Opinion ID: 406699
Heading Depth: 3
Heading Rank: 1

Heading: Capitalization of Construction Interest Expense

Text: 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