Guernsey Memorial Hosp. v. Secretary of Health and Human Services, 92-3563
Decision Date | 18 June 1993 |
Docket Number | No. 92-3563,92-3563 |
Citation | 996 F.2d 830 |
Parties | , Medicare & Medicaid Guide P 41,492 GUERNSEY MEMORIAL HOSPITAL, Plaintiff-Appellant, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant-Appellee. |
Court | U.S. Court of Appeals — Sixth Circuit |
Scott W. Taebel, Bricker & Eckler, Columbus, OH (argued and briefed), for plaintiff-appellant.
Donald T. McDougall (argued and briefed), Dept. of Health and Human Services, Office of Gen. Counsel, Chicago, IL, Joseph E. Kane, Asst. U.S. Atty., Office of U.S. Atty., Columbus, OH, for defendant-appellee.
Before: JONES and NELSON, Circuit Judges; and LIVELY, Senior Circuit Judge.
Appellant Guernsey Memorial Hospital, a participant in the federal government's Medicare program, is entitled to reimbursement by the Department of Health and Human Services for reasonable costs incurred in providing services to Medicare patients. Such costs include the cost of money employed in financing hospital improvements.
The particular costs at issue in this case are known technically as "advance refunding" or "defeasance" costs: costs incurred in connection with the refunding of bonded mortgage indebtedness ahead of schedule in order to obtain new financing. It is undisputed that the hospital is entitled to reimbursement for reasonable advance refunding costs. There is a dispute, however, as to when and how reimbursement is to be made--in a lump sum payable now, or in a series of payments stretched over the remaining life of the original bonds?
Under generally accepted accounting principles (referred to in the accounting world as "GAAP"), advance refunding costs are not amortized over the life of the original bonds. Such costs must be recognized, in full, up front. Regulations promulgated by the Department strongly imply, if they do not say in so many words, that reimbursement will be made on the basis indicated by GAAP.
A Department manual on reimbursement provides otherwise. The manual says that any loss incurred through advance refunding of existing debt must be amortized, as opposed to being recognized immediately.
Unlike the regulations, the manual was not adopted in accordance with the notice and comment procedures mandated, for substantive rules, by the rulemaking section of the Administrative Procedure Act, 5 U.S.C. § 553. The dispositive question presented here is whether the manual provision constitutes a substantive rule, under the Administrative Procedure Act, or an "interpretative" rule to which the statutory notice and comment requirements do not apply. If substantive, the rule is void; if merely interpretive, it is not. See State of Ohio Dep't of Human Services v. U.S. Dep't of Health & Human Services, 862 F.2d 1228 (6th Cir.1988).
We conclude that the manual's amortization requirement effects a substantive change in the regulations. It is not an interpretation, it is a stand-alone substantive rule. And it is void by reason of the agency's failure to comply with the Administrative Procedure Act in adopting it.
The district court, in the decision now before us on appeal, impliedly held the manual to be interpretive; the court therefore upheld the validity of the amortization requirement. 796 F.Supp. 283. We shall reverse the court's decision on this point. The decision will be affirmed on an unrelated point involving the proper treatment of income earned on funds placed in an account dedicated to the payment of interest on the newly issued bonds.
Guernsey Memorial Hospital, a not-for-profit acute care institution located in Cambridge, Ohio, paid for certain capital improvements with the proceeds of mortgage revenue bonds issued in 1972 and 1982. This bonded indebtedness was refinanced, on advantageous terms, in 1985.
Most of the proceeds of the 1985 bond issue were used to purchase United States Treasury obligations that were escrowed for the benefit of the holders of the older bonds. This advance refunding arrangement permitted defeasance of the mortgages on the hospital property, and the liens of the 1972 and 1982 bond indentures were discharged and released in 1985.
Prior to the 1985 advance refunding the hospital had been amortizing various costs (including legal and accounting fees, feasibility study costs, and underwriter discounts) incurred in connection with the earlier bond issues. When the earlier bonds were "defeased," the hospital--acting in accordance with GAAP, 1 as required by 42 C.F.R. § 413.20--took the unamortized balance of these costs as a charge against current income. A call premium advanced by the hospital in 1985 as part of the cost of defeasance was handled the same way, also in accordance with the requirements of GAAP.
