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NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports.  Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash-
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SUPREME COURT OF THE UNITED STATES
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No. 93-1251
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DONNA E. SHALALA, SECRETARY OF HEALTH
AND HUMAN SERVICES, PETITIONER v.
GUERNSEY MEMORIAL HOSPITAL
on writ of certiorari to the united states court
of appeals for the sixth circuit
[March 6, 1995]

  Justice Kennedy delivered the opinion of the Court.
  In this case a health care provider challenges a Medi-
care reimbursement determination by the Secretary of
Health and Human Services.  What begins as a rather
conventional accounting problem raises significant
questions respecting the interpretation of the Secretary's
regulations and her authority to resolve certain reim-
bursement issues by adjudication and interpretive rules,
rather than by regulations that address all accounting
questions in precise detail.
  The particular dispute concerns whether the Medicare
regulations require reimbursement according to generally
accepted accounting principles (GAAP), and whether the
reimbursement guideline the Secretary relied upon is
invalid because she did not follow the notice-and-com-
ment provisions of the Administrative Procedure Act in
issuing it.  We hold that the Secretary's regulations do
not require reimbursement according to GAAP and that
her guideline is a valid interpretive rule.

                            I
  Respondent Guernsey Memorial Hospital issued bonds
in 1972 and 1982 to fund capital improvements.  In
1985, the Hospital refinanced its bonded debt by issuing
new bonds.  Although the refinancing will result in an
estimated $12 million saving in debt service costs, the
transaction did result in an accounting loss, sometimes
referred to as an advance refunding or defeasance loss,
of $672,581.  The Hospital determined that it was
entitled to Medicare reimbursement for about $314,000
of the loss.  The total allowable amount of the loss is
not in issue, but its timing is.  The Hospital contends it
is entitled to full reimbursement in one year, the year
of the refinancing; the Secretary contends the loss must
be amortized over the life of the old bonds.
  The Secretary's position is in accord with an informal
Medicare reimbursement guideline.  See U. S. Dept. of
Health and Human Services, Medicare Provider Reim-
bursement Manual 233 (Mar. 1993) (PRM).  PRM 233
does not purport to be a regulation and has not been
adopted pursuant to the notice-and-comment procedures
of the Administrative Procedure Act.  The fiscal interme-
diary relied on 233 and determined that the loss had
to be amortized.  The Provider Reimbursement Review
Board disagreed, see App. to Pet. for Cert. 54a, but the
Administrator of the Health Care Financing Administra-
tion reversed the Board's decision, see id., at 40a.  In
the District Court the Secretary's position was sustained,
see Guernsey Memorial Hospital v. Sullivan, 796
F. Supp. 283 (SD Ohio 1992), but the Court of Appeals
reversed, see Guernsey Memorial Hospital v. Secretary of
HHS, 996 F. 2d 830 (CA6 1993).  In agreement with the
Hospital, the court interpreted the Secretary's own
regulations to contain a -flat statement that generally
accepted accounting principles `are followed'- in deter-
mining Medicare reimbursements.  Id., at 833 (quoting
42 CFR 413.20(a)).  Although it was willing to accept
the argument that PRM 233's treatment of advance
refunding losses -squares with economic reality,- 996
F. 2d, at 834, the Court of Appeals concluded that,
because PRM 233 departed from GAAP, it -effects a
substantive change in the regulations [and is] void by
reason of the agency's failure to comply with the
Administrative Procedure Act in adopting it.-  Id., at
832.  Once the court ruled that GAAP controlled the
timing of the accrual, it followed that the Hospital, not
the Secretary, was correct and that the entire loss
should be recognized in the year of refinancing.
  We granted certiorari, 511 U. S. ___ (1994), and now
reverse.

                           II
  Under the Medicare reimbursement scheme at issue
here, participating hospitals furnish services to program
beneficiaries and are reimbursed by the Secretary
through fiscal intermediaries.  See 42 U. S. C. 1395g
and 1395h (1988 and Supp. V).  Hospitals are reim-
bursed for -reasonable costs,- defined by the statute as
-the cost actually incurred, excluding therefrom any part
of incurred cost found to be unnecessary in the efficient
delivery of needed health services.-  1395x(v)(1)(A).
The Medicare statute authorizes the Secretary to
promulgate regulations -establishing the method or
methods to be used- for determining reasonable costs,
directing her in the process to -consider, among other
things, the principles generally applied by national
organizations or established prepayment organizations
(which have developed such principles) in computing-
reimbursement amounts.  Ibid.
