Good Samaritan Hospital, Corvallis v. Mathews
| Decision Date | 13 December 1979 |
| Docket Number | No. 77-3308,77-3308 |
| Citation | 609 F.2d 949 |
| Parties | GOOD SAMARITAN HOSPITAL, CORVALLIS, Plaintiff-Appellant, v. F. David MATHEWS, Secretary of Health, Education and Welfare of the United States of America, Blue Cross Association and Northwest Hospital Service, dba Blue Cross of Oregon, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Robert G. Simpson, Spaulding, Portland, Or., on brief; Ridgway K. Foley, Jr., Southern, Spaulding, Kinsey, Williamson & Schwabe, Portland, Or., for plaintiff-appellant.
Jack G. Collins, Asst. U. S. Atty., Portland, Or., James C. Pyles, Baltimore, Md., on brief; Raenele C otee, Dept. HEW, Baltimore, Md., for defendants-appellees.
Appeal from the United States District Court for the District of Oregon.
Before COWEN, * Court of Claims Judge, and KILKENNY and HUG, Circuit Judges.
Appellant (Good Sam), the plaintiff below, appeals from a judgment dismissing its claim in an action prosecuted under the provisions of Title XVIII of the Social Security Act and related statutory provisions. The controversy grows out of a claim filed by Good Sam against appellee Blue Cross of Oregon (Blue Cross) for reimbursement of interest on construction loans as a current expense item under the Medicare Act, 42 U.S.C. § 1395, Et seq. (1970). In general, the controversy presents the question of whether interest costs incurred by Good Sam during the period of its new hospital construction in 1973 and 1974 should be considered as a current expense and therefore currently deductible, or should be capitalized and amortized over the years of the estimated life of the new facility.
Following denial of the claim, Good Sam filed a request for a hearing before the Provider Reimbursement Review Board (PRRB), the agency designated to hear Medicare disputes. The PRRB denied the claim. Good Sam, pursuant to the provisions of 42 U.S.C. § 1395Oo (f), filed a claim in the district court seeking review of the PRRB decision. Named as defendants in this action were the Secretary of Health, Education and Welfare, Blue Cross Association, and Northwest Hospital Service, dba Blue Cross of Oregon. The magistrate before whom the case was tried recommended the denial of appellant's and the granting of appellees' motion for summary judgment. On a full De novo review of the contested issues, the district judge followed the magistrate's recommendations and held for the appellees. Good Sam appeals. We affirm.
Whether Section 206 of the Provider Reimbursement Manual and Intermediary Letter No. 51 are exempt from the rulemaking requirements of the Administrative Procedure Act under the benefit exception contained in 5 U.S.C. § 553(a)(2).
Whether Section 206 of the Provider Reimbursement Manual and Intermediary Letter No. 51 are interpretive rules and, therefore, exempt from the rulemaking requirements of the Administrative Procedure Act under 5 U.S.C. § 553(b)(A).
Whether Section 206 of the Provider Reimbursement Manual and Intermediary Letter No. 51 are consistent with the Medicare statutes and regulations.
Inasmuch as the proceeding before the district court consisted of a review of the PRRB decision, we treat the findings of the magistrate and the district court's review and approval of those findings as subject to the rules on agency appeals contained in Chapter 7 of Title V of the United States Code as required by 42 U.S.C. § 1395Oo (f).
The standard of review in 5 U.S.C. § 706 frees the reviewing court of the time consuming and difficult task of weighing evidence, gives proper respect to the expertise of the administrative tribunal and helps promote uniform application of the statute. Consolo v. Federal Maritime Commission,383 U.S. 607, 620, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966). The review is not a determination of whether there is any genuine issue as to any material fact as in a ruling on a summary judgment motion, but rather whether the agency action was arbitrary, capricious, an abuse of discretion, not in accordance with law, or unsupported by substantial evidence on the record taken as a whole. 5 U.S.C. § 706(2).
The material facts are not in dispute. Appellant Good Sam, an Oregon nonprofit corporation, operates the Good Samaritan Hospital in Corvallis, Oregon. The Secretary of HEW has the responsibility for the administration of the Medicare Act. Appellee Blue Cross, under contract with HEW, computes and distributes payments to providers of health care services under the Medicare program. 42 U.S.C. § 1395h. Northwest Hospital Service administers the local Blue Cross plan. Good Sam is a provider of services within the meaning of the Act.
