Providence Hosp. v. Shalala
| Decision Date | 03 December 1993 |
| Docket Number | No. C93-64R.,C93-64R. |
| Citation | 843 F. Supp. 650 |
| Parties | PROVIDENCE HOSPITAL, et al., Plaintiffs, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant. |
| Court | U.S. District Court — Western District of Washington |
Robert Mazer, Oper Kaler Grimes & Shriver, Baltimore, MD, Stephen Smith, Lane, Powell, Spears, Lubersky, Seattle, WA, for plaintiffs.
Evelyn McChesney, Office of General Counsel, Dept. of Health and Human Services, Charles Pinnell, U.S. Attys. Office, Seattle, WA, for defendant.
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
THIS MATTER comes before the court on cross motions for summary judgment. Having reviewed the motions together with all documents filed in support and in opposition, and being fully advised, the court finds and rules as follows:
I. BACKGROUND
Plaintiffs, "the providers", are hospitals and other Medicare providers owned and managed by three Sisters of Providence non-profit corporations1 operating hospitals located in Alaska, Washington, Oregon, and California. Defendant is Donna Shalala, the Secretary of Health and Human Services, ("the Secretary"), the agency responsible for reimbursement to Medicare providers. Plaintiffs bring this action contesting the Medicare reimbursement determinations of the Secretary with respect to interest costs of the providers for the 1986 cost reporting period.
Medicare providers are reimbursed the portion of their costs associated with services rendered to Medicare recipients. 42 U.S.C. § 1395 et seq. 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 fiscal intermediaries ("the intermediaries"), such as Blue Cross and Blue Shield Association, who act on behalf of HCFA. 42 C.F.R. § 421.5(b). Providers who disagree with the reimbursement decisions made by the fiscal intermediaries may appeal to the Provider Reimbursement Review Board ("PRRB") if the amount in controversy exceeds the statutory minimum. The fiscal 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. § 1395.
The providers in this case appealed to the PRRB the reimbursement determinations by several intermediaries with respect to interest expenses for capital-related assets for the 1986 reporting period. The PRRB issued a decision in favor of the Providers, ruling that the providers were entitled to additional reimbursement. The Administrator reversed the PRRB. The providers now appeal the Administrator's decision.
Prior to the period in issue, each state corporation borrowed independently using taxable debt issuances. However, anticipating large capital expenditures, the three corporations developed a plan to use tax-exempt debt by borrowing as a group under a master trust indenture agreement, pledging the general credit of the group as a whole. As the Administrator noted in his decision:
the combined size and financial strength of the obligated group allowed it to obtain a large amount of variable rate debt at a lower interest rate than the providers would have obtained individually. The group was also able to receive an improved rating and lower interest rates on fixed rate bond issues. id.
Because proceeds from the various state bond authorities could not cross state lines, the total amount required by the group as a whole ($309,570,580) could not all be borrowed from the same state bond authority. Instead, bonds were issued in each state where the hospitals were located (Washington, Oregon, California, and Alaska). The three corporations together borrowed as an "obligated group" under four fixed rate bonds (one issuance in each of the four states) and one variable rate bond (issued by the Washington bond authority). Each state corporation signed a series of cross-guarantees, pledging the total assets of the group as a whole.
By borrowing as a group, the providers were able to obtain lower interest rates than they would have obtained individually. The overall plan included borrowing 70 percent of the total amount at a fixed rate and 30 percent of the total at a variable rate. Variable rate debt is a riskier type of debt. All of the variable rate debt was issued by the Washington bond authority alone because this type of debt is costly to issue and the providers found it more economical to use a single bond authority.
Each provider initially paid the principal and interest for the debt issuances from its state bond authority at the applicable rate. However, the providers as a group agreed to share the benefits of the lower rate obtained through the variable rate bond issuance in Washington. The central management office of the providers accounted for the interest costs of the various individual providers by using a "blended rate" which combined or averaged the various rates. This blended rate was 7.8 percent. Each individual provider then made payments to or received payments from the other providers such that each provider's payments were equal to the blended rate rather than the rate of the specific bond(s) issued in its state.