  The Secretary has promulgated, and updated on an
annual basis, regulations establishing the methods for
determining reasonable cost reimbursement.  See Good
Samaritan Hospital v. Shalala, 508 U. S. ___, ___ (1993)
(slip op., at 2).  The relevant provisions can be found
within 42 CFR pt. 413 (1993).  Respondent contends
that two of these regulations, 413.20(a) and 413.24,
mandate reimbursement according to GAAP, and the
Secretary counters that neither does.

                            A
  Section 413.20(a) provides as follows:
      -The principles of cost reimbursement require that
providers maintain sufficient financial records and
statistical data for proper determination of costs
payable under the program.  Standardized defini-
tions, accounting, statistics, and reporting practices
that are widely accepted in the hospital and related
fields are followed.  Changes in these practices and
systems will not be required in order to determine
costs payable under the principles of reimbursement.
Essentially the methods of determining costs payable
under Medicare involve making use of data available
from the institution's basis accounts, as usually
maintained, to arrive at equitable and proper
payment for services to beneficiaries.-
  Assuming, arguendo, that the -[s]tandardized defini-
tions, accounting, statistics, and reporting practices-
referred to by the regulation refer to GAAP, that
nevertheless is just the beginning, not the end, of the
inquiry.  The decisive question still remains: Who is it
that -follow[s]- GAAP, and for what purposes?  The
Secretary's view is that 413.20(a) ensures the existence
of adequate provider records but does not dictate her
own reimbursement determinations.  We are persuaded
that the Secretary's reading is correct.
  Section 413.20(a) sets forth its directives in an ordered
progression.  The first sentence directs that providers
must maintain records that are sufficient for proper
determination of costs.  It does not say the records are
conclusive of the entire reimbursement process.  The
second sentence makes it clear to providers that stand-
ardized accounting practices are followed.  The third
sentence reassures providers that changes in their
recordkeeping practices and systems are not required in
order to determine what costs the provider can recover
when principles of reimbursement are applied to the
provider's raw cost data.  That sentence makes a
distinction between recordkeeping practices and systems
on one hand and principles of reimbursement on the
other.  The last sentence confirms the distinction, for it
contemplates that a provider's basic financial information
is organized according to GAAP as a beginning point
from which the Secretary -arrive[s] at equitable and
proper payment for services.-  This is far different from
saying that GAAP is by definition an equitable and
proper measure of reimbursement.
  The essential distinction between recordkeeping
requirements and reimbursement principles is confirmed
by the organization of the regulations in 42 CFR pt. 413
(1993).  Subpart A sets forth introductory principles.
Subpart B, containing the regulation here in question, is
entitled -Accounting Records and Reports.-  The logical
conclusion is that the provisions in Subpart B concern
recordkeeping requirements rather than reimbursement,
and closer inspection reveals this to be the case.
413.20 is the first section in Subpart B, and is entitled
-Financial data and reports.-  In addition to 413.20(a),
the other paragraphs in 413.20 govern the -[f]requency
of cost reports,- -[r]ecordkeeping requirements for new
providers,- -[c]ontinuing provider recordkeeping require-
ments,- and -[s]uspension of program payments to a
provider . . . [who] does not maintain . . . adequate
records.-  Not until the following Subparts are cost
reimbursement matters considered.  Subpart C is
entitled -Limits on Cost Reimbursement,- Subpart D
-Apportionment [of allowable costs],- Subpart E -Pay-
ment to Providers,- and Subparts F through H address
reimbursement of particular cost categories.  The logical
sequence of a regulation or a Part of it can be signifi-
cant in interpreting its meaning.
  It is true, as the Court of Appeals said, that
413.20(a) -does not exist in a vacuum- but rather is a
part of the overall Medicare reimbursement scheme.
996 F. 2d at 835.  But it does not follow from the fact
that a provider's cost accounting is the first step toward
reimbursement that it is the only step.  It is hardly
surprising that the reimbursement process begins with
certain recordkeeping requirements.
  The regulations' description of the fiscal intermediary's
role underscores this interpretation.  The regulations
direct the intermediary to consult and assist providers
in interpreting and applying the principles of Medicare
reimbursement to generate claims for reimbursable costs,
413.20(b), suggesting that a provider's own determina-
tion of its claims involves more than handing over its
existing cost reports.  The regulations permit initial
acceptance of reimbursable cost claims, unless there are
obvious errors or inconsistencies, in order to expedite
payment.  413.64(f)(2).  When a subsequent, more
thorough audit follows, it may establish that adjust-
ments are necessary.  Ibid.; see also 421.100(a), (c).
