MOTHER FRANCES HOSP. OF TYLER, TEXAS v. Shalala, 6:92 CV 337.

• Decision Date: 23 March 1993
• Docket Number: No. 6:92 CV 337.,6:92 CV 337.
• Citation: 818 F. Supp. 990
• Parties: MOTHER FRANCES HOSPITAL OF TYLER, TEXAS, Plaintiff, v. Donna SHALALA, PH.D., Secretary of Health and Human Services, et al., Defendants.
• Court: U.S. District Court — Eastern District of Texas

818 F. Supp. 990

MOTHER FRANCES HOSPITAL OF TYLER, TEXAS, Plaintiff, v. Donna SHALALA, PH.D.,¹ Secretary of Health and Human Services, et al., Defendants.

No. 6:92 CV 337.

United States District Court, E.D. Texas, Tyler Division.

March 23, 1993.

COPYRIGHT MATERIAL OMITTED

Dan M. Peterson, Washington, DC, Thomas M. Alleman, Tyler, TX, for plaintiff.

Steven MacArthur Mason, Asst. U.S. Atty., Tyler, TX, for defendants.

MEMORANDUM OPINION

JUSTICE, District Judge.

I. Background and Procedural History

In 1987, plaintiff, Mother Frances Hospital ("Hospital"), retired its 1983 series bonds by issuing, in replacement, $64,000,000.00 in 1987 series bonds. The Hospital allegedly sustained a loss of $11,671,393.00,² and claimed $4,565,362.00 as the allowable amount to be reimbursed by the Department of Health and Human Services ("HHS"), through its program of Medicare. The Hospital argued that under General Accepted Accounting Principles ("GAAP"), it was due the full reimbursement in the year the loss was incurred, 1987. Blue Cross & Blue Shield, the intermediary for Medicare providers in Texas and for the Hospital, made audit adjustments that permitted only $824,727.00 as an allowable cost, reflecting amortization of the loss in future periods. The intermediary, rejecting application of GAAP, relied on Section 233 of the Provider Reimbursement Manual ("PRM 233"), published by the Secretary of HHS to aid in interpreting the Medicare regulatory provisions.

The Hospital, disagreeing with the intermediary's determination, obtained a hearing before the Medicare Provider Reimbursement Review Board ("PRRB"), in accordance with 42 U.S.C. § 1395oo. Reversing the decision of the intermediary, the PRRB found GAAP applicable, making the loss reimbursable in the year in which it was incurred, 1987. The Acting Administrator of the Health Care Financing Administration reversed the PRRB's decision and held that the loss must be amortized, and that the PRRB's reliance on GAAP was erroneous.³ The Administrator, like the intermediary, found that PRM 233 was controlling. In compliance with 42 U.S.C. § 1395oo (f)(1), the Hospital sought judicial review of the final administrative decision of the Secretary to amortize the Hospital's loss.

This civil action was referred to the Honorable Harry W. McKee, United States Magistrate Judge, pursuant to 28 U.S.C. § 636(b), for proposed findings of fact, conclusions of law, and recommendations for the disposition of pending motions. The parties filed cross motions for summary judgment. The Magistrate Judge recommended that the Hospital's motion for summary judgment be granted, that the Secretary's motion be denied, and that the final decision of the Secretary to amortize the loss be reversed. In addition, the Magistrate Judge accepted the Hospital's claimed reimbursement costs, $4,563,362.00.

A district judge is required to conduct a de novo review of objections to the report and recommendation filed by the parties, in accordance with 28 U.S.C. § 636. The district judge may accept, reject, or modify the report and recommendation, and may receive further evidence or recommit the matter to the Magistrate Judge.

It is determined from such de novo review that the Secretary's position, that Medicare reimbursement for the Hospital's loss be amortized, is both a permissible and reasonable interpretation of the applicable statute and regulations. Hence, the Secretary's final decision to amortize the Medicare reimbursement for the loss on bond defeasance incurred by the Hospital should be approved and ordered reinstated.

II. Standard of Review — Deference to the Agency's Interpretation

Where the determination at issue involves the interpretation of a statute, an agency's interpretation of a statute it administers should be upheld if it is based on a "permissible" construction of the language of the statute. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. et al., 467 U.S. 837, 843, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). Moreover, the agency's construction of a statutory scheme it administers need only be reasonable, and not the only interpretation or the one the court would have reached if it were initially faced with the question. Udall v. Tullman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Marcello v. Bowen, 803 F.2d 851, 855 (5th Cir.1986).

The agency has the authority, either explicit or implicit, to elucidate a particular statute by issuing regulations. Chevron, 467 U.S. at 843-44, 104 S.Ct. at 2782. Such regulations are to be given controlling weight unless they are "arbitrary, capricious, or manifestly contrary to the statute." Id. at 844, 104 S.Ct. at 2782.

