Sun City Community Hospital, Inc. v. United States, 545-78.

• Decision Date: 28 May 1980
• Docket Number: No. 545-78.,545-78.
• Citation: 624 F.2d 997
• Parties: SUN CITY COMMUNITY HOSPITAL, INC., d/b/a Walter O. Boswell Memorial Hospital v. The UNITED STATES.
• Court: U.S. Claims Court

624 F.2d 997

SUN CITY COMMUNITY HOSPITAL, INC., d/b/a Walter O. Boswell Memorial Hospital v. The UNITED STATES.

No. 545-78.

United States Court of Claims.

May 28, 1980.

Arthur P. Allsworth, Phoenix, Ariz., attorney of record, for plaintiff. O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P.A., Phoenix, Ariz., of counsel.

Kenneth R. Melvin, Washington, D.C., with whom was Asst. Atty. Gen. Alice Daniel, Washington, D.C., for defendant. Jerry J. Bassett, of counsel.

Before KASHIWA, KUNZIG and BENNETT, Judges.

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

KASHIWA, Judge:

This is an action for the recovery of Medicare reimbursements for plaintiff's 1971 and 1972 fiscal years. The case is before the court on the parties' cross motions for summary judgment. Plaintiff asks us to find it entitled to additional Medicare reimbursements of $19,204 for 1971 and $27,846 for 1972. Defendant asks us to find plaintiff entitled to no additional reimbursements. As explained in more detail infra, a Hearing Officer initially held plaintiff entitled to additional reimbursement. The Hearing Officer was then ordered to reopen and revise his decision. In accordance with this directive, the Hearing Officer rendered a second decision in which he held plaintiff entitled to no additional Medicare reimbursement. For the reasons set out below, we accord finality to the first decision and grant plaintiff recovery, but not in the full amount requested.

Plaintiff is a nonprofit corporation organized under the laws of the State of Arizona, has a fiscal year ending June 30 of each calendar year, and operates the Walter O. Boswell Memorial Hospital. Plaintiff participates in the Medicare program as a "provider," in accordance with Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (1970). Pursuant to an agreement filed with the Secretary of Health, Education and Welfare ("HEW") under 42 U.S.C. § 1395cc, a provider agrees not to charge Medicare beneficiaries directly for services furnished to them, agreeing instead to be reimbursed from the Medicare fund for such services.

To the extent here relevant, 42 U.S.C. § 1395f(b) provides that the reimbursement will be equal to the "reasonable cost," as defined in 42 U.S.C. § 1395x(v), of providing such services. "The reasonable cost of any services shall be determined in accordance with regulations establishing * * * the items to be included, in determining such costs for various types or classes of institutions * * *." 42 U.S.C. § 1395x(v)(1). The regulations so authorized are now set out at 42 C.F.R. § 405.101 et seq. (1979).¹ 42 C.F.R. § 405.415(a) provides that "an appropriate allowance for depreciation on buildings and equipment used in the provision of patient care is an allowable cost." This means an appropriate allowance for depreciation is considered one of the reasonable costs of providing services to Medicare beneficiaries. An amount equal to such allowance is, therefore, included in and increases a provider's Medicare reimbursement.

Sometime prior to 1971, plaintiff chose Blue Cross Association of Illinois ("BCA") to act as its fiscal intermediary. BCA in turn had Blue Cross of Arizona, Inc. (The "Plan") assume, in the first instance, the obligation to service plaintiff. Under plaintiff's agreement with HEW and also pursuant to 42 U.S.C. § 1395h, BCA and the Plan were required to determine the amount of Medicare reimbursement due, and make actual payment to, plaintiff. This in turn required the Plan and BCA to determine plaintiff's reasonable cost of providing services to Medicare beneficiaries.

Plaintiff's hospital was constructed in the late 1960's. Although there is disagreement as to the motive for doing so, it is undisputed that the general contractor, Del E. Webb Corporation ("Webb"), agreed to forego its usual overhead and profit markup on this construction project. When the hospital facility was completed, it was appraised by a nationally recognized appraisal company. The appraisal indicated the hospital had a date-of-completion fair market value of $5,329,451. The actual cost to plaintiff of constructing the facility was $576,114 less than such fair market value.

