Opinion ID: 480354
Heading Depth: 2
Heading Rank: 1

Heading: Conversion Costs

Text: 14 Appellant Monsour Medical Center seeks Medicare reimbursement for the sizable interest expenses it incurred pursuant to its 1975 mortgage agreement with members of the Monsour family. It also seeks Medicare reimbursement, at a stepped up basis that reflects the price at which it purchased the hospital from Monsour family members in 1975, for its depreciation expenses since the conversion. The district court granted the Center's motion for summary judgment on these issues, and the Secretary, as cross-appellant, now appeals from that portion of the district court's order. At issue in this cross-appeal are reimbursement claims dating back to fiscal year 1977. To assess the validity of the PRRB's treatment of these claims, we turn first to the applicable federal regulations. 15 According to the Medicare regulations, a health care provider's interest expenses are an allowable cost (i.e., reimbursable) if they are paid to a lender not related through control or ownership, or personal relationship to the borrowing organization. 42 C.F.R. Sec. 405.419(b)(3)(ii) (1985). As to determining the proper cost basis of a provider (i.e., the purchase price figure from which its depreciation costs are to be calculated), the regulations provide that, [i]f the purchaser cannot demonstrate that the sale was bona fide, ... [its] cost basis shall not exceed the seller's cost basis, less accumulated depreciation. 13 42 C.F.R. Sec. 405.415(g)(3) (1985). For both determinations, 14 the crucial inquiry concerns the relationship between the Foundation and the Monsour family (i.e., the buyer and the seller of the hospital facility). The related organizations provision, 42 C.F.R. Sec. 405.427 (1985), 15 which provides for the allowance of certain costs incurred by a provider's relatives, offers these definitions of organizations related to the provider by common ownership or control: 16 (b) Definitions--(1) Related to provider. Related to the provider means that the provider to a significant extent is associated or affiliated with or has control of or is controlled by the organization furnishing the services, facilities, or supplies. 17 (2) Common ownership. Common ownership exists when an individual or individuals possess significant ownership or equity in the provider and the institution or organization serving the provider. 18 (3) Control. Control exists where an individual or an organization has the power, directly or indirectly, significantly to influence or direct the actions or policies of an organization or institution. 19 Id. Applying this precise definition of control as the governing legal precept in this matter, we will hold that substantial evidence on the record supported the PRRB's finding that the Foundation and the Monsour family were related parties at the time of the conversion.
20 The PRRB and the district court, in their respective analyses of these reimbursement issues, disagreed fundamentally on the proper application of the relevant Medicare regulations. In assessing the relatedness of the Monsour family and the Foundation, the Board looked to the corporate long-term planning period. 16 Monsour Medical Center v. Blue Cross & Blue Shield Ass'n/Blue Cross of W. Pa., PRRB Hearing Dec. No. 80-24, at 20 (June 14, 1984); Appellant's App. at A64. The district court, by contrast, believed that focusing on that earlier time period beg[ged] the issue, i.e., whether the Monsours continued to control the Center after the sale. Monsour Medical Center v. Heckler, No. 84-1938, at 11 (W.D.Pa. Dec. 30, 1985); Appellant's App. at A79. Although the regulations--like the analyses of this issue by both the PRRB and the district court--lack ideal clarity, we will accept the PRRB's interpretation of them. 21 The regulation governing depreciation, although it does not speak of control or relatedness, 17 requires a purchaser of a care providing facility to demonstrate that the sale was bona fide. 42 C.F.R. Sec. 405.415(g)(3) (1985). We interpret this regulation as addressing the bona fides of a sale at the time of that sale. The regulation governing interest costs paid to a lender ... [by] the borrowing organization does speak of control, personal relationship and related[ness]. 42 C.F.R. Sec. 405.419(b)(3)(ii) (1985). We interpret this regulation as addressing, though less clearly than the previous regulation, the control, personal relationship and related[ness] of parties to a loan at the time of their borrowing and lending. So far as we can ascertain from its hearing decision, these were and are the PRRB's interpretations of its governing regulations. 18 As a reviewing court constrained by the A.P.A., [w]e must ... accept the agency's view so long as the 'interpretation[§ are] within the range of reasonable meanings that the words of the regulation[s] admit.'  19 Butler County Memorial Hospital, 780 F.2d at 355-56 (quoting Psychiatric Institute of Washington, D.C., Inc. v. Schweiker, 669 F.2d 812, 813-14 (D.C.Cir.1981) (per curiam)). 20 Based on our own reading of the regulatory language, we conclude that the Secretary's apparent interpretations are plainly reasonable. In these circumstances, where there is no evidence that accepting the Secretary's interpretive expertise will actually shield an irrational decision-making process, Natural Resources Defense Council, Inc. v. EPA, 790 F.2d 289, 298 (3d Cir.1986), or work[ ] an unduly harsh result in the name of an otherwise valid and laudable regulation, Hart v. Bowen, 799 F.2d 567, 570 (9th Cir.1986), there is no basis for second-guessing the agency. The district court therefore erred as a matter of law in replacing these interpretations, which are completely within the range of reasonable meanings [that] may logically ... be drawn from the words of the regulation[s], Garner v. United States Office of Personnel Management, 633 F.Supp. 995, 999 (E.D.Pa.1986), with its own views.
