996 F.2d 830 (6th Cir. 1993), 92-3563, Guernsey Memorial Hosp. v. Secretary of Health and Human Services

Docket Nº:92-3563.
Citation:996 F.2d 830
Party Name:P 41,492 GUERNSEY MEMORIAL HOSPITAL, Plaintiff-Appellant, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant-Appellee.
Case Date:June 18, 1993
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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996 F.2d 830 (6th Cir. 1993)

P 41,492




No. 92-3563.

United States Court of Appeals, Sixth Circuit

June 18, 1993

Argued March 2, 1993.

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Scott W. Taebel, Bricker & Eckler, Columbus, OH (argued and briefed), for plaintiff-appellant.

Donald T. McDougall (argued and briefed), Dept. of Health and Human Services, Office of Gen. Counsel, Chicago, IL, Joseph E. Kane, Asst. U.S. Atty., Office of U.S. Atty., Columbus, OH, for defendant-appellee.

Before: JONES and NELSON, Circuit Judges; and LIVELY, Senior Circuit Judge.

DAVID A. NELSON, Circuit Judge.

Appellant Guernsey Memorial Hospital, a participant in the federal government's Medicare program, is entitled to reimbursement by the Department of Health and Human Services for reasonable costs incurred in providing services to Medicare patients. Such costs include the cost of money employed in financing hospital improvements.

The particular costs at issue in this case are known technically as "advance refunding" or "defeasance" costs: costs incurred in connection with the refunding of bonded mortgage indebtedness ahead of schedule in order to obtain new financing. It is undisputed that the hospital is entitled to reimbursement for reasonable advance refunding costs. There is a dispute, however, as to when and how reimbursement is to be made--in a lump sum payable now, or in a series of payments stretched over the remaining life of the original bonds?

Under generally accepted accounting principles (referred to in the accounting world as "GAAP"), advance refunding costs are not amortized over the life of the original bonds. Such costs must be recognized, in full, up front. Regulations promulgated by the Department strongly imply, if they do not say in so many words, that reimbursement will be made on the basis indicated by GAAP.

A Department manual on reimbursement provides otherwise. The manual says that any loss incurred through advance refunding

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of existing debt must be amortized, as opposed to being recognized immediately.

Unlike the regulations, the manual was not adopted in accordance with the notice and comment procedures mandated, for substantive rules, by the rulemaking section of the Administrative Procedure Act, 5 U.S.C. § 553. The dispositive question presented here is whether the manual provision constitutes a substantive rule, under the Administrative Procedure Act, or an "interpretative" rule to which the statutory notice and comment requirements do not apply. If substantive, the rule is void; if merely interpretive, it is not. See State of Ohio Dep't of Human Services v. U.S. Dep't of Health & Human Services, 862 F.2d 1228 (6th Cir.1988).

We conclude that the manual's amortization requirement effects a substantive change in the regulations. It is not an interpretation, it is a stand-alone substantive rule. And it is void by reason of the agency's failure to comply with the Administrative Procedure Act in adopting it.

The district court, in the decision now before us on appeal, impliedly held the manual to be interpretive; the court therefore upheld the validity of the amortization requirement. 796 F.Supp. 283. We shall reverse the court's decision on this point. The decision will be affirmed on an unrelated point involving the proper treatment of income earned on funds placed in an account dedicated to the payment of interest on the newly issued bonds.


Guernsey Memorial Hospital, a not-for-profit acute care institution located in Cambridge, Ohio, paid for certain capital improvements with the proceeds of mortgage revenue bonds issued in 1972 and 1982. This bonded indebtedness was refinanced, on advantageous terms, in 1985.

Most of the proceeds of the 1985 bond issue were used to purchase United States Treasury obligations that were escrowed for the benefit of the holders of the older bonds. This advance refunding arrangement permitted defeasance of the mortgages on the hospital property, and the liens of the 1972 and 1982 bond indentures were discharged and released in 1985.

Prior to the 1985 advance refunding the hospital had been amortizing various costs (including legal and accounting fees, feasibility study costs, and underwriter discounts) incurred in connection with the earlier bond issues. When the earlier bonds were "defeased," the hospital--acting in accordance with GAAP, 1 as required by 42 C.F.R. § 413.20--took the unamortized balance of these costs as a charge against current income. A call premium advanced by the hospital in 1985 as part of the cost of defeasance was handled the same way, also in accordance with the requirements of GAAP.

The advance refunding costs came to a net amount of $672,581. Of that sum, the hospital sought reimbursement of approximately $314,000.

The request for reimbursement was denied by the "fiscal intermediary" to which such requests are routed initially. The hospital appealed to the Provider Reimbursement Review Board, a body established by the Secretary of HHS pursuant to 42 U.S.C. § 1395oo. After an evidentiary hearing the Review Board issued a decision allowing reimbursement in full as of 1985. (The Review Board also decided in favor of the hospital on a debt service fund issue that will be discussed in Part III of this opinion.) Upon review by the Administrator of the...

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