This appeal concerns the treatment, in the course of a retroactive adjustment, of interest earned on over-payments of social security taxes by providers of health services under the Medicare Act. The Secretary of Health and Human Services required that any interest received by the providers and attributable to Medicare payments be offset against the interest expense claimed by the providers under the Act. On appeal the district court concluded that such an offset was a violation of the Secretary's own regulations concerning Medicare reimbursements. We reverse for the reasons stated below.

The facts giving rise to the interest award and the current dispute may be summarized as follows. Each of the plaintiff hospitals was formed by consolidating two or more constituent hospital corporations in 1969 or 1970. These predecessor hospitals had all waived their exemption from coverage under the Federal Insurance Contribution Act (FICA) as non-profit charitable institutions. Accordingly, they made FICA tax payments on wages paid. See 26 U.S.C. Secs. 501(c)(3), 3121(b)(8)(B). Following the consolidations the newly formed hospitals continued to make regular Social Security payments on the assumption that they had assumed their predecessor's tax status. As providers of services under Part A of the Medicare Act,1 the hospitals were reimbursed monthly by a fiscal intermediary of the Department of Health and Human Services for that portion of the post-consolidation FICA payments attributable to Medicare patients.2

The intermediary's payments would typically be the last act in a routine Medicare reimbursement--except for an end-of-the-year cost adjustment--but a complication arose. The Internal Revenue Service informed the providers in 1972 or 1973 that they had not automatically acceded to their predecessors' FICA tax status and that their post-consolidation Social Security payments were therefore subject to refund with interest.3 The providers retroactively waived this exemption, but under IRS regulations each employee was extended the option of adopting Social Security coverage for this period or receiving a refund of the taxes withheld on their behalf. A number of employees exercised the latter option. For each employee requesting a refund the hospital was reimbursed with interest the employer's share of the previously paid tax.4

In the course of its annual review of the provider's costs in 1976 and 1977 the Secretary's fiscal intermediary examined the status of these reimbursements.5 In its Notice of Program Reimbursement to each of the plaintiffs the intermediary determined that (1) the portion of refunded FICA taxes previously reimbursed to the providers by the Medicare program must be offset against the providers' reimbursable costs in the year the refund was received and (2) the interest earned on the Medicare portion of the refund constitutes "investment income" which must be offset against the providers' reimbursable interest expense. 42 C.F.R. Sec. 405.419(b)(2)(iii).

The providers challenged the intermediary's determination before the Provider Reimbursement Review Board (PRRB). See 42 U.S.C. Sec. 139500(a); 42 C.F.R. Sec. 405.1835. After a hearing in March of 1977, the PRRB issued its decision6 affirming the substance of the intermediary's notice to the providers. First, the Board agreed that the refund of FICA taxes should offset the providers' reimbursable costs in the year received, though it modified the intermediary's cost adjustment to reflect actual Medicare use in the year the taxes were paid.7 Second, the Board agreed that interest earned on the refunded taxes should reduce the providers' interest expense claim.

The PRRB affirmed this second ruling while acknowledging that the intermediary was mistaken in characterizing the FICA interest as "investment income" subject to offset under 42 C.F.R. Sec. 405.419(b)(2)(iii). The Board held the interest on FICA taxes was neither specifically included nor "specifically excluded from the offset requirement" in Sec. 405.419. PRRB Dec. at 13. Concluding that the Medicare regulations were silent on the treatment of the interest, the PRRB held that the interest offset was consistent with the Medicare program's statutory policy of paying only for a provider's net costs. 42 U.S.C. Sec. 1395x(v)(1)(A). Since the interest income reduced the provider's costs the Board decided an offset against interest expense was appropriate. The Board stressed that the interest was "wind-fall" income on monies provided by the Medicare program and therefore equity required that it be offset against any amount owed the providers.

The Secretary of Health and Human Services declined to modify or reverse the PRRB's ruling within 60 days; it therefore constitutes the agency's final decision. 42 U.S.C. Sec. 1395oo (f)(1).

