I decide that the Health Care Financing Administration's (HCFA) July 23, 1998 determination not to redesignate the Regional Organ Procurement Agency of Southern California (ROPA) as the federal organ procurement organization (OPO) for Los Angeles, Santa Barbara, and Ventura Counties was appropriate and correct under the applicable law and facts. I find that the regulation at 42 C.F.R. § 486.310(b) is clear and unambiguous in its requirement that each OPO, in order to meet the performance standards in that section, must achieve at least 75 percent of the national mean for four of the five performance categories, averaged over the "2 calendar years before the year of redesignation." ROPA did not meet the required performance standards for this period and therefore, did not meet a condition for redesignation applicable to every OPO. Under the applicable regulations, HCFA is authorized to not redesignate an OPO, or to terminate its agreement with a designated OPO, if the OPO does not comply with the requirements of 42 C.F.R. Part 486, Subpart G, including the performance standards at 42 C.F.R. § 486.310.

I. Procedural history

By letter to ROPA dated July 23, 1998, HCFA informed ROPA of its decision not to redesignate it as the OPO for its service area and to award ROPA's service area to Southern California Organ Procurement Center (SCOPC). HCFA Exhibit (Ex.) 70. HCFA directed that ROPA's final designation period would end on November 1, 1998 and that, before that date, ROPA would have to undertake the activities listed in 42 C.F.R. § 486.304(c)(8) to achieve a smooth transition of its former service area. Id.

On August 7, 1998, ROPA requested that HCFA reconsider its decision, arguing that HCFA had misinterpreted 42 C.F.R. § 486.310(b), and contending that HCFA's June 1998 on-site survey was defective. HCFA Ex. 71. That same date, ROPA timely requested a hearing before an administrative law judge pursuant to 42 C.F.R. Part 498. HCFA Ex. 72.

On August 24, 1998, HCFA responded to ROPA's reconsideration request. In that determination, HCFA assumed that everything ROPA alleged regarding the June 1998 survey was true and withdrew its survey results. HCFA Ex. 73. HCFA nevertheless adhered to its decision not to renew ROPA's designation because ROPA had failed to meet the performance standards by achieving at least 75 percent of the national mean for four of the five performance categories averaged over the two calendar years before the 1998 designation period. Id. HCFA further stated that it did not agree with ROPA's interpretation that ROPA met the standards under 42 C.F.R. § 486.310(b) because it satisfied four of the five performance standards across the 24-months coterminous with its original designation period and satisfied four out of five during the 21 months since it assumed its revised service area for the 1996 designation period.

On August 19, 1998, ROPA filed an action against the Department of Health and Human Services (HHS) challenging HCFA's decision not to redesignate ROPA as the OPO for Los Angeles, Ventura, and Santa Barbara Counties. ROPA sought temporary and preliminary injunctive relief, or an alternative writ of mandamus, staying the effectiveness of the agency's decision and any other assignment of the service area in question until this administrative appeal could be heard and until judicial review could be obtained.

In the preliminary injunction proceeding, Petitioner essentially argued that HHS' decision not to redesignate ROPA violates HCFA's own rules and regulations, and is therefore arbitrary and capricious. Specifically, ROPA contended that HCFA violated 42 C.F.R. § 486.318(b)(2) when it judged ROPA's compliance with the performance standards of 42 C.F.R. § 486.310(b) based upon its performance in calendar years 1996 and 1997, rather than based upon ROPA's performance during a period following the change in its service area and through the end of its designation period (July 31, 1998). ROPA conceded that it cannot meet the performance standards if evaluation of its performance is based on calendar years 1996 and 1997. ROPA, therefore, contended that the relevant time period for evaluation is provided by 42 C.F.R. § 486.318(b), which it interprets to mean that any OPO that undergoes a change in service area within two calendar years of redesignation is to be evaluated between the date of its reorganization and the date of its redesignation. Petitioner's Brief (P. Br.) at 7.

On September 16, 1998, the district court issued a preliminary injunction that stayed the effect of HCFA's decision not to redesignate ROPA until I heard the matter and made my decision. See Order Granting Preliminary Injunction, The Regents of the University of California, v. Donna Shalala, Secretary of Health and Human Services, CV 98-6715 (C.D.CA., September 29, 1998)(Order). In granting the preliminary injunction, the court indicated that the deference to which HCFA's interpretation of its own regulations would be entitled may be undermined if inconsistencies are found between the interpretation HCFA now makes and its previous actions and conduct with ROPA during the 1996 designation process. Order at 14. The Court, however, made no finding that HCFA's conduct with regard to ROPA during the 1996 redesignation process was inconsistent or could not be reconciled with its present interpretation of the regulations during the 1998 redesignation process. See Order, at 16, n. 7. The court therefore requested that I explore the following factual matters during this administrative appeal and whether those matters can be reconciled with HCFA's present interpretation:

o The import of the statement, "[t]he Present Management Team of ROPA will be judged on their own success and failures in two years time, not those of a previous administration from two years ago," contained in a letter transmitting for ROPA and SCOPC signatures, the "Redesignation Understanding Los Angeles Basin OPOs," the acceptance of which, and the participation in, by ROPA was a condition to HCFA's determination to redesignate ROPA as an OPO. See Section III below.

o Whether "Present Management Team" means the team ROPA had in place at the beginning of 1996, or means the team in place when the agreement was executed in August, 1996, or means the team that was to govern ROPA following completion of that part of the service area transfer pertaining to Los Angeles County which would be completed in October 1996. Section III below.

