Monongahela Valley Hosp., Inc. v. Bowen

• Decision Date: 16 January 1990
• Docket Number: Civ. A. No. 87-1697.
• Citation: 728 F. Supp. 1172
• Parties: MONONGAHELA VALLEY HOSPITAL, INC. v. Otis R. BOWEN, Secretary of the Department of Health and Human Services.
• Court: U.S. District Court — Eastern District of Pennsylvania

728 F. Supp. 1172

MONONGAHELA VALLEY HOSPITAL, INC. v. Otis R. BOWEN, Secretary of the Department of Health and Human Services.

Civ. A. No. 87-1697.

United States District Court, W.D. Pennsylvania.

January 16, 1990.

Mary Drake Korsmeyer, Peacock, Keller, Yohe, Day & Ecker, Washington, Pa., for plaintiff.

U.S. Atty., Pittsburgh, Pa. and Javier A. Arrastia, Office of Gen. Counsel, Dept. of Health and Human Services, for defendant.

OPINION

COHILL, Chief Judge.

Plaintiff Hospital challenges the Secretary's decision concerning Medicare reimbursement for the fiscal year ending June 30, 1984. At issue is the Secretary's interpretation of regulations regarding interest offset when applied to a multi-corporation organizational structure.

FACTS

Plaintiff Monongahela Valley Hospital, Inc. (Hospital) is a tax exempt non-profit corporation under the Internal Revenue Code, 26 U.S.C. § 501(c)(3), operating a hospital in Monongahela, Pennsylvania. Plaintiff was formed in 1976 as a result of the merger of two smaller hospitals.

In 1982 the Hospital underwent a corporate restructuring. The Hospital survived as a separate non-profit corporation, but it became a wholly owned subsidiary of a newly created parent corporation, Mon Vale Health Resources, Inc. (Mon Vale). This parent corporation also attained tax exempt status as a non-profit corporation. Plaintiff claims that this restructuring permitted greater flexibility in management, financing and regulatory concerns.

In June, 1982, the Hospital decided that a radiation therapy and oncology center was necessary to serve the people of the area, and so the Hospital applied to the Commonwealth's Department of Health for permission to build it. The projected cost of the center was $2.7 million. In July, 1983, the Hospital also applied to the Commonwealth for approval of the purchase of digital subtraction angiography equipment for $1.7 million. In March, 1984, the Hospital decided to replace its CAT scanner at a cost of $1.2 million.

These projects were approved by the Department of Health, but instead of being carried out by the original applicant (i.e., the Hospital) each project was carried out by Mon Vale with funds transferred to it by the Hospital. Upon completion of the projects, Mon Vale then transferred title to the Hospital. Simply put, the Hospital made the applications, obtained the necessary approvals, provided the funds, and ultimately received and operated the completed projects, but Mon Vale served as a middleman or conduit for each project.

In the Spring of 1984, Blue Cross, acting in its capacity as Medicare Intermediary, audited the Hospital for the fiscal year ending June 30, 1983. At that time the auditor raised questions about the details of the corporate restructuring and the transfer of $3.4 million from the Hospital to Mon Vale earmarked for the above-described projects.

At this point the reader is probably asking "So what?" If the projects were completed and ultimately titled in the entity that paid for them, where's the harm? The answer lies in the interstices of the Medicare regulatory scheme. The reader may follow at his peril as we step gingerly into the maze.

Medicare reimburses health care providers for certain types of medical care provided to aged and disabled patients eligible for Medicare. Reimbursement is made on the basis of certain computations which are horribly complicated. These computations are made by a middleman known as a "Fiscal Intermediary," which in this case was Blue Cross of Western Pennsylvania.

Apparently hospitals receive interim reimbursements during the course of the year and at the close of the fiscal year a final audit is performed by the Fiscal Intermediary to balance accounts.

These unfathomable reimbursement computations in some manner include consideration of interest. To grossly oversimplify, it appears that interest expense on borrowed money is somehow included in the computation of reimbursable costs, while interest income on invested funds is in some manner offset against such costs.

We trust that the patient reader will begin to see the focus. Beginning with the 1982-83 fiscal year, the Hospital claimed interest expense on money it had borrowed and sought to include such expense in the computation to determine reimbursable costs. But the Fiscal Intermediary noted that the Hospital had transferred $3.4 million to its parent, Mon Vale, and Mon Vale had earned a considerable amount of interest on these funds. The auditing intermediary thus sought to offset the interest earned by Mon Vale against the interest expense incurred by the Hospital, thereby reducing the Medicare reimbursement due the Hospital.