The advance refunding costs came to a net amount of $672,581. Of that sum, the hospital sought reimbursement of approximately $314,000.
The request for reimbursement was denied by the "fiscal intermediary" to which such requests are routed initially. The hospital appealed to the Provider Reimbursement Review Board, a body established by the Secretary of HHS pursuant to 42 U.S.C. § 1395oo. After an evidentiary hearing the Review Board issued a decision allowing reimbursement in full as of 1985. (The Review Board also decided in favor of the hospital on a debt service fund issue that will be discussed in Part III of this opinion.) Upon review by the Administrator of the Health Care Financing Administration, however, the decision of the Review Board was reversed. Under 42 C.F.R. § 405.1875 the reversal represented the final decision of the Secretary.
Insofar as reimbursement of advance refunding costs was concerned, the Administrator held, in accordance with a policy announced in § 233 of the agency's Provider Reimbursement Manual, that the items in question had to be amortized over the life of the refunded debt. The Administrator said that the manual section was "interpretive" of the regulations.
Pursuant to § 1878(f) of the Social Security Act, 42 U.S.C. § 1395oo (f), the hospital sought judicial review in the United States District Court for the Southern District of Ohio. In a carefully considered decision published at 796 F.Supp. 283 (S.D.Ohio 1992), that court denied a summary judgment motion of the hospital and granted summary judgment to the Secretary on both the amortization issue and the debt service fund issue. As to the former issue, the district court recognized that manual section 233 "does not have the force of regulation because it was not subject to the notice and comment procedure which precedes adoption of regulations codified in [the Code of Federal Regulations]." Id. at 286. The district court nonetheless held that it was permissible for the agency to follow the manual in preference to GAAP. For the reasons stated in the part that follows, we disagree.
The amount the Department pays for services provided by hospitals such as Guernsey Memorial is fixed by statute at "the reasonable cost of such services, as determined under section 1395x(v) of [Title 42 of the United States Code]," if that cost does not exceed "the customary charges with respect to such services." 42 U.S.C. § 1395f(b)(1). "The reasonable cost of any services shall be the cost actually incurred," § 1395x(v) provides, "and shall be determined in accordance with regulations establishing the method or methods to be used...."
"In prescribing the regulations," § 1395x(v) goes on to say, "the Secretary shall consider, among other things, the principles generally applied by national organizations...." We can safely assume that "national organizations" keep their books in accordance with "generally accepted accounting principles."
The fact that the Secretary must "consider" GAAP in prescribing her regulations does not mean that GAAP must be adopted in the regulations, of course. But when one turns to Part 413 of Title 42 of the Code of Federal Regulations--a part devoted in its entirety to "Principles of Reasonable Cost Reimbursement"--one finds what appears to be a flat statement that generally accepted accounting principles "are followed." See 42 C.F.R. § 413.20, which is contained in a sub-part dealing with "Accounting Records and Reports."
"The principles of cost reimbursement," § 413.20(a) says, "require that providers [hospitals, e.g.] maintain sufficient financial records and statistical data for proper determination of costs payable [i.e., reimbursable by HHS] under the program." The regulation continues as follows:
(Emphasis supplied.)
Where a hospital keeps its books on the accrual basis and in accordance with an approved method of cost-finding, changes not only are not required by the regulations, they do not seem to be permitted: "The cost data must be based on an approved method of cost finding and on the accrual basis of accounting." 42 C.F.R. § 413.24(a) (emphasis supplied). Section 413.24(b)(2) goes on to give this explanation of the accrual basis of accounting:
"Under the accrual basis of accounting, revenue is reported in the period it is earned, regardless of when it is collected, and expenses are reported in the period in which they are incurred, regardless of when they are paid."
In general terms, the introduction to Part 413 explains, "the methods of reimbursement should result in current payment so that institutions will not be disadvantaged, as they sometimes are under other arrangements, by having to put up money for the purchase of goods and services well before they receive reimbursement."
It is undisputed, in the case at bar, that Guernsey Memorial Hospital keeps its books on the accrual basis of accounting and in accordance with...
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