This is an action by an independent nursing home (I. e., one not affiliated with a hospital) with more than 100 beds for reimbursement of certain costs under the Medicare program. At issue are regulations the Secretary of Health, Education and Welfare (HEW) issued in 1972 requiring a more accurate method of cost computation for hospitals or hospital-nursing home complexes having 100 beds or more, and another less accurate one for all independent nursing homes, including those with 100 or more beds. The appellant here lost substantial sums of money in Medicare reimbursement by being forced to use the less accurate method.

An HEW administrative review board for Medicare providers to which the appellant applied for relief concluded that, whatever equities weighed in the appellant's favor, the regulations were binding, and the board denied relief. The district court found the regulations valid and granted the Secretary summary judgment. Diplomat Lakewood Inc. v. Califano, 453 F. Supp. 442 (D.D.C.1978). We find the requirement in the 1972 regulations that large independent nursing homes use a different and less accurate cost-computation method than that demanded of large hospitals and large hospital-nursing home complexes to be arbitrary, capricious and not in accordance with law. We reverse.

The Diplomat Lakewood Incorporated (Diplomat) owns and operates a 129-bed nursing home in northeastern Ohio which provides care to elderly, infirm patients under the Medicare program, 42 U.S.C. § 1395 Et seq. (1976).1 Diplomat's nursing home contains a distinct part certified as a "skilled nursing facility" under § 1861(j) of the statute, Id. § 1395x(j); that facility provides "extended care services"2 to patients. Therefore, Diplomat qualifies as a "provider of services" under the statute for the services rendered in its skilled nursing facility. Id. § 1395x(u). Diplomat also provides "intermediate" and "custodial" types of care which are less intensive than skilled nursing care and for which Diplomat does not receive Medicare reimbursement.

The relevant statute requires that providers be reimbursed for the services they furnish Medicare patients on the basis of their customary charge for, or the "reasonable cost" of, those services, whichever is less. Id. § 1395f(b). Reasonable costs must be determined pursuant to methods set forth by regulation. Id. § 1395x(v)(1)(A). Those computation methods must be fashioned to insure that Medicare costs are not borne by non-Medicare patients. Id.

Reimbursement to providers for services rendered to Medicare beneficiaries is made either by the Secretary or, more commonly, by private insurance companies which serve as fiscal intermediaries pursuant to contracts with the Secretary. Id. § 1395h.3 The intermediaries make interim estimated payments to providers. Id. § 1395g; 42 C.F.R. § 405.454 (1978). At the close of the providers' fiscal year, the intermediaries make final determinations regarding properly reimbursable costs based upon "cost reports" which the providers are required to file. Id. § 405.406(b).

Providers must distinguish between "routine" and "ancillary" services in their accounting. "Routine" services include bed, board, nursing care, minor medical and surgical supplies, and the use of equipment for which a separate charge is not made. Id. § 405.452(d)(2). All other services I. e., those "for which charges are customarily made in addition to routine charges" are "ancillary" services. Id. § 405.452(d)(3).

A skilled nursing facility administers the next most intensive level of care below a hospital. Medicare beneficiaries in skilled nursing homes must be certified by a physician as requiring daily supervised professional health care. Id. § 405.1632. Approximately one-fourth of Diplomat's patients require this high degree of care and otherwise qualify for Medicare benefits. It is acknowledged generally that patients in skilled nursing facilities require more of some routine services E. g., more nursing care, more minor medical and surgical supplies and greater use of equipment than patients receiving lower levels of care.

In 1966 the Secretary promulgated regulations giving all skilled nursing homes two options in computing their costs: the Departmental Method or the Combination Method. 20 C.F.R. § 405.452(a); 31 Fed.Reg. 14808, 14817 (1966). For Diplomat, the computation of reimbursable costs for ancillary services is essentially the same under either method. The two methods differed, however, in how reimbursable costs for routine services were to be computed.

