Monongahela Valley Hosp., Inc. v. Sullivan

Decision Date20 September 1991
Docket NumberNos. 90-3207,90-3247,s. 90-3207
Citation945 F.2d 576
Parties, 35 Soc.Sec.Rep.Ser. 154, Medicare & Medicaid Guide P 39,595 MONONGAHELA VALLEY HOSPITAL, INC. v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Monongahela Valley Hospital, Inc., Appellant in 90-3247, Louis W. Sullivan, M.D., Secretary, Appellant in 90-3207.
CourtU.S. Court of Appeals — Third Circuit

Mary Drake Korsmeyer (argued), Peacock, Keller, Yohe, Day & Ecker, Washington, Pa., for Monongahela Valley Hospital, Appellant in 90-3247.

Stuart M. Gerson, Asst. Atty. Gen., Thomas W. Corbett, Jr., U.S. Atty., Anthony J. Steinmeyer, John C. Hoyle (argued), Appellate Staff Civil Div., Dept. of Justice, Washington, D.C., for Louis W. Sullivan, M.D., Secretary, Appellant in 90-3207.

Before BECKER, NYGAARD and ALITO, Circuit Judges.


BECKER, Circuit Judge.

These consolidated cross-appeals by plaintiff Monongahela Valley Hospital ("Monongahela") and defendant Louis W. Sullivan, Secretary of Health and Human Services ("HHS"), concern the Secretary's interpretation of the former HHS regulations under which hospitals were reimbursed for services provided to Medicare beneficiaries on the basis of actual, reasonable costs incurred. 1 See 42 C.F.R. § 405.451, recodified at 42 C.F.R. § 413.9 (1990). 2 Primarily at issue are the regulations requiring health care providers that claim interest expense as a reimbursable cost of rendering health care services to Medicare beneficiaries to offset any investment income against that interest expense, unless the provider complies with the rigorous requirements for demonstrating that such investment income is to be used to fund the depreciation of assets. See 42 C.F.R. § 405.419, recodified at 42 C.F.R. § 413.153 (1990). Also at issue is a regulation that, for the purpose of determining whether investment income is to be offset against interest expense, treats health care providers under common ownership or control as a single entity. See 42 C.F.R. § 405.427, recodified at 42 C.F.R. § 413.17(a) (1990).

Monongahela brought this action in the district court for the Western District of Pennsylvania pursuant to 42 U.S.C. § 1395oo (f)(1), which provides for judicial review of final administrative decisions concerning disputed claims for Medicare reimbursement. The action followed administrative determinations requiring the offset of Monongahela's investment income against its interest expense--thereby reducing by approximately $213,000 Monongahela's Medicare reimbursement for the fiscal year ("FY") ending June 30, 1984. These determinations were made by: (1) Blue Cross-Blue Shield of Western Pennsylvania ("Blue Cross"), Monongahela's fiscal intermediary; (2) the Provider Reimbursement Review Board (the "Board"); and (3) the Administrator of the Health Care Financing Administration (the "HCFA").

The district court held that the Secretary did not act arbitrarily and capriciously in determining that the interest earned on funds transferred from Monongahela to its parent corporation, Mon Vale Health Resources, Inc. ("Mon Vale"), must be imputed to Monongahela to be offset against interest expense. The court also determined that, even though the fiscal intermediary had failed to require such a reduction when Monongahela applied for its Medicare reimbursement in the previous year, the Secretary was not equitably estopped from requiring that Monongahela subsequently offset the interest. On Monongahela's appeal from these adverse decisions, we affirm.

The district court further held, however, that the Secretary had acted arbitrarily and capriciously in determining that the interest earned on funds that Monongahela had transferred to Mon Vale did not fall within the exception to the interest offset rule concerning investment income used to fund the depreciation of assets. Although Mon Vale failed to place the transferred funds in a separate "funded depreciation account," as required by the Secretary's Provider Reimbursement Manual, the district court concluded that Monongahela did not have to offset against its interest expense the income from the funds that Mon Vale had used to acquire and to replace depreciable assets. On the government's appeal from this decision, we reverse.

