Opinion ID: 406699
Heading Depth: 2
Heading Rank: 1

Heading: Interest Expense

Text: 16 Three of the issues involve the manner in which reimbursement of Research's interest expense was determined. 17
18 In 1971 and 1972, Research built a student housing facility for residents, interns, and student nurses on a site adjacent to the hospital facility. The bulk of the construction money came from borrowed funds. During the period of actual construction, Research incurred a substantial interest expense. Section 206 of the Provider Reimbursement Manual requires that the interest expense be capitalized over the useful life of the building (thirty years). This means Research's reimbursement (based on the percentage of Medicare patients) would be spread over thirty years. Research wants the interest expense treated as a current expense, which would result in immediate reimbursement for the Medicare patient percentage. Section 206 is not a legislative regulation with the force of law, but an interpretative rule. Good Samaritan Hospital, Corvallis v. Mathews, 609 F.2d 949, 954 (9th Cir. 1979). 19 Research argues that requiring capitalization is contrary to the statutory and regulatory authority which requires payment of its allowable costs on a current basis. According to Research, the capitalization requirement is contrary to the statute which requires that regulations take into account both direct and indirect costs so that the costs of delivering services to Medicare patients are not borne by non-Medicare patients. 42 U.S.C. § 1395x(v)(1)(A)(i) (1976). Research also relies upon the provisions of the following regulations which the Secretary has promulgated: (1) 42 C.F.R. § 405.419(a), which provides, in part, that (n)ecessary and proper interest on both current and capital indebtedness is an allowable cost, (2) 42 C.F.R. § 405.402(a) and (b)(1), which requires that (i)n formulating methods for making fair and equitable reimbursement for services rendered beneficiaries of the program, payment is to be made on the basis of current costs of the individual provider and that (t)he methods of reimbursement (employed) should result in current payment so that institutions will not be disadvantaged ... by having to put up money for the purchase of goods and services well before they receive reimbursement, (3) 42 C.F.R. § 405.402(a), which provides that the share of the total institutional cost that is borne by the (Medicare) program is (to be) related to the care furnished beneficiaries so that no part of their cost would need to be borne by other patients, and (4) 42 C.F.R. § 405.406(a), which requires that generally accepted accounting practices in the health care and hospital fields be followed in maintaining financial records for the Medicare program. Research asserts that these regulations prohibit the Secretary's capitalization requirement. 20 The capitalization requirement of § 206 of the Provider Reimbursement Manual attempts to implement the statutory requirement that Medicare costs should not be borne by non-Medicare patients. Capitalization allows the Medicare reimbursement to change as the percentage of Medicare patients in a medical facility changes over the years. A rate that changes over the capitalization period would better reflect the proportion of Medicare patients benefiting from the new facility. If the interest expense were currently reimbursed, and Research withdrew from the Medicare program shortly after the construction was completed, Research's non-Medicare patients would benefit for many years from a Medicare reimbursement. The Secretary's determination that capitalization of interest best implements the statute is reasonable. As we said in § II, supra, we give deference to the Secretary's interpretation of the statute. Section 206 has a reasonable basis in law and does not frustrate congressional policy. We, therefore, uphold the Secretary's interpretation. See Medical Center of Independence, 628 F.2d at 1118. See also Gosman v. United States, 573 F.2d 31, 41 (Ct.Cl.1978). 21 Furthermore, our decision is consistent with the decisions of other courts which have considered arguments similar to Research's and likewise rejected them. Good Samaritan, 609 F.2d at 954-56. St. Francis Memorial Hospital v. United States, 648 F.2d 1305, 1307-08 (Ct.Cl.1981). Research argues that these cases are not on point because they involved new facilities, and Research's student housing was an expansion. We agree with the magistrate that substantial evidence exists to support a finding that the student housing facility should be treated as new construction. 22
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.
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.