Graham Hosp. Ass'n v. Sullivan
| Decision Date | 27 August 1993 |
| Docket Number | No. 92-1002.,92-1002. |
| Citation | 832 F. Supp. 1235 |
| Parties | GRAHAM HOSPITAL ASSOCIATION, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, and The U.S. Department of Health and Human Services, Defendants. |
| Court | U.S. District Court — Central District of Illinois |
Ralph Froehling, Canton, IL, for plaintiff.
Donna Morros Weinstein, Dept. of Health and Human Services, Chicago, IL, Gerard Brost, Asst. U.S. Atty., Peoria, IL, for defendants.
Pending before the Court is Plaintiff's Motion for Summary Judgment and Defendants' Cross-Motion for Summary Judgment. For the reasons set forth below, Plaintiff's Motion for Summary Judgment is granted and Defendants' Motion for Summary Judgment is denied.
Plaintiff, Graham Hospital Association ("Graham"), participates as a fully qualified provider of hospital services and skilled nursing services under the Federal Health Insurance Program for the Aged and Disabled, ("Medicare Program"). See 42 U.S.C. § 1395 et seq. The Medicare Program provides certain hospital insurance benefits to enrolled beneficiaries and establishes a reimbursement system through which providers of hospital services ("providers"), including Graham, are reimbursed for the reasonable and necessary costs which they incur in furnishing these services to Medicare beneficiaries pursuant to 42 U.S.C. § 1395x(v)(1)(A).
Hospital providers such as Graham record the allowable costs and expenses incurred for services furnished to Medicare beneficiaries for each fiscal year and submit reports to their respective Medicare Fiscal Intermediary ("Intermediary") pursuant to 42 U.S.C. § 1395h. The Intermediary, in this case Blue Cross and Blue Shield Association/Blue Cross and Blue Shield of Illinois, must determine the proper amount of allowable costs to be reimbursed under the Medicare Program to the provider. A provider may appeal the Intermediary's determination of allowable costs to the Provider Reimbursement Review Board ("PRRB") established under 42 U.S.C. § 1395oo(h).
At the end of calendar year 1986, Graham's long term debt consisted of: (1) First Mortgage Revenue Bonds, Series 1975 ("Series 1975 Bonds"): principal balance of $2,900,000 with interest rates between 6.7% and 8.625% per annum, and (2) Series 1981 Revenue Bonds ("Series 1981 Bonds"): principal balance of $6,525,000 with an interest rate of 14.25% per annum. Both series matured no earlier than 1995. When interest rates declined during the mid-1980's, Graham began to look for a way to relieve its burden of the relatively high rate of interest required by the Series 1981 Bonds. In January 1987, through the Illinois Health Facilities Authority, Graham issued bonds in the amount of $10,595,000 dated January 15, 1987 ("Series 1987 Bonds"). The purpose of the issue was to refund the Series 1975 Bonds on April 1, 1987 and advance refund the Series 1981 Bonds as of July 1, 1991, the call date of that issue. The mechanism Graham used to eliminate the Series 1987 Bonds necessarily included the establishment of an irrevocable trust. The proceeds of the Series 1987 Bonds together with other available funds were used (1) to enable the trustee to purchase direct obligations of the United States sufficient to pay the principal off, the redemption premium, and interest on the Series 1981 and 1975 Bonds until and at their respective redemption dates, (2) provide funds for a debt service reserve fund, and (3) pay costs related to issuance of the Series 1981 Bonds, refunding the Series 1975 Bonds and advance refunding the Series 1981 Bonds. The 1981 and 1975 bond issues were extinguished and removed from Graham's books and the Series 1987 Bonds were added.