Under the Departmental Method, providers computed "(t)he ratio of (Medicare) beneficiary charges to total patient charges for the services of each Department (as) . . . applied to the cost of the department." Id. 405.452(a) (1) (emphasis supplied).4 The figure resulting from that process included the providers' reimbursable Medicare costs for both routine and ancillary services.

The Combination Method provided that:The cost of "routine services" for program beneficiaries is determined on the basis of Average cost per diem of these services . . . (plus) the cost of ancillary services used by beneficiaries, determined by apportioning the total cost of ancillary services on the ratio of beneficiary charges for ancillary services to total patient charges for such services.

In simplified terms, therefore, the Combination Method requires providers operating nursing homes to average the costs of their routine services for all patients, regardless of the level of care I. e., skilled, intermediate or custodial. In contrast, under the Departmental Method a nursing home provider is paid on the basis of the costs attributable to the routine services its Medicare patients receive at the skilled nursing level of care. As explained below, that distinction becomes crucial in determining whether the Secretary abused his6 discretion in 1972 by requiring that large independent nursing homes use the Combination Method, because that method of cost computation has no adequate mechanism for reflecting the fact that patients in skilled nursing facilities generally require and receive more routine services than patients receiving lower levels of care,7 and it therefore is less accurate than the Departmental Method.

Until 1972 Diplomat utilized the Departmental Method in order to reflect the fact that all of its Medicare patients received the more intensive routine services provided in its skilled nursing unit.

In December 1970 the Committee on Finance of the United States (Senate Finance Committee) reported on several amendments to the Medicare reimbursement standards not relevant here. In its report, however, the Senate Finance Committee described two "additional matters of concern," one of which involved the option in the 1966 regulations for Medicare providers allowing them to use either the Departmental or Combination Method. S.Rep.No. 1431, 91st Cong., 2d Sess. 178-80 (1970) (hereinafter 1970 Senate Report ).

According to the 1970 Senate Report, both the Comptroller General and HEW's Audit Agency had recommended a total scrapping of the less accurate Combination Method because it resulted in the inclusion of some nonreimbursable ancillary costs (E. g., for pediatric and obstetrical care) under the Medicare statute. The Committee was concerned, however, about imposing the more precise but admittedly more burdensome Departmental Method on smaller institutions. A compromise was struck. The Committee and the Secretary "concur(red)" that facilities with fewer than 100 beds should be required to use the Combination Method; "larger institutions (E. g., those with 100 beds or more) should be required to carry out cost finding under more sophisticated methods and to apportion costs under the more accurate Departmental Method." Id. at 179.

On November 17, 1971, the Secretary proposed several changes in the Medicare regulations, one of which was to eliminate the option between the Departmental and Combination Method for all providers. Despite the Senate Finance Committee's 1970 Report, however, emphasizing facility size as the distinguishing factor between nursing homes for accounting purposes, All independent nursing homes of whatever size were required to use the less accurate Combination Method for cost reporting periods beginning after December 31, 1971. 36 Fed.Reg. 22987, 22989 (1971). On the other hand, large (over-100-bed) hospitals or hospital-nursing home complexes had to use the Departmental Method. In spite of the drastic effect of that proposal on large independent nursing homes, the preamble to the proposed regulations gave no explanation for the differentiation.

On April 21, 1972, the Secretary adopted the November 1971 proposed regulations with no change. 37 Fed.Reg. 10353, 10355 (1972). Again no justification was offered for the requirement that large independent nursing homes use the Combination Method. The Secretary said only:

Many of the correspondents opposed elimination of the option, heretofore permitted under regulations, allowing hospitals to use either the Combination Method or Departmental Method of apportionment. Elimination of the option has been retained. The option was originally granted to accommodate institutions that found the more sophisticated Departmental Method difficult to employ. In practice, however, this provider option gives each provider the opportunity to select the method that will result in greatest reimbursement from the program.