In light of its conclusion that Monongahela need not offset the interest income that its parent corporation expended on capital assets, the district court remanded the case for the Secretary to determine the amount of interest that should be exempt from the interest offset rule and for other proceedings consistent with its opinion. As a result of this remand, Monongahela, in the form of a motion to dismiss this appeal for lack of a final order, raises questions concerning our appellate jurisdiction. Monongahela's jurisdictional challenge presents an important question of interpretation of the Supreme Court's recent decision in Sullivan v. Finkelstein, --- U.S. ----, 110 S.Ct. 2658, 110 L.Ed.2d 563 (1990). Finkelstein held that a district court's order remanding a spouse's claim for disability insurance benefits to the Secretary of HHS for reconsideration without regard to the applicable regulations, which the order essentially invalidated, was immediately appealable as a final decision under 28 U.S.C. § 1291 (1988). Application of the criteria announced in Finkelstein leads to the conclusion that we have appellate jurisdiction. Before addressing either jurisdiction or the merits, however, we must, in order to make that discussion intelligible, describe the factual background, statutory scheme, and procedural history giving rise to this case.


Monongahela is a non-profit, tax exempt corporation that was formed in 1976 as a result of the merger of two smaller hospitals. See Monongahela Valley Hospital v. Bowen, 728 F.Supp. 1172, 1174 (W.D.Pa.1990). In order to construct the present hospital facility, the hospital authority in the county in which Monongahela is located issued $24,200,000 in gross revenue bonds, giving rise to the hospital's interest expense. In 1982, Monongahela underwent a corporate reorganization, in which a new corporate entity, Mon Vale, was created to function as the parent corporation for the hospital and other health service entities. 4 See id. Like Monongahela, Mon Vale is a tax exempt, non-profit corporation. Monongahela, now a wholly-owned subsidiary of Mon Vale, has retained its own non-profit corporate identity and tax exempt status under the Internal Revenue Code, 26 U.S.C. § 501(c)(3) (1988). See id.

After assessing community health care needs, Monongahela, between 1982 and 1984, applied to the Commonwealth of Pennsylvania's Department of Health for authorization to embark on several capital projects, including the construction of a radiation therapy and oncology center, the acquisition of digital subtraction angiography equipment, and the replacement of its CAT scanner. See id. Following the Department of Health's approval of these projects, at a projected cost of approximately $5.6 million, Monongahela transferred the necessary funds to Mon Vale, which carried the projects out. Id. At the time that Mon Vale undertook construction of the radiation therapy and oncology center, the officers of the two corporations had not yet decided whether the new facility would be owned and operated by Monongahela or by its parent. 5 Mon Vale, however, subsequently transferred the completed radiation therapy and oncology center, as well as the acquired equipment, back to Monongahela. The district court determined that "[s]imply put, the [h]ospital 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." Id.

The manner in which Monongahela transferred to Mon Vale the funds necessary for its capital construction and asset acquisition projects is at the heart of this case. What happened is that Monongahela simply transferred the funds to its parent, without designating that they were to be used for the construction and acquisition of depreciable assets. Most pertinently, Monongahela failed to place the amounts that it transferred to Mon Vale in a "funded depreciation" account of the type that the HCFA had instructed Medicare providers to use to ensure that interest earned would not be offset against reimbursable interest expense. See Health Care Financing Administration, Department of Health & Human Services, Medicare Provider Reimbursement Manual §§ 226-228 (Jan.1983) [hereinafter "Manual "]. The transferred funds also were not otherwise segregated from monies that Mon Vale received from other sources.

The Vice President of Finance and Chief Financial Officer for both Monongahela and Mon Vale testified that Mon Vale used the bulk of the transferred funds to construct the oncology center. He testified that the remainder of the transferred funds was expended on Mon Vale's initial capitalization, its general operating costs, such as legal fees, and a partnership interest in an emergency treatment facility. According to the Vice President and Chief Financial Officer, a cash balance remained at Mon Vale following the construction of the oncology center and the purchase of the medical equipment.

A. The Statutory Scheme

Monongahela is a participant in the Medicare program, 42 U.S.C.A. §§ 1395-1395ccc (West 1983 & Supp. 1991), which provides health insurance for the aged and disabled. More specifically, Monongahela serves as a health care provider under Part A of the Medicare Act, 42 U.S.C.A. §§ 1395c-1395i-4 (West 1983 & Supp. 1991), which provides insurance, covering inpatient hospital care and related post-hospital home and hospice care, for eligible beneficiaries. 6 In order to become a Part A provider, see 42 U.S.C. § 1395x(u)...

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