Blue Cross acts as a fiscal intermediary and distributes the trust funds of the Medicare program to providers of services to program beneficiaries. Estimated payments are made to providers periodically during the year with a final determination of the reimbursable costs made after the provider files a cost report at the end of its fiscal year. Blue Cross performs any necessary investigation and then makes a determination of the "reasonable costs" of covered services for which the provider is entitled In 1973, Good Sam began construction of a new 166-bed replacement hospital for its out-dated facility. The hospital was completed in 1975 and occupied on December 1st of that year. All patients were moved from the old to the new facility in one day. To finance the project, Good Sam entered into two mortgage agreements totalling approximately $8,500,000.00. Interest payments on construction advances amounted to $29,803.00 in 1973 and $178,743.00 in 1974. Good Sam filed the Medicare cost reports for both 1973 and 1974. Interest costs on construction loans are reimbursable under the Medicare plan. 20 C.F.R. §§ 405.419(a) and (b)(2).
to reimbursement. If the provider is not satisfied with that determination, it may request a hearing before the PRRB. 42 U.S.C. § 1395Oo . Judicial review is available in the United States District Court pursuant to 42 U.S.C. § 1395Oo (f).
The dispute here is over whether interest costs incurred by a provider of services while construction of a new facility is in progress may be included as an allowable cost in the current year, or must be capitalized as part of the new facility. If the interest costs may be included, Good Sam is entitled to current reimbursement. If they must be capitalized, reimbursement can only occur over the life of the hospital.
Blue Cross determined that the costs could not be expensed, but rather must be capitalized. On October 23, 1975, Blue Cross demanded payment of $69,941.50 from Good Sam, and Blue Cross thereafter began withholding portions of that amount from Good Sam's weekly interim Medicare payments for current reimbursable costs. On January 16, 1976, Good Sam requested a hearing before the PRRB.
The PRRB upheld the action taken by Northwest Hospital Service dba Blue Cross, finding: (1) that Section 206 of the Provider Reimbursement Manual issued in 1968 and Intermediary Letter No. 51 issued in 1966 were interpretive clarifications of the reimbursement regulations; (2) that 42 C.F.R. § 405.406(a) directed that widely accepted accounting practices in the hospital industry be followed; (3) that capitalization of construction loan interest is the standard hospital industry practice; and (4) that a pertinent federal district court decision, St. Francis Hospital v. Weinberger, 413 F.Supp. 323 (N.D.Cal.1975), cited by the hospital in support of its contentions was inapplicable since the construction project considered therein began prior to the Medicare program, and requiring capitalization of the construction loan interest there involved inequitable retroactivity not present in the instant controversy.
The threshold issue is whether Section 206 of the Provider Reimbursement Manual and Intermediary Letter No. 51 are exempt from the rulemaking requirements under the benefit exception provided for in 5 U.S.C. § 553(a)(2). These instruments require capitalization of interest costs incurred during construction of a new facility. Item # 6 of the letter reads:
"Question: May the interest during construction of an asset be expensed?
Answer: No. Interest during construction should be capitalized. However, when the asset is completed and in use, the interest on the liability may be expensed."
Section 206 provides:
"Interest During Period of Construction
Frequently, providers may borrow funds to construct facilities or to enlarge existing facilities. Usually, construction of facilities will extend over a long period of time, during which interest costs on the loan are incurred. Interest costs incurred during the period of construction must be capitalized as a part of the cost of the facility. The period of construction is considered to extend to the date the facility is put into use for patient care.
If the construction is an addition to any existing facility, interest incurred during the construction period on funds borrowed to construct the addition must be capitalized as a cost of the addition. After the construction period, interest on the loan is allowable, as an operating cost."
Good Sam challenges the procedures used to promulgate Section 206 and Letter No. 51. It argues that the promulgation of both violated the Administrative Procedure Act's rulemaking provisions, 5 U.S.C. § 553.
The APA's rulemaking provisions require agencies and departments to give notice and to afford opportunity for comment by interested persons before rules are promulgated. It is not disputed that the Secretary of HEW did not adhere to the APA's notice and comment provisions in issuing Letter No. 51 and Section 206. Consequently, the validity of the rules depends on the applicability of one of the exceptions to the normal rulemaking procedures.
The above mentioned rulemaking requirements do not apply "to the extent that there...
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