Plaintiff took the position that Webb, the subcontractors, and the architect who worked on the hospital facility all made donations of services to plaintiff to aid in plaintiff's acquisition of its hospital. In plaintiff's view, Webb's donation was its not charging an overhead and profit markup; and the subcontractors and architect made their donations by agreeing to work for less than their normal rates of profit. Plaintiff also assumed the $576,114 difference between fair market value and cost was entirely attributable to, and equaled the total amount of, these various donations. Operating under the assumption that in determining the appropriate allowance for depreciation donations could be added to basis, plaintiff increased its basis in the facility by this amount. This in turn increased the allowance for depreciation and, thus, also the reasonable cost of providing services to Medicare beneficiaries by $19,204 for its fiscal year 1971 and $27,846 for its fiscal year 1972.

The Plan determined that none of the $576,114 could be included in plaintiff's basis for its hospital facility. It, therefore, reduced plaintiff's Medicare reimbursement by $19,204 and $27,846 for fiscal 1971 and 1972, respectively. Plaintiff appealed this decision to BCA and a hearing was conducted by BCA's Chief Hearing Officer. Plaintiff was the only party to offer evidence and testimony at the hearing.

In determining plaintiff's basis in its hospital facility for purposes of determining the appropriate allowance for depreciation, the Hearing Officer looked to the Provider Reimbursement Manual (the "Manual").² The Hearing Officer interpreted Manual section 104.15 as articulating a general rule that for Medicare reimbursement purposes, a provider can acquire an asset either entirely by purchase or entirely by donation, but cannot acquire a single asset partially by purchase and partially by receipt of donations. If the provider makes any payment in obtaining an asset, even if the asset was in fact donated in part, the asset is considered acquired entirely by purchase and the donation treated as if it never occurred.³ Since not recognizable, the value of the donation cannot be added to the basis of such asset, limiting the basis to the provider's cost of acquisition. However, he then went on to interpret Manual section 134.6 as creating an exception to this general rule.⁴

The Hearing Officer viewed the first sentence of the second paragraph of section 134.6 as stating that where a provider constructs an asset and in fact receives a donation of material, labor, or services in conjunction with such construction, the donation is recognizable for Medicare purposes and the asset's basis includes both the fair market value of such donation as well as the cost actually incurred by the provider. The Hearing Officer then interpreted the first paragraph of Manual section 134.6 as authorizing the use of an appraisal to determine the fair market value of the donated material, labor, or services.

Finally, he derived tangential support from Manual section 806 for his reading of Manual section 134.6.⁵ In the Hearing Officer's view, under section 806 had Webb, the subcontractors, and the architect charged plaintiff the full price for their services and then made a cash donation of all or part of their profits, plaintiff's basis would not be reduced by such donation. He, therefore, found no reason why a donation in the form of material, labor, or services could not be directly recognized in basis.

Turning to the facts of this controversy, the Hearing Officer found plaintiff had acquired its hospital facilities through its construction of them, making this Manual section 134.6 exception available. He then found that of Webb, the subcontractors, and the architect, only Webb had in fact made a donation to aid plaintiff in the construction of its hospital and that this was a donation of services in the form of Webb's waiving its usual markup for overhead and profit. As a consequence, he allowed plaintiff to include in its basis for determining allowable depreciation on the hospital the appraisal-determined fair market value of such donated services.

Plaintiff subsequently established by appraisal that the fair market value of Webb's donation was $550,055.64. The Hearing Officer then allowed plaintiff to increase its basis in the hospital by this amount. Since the Hearing Officer was acting on behalf of BCA, the Hearing Officer's action constituted a hearing decision rendered by BCA itself.

After this basis increase was allowed, HEW's Social Security Administration's Bureau of Health Insurance ("BHI") ordered the Hearing Officer to reopen and revise his decision. BHI relied upon 42 C.F.R. § 405.1885(b) as authority for its taking such action.⁶ While this regulation does allow BHI to order an intermediary to reopen and revise its decision, BHI can do so only if the determination or decision of the intermediary (here BCA) "is inconsistent with the applicable law, regulations, or general instructions issued by the Health Care Financing Administration in accordance with the Secretary's agreement with the intermediary."

As a result of being ordered to reopen and revise his decision, the Hearing Officer did so and decided none of the $550,055.64 could be added to the basis of the hospital. He also reinstated the Plan's original decision restricting plaintiff's basis for determining allowable depreciation to plaintiff's actual cost of constructing the hospital facility.

The parties have stipulated that increasing the basis by $550,055.64 above plaintiff's actual cost of constructing the hospital would increase the allowance for depreciation by $18,335.35 for fiscal 1971 and...