Regents of University of California v. Shalala

• Decision Date: 17 April 1996
• Docket Number: No. 94-56475,94-56475
• Citation: 82 F.3d 291
• Parties: , 108 Ed. Law Rep. 1118, 50 Soc.Sec.Rep.Ser. 592, Medicare & Medicaid Guide P 44,154, 96 Cal. Daily Op. Serv. 2677, 96 Daily Journal D.A.R. 4434 REGENTS OF the UNIVERSITY OF CALIFORNIA, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary, Health & Human Services; Provider Reimbursement Review Board, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 291

82 F.3d 291

64 USLW 2671, 108 Ed. Law Rep. 1118,

50 Soc.Sec.Rep.Ser. 592,

Medicare & Medicaid Guide P 44,154,

96 Cal. Daily Op. Serv. 2677,

96 Daily Journal D.A.R. 4434

REGENTS OF the UNIVERSITY OF CALIFORNIA, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary, Health & Human Services;

Provider Reimbursement Review Board, Defendants-Appellees.

No. 94-56475.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 6, 1996.

Decided April 17, 1996.

Robert Barnes, Oakland, California, for plaintiff-appellant.

Russell W. Chittenden, Assistant United States Attorney, Los Angeles, California, for defendant-appellee.

Appeal from the United States District Court for the Central District of California; Ronald S.W. Lew, Presiding.

Before: HARRY PREGERSON and T.G. NELSON, Circuit Judges, and DAVID A. EZRA, ^* District Judge.

T.G. NELSON, Circuit Judge:

OVERVIEW

Regents of the University of California ("Regents") appeals the district court's summary judgment in favor of the Secretary of Health and Human Services in Regents' action under Title XVIII of the Social Security Act, 42 U.S.C. § 1395oo(f)(1), challenging the Secretary's decision to deny Medicare reimbursement for patient expenses attributable to interest costs incurred on working loans from Regents to three University hospitals ("providers").

We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

FACTS AND PROCEDURAL HISTORY

Regents owns and operates the three Medicare providers on whose behalf this appeal is taken, UCLA Medical Center, UC Irvine Medical Center, and UCSD Medical Center. The providers are not separate legal entities from the Regents and, as such, cannot sue, be sued, enter into contracts, or perform other legal functions in their own names, including borrowing monies from outside sources.

In 1982, 1983, 1984, and 1985, Regents made working capital loans to the providers. It is undisputed that the proceeds from the loans were used for necessary and proper purposes related to patient care. These loans were necessitated by a budget shortfall resulting from a decrease in funding from the state legislature.

The providers filed claims for Medicare reimbursement for the interest expenses associated with these loans. The claims were initially reviewed by the fiscal intermediary, Blue Cross in this case, and were denied on the basis of 42 C.F.R. § 405.419 (1985), which disallows reimbursement for interest expenses on loans between related organizations. Regents appealed to the Provider Reimbursement Review Board ("PRRB"), which affirmed the intermediary and disallowed the interest expense. On review, the district court granted the Secretary's motion for summary judgment.

ANALYSIS

I. Standard of Review

We review a grant of summary judgment order de novo. Rendleman v. Shalala, 21 F.3d 957, 960 (9th Cir.1994). Judicial review of Medicare reimbursement disputes under 42 U.S.C. § 1395oo(f)(1) is governed by the Administrative Procedure Act, 5 U.S.C. §§ 701-706 ("APA"). Under the APA, "[r]eview is limited to determining whether the Secretary's action was arbitrary, capricious, an abuse of discretion, not in accordance with the law, or unsupported by substantial evidence on the record taken as a whole." Vallejo Gen. Hosp. v. Bowen, 851 F.2d 229, 231 (9th Cir.1988).

When the meaning of a provision within the expertise of an agency is involved, the agency's expertise makes it particularly suited to interpret the language. Pacific Coast Medical Enters. v. Harris, 633 F.2d 123, 131 (9th Cir.1980). In such cases, we will generally afford deference to the agency's construction of its own regulation.

Review of an agency's interpretation of its regulations involves a two-pronged analysis. First, we look to the plain language of the regulation. The words of the regulation must be "reasonably susceptible to the construction placed upon them by the Secretary, both on their face and in light of their prior interpretation and application." Id. Second, "the Secretary's construction must be reviewed in relation to the governing statute." Id. "Agency regulations must be consistent with and in furtherance of the purposes and policies embodied in the Congressional statute which authorize them." Id.

