Saint Francis Memorial Hospital v. United States

• Decision Date: 06 May 1981
• Docket Number: No. 421-79C.,421-79C.
• Citation: 648 F.2d 1305
• Parties: SAINT FRANCIS MEMORIAL HOSPITAL v. The UNITED STATES.
• Court: U.S. Claims Court

648 F.2d 1305

SAINT FRANCIS MEMORIAL HOSPITAL v. The UNITED STATES.

No. 421-79C.

United States Court of Claims.

May 6, 1981.

Patric Hooper, Los Angeles, Cal., atty. of record, for plaintiff. Weissburg & Aronson, Inc., Los Angeles, Cal., of counsel.

Benjamin F. Wilson, Atlanta, Ga., with whom was Acting Asst. Atty. Gen. Thomas S. Martin, Washington, D. C., for defendant. S. Raenele Cote, Washington, D. C., of counsel.

Before DAVIS, NICHOLS and KASHIWA, Judges.

ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT

DAVIS, Judge.

This dispute turns on the method of reimbursement to a Medicare provider for interest payments made in 1966-1968 on a construction loan for a replacement hospital which was not ready or used until after that period. The hospital asserts that it is entitled to reimbursement for those payments as made, while the Government's position is that the payments for that period should be capitalized, added to the cost of the new building, and amortized over time. The issue is properly presented on cross-motions for summary judgment. We hold for the defendant.

I

Plaintiff Saint Francis Memorial Hospital, a San Francisco non-profit corporation which is a provider under the Medicare program, 42 U.S.C. §§ 1395 et seq. (1970) (amended 1976 & Supp. III 1979), seeks reversal of reimbursement audit adjustments made by the Secretary of the Department of Health, Education and Welfare (now Health and Human Services) acting through the Blue Cross Association, which itself acted via its local plan, Hospital Service of California. These adjustments resulted in a smaller Medicare reimbursement for 1966-1968 than the hospital had sought.

Before the Medicare program began in 1966, plaintiff planned to build a new facility replacing the building it was then using. It obtained a construction loan for that purpose and the replacement facility was in the process of construction all during the years here involved — 1966-1968. Construction was completed and patients transferred in January 1969. Meanwhile, Saint Francis paid substantial amounts of interest on the construction loan in 1966, 1967 and 1968. During that time Medicare patients were cared for in the old building.

The disagreement arises because Saint Francis treated the interest payments made during the 1966-1968 construction period as a current expense calling for current reimbursement for those years, and Blue Cross later required that the payments be capitalized and recovered over the life of the new facility. Saint Francis' allowable costs for 1966 to 1968 were reduced from $571,926 to $94,071. It appealed that decision to the Blue Cross Association Medicare Provider Appeals Committee which sustained the intermediary's adjustments.

Saint Francis then took its case to the District Court for the Northern District of California, and obtained a ruling in its favor. Saint Francis Memorial Hospital v. Weinberger, 413 F.Supp. 323 (N.D.Cal.1976). On the Government's appeal, the Ninth Circuit held that the District Court lacked subject matter jurisdiction over the claim, and remanded it for transfer to the Court of Claims. No. 73-0495 (9th Cir., filed July 10, 1979). The current case is the result.¹

The controversy is narrow. All are agreed that recovery for interest payments is a proper part of Medicare reimbursement. 42 C.F.R. § 405.419(a).² The dispute is the method and time for reimbursement — current expensing or capitalization over time. Defendant maintains that capitalization is demanded by Section 206 of the Provider Reimbursement Manual (Health Insurance Manual No. 15) (issued in 1968-69) which admittedly requires capitalization. The claimant says, on the other side, that Section 206 is invalid, in any event cannot be applied retroactively to interest payments made and expensed in 1966-1968 before the Manual was issued, and plaintiff's interest payments were reimbursable under the Medicare law governing 1966-1968.³

The relevant parts of Section 206 provide:

Interest During Period Of Construction

Frequently, providers may borrow funds to construct facilities or to enlarge existing facilities. Usually, construction of facilities will extend over a long period of time, during which interest costs on the loan are incurred. Interest costs incurred during the period of construction must be capitalized as a part of the cost of the facility. The period of construction is considered to extend to the date the facility is put into use for patient care.

If the construction is an addition to any existing facility, interest incurred during the construction period on funds borrowed to construct the addition must be capitalized as a cost of the addition. After the construction period, interest on the loan is allowable as an operating cost. (Emphasis added).

