GRAND ISLANDER HEALTH CARE CENTER v. Heckler, Civ. A. No. 82-0304-S.

• Decision Date: 17 October 1983
• Docket Number: Civ. A. No. 82-0304-S.
• Citation: 573 F. Supp. 405
• Parties: GRAND ISLANDER HEALTH CARE CENTER, INC., Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, and The Travelers Insurance Company, Defendants.
• Court: U.S. District Court — District of Rhode Island

573 F. Supp. 405

GRAND ISLANDER HEALTH CARE CENTER, INC., Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, and The Travelers Insurance Company, Defendants.

Civ. A. No. 82-0304-S.

United States District Court, D. Rhode Island.

October 17, 1983.

COPYRIGHT MATERIAL OMITTED

Higgins, Cavanagh & Cooney by Guido R. Salvadore, Gerald C. DeMaria, Robert G. Jeffrey, Providence, R.I., for plaintiff.

Clifford Pierce, Asst. Regional Counsel, Dept. of Health & Human Services, Boston, Mass., Lincoln C. Almond, U.S. Atty., Everett C. Sammartino, Robert L. Gammell, Asst. U.S. Attys., Providence, R.I., for defendants.

OPINION

SELYA, District Judge.

This is an action brought by Grand Islander Health Care Center, Inc. ("Grand Islander") pursuant to 42 U.S.C. § 1395oo (f)(1). Plaintiff appeals from a decision rendered by the Provider Reimbursement Review Board (the "Board" or "PRRB") in which the Board affirmed the denial of various of Grand Islander's claims for reimbursement under the Medicare program, 42 U.S.C. § 1395 et seq. (the "Act").¹ The Act is a federal insurance scheme which allows for the reimbursement of "reasonable costs" to those who provide health-care services to Medicare-eligible individuals, 42 U.S.C. § 1395f(b), and which places on the Secretary of Health and Human Services the responsibility for determining the amount of such payments. 42 U.S.C. § 1395g. Under 42 U.S.C. § 1395h, the Secretary is authorized to contract with public or private entities as fiscal intermediaries to assist with the disbursement of Medicare funds.

In the present case, Grand Islander, the owner of a skilled nursing intermediate care facility in Middletown, Rhode Island, disputes a denial originally issued by the Travelers Insurance Company ("Travelers"), a duly appointed fiscal intermediary, and subsequently affirmed by the Board following a plenary evidentiary hearing. The denial relates to reimbursement for various items contained in the plaintiff's cost reports for the years ended December 31, 1975 and December 31, 1976.

The matter is before the court on cross-motions for summary judgment, each based upon the administrative record. Perscrutation of the issues raised in this appeal requires, at the outset, an explication of the factual setting giving rise to the litigation.

I.

Grand Islander is a wholly-owned subsidiary of Great American Nursing Centers, Inc. ("Great American"). It operates a 134-bed nursing home² in Middletown. Thirty-two of these beds are certified for Medicare participation as a distinct-part skilled nursing facility. Grand Islander leases its building and equipment from First Equity Capital Corporation ("First Equity"), another wholly-owned subsidiary of Great American.

In approximately August of 1969, Great American purchased the tract of land on which the nursing home is presently situated. In February, 1970 it conveyed the real estate to First Equity. Soon thereafter, First Equity entered into a construction contract with Medical Building Developers, Inc. ("MBD"), a Rhode Island corporation of which Andrew Panteleakis was the sole shareholder.³ The ubiquitous Mr. Panteleakis was also an officer, director, and a 35% interest-holder of Great American. Prior to entering into the contract with MBD, First Equity had received a computerized cost analysis for the construction of the facility from Bowerman Brothers, Inc. ("Bowerman"), an independent design and construction company. The Bowerman breakdown projected anticipated construction costs of $2,115,781.00. At the hearing before the PRRB, there was evidence that First Equity also received an oral price quotation from one Carlone. Yet, First Equity never advertised for bids in any manner, nor did it receive so much as one formal written bid proposal from any individual or entity before entering into the MBD contract.

Since 1961, Panteleakis has been engaged in numerous construction ventures in Massachusetts, Connecticut, and Rhode Island, invariably through corporate alter egos specially organized for that end in each of these three states. He formed MBD in 1972 for the stated purpose of developing and constructing medical buildings. MBD actually built three such facilities (of which the Grand Islander was the second). Norwich Medical Arts Building in Norwich, Connecticut, MBD's first project, was begun in 1972 and was completed in 1973 (at about the time that ground was broken for the Grand Islander facility). Work on the third project undertaken by MBD (the construction of the Groton Regency Nursing Home) was commenced after Grand Islander was built.

