Providence Hosp. of Toppenish v. Shalala, 94-35031

• Decision Date: 04 April 1995
• Docket Number: No. 94-35031,94-35031
• Citation: 52 F.3d 213
• Parties: , Medicare & Medicaid Guide P 43,158 PROVIDENCE HOSPITAL OF TOPPENISH; Providence Hospital of Anchorage; Providence Hospital, Rehabilitation Unit of Anchorage; Providence Hospital of Everett; Providence Hospital of Everett, Rehabilitation Unit, Plaintiffs-Appellants, v. Donna E. SHALALA, Secretary, Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 213

52 F.3d 213

47 Soc.Sec.Rep.Ser. 425, Medicare & Medicaid Guide

P 43,158

PROVIDENCE HOSPITAL OF TOPPENISH; Providence Hospital of

Anchorage; Providence Hospital, Rehabilitation Unit of

Anchorage; Providence Hospital of Everett; Providence

Hospital of Everett, Rehabilitation Unit, Plaintiffs-Appellants, v. Donna E. SHALALA, Secretary, Department of Health and Human

Services, Defendant-Appellee.

No. 94-35031.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 9, 1995.

Decided April 4, 1995.

Robert E. Mazer, Ober, Kaler, Grimes & Shriver, Baltimore, MD, for plaintiffs-appellants.

Esther R. Scherb and Thomas W. Coons, Office of Gen. Counsel, Dept. of Health and Human Services, Baltimore, MD, for defendant-appellee.

Appeal from the United States District Court for the Western District of Washington.

Before ALARCON and BRUNETTI, Circuit Judges, and KELLEHER. ^*

KELLEHER, District Judge:

Sisters of Providence hospitals (providers) appeal from the district court's summary judgment order affirming the determination of the Secretary of Health and Human Services (Secretary) disallowing the use of a "blended" interest rate for purposes of Medicare reimbursement.

Under the Medicare Act, 42 U.S.C. Sec. 1395 et seq., hospitals are reimbursed for interest costs that are "actual" and "necessary." See 42 U.S.C. Sec. 1395x(v)(1)(A); 42 C.F.R. 413.153(a)(1) (1994). In addition, the Medicare program must seek to prevent cross-subsidization. ¹ See 42 U.S.C. Sec. 1395x(v)(1)(A). In denying reimbursement of interest costs according to a "blended" interest rate, the Secretary interpreted the provisions of the Medicare Act to bar reimbursement of interest costs that were not incurred directly by each hospital. On appeal, the providers contend that the Secretary applied the Medicare regulations arbitrarily, denying the providers the benefit of a lower interest rate obtained as a result of group financing. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291 and we affirm.

BACKGROUND

The material facts are not in dispute. This action involves a dispute between Providence Hospital of Toppenish, et al. (collectively, the providers), and Donna E. Shalala, Secretary, Department of Health and Human Services (Secretary), regarding Medicare reimbursement for interest costs incurred by the providers for the 1986 cost reporting period.

The providers are acute care hospitals in Washington, Alaska, Oregon and California, all managed and operated by the Sisters of Providence organization. The Sisters of Providence organization is comprised of three non-profit corporations: Sisters of Providence in Washington, Sisters of Providence in Oregon, and Sisters of Providence in California.

The Secretary is responsible for administering the Medicare program, which provides medical assistance to eligible beneficiaries, and a mechanism for reimbursing hospitals for the costs of providing that care. See generally 42 U.S.C. Sec. 1395 et seq. (1994). The Health Care Financing Administration (HCFA), an agency within the Department of Health and Human Services, administers the Medicare program. Payment to Medicare providers is carried out through private organizations, such as Blue Cross and Blue Shield Association, which act as intermediaries on behalf of HCFA. See 42 C.F.R. Sec. 421.5(b). Based on cost reports submitted by providers, intermediaries determine the reasonable cost of services rendered Medicare patients and the Medicare payments due the providers. If providers disagree with the reimbursement decisions made by the intermediaries, and if the amount in controversy exceeds $10,000 ($50,000 for a group appeal), they may appeal to the Provider Reimbursement Review Board (PRRB). 42 U.S.C. Sec. 1395oo. The intermediaries represent HCFA before the PRRB. The Board's decision is the final decision of the Secretary unless the Administrator of HCFA reverses, modifies or affirms the Board's decision. 42 U.S.C. Sec. 1395oo(f)(1).