The providers sought review of the PRRB's decision in federal district court. See 5 U.S.C. Sec. 701; 42 U.S.C. Sec. 1395oo (f)(1). On appeal the hospitals acknowledged the propriety of offsetting the FICA tax refund against reimbursable costs in the year received, but challenged the Board's affirmance of the interest offset.8 The district court designated a United States Magistrate to conduct hearings and submit proposed findings of fact and recommendations for disposition of the case. 28 U.S.C. Sec. 636(b)(1)(B). After considering cross-motions for summary judgment, the Magistrate recommended that the plaintiffs' motion be granted.

The Magistrate concluded that the Board's affirmance of the interest offset was contrary to Medicare regulations. Specifically the Magistrate pointed to Sec. 405.419(a) which provides that "necessary and proper interest on both current and capital indebtedness is an allowable cost." 42 C.F.R. Sec. 405.419(a). Noting that Sec. 405.419 expressly requires the reduction of interest expense by investment income, 42 C.F.R. Sec. 405(b)(2)(iii), the Magistrate reasoned that no other interest income may reduce a provider's interest expense. The interest offset also struck the Magistrate as contrary to the Medicare regulation on provider reimbursements, 42 C.F.R. Sec. 405.454(1), which he asserted contemplates that no interest be charged on the over- or under-payment of Medicare costs. Cf. Reimbursement Manual, Part I Sec. 2409. The Magistrate emphasized that his recommendation to grant the plaintiffs' motion for summary judgment was based on the view that the regulations were part of the contractual arrangement between the parties alterable only by formal rule-making procedures, and even then to be accorded only prospective effect.

The district court adopted the recommendations of the Magistrate. The court stated that the accepted rules of statutory construction require that Sec. 405.419 be read to preclude the offset of interest expense by other than investment income. The court also noted that the underlying purpose of the investment income offset--to reduce a provider's incentive to divert Medicare funds from operational costs to investment opportunities--had no bearing on the treatment of the FICA interest earned on a good faith over-payment. Finally, the court agreed that an interest offset was inconsistent with "the clear statutory policy of not requiring interest payments on either over- or under-payments of Medicare funds." District Court Opinion at 4. The court entered an order granting the plaintiffs' motion for summary judgment on November 3, 1981. The Secretary appeals from judgment accordingly entered.

An administrative agency's interpretation of its own regulation merits considerable respect by a reviewing court, and will be controlling absent a showing "that it is plainly erroneous or inconsistent with the regulation." Cheshire Hosp. v. N.H.-VT. Hosp. Service, 689 F.2d 1112, 1117 (1st Cir.1982); Medical Center of Independence v. Harris, 628 F.2d 1113, 1117 (8th Cir.1980). See also 1A Sutherland Statutory Construction Sec. 31.06, at 362 (4th ed. 1973). Such deference is especially applicable to areas like Medicare reimbursements that require judgments about appropriate cost accounting practices. Cheshire Hosp., 689 F.2d at 1117 (citing Hospital San Jorge v. Secretary of Health, Ed., 616 F.2d 580, 589 (1st Cir.1980) (Campbell, J. concurring). Cf. Bright v. Ball Memorial Hospital Ass'n, Inc., 616 F.2d 328, 33 n. 1 (7th Cir.1980); 1A Sutherland Statutory Construction Sec. 31.06, at 362 n. 6 (Supp.1982).

The district court acknowledged the substantial deference due the Board's conclusion that its enabling statute and regulations warranted the interest income offset, but held the Board's determination to be inconsistent with the language and policy of Medicare regulations. The disposition of this appeal turns on the same issue: is the reduction of the providers' interest expense by the interest income earned on the FICA refund inconsistent with the terms or the underlying policy of the Medicare regulations.

