Opinion ID: 161838
Heading Depth: 3
Heading Rank: 1

Heading: Disallowance of Bonuses

Text: 12 AllCare appeals as arbitrary and capricious the PRRB's finding that the bonuses awarded to the CEO and CFO were returns on equity and therefore not allowable under the Medicare program. 13 Owners may receive compensation only if they render necessary services, and their compensation is limited to the reasonable cost of those services. 42 C.F.R. § 413.102(c)(2). According to the regulations, [r]easonableness of compensation may be determined by reference to, or in comparison with, compensation paid for comparable services and responsibilities in comparable institutions; or it may be determined by other appropriate means. Id. 14 The Medicare program prohibits owners of service providers from receiving profits, however. 42 C.F.R. § 413.102(c)(2). Section 902.2 of the Medicare Provider Reimbursement Manual states: Payments found to represent a return on equity capital are not compensation and are in no event allowable as an item of reimbursable cost. 15 At the end of fiscal year 1996, the owners of AllCare awarded themselves $60,000 in bonuses, which they claim was reasonable compensation for their services as CEO and CFO. Including these bonuses, the total compensation packages of the CEO and CFO were $127,000 and $97,000 respectively. The PRRB did not dispute the reasonableness of the amount of the bonuses, as the total compensation for each individual was in line with others in the industry. 16 The PRRB instead disallowed the bonuses because the method of calculation made the bonuses analogous to the payment of a return on equity capital. The PRRB stated that bonuses may properly be labeled as compensation if there is a well-defined incentive plan in place with clear standards, but it found that AllCare had no such incentive plan in place. Instead, the owners determined the bonus amounts by examining the spread between AllCare's actual costs and the Medicare program's established limits. Because the cost limits do not create payment entitlements, the PRRB found that bonuses calculated in this fashion constitute an unallowable return on equity. 17 These findings were supported by substantial evidence. Nothing in the record demonstrates that a formalized incentive program existed. To the contrary, Mr. Bhasin's testimony indicates that AllCare did not rely on such a program in setting bonuses. Instead, AllCare set the CEO's and CFO's base salaries at the beginning of the year, and then set the bonuses at the end of the fiscal year based on the financial status of the company. The owners admit that they set the bonuses in consultation with the reimbursement consultant, and that they considered the difference between the cost limits and actual costs in setting the bonuses. These admissions support the PRRB's determination that the bonuses were analogous to a return on equity and therefore not allowable. Given the substantial evidence supporting it, we cannot find that the PRRB's decision was arbitrary and capricious.