Opinion ID: 406699
Heading Depth: 3
Heading Rank: 2

Heading: Offset of Interest Income Against Interest Expense

Text: 23 A Medicare regulation requires that in determining reimburseable interest expense, interest income must be offset against interest expense. That regulation makes necessary interest expense an allowable cost and, in defining necessary, states: Necessary requires that the interest ... (b)e reduced by investment income .... 42 C.F.R. § 405.419(b)(2)(iii). 2 Research argues that the Secretary erred in applying this regulation to two special accounts Research established. The money in these accounts can be used only for specified purposes, i.e., paying the principal or interest on bonds or covering the costs of unusual repairs or replacements. 24 Research's argument is that because the requirement that investment income be used to offset interest expense appears in the course of the definition of the term necessary as it applies to interest expense, the offset requirement must be limited to instances where the interest income could be used in lieu of borrowing. Research argues that since it cannot use the money in these special accounts for expansion projects, the investment income these accounts generate does not make Research's borrowing for its projects any less necessary. 25 The regulations do not explicitly limit offsets to situations where borrowing is not necessary. Regulation 405.419(b)(2)(iii) lists specific exceptions to the offset requirement (for grants and gifts); the inability to currently use the investment income is not one of the listed exceptions. Furthermore, the investment income reduces Research's need to borrow from other funds. The fact that Research set up a restricted fund should not allow it to circumvent the offset requirement. The Secretary's determination that investment income, even if not currently available for unrestricted use, should be considered in determining what is a necessary interest expense is reasonable and will be upheld.