o Whether any of the communications between HCFA and ROPA during either the 1996 redesignation process or the 1998 redesignation process expressly interpreted or mentioned 42 C.F.R. § 486.318(b)(2), or stated that for purposes of redesignation in 1998, ROPA's performance would be judged on a time period other than the two calendar years 1996 and 1997, and what that other time period would be. Sections III and IV below.

o Whether HCFA's position regarding the 1998 redesignation determination could be interpreted to be in conflict with or inconsistent with its positions prior to the 1998 redesignation determination, as evidenced by the conduct and statements of HCFA staff prior to the determination not to redesignate ROPA in 1998. Sections III and IV below.

o Whether there was any difference between HCFA's actions surrounding its notification to ROPA of its redesignation determination in 1998, particularly with regard to the length of time HCFA took to notify ROPA of its redesignation decision, which differed in any significant respect to HCFA's notification to ROPA of its redesignation determination in 1996. Section IV below.

o Whether the statement from the preamble to the Final Rule, "We believe that the data used to evaluate the OPO's suitability for redesignation reflect the most recent performance of an OPO," Order, at 13, would permit HCFA to examine performance data from ROPA for a time period other than the two calendar year period before the year of designation.⁽¹⁾ Section II, n. 5.

Upon issuance of my decision, the Court will consider whether a preliminary injunction should remain in place.

This case was assigned to me for a hearing and a decision and I am authorized to hear this matter. See 42 C.F.R. §§ 486.316(b) and 486.325(c); 42 C.F.R. Part 498. The hearing was held in Los Angeles, California, on October 6 and 7, 1998. The record before me consists of the parties' prehearing submissions, the transcript of the in-person hearing, the evidence I received at the hearing, and the parties' posthearing submissions.⁽²⁾

The issue before me is whether HCFA's determination not to redesignate ROPA in 1998 as the OPO for Los Angeles, Santa Barbara, and Ventura Counties for failure to meet the performance standards under 42 C.F.R. § 486.310(b) was appropriate. ROPA contends that under the provisions of 42 C.F.R. § 486.318(b)(2), HCFA was required to look at ROPA's performance for a period after its service area was reduced (either August 1, 1996 - July 31, 1998 or November 1, 1996 - July 31, 1998) for purposes of determining whether ROPA met the performance standards. HCFA contends that, as it does for every other OPO applying for redesignation, it is obligated to review ROPA's performance for the two calendar years before the year of redesignation as required under 42 C.F.R. § 486.310(b).

I use the following format for my Decision. The numbered paragraphs set out in italics, and any subheadings thereunder, are my findings of fact and conclusions of law (Finding(s)). The descriptive text under each heading is my rationale for my determinations.

II. Applicable law and regulations

1. Under the applicable law, HCFA's determination to not redesignate ROPA in 1998 as the OPO for Los Angeles, Santa Barbara, and Ventura Counties was reasonable and appropriate.

a. The applicable regulations at 42 C.F.R. § 486.310(b) clearly and unambiguously provide that the relevant time period for determining whether a previously designated OPO has met the performance standards is the two calendar years before the year of redesignation.

b. Since 1994, HCFA, through notice and comment rulemaking, has indicated that beginning in 1996 it would measure whether designated OPOs meet the performance standards and, thus, qualify for redesignation, by requiring that designated OPOs achieve at least 75 percent of the national mean for four of the five expressed categories averaged over the 2-calendar year period preceding the year of designation.

c. The provisions of 42 C.F.R. § 486.318 are not inconsistent with 42 C.F.R. § 486.310(b); the provisions of 42 C.F.R. § 486.318 relate only to what designation period applies if there has been a change in ownership, either through merger or consolidation, or a change in service area, during the designation period.

d. Under the provisions of 42 C.F.R. § 486.318(b)(2), at the end of the designation period for the changed entity, a performance review will be performed based on an examination of the time period specified in 42 C.F.R. § 486.310(b).

ROPA contends that HCFA's decision not to redesignate ROPA in 1998 based on ROPA's performance during calendar year 1996 and 1997 was wrong. ROPA contends that 42 C.F.R. § 486.318(b) can be interpreted to mean that when an OPO has undergone a change in its service area, its performance, for purposes of determining whether it meets the requisite performance standards necessary for redesignation, will be measured over the period from the date of the change in its service area until the end of its designation period. P. Br. at 27. Thus, since ROPA's service area changed at the time of its 1996 designation, its performance should be judged only for the period it performed in its reorganized service area. That is-- the period either following completion of the transition in October of 1996 through December 31, 1997, or from August 1, 1996 through July 31, 1998.⁽³⁾ P. Br. at 15-16.

OPOs serve as a important link between potential organ donors and transplant centers (hospitals with the resources and technological expertise to effectuate organ transplants). OPOs play a critical role in the federal government's efforts to address the national shortage of transplantable organs by identifying potential donors and converting potential donors to actual donors. See Final Rule, Health Care Financing Administration, Medicare and Medicaid Programs; Condition of Coverage for Organ Procurement Organizations, 61 Fed. Reg. 19,722, at 19,736 (May 2, 1996); HCFA Ex. 2 at 34. OPOs are responsible for a variety of functions, including increasing the number of organs available for transplant in their respective service areas, arranging for the acquisition, preservation, testing, transportation and equitable allocation of donated organs and coordinating their activities with the transplant centers in their service area. 42 U.S.C. § 273(b)(3).

