Opinion ID: 474261
Heading Depth: 1
Heading Rank: 2

Heading: the investment income offset

Text: 26 St. Elizabeth's provides its employees health insurance through a self-funded insurance plan called the St. Elizabeth Hospital Health Benefit Plan. The Plan is administered as an independent trust--the St. Elizabeth Health Trust (Trust)--into which St. Elizabeth's contributes funds on a regular basis, based on needs projected by an actuary. In its 1975, 1976 and 1977 cost reports, St. Elizabeth's claimed as an allowable cost its contributions into the Trust. The Trust's assets are invested and generate investment income, which must be retained in the Trust and used to pay for employee health care. We must consider here the treatment of this investment income under Medicare's provider reimbursement scheme. (We will also touch upon the treatment of contributions to self-insurance funds, an issue which has not been appealed to this court but which is related to the investment income offset.) 27 In determining which of a hospital's expenses may be included in the reasonable cost of a Medicare patient's hospital stay, [n]ecessary and proper interest on both current and capital indebtedness is an allowable cost, 42 C.F.R. Sec. 405.419(a). The definition of necessary requires that the interest be 28 reduced by investment income except where such income is from gifts and grants, whether restricted or unrestricted, and which are held separate and not commingled with other funds. Income from funded depreciation or provider's qualified pension fund is not used to reduce interest expense. Interest received as a result of judicial review by a Federal court ... is not used to reduce interest expense. 29 Id. Sec. 405.419(b)(iii). The Secretary has interpreted this regulation as requiring that the income earned by the Trust be offset against and reduce St. Elizabeth's otherwise allowable interest expense. 30 When Blue Cross reopened St. Elizabeth's cost reports for 1975, 1976 and 1977, it denied reimbursement for contributions to the Trust and also denied reimbursement for interest expense to the extent it was offset by income earned by the Trust. St. Elizabeth's appealed both of these issues to the PRRB, which upheld Blue Cross' position on both. The HCFA then affirmed the PRRB, and the district court referred both issues to the magistrate, who recommended affirming the Secretary on both. As for allowing the cost of contributions to the Trust, the magistrate noted that while the applicable regulation states that premium payments for employee health ... plans are an allowable cost, the Provider Reimbursement Manual (the Manual), which contains the Secretary's interpretation of the regulations, states that when payments are made into a self-insurance fund, the cost of contributions is not allowable. Magistrate's Recommendation at 15. He concluded that it was not arbitrary, capricious or an abuse of discretion for the Secretary to interpret the regulation providing for reimbursement for premiums as applying to commercial insurance policies only. As to the investment income offset, the magistrate cited Manual section 2161B, which states that the provider's total allowable interest expense under the Medicare program will be offset by income earned by invested insurance reserve funds. He also noted that investment income from employee health benefit self-insurance is not one of the four enumerated exceptions to the general rule of the income-offset regulation and again concluded that the Secretary's interpretation was reasonable. Magistrate's Recommendation at 15-16. 31 The district court adopted the recommendation about the income offset without comment but declined to adopt the Magistrate's recommendation on the treatment of contributions to a self-insurance fund. It rejected the distinction between commercial insurance and self-insurance, finding no warrant in the regulations or in reason and ruled that the amounts contributed into the Trust were allowable. District Court Opinion at 5 (The payments made by the hospital for its employees' health insurance do not lose their status as 'premiums' ... simply because the insurance plan is self-funded....). The Secretary apparently accepts this decision as he has not appealed it. 32 St. Elizabeth's, however, appealed the district court's decision on the investment income offset, arguing that it is unreasonable to read the offset regulation as applying to income earned by a trust fund to which St. Elizabeth's has no effective access. The Secretary supports his interpretation of the regulation with the two reasons given by the magistrate, supra: (1) that the offset is required by section 2161B of the Manual and (2) that income from an employee health benefit self-insurance fund is not one of the listed exceptions to the general offset rule. 33 Section 2161B establishes the conditions under which a provider may be reimbursed for actual losses met by a self-insurance reserve fund. One of the eight conditions that a plan must meet