This sequence as well is consistent with the Secretary's
view that a provider's cost accounting systems are only
the first step in the ultimate determination of reimburs-
able costs.
  The Secretary's position that 413.20(a) does not bind
her to reimburse according to GAAP is supported by the
regulation's text and the overall structure of the regula-
tions.  It is a reasonable regulatory interpretation, and
we must defer to it.  Thomas Jefferson Univ. v. Shalala,
512 U. S. ___, ___ (1994) (slip op., at 7-8); see also
Martin v. Occupational Safety and Health Review
Comm'n, 499 U. S. 144, 151 (1991) (-Because applying
an agency's regulation to complex or changing circum-
stances calls upon the agency's unique expertise and
policymaking prerogatives, we presume that the power
authoritatively to interpret its own regulations is a
component of the agency's delegated lawmaking powers-);
Lyng v. Payne, 476 U. S. 926, 939 (1986) (-agency's
construction of its own regulations is entitled to substan-
tial deference-).
  Respondent argues that, even if 413.20(a) does not
mandate reimbursement according to GAAP, 413.24
does.  This contention need not detain us long.  Section
413.24 requires that a provider's cost data be based on
the accrual basis of accounting, under which -revenue is
reported in the period when it is earned, regardless of
when it is collected, and expenses are reported in the
period in which they are incurred, regardless of when
they are paid.-  413.24(b)(2).  But GAAP is not the only
form of accrual accounting; in fact, both the GAAP
approach and PRM 233 reflect different methods of
accrual accounting.  See Accounting Principles Board
(APB) Opinion No. 26, --5-8, reprinted at App. 64-66
(describing alternative accrual methods of recognizing
advance refunding losses, including the one adopted in
PRM 233).  Section 413.24 does not, simply by its
accrual accounting requirement, bind the Secretary to
make reimbursements according to GAAP.

                            B
  The Secretary's reading of her regulations is consistent
with the Medicare statute.  Rather than requiring
adherence to GAAP, the statute merely instructs the
Secretary, in establishing the methods for determining
reimbursable costs, to -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 providers of services.-  42 U. S. C.
1395x(v)(1)(A).
  Nor is there any basis for suggesting that the Secre-
tary has a statutory duty to promulgate regulations that,
either by default rule or by specification, address every
conceivable question in the process of determining
equitable reimbursement.  To the extent the Medicare
statute's broad delegation of authority imposes a rule-
making obligation, see 42 U. S. C. 1395x(v)(1)(A), it is
one the Secretary has without doubt discharged.  See
Good Samaritan Hospital v. Shalala, 508 U. S., at ___
and n. 13, ___ (slip op., at 15 and n. 13, 16).  The
Secretary has issued regulations to address a wide range
of reimbursement questions.  The regulations are
comprehensive and intricate in detail, addressing
matters such as limits on cost reimbursement, apportion-
ing costs to Medicare services, and the specific treatment
of numerous particular costs.  As of 1993, these regula-
tions consumed some 620 pages of the Code of Federal
Regulations.
  As to particular reimbursement details not addressed
by her regulations, the Secretary relies upon an elabo-
rate adjudicative structure which includes the right to
review by the Provider Reimbursement Review Board,
and, in some instances, the Secretary, as well as judicial
review in federal district court of final agency action.
42 U. S. C. 1395oo(f)(1); see Bethesda Hospital Assn. v.
Bowen, 485 U. S. 399, 400-401 (1988).  That her
regulations do not resolve the specific timing question
before us in a conclusive way, or -could use a more
exact mode of calculating,- does not, of course, render
them invalid, for the -methods for the estimation of
reasonable costs- required by the statute only need be
-generalizations [that] necessarily will fail to yield exact
numbers.-  Good Samaritan, supra, at ___ (slip op., at
15-16).  The APA does not require that all the specific
applications of a rule evolve by further, more precise
rules rather than by adjudication.  See NLRB v. Bell
Aerospace Co., 416 U. S. 267 (1974); SEC v. Chenery
Corp., 332  U. S. 194 (1947).  The Secretary's mode of
determining benefits by both rulemaking and adjudica-
tion is, in our view, a proper exercise of her statutory
mandate.