Id. at 10353. Thus, the single factor mentioned to justify continued use of the Combination Method was lack of accounting sophistication.

Following adoption of the 1972 Regulations and in response to protests from the American Hospital Association and other provider representatives, the Secretary in August and September 1972 conducted a random survey of 20 out of the approximately 4,000 independent nursing homes in the Medicare Program to determine the impact on them of the Combination Method. Because of the small number of independent nursing homes surveyed, the results were inclusive.

Nearly three years later, in December 1974, the Secretary ordered another survey to determine whether skilled nursing facilities regardless of size or hospital affiliation then required to use the Combination Method were, in fact, sufficiently skilled in their accounting practices to utilize the more accurate Departmental Method. This time 842 providers were questioned. The survey, completed in July 1975, established that the "vast majority" of such facilities (I. e., 95 to 98 percent) had the requisite accounting capability to use the Departmental Method. Joint Appendix (J.A.) 62. Acting upon those results, the Secretary signified he would consider a further amendment of the regulations to completely eliminate the Combination Method as to all providers.8

HEW officials also contacted the Dallas regional Medicare director on November 11, 1976, and directed the Dallas office to advise two of its fiscal intermediaries to begin accepting current and resubmitted cost reports from small hospitals and independent nursing homes9 which followed "discrete costing" principles "in general agreement with" the Departmental Method, as long as those facilities maintained "auditable records" reflecting specific cost allocations. J.A. 103 & 105.10 The effect of the letter (which was not, apparently, ever incorporated in any formal announcement to providers) was to establish an exception procedure allowing the fortunate providers who knew of its existence to avoid the inequities of the 1972 regulations if the required cost-allocation showing was made.

Diplomat obtained a copy of the letter in the fall of 1977, pursuant to a Freedom of Information Act request a year after this lawsuit was begun. Shortly thereafter, Diplomat requested and obtained from the Secretary a tentative agreement that Diplomat might avail itself of the exception process as well. Id. at 99-103. Accordingly, Diplomat submitted a "discrete costing" proposal to its fiscal intermediary in 1977. At the time of oral argument, that proposal apparently had not been finally accepted or denied.11 In 1976, the Secretary finally proposed new regulations requiring the use of the Departmental Method for all Medicare providers. 41 Fed.Reg. 52067 (1976).

The preamble to the proposal stated that the 1970 Senate Finance Committee report had been the cause for his prior action in 1972 requiring the Combination Method for smaller nursing homes and independent nursing homes. Id. at 52068. In support of the new proposal to do away with the Combination Method altogether, the justifications given were: (1) the 1975 survey showed that virtually all providers had the accounting capability to use the Departmental Method, (2) the Departmental Method would not unduly burden small providers, because statutory changes in 1972 already required more precise accounting in other contexts, and (3) the Departmental Method is a more precise method of computing Medicare-related patient costs. Id.12 It was not, however, until over two years later, in January 1979, that the Secretary finally adopted the new regulations requiring the Departmental Method for all providers for reporting periods beginning on or after July 1, 1979. 44 Fed.Reg. 3984 (1979).

Despite the long delay between the proposal in 1976 and the final issuance of the new regulations in 1979, the Secretary refused to apply them retroactively because the benefits "would (not) be sufficient to justify the administrative effort." Id. at 3985. Furthermore, the Secretary concluded that the procedures allowing for an exception "provide some degree of the flexibility sought by . . . providers (seeking retroactive application of the 1979 change)." Id.

Pursuant to the 1972 regulations, Diplomat and other large nursing homes filed cost reports with their fiscal intermediaries using the Combination Method for accounting periods starting after December 31, 1971. The providers' fiscal intermediaries computed their Medicare reimbursements for those periods on that basis. The first reporting period to which Diplomat applied the Combination Method was fiscal year August 1, 1971 to July 31, 1972.