to receive reimbursement for such losses is that [t]he provider's total allowable interest expense under the Medicare program ... be offset by income earned by invested insurance reserve funds. Manual, Sec. 2161B(6). For two reasons, however, we do not think that this condition, relied upon by the magistrate and the Secretary, is dispositive of the question before us. 34 First, the Manual was amended during the course of this litigation to add new provisions on the treatment of employee health benefit trust funds. Section 2161B, upon which the Secretary relies, now appears to apply only 35 [w]here a provider maintains a self-insurance program for other than malpractice and comprehensive general liability coverage in conjunction with malpractice coverage, as well as unemployment compensation and workers' compensation coverage coupled with secondary injury coverage, or employee health-insurance coverage, provided it meets the requirements of Sec. 2162.7.... 36 Manual, Sec. 2161B (emphasis supplied). New Section 2162 covers Provider Costs for Malpractice and Comprehensive General Liability Protection, Unemployment Compensation, Workers' Compensation and Employee Health Care Insurance and subsection 2162.7 sets forth the conditions which self-insurance funds must meet in order to be reimbursed for all payments into the trust fund. These amendments for employee health benefit coverage were added in January 1983, Action Transmittal No. 276, and are effective for all cost reports under appeal as of or subsequent to January 15, 1983, Manual Sec. 2162.11(c). Therefore, we think there is a real question whether section 2161B still applies to the Trust or whether section 2162, which does not expressly condition reimbursement on an investment income offset, has superseded it. 37 Second, even if section 2162 is not relevant here, 9 the district court's decision in this case casts doubt on the continued applicability of section 2161B to employee health benefit trust funds. This section, as noted, instructs providers how to set up a self-insurance plan so that actual losses met by the plan can be reimbursed. But the district court ruled that it was unreasonable to distinguish between commercial insurance and self-insurance and that therefore all contributions made by St. Elizabeth's into the Trust were allowable costs. Therefore, section 2161B is no longer strictly applicable to the St. Elizabeth's Trust: the offset requirement of section 2161B(6) is a condition precedent to a result--reimbursement for actual losses--that St. Elizabeth's no longer wishes to achieve. 38 The Secretary also supports his interpretation of the offset regulation by appealing to its language: the regulation lists four exceptions to a general offset requirement and employee health benefit trust funds is not among them. St. Elizabeth's counters by arguing that when a provider self-insures for malpractice, it need not offset the income earned by the reserve fund: this exception, it points out, is also not among those listed. In support of this claim it points to the requirement in section 2162 that, in order to be reimbursed for all contributions, a malpractice self-insurance fund must ensure that any income earned by the fund must become part of the fund and used in establishing adequate fund levels. Manual, Sec. 2162.7(B)(6). Since the Trust retains earnings in the same way, St. Elizabeth's argues that it is arbitrary for the Secretary to apply the offset rule to employee health benefit self-insurance funds. 39 No one has explained why the conclusion about the offset follows from the requirement that earnings be retained, 10 but the Secretary does not dispute it. In fact, he seizes upon this requirement to distinguish malpractice self-insurance from employee health self-insurance. Appellant's Reply Brief at 10. However, section 2162 and its requirement that income become part of the fund applies to employee health benefit self-insurance as well. If there is no offset for malpractice funds (as the Secretary's silence suggests), then the Secretary has articulated no reason why there should be an offset for investment income generated by St. Elizabeth's Trust. He cannot rely on the language of the regulation since neither of these forms of self-insurance are expressly exempted from the offset requirement. 40 In sum, neither of the reasons given us by the Secretary seems to support his interpretation of the offset regulation. Therefore, we vacate and remand to the Secretary for further action consistent with this opinion that part of the judgment concerning the investment income offset. On remand, the Secretary will want to consider (1) whether section 2162 of the Manual applies to the Trust; (2) if not, whether section 2161B applies to the Trust in light of the district court's decision to allow the cost of self-insurance premiums; and (3) whether malpractice and employee health benefit self-insurance may be distinguished under the regulations. REVERSED IN PART AND REVERSED AND REMANDED IN PART