OPOs charge transplanting hospitals fees for the services they perform. The Social Security Act (Act) provides for Medicare and Medicaid reimbursement for these fees, as follows:

The Secretary shall provide that payment may be made under title XVIII [Medicare] or XIX [Medicaid] with respect to organ procurement costs attributable to payments made to an organ procurement agency only if the agency--

(A)(I) is a qualified organ procurement organization (as described in section 371(b) of the Public Health Service Act) . . . or (ii) has been certified or recertified by the Secretary within the previous two years as meeting the standards to be a qualified organ procurement organization (as so described);

(B) meets the requirements that are applicable under such title for organ procurement agencies;

(C) meets the performance-related standards prescribed by the Secretary;

. . .; and

(F) is designated by the Secretary as an organ procurement organization payments to which may be treated as organ procurement costs for purposes of reimbursement under such title.

Section 1138(b)(1) of the Act.

In order to guarantee competition among OPOs and increase the efficiency of service, Congress instructed the Secretary by statute to designate only one OPO for each geographical service area. Section 1138(b)(2) of the Act. Thus, each OPO serves a specific geographical area in which it is solely responsible for organ procurement activities.

The Congressional mandate for competition among OPOs for a particular geographic service area occurs in the context of the OPO designation and redesignation process. HCFA, therefore, promulgated regulations through notice and comment rulemaking to comply with Congress' mandate. The rules are designed to foster competition among OPOs for a particular geographical service area. Section 1138(b)(1) and section 1102(a) of the Act; 61 Fed. Reg. 19,722, at 19,738 (May 2, 1996) Final Rule (HCFA Ex. 2 at 37); 59 Fed. Reg. 46,500 (September 8, 1994) Interim Final Rule (HCFA Ex. 1); and 56 Fed. Reg. 28,513 (June 21, 1991) Proposed Rule. Under the applicable regulations, an OPO is normally designated for only two years, and a redesignation decision must occur at least that often. 42 C.F.R. § 486.304(e)(1)-(2).⁽⁴⁾ Designation periods need not, and often do not, coincide with the calendar year. Typically, designation periods begin in the summer months of a particular calendar year and expire 24 months later. HCFA Ex. 2 at 25. For example, the 1996 designation period for both ROPA and SCOPC began August 1, 1996 and expired July 31, 1998.

A condition of redesignation as an OPO is that each OPO must meet certain performance standards. 42 C.F.R. § 486.310(b). Beginning on January 1, 1996 and thereafter, the performance standards are as follows:

[E]ach OPO must achieve at least 75 percent of the national mean for four of the following categories, averaged over the 2 calendar years before the year of redesignation:

(1) Number of actual donors per million population.

(2) Number of kidneys recovered per million population.

(3) Number of extrarenal organs transplanted per million population.

(4) Number of Kidneys transplanted per million population.

(5) Number of extrarenal organs transplanted per million population.

Id.

For purposes of redesignation and determining whether an OPO has met the performance standards, the regulations clearly specify that performance is measured by reviewing the five categories over the two calendar years before the year of redesignation. Essentially, all OPOs are on the same designation cycle (i.e., 1996 and 1998) in order that HCFA may collect and review from each OPO the information necessary to complete the national average figures for each of the five performance standard categories. Thus, under the regulations, there is a distinct separation between the designation period on the one hand and the performance review period on the other, so that HCFA may assemble the necessary performance data for every OPO and compute the national averages prior to the end of each designation period. The reason for this is to prevent an interruption in OPO designation and OPO service until all the necessary information is gathered and reviewed, any neccessary adjustments are made, the data is entered into a database, and the performance standard figures are calculated using the relevant census data. HCFA Ex. 2 at 24.

While Petitioner argues a different interpretation of the regulations, the applicable regulations have been subject to extensive notice and comment rulemaking since 1991. Throughout this period, these regulations have consistently and unambiguously stated that the relevant time period to review for the purpose of determining whether an OPO meets the performance standards is the two calendar years before the year of redesignation. The legislative history of the Proposed Rule indicates that the present performance standards were initially proposed by the Association of Organ Procurement Organizations (AOPO) as early as 1991 and included in the HCFA's Notice of Proposed Rulemaking for comment. 56 Fed. Reg. 28,513, at 28,516 (June 21, 1991). In the Interim Final Rule published in 1994, HCFA, having received favorable comments on the AOPO proposal, adopted the proposal for redesignations made in 1996 and thereafter. 59 Fed. Reg. 46,500, at 46,508 - 46,509 (September 8, 1994). Both the commenters and HCFA recognized that the AOPO performance criteria, by setting a threshold at 75 percent of the mean, would provide ample opportunity for variation in OPO performance and yet would recognize individual structural and size differences among OPOs while ensuring some objective measure of effectiveness. In adopting this proposal as the primary performance standard, HCFA stated in the preamble to the 1994 Interim Final Rule:

The Congress recognized that some OPOs were not operating in an efficient and effective manner. It expressed an intent that we establish challenging, definite standards to ensure that designated OPOs would be capable of helping to invigorate organ procurement and distribution in this country . . . . It charged the Department with the difficult task of articulating standards that would produce such results, while at the same time, taking into account diverse, sometimes competing, factors. We believe that the threshold of 75 percent of the national mean provides a reasonably liberal criterion that reflects the state-of-the-art on an ongoing basis, is based on the experience of peers for a comparable population base, and best implements the statute.

59 Fed. Reg. 46,500, at 46,509 (September 8, 1994). HCFA also specifically specified in the preamble, in response to a question about what is meant by "year" (i.e. fiscal or calendar), under the regulation regarding performance standards, that--

We agree that the regulations should be as unambiguous as possible. Most of our relevant OPO data is collected on a calendar year basis. For this reason, we are specifying that the calendar year be used for qualifying criteria and performance standards.

