Cheshire Hospital v. NEW HAMPSHIRE-VERMONT, ETC.

• Decision Date: 30 December 1981
• Docket Number: Civ. No. 81-207-D.
• Citation: 528 F. Supp. 1104
• Parties: CHESHIRE HOSPITAL v. NEW HAMPSHIRE-VERMONT HOSPITALIZATION SERVICE, INC., d/b/a Blue Cross-Blue Shield of New Hampshire-Vermont; Richard S. Schweiker, Secretary of Health and Human Services.
• Court: U.S. District Court — District of New Hampshire

528 F. Supp. 1104

CHESHIRE HOSPITAL v. NEW HAMPSHIRE-VERMONT HOSPITALIZATION SERVICE, INC., d/b/a Blue Cross-Blue Shield of New Hampshire-Vermont; Richard S. Schweiker, Secretary of Health and Human Services.

Civ. No. 81-207-D.

United States District Court, D. New Hampshire.

December 30, 1981.

COPYRIGHT MATERIAL OMITTED

Jon S. Richardson, Manchester, N. H., for plaintiff.

Joseph Stewart, Concord, N. H., for Blue Cross.

W. Stephen Thayer, III, U. S. Atty., Concord, N. H., Clifford Pierce, H.H.S., Boston, Mass., for defendants.

OPINION

DEVINE, Chief Judge.

The instant action was filed with this Court by Cheshire Hospital ("Cheshire") formerly Elliot Community Hospital, a nonprofit corporation doing business in Keene, New Hampshire. The hospital is a 170-bed acute-care, general short-term facility. It provides services to both private and Medicare patients. This lawsuit arises from a dispute over payment for the costs of services to Medicare patients, which is governed by the Medicare Act ("Medicare"), formally entitled the Health Insurance for the Aged Act, adopted as part of the Social Security Act of 1965, Pub.L.No.89-97, 79 Stat. 291 (and codified at 42 U.S.C. § 1395, et seq.)

Cheshire Hospital is a "provider of services" for Medicare purposes, 42 U.S.C. § 1395x(u), and receives the "reasonable cost of such services", 42 U.S.C. §§ 1395f(b), 1395x(v), from the Secretary of Health and Human Services ("Secretary"), who acts through his fiscal intermediary. The Secretary's fiscal intermediary for Cheshire Hospital for the fiscal year here at issue, which ended June 30, 1977, was New Hampshire-Vermont Hospitalization Service, Inc. ("Blue Cross").

Specifically, this dispute arises from the accounting of certain funds connected with the financing of a new hospital facility. In 1971, in order to finance the construction of a new hospital building, Cheshire entered into an agreement with the New Hampshire Higher Education and Health Facilities Authority ("Authority") whereby bonds were issued and the resulting revenue was placed in several different funds.¹ It appears that at the time this approach was taken to finance the construction, i.e., utilizing the Authority's ability to issue tax exempt bonds, it was a relatively new method for all concerned. See Tr.² 78-79.³

As stated above, the bond sale proceeds were placed in several different funds. The Authority's General Bond Resolution, see Tr. 653-714, referred to these funds as the construction fund, the revenue fund, the operating fund, the debt service fund, the debt service reserve fund, the project reserve fund, and the redemption fund. Tr. 677. See also Authority's Series Resolution, Tr. 716-26. The fund primarily involved in this dispute is the debt service reserve fund ("DSRF"). The purpose for establishing the DSRF was to insure that Cheshire had the ability to make the necessary payments of principal and interest due on the bonds in the event there occurred a deficiency in the debt service fund. The DSRF was funded with proceeds from the bond issuance. The monies were placed under the control of an independent trustee, the Shawmut Bank of Boston ("Trustee"), and since then Cheshire has not had direct control over them. The monies in the DSRF were then invested by the Trustee,⁴ with the earnings from said investment being placed first into the DSRF. Any surplus⁵ which might exist would flow into the project reserve fund, and similarly any surplus therein would flow into the redemption fund. Tr. 724-25. When the redemption fund is of sufficient size to retire the remaining debt on the bond issuance, the Trustee, upon notification from the Authority, shall cause a redemption of the outstanding bonds to occur. Tr. 675-76, 710-11.

The issue herein arises in the context of what is the "reasonable cost" of services which Cheshire has provided to Medicare patients and for which Cheshire is entitled to payment pursuant to Medicare. See 42 U.S.C. § 1395f(b). It is settled between the parties that the construction of this facility was necessary and that Cheshire is entitled to partial reimbursement for the interest payments which it incurs due to the bond issuance in proportion to the Medicare patients served. See 42 U.S.C. § 1395x(v)(1)(A) (allowing reimbursement for both direct and indirect costs incurred in providing services to Medicare patients).

The question before this Court is whether the Secretary may be allowed to deduct the earnings made by investing the monies in DSRF from the reimbursable interest expenses mentioned above. It is a question of first impression.

