Abbott-Northwestern Hosp., Inc. v. Schweiker, ABBOTT-NORTHWESTERN

• Decision Date: 12 January 1983
• Docket Number: No. 82-1029,ABBOTT-NORTHWESTERN,82-1029
• Citation: 698 F.2d 336
• Parties: HOSPITAL, INC., et al., Plaintiffs-Appellees, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 336

698 F.2d 336

1 Soc.Sec.Rep.Ser. 80

ABBOTT-NORTHWESTERN HOSPITAL, INC., et al., Plaintiffs-Appellees, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Defendant-Appellant.

No. 82-1029.

United States Court of Appeals Eighth Circuit.

Argued June 16, 1982.

Decided Jan. 12, 1983.

Thorwald H. Anderson, Jr., U.S. Atty., Minneapolis, Minn., J. Paul McGrath, Asst. Atty. Gen., Anthony J. Steinmeyer and Carlene v. McIntyre, Civ.Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Hubert V. Forcier, Jerry W. Snider, James L. Volling, Minneapolis, Minn., for plaintiffs-appellees; Faegre & Benson, Minneapolis, Minn., of counsel.

Before LAY, Chief Judge, BRIGHT, Circuit Judge, and FAIRCHILD, Senior Circuit Judge. ^*

FAIRCHILD, Senior Circuit Judge.

This appeal concerns the treatment, in the course of a retroactive adjustment, of interest earned on over-payments of social security taxes by providers of health services under the Medicare Act. The Secretary of Health and Human Services required that any interest received by the providers and attributable to Medicare payments be offset against the interest expense claimed by the providers under the Act. On appeal the district court concluded that such an offset was a violation of the Secretary's own regulations concerning Medicare reimbursements. We reverse for the reasons stated below.

I.

A. The Refund

The facts giving rise to the interest award and the current dispute may be summarized as follows. Each of the plaintiff hospitals was formed by consolidating two or more constituent hospital corporations in 1969 or 1970. These predecessor hospitals had all waived their exemption from coverage under the Federal Insurance Contribution Act (FICA) as non-profit charitable institutions. Accordingly, they made FICA tax payments on wages paid. See 26 U.S.C. Secs. 501(c)(3), 3121(b)(8)(B). Following the consolidations the newly formed hospitals continued to make regular Social Security payments on the assumption that they had assumed their predecessor's tax status. As providers of services under Part A of the Medicare Act, ¹ the hospitals were reimbursed monthly by a fiscal intermediary of the Department of Health and Human Services for that portion of the post-consolidation FICA payments attributable to Medicare patients. ²

The intermediary's payments would typically be the last act in a routine Medicare reimbursement--except for an end-of-the-year cost adjustment--but a complication arose. The Internal Revenue Service informed the providers in 1972 or 1973 that they had not automatically acceded to their predecessors' FICA tax status and that their post-consolidation Social Security payments were therefore subject to refund with interest. ³ The providers retroactively waived this exemption, but under IRS regulations each employee was extended the option of adopting Social Security coverage for this period or receiving a refund of the taxes withheld on their behalf. A number of employees exercised the latter option. For each employee requesting a refund the hospital was reimbursed with interest the employer's share of the previously paid tax. ⁴

B. Administrative Proceedings

In the course of its annual review of the provider's costs in 1976 and 1977 the Secretary's fiscal intermediary examined the status of these reimbursements. ⁵ In its Notice of Program Reimbursement to each of the plaintiffs the intermediary determined that (1) the portion of refunded FICA taxes previously reimbursed to the providers by the Medicare program must be offset against the providers' reimbursable costs in the year the refund was received and (2) the interest earned on the Medicare portion of the refund constitutes "investment income" which must be offset against the providers' reimbursable interest expense. 42 C.F.R. Sec. 405.419(b)(2)(iii).

The providers challenged the intermediary's determination before the Provider Reimbursement Review Board (PRRB). See 42 U.S.C. Sec. 139500(a); 42 C.F.R. Sec. 405.1835. After a hearing in March of 1977, the PRRB issued its decision ⁶ affirming the substance of the intermediary's notice to the providers. First, the Board agreed that the refund of FICA taxes should offset the providers' reimbursable costs in the year received, though it modified the intermediary's cost adjustment to reflect actual Medicare use in the year the taxes were paid. ⁷ Second, the Board agreed that interest earned on the refunded taxes should reduce the providers' interest expense claim.