The portion of each provider's "necessary and proper" interest on capital indebtedness attributable to Medicare patient utilization is reimbursable under Medicare. See 42 C.F.R. § 413.153. Each provider has a different Medicare utilization rate, and thus each provider is reimbursed by Medicare for a different percentage of its interest costs. For example, Alaska has only a 14 percent Medicare utilization rate while the Washington providers have a Medicare utilization rate of between 45 and 49 percent. Thus, in Alaska, Medicare will only reimburse 14 percent of the providers' interest costs while in Washington 45 to 49 percent of the providers' interest costs will be reimbursed.
In their Medicare cost reports the individual providers claimed interest costs based on the overall blended interest rate, not the specific rate of the bond issued in the corresponding state. Thus, each of the providers claimed interest costs at the rate of 7.8 percent. Some intermediaries accepted the blended rate and others rejected it. Where the blended rate was rejected, the intermediaries reimbursed each provider at the interest rate of the bond issuance from which it actually received loan proceeds. The parties have now agreed that each provider should be reimbursed using the same methodology, either based on the blended rate or on the rate of each state-specific bond issuance. In this action the providers assert that they are entitled to be reimbursed by Medicare based on the blended rate of interest, because each hospital has actually paid interest costs based on the blended rate as a result of the cross-hospital payments administered through the providers' central office. The Secretary, through the decision of the Administrator, argues that each provider is entitled to interest cost reimbursement at the rate of the specific loan proceeds it received from its state bond issuance, not at the blended rate.
II. DISCUSSION
The issue in this case turns on the interpretation of the Medicare reimbursement statutes, 42 U.S.C. § 1395 et seq., and regulations enacted pursuant thereto. This court must determine whether the Secretary acted properly within her discretion in interpreting the Medicare statutes and regulations to disallow reimbursement of the interest costs claimed by the providers on the basis of the blended rate of interest, allowing them instead based on the rate of each separate bond issuance.
By statute, review of the Secretary's reimbursement decision is governed by the Administrative Procedure Act. 42 U.S.C. § 1395oo(f)(1). Thus, the decision of the Secretary will be reversed only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law". 5 U.S.C. § 706(2)(A).
The Ninth Circuit, in the Medicare reimbursement context, has said that "judicial deference to an agency determination is particularly important where, as here, Congress has vested broad discretion in an agency to interpret a statute ... and the implementing regulations are highly complex". National Medical Enterprises, Inc. v. Sullivan, ("NME II"), 916 F.2d 542, 546 (9th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 2014, 114 L.Ed.2d 100 (1991) (citation omitted). Additionally, "deference is accorded the Secretary's interpretation of her own regulations where she has expertise in the substantive area involved and where the regulations were promulgated pursuant to congressional authorization." St. Elizabeth Community Hospital v. Heckler, 745 F.2d 587, 592 (9th Cir.1984). Thus, the standard of review is deferential with respect to the Secretary's determination, as represented by the Administrator's decision. As the Court of Appeals for the Eighth Circuit has said:
An administrative agency's interpretation of its own regulation merits considerable respect by a reviewing court, and will be controlling absent a showing "that it is plainly erroneous or inconsistent with the regulation." Such deference is especially applicable to areas like Medicare reimbursements that require judgments about appropriate cost accounting practices. Abbott-Northwestern Hosp., Inc. v. Schweiker, 698 F.2d 336, 340 (8th Cir.1983) (citations omitted).
Pursuant to the Medicare statutes in effect during the relevant time period, the providers were entitled to be reimbursed for the "reasonable cost" of their capital-related expenses. 42 U.S.C. § 1395f. "Reasonable cost" is defined by 42 U.S.C. § 1395x(v)(1)(A) as "the cost actually...
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