Humana, Inc. v. Heckler

• Citation: 758 F.2d 696
• Decision Date: 26 April 1985
• Docket Number: 82-1989,82-1987,Nos. 82-1986,82-1994 and 82-1995,s. 82-1986
• Parties: , 9 Soc.Sec.Rep.Ser. 176, Medicare&Medicaid Gu 34,572 HUMANA, INC., et al., Appellants, v. Margaret M. HECKLER, Secretary, Department of Health and Human Services. (Four Cases) HUMANA OF SOUTH CAROLINA, INC., doing business as Coleman-Aimar Hospital, a corporation, Appellant, v. Margaret M. HECKLER, Secretary, Department of Health and Human Services.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 696

758 F.2d 696

244 U.S.App.D.C. 376, 9 Soc.Sec.Rep.Ser. 176,

Medicare&Medicaid Gu 34,572

HUMANA, INC., et al., Appellants, v. Margaret M. HECKLER, Secretary, Department of Health and Human Services. (Four Cases)

HUMANA OF SOUTH CAROLINA, INC., doing business as

Coleman-Aimar Hospital, a corporation, Appellant, v. Margaret M. HECKLER, Secretary, Department of Health and Human Services.

Nos. 82-1986, 82-1987, 82-1989, 82-1994 and 82-1995.

United States Court of Appeals, District of Columbia Circuit.

Argued April 22, 1983.

Decided April 2, 1985.

As Amended April 26, 1985.

Appeals from the United States District Court for the District of Columbia (D.C. Civil Action Nos. 78-00175, 81-01311, 75-00302, 81-00853, 78-00584)

Lee Calligaro, Washington, D.C., with whom Thomas H. Brock, Washington, D.C., was on the brief, for appellants.

David B. Palmer, Atty. Dept. of Health and Human Services, Washington, D.C., of the Bar of the District of Columbia Court of Appeals, pro hac vice, by special leave of Court, with whom Juan A. del Real, Gen. Counsel and Lynne K. Zusman, Deputy Gen. Counsel, Dept. of Health and Human Services, and Henry R. Goldberg, Atty. Dept. of Health and Human Services, Washington, D.C., were on the brief for appellee.

Stanley S. Harris, U.S. Atty., Washington, D.C., at the time the brief was filed, Royce C. Lambert, R. Craig Lawrence and Nathan Dodell, Asst. U.S. Attys., Washington, D.C., entered appearances for appellee.

Before WALD and SCALIA, Circuit Judges, and BAZELON, Senior Circuit Judge.

Opinion for the Court PER CURIAM.

PER CURIAM:

Petitioners Humana, Inc. and sixty-four of its subsidiary acute care proprietary hospitals appeal from a district court decision limiting reimbursement under the Medicare Act, Title XVIII of the Social Security Act. ¹ Humana argues that reimbursement should be calculated by means of a formula based on all of the costs it actually incurred in providing services to Medicare beneficiaries. The district court, upholding the decision of the Secretary of Health and Human Services (the Secretary), held that certain of these costs were not necessary in the efficient delivery of needed health services and therefore denied reimbursement.

We affirm disallowance of reimbursement for 1) stock maintenance costs, 2) income taxes, and 3) the inclusion of income tax liability in the calculation of equity capital. We also find that the rate of return on equity capital prescribed by the Secretary was reasonable. We vacate the district court's holding disallowing reimbursement for stock acquisition costs when an acquired corporation is liquidated or merged into the acquiring corporation.

I. BACKGROUND

A. The Medicare Statutory Scheme

In 1965, Congress enacted the Medicare Act ² (the Act), which created an extensive program of health insurance for the aged and disabled. Part A of the Act ³ entitled participating hospitals to reimbursement for the reasonable costs of medical services with such costs being limited to "the cost actually incurred, excluding therefrom any part of the incurred cost found to be unnecessary in the efficient delivery of needed health services." ⁴ Under the statutory scheme, reimbursable costs include both direct and indirect costs of patient care. ⁵ Direct costs are those directly related to patient care such as nursing services and medication. Indirect costs include such items as return on equity capital and depreciation of plant and equipment. The Secretary is charged with developing regulations "establishing the methods or method to be used and the items to be included in determining [reasonable] costs." ⁶

These appeals challenge the Secretary's determinations regarding certain of these indirect costs: 1) reimbursement of stock maintenance costs, 2) reimbursement of income taxes, 3) the treatment of tax liability in calculating equity capital, 4) the allowable rate of return on equity, and 5) stock acquisition costs.

