796 F.Supp. 283 (S.D.Ohio 1992), C2-90-828, Guernsey Memorial Hosp. v. Sullivan

Docket Nº:C2-90-828.
Citation:796 F.Supp. 283
Party Name:GUERNSEY MEMORIAL HOSPITAL, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.
Case Date:March 30, 1992
Court:United States District Courts, 6th Circuit, Southern District of Ohio

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796 F.Supp. 283 (S.D.Ohio 1992)



Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.

No. C2-90-828.

United States District Court, S.D. Ohio, Eastern Division.

March 30, 1992

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Scott Winfield Taebel, Bricker & Eckler, Columbus, Ohio, for plaintiff.

Joseph E. Kane, U.S. Atty., Columbus, Ohio, for defendant.


HOLSCHUH, Chief Judge.


Guernsey Memorial Hospital, a nonprofit acute care hospital located in Cambridge, Ohio, filed this action seeking review of a final decision of the Healthcare Financing Administration (HCFA) administrator dealing with two cost reimbursement issues arising under Medicare. The parties agree that this court has jurisdiction to review that decision under 42 U.S.C. § 1395 oo. The record of administrative proceedings has been filed with the court, and the parties have each moved for summary judgment, supplementing their respective filings as recently as March 12, 1992, with citations to additional decisions of the Provider Reimbursement Review Board, the HCFA administrator, two other district courts, and the United States Supreme Court. The court's review of the Secretary's decision is not de novo, but is limited to determining whether the Secretary's action was unsupported by substantial evidence, or was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. See 42 U.S.C. § 1395 oo (f)(1); Memorial Hospital/Adair County Health Center v. Bowen, 829 F.2d 111, 116 (D.C.Cir. 1987).


The facts in this case are not in dispute. In 1972, Guernsey Hospital issued $7,600,000 in bonds to finance capital improvements. In 1982, it issued another $10,410,000 of bonds for similar purposes. In 1985, in order to take advantage of more favorable interest rates which would, in its view, save it approximately $12,000,000 in debt service over the life of the two prior bond issues, eliminate certain restrictions on additional borrowing contained in those debt instruments, and free up funds to buy medical equipment, the hospital participated in a new bond issue in the amount of $15,375,000.

The refinancing arrangement involved, inter alia, deeding the hospital to the City of Cambridge and leasing it back. It also required the hospital to deposit $16,011,200 in an escrow account under the control of BancOhio National Bank as trustee. In exchange for doing so, the hospital was

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released of any further obligation to the bondholders who purchased hospital bonds in 1972 and 1982. The trustee would use the money in escrow to "advance purchase" some or all of the old bonds, and was also entitled to use the rent payments made by the hospital to the city for purposes of repaying the new bonds. To that end, a Debt Service Fund, or DSF, was created, divided into two separate accounts, one for the repayment of principal on the bonds, and one for the repayment of interest.

Because this refinancing occurred in 1985, Guernsey Hospital was required, under applicable regulations, to report the impact of the refinancing pursuant to Generally Accepted Accounting Procedures (GAAPs). The parties agree that, under GAAPs, the hospital properly reported a loss of $672,581 in 1985. Guernsey Hospital sought to include this loss as an operating cost for 1985, and to receive appropriate reimbursement for the loss under the Medicare program.

In Ohio, requests for reimbursement under Medicare are channeled through a fiscal intermediary, which has primary responsibility for determining what costs will be reimbursed. In this case, the fiscal intermediary was Blue Cross and Blue Shield/Community Mutual Insurance Company. That entity determined that, under provisions set forth in the Provider Reimbursement Manual, the loss could not be taken in full in 1985, but rather was required to be amortized over a period of years. Guernsey Hospital appealed that decision to the Provider Reimbursement Review Board, which overruled the fiscal intermediary. The Board, in turn, was reversed by the HCFA administrator, who concluded, like the fiscal intermediary, that the loss would have to be amortized. That issue is the primary one presented for review.

Guernsey Hospital has also asked this court to review a second decision of the administrator which, again, upheld the action of the fiscal intermediary and overruled the Provider Reimbursement Review Board. A certain amount of interest was earned on the interest portion of the Debt Service Fund during 1985. The Secretary offset that interest against other interest expenses incurred by Guernsey Hospital. The hospital contends that the Debt Service Fund, including both the principal account and the interest account, is a "qualified funded depreciation account." If that is so, under applicable regulations, the interest earned in such an account may not be used by the Secretary to offset other interest expenses claimed by the hospital. As with the first issue presented for review, the facts concerning this matter are not in dispute. Rather, it is the Secretary's interpretation of applicable regulations which Guernsey Hospital seeks to have this court overturn.


As with most cases involving actions by the Secretary of Health and Human Services, there are three sources of authority which must be examined. The first is the governing statute; the second consists of the implementing regulations; and the third is the Secretary's interpretation of those regulations. Because the two reimbursement issues in this case are governed by different sets of regulations, the Court will treat each separately. The court will also, prior to analyzing the Secretary's action in this case, enunciate the appropriate standard for review of the Secretary's interpretation of the regulations and statute at issue.

A. The Bond Refinancing Issue

1. Applicable Statutes, Regulations and Interpretations.

The basic statutory authority for reimbursement of reasonable costs by qualified healthcare providers is 42 U.S.C. § 1395x(v). The statute provides, in pertinent part:

"(1)(A) The reasonable costs 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

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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 providers of services on account of services furnished to such recipients by such providers."

Acting under this statutory grant of authority, the Secretary has promulgated regulations relating to reimbursement of Medicare providers. Those regulations now appear at 42 C.F.R. Part 413. The general principles for cost reimbursement are set forth in 42 C.F.R. § 413.5, which provides that "[a]ll necessary and proper expenses of an institution in the production of services ... are recognized." The parties agree that the refinancing cost incurred by Guernsey Hospital is a cost which is reimbursable under this general principle. As noted above, the disagreement involves the timing of reimbursement. The parties appear to agree that there is no specific regulation which addresses this issue.

The more general regulation dealing with the timing of payments is 42 C.F.R. § 413.20, which is contained in Subpart B of the regulations ("Accounting Records and Reports"). Section 413.20(a) requires that providers "maintain sufficient financial records and statistical data for proper determination of costs payable under the program." It then provides:

"Standardized definitions, 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."

Further, 42 C.F.R. § 413.24 requires providers who receive payment on the basis of reimbursable costs to provide adequate cost data based upon verifiable financial and statistical records. That section requires that the accrual method of accounting be followed which, according to § 413.24(b)(2), means that "revenue is reported in the period when it is earned ... and expenses are reported in the period in which they are...

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