Adams House Health Care v. Sullivan, 89-5018

• Decision Date: 06 February 1990
• Docket Number: No. 89-5018,89-5018
• Citation: 895 F.2d 767
• Court: U.S. Court of Appeals — District of Columbia Circuit
• Parties: , 28 Soc.Sec.Rep.Ser. 509, Medicare&Medicaid Gu 38,398 ADAMS HOUSE HEALTH CARE, et al., Appellants, v. Louis W. SULLIVAN, M.D.

Page 767

895 F.2d 767

282 U.S.App.D.C. 362, 28 Soc.Sec.Rep.Ser. 509,

Medicare&Medicaid Gu 38,398

ADAMS HOUSE HEALTH CARE, et al., Appellants, v. Louis W. SULLIVAN, M.D.

No. 89-5018.

United States Court of Appeals, District of Columbia Circuit.

Argued Dec. 12, 1989.

Decided Feb. 6, 1990.

Robert J. Aamoth, with whom Eugene Tillman, Washington, D.C., was on the brief, for appellants.

Donald G. Kosin, Jr., U.S. Dept. of Health and Human Services, with whom Jay B. Stephens, U.S. Atty., Michael J. Astrue, Gen. Counsel, and Darrel Grinstead, Chief Counsel, Health Care Financing Admin., Washington, D.C., were on the brief, for appellee.

Before WALD, Chief Judge, EDWARDS and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.

HARRY T. EDWARDS, Circuit Judge:

In this case, the appellants, eighty-two skilled nursing facilities that provide Medicare services ("Providers"), seek reimbursement under the Medicare Act, Title XVIII of the Social Security Act, 42 U.S.C. Secs. 1395-1395ccc (1982 & Supp. V 1987), for services furnished to Medicare beneficiaries. The Secretary of Health and Human Services ("Secretary") ruled that, pursuant to existing agency regulations, the "interest offset" rule, see 42 C.F.R. Sec. 413.153 (1988), and the "equity capital exclusion" rule, see 42 C.F.R. Sec. 413.157 (1988), should be applied to funds invested by the Providers during fiscal year 1981. The application of these two rules had the effect of disallowing certain costs for which the Providers claim entitlement to reimbursement. The Providers petitioned for review in District Court, claiming that the Secretary's action was taken without statutory authority and/or that it was arbitrary and capricious and thus should be set aside. The District Court entered judgment for the Secretary. See Adams House Health Care v. Bowen, Civ. Action No. 85-2739 (D.D.C. Dec. 6, 1988) (Johnson, J.), reprinted in Joint Appendix ("J.A.") 75. We affirm.

I. BACKGROUND

The material facts in this case are undisputed. During fiscal year 1981, the Providers ¹ collectively invested $7.5 million in certificates of deposit, treasury bills, and other similar notes, for a period exceeding six months. See Adams House, slip op. at 2, reprinted in J.A. 76. These investments were found by the Secretary to be subject to two rules under the regulations issued by the Department of Health and Human Services ("HHS") pursuant to the Medicare Act. The first, the "interest offset rule," requires a reduction of otherwise reimbursable interest expenses. Under the Medicare Act, the Providers are entitled to payment of the lesser of the "reasonable cost" or the "customary charges" for services they furnish to Medicare beneficiaries. See 42 U.S.C. Sec. 1395f(b)(1) (1982 & Supp. V 1987). The statute defines "reasonable cost" as the "cost actually incurred, excluding ... any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. Sec. 1395x(v)(1)(A) (1982 & Supp. V 1987). Agency regulations provide that HHS will reimburse a provider for "[n]ecessary and proper interest" expenses, 42 C.F.R. Sec. 413.153(a)(1), on loans that are "made for a purpose reasonably related to patient care," id. Sec. 413.153(b)(2)(ii). To be "necessary," the interest must first be reduced by investment income. Id. Sec. 413.153(b)(2)(iii). In preparing the 1981 Medicare cost reports, the Providers complied with Medicare regulations and reduced their claimed interest expenses by income earned on the $7.5 million investment.