Id., at 46,505. Consequently, Petitioner clearly was on notice, since 1994, through HCFA notice and comment rulemaking, that HCFA intended the calendar year, as opposed to a fiscal year or any other 12-month period, as the time period it would look at for determining whether performance standards had been met.

Furthermore, in response to concerns that the regulation requires each OPO to achieve at least 75 percent of the national mean for four out of the five performance categories or be terminated, rather than providing an opportunity to provide a corrective action plan or providing a probationary period of one year, HCFA responded--

We believe the establishment of primary performance standards at 75 percent of the national average is a reasonable standard. We hold no OPO accountable to an arbitrary number but rather look only to its peers. We are not aware of geographical factors that by themselves make it impossible for an OPO to meet the standards in a certain service area. Rather with a 25-percent margin of error off the mean, we believe that the most influential factor to performance is the OPO itself.

We intend these performance standards to serve the people on the transplant waiting lists in all areas of the country by fostering the most efficient OPO service for them. We believe that all Americans, regardless of whether they are Medicare or Medicaid beneficiaries, deserve to be serviced by OPOs that make every effort and use every skill available to procure transplantable organs so that lives may be saved or improved through timely organ transplants. Consequently, we believe it is important to hold each OPO accountable for meeting the primary performance standard. If the OPO that is assigned to a service area is not achieving appropriate organ donation rates, we would be acting irresponsibly to the Americans on the waiting list to allow that OPO to continue to serve that area rather than replace it with another better-performing OPO.

61 Fed. Reg. 19,722, at 19,737 (May 2, 1996).

Also, the Act and the implementing regulations at 42 C.F.R. § 486.316 also make clear that OPOs designated for a particular service area are not assured a monopoly simply because they meet the performance standards. Id. To this end, every county in the country is open for competition at redesignation time, and HCFA intends to designate the best performing OPO for each service area. Id. HCFA will not "designate a marginally performing OPO for a service area simply because it has operated in that area previously if a peak-performing OPO is also competing for the area . . ." Id.

Each OPO is required to submit accurate data regarding these performance categories within 15 days following the end of a calendar year together with information on the population of their designated service area based on the most recent U.S. census data. 42 C.F.R. § 486.306(t).

If an OPO does not meet the requisite performance standards for the two calendar years before the year of redesignation, the Secretary need not redesignate the OPO and may terminate that OPO's designation by giving notice of termination at least 90 days before the effective date stated in the notice. 42 C.F.R. § 486.314; 42 C.F.R. § 486.325(a) and (b). Upon termination of an OPO agreement, Medicare and Medicaid payments may no longer be made for organ procurement services furnished by the terminated OPO and the Secretary will accept applications from any entity to become the designated OPO for that service area. 42 C.F.R. § 486.325(d). The terminated OPO may appeal HCFA's determination to an administrative law judge of the Departmental Appeals Board.

Some OPOs undergo changes in service area or undergo changes in ownership or merger during the designation period. For this reason, the Secretary implemented 42 C.F.R. § 486.318. That regulation provides--

(a) OPO requirements. (1) A designated OPO considering a change in ownership or in its service area must notify HCFA before putting it into effect. This notification is required to ensure that the entity, as changed, will continue to satisfy Medicare and Medicaid requirements. A change in ownership takes place if there is the merger of one entity into another or the consolidation of one entity with another.

(2) A designated OPO considering a change in its service area must obtain prior HCFA approval. In the case of a service area change that results from a change of ownership due to a merger or consolidation, the entities must submit anew the information required in an application for designation, or other written documentation HCFA determines to be necessary for designation.

(b) HCFA requirements. (1) If HCFA finds that the entity has changed to such an extent that it no longer satisfies the prerequisites for OPO designation, HCFA may terminate the OPO's agreement and declare the OPO's service area to be an open area.

(2) If HCFA finds that the changed entity continues to satisfy the prerequisites for OPO designation, the period of designation of the changed entity is the remaining designation term of the OPO that was reorganized. If more than one designated OPO is involved in the reorganization, the remaining designation term is ordinarily the longest of the remaining periods. HCFA may determine, however, that a shorter period applies if it decides that a shorter period is in the best interest of the Medicare and Medicaid programs. The performance standards of § 486.310 apply at the end of this remaining period.

In the Notice of the final rule, HCFA responded to a specific comment received regarding this regulatory provision, requesting that newly merged OPOs and OPOs acquiring significant new territory be granted a grace period for compliance with the performance standards, similar to what is permitted for newly formed OPOs. 61 Fed. Reg. 19,722, at 19,737 (May 2, 1996). HCFA stated, in response:

The concept of granting a grace period for merging OPOs and OPOs acquiring significant new territory is a difficult one. We recognize that significant changes in OPO management, administration, or new service areas could potentially result in a temporary decline in performance as the organization adjusts to the change.

On the other hand, we are extremely concerned that permitting a grace period could instill a perverse incentive into the program. That is, allowing a grace period could provide an incentive for two poorly performing OPOs to merge merely to avoid termination or for OPOs to enter into bidding wars over service areas to avoid application of performance standards. Policies that promote frequent major changes in the OPO structure could be counter to our goals by resulting in decreased rather than increased organ donations.

After considerable thought, we have decided to retain our current policy of not permitting a grace period for newly merged OPOs or OPOs with significant changes in territory. We believe that this will encourage OPOs to undertake such changes judiciously using careful thought and extensive planning.