B. Proceedings Below

All of these appeals, with the exception of Humana of South Carolina v. Mathews, ⁷ began as the subject of administrative proceedings before the Provider Reimbursement Review Board (PRRB). ⁸ While Humana of South Carolina was pending, Humana's fiscal intermediaries ⁹ disallowed the reimbursement of certain costs to the hospitals. The hospitals appealed to the PRRB challenging the fiscal intermediaries' disallowance in three areas: 1) the cost of federal and state income taxes, 2) stock maintenance costs, and 3) costs incurred in acquiring new facilities by purchasing one hundred percent of the capital stock of another corporation.

The PRRB held that: 1) Humana was not entitled to reimbursement for income taxes, nor could it exclude income tax liability from the calculation of equity capital; 2) it was entitled to reimbursement for stock maintenance costs; and 3) subsequent to the acquisition of one hundred percent of the capital stock of other hospitals, five of the hospitals in question were entitled to increase their asset valuation while seven were not. The Administrator of the Health Care Financing Administration (HCFA) later reviewed and reversed the portions of the PRRB's decision which ruled in Humana's favor. Humana appealed these adverse decisions of both the PRRB and the HCFA and filed identical claims for the fiscal years ending in 1974 and 1975. In August 1979, Humana amended its complaint ¹⁰ to include additional claims in which the PRRB decision represented final agency action. ¹¹ The district court issued its memorandum opinion in August 1982, affirming the Secretary's decision on all issues.

II. ANALYSIS

A. Standard of Review

The Medicare Act itself ¹² incorporates the standard of review set out in section 706 of the Administrative Procedure Act. ¹³ As a reviewing court, we are permitted to set aside the Secretary's decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." ¹⁴ It is undisputed that Congress, in the statute, granted broad discretion to the Secretary to develop the "reasonable cost" concept through regulations. ¹⁵ The Secretary's interpretations of the statutes that she administers are entitled to great deference. ¹⁶ With this standard of review in mind, we consider each of the claims.

B. Proprietary Costs

Proprietary costs are those expenses incurred solely as a result of a hospital's for-profit status. These include the costs associated with attracting private investment capital. The specific proprietary costs at issue here are stock maintenance costs, income taxes, the inclusion of tax liability in calculating equity capital and the rate of return on equity capital. Humana seeks an amount of reimbursement for proprietary costs "limited to a level sufficient to recoup its 'costs,' " including the expenses of attracting investment capital. ¹⁷ It argues that all other government programs, except Medicare, allow for reimbursement of all of these costs. ¹⁸

The Secretary contends that these proprietary costs are not costs of patient care as allowed under 42 U.S.C. Sec. 1395x(v)(1)(A). ¹⁹ The costs are, in addition, not necessary in the efficient delivery of needed health services as required by 42 C.F.R. Sec. 405.451(a) (1983). The Secretary also maintains that Congress has included recognition of proprietary costs in the allowable rate of return on equity capital, which is based on one and a half times the interest on debt obligations issued by the Federal Hospital Insurance Trust Fund (FHITF). ²⁰ Therefore, in the Secretary's view, no reimbursement for proprietary costs was intended under 42 U.S.C. Sec. 1395x(v)(1)(A), the "reasonable costs" provision of the Act.

1. Stock Maintenance Costs

Stock maintenance costs include Security and Exchange Commission (SEC) filing fees, stock transfer fees, and the costs of shareholder meetings and reports. ²¹ Humana contends that "these expenses are no different in substance than either incorporation fees or other corporate expenses, which are reimbursed under the Program, or the transaction costs associated with attracting debt financing, which are similarly reimbursed." ²² It cautions that the Secretary's disallowance of reimbursement for these expenses will result in cross-subsidization, the shifting of Medicare costs to non-Medicare patients, which is prohibited under the Act. ²³

The guiding precedent in this circuit is American Medical International, Inc., v. Secretary of Health, Education and Welfare (AMI). ²⁴ In AMI, the provider hospitals challenged the Secretary's denial of reimbursement for various expenses, including stock maintenance costs. The district court drew, and we affirmed, the distinction between reimbursable and nonreimbursable costs based on the purpose they served:

A crucial distinction must be drawn between costs which are necessary for the maintenance of a corporate structure and those which are necessary for providing medical services. Stock maintenance costs are necessary for a corporation to exist, but medical services can be provided without the corporate form. ²⁵

Today we reaffirm this distinction. The purpose of the Medicare reimbursement scheme is to refund the cost of providing medical services. These services can be provided in a variety of settings, both proprietary and nonprofit. It is the Secretary's task to ferret out those costs incurred by proprietary hospitals which actually relate to medical care.

The regulations implementing the Act allow reimbursement for both direct and indirect costs. ²⁶ At some point, however, certain indirect costs become too attenuated to be regarded as for the provision of medical services. To make these distinctions, the Secretary employs the primary purpose test, ²⁷ determining the primary purpose of a given activity and its associated cost.

In the case of stock maintenance costs, submitting SEC filings, paying stock transfer fees, and conducting and reporting on shareholder meetings all serve to...