Sentara-Hampton General Hosp. v. Sullivan, SENTARA-HAMPTON
| Decision Date | 11 December 1992 |
| Docket Number | SENTARA-HAMPTON,Nos. 91-5243,91-5348,s. 91-5243 |
| Citation | 980 F.2d 749 |
| Parties | , 39 Soc.Sec.Rep.Ser. 520, Medicare & Medicaid Guide P 40,937 GENERAL HOSPITAL, Appellant, v. Louis V. SULLIVAN, M.D., Secretary of Health and Human Services, Appellee. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Ronald N. Sutter, with whom Mary Susan Philip, was on the brief, for appellant.
Robert L. Roth, Atty., Office of Gen. Counsel, Dept. of Health and Human Services, with whom Stuart M. Gerson, Asst. Atty. Gen., and Henry R. Goldberg, Atty., Office of Gen. Counsel, Dept. of Health and Human Services, were on the brief, for appellee.
Before: MIKVA, Chief Judge, SENTELLE, and RANDOLPH, Circuit Judges.
Glossary of Acronyms
The following acronyms are included in this opinion:
APA--Administrative Procedure Act
FDA--Funded Depreciation Account
HCFA--Health Care Financing Administration
HHS--Health and Human Services
ICU/CCU--Intensive Care Unit/Critical Care Unit
PRM--Provider Reimbursement Manual
PRRB--Provider Reimbursement Review Board
SHGH--Sentara-Hampton General Hospital
Statement of the court filed PER CURIAM.
Sentara-Hampton General Hospital ("SHGH" or "the Hospital") challenges the decision by the Health Care Financing Administration ("HCFA") to deny Medicare reimbursement for a portion of the interest expense SHGH incurred on a loan taken out in 1982 for capital improvements. The HCFA denied reimbursement on the grounds that $2,980,575 of the $14,675,000 loan was unnecessary, and therefore, under the Medicare Act, SHGH was not entitled to reimbursement for the interest expense incurred on the unnecessary borrowing. See 42 U.S.C. § 1395x(v)(1)(A). In making its decision, the HCFA relied on § 226 of the Provider Reimbursement Manual ("PRM"), issued by the Secretary of Health and Human Services ("HHS") and revised in 1983, which deems any borrowing unnecessary if the provider has funds in its funded depreciation account that are not committed by contract to a capital purpose. SHGH argues that the Administrator's application of revised PRM § 226 was illegal, since the "contractually committed" standard We commend Judge Lamberth on his thorough Memorandum Opinion and affirm the major conclusions reached therein; specifically, that the revisions to section 226 constituted interpretive rule-making for which notice and comment was not required, and that the Administrator's decision was not arbitrary and capricious. We also grant the government's cross-appeal, which slightly modifies the district court's determination of unnecessary borrowing.
[298 U.S.App.D.C. 375] constitutes a legislative rule that was not promulgated with "notice and comment" as required by the Administrative Procedure Act ("APA"). 5 U.S.C. § 553. SHGH also contends that the Administrator's decision was arbitrary and capricious, and not supported by substantial evidence. 5 U.S.C. § 706(2)(A) and (E)
SHGH is a non-profit acute care hospital located in Hampton, Virginia. As a provider of services under the Medicare program, SHGH is entitled to reimbursement for the reasonable cost of rendering hospital services to Medicare beneficiaries. 42 U.S.C. § 1395f(b). The term "reasonable cost" is defined under the Medicare Act as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services...." 42 U.S.C. § 1395x(v)(1)(A). Beyond this general requirement, what does and does not qualify as a reasonable cost is determined under Medicare regulations and program guidelines issued by the Secretary, including those contained in the PRM.
Reimbursement payments to providers are ordinarily made by private organizations, known as fiscal intermediaries, under contracts with the Secretary. 42 U.S.C. § 1395h; 42 C.F.R. § 421.100. Under the cost reimbursement system, the intermediary distributes to providers estimated payments during a cost reporting year. 42 C.F.R. § 413.64(a), (b) and (e). These payments are eventually adjusted, retroactively, after the intermediary audits the annual cost report filed by the provider. 42 C.F.R. §§ 413.64(a) and 405.1803. A provider may, if dissatisfied with the intermediary's determination, request a hearing before the Provider Reimbursement Review Board ("PRRB") whose decision is final unless the Secretary reverses, affirms or modifies the Board's decision. 42 U.S.C. § 1395oo(a), (d), (f)(1). The Secretary has delegated his authority to review PRRB decisions to the HCFA, the agency within HHS responsible for administering the Medicare program. 42 Fed.Reg. 13,262 (1977); 42 Fed.Reg. 57,351 (1977).
