Opinion ID: 693465
Heading Depth: 3
Heading Rank: 2

Heading: Regulations Determining Necessary and Proper Interest Costs.

Text: 33 Neither party disputes that interest costs are allowable costs pursuant to the Medicare Act. See 42 CFR Sec. 413.153(a)(1). Interest is defined as the cost incurred for the use of borrowed funds. Sec. 413.153(b)(1). However, only the portion of each provider's interest on capital indebtedness that is necessary and proper and attributable to Medicare patient utilization is reimbursable under Medicare. See Sec. 413.153(a)(1). 34 The term necessary requires that interest be: 35 (i) Incurred on a loan made to satisfy a financial need of the provider ...; [and] 36 (ii) Incurred on a loan made for a purpose reasonably related to patient care.... Sec. 413.153(b)(2). 5 37 Both parties to the instant action agree that necessary and proper expenditures are those which were actually incurred. See 42 U.S.C. Sec. 1395x(v)(1)(A); 42 C.F.R. Sec. 413.5(a). However, each party contends that its method of calculation reflects actual costs. 38 The providers contend that the use of the blended interest rate most accurately represents the interest costs actually incurred by each provider. Because these interest costs arose from an integrated financing system where the borrowing was undertaken by the entire group, lower rates and a higher percentage of variable rate debt was possible. Without the participation of the entire group, the providers argue, these favorable rates could not have been obtained. The providers further argue that because each provider was legally responsible for obligations arising out of the total debt, each incurred a portion of the total interest costs. In addition, the state corporations, acting independently probably could not have assumed such a high percentage of variable rate debt. Therefore, the providers contend, to reflect the overall risks and benefits assumed by each of the providers, interest costs can be apportioned only according to a blended rate. 39 The Secretary takes the position that because all reimbursements must take account of the actual use of services by ... [Medicare] beneficiaries, use of an overall interest rate is improper. Sec. 413.5(b)(3). In other words, equalizing crosspayments by the providers to each other, for which an overall blended rate of interest is claimed for Medicare reimbursement purposes, blurs the Medicare utilization rate. The overall interest rate cannot precisely reflect the specific costs incurred to satisfy the needs of the individual provider to render services to its Medicare patients. Because the Secretary's determination to disallow reimbursement according to a blended interest rate was reasonable and consistent with the Medicare regulations, we must affirm her interpretation. 40