On April 2, 1975 (before the HEW exception letter was written) those providers began a declaratory judgment action in the district court challenging the 1972 regulations. That court dismissed the complaint, on the ground that the providers had failed to exhaust their administrative remedies under 42 U.S.C. § 1395Oo. Aristocrat South, Inc. v. Mathews, 420 F. Supp. 23 (D.D.C.1976).

Section 1395Oo allows any provider dissatisfied with a decision of its fiscal intermediary to obtain a hearing before HEW's Provider Reimbursement Review Board (PRRB). The PRRB may affirm, modify or reverse the determinations of a fiscal intermediary and make "any other modifications" on matters covered by the provider's cost reports. 42 C.F.R. § 405.1869 (1978).13

Diplomat then took its case to the PRRB, where it was decided on a stipulated record. The stipulation concluded that Diplomat suffered a loss of $56,302 in reimbursements for the fiscal years 1973 and 1974 due to the enforced use of the Combination Method rather than the Departmental Method.14 It was also stipulated, however, that Diplomat had no choice in those years but to use the Combination Method even though the Departmental Method was the more accurate one. Thus, the PRRB ruled that it was "bound" by the 1972 regulations and could not assist Diplomat in any way:

Although the Board is sympathetic with the Provider's position, it must find for the Intermediary as the Board is bound by the Regulations promulgated by the Secretary of Health, Education, and Welfare.

However, the Board believes it appropriate to state that the method of apportionment which the Provider is forced to employ may only be appropriate for certain unsophisticated providers. The Provider has demonstrated that it has the capability to use the more sophisticated Departmental Method of apportionment and the Board believes that this latter method is substantially more accurate in most situations. Further, the Board believes that the instant situation is an appropriate example of this. The Board further notes that evidence was presented indicating that even the Bureau of Health Insurance does not dispute the fact (that) . . . the Departmental Method is a more accurate method for cost apportionment assuming the providers have the accounting capabilities to employ same.

The Provider must use the Combination Method of cost apportionment with simplified cost finding for the cost reporting periods ended July 31, 1973 and 1974.

J.A. 9-10. Diplomat then returned to the district court for judicial review under 42 U.S.C. § 1395Oo (f)(1) (1976).

On cross-motions for summary judgment, the district court found the 1972 regulations valid. The Secretary admitted (J.A. 71) and the district court recognized (453 F.Supp. at 444) that the Departmental Method is a more accurate indicator of Medicare patient-related costs, although it requires greater accounting sophistication on the part of the provider than the Combination Method. But the court thought that the criticism in the 1970 Senate Report of the excessive costs to the Medicare program which resulted from allowing providers to choose between the Combination and Departmental Methods was an adequate justification for the 1972 regulations taking away that option and requiring specific cost computation methods for various categories of providers.

This was so even though the court recognized that the 1970 Senate Report focused on facility size and accounting sophistication rather than hospital affiliation in differentiating between facilities for which the Combination Method was appropriate and those for which the Departmental Method should be required. It concluded that deference must be paid to the Secretary's distinction in the 1972 regulations between large independent nursing homes and large hospital-affiliated nursing homes on the ground that large hospitals and affiliated nursing homes are "most likely" to have sophisticated accounting abilities; the group required to use the Combination Method on the other hand included providers "tending" to have less accounting sophistication. Id. at 446. The court further found that a regulatory scheme need not be equitable in every case to be reasonable.15II. THE LEGALITY OF THE 1972 REGULATIONS

We can find no rational basis in the record nor in any justification proffered by the Secretary for the distinction drawn in the 1972 regulations (for purposes of cost computation methodology) between large independent nursing homes on one hand, and large hospitals or hospital-nursing home complexes on the other. Therefore, we are compelled to reverse the decision of the district court upholding the validity of the regulations as they applied to Diplomat. We remand the case to the district court to enter summary judgment on behalf of Diplomat as to the invalidity of the 1972 regulations as applied to it and to grant further relief consistent with this opinion.