The Secretary asserts that the regulations are simply silent as to the treatment of interest refunded in circumstances not a part of the ordinary course of business; and that, in such a case, the PRRB properly relied upon the basic principle that a Medicare provider should be reimbursed only its reasonable costs. 42 U.S.C. Sec. 1395x(v)(1)(A). The plaintiffs argue, however, that the offset is inconsistent both with regard to the specific terms of 42 C.F.R. Sec. 405.419 and with the underlying policies of provider reimbursement regulations generally. We examine each of the plaintiffs' contentions in turn.

The principal section relied on by the plaintiffs to establish a regulatory limit on the Board's power to offset the refunded interest is 42 C.F.R. Sec. 405.419. Section 405.419 provides in relevant part:

Sec. 405.419 Interest expense.

(a) Principle. Necessary and proper interest on both current and capital indebtedness is an allowable cost....

(b) Definitions

....

(2) Necessary. Necessary requires that the interest:

(i) Be incurred on a loan made to satisfy a financial need of the provider. Loans which result in excess funds or investments would not be considered necessary.

(ii) Be incurred on a loan made for purpose reasonably related to patient care.

(iii) Be reduced by investment income except where such income is from gifts and grants, whether restricted or unrestricted, and which are held separate and not commingled with other funds. Income from funded depreciation or provider's qualified pension fund is not used to reduce interest expense. Interest received as a result of judicial review by a Federal court (as described in Sec. 405.454(1)) is not used to reduce interest expense.

(Emphasis in original.)

Section 405.419 expressly requires that a provider's interest expense be offset by a single form of interest income: investment income. Therefore, plaintiffs argue, the plain meaning of Sec. 450.419 and application of the statutory maxim expressio unius est exclusio alterius indicate that investment income is the only type of interest income for which an offset is permitted.

Even ignoring the substantial deference due the Secretary's own interpretation of its regulation, we are uncomfortable with the providers' construction of Sec. 405.419. Their suggestion that a conclusive interpretation of the section can be obtained by examining its "plain meaning" does not quiet our discomfort. The plain meaning approach to statutory construction "uses as its guide the language of the statute when read in context." R. Dickerson, The Interpretation and Application of Statutes 190 (1975). The express language of Sec. 405.419 does not indicate that interest income is subject to only one form of offset. The first sentence of Sec. 405.419(b)(2)(iii), which plaintiffs rely upon here, states that interest expense will not be deemed "necessary" unless reduced by investment income; it does not expressly state that this is the single allowable offset.

Nor is the language of this express offset any more restrictive when viewed in the context of the section as a whole. Section 405.419 merely advances a Medicare accounting principle: a provider is allowed to claim all necessary and proper interest expense incurred on current and capital indebtedness. The remainder of regulation is devoted to giving some substance to this principle. For example, the second sentence of Sec. 405.419(b)(2)(iii) provides that income from a provider's funded depreciation or pension fund does not reduce interest expense. As with the first sentence, the express terms of this proviso do not exclude the possibility of other excepted income. Certainly the plaintiffs would not have us read this sentence to mean that income from all other sources must be offset against interest expense--since this would include the interest earned on the FICA tax refund. Viewed in context, the regulation's references to specific forms of includable and excludable interest income suggest the general contours of a relatively undefined accounting principle, rather than delineate its precise limits.

The providers' invocation of the Latin maxim expressio unius est exclusio alterius is equally unhelpful. The reliability of this maxim as a tool for statutory interpretation is open to question. See R. Dickerson, supra, at 234 ("it is simply not true, generally, that the mere express conferral of a right or privilege in one kind of situation implies the denial of the equivalent right or privilege in other kinds"). Whatever its general value, its specific application "is premised on the assumption that the legislature considered and rejected all factors not listed." Tri-State Terminals, Inc. v. Jesse, 596 F.2d 752, 755 n. 2 (7th Cir.1979). The maxim therefore requires that we return to the context of the regulation and the circumstances of our particular case to determine the validity of this presumption. R. Dickerson, supra, at 234-35. Having already observed that Sec. 405.419 was probably not drafted with exhaustiveness in mind, and noting that the exceptional facts of this appeal were not likely to be anticipated in any event, we again conclude that the regulation need not be read to preclude other forms of interest income offsets.