22 We now address the question the district court did not reach: 21 Was the PRRB's finding that the Monsour family and the Foundation--the seller and the buyer--were related parties at the time of the 1975 conversion 22 based on substantial evidence? 23 ] We answer this question unequivocally and in the affirmative. 23 The Medicare statute defines related organizations in terms of control, which exists where an individual or an organization has the power, directly or indirectly, significantly to influence or direct the actions or policies of an organization or institution. 42 C.F.R. Sec. 405.427(b)(3) (1985) (emphasis added). Virtually all the factual evidence in the record before the PRRB establishes that the creation of the Foundation, the selection of its board members and trustees, and the financial transactions that effectuated the hospital conversion all proceeded according to the plans of, and were executed by, the members of the Monsour family who were the hospital's original (and only) stockholders. The record indicates that they planned a series of transactions that would produce for them financial benefits far exceeding the real value of the hospital they were selling to the Foundation. 24 The record also indicates that the Monsour family members, after setting the terms of the conversion, expanded the Foundation they had created by adding eight new members appointed for the purpose of approving the conversion; in fact, while the four Monsours abstained from voting, this new, non-Monsour majority Foundation did approve every aspect of the proposed conversion. The record thus indicates that the conversion went exactly as the Monsour family members, as both the selling stockholders and the buying Foundation, had planned. Complicated organizational and financial structures simply cannot conceal or negate such substantial record evidence of the Monsours' direct power significantly to influence the actions or policies of the Foundation at the time of the conversion. 25 While the substantial evidence just described is sufficient to demonstrate direct power to control, it in addition--and without question--demonstrates that the Monsour family at least had the indirect power, referred to in the regulations, significantly to influence or direct the actions or policies of the Foundation at the time of the conversion. 42 C.F.R. Sec. 405.427(b)(3) (1985). The district court erred in finding otherwise. It looked only at events subsequent to the conversion, and it appears simply to have ignored the PRRB's finding that the precise facts of the conversion itself, because it was carried out as planned when the Monsours were the Foundation, were powerful and substantial evidence of the Monsour's continuing power to influence the Foundation at the time in question. We will therefore vacate the district court's summary judgment for the Center as to the conversion costs and order that the district court enter summary judgment for the Secretary on this issue.
24 In the state court action involving Blue Cross and the Center, Judge Wekselman addressed appellant's claim that evidence supports a finding that the conversion which occurred in May of 1975 was an arm's length transaction within the guidelines established by the Medicare regulations. 26 Blue Cross of W. Pa. v. Monsour Medical Center, No. GD 82-4968, at 7 (Pa.Ct. Common Pleas Feb. 2, 1983); Appellant's App. at A12. He found that, 25 [i]n essence, there is no evidence in this case from which the Court can find that the members of the two Boards were in any way beholding to the Monsours by virtue of prior social, business or family relationships with them, and the fact of such relationships is insufficient alone or in combination with any or all of the other evidence in the case to support a finding such as that contended for by Blue Cross. 26 Id. at 33; Appellant's App. at A38. Appellant, as cross-appellee on this issue, urges us, as it urged both the PRRB and the district court, to consider ourselves governed by this state court finding. 27 While Blue Cross was a party to the state proceeding, the Secretary was not. Therefore, to estop the federal government from litigating its claims, appellant would have to prove that the United States exercised control over Blue Cross's Pennsylvania court suit against the Center. Montana v. United States, 440 U.S. 147, 155, 99 S.Ct. 970, 974, 59 L.Ed.2d 210 (1979). In Montana, where this question of control by the United States was not in dispute due to stipulations of the United States, see id., the Supreme Court based its finding that the United States had controlled the prior state suit, and thus was precluded from relitigating the issues that that state suit had settled, on the following indicia: 28 [t]he government ... 29
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34 (6) directed the filing of a notice of appeal to [the United States Supreme] Court; and 35 (7) effectuated [the state court plaintiff's] abandonment of that appeal on advice of the Solicitor General. 36 Id. In the state suit that preceded this case, the Secretary played none of these controlling roles. The fact that she was sufficiently satisfied with the probative value of the state court proceeding to submit its transcript as evidence in the PRRB hearing does not, at least not without certain proof of the Montana indicia just enumerated, prove plainly [that the Secretary] had a sufficient 'laboring oar' in the conduct of state court litigation to actuate principles of estoppel. 27 Id. (quoting Drummond v. United States, 324 U.S. 316, 318, 65 S.Ct. 659, 660, 89 L.Ed. 969 (1945)). We therefore agree with the PRRB and the district court 28 that the state court findings in the Blue Cross-Monsour Medical Center suit should not be given legally preclusive effect in this federal action. 29
37 Five years passed and actual reimbursement was paid for the Center's conversion costs before Blue Cross audited the Center's cost reports and retroactively disallowed these reimbursements. Appellant contends that the Secretary should therefore be equitably estopped from changing the original course of conduct. 38 Appellant has failed to carry its sizeable burden of proof on this issue. 30 In Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984) (Crawford County), the Supreme Court unanimously rejected a similar claim by a Medicare provider that had benefitted from excessive reimbursements provided by the Secretary's intermediary. Appellant has failed to demonstrate that the denial of reimbursement for the interest and depreciation costs associated with its conversion leaves it significantly worse off than if it had never obtained such reimbursement in the first place. Id. at 63, 104 S.Ct. at 2225. In fact, like the health care provider in Crawford County, the Center here has demonstrated no detriment other than its inability to retain money that [the Secretary has now determined] it should never have received in the first place. Id. at 61, 104 S.Ct. at 2225. The core teaching of Crawford County is that, in the context of a complex program such as Medicare, it is simply too much to expect the Government to ensure that every bit of informal advice given by its agents ... will be sufficiently reliable to justify expenditure of sums of money as substantial as those spent by [appellant]. Id. at 64, 104 S.Ct. at 2226. Adhering to that teaching, we find that equitable estoppel of the Secretary is not justified on the facts of this case.