The burden of showing that the distinction in permissible accounting methods of which it complains in the 1972 regulations was "arbitrary, capricious, (or) an abuse of discretion"16 lay, of course, with Diplomat.17 We would be obliged to affirm the decision below if we could find a rational basis in the record for the Secretary's action.18 We must "uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned."19

But as the Supreme Court held in SEC v. Chenery Corp., 318 U.S. 80, 94, 63 S. Ct. 454, 87 L. Ed. 626 (1943), the Secretary's action cannot be upheld "merely because findings might have been made and considerations disclosed which would justify (the 1972 regulations) . . . ." The Secretary must give "clear indication that (he) . . . has exercised the discretion with which Congress has empowered (him) . . . ." Id. at 94-95, 63 S.Ct. at 462, Quoting Phelps Dodge Corp. v. NLRB, 313 U.S. 177, 197, 61 S. Ct. 845, 85 L. Ed. 1271 (1941). In short, we must be satisfied that the distinction in the 1972 accounting regulations between large independent nursing homes and large hospitals or hospital-extended care facilities "was based on a consideration of the relevant factors" and that there has not been "a clear error of judgment." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 91 S. Ct. 814, 824, 28 L. Ed. 2d 136 (1971). See Home Box Office, Inc. v. FCC, 185 U.S.App.D.C. 142, 167-169, 567 F.2d 9, 34-36, Cert. denied, 434 U.S. 829, 98 S. Ct. 111, 54 L. Ed. 2d 89 (1977); Nat'l Ass'n of Food Chains, Inc. v. ICC, 175 U.S.App.D.C. 346, 356, 535 F.2d 1308, 1318 (1976).20 Our "sole concern" in the Food Chains case, as it is here, was whether the agency gave "reasoned consideration to the problem and . . . presented a rational basis for its decision." 175 U.S.App.D.C. at 354, 535 F.2d at 1316.

We begin our analysis with a reference to the applicable statutory guidelines pursuant to which the Secretary acted in promulgating the regulations in question. The Secretary is obligated to pay providers for the "reasonable cost" of care provided to Medicare patients. The statute provided in 1972:

The reasonable cost of any services shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services . . . . In prescribing the regulations referred to in the preceding sentence, the Secretary shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. . . . Such regulations Shall (A) Take into account both direct and indirect costs of providers of services in order that, under the methods of determining costs, the costs with respect to individuals covered by the insurance programs established by this title will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (B) provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive.21

When he first proposed the controversial 1972 regulations, the Secretary made no explanation at all of why the more accurate Departmental Method option was being taken away from large independent providers who had heretofore used it efficiently. In fact, the 1972 proposed regulations stated that their "objective" was, in accordance with the statutory mandate, to accord providers the "reasonable costs" attributable to Medicare patients:

The law provides that the costs with respect to individuals covered by the health insurance program will not be borne by individuals not so covered, and conversely that costs with respect to individuals who are not under the program will not be borne by the program.

Proposed 20 C.F.R. §§ 405, 452(e); 36 Fed.Reg. at 22990. And although the proposed regulation prescribed the type of accounting method nursing homes could use after January 1, 1972, it allowed the use of either method for periods up to that time, provided that the objective of "whatever method of apportionment is used will be to approximate as closely as practicable the Actual cost of services rendered." Id. (emphasis supplied). The proposal emphasized that:

The two methods of apportionment available for use in determining the cost of services rendered to beneficiaries of the program have as their goal the allocation of the total allowable costs between the beneficiaries and other patients in as Equitable a manner as possible. Under these methods, if it is found that beneficiaries receive more than the average amount of services, the providers would receive reimbursement greater than average cost for all patients. Conversely, if the beneficiaries receive less than the average amount of services, the providers would be reimbursed accordingly for the services rendered.

Id. (emphasis supplied).