Fortunately for the Hospital, the auditing intermediary backed off from this position for the 1982-83 fiscal year. The final audit report for that year, issued only four days before the close of the succeeding fiscal year, did not include the interest earned by Mon Vale as an offset against reimbursable costs.

The Hospital was not so fortunate in the audit for the fiscal year 1983-84. During that fiscal year, while the auditor was raising serious questions about the interest earned by Mon Vale on the $3.4 million transferred from the Hospital in 1982-83, the Hospital transferred an additional $2.1 million to Mon Vale. On January 29, 1985 the Health Care Financing Administration (HCFA), the federal agency which administers the Medicare program, issued an internal memo to Fiscal Intermediaries requiring the inclusion of interest earned by a parent or related corporation when computing a provider's reimbursement. On this basis the Fiscal Intermediary, conducting its audit for the 1983-84 fiscal year, offset Mon Vale's interest income of $386,998 against the Hospital's expenses for the year, resulting in a significantly reduced Medicare benefit.

The Hospital made timely appeals through the appropriate administrative channels. Although a minor adjustment was made ($9,700 interest earned on donations made directly to Mon Vale could not be offset against the Hospital), the auditor's position on the core of the dispute was affirmed.

The Hospital then filed this suit pursuant to 42 U.S.C. § 1395f seeking to overturn the Secretary's decision and obtain reimbursement of the higher sum due when the offset is not applied.

The parties have filed cross motions for summary judgment with briefs and the administrative record. A variety of issues are presented which we address seriatim.

1. Equitable Estoppel

Plaintiff seeks to apply equitable estoppel against the Secretary, arguing that the Fiscal Intermediary's decision not to offset Mon Vale's interest earnings in fiscal year 1982-83 lulled plaintiff into a state of repose, and the Secretary's change in policy for fiscal year 1983-84 caught plaintiff by surprise. Assuming for the moment that equitable estoppel may be applied against the government, a premise that is not entirely clear, see, Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 60, 104 S.Ct. 2218, 2224, 81 L.Ed.2d 42 (1984) (hereinafter Heckler v. Crawford), we conclude that the Hospital's argument has several fatal flaws.

To invoke equitable estoppel a party must establish a material misrepresentation by the party to be estopped and reasonable detrimental reliance on that misrepresentation by the party asserting estoppel. E.g., Heckler v. Crawford, 467 U.S. at 59, 104 S.Ct. at 2223; Restatement 2d of Torts, § 894 (1979).

In the present case, the Hospital contends that the Fiscal Intermediary concluded the 1982-83 audit without applying the offset and assured the Hospital that the same result would obtain for 1983-84.¹ The Hospital claims that on the basis of this assurance, it did not alter its accounts for 1983-84, and thus was caught by surprise when the Secretary sought to offset Mon Vale's interest earnings. It is this alleged misrepresentation that plaintiff seeks to hold against the government to effect an estoppel.

The Hospital misapprehends the nature of the relationship between the Fiscal Intermediary and the Secretary. The Fiscal Intermediary is only a hired hand, an independent contractor selected by the government to conduct the audits. The Fiscal Intermediary cannot speak with finality for the Secretary on the interpretation of regulations and certainly cannot make policy pronouncements. Heckler v. Crawford, 467 U.S. at 64, 65, 104 S.Ct. at 2225, 2226. Therefore the Secretary cannot be bound by the statements of the Fiscal Intermediary and, charged with this knowledge, the Hospital could not have reasonably relied on such statements.

The fallacy of plaintiff's position is further highlighted by the nature of the audits themselves. Medicare audits are subject to reopening and adjustment for a three year period. Thus the Hospital had to be aware that nothing was written in stone with the 1982-83 audit. Indeed plaintiff is fortunate that the Secretary applied the offset in the 1983-84 fiscal year and did not reopen the 1982-83 audit.

Finally, we fail to see how the 1982-83 audit and the alleged assurances from the Fiscal Intermediary caused plaintiff to suffer detriment in 1983-84. The 1982-83 audit was completed only four days before the end of the 1983-84 fiscal year. Mon Vale still held the $3.4 million transferred to it in 1982, and had received an additional $2.1 million from the Hospital in 1983-84. Mon Vale had already earned all but four days of interest for the 1983-84 fiscal year when the Fiscal Intermediary made its alleged misrepresentation. Furthermore, though the issue of offsetting Mon Vale's interest income had been raised as a serious matter by the Fiscal Intermediary months earlier, Mon Vale and the Hospital took no steps to avoid the effect of the offset rule in the event it was ultimately upheld. Having placed all its eggs in one basket, hoping to convince the Fiscal Intermediary that its interpretation was wrong, the Hospital cannot...