Prior to the period at issue, each Sisters of Providence corporation borrowed needed funds independently using taxable debt issuances. However, anticipating large capital expenditures, the three corporations developed The combined size and financial strength of the group allowed it to obtain a large amount of variable rate debt, ² a riskier type of debt, at a lower interest rate than the providers could have obtained had they borrowed individually. In addition, the group was able to obtain an improved bond rating and lower interest rates on fixed rate bond issues.

a plan to use tax-exempt debt by borrowing as a group under a master trust indenture agreement. The corporations borrowed together as an "obligated group" under four fixed rate bonds (one issuance in each of the four states) and one variable rate bond. Each state corporation signed a series of cross-guarantees, pledging the total assets of the group. Therefore, the assets and revenues of each corporation were exposed to liability arising out of the total debt.

The total amount of debt required by the group was $309,570,580. Because proceeds from a particular state bond authority could not cross state lines, the entire amount could not be borrowed from a single bond authority. Therefore, money was borrowed from bond authorities in each of the states in which the hospitals were located. ³ However, because variable rate debt is costly to issue, the providers decided to use a single bond authority to issue the variable rate debt. Therefore, all the variable rate bonds were issued through the Washington bond authority.

Initially, each provider paid the principal and interest for the debt issuances from its state bond authority at the applicable rate. The central management office of the providers then accounted for the interest costs of the various providers by averaging all the interest rates together to create a "blended" rate. ⁴ In order to share in the benefits of the lower rate obtained as a result of the group financing, the providers made a series of cross-payments or equalizing payments such that each provider's payments were equal to the blended rate. During 1986, the blended rate was approximately 7.8 percent.

Each of the providers claimed interest costs on its Medicare cost report based on the overall rate of interest incurred, i.e. 7.8 percent. Some intermediaries accepted the blended rate while others rejected it. Where the blended rate was rejected, the intermediaries reimbursed each provider at the interest rate of the bond issuance from which the provider actually received loan proceeds (the actual rate).

Upon the decision by several intermediaries to reimburse at the actual rate, the providers appealed to the PRRB. The PRRB issued a decision in favor of the providers, finding that use of the overall rate of interest was proper as that rate accurately represented the interest costs actually incurred by each provider under the terms of the master trust indenture agreement. In addition, the PRRB found that the use of an overall interest rate did not arbitrarily shift costs among the providers because the manner in which interest was assessed to the providers was consistent with the integrated nature of the providers' systemwide financing. Accordingly, the PRRB held that the providers were entitled to additional reimbursement.

The Administrator reversed the PRRB, finding that the providers must be reimbursed according to the interest rates actually The providers appealed to the United States District Court for the Western District of Washington. The district court upheld the Secretary's decision, finding that her interpretation of the Medicare statutes and regulations was not "arbitrary, capricious or an abuse of discretion."

                charged on the bonds from which they received proceeds.  Use of the providers' "actual, individual interest rates," the Administrator found, enables "Medicare payment [to] match the interest rates to the Provider's utilization rates."   This method ensures that the program "is protected from reimbursement based on a higher than actual rate of interest where there is a low rate of Medicare utilization."
                

ANALYSIS

I.

We review the Secretary's decision pursuant to the provisions of the Administrative Procedure Act (APA), 5 U.S.C. Sec. 551 et seq. (1994). The APA, which is incorporated by the Social Security Act, see 42 U.S.C. Sec. 1395oo(f)(1), directs that review of the Secretary's decision be limited to determining whether the agency action was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. Sec. 706(2)(A) (1994). See Thomas Jefferson University v. Shalala, --- U.S. ----, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994).

We must give "substantial deference" to "an agency's interpretation of its own regulations." Id. at ----, 114 S.Ct. at 2386 (citations omitted). Therefore, "unless an 'alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation,' " we must defer to the Secretary's interpretation. Id. at ---- - ----, 114 S.Ct. at 2386-87 (quoting Gardebring v. Jenkins, 485 U.S. 415, 430, 108 S.Ct. 1306, 1314, 99 L.Ed.2d 515 (1988)).

II.

All parties agree that interest costs are allowable costs under the Medicare Act. See 42 C.F.R. Sec. 413.153(a)(1). However, allowable interest costs are limited to those expenditures that are "necessary and proper." Id. The providers contend that in the instant case, "necessary and proper" costs can be determined only by the use of a blended rate due to their use of a system-wide financing program which enabled the providers to obtain lower interest rates and a higher percentage of variable rate debt.

The providers also contend that because there is no Medicare statute specifically applicable to the calculation of interest costs based on group financing, generally accepted accounting principles (GAAP) must be applied....