II. Statutory Interpretation

Initially, Regents challenges the Secretary's interpretation of § 405.419(b)(3)(ii), which disallows reimbursement for interest expenses on loans between related organizations. There is no dispute that the providers and Regents are related entities. Further, there is no dispute that the interest expense claimed on the instant loans was below then-existing market rates. Thus, we must determine whether the plain words of the regulation are "reasonably susceptible to the construction placed upon them by the Secretary, both on their face and in light of their prior interpretation and application," Pacific Coast, 633 F.2d at 131, and whether the Secretary's application of the prophylactic rule, which deems all expenses arising out of loans between providers and their related organizations per se unreasonable, is contrary to Congressional intent.

Under the Medicare Program, as established by Title XVIII of the Social Security Act (42 U.S.C. §§ 1395-95rr), providers of services to Medicare patients are reimbursed for the "reasonable costs" of providing these services. The term "reasonable costs" is generally defined in 42 U.S.C. § 1395x(v)(1)(A):

[T]he 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 to be included in determining such costs for various types or classes of institutions, agencies, and services....

The precise definition of "reasonable cost" was left to the Secretary. Pursuant to that authority, the Secretary promulgated 42 C.F.R. § 405.419 (1985). Subsection(a) of § 405.419 provides that "[n]ecessary and proper interest on both current and capital indebtedness is an allowable cost." Under Regents asserts that the Secretary's interpretation of § 405.419 to deny reimbursement of interest on operating loans Regents made to its providers "runs afoul of Congressional intent that proper and necessary medicare patient expenses be reimbursed by the medicare program...." Regents argues that because the regulations make exception for § 405.419 in certain related party transactions, other exceptions must be recognized where interest rates on loans between related entities are reasonable, the loan proceeds are necessary for patient care, and the related parties have no profit motive. Regents further contends that the scope of the prophylactic rule in (b)(3)(ii) is defined by the language in § 405.419(c)(1), which states: "The intent of this provision is to assure that loans are legitimate and needed and that the interest rate is reasonable." Thus, according to Regents, the effect of § 405.419(b)(3)(ii) together with (c)(1) is to disallow reimbursement of interest costs on loans between related parties unless the loans are necessary, related to patient care, and are made at reasonable interest rates. Regents thus reads the reasons expressed in (c)(1) as exceptions to the general rule of non-reimbursement.

                subsection (b)(2)(i) of § 405.419, interest is "necessary" if it is "incurred on a loan made to satisfy a financial need of the provider."   Further, interest must be "proper," which requires interest to be "incurred at a rate not in excess of what a prudent borrower would have had to pay in the money market existing at the time the loan was made," § 405.419(b)(3)(i), and be "paid to a lender not related through control or ownership, or personal relationship to the borrowing organization." § 405.419(b)(3)(ii)
                

In support of its argument, Regents cites Trustees of Indiana Univ. v. United States, 223 Ct.Cl. 88, 618 F.2d 736 (1980). In Indiana, the hospitals, although not owned by the University, were a part of the University and its medical center. Id. 618 F.2d at 737, 740. The court found that the relationship of the hospitals to Indiana University was unique in that the hospitals were state institutions, but, unlike the University, received no money from the state for their operations. Further, although the University received funds from the State of Indiana, Indiana state law prohibited the University from using any of those funds for the hospitals. Id. at 737. Because the hospitals were not separate legal entities, they could not borrow money from outside the University. Id. As such, the hospitals' only source of funds, other than from collection of fees, was through loans from the University. Id.

Presented with those particular circumstances, the Indiana court held that the prophylactic rule under § 405.419 was inapplicable. Id. at 740-41. The court reasoned that "[t]he evils against which the prohibition is directed are no more present where the related person to which the payments are made is a university than where it is a religious order." Id. at 740. However, the court expressly limited the holding in Indiana to the particular facts of that case:

In holding for the plaintiffs in this case, we stress the limited scope of our decision. We are not holding that interest payments to a related person are reimbursable wherever the particular relationship does not involve any of the evils against which the regulation is directed. Nor are we casting any doubt upon the authority of the Secretary to adopt his prophylactic regulation generally barring reimbursement of interest payments to related persons without inquiry into the particular circumstances.

Id.

In Indiana, the University received funds from the state, but pursuant to state law, those funds could not be diverted for the use of the hospitals. Id. at 737. Further, the hospitals were...