Under the Medicare regulations promulgated by the Secretary, reimbursable costs include "all necessary and proper costs incurred in furnishing the services...." 42 C.F.R. § 413.9. Thus, interest expense incurred on borrowing will be reimbursed only if "necessary and proper." Since there is no dispute in this case that SHGH's claimed interest expense was "proper," the only question here is whether the interest expense was "necessary." According to § 413.153(b)(2) of the regulations, interest expense is considered "necessary" only if it was incurred to satisfy a "financial need" of the provider.
Although generally interest expense is required to be offset against interest income, providers are allowed to deposit the reimbursement received for depreciation costs and other cash into sinking funds for capital purposes called "funded depreciation accounts" ("FDAs"). 42 C.F.R. §§ 413.134(e) and 413.153(b)(2)(iii). The interest income incurred on FDAs may be retained in full and will not be offset by interest expense. Id. The PRM provisions applicable to funded depreciation were originally issued in 1968, and were intended to encourage providers to save for their capital costs. PRM § 226, in its original form, described funding of depreciation as
the practice of setting aside cash, or other liquid assets, in a fund separate from the general funds of the provider to be used for replacement of the assets depreciated, or for other capital purposes. The deposits to the fund are generally in an amount equal to the depreciation expense Although funding of depreciation is not required, it is strongly recommended that providers use this mechanism as a means of conserving funds for replacement of depreciable assets, and coordinate their planning of capital expenditures with areawide planning activities of community and State agencies.
[298 U.S.App.D.C. 376] charged into costs each year, and are in effect made from the cash generated in excess of cash expenses by the non-cash expense depreciation....
Section 226 also noted that contractual obligations would often limit the availability of funded depreciation for capital purposes:
Funding of depreciation by a provider may be required under the terms of a bond indenture, mortgage, or other lending agreement, in which the creditors restrict the use of such funds by the providers....
According to the Secretary, although these guidelines were designed to give providers an opportunity and incentive to save for future capital needs, HHS was also concerned about the possible misuse of the favorable treatment afforded FDAs. If providers declined to use their FDA for their capital costs, they could reap a double benefit by receiving reimbursement for their interest expense on current borrowing, while also retaining available FDA and earning protected interest. Thus, to protect the financial integrity of the Medicare program, the Secretary generally interpreted the guidelines to disallow the reimbursement of interest expense if a provider chose to borrow rather than expend or commit its FDA to a capital purpose. See e.g. Bemidji Community Hospital, Medicare and Medicaid Guide (CCH) p 29,704 (HCFA May 4, 1979); but cf. Research Medical Center, Medicare and Medicaid Guide (CCH) p 29,447 (HCFA Sept. 28, 1978).
In January 1983, the Secretary revised § 226 and characterized the new provision as a "clarification" of Medicare policy. The revised provision states in part:
C. Restrictions....Funds are considered available unless committed, by virtue of contractual arrangements, to the acquisition of depreciable assets used to render patient care, or to other capital purposes. Borrowing for a purpose intended by funded depreciation is unnecessary to the extent funded depreciation is available. Thus, interest expense for borrowing up to the amount of available funded depreciation is not an allowable cost.
The 1983 revisions became effective upon issuance. In 1991, the underlying regulations were amended for the first time with notice and comment to codify the "contractually committed" standard in order to "remove any doubt about [its] applicability." 42 C.F.R. § 413.134(e)(2)(i).
In 1979 SHGH adopted a long range capital expansion plan which designated projects for renovating and expanding the hospital facility. The largest project identified in the expansion plan was the construction of a new intensive care unit/critical care unit ("ICU/CCU"). In 1982, the Hospital was ready to begin the ICU/CCU project but was considerably short on funds. While the estimated cost of the project was $15,681,002, the Hospital only had $3,480,575 in its funded depreciation account, and at least some of those funds were intended for other purposes. For example, aside from the ICU/CCU project, the Hospital planned to use FDA funds to make a balloon payment of $1.5 million on a 1975 bond issue which would become due in 1985, and had also committed to pay $500,000 as a contingency for the ICU/CCU project. To make matters worse, SHGH projected additional capital expenditures of...
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