                           III
  We also believe it was proper for the Secretary to
issue a guideline or interpretive rule in determining that
defeasance losses should be amortized.  PRM 233 is the
means to ensure that capital-related costs allowable
under the regulations are reimbursed in a manner
consistent with the statute's mandate that the program
bear neither more nor less than its fair share of costs.
42 U. S. C. 1395x(v)(1)(A)(i) (-[T]he necessary costs of
efficiently delivering covered services to individuals
covered by [Medicare] will not be borne by individuals
not so covered, and the costs with respect to individuals
not so covered will not be borne by [Medicare]-).  The
Secretary has promulgated regulations authorizing
reimbursement of capital-related costs such as respond-
ent's that are -appropriate and helpful in . . . maintain-
ing the operation of patient care facilities,- 42 CFR
413.9(b)(2) (1993); see generally 413.130-413.157,
including -[n]ecessary and proper interest- and other
costs associated with capital indebtedness, 413.153(a)(1);
see also 413.130(a)(7) and (g).  The only question
unaddressed by the otherwise comprehensive regulations
on this particular subject is whether the loss should be
recognized at once or spread over a period of years.  It
is at this step that PRM 233 directs amortization.
  Although one-time recognition in the initial year might
be the better approach where the question is how best
to portray a loss so that investors can appreciate in full
a company's financial position, see APB Opinion 26,
--4-5, reprinted at App. 64, the Secretary has deter-
mined in PRM 233 that amortization is appropriate to
ensure that Medicare only reimburse its fair share.  The
Secretary must calculate how much of a provider's total
allowable costs are attributable to Medicare services, see
42 CFR 413.5(a), 413.9(a) and (c)(3) (1993), which
entails calculating what proportion of the provider's
services were delivered to Medicare patients, 413.50
and 413.53.  This ratio is referred to as the provider's
-Medicare utilization.-  App. to Pet. for Cert. 49a.  In
allocating a provider's total allowable costs to Medicare,
the Secretary must guard against various contingencies.
The percentage of a hospital's patients covered by
Medicare may change from year to year; or the provider
may drop from the Medicare program altogether.  Either
will cause the hospital's Medicare utilization to fluctuate.
Given the undoubted fact that Medicare utilization will
not be an annual constant, the Secretary must strive
to assure that costs associated with patient services pro-
vided over time be spread, to avoid distortions in reim-
bursement.  As the provider's yearly Medicare utilization
becomes ascertainable, the Secretary is able to allocate
costs with accuracy and the program can bear its
proportionate share.  Proper reimbursement requires
proper timing.  Should the Secretary reimburse in one
year costs in fact attributable to a span of years, the
reimbursement will be determined by the provider's
Medicare utilization for that one year, not for later
years.  This leads to distortion.  If the provider's
utilization rate changes or if the provider drops from the
program altogether the Secretary will have reimbursed
up front an amount other than that attributable to
Medicare services.  The result would be cross-subsidi-
zation, id., at 50a, which the Act forbids.  42 U. S. C.
1395x(v)(1)(A)(i).
  That PRM 233 implements the statutory ban on
cross-subsidization in a reasonable way is illustrated by
the Administrator's application of 233 to the facts of
this case.  The Administrator found that respondent's
loss -did not relate exclusively to patient care services
rendered in the year of the loss . . . . [but were] more
closely related to [patient care services in] the years
over which the original bond term extended.-  App. to
Pet. for Cert. 49a.  Because the loss was associated with
patient services over a period of time, the Administrator
concluded that amortization was required to avoid the
statutory ban on cross-subsidization:
-The statutory prohibition against cross-subsidization
[citing the provision codified at 42 U. S. C.
1395x(v)(1)(A)], requires that costs recognized in
one year, but attributable to health services ren-
dered over a number of years, be amortized and
reimbursed during those years when Medicare
beneficiaries use those services.-  Id., at 50a (foot-
note omitted).
-By amortizing the loss to match it to Medicare
utilization over the years to which it relates, the
program is protected from any drop in Medicare
utilization, and the provider is likewise assured that
it will be adequately reimbursed if Medicare utiliza-
tion increases.  Further, the program is protected
from making a payment attributable to future years
and then having the provider drop out of the
Program before services are rendered to Medicare
beneficiaries in those future years.-  Id., at 49a
(footnote omitted).
  As an application of the statutory ban on cross-
subsidization and the regulatory requirement that only
the actual cost of services rendered to beneficiaries
during a given year be reimbursed, 42 U. S. C.