The PRRB affirmed this second ruling while acknowledging that the intermediary was mistaken in characterizing the FICA interest as "investment income" subject to offset under 42 C.F.R. Sec. 405.419(b)(2)(iii). The Board held the interest on FICA taxes was neither specifically included nor "specifically excluded from the offset requirement" in Sec. 405.419. PRRB Dec. at 13. Concluding that the Medicare regulations were silent on the treatment of the interest, the PRRB held that the interest offset was consistent with the Medicare program's statutory policy of paying only for a provider's net costs. 42 U.S.C. Sec. 1395x(v)(1)(A). Since the interest income reduced the provider's costs the Board decided an offset against interest expense was appropriate. The Board stressed that the interest was "wind-fall" income on monies provided by the Medicare program and therefore equity required that it be offset against any amount owed the providers.

The Secretary of Health and Human Services declined to modify or reverse the PRRB's ruling within 60 days; it therefore constitutes the agency's final decision. 42 U.S.C. Sec. 1395oo (f)(1).

C. Judicial Proceedings

The providers sought review of the PRRB's decision in federal district court. See 5 U.S.C. Sec. 701; 42 U.S.C. Sec. 1395oo (f)(1). On appeal the hospitals acknowledged the propriety of offsetting the FICA tax refund against reimbursable costs in the year received, but challenged the Board's affirmance of the interest offset. ⁸ The district court designated a United States Magistrate to conduct hearings and submit proposed findings of fact and recommendations for disposition of the case. 28 U.S.C. Sec. 636(b)(1)(B). After considering cross-motions for summary judgment, the Magistrate recommended that the plaintiffs' motion be granted.

The Magistrate concluded that the Board's affirmance of the interest offset was contrary to Medicare regulations. Specifically the Magistrate pointed to Sec. 405.419(a) which provides that "necessary and proper interest on both current and capital indebtedness is an allowable cost." 42 C.F.R. Sec. 405.419(a). Noting that Sec. 405.419 expressly requires the reduction of interest expense by investment income, 42 C.F.R. Sec. 405(b)(2)(iii), the Magistrate reasoned that no other interest income may reduce a provider's interest expense. The interest offset also struck the Magistrate as contrary to the Medicare regulation on provider reimbursements, 42 C.F.R. Sec. 405.454(1), which he asserted contemplates that no interest be charged on the over- or under-payment of Medicare costs. Cf. Reimbursement Manual, Part I Sec. 2409. The Magistrate emphasized that his recommendation to grant the plaintiffs' motion for summary judgment was based on the view that the regulations were part of the contractual arrangement between the parties alterable only by formal rule-making procedures, and even then to be accorded only prospective effect.

The district court adopted the recommendations of the Magistrate. The court stated that the accepted rules of statutory construction require that Sec. 405.419 be read to preclude the offset of interest expense by other than investment income. The court also noted that the underlying purpose of the investment income offset--to reduce a provider's incentive to divert Medicare funds from operational costs to investment opportunities--had no bearing on the treatment of the FICA interest earned on a good faith over-payment. Finally, the court agreed that an interest offset was inconsistent with "the clear statutory policy of not requiring interest payments on either over- or under-payments of Medicare funds." District Court Opinion at 4. The court entered an order granting the plaintiffs' motion for summary judgment on November 3, 1981. The Secretary appeals from judgment accordingly entered.

II.

An administrative agency's interpretation of its own regulation merits considerable respect by a reviewing court, and will be controlling absent a showing "that it is plainly erroneous or inconsistent with the regulation." Cheshire Hosp. v. N.H.-VT. Hosp. Service, 689 F.2d 1112, 1117 (1st Cir.1982); Medical Center of Independence v. Harris, 628 F.2d 1113, 1117 (8th Cir.1980). See also 1A Sutherland Statutory Construction Sec. 31.06, at 362 (4th ed. 1973). Such deference is especially applicable to areas like Medicare reimbursements that require judgments about appropriate cost accounting practices. Cheshire Hosp., 689 F.2d at 1117 (citing Hospital San Jorge v. Secretary of Health, Ed., 616 F.2d 580, 589 (1st Cir.1980) (Campbell, J. concurring). Cf. Bright v. Ball Memorial Hospital Ass'n, Inc., 616 F.2d 328, 33 n. 1 (7th Cir.1980); 1A Sutherland Statutory Construction Sec. 31.06, at 362 n. 6 (Supp.1982).

The district court acknowledged the substantial deference due the Board's conclusion that its enabling statute and regulations warranted the interest income offset, but held the Board's determination to be inconsistent with the language and policy of Medicare regulations. The disposition of this appeal turns on the same issue: is the reduction of the providers' interest expense by the interest income earned on the FICA refund inconsistent with the terms or the underlying policy of the Medicare regulations.

The Secretary asserts that the regulations are simply silent as to the treatment of interest refunded in circumstances not a part of the ordinary course of...