Id. Thus, the legislative history and the regulations clearly show that regardless of any change in service area or ownership occurring during the designation period, the performance standards still apply at the end of the designation period and compliance with those standards and the time period for which data is examined are still governed under the provisions of 42 C.F.R. § 486.310(b). Thus, it is clear that there is no conflict with the provisions of 42 C.F.R. § 486.318 and 42 C.F.R. § 86.310(b).⁽⁵⁾

Moreover, contrary to what Petitoner argues, 42 C.F.R. § 486.318 is not applicable here, as that regulation only applies where a change in ownership or service area occurs during the designation period. In this case, the change in Petitioner's service area did not occur during its designation period. Rather, the change in service area occurred as a result of ROPA's amended application for redesignation in 1996. It was ROPA who agreed to and then applied for redesignation in 1996 with the reduced service area. Based on ROPA's amended application, HCFA later redesignated Petitioner, but for a smaller service area.

In any event, despite Petitioner's contentions to the contrary, even if 42 C.F.R. § 486.318 were applicable, the application of the regulation to the facts would have the same result; i.e., the same period of performance, namely calendar years 1996 and 1997, would be the relevant period for HCFA to review for determination of the performance standards. In this instance, both ROPA and SCOPC were redesignated beginning August 1, 1996, based on the new service area composition. Both OPOs' designations therefore ended 24 months later, or on July 31, 1998. Thus, under the operation of 42 C.F.R. § 486.318(b)(2), the performance of both OPOs would be reviewed at the end of their designation period, July 31, 1998, in accordance with the provisions of 42 C.F.R. § 486.310(b), namely the calendar years 1996 and 1997.

III. 1996 Redesignation Process

2. As early as September 8, 1994, all OPOs were on notice, and ROPA knew or should have known, that beginning with designations occurring in 1996, the performance criteria as currently set forth in 42 C.F.R. § 486.310(b) were applicable and that performance over the two calendar years before the year of designation would be the period reviewed for purposes of determining whether the performance standards had been met. Interim Final Rule, 59 Fed. Reg. 46,500, at 46,505 - 46,506 and 46,508 - 46,509 (September 8, 1994); Final Rule, 61 Fed. Reg. 19,722, at 19,732 - 19,737 (May 2, 1996).

3. At the time of the 1996 designation process, ROPA was familiar with the applicable regulations regarding designation and redesignation of OPOs and was familiar with the regulatory requirements for adherence to the performance standards beginning January 1, 1996, which required achievement of at least 75 percent of the national mean in four of the five performance categories, averaged over the two calendar years before the year of redesignation, as a condition for redesignation. Tr. at 356.

4. For the 1996 redesignation cycle, ROPA failed to meet any of the five performance standards for the two calendar years before the year of redesignation, i.e., calendar years 1994 and 1995, although it applied for redesignation for its same service area.

5. Because of deficiencies in its performance, ROPA discussed with HCFA Region IX staff in June, 1996, the need for ROPA to reduce its service area in order to have a chance to stay in the program.

6. While the applicable regulations give HCFA discretion as to whether it will terminate its agreement with an OPO if the OPO no longer meets the conditions for coverage, the applicable regulations do not give HCFA any discretion as to the performance standards to be applied and the period of time which will be reviewed for the purpose of determining whether the performance standards have been met.

a. Because ROPA realized HCFA was authorized to not redesignate it in 1996 due to its failure to meet the requisite performance standards, ROPA wrote to Region IX staff on July 1, 1996, that "ROPA is currently meeting the HCFA performance standards, and we have been in compliance since November 1995, after implementing a comprehensive reorganization." HCFA Ex. 9 at 2; Tr. at 450.

b. ROPA's Plan of Correction, addressing its failure to meet the performance standards for the 1996 designation period (i.e. performance over calendar years 1994 and 1995), touted that ROPA had improved its performance so that it was in compliance with the HCFA performance standards for the first five months of 1996.

7. HCFA agreed to redesignate ROPA in 1996, based on ROPA's representations of its improved performance since its new Director had made major organizational changes in November, 1995, and based on ROPA's agreement to reduce its service area and transfer approximately 40 percent of its geographical area to SCOPC.

8. Nothing in the facts presented could lead to an understanding on ROPA's part that HCFA would relieve ROPA, in 1998, from the requirement in the performance standards that ROPA's performance would be measured by data gathered from the two calendar years 1996 and 1997.

9. It is reasonable to conclude that "Present Management Team," as used in the letter transmitting the agreement between ROPA, SCOPC, and HCFA, whereby ROPA agreed to transfer approximately 40 percent of its service area to SCOPC in order to be redesignated (and which ROPA was free either to accept or reject), means that HCFA would not make its 1998 redesignation determination based on ROPA's substandard performance during 1994 and 1995. Rather, HCFA would give ROPA's new Management Team, in place at ROPA at the beginning of 1996, a chance to prove its performance over the two years 1996 and 1997, based on ROPA's express representations to HCFA that its reorganization in November 1995, under the leadership of its new Director, resulted in ROPA's meeting the performance standards for the first 5 months of 1996. HCFA Ex. 24; Tr. at 192, 318, and 319.

10. There were no communications between HCFA and ROPA during either the 1996 or 1998 redesignation process that expressly interpreted or mentioned 42 C.F.R. § 486.318(b)(2), or stated that, for purposes of ROPA's redesignation in 1998, ROPA's performance would be judged on a time period other than the two calendar years 1996 and 1997.