The second rule, the "equity capital exclusion" rule, requires the exclusion of certain equity capital investments from payment by HHS of a "reasonable return on equity capital." 42 C.F.R. Sec. 413.157(b); Health Care Financing Administration, Provider Reimbursement Manual, Publication 15 Sec. 1218.2, 1 Medicare & Medicaid Guide (CCH) p 5810 (Nov. 1968) [hereinafter HCFA Pub. 15], reprinted in Brief of Appellee Addendum at 32. Proprietary facilities are generally entitled to a reasonable return on equity capital invested in the facility and used in furnishing care to Medicare beneficiaries. See 42 U.S.C. Sec. 1395x(v)(1)(B) (1982 & Supp. V 1987); 42 C.F.R. Sec. 413.157(b). However, a provider must exclude equity capital used for purposes other than patient care from the equity capital base used to determine the reasonable return due. See 42 C.F.R. Sec. 413.157(c). Under the Secretary's interpretation of this rule, "[a]ny portion of the provider's general funds or operating funds invested in [income producing activities that are not related to patient care] for more than six consecutive months is not includable in the provider's equity capital." HCFA Pub. 15 Sec. 1218.2. In accordance with this interpretation of the rule, the Providers excluded the $7.5 million investment from their equity capital base in their 1981 Medicare cost report. In short, the Providers applied the interest offset and equity capital exclusion rules to the $7.5 million investment in precisely the manner the Secretary contends that the statute and applicable regulations require.

After receiving their final notice of program reimbursement for the 1981 cost year, however, the Providers filed an appeal with the Provider Reimbursement Review Board ("PRRB") challenging the simultaneous application of the two rules to their investment. Following a prolonged jurisdictional dispute, in which the Supreme Court ultimately held that the PRRB must entertain the Providers' complaint, see Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399, 108 S.Ct. 1255, 1260, 99 L.Ed.2d 460 (1988), the PRRB rejected the Providers' claims, ruling that the 1981 cost reports were proper as submitted and accepted. See Hillhaven, Inc. v. Aetna, 85-D38 P.R.R.B. Case No. 83-63G(R) at 5 (Apr. 23, 1985), reprinted in J.A. 14. In reviewing the PRRB's decision, the Health Care Financing Administration ("HCFA") Administrator also concluded that the Secretary properly applied the two rules simultaneously. See Hillhaven, Inc. v. Aetna, HCFA Administrator Review of PRRB Hearing Decision No. 85-D38 at 3 (June 19, 1985), reprinted in J.A. 21.

Upon petition for review, the District Court rejected the Providers' claim that the two rules are mutually exclusive anti-borrowing rules. See Adams House, slip op. at 11, reprinted in J.A. 85. The District Court thus upheld the PRRB's decision. The District Court reasoned that the two rules as applied to the Providers' $7.5 million investment have distinct purposes: "one to avoid reimbursement of unnecessary interest expense, and the other to exclude funds not invested in patient care from the calculation of plaintiffs' return on equity." Id. The District Court concluded that the "Secretary's simultaneous application of the interest offset rule and equity exclusion rule was appropriate, and, in any case, was clearly 'within the range of reasonable meanings that the words of the regulation admit.' " Id. (quoting Psychiatric Institute of Washington, D.C., Inc. v. Schweiker, 669 F.2d 812, 814 (D.C.Cir.1981) ). The Providers appeal.

II. ANALYSIS

The Providers claim that the Secretary violated the statutory obligation to reimburse health care providers for all reasonable costs of furnishing covered Medicare services when the agency applied both the interest offset rule and the equity capital exclusion rule to the $7.5 million which the Providers collectively invested. See Brief of Appellants at 3; see also 42 U.S.C. Secs. 1395f(b), 1395x(v). The Providers do not challenge the validity of the regulations, but only their simultaneous application.

A. Review Under Chevron

It is obvious that the Secretary has the authority to define reasonable costs. Congress explicitly delegated to the Secretary the responsibility to promulgate regulations "establishing the method or methods to be used, and the items to be included, in determining [the reasonable] costs for various types or classes of institutions, agencies, and services." 42 U.S.C. Sec. 1395x(v)(1)(A). Congress did not speak directly to the precise question at issue in the instant case regarding the meaning of "reasonable cost," and the Secretary's simultaneous application of the rules does not conflict with the statute. See Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-44, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). In short, the Providers have not pointed to any provision in the statute which suggests that the Secretary lacked the authority to define reasonable costs as he did.

B. Review Under State Farm

The only other possible basis for questioning the Secretary's simultaneous application of the two rules is pursuant to the "arbitrary and capricious" standard of review under the Administrative Procedure Act. ² See 42 U.S.C. Sec. 1395oo(f)(1) (1982 & Supp. V 1987) (explicitly incorporating the Administrative Procedure Act's standard of review into the Medicare Act). That is, in reviewing the Secretary's explanation for applying the rules simultaneously, we must consider whether the decision " 'was based on a consideration of the relevant factors and whether there has been a clear error of judgment.' " See Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) (quoting Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285, 95 S.Ct. 438, 441, 42 L.Ed.2d 447 (1974) ); see also Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971). We can find no basis for overturning the Secretary's judgment on these terms.

It is clear that each of the regulations on its face supports the Secretary's decision. The regulation governing Medicare reimbursement of interest expenses expressly provides that, excluding a few exceptions not apposite here, a provider's reimbursable interest expense must be "[r]educed by...