Opinion ID: 429783
Heading Depth: 2
Heading Rank: 3

Heading: Costs of Unconsummated Acquisitions.

Text: 83 The next issue also arises from HCA's acquisition program. In 1973, HCA evaluated several hospitals for possible acquisition, ultimately purchasing some but deciding not to acquire others. The costs incurred in making these evaluations were claimed on HCA's home office cost report and allocated to the individual providers operated by HCA (all of which are plaintiffs in this suit). The plaintiffs' fiscal intermediaries allowed Medicare reimbursement for the costs incurred in evaluating the facilities which were actually purchased. However, they denied Medicare reimbursement for the costs incurred in investigating the facilities which were not purchased. 35 In ultimately disallowing these costs, the Secretary noted that HCA is a chain organization engaged in the business of acquiring hospitals so as to increase corporate profits. While Medicare reimburses a provider's reasonable costs, it does not reimburse the costs of seeking additional earnings to the extent that those costs are unrelated to patient care. Here, she held, no patient care services resulted from the unconsummated acquisition costs and, consequently, reimbursement of those costs had to be denied. 84 The plaintiffs advance several arguments in opposition to the Secretary's decision not to reimburse unconsummated acquisition costs, most of which can be dealt with summarily. First, they argue that HCA's acquisition program enabled it to lower health care costs. By acquiring more member hospitals, HCA was able to buy more items in bulk and was able to spread fixed costs over a greater number of units. While the costs incurred in investigating unacquired hospitals did not in themselves result in economies of scale (in that they did not result in additional member hospitals), these expenses were an unavoidable cost of the acquisition program which did effect successful acquisitions. The plaintiffs cite 42 C.F.R. Sec. 405.451(a), which requires the reimbursement of all necessary and proper costs, and they assert that these unconsummated acquisition costs were both necessary and proper. Section 405.451(a), however, permits the payment of necessary and proper costs only if they are incurred in rendering the services [covered under the Medicare Act and related to the care of beneficiaries]. (Emphasis added.) Since the acquisitions here were never consummated, the costs were never incurred in rendering ... services, and never became related to the care of beneficiaries. Furthermore, we agree with the Secretary's position that these costs are too remotely related to the provision of health care to allow them to be considered reasonable costs. The plaintiffs' argument is similar to that raised and rejected by the court in Gosman v. United States, 573 F.2d 31 (Ct.Cl.1978). In Gosman, the plaintiffs sought reimbursement for advertising and public relation expenses designed to increase the occupancy of a group of nursing homes. The plaintiffs there claimed that by increasing the occupancy rate, the per diem cost of caring for Medicare beneficiaries would be lower, thus benefiting the program. This argument was rejected by the court, which held that the Medicare Act and its regulations preclude the reimbursement of indirect expenditures only tangentially or speculatively related to the actual care of Medicare beneficiaries. Id. at 38. See also American Medical International v. Secretary of Health, Educ. & Welfare, 466 F.Supp. at 613 n. 3 (fact that stock maintenance costs allow equity capital and thus reduces reimbursable finance costs incurred through debt too attenuated to justify reimbursement). 85 Nonetheless, the plaintiffs cite section 1395x(v)(1)(A), which requires Medicare to pay its own way so that the costs of delivering care to patients covered by Medicare will not be borne by individuals not so covered .... Thus, they argue that, if these unsuccessful acquisition costs are not reimbursed by Medicare, they will be borne in their entirety by non-Medicare patients, notwithstanding the benefit realized by Medicare from these costs. As previously noted, unconsummated acquisition costs are not necessary costs of covered services and, as a result, do not fall within the cost-shifting prohibition. Indeed, if HCA's cost-shifting argument were to prevail, no cost could ever be disallowed for reimbursement purposes because to do so would tend to shift the cost to non-Medicare patients. Pasadena Hosp. Association v. United States, 618 F.2d 728, 735 (Ct.Cl.1980). 86 The plaintiffs also seek support from 42 C.F.R. Sec. 405.429, the return on equity capital regulation, and from 42 C.F.R. Sec. 405.402(b)(6), which states that there should be recognition of the need of hospitals ... to make improvements. Neither provision requires reversal of the Secretary's determination. As the Secretary explains, section 405.429 does not magically transform all expansion expenses, including those connected with unsuccessful ventures, into reimbursable costs. If that were the effect, virtually all expenses ... would be reimbursable without regard to their relationship to patient care. Brief for Appellee/Cross-Appellant at 57-58. Similarly, the general policy of section 405.402(b)(6), which recognizes the need for hospitals to make improvements, is inapposite here. The hospitals being investigated were not acquired and, consequently, no improvements were made and no patients were benefited. 87 Finally, the plaintiffs argue that the Secretary's disallowance of HCA's unconsummated acquisition costs is contrary to Medicare's treatment of other home office costs. A number of home office management decisions result in abandoned efforts, the costs of which are not challenged by Medicare. These include costs associated with investigating computer installations, shared services, litigation and personnel recruitment. The Secretary distinguishes reimbursement of these costs on the ground that these expenses are more closely related to the improvement or maintenance of health care services provided by existing facilities. In contrast, the Secretary argues, HCA's acquisition program was directed primarily at establishing itself as a growth industry among potential stockholders. In order to obtain more investors, HCA needed to expand by purchasing additional profitable hospitals. She argues that the primary purpose of HCA's unconsummated acquisition costs was to prevent HCA from making financially disadvantageous acquisitions, which might deplete corporate resources and lower corporate profits. Thus, she concludes, the principal benefit of these costs was felt by HCA and its stockholders, not HCA's Medicare patients, and to reimburse these costs would be inappropriate. Although the Secretary has drawn a fine line here, we do not find the distinction she makes to be irrational. As the Fourth Circuit noted in Fairfax Hosp. Association v. Califano, 585 F.2d 602, 606 (4th Cir.1978): 88 Particularly in a program as complex as the Medicare program, with its large number of providers and suppliers ... the Secretary in his regulations may make, indeed he must make, rough accommodations ... using generalized classifications governing the methods of calculating reasonable cost when it is obvious that individualized cost calculations are both not administratively practical and unduly expensive. 89 See also American Hospital Management Corp. v. Harris, 638 F.2d 1208, 1212 & n. 7 (9th Cir.1981). Thus, we affirm the district court on this issue. 90