reimbursement for educational costs historically borne by a hospital's affiliated medical school, constitute a reasonable construction of that regulation?

Opinions:

Majority - Justice Kennedy

Yes. The Secretary's interpretation of the regulation is reasonable and must be given controlling weight. The court must give substantial deference to an agency's interpretation of its own regulations unless it is plainly erroneous or inconsistent with the regulation. The regulation's anti-redistribution clause plainly states that the Medicare program will not participate in 'increased costs resulting from redistribution of costs from educational institutions...to patient care institutions.' The Secretary’s interpretation—that shifting costs previously incurred and paid by an affiliated medical school to a provider hospital is a prohibited 'redistribution'—is the most sensible reading of this language. The petitioner's argument that the clause prohibits the redistribution of activities, not costs, is contrary to the regulation’s explicit text. Furthermore, the Secretary is not estopped from applying this interpretation now, even if there were prior inconsistencies, as an agency can change a view it believes was based on a mistaken legal interpretation.

Dissenting - Justice Thomas

No. The Secretary's interpretation is an unreasonable construction that is contrary to law. The language of § 413.85(c) is merely a precatory and aspirational statement of purpose, not a substantive rule that can bar reimbursement. For two decades, the Secretary acquiesced to reimbursements that would have violated the current interpretation, demonstrating a long-standing inconsistent practice. Even if the clause were substantive, its proper meaning, read in context, is to bar reimbursement for the costs of activities not 'customarily or traditionally carried on by providers,' such as classroom training. The GME activities at issue here are traditionally carried on by teaching hospitals, so their costs should be reimbursable. The Secretary's current interpretation arbitrarily creates disparate outcomes for similarly situated hospitals based on their past accounting practices.

Analysis:

This case is a significant affirmation of the principle of judicial deference to agency interpretations of their own regulations, known as 'Seminole Rock' or 'Auer' deference. The decision establishes that an agency's interpretation need not be the only possible one, or even the best one, but merely a reasonable one to receive controlling weight from a court. This high standard of deference solidifies agency power, particularly in complex fields like Medicare, making it difficult for regulated parties to challenge agency enforcement actions based on interpretations of ambiguous rules. The ruling reinforces that an agency's reliance on historical cost-bearing practices is a valid method for applying rules against cost-shifting.

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