The plaintiffs' application of the rules of statutory construction to Sec. 405.419 fail to persuade us that the regulation must be read as permitting but one form of interest income offset against a provider's interest expense.9 At best, their treatment suggests that the section's applicability to the interest earned on the FICA refund is unclear. This of course is the interpretation urged by the Secretary. "Since this interpretation is not plainly inconsistent with the wording of the regulations, we accept the Government's reading of those regulations as correct." United States v. Larionoff, 431 U.S. 864, 872-73, 97 S. Ct. 2150, 2155-56, 53 L. Ed. 2d 48 (1977).

While we are satisfied that no Medicare regulation expressly prohibits the FICA interest offset, our inquiry is not at an end. There remains a question as to whether the Secretary's treatment of the FICA interest is consistent with the policies inherent in its enabling statute and promulgated regulations.

There is no question that an agency is authorized to carry out its statutory duty through the adjudication of an individual dispute even in the absence of specific regulations. Matter of Keokuk Steel Castings, 638 F.2d 42, 44-45 (8th Cir.1981); Cf. 2 K. Davis, Administrative Law Treatise Sec. 7:27, at 148-49 (1979). In this case the Secretary is statutorily charged with the broad duty of providing medical care to those eligible under the Medicare Act, including paying private providers their reasonable costs. 42 U.S.C. Sec. 1395f(b)(1). This duty necessarily requires the Secretary to make decisions about which of the provider's costs are reasonable.

Nevertheless, PRRB's ad hoc resolution of the current dispute was bound by the underlying policies of its governing statute and its own regulations. Doraiswamy v. Secretary of Labor, 555 F.2d 832, 843 (D.C.Cir.1976). Cf. 2 K. Davis, Administrative Law Treatise Sec. 7:27, at 151-52 (1979) (absent a reasoned explanation for departure, agency's ad hoc decision must be consistent with past policy). The Secretary persuasively argues that its interest income offset was in keeping with the precept underlying 42 U.S.C. Sec. 1395x(v)(1)(A). That statute states in relevant part:

The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items be included, in determining such costs....

This statute constrains the Secretary to reimburse a provider for only those costs actually incurred in providing services. The Secretary argues that since the interest refunded along with the FICA taxes was earned on monies originally paid by the Medicare program, it must be applied to reduce the costs of providing services to Medicare patients.

Absent any conflicting statutory or regulatory purposes, the Secretary's conclusion does not strike us as arbitrary, capricious or in excess of statutory jurisdiction. See Medical Center of Independence v. Harris, 628 F.2d 1113, 1117 (8th Cir.1980). The providers argue, however, that the policies underlying two Medicare regulations run contrary to the Secretary's interpretation and require disallowance of the offset.

(1) 42 C.F.R. Sec. 405.419(b)(2)(iii)

Independent of the question of whether 42 C.F.R. Sec. 405.419 by its terms precludes the offset of a provider's interest expense by other than investment income, the plaintiffs argue that other reductions in interest expense must be consistent with the policies which gave rise to the regulation's express offset in subsection 405.419(b)(2)(iii). As an initial matter, we are uncertain why another offset could not be justified on different policy grounds from those advanced to justify an investment income reduction; we need not address this issue, however, since we are confident that the FICA interest reduction is consistent with the policies giving rise to the investment income offset.

The plaintiffs assert in their brief that the interest income offset was promulgated for the single purpose of discouraging the diversion of Medicare funds to income producing activities unrelated to patient care. Since neither party asserts that such a diversion occurred here, they would argue that the purpose of the regulation would not be furthered by allowing any additional offsets.