1395x(v)(1)(A)(i); 42 CFR 413.9 (1993), PRM 233 is a
prototypical example of an interpretive rule -`issued by
an agency to advise the public of the agency's construc-
tion of the statutes and rules which it administers.'-
Chrysler Corp. v. Brown, 441 U. S. 281, 302, n. 31
(1979) (quoting the Attorney General's Manual on the
Administrative Procedure Act 30, n. 3 (1947)).  Interpre-
tive rules do not require notice-and-comment, although,
as the Secretary recognizes, see Foreword to the PRM,
they also do not have the force and effect of law and are
not accorded that weight in the adjudicatory process,
ibid.
  We can agree that APA rulemaking would still be
required if PRM 233 adopted a new position inconsis-
tent with any of the Secretary's existing regulations.  As
set forth in Part II, however, her regulations do not
require reimbursement according to GAAP.  PRM 233
does not, as the Court of Appeals concluded it does,
-effect[] a substantive change in the regulations.-  996
F. 2d, at 832.

                           IV
  There is much irony in the suggestion, made in
support of the Hospital's interpretation of the statute
and regulations, that the Secretary has bound herself to
delegate the determination of any matter not specifically
addressed by the regulations to the conventions of fi-
nancial accounting that comprise GAAP.  The Secretary
in effect would be imposing upon herself a duty to go
through the time-consuming rulemaking process whenever
she disagrees with any announcements or changes in
GAAP and wishes to depart from them.  Examining the
nature and objectives of GAAP illustrates the unlikeli-
hood that the Secretary would choose that course.
  Contrary to the Secretary's mandate to match reim-
bursement with Medicare services, which requires her to
determine with some certainty just when and on whose
account costs are incurred, GAAP -do[es] not necessarily
parallel economic reality.-  R. Kay & D. Searfoss,
Handbook of Accounting and Auditing, ch. 5, p. 7 (2d ed.
1989).  Financial accounting is not a science.  It ad-
dresses many questions as to which the answers are
uncertain, and is a -process [that] involves continuous
judgments and estimates.-  Id., at ch. 5, pp. 7-8.  In
guiding these judgments and estimates, -financial ac-
counting has as its foundation the principle of con-
servatism, with its corollary that `possible errors in
measurement [should] be in the direction of understate-
ment rather than overstatement of net income and net
assets.'-  Thor Power Tool Co. v. Commissioner, 439
U. S. 522, 542 (1979) (citation omitted).  This orientation
may be consistent with the objective of informing
investors, but it ill-serves the needs of Medicare reim-
bursement and its mandate to avoid cross-subsidization.
Cf. id., at 543 (-[T]he accountant's conservatism cannot
bind the Commissioner [of the IRS] in his efforts to
collect taxes-).
  GAAP is not the lucid or encyclopedic set of pre-exist-
ing rules that the dissent might perceive it to be.  Far
from a single-source accounting rulebook, GAAP -encom-
passes the conventions, rules, and procedures that define
accepted accounting practice at a particular point in
time.-  Kay & Searfoss, at ch. 5, p. 7 (1994 Update).
GAAP changes and, even at any one point, is often
indeterminate.  -[T]he determination that a particular
accounting principle is generally accepted may be
difficult because no single source exists for all princi-
ples.-  Ibid.  There are 19 different GAAP sources, any
number of which might present conflicting treatments of
a particular accounting question.  Id., at ch. 5, pp. 6-7.
When such conflicts arise, the accountant is directed to
consult an elaborate hierarchy of GAAP sources to
determine which treatment to follow.  Ibid.  We think it
is a rather extraordinary proposition that the Secretary
has consigned herself to this process in addressing the
timing of Medicare reimbursement.
  The framework followed in this case is a sensible
structure for the complex Medicare reimbursement
process.  The Secretary has promulgated regulations
setting forth the basic principles and methods of reim-
bursement, and has issued interpretive rules such as
PRM 233 that advise providers how she will apply the
Medicare statute and regulations in adjudicating particu-
lar reimbursement claims.  Because the Secretary's
regulations do not bind her to make Medicare reimburse-
ments in accordance with GAAP, her determination in
PRM 233 to depart from GAAP by requiring bond
defeasance losses to be amortized does not amount to a
substantive change to the regulations.  It is a valid
interpretive rule, and it was reasonable for the Secretary
to follow that policy here to deny respondent's claim for
full reimbursement of its defeasance loss in 1985.
  The judgment of the Court of Appeals is reversed.

It is so ordered.