We first discuss (Part II, infra) the prospective validity of Section 206 without regard to the problem of retrospectivity occasioned by the fact that the directive was issued in 1968-69 and the interest payments involved here were made in 1966-68. We proceed then (Part III, infra) to consider the harder problem of retrospectivity in the light of Saint Francis' particular circumstances.

II

Saint Francis levies attacks on both the content of Section 206 (viewed prospectively) and on the procedure by which it was adopted, but those challenges do not destroy the provision.

A. The validity of the contents of Section 206 was upheld in Good Samaritan Hospital, Corvallis v. Mathews, 609 F.2d 949, 954-56 (9th Cir. 1979), squarely considering that problem in a case on all fours with this one (except for the retrospective aspect).⁴ That court ruled that the Secretary of HEW could reasonably read the Medicare statute and regulations as authorizing capitalization of construction loan interest, rather than current expensing. We agree.

The legislation expressly prescribes, first, that the cost reimbursement regulations should take into account that Medicare should cover only costs respecting Medicare patients while, on the other hand, non-Medicare patients should not bear Medicare costs, and, second, that "the principles generally applied by national organizations or established prepayment organizations" should be considered. 42 U.S.C. § 1395x(v)(1) (1970) (amended 1976 & Supp. III 1979). The Act also emphasizes the "reasonable cost of such services." 42 U.S.C. § 1395f(b) (1970) (amended 1976 & Supp. III 1979). Implementing these several standards, the regulations at all pertinent times emphasized accounting practices "which are widely accepted in the hospital and related fields" (42 C.F.R. § 405.406(a)) and called for reimbursement of "necessary and proper" costs, which "are usually costs which are common and accepted occurrences in the field of the provider's activity" (42 C.F.R. § 405.451(b)(2)). Against this background, the Secretary could rationally conclude that expensing should be prohibited because Medicare patients would not use the new or expanded facility during construction and before it was put into patient use. During that time, full interest costs could well be considered as not actually incurred or tied to current Medicare use and therefore as unreimbursable under the Act and the regulations. Conversely, capitalization over the life of the new facility can properly be thought to link the interest costs more directly to the Medicare users of that facility; in particular, a capitalization practice avoids the problem of a Medicare provider's leaving the program or lessening its participation before Medicare patients would use the new hospital. Moreover, as plaintiff's own experts agreed, and the Appeals Committee found, capitalization is an accepted accounting practice (though probably not the only one).⁵

As did the Ninth Circuit in Good Samaritan, we accept the Secretary's position that Section 206 is a reasonable implementation of the statute and regulations.⁶ Even though there may be differing accounting theories, the administrative judgment as to which of the accounting methods "most appropriately implements the principles of reimbursement under the Medicare Program is entitled to deference." Gosman v. United States, 215 Ct.Cl. 617, 632, 573 F.2d 31, 41 (1978). The same deference is due all the formal administrative interpretations of the Medicare program, so long as they are reasonably related (as here) to the purposes of the statute and not in conflict with it. See Johnson's Professional Nursing Home v. Weinberger, 490 F.2d 841, 844 (5th Cir. 1974).⁷

B. On the procedural level, Saint Francis insists that Section 206 was invalidly adopted because the Secretary, in promulgating the Provider's Manual (of which Section 206 is a part), admittedly did not follow the rulemaking provisions of the Administrative Procedure Act, 5 U.S.C. § 553 (1976) (which call for notice to, and an opportunity to comment by, interested parties before rules are promulgated). These rulemaking provisions do not apply, however, to rules relating to "benefits". 5 U.S.C. § 553(a)(2). Good Samaritan expressly held Section 206 within this "benefit" exception, and we have no occasion to disagree. See also Humana of South Carolina, Inc. v. Califano, 590 F.2d 1070, 1082-1084 (D.C.Cir.1978), to comparable effect.⁸

III

The troubling question is the retrospective application of Section 206, issued in 1968-69, to plaintiff's interest payments in 1966-1968.⁹ Saint Francis' argument is that, whatever may be true of providers who acted after and in the light of Section 206 such as the Good Samaritan hospital, plaintiff was authorized by the Medicare law governing in 1966-1968 to expense its construction-interest payments for Medicare purposes. This contention rests on three pillars: (a) while the Medicare regulations in 1966-1968 did not treat specifically with the precise problem of capitalization vs. expensing for construction-loan interest, they did allow (in general) reimbursement in...