This argument was recently rejected by the First Circuit. Cheshire Hosp. v. N.H.-VT. Hosp. Service, 689 F.2d 1112 (1st Cir.1982). In Cheshire a Medicare provider sought review of the PRRB's determination that interest income earned on a Debt Service Reserve Fund (DSRF) was investment income within the meaning of Sec. 405.419(b)(2)(iii). The Secretary contended there that "the purpose of the offset rule is not just to deter excess borrowing.... [T]he offset rule serves the additional purpose of insuring that providers are reimbursed only for those costs which they actually incur, and application of the offset rule to Cheshire 's DSRF is fully consistent with this second purpose of the regulation." 689 F.2d at 1119. The First Circuit found the Secretary's argument wholly consistent with the general purposes of the Medicare Act. Citing 42 U.S.C. Sec. 1395x(v)(1)(A), the court concluded that "[s]uch a determination clearly serves the purpose of the Medicare Act which limits reimbursement to costs actually incurred by the provider." Id. Since the FICA interest reduction serves the same purpose, we think it, too, is consistent with the policies underlying the investment income offset and the Act generally.10

(2) 42 C.F.R. Sec. 405.454(f)(3)

Under the Medicare Act, the fiscal intermediary advances a provider funds periodically to cover its estimated expenses. The intermediary makes retroactive adjustments of these payments at the end of a provider's fiscal year to reflect actual costs. See United States v. Gravette Manor Homes, 642 F.2d 231, 233 (8th Cir.1981); nn. 2, 5 supra. The calculation of these over- or under-payments is made according to 42 C.F.R. Sec. 405.454(f)(3). That regulation expressly requires that the provider return the amount of the over-payment, but makes no provision for the payment of the time value of the money; the regulation similarly requires the Government to pay for any under-payment, without reference to interest. Both parties agree that it had become the custom under Sec. 405.454(f)(3) not to charge interest on retroactive adjustments made by the fiscal intermediary at the end of each fiscal year.11 The providers argue that requiring them to pay interest on their over-payment of FICA taxes was inconsistent with this longstanding practice.12

Whatever merit this policy may have had, it has no obvious application to this dispute. This was not a case where the Secretary charged a provider for the theoretical time value of the money received on an over-payment; this dispute is over interest actually received on monies paid by the Medicare program. The interest was earned because the use of the money was enjoyed by someone else, not the provider. This is also not a case where the error in over-payment was resolved in the few months before the next annual fiscal review, or that was likely to be partially offset by an under-payment of some other expense over the same period; the FICA refund was a one time error that took nearly three years to be discovered. While we concede that the agency's policy of ignoring the time value of money on short term under- or over-payments might have had some practical accounting advantage, we do not find the Secretary's departure from the practice in the case of a one time wind-fall to be arbitrary or capricious.

The plaintiffs finally contend that we should hesitate to sustain the agency's retroactive determination of offset because a contractual relationship exists between the Secretary and a provider. We disagree. We have already concluded that the Secretary's determination--to offset the FICA interest against the provider's interest expense--was a reasonable result given the regulatory silence on the issue. The determination's retroactive effect strikes us as no more unsettling than a court's interpretation of an ambiguous clause in a contract.13

The FICA interest offset merely recoups to the Secretary income earned on Medicare payments and insures that the providers receive reimbursement for no more than their reasonable costs. By contrast the plaintiffs here seek to benefit by a gap in the Secretary's regulatory scheme. The FICA refund and its accompanying interest was an unforeseen result of their own mistaken over-payment; the plaintiffs can hardly claim that they relied upon any right to retain this wind-fall. In fact, the plaintiffs concede that they never doubted their obligation to offset the refunded principal against their reimbursable costs.

Under these circumstances, the judgment of the district court, invalidating the offset of interest income earned on the FICA tax refund against the providers' interest expense, is reversed and the case remanded for the entry of judgment affirming the Secretary.

REVERSED AND REMANDED.