It is clear, then, from these excerpts that the articulated objective of the 1972 regulations like the 1966 regulations (See 31 Fed.Reg. at 14817) was to provide reimbursement on the basis of the most reasonable approximation practicable to the actual costs of providers in servicing Medicare patients.

The record does reflect that one of the practicalities with which the Secretary had to cope, however, was the uneven "cost finding" capabilities among providers, a factor he noted in proposing both the 1966 and 1972 regulations.22 Indeed, we would have no problem at all in upholding these regulations if he had gone ahead and drawn a distinction between different kinds of providers on the basis of their actual accounting sophistication, or even provided some basis in the record for broad groupings incorporating such a distinction. The Secretary did do this to some degree in applying the Combination Method to small providers and the Departmental Method to large ones. Unfortunately, however, he did not cite any evidence in the agency record or even in the agency's experience that would warrant drawing such a distinction between large hospital-affiliated nursing homes and large independent nursing homes.

It is noteworthy that even now the Secretary makes no such claim. He admitted in this case that the 1972 regulations were "not based upon any study that included a review of the impact of the 'Combination Method' of cost apportionment on 'extended care facilities' previously using the 'Departmental Method' of cost apportionment, (or) . . . the accounting capability of such 'extended care facilities' to use the 'Departmental Method' of cost apportionment." J.A. 76. Nor did he conduct any "survey of the use by 'extended care facilities' of the more sophisticated 'Departmental Method' of cost apportionment." Id. In fact, his original proposal, as stated in the 1970 Senate Report, had been to do away altogether with the Combination Method.

Although the 1972 regulations in proposed or final form made no reference to the 1970 Senate Report, the Secretary argued before the district court that the changes were motivated by it. He also made that statement in the preambles to the proposed and final amendments in 1976 and 1979. 41 Fed.Reg. at 52068; 44 Fed.Reg. at 3985. Thus, it behooves us to take a careful look at the Report.

The 1970 Senate Report criticized the excessive Medicare costs attributable to the inclusion of certain pediatric and obstetrical services I. e., ancillary services in reimbursable costs under the Combination Method. 1970 Senate Report at 179. The Report also recognized that the Combination Method had been allowed as an option for both large and small "institutions" in the past because "even some relatively large hospitals would have difficulty completing the required cost finding and would also be unable to apportion costs under the Departmental Method because of poor recordkeeping practices, and this initial (1966) provision for simplifying reimbursement even for the largest institutions seems reasonable For the past." Id. (emphasis supplied).

But a close reading of the Report leaves us with no doubt that the Senate Finance Committee clearly envisioned a new system for the future that would not allow, let alone mandate, the Combination Method for large institutions.

It is recognized that medicare cost finding and cost reporting requirements have contributed to an upgrading in recordkeeping and accounting systems and it does not seem unreasonable now to expect All larger institutions which generally receive larger medicare payments To use the more accurate Departmental Method of apportionment of costs between medicare and other payers. On the other hand, the committee is concerned that for smaller providers program cost finding requirements should be simplified wherever possible and wherever equitable.

Therefore, the committee and the Department concur that the Department should simplify its cost finding and cost reporting requirements for smaller institutions (e. g. those having less than 100 beds) and require the use of the Combination Method by those institutions without an option to use the Departmental Method. At the same time Larger institutions (e. g. those with 100 beds or more) should be required to carry out cost finding under more sophisticated methods and to apportion costs under the more accurate Departmental Method.

1970 Senate Report at 179-80 (emphasis supplied).23 It is impossible to find in the Report any license to impose the disfavored Combination Method upon large independent institutions.24 The Report stressed that there was a correlation between cost finding sophistication and size; it nowhere mentioned any such correlation with hospital affiliation.