Under these well-settled principles of deference to an agency's interpretation of a statutory scheme it administers, the question before the Magistrate Judge was whether the Secretary's interpretation of 42 U.S.C. § 1395f(b), the statutory authority for allowing reimbursement of "reasonable costs" to health care providers, was reasonable. Two of the regulations promulgated to elucidate the statutory scheme, 42 C.F.R. §§ 413.9(b) and 413.20, are applicable to the point at issue, and these regulations must be given controlling weight, unless they are "arbitrary, capricious, or manifestly contrary to the statute."

III. Analysis

In analyzing the statute and its implementing regulations, the salient point for consideration by the Magistrate Judge, and by this court, is whether the Secretary must follow GAAP in determining when to reimburse the Hospital's refinancing loss, or whether the Secretary may follow PRM 233, requiring amortization. The issue respecting the amount of the loss was not properly before the Magistrate Judge.

The Hospital argues that 42 C.F.R. § 413.20 requires General Accepted Accounting Principles to be applied, making the loss reimbursable in the year in which it was incurred. In addition, the Hospital argues that if PRM 233 is applicable, calling for amortization, then PRM 233 is a substantive provision, demanding notice and comment before promulgation, neither present in this case. The Secretary, in opposition, argues that § 413.20 does not require GAAP for cost reimbursement, but only for the maintenance of reports and records by health care providers. In addition, the Secretary takes the position that PRM 233 is an interpretive provision of its own regulation, specifically 42 C.F.R. § 413.9(b), not requiring notice and comment.

All parties agree that if GAAP applied, it was mandatory that the cost be claimed in the period in which the transaction took place, and, further, that the reimbursement for the full cost be paid within the same period.

A. The Secretary is not Bound by GAAP in Determining When to Reimburse the Hospital's Refinancing Losses.

Title 42 U.S.C. § 1395f(b), the statutory authority for reimbursement of "reasonable costs" to health care providers, provides that a "reasonable cost" is the cost "actually incurred ... and ... determined in accordance with regulations establishing the method or methods to be used." 42 U.S.C. § 1395x(v)(1)(A). All parties agree that, under 42 C.F.R. § 413.5, the refinancing costs of the Hospital are reimbursable as "reasonable costs." The disagreement involves the timing of such reimbursement.

The central regulation at issue here, 42 C.F.R. § 413.20, provides that:

The principles of cost reimbursement require that providers maintain sufficient financial records and statistical data for proper determination of costs payable under the program. Standardized definitions, accounting statistics, and reporting practices that are widely accepted in the hospital and related fields are followed. Changes in these practices and systems will not be required in order to determine costs payable under the principles of reimbursement. Essentially the methods of determining costs payable under Medicare involve making use of data available from the institution's basis accounts, as usually maintained, to arrive at equitable and proper payment for services to beneficiaries.

42 C.F.R. § 413.20(a).

The title of § 413.20, "Financial data and reports," appears in Subpart B of the regulations, which is entitled "Accounting Records and Reports." Other provisions of the regulation concern the frequency with which providers are to supply cost reports, record-keeping requirements for new providers, and continuing provider record-keeping requirements. Subsection (e) permits program payments to be suspended if a provider does not maintain adequate records.

It is clear from the plain language of 42 C.F.R. § 413.20, that no provision in any way supports the Hospital's position that GAAP applies to cost reimbursement principles. Rather, the express language of § 413.20(a) indicates that GAAP only applies to the maintenance of financial records and statistical data by providers. In fact, the general rules of cost reimbursement are set forth in 42 C.F.R. § 413.5, which makes no reference to GAAP. Indeed, 42 C.F.R. § 413.5(b)(4) states that there should be "sufficient flexibility in the methods of reimbursement to be used...."

In addition, the Secretary publishes the Provider Reimbursement Manual ("PRM") to aid in the interpretation of regulations. While the PRM does not have the binding effect of law or regulation, it is "entitled to be given important significance." Sun Towers v. Heckler, 725 F.2d 315, 325 n. 16 (5th Cir.), cert. denied, 469 U.S. 823, 105 S.Ct. 100, 83 L.Ed.2d 45 (1984). PRM 233 explicitly addresses losses incurred through advance refunding and states that these losses should be amortized over the life of the refunded bonds. PRM 233.3 provides, in relevant part: "the effect of amortization is to implicitly recognize any gain or loss incurred as the result of an advance refunding over the period from the date the refunding debt is issued to the date the holders of the refunded debt receive the principal payment, rather than immediately."...