ROPA has been designated as the qualified OPO for part of the greater Los Angeles area since 1986. When ROPA applied for redesignation in 1996, HCFA determined that ROPA failed to meet any of the five performance standards of 42. C.F.R. § 486.310(b) for the two calendar years before the year of redesignation, i.e. January 1, 1994 - December 31, 1995. HCFA Ex. 10 at 2. On June 10 1996, ROPA applied for redesignation as the OPO for Orange, Ventura, and Santa Barbara Counties, and most of the population (approximately 65%) of Los Angeles County. Tr. at 175, HCFA Ex. 8. SCOPC also applied for redesignation for all of its previously designated service area (San Bernardino, Riverside, and Tulare Counties, and approximately 35% of the population of Los Angeles County), and all of ROPA's service area. Tr. at 175 and 176; HCFA Ex. 6.

Under the applicable regulations, HCFA could have determined not to redesignate ROPA in 1996 when ROPA failed to meet the performance standards for calendar years 1994 and 1995 and SCOPC applied to take over ROPA's service area. See 42 C.F.R. § 486.304(a)(6), 42 C.F.R. § 486.314, and 42 C.F.R. § 486.325(a)(2).

HCFA, however, was concerned with SCOPC's ability to absorb ROPA's entire service area all at once. HCFA also was impressed by the accomplishments of ROPA since late 1995 under its new Executive Director. HCFA Ex. 20; Tr. at 224, 225, 269, 270, 283 - 285.⁽⁶⁾ ROPA subsequently reapplied for a smaller service area on July 8, 1996. HCFA Ex. 11; Tr. at 357 - 358. On July 16, 1996, ROPA made a presentation to HCFA Region IX staff to discuss ROPA's early 1996 performance, representing to HCFA that ROPA was currently meeting the five regulatory performance standards. HCFA Ex. 14; Tr. 187 - 188, 359, and 452. In August, 1996, ROPA, SCOPC and HCFA reached an agreement whereby ROPA would reduce its service area by transferring approximately 40% of its service area to SCOPC. HCFA Ex. 24, at 4 - 5. In transmitting the agreement for ROPA's signature, HCFA indicated that while this agreement was a compromise, the agreement would: avoid termination of ROPA based on its 1994 - 1995 performance; allow ROPA, with less territory, to become more efficient; and enable the present management team of ROPA to be judged on their own successes and failures in two years, rather than those of an administration from two years previously. HCFA Ex. 24 at 2. The transmittal letter also stated that if ROPA chose "not to participate or try this agreement we will designate SCOPC as the OPO for both territories." HCFA Ex. 24 at 3. Based on acceptance of this agreement, HCFA notified ROPA on August 5, 1996 that its application as an OPO for the Medicare and Medicaid programs under section 1138 of the Act had been approved, as modified by the "Redesignation Understanding, Los Angeles Basin OPO's," dated August 1, 1996. HCFA Ex. 27. In its letter, HCFA also informed ROPA that, effective August 1, 1996, it was designated as the OPO for Ventura and Santa Barbara Counties, and certain hospitals in Los Angeles County. Id. SCOPC was designated as the OPO for Kern, San Bernardino, Riverside, and Orange Counties and certain hospitals in Los Angeles County. HCFA Ex. 24 at 4.

IV. 1998 Redesignation Process

11. ROPA does not dispute that, based on its performance in calendar years 1996 and 1997, it did not achieve 75 percent of the national mean as required for four out of the five performance categories. ROPA failed the performance standards for two of the required categories.

12. There was no significant difference between HCFA's action surrounding its notification to ROPA of its redesignation determination in 1998 from its notification in 1996 with regard to the amount of time it took HCFA to notify ROPA of its decision. For the 1996 redesignation, HCFA notified ROPA on August 5, 1996, that its application for redesignation had been approved. For the 1998 redesignation, HCFA notified ROPA on July 23, 1998, of its decision not to redesignate ROPA. HCFA Ex. 27; HCFA Ex. 70.

13. During the 1998 redesignation process, HCFA evaluated the performance of all 63 OPOs up for redesignation for the two calendar years 1996 and 1997, and no OPO, subject to redesignation, has been reviewed for a period other than the two calendar years before the year of redesignation, despite a change in service area. Tr. at 103 - 104.

14. ROPA requested a meeting with HCFA and, in that meeting on October 29, 1997, for the first time raised concerns about the time period HCFA would examine in 1998 to determine compliance with the performance standards under 42 C.F.R. § 486.310(b). Tr. at 372.

15. ROPA suggested that HCFA look at its performance for a period other than the calendar years 1996 and 1997, as prescribed by regulation. HCFA indicated that ROPA could submit its documentation and interpretation of its position, but never indicated to Petitioner that HCFA would grant its request. Rather, the evidence clearly shows that HCFA consistently told Petitioner that it was bound by the applicable regulations, which required HCFA to use the two calendar years of 1996 and 1997.

16. HCFA's determination not to redesignate Petitioner in 1998 as an OPO is fully supported by the facts in evidence, is consistent with the language of the regulations, with the competitive regulatory framework required by Congress and implemented by the regulations, and is also consistent with HCFA's communications and actions relating to ROPA's redesignation.

17. Thus, given the applicable law, HCFA was correct to review ROPA's performance for purposes of determining whether it had met the performance standards and was therefore qualified for redesignation over the two calendar years of 1996 and 1997. No other time period was relevant to HCFA's review. To do otherwise would require HCFA to act in an arbitrary manner towards the other OPOs in the same circumstances as ROPA.