In approaching this issue, we note the appropriate standard of review. In establishing judicial review of the Secretary's action, 42 U.S.C. § 1395oo(f)⁶ specifies that the Administrative Procedure Act ("APA") is to govern the proper scope and standard of that review.⁷ The APA provides that "the reviewing court shall decide all relevant questions of law, and interpret constitutional and statutory provisions", and that the Court must "hold unlawful and set aside agency action, findings, and conclusions found to be ... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; ...."⁸ The burden of showing that the Secretary's action was contrary to the standard of review enunciated in 5 U.S.C. § 706 lies with Cheshire. Diplomat Lakewood, Inc. v. Harris, 613 F.2d 1009, 1018 (D.C.Cir.1979). While the decision of the Secretary must be rational and he must give clear indication that he is exercising the discretion with which he is empowered, id., quoting SEC v. Chenery Corporation, 318 U.S. 80, 94-95, 63 S.Ct. 454, 462-463, 87 L.Ed. 626 (1943), it may be "a decision of less than ideal clarity if the agency's path may reasonably be discerned", id., quoting Bowman Transportation, Inc. v. Arkansas-Best Freight, Inc., 419 U.S. 281, 286, 95 S.Ct. 438, 442, 42 L.Ed.2d 447 (1974).

Counsel are at odds concerning the deference to which the Secretary's decision is entitled. In reviewing the applicable case law, we find that "generally, when the meaning of a provision within the expertise of an agency is involved, the courts will afford deference to that agency's construction", Pacific Coast Medical Enterprises v. Harris, 633 F.2d 123, 130-31 (9th Cir. 1980). "Even though there may be differing accounting theories, the administrative judgment as to which of the accounting methods `most appropriately implements the principles of reimbursement under the Medicare Program is entitled to deference.' Gosman v. United States, 215 Ct.Cl. 617, 632, 573 F.2d 31, 41 (1978)." Saint Francis Memorial Hospital v. United States, 648 F.2d 1305, 1308 (Ct.Cl.1981). Thus, while it is clear that the Secretary's discretion does have limitations, see St. John's Hickey Memorial Hospital v. Califano, 599 F.2d 803 (7th Cir. 1979), where the Secretary's position is arrived at in the exercise of his discretion and is reasonably related to the purpose of the statute, see Batterton v. Francis, 432 U.S. 416, 428, 97 S.Ct. 2399, 2407, 53 L.Ed.2d 448 (1977); Morton v. Ruiz, 415 U.S. 199, 237, 94 S.Ct. 1055, 1075, 39 L.Ed.2d 270 (1974), such position should be accorded "considerable" deference, Ford Motor Credit Company v. Cenance, 452 U.S. 155, 158, 101 S.Ct. 2239, 2241, n.3, 68 L.Ed.2d 744 (1981); Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 107, 99 S.Ct. 1601, 1612, 60 L.Ed.2d 66 (1979). Keeping these standards in mind we turn now to the question before us.

The decision of the Provider Reimbursement Review Board ("PRRB"), Tr. 8-15, which became the final decision of the Secretary when he declined further review of the decision, Tr. 1, held that Blue Cross had properly reduced the amount of Cheshire's reimbursement for its interest expenses it had paid under the bond arrangement by $51,995, the amount of earnings it had made from investing the DSRF monies. In so finding, the PRRB relied upon 20 C.F.R. § 405.419(b)(2)(iii), which states in pertinent part that interest expense must "be reduced by investment income, except where such income is from gifts or grants, whether restricted or unrestricted, and which are held separate and not commingled with other funds", Tr. 14.

Plaintiff Cheshire makes several arguments against a "technical" application of this regulation. First, the hospital argues that the "investment income" referred to in 20 C.F.R. § 405.419(b)(2)(iii) must be the investment income of the provider. Plaintiff's counsel argues such is not the case here; the income is "held by an independent trustee, provides no benefit to Cheshire Hospital and is reported on the hospital's balance sheet only at the behest of the accounting profession". Tr. 20. Further, Stephen Purdy, an accountant with considerable expertise in the field of hospital accounting and first-hand experience with Cheshire's situation, stated that the DSRF is "owned by the Authority, I guess, is the best way to describe ownership". Tr. 138.

The Court finds the Secretary could properly reject this argument. It would only be by way of a hypertechnical analysis that one would find it unreasonable to conclude the investment income at issue was that of the provider, Cheshire. We refuse to take such a tack. The DSRF is required by the Authority in arranging the financial package. See, e.g., Tr. 723. Thus, the DSRF fulfills a requirement which directly and immediately benefits Cheshire in that it complies with the Authority's requirements. Further, it protects the bondholders who invested in the construction of Cheshire's facility and without whom said construction would not have occurred.

Finally, due to the "waterfall effect" of the surplus, it is reasonable to conclude that the earnings which are initially attributable to the DSRF, Tr. 684-85,⁹ are then transferred into the project reserve fund and into the redemption fund when an adjustment occurs, which is five days after the initial deposit, Tr. 724-25. It is...