Cite as: 514 U. S. 87 (1995)
O'Connor, J., dissenting
unlawful and set aside" an agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U. S. C. § 706(2)(A). We must give substantial deference to an agency's interpretation of its own regulations, Lyng v. Payne, 476 U. S. 926, 939 (1986), but an agency's interpretation cannot be sustained if it is " 'plainly erroneous or inconsistent with the regulation.' " Stinson v. United States, 508 U. S. 36, 45 (1993) (quoting Bowles v. Seminole Rock & Sand Co., 325 U. S. 410, 414 (1945)). In my view, that is the case here.
The Medicare Act requires that, for reimbursement purposes, the actual reasonable costs incurred by a provider "shall be determined in accordance with regulations establishing the method or methods to be used . . . in determining such costs." 42 U. S. C. § 1395x(v)(1)(A). The Secretary's regulations similarly provide that the "[r]easonable cost of any services must be determined in accordance with regulations establishing the method or methods to be used, and the items to be included." 42 CFR § 413.9(b)(1) (1994). The Secretary is not bound to adopt GAAP for reimbursement purposes; indeed, the statute only requires that, in promulgating the necessary regulations, "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 providers of services . . . ." 42 U. S. C. § 1395x(v)(1)(A). Neither the Hospital nor the Court of Appeals disputes that the Secretary has broad and flexible authority to prescribe standards for reimbursement. See Good Samaritan Hospital v. Shalala, 508 U. S. 402, 418, n. 13 (1993).
Nevertheless, the statute clearly contemplates that the
Secretary will state the applicable reimbursement methods in regulations—including default rules that cover a range of situations unless and until specific regulations are promulgated to supplant them with respect to a particular type of
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