Sentara Hampton General Hosp. v. Sullivan, Civil A. No. 89-1248.
| Decision Date | 24 May 1991 |
| Docket Number | Civil A. No. 89-1248. |
| Citation | 799 F. Supp. 128 |
| Parties | SENTARA HAMPTON GENERAL HOSPITAL, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary, Department of Health and Human Services, Defendant. |
| Court | U.S. District Court — District of Columbia |
Mary Susan Philp, Ronald Nelson Sutter, Powers, Pyles & Sutter, P.C., Washington, D.C., for plaintiff.
Robert Lloyd Roth, Dept. of Health & Human Services, OGC-HCFA, Baltimore, Md., for defendant.
This case comes before the court on the parties' cross-motions for summary judgment.
The controversy here involves plaintiff hospital's 1984 claim for Medicare reimbursement for interest incurred as a result of borrowing $14,675,000.00 for a capital project without using the $3,480,575.00 fund designated for spending on capital projects. The court finds that the hospital must forfeit most of its claim for interest expense reimbursement for 1984 since it failed to use the designated capital fund account first.
Plaintiff Sentara-Hampton General Hospital ("Hampton") is a non-profit acute care hospital in coastal Virginia. The hospital enjoys certification to participate in the Medicare program.1Defendant's Statement of Material Facts ("Def. Stmt.") at ¶ 1 (Jan. 16, 1990); see 42 U.S.C. § 1395cc (1988) ().
In 1979-80 Hampton's Board of Trustees approved a long-term capital improvement plan, which included construction of an intensive care unit and a critical care facility. Plaintiff's Statement of Material Facts ( ) at 4, ¶ 14 (Nov. 27, 1989). When the Board was ready to begin construction in April 1982, it expected the project to cost $15,681,002.00. Pltf. Stmt. at 15.
Like any consumer planning a large purchase, the Hampton Board needed to minimize its interest costs while keeping installment payments manageably low. Hampton here could plan its construction to maximize Medicare reimbursement for all of their "necessary and proper expenses incurred in furnishing services, such as administrative costs, maintenance costs, and premium payments" that they incur in serving Medicare patients. 42 C.F.R. § 413.13(c)(3) (1989). See also 42 U.S.C. § 1395ww(a) (1988). Since Congress requires the Health Care Financing Administration ("HCFA")2 to avoid both subsidization of expenses that non-Medicare patients incur and non-Medicare patient shouldering of Medicare expenses, HCFA will reimburse the cost of new construction to the extent that Medicare patients will occupy the new building just as it will pay traditional medical bills.3
Since hospitals like Hampton frequently must renovate their old buildings and buy new equipment simply to maintain their state accreditation, the Medicare program includes special construction financing incentives. Among them is a regulation permitting hospitals to create funded depreciation accounts ("FDAs"), which are savings accounts that a hospital must spend exclusively for replacement and renovation of capital assets. 42 C.F.R. § 413.143(e).4 In return for the hospital spending the FDA exclusively upon capital projects, HCFA omits the interest that the funds accumulate from the hospital's annual earnings since the earnings reduce the hospital's total annual cost which then reduces Medicare reimbursement, as follows:
Total cost of routine services × Medicare = Annual Total number of inpatient days inpatient days reimbursement St. Mary of Nazareth Hospital Center v. Heckler, 760 F.2d 1311 1314 (D.C.Cir.1985) ().
Not only must the hospital spend the FDA exclusively upon capital projects, but, to minimize the Medicare program's liability for interest expense reimbursement, the hospital also must use the fund to reduce borrowing for capital projects. HCFA executes the plan by:
When HCFA determines the necessity of borrowing (step # 4), Medicare regulations require that the interest expense be both "proper"—incurred in giving patient care, 42 C.F.R. § 413.153(a)(1), and necessary:
Controversy and confusion arise in applying this "financial need/necessary" provision because even the hospitals that have created FDAs often need to borrow by issuing bonds when they commence major construction projects. True to that pattern, Hampton has claimed that it needed to borrow the entire cost of the ICU/CCU construction by issuing $14,675,000.00 in tax exempt bonds to satisfy a "financial need," while HCFA countered argue that Hampton did not have a financial need that included the $3,480,575.00 in its FDA. Pltf. Stmt. at ¶ 16. However, since the hospital's Certificate of Need required completion of the project during 1984, the Board voted to use $500,000.00 from the FDA to create a contingency account which it could use should the ICU project expenses exceed the $403,000.00 from the borrowed funds already set aside. Id. at ¶ 8.
To buttress its reimbursement claim, the plaintiff has added that the Board in 1982 expected to satisfy the following obligations by 1985 in addition to completion of the ICU/CCU:
1) a $1.5 million balloon payment due in 1985 on a 1975 bond issue
2) the cost of renovating the hospital's third floor
3) Purchase of new CAT scanner 4) Other capital expenditures discussed in long term plan between 1982 and 1985. Pltf. Stmt. at ¶ 17.
Yet even when the Board created the $500,000.00 contingency account and bought miscellaneous capital goods, the FDA still grew from 1982 through 1985:
Fiscal Year FDA Balance
1982 $4,918,449
1983 $5,296,000
1984 $6,158,000
1985 $6,927,063
Deft. Stmt. at ¶ 9. Thus, Hampton paid the $1.5 million balloon payment in November 1985 and ended that fiscal year with an $6,927,063 FDA accumulation.
Since Medicare reimbursement regulations require hospitals to wait until a facility opens to apply for construction expense reimbursement, Hampton after the ICU opened in 1984 sought reimbursement for interest expense incurred on $13,194,425.00 of the 1982 borrowing.5 Deft. Stmt. at ¶ 15. To receive the monies, Hampton submitted an annual cost report to a "fiscal intermediary," which is a private insurer acting on behalf of HCFA6, with Blue Cross/Blue Shield of Virginia playing that role here. See 42 C.F.R. § 413.24(f) (content of report); 42 C.F.R. § 413.20(b) (reports submitted annually). Id. at § 413.20(d)(2).
Blue Cross audited the report using the Provider Reimbursement Manual ("PRM"), a set of transmittals that HHS sends to fiscal intermediaries and accountants who compose hospitals' annual cost reports. Blue Cross particularly focused upon the 1983 revision to the PRM at § 226, a provision which deemed FDA monies were "available" for spending on capital projects unless they are "contractually committed." Pltf. Stmt. at ¶ 18. The regulation was to apply to all cost reporting periods ending after December 31, 1982.
Applying the "contractual commitment" provision, the intermediary concluded that Hampton's intention to use $1.5 million from the FDA to pay the 1985 balloon payment on the 1975 bond issue was "a discussion of rainy day plans ... without any resolution or vote-taking." Deft. Mtn., Ex. I at 9. Blue Cross also found that the $500,000 in the contingency fund was available, since the 1982 bond prospectus required its use only if overruns exceeded the $403,000.00 from the borrowed funds already set aside, a problem that never materialized. Deft. Mtn., Ex. I at 9.
Finally, Blue Cross found that Hampton should have included among available FDA funds the amount of imputed interest that it would earn on the account ($2,240,000.00 from a separate construction fund and $533,010.00 from the FDA) between 1982-84. Id. at 11. The intermediary thus concluded that:
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Sentara-Hampton General Hosp. v. Sullivan, SENTARA-HAMPTON
...... plaintiff's FDA allocation theory is untenable for lack of statutory or regulatory support." Sentara Hampton General Hospital v. Louis W. Sullivan, 799 F.Supp. 128 (D.D.C.1991). In fact, the 1968 provision made clear that providers were free to use their FDA, or any part of their FDA, f......