ROPA's 1996 designation was due to expire on July 31, 1998. On October 29, 1997, ROPA's Executive Director met with Ken Simpson of HCFA's Region IX staff, to discuss ROPA's performance numbers for 1996 and 1997. Tr. at 372. At the meeting, ROPA presented documentation on ROPA's performance on each of the five standards for January 1, 1996 through December 31, 1996, and from November 11, 1996 through September 30, 1997, and a chart comparing ROPA's performance from January through October 1996, to ROPA's performance from November 1996 through September 1997. HCFA Ex. 30 at 1. At this meeting, ROPA requested for the first time that HCFA measure ROPA's performance for a time period other than the two calendar years of 1996 and 1997, as prescribed by the regulations. Tr. at 200. Mr. Simpson indicated that HCFA would look at the documentation ROPA provided, but that absent a regulatory change, HCFA had no option but to look at performance over the two calendar years before the year of redesignation. Tr. at 202 and 214. ROPA's Executive Director then requested a meeting at HCFA's central office in Baltimore to discuss the question of which time period HCFA would examine during the 1998 redesignation cycle. Tr. at 381 and 383. At this meeting, the HCFA representative indicated that it would look at ROPA's performance for calendar years 1996 and 1997. Tr. at 382 - 384. HCFA, also, stated it would look at the information provided by ROPA, but did not promise that HCFA would use ROPA's proposed time periods. Tr. at 89.

ROPA met again with HCFA Central Office staff on December 11, 1997, and presented data comparing ROPA's performance over different time periods. Tr. at 384 and 386; HCFA Ex. 34. On January 14, 1998, ROPA sent HCFA's Central Office a letter with supporting documentation further explaining its position that HCFA should use a time period different from the two calendar years of 1996 and 1997 to measure ROPA's performance. HCFA Ex. 35; Tr. at 386. ROPA again met with HCFA Central Office staff on March 17, 1998. Tr. at 389. At this meeting, HCFA indicated that it could not reconcile ROPA's view of which time period to examine to determine performance standards, given the express mandate in the regulations. Tr. at 390. ROPA contended that HCFA had the discretion to evaluate ROPA based on its performance only since November 1996. Tr. at 391. HCFA requested that ROPA put its proposal in writing. Tr. at 391. ROPA submitted its request in writing with supporting documentation. HCFA Ex. 44; Tr. at 391. In this letter, ROPA for the first time argued that 42 C.F.R. § 486.318(b)(2) requires HCFA to look at ROPA's performance for a period other than ROPA's performance over the previous two calendar years.

In the spring of 1998, HCFA found that ROPA again failed to meet the performance standards under 42 C.F.R. § 486.310(b)(1) - (5) for the two calendar years before the year of redesignation, i.e., 1996 and 1997. HCFA used the same two-year calendar period to judge all OPOs seeking redesignation in the Medicare program, even OPOs with changed service areas. Tr. at 103. Specifically, based on the data submitted by ROPA, HCFA determined that ROPA failed to achieve 75 percent of the national mean for the number of extrarenal organs recovered per million population and for the number of extrarenal organs transplanted per million population during this period. HCFA Ex. 76 at 4. HCFA calculated the population in ROPA's service area by using a weighted average of its population before and after its change in service area. HCFA Ex. 76 at 22. ROPA concedes that it did not meet the performance standards in the two calendar years of 1996 and 1997. Tr. at 24. ROPA, nevertheless, applied for redesignation on May 21, 1998. HCFA Ex. 53; Tr. at 398 and 401. On June 9, 1998, SCOPC applied for redesignation as the OPO for the counties it already served and also requested redesignation as the OPO for all of the counties served by ROPA. HCFA Ex. 56; Tr. at 203.

ROPA met with HCFA Region IX staff on May 28, 1998, to give a presentation on HCFA's improved performance since the service area transition and to provide HCFA with letters of support for ROPA. HCFA Ex. 61; Tr. at 205, 404, and 405. At this meeting, the HCFA Region IX staff learned that HCFA Central Office had not yet responded to ROPA's letters. Shortly thereafter, the HCFA Region IX staff met with Central Office staff on this matter, and received an unequivocal response that the regulations did not allow HCFA to do what ROPA requested; HCFA was bound to stick with the two calendar years of 1996 and 1997. Tr. at 295.

Contrary to Petitioner's assertions, there is no evidence to support a determination that HCFA somehow led ROPA to believe that it would be judged on its performance for any period other than the calendar years 1996 and 1997.⁽⁷⁾ To conclude otherwise would require HCFA to assess ROPA differently than all other OPOs. The regulatory scheme promulgated by HCFA, based on the OPOs' own proposal, sets forth an objective measurement of effectiveness whereby every OPO is judged not on arbitrary data but rather on the same data for the same period as all of the other OPOs. Moreover, because the standard is set at 75 percent of the national mean as averaged over the two calendar years before the year of redesignation, the regulatory standard allows for variation in OPO performance and recognizes individual structural and size differences, something ROPA's interpretation fails to do. ROPA suggests by its assertions here that it should be treated differently than other OPOs and HCFA should be required in ROPA's case to look at data different than the data it looks at in making its redesignation determinations for other OPOs.⁽⁸⁾ HCFA clearly is not obligated to do so. Furthermore, if HCFA were to act as ROPA contends it should, its actions would be considered violative of the statute and regulations, as well as arbitrary and capricious.

I conclude that HCFA's decision not to redesignate ROPA in 1998 as an OPO was appropriate and correct under the applicable law and facts.

1. The same argument has been made by ROPA that for purposes of determining the propriety of the 1998 HCFA redesignation determination, I evaluate performance data of ROPA and SCOPC outside of the period designated in 42 C.F.R. 486.310.b(2).

2. I have evaluated carefully all the arguments made by the parties. If I do not specifically refer to such argument in my Decision, I have rejected it.

3. Petitioner has not stated consistently the time period over which its performance should be measured. In its Statement of Issues, dated October 2, 1998, ROPA suggests the period of August 1, 1996 through July 31, 1998 (the 1996 designation period) or October 1, 1996 through July 31, 1998 (October 1, 1996 being the day the reassignment of hospitals agreements between ROPA and SCOPC in Los Angeles County was to be completed). See also HCFA Ex. 24 at 4. In its Proposed Findings of Fact, ROPA states, as in its Proposed Finding 42, that ROPA's performance should be judged for "the period either following completion of the transition in October 1996 through December 31, 1997, or from August 1, 1997 [sic](before the transition occurred, but when the restructuring was accepted) through July 31, 1998." Petitioner Findings of Fact at 16. In that same Proposed Finding, ROPA cites us to Petitioner's Exhibit (P. Ex. 23), at page 6, which is intended to show ROPA's performance over the periods of August 1, 1996 to July 31, 1998 and November 1, 1996 to July 1998.

4. A recent provision in the Balanced Budget Act allows the Secretary to designate an OPO for a four-year period. Section 1138 of the Act.

5. I note that Petitioner's support for the use of a period other than the two-calendar years before the year of redesignation was based on the statement from the preamble to the Final Rule that "we believe that it is important that the data used to evaluate the OPO's suitability for redesignation reflect the most recent performance of an OPO. The use of old data could result in our terminating the agreement of an OPO that has just completed an outstanding performance year because the OPO did not meet the criteria 2 or 3 years ago." 61 Fed. Reg. 19,722, at 19,732 (May 2, 1996). Petitioner, however, took this comment completely out of context without explanation. A review of this statement in its entirety indicates that it was made to specifically support HCFA's requirement for submission of data within 15 days of the end of the calendar year so that HCFA would have the necessary data for the two-calendar years before the year of redesignation (data which HCFA considers to be the most current). Using the 1996 designation year as an example, HCFA stated that if it did not require the submission of the data within 15 days of the end of the calendar year, it would have to calculate the performance standards for the 1996 designation year using data from 1993 and 1994 rather than from 1994 and 1995.

6. HCFA performed an on-site survey of ROPA in June, 1996. At this time, because of the deficiencies in ROPA's performance and the likelihood of its not being redesignated, the HCFA surveyor from HCFA's Region IX, ROPA's Executive Director, and the former Executive Director and ROPA Advisory Board member discussed the need for ROPA to reduce its service area in order to have a chance to stay in the program. Tr. 351 - 352. Following the survey, the Executive Director, Mr. Cottingham, wrote to the HCFA surveyor on July 1, 1996 stating, "ROPA is currently meeting the HCFA performance standards, and we have been in compliance since November 1995, after implementing a comprehensive reorganization." HCFA Ex. 9 at 2. Tr. at 450. (Mr. Cottingham was hired in May, 1995 as ROPA's first full-time professional executive director. He soon began a process to address ROPA's operating shortcomings with a new management structure and with new personnel. Tr. at 340
- 342.) After HCFA informed ROPA of its survey deficiencies on July 5, 1996, ROPA submitted a plan of correction addressing the deficiencies found. HCFA Ex. 10. In that plan, it stated, "Many of these programs as well as other ones have been implemented with the results that for the first five months of 1996, ROPA was in compliance with the HCFA performance standards." HCFA Ex. 10 at 2; Tr. at 451.

7. In fact, it was ROPA itself, in attempting to convince HCFA to redesignate it as the OPO in 1996, that touted its improved performance in the first five months of calendar year 1996 as justification as to why HCFA should designate it. Now, ROPA clearly wishes to disavow itself of that position and argues just the opposite, that this period should be disregarded by HCFA in making its determination for 1998.

8. ROPA presented both to me and to the District Court, certain "head to head" data for ROPA and SCOPC intended to show that ROPA's current performance (since January 1, 1998) exceeded that of SCOPC. That data, however, is irrelevant to my review. I am first charged with determining whether HCFA's determination to not redesignate ROPA in 1998 for failure to meet the applicable performance standards was appropriate. For that determination, my review encompasses only the two calendar years of 1996 and 1997. Under the regulatory scheme intended to promote competition, such "head to head" data, would be relevant only if ROPA had passed the performance standards and both ROPA and SCOPC had applied for designation of ROPA's service area. Under such circumstances, HCFA would review the factors specified in 42 C.F.R. § 486.316(a) to determine which is the better performing OPO. Otherwise, this "head to head" data is meaningless because it does not correspond to the national data used for determining adherence to the performance standards for all other OPOs for the 1998 designation cycle. Furthermore, I queried HCFA as to whether it now had performance data for the period subsequent to calendar year 1997 (i.e., for 1998 and 1999). HCFA informed me that it would only have raw data for calendar year 1998 and would not have the appropriate data required nor have performed the requisite computations to determine 75 percent of the national mean for each of the five performance categories. HCFA explained that no such national data is available or collected, inasmusch as that kind of information and the performance of those kinds of computations occur only in a designation year and 1999 is not a designation year. Thus, I conclude that such information was not needed or even relevant to the determination before me for review.