During the period when Grand Islander was under construction, MBD rented space from American Capital, Inc. ("American"), in "Miramar", a stately fifty-room mansion located in Newport, Rhode Island. Not surprisingly, American was owned entirely by Panteleakis. In addition to MBD, Medical Building Designers ("M-Des"), an engineering firm of which Panteleakis was also the sole shareholder, enjoyed the use of office space in these posh surroundings.⁴ This was not the only thing which the two Miramar tenants had in common: during the relevant time period, M-Des did work for the Norwich Medical Arts Building.

Financing for the Grand Islander facility was acquired through the Old Stone Bank, Providence, Rhode Island. First Equity took a 25-year mortgage loan in the principal amount of $1,700,000.00 at an interest rate of 9¼ percent in order to finance construction costs. It also borrowed $300,000.00 at the bank's then standard variable rate to assist in the purchase of furnishings, fixtures, and equipment.

Grand Islander admitted the first patient to its non-Medicare wing on November 26, 1974. Its distinct wing was Medicare-certified on February 15, 1975 and admitted its first patient a few days later. At that time (February 21, 1975), the non-distinct wing had a 34% occupancy rate.

In this action, plaintiff disputes the following conclusions and findings of the Board:

(1) Grand Islander does not qualify under the exception to the related organization principle;⁵ and, therefore, its reimbursable construction costs should be based on the costs actually incurred by MBD, rather than on the costs paid by First Equity.

(2) Allowable overhead costs should be limited to those verified by an independent audit conducted by the State of Rhode Island.

(3) The compensable interest expense on the loans allegedly taken to finance the construction should be computed on the basis of the costs incurred by MBD, minus the owner's investment in the project.⁶

(4) Grand Islander failed adequately to document certain equipment purchases, and consequently, the interest expense incurred in relation to such acquisitions was not allowable.

(5) The calculation of the occupancy differential between the certified and non-certified portions of a facility necessary to determine standby cost allocation⁷ should be based on a comparison of occupancy rates of the two sections during the cost reporting year.

(6) Grand Islander failed adequately to substantiate its claim for the reimbursement of compensation allegedly paid to Panteleakis as co-administrator of the nursing facility.⁸

The plaintiff contends that in so holding, the Board acted in a manner which was unlawful, arbitrary, capricious, and characterized by abuse of discretion. Grand Islander further contends that the Board's decision is unsupported by substantial evidence and unwarranted by the facts. To frost the cake, it adds allegations of unconstitutionality. The plaintiff prays relief in the form of an order reversing the PRRB's decision and insuring that Grand Islander be reimbursed in full for the disputed costs.

For each in reference, these claims will be addressed below severally (albeit not in the exact order in which they have been advanced by Grand Islander).

II.

In order to address Grand Islander's claims, the appropriate standard of review must first be delineated. Plaintiff has properly invoked the jurisdiction of this court pursuant to 42 U.S.C. § 1395oo (f)(1). The scope of the available judicial review is, however, extremely narrow. 42 U.S.C. § 1395oo (f)(1) provides that appeals from the Secretary's decisions shall be tried pursuant to the applicable provisions of the Administrative Procedure Act. Under that standard, a court may overturn an agency's action only if it is found to be:

(a) arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;

(b) contrary to constitutional right, power, privilege or immunity;

(c) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;

(d) without observance of procedure required by law; or

(e) unsupported by substantial evidence.

5 U.S.C. § 706; Cheshire Hospital v. New Hampshire-Vermont Hospitalization Service, Inc., 689 F.2d 1112, 1117 (1st Cir. 1982); American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F.Supp. 605, 610 (D.D.C. 1979), aff'd, 677 F.2d 118 (D.C.Cir.1981).

Furthermore, several of the claims posited by the plaintiff constitute challenges to the Board's interpretation of its own regulations. The First Circuit has put a gloss on the Administrative Procedure Act in regard to such claims:

Generally, such an interpretation is of controlling weight, unless the reviewing court determines that it is plainly erroneous or inconsistent with the regulation. Udall v. Tallman, 380 U.S. 1, 16-17, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Bowles v. Seminole Rock Co., 325 U.S. 410, 413-14, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700 (1945). Deference is particularly appropriate in an area that is as complex as the field of Medicare reimbursement....

Cheshire Hospital, 689 F.2d at 1117. See also Hospital San Jorge v. Secretary of Health, Education & Welfare, 616 F.2d 580, 589 (1st Cir.1980) (Campbell, J., concurring).

Plaintiff also challenges the promulgation of C.F.R. § 405.427 as an...