Court Opinion

ID: 8921230
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:17:22.924268+00
Date Added: 2024-06-11T17:09:18.251982
License: Public Domain

KRUPANSKY, Circuit Judge,
dissenting.
Because I believe that the majority has mistakenly interpreted 42 C.F.R. § 405.419(c)(1) as an absolute prophylactic rule, I must dissent.
The medicare act entitles providers to reimbursement for covered services based on “the reasonable costs of such services”. 42 U.S.C. § 1395f(b)(1). The standards for determining the reasonable cost of services provided to medicare patients are concisely enumerated by the act:
The reasonable cost of any services, shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions.
42 U.S.C. § 1395x(v)(1)(A).
Pursuant to this specific statutory delegation, the Secretary promulgated a series of regulations which define the procedure to be implemented and items included in the determination of reimbursable expenditures. Of immediate application to this appeal is the rule codified as 42 C.F.R. § 405.419. This regulation addresses the interest expenses of medicare providers; in part, it reads as follows:
(a) Principle. Necessary and proper interest on both current and capital indebtedness is an allowable cost____
(b) Definitions. (1) Interest. Interest is the cost incurred for the use of borrowed funds____ This is usually for such purposes as working capital for normal operating expenses____
(2) Necessary. Necessary requires that the interest:
(i) Be incurred on a loan made to satisfy a financial need of the provider. Loans which result in excess funds or investments would not be considered necessary.
(ii) Be incurred on a loan made for a purpose reasonably related to patient care.
(iii) Be reduced by investment income except where such income is from gifts and grants____
(3) Proper. Proper requires that interest:
(1) Be incurred at a rate not in excess of what a prudent borrower would have had to pay in the money market existing at the time the loan was made, (ii) Be paid to a lender not related through control or ownership or personal relationship to the borrowing organization ____
(c) Borrower-lender relationship. (1) To be allowable, interest expense must be incurred on indebtedness established with lenders or lending organizations not related through control, 'ownership, or personal relationship to the borrower. Presence of any of these factors could affect the “bargaining” process this [sic ] usually accompanies the making of a loan, and could thus be suggestive of an agreement on higher rates of interest or of unnecessary loans. Loans should be made under terms and conditions that a prudent borrower would make in arms length transactions with lending institutions. The intent of this provision is to assure that loans are legitimate and needed, and that the interest rate is reasonable. Thus, interest paid by the provider to ... related organizations of the provider would not be allowable____
(2) Exceptions to the general rule regarding interest on loans from controlled sources of funds are made____ if a provider operated by members of a religious order borrows from the order, [then] interest paid to the order is an allowable cost.
On this appeal, the Secretary has urged that § 405.419 in an absolute prophylactic regulation designed to effectuate the medicare statute which is the genesis of the promulgation of the rule. Patently