In connection with refinancing, Graham applied Generally Accepted Accounting Principles ("GAAP") and calculated a loss which was reflected as an extraordinary item in 1987, the year of refinancing. The total amount of this "loss" as a result of the advance refunding was $2,576,781. Of that amount, $2,364,769 related to the 1981 Bonds. Graham claimed the loss on defeasance in its 1987 cost report to the Intermediary. The portion of the loss attributed to the 1975 Bonds, $212,012, was allowed by the Intermediary and is not at issue. The recorded loss on the advance refunding for the 1981 Bonds, $2,364,769.33, was comprised of the call premium (2% of $6,525,000, $130,500), unamortized bond expense at $351,778.28, interest expense through the call date (July 1, 1991) $4,096,340.60, less the estimated interest income from the escrow fund investments over the period prior to the call date, $2,213,849.55. The Medicare share of the loss was calculated at $1,250,000. These costs were calculated pursuant to 42 U.S.C. § 1395x(v)(1)(A) which requires the Secretary to promulgate regulations that interpret "reasonable costs" pursuant to "principles generally applied by national organizations." See also 42 C.F.R. 413.24(a), which requires that cost data provided by hospitals "must be based on an approved method of cost finding and on the accrual basis of accounting," and 42 C.F.R. § 413.20(a), which requires that "standardized definitions, accounting, statistics, and reporting practices that are widely accepted in hospital and related fields were followed." Because no statute or regulation directly addresses the treatment of a loss incurred on an advanced refunding, Graham relied on GAAP pursuant to ¶ 8 of Accounting Principles Board ("APB") Opinion No. 261 which states:
Recognition Currently in Income. Some accountants believe a difference on refunding is similar to the difference on the other early extinguishments and should be recognized currently in income in the period of the extinguishment. This view holds that the value of the old debt has changed over time and that paying the call rice or current market price is the most favorable way to extinguish the debt. The change in the market value of the debt is caused by a change in the market rate of interest, but the change has not been reflected in the accounts. Therefore, the entire difference is recorded when the specific contract is terminated because it relates to the past periods when the contract was in effect.... When such debt originally issued at par is refunded, few accountants maintain that some portion of past interest should be capitalized and written off over the remaining life of the old debt or over the life of the new debt.
APB Opinion 26 at AR. 253. This paragraph, among others, provided the primary basis for the Board's conclusion that:
A difference between the reacquisition price and the net carrying amount of the extinguished debt should be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item.... Gains and losses should not be amortized to future periods.
APB Opinion at AR. 256.
In response to Graham's fiscal report for 1987, the Intermediary allowed $229,000 of the loss in fiscal year 1987 and applied § 233 of Part 1 of the Provider Reimbursement Manual (HSFA Pub. 15-A) to the remainder transaction. Section 233 required amortization of the remainder of the defeasance loss over the remaining life of the 1981 Bonds. Plaintiff appealed the Intermediary's determination to the PRRB pursuant to 42 U.S.C. § 1395oo(a)(3).
On September 30, 1991, the PRRB reversed the adjustments of the Intermediary, stating that "the entire loss on defeasance should be recorded when the bond contract is terminated, because it relates to the past periods when the bond contract was in effect." The Board noted that its decision was supported by GAAP, as outlined in APB-26 on early extinguishment of debt. The PRRB stated that the loss resulted from the decrease in the market value of the debt. Since this decrease was not recognized periodically, it should be recognized at the time of defeasance similar to the treatment of an asset that it retired prematurely. The PRRB concluded that the Supreme Court's decision in Thor Power Tool Co. v. Commissioner of Internal Revenue, 439 U.S. 522, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979) supported its conclusion that, absence a specific regulatory instruction, Medicare Program policy requires that GAAP be followed.
On October 16, 1991, the Deputy Administrator of the Health Care Financing Administration gave notice of his intention to review the PRRB's September 30, 1991 decision. The Secretary's final determination, rendered November 27, 1991, reversed the decision of the PRRB. The Secretary noted that under 42 U.S.C. § 1395f(b), providers of health care services to Medicare beneficiaries are entitled to be reimbursed for the "reasonable cost" of the capital-related component of providing such services. The Secretary acknowledged that the loss claimed by Graham in this case is a capital-related cost which is still reimbursed on a cost basis. "Reasonable cost" is defined in the Social Security Act as:
The reasonable cost of any services shall be the cost actually incurred, ... and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs.... In prescribing the regulations referred to in the preceding sentence, the Secretary shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations ... in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. Such regulations may provide for determination of the costs of services on a per diem, per unit, per capita, or other basis, may provide for using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services, may provide for the establishment of limits on the direct or indirect overall...
To continue reading
Request your trial
-
Mother Frances Hosp. of Tyler, Texas v. Shalala
...existing regulations, section 233 impermissibly changed the meaning of the properly promulgated regulations. Id. at 835; See also Graham, 832 F.Supp. at 1243. Hence, the Guernsey court found that section 233 worked a substantive change in the regulations and was thus an invalid attempt to m......