The final regulations promulgated in April 1972 again failed to discuss any justification for the distinction in question. The Secretary did allude generally to objections he had received during the comment period on the elimination of the option, but he did not touch on the distinction among larger institutions at issue here. 37 Fed.Reg. at 10353. We are forced to conclude that he either was not aware of the problem at all25 or he chose to ignore it. In either event, he has provided us with no findings or evidence in the record to support the distinction.26

In contrast, when the Secretary proposed a radical turnabout in 1976 to eliminate the Combination Method altogether, he cited as his basis: 1) two interim studies, one of which involved 842 nursing homes then using the Combination Method, 2) extensive provider and Congressional correspondence, and 3) General Accounting Office data and "results of our own reviews." 41 Fed.Reg. at 52068.27 The Secretary in this same preamble explained the 1972 regulations only as having been "established in accordance with the report of the Senate Finance Committee," and their "objective" as "to eliminate the choice of reimbursement methods" in order to "relieve the smaller and less complex providers of the necessity for developing the more sophisticated accounting procedures as now required by step-down cost finding and the Departmental Method of apportionment." Id.

The motivation for the 1972 distinction between large independent nursing homes and large hospitals or hospital-nursing home complexes remains unfathomable. We must therefore disagree with the lynchpin of the district court's opinion that "this categorization was sound and reasonable, demonstrating the Secretary's 'consideration of relevant factors': bed size, accounting sophistication, and excessive reimbursement problems . . . ." 453 F. Supp. at 446 (citations omitted). Similarly, we cannot agree with the district court's conclusion that:

. . . The Departmental Method group includes those large providers most likely to have sophisticated accounting ability, namely hospitals and nursing homes affiliated with hospitals. The Combination Method group encompasses the providers tending to have less accounting prowess and least likely to abuse the ancillary cost aggregation procedures of the Combination Method. The Secretary chose this breakdown of facilities in order to improve Medicare reimbursement procedures for the majority of providers and thereby benefit Medicare recipients.

Id.28 Our independent review of the Secretary's single justification, the 1970 Senate Report, as well as his admission that no other investigation was made of independent nursing home accounting capabilities prior to the 1972 changes convinces us differently: there is no rational basis for the distinction.29

Thus, although, as the district court cautioned, due deference should be paid an agency's determination of how best to achieve the statutory policies Congress directs it to implement30 and regulations must be validated if they are "reasonably related to the purposes of the enabling legislation,"31 the deference due an agency "cannot be allowed to slip into a judicial inertia." Greater Boston Tele. Corp. v. FCC, supra n.20, 143 U.S.App.D.C. at 393, 444 F.2d at 850, Quoting Volkswagenwerk Aktiengesellschaft v. FMC, 390 U.S. 261, 272, 88 S. Ct. 929, 19 L. Ed. 2d 1090 (1968). We are convinced that the reasonableness requirement was breached here. Cf., Nat'l Ass'n of Food Chains, Inc. v. ICC, Supra, 175 U.S.App.D.C. at 353-56, 535 F.2d at 1315-18; Portland Cement Ass'n v. Ruckelshaus, supra n.20, 158 U.S.App.D.C. at 323-335, 486 F.2d at 390-402.32

The 1972 regulations have since been replaced by newer regulations effective February 20, 1979, which apply the Departmental Method to all providers. The Secretary, however, refused to apply the 1979 revision retroactively because of administrative inconvenience.

Where does this leave Diplomat? Its fiscal intermediary, Blue Cross of Northeastern Ohio, stipulated before the PRRB that the loss in reimbursable costs for the two-year period involved in this case, Diplomat's fiscal years 1972-73 and 1973-74, stemming from its ineligibility to use the Departmental Method was $56,302. J.A. 15. Diplomat may have additional claims for the following years, but we need not deal with them here or determine if there are any bars to Diplomat's reimbursement applications for those years. Nor are we in a position to say what, if any, further burden of proof Diplomat can be required by HEW to meet in order to make out its present claims.33

We remand the case to the district court with instructions to enter an appropriate order granting summary judgment to Diplomat on the issue of the invalidity of the regulations, and to take further action consistent with this opinion.

Reversed and Remanded.