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

Heading: The Funding of Depreciation

Text: 26 Research has maintained a funded depreciation account into which it deposits excess operating funds. The account has been used for improvement, replacement, and expansion of facilities. The amount in this account exceeded historical depreciation. Research deliberately and prudently maintained this excess to have money available for replacement costs (which would exceed the original costs) and for expansion. 27 Under 42 C.F.R. § 405.415(e), investment income from a funded depreciation account is not to be used to reduce interest expense. However, § 226.3 of the Provider Reimbursement Manual limits this exception to the offset requirement to income produced from the amount in the fund which reflects historical depreciation. As a result, the Secretary has required Research to offset the investment income which came from the amount in the account in excess of historical depreciation. Research asserts that the exception cannot be limited in such a way. 28 Research argues that the purpose of not requiring offset with funded depreciation accounts is to encourage medical facilities to accumulate funds for replacement and expansion of facilities, thus reducing borrowing costs. A reduction in borrowing costs results in savings to the government because much of the borrowing costs would be allowable costs. The purpose of encouraging an accumulation of funds is best achieved by excepting all of the income from the depreciation account from the offset requirement. Research also argues that § 226.3 of the Provider Reimbursement Manual allows for depreciation to be calculated on the basis of replacement costs, rather than historical costs. 29 Research's argument that depreciation refers to replacement, rather than historical, costs is contrary to usual accounting practices. 30 Research's other argument appears to be that the Secretary must adopt regulations which fulfill one of the purposes of a statute to as great an extent as possible. First, we give deference to the Secretary's determination as to what incentives are appropriate for achieving an underlying purpose of the Act. Second, we give deference to the Secretary in determining how to balance conflicting goals of the Act. For instance, if medical institutions should be given a greater incentive to accumulate funds to reduce future borrowing costs, reimbursements in the short run would be higher. The Secretary's decision to limit the exception to the offset requirement to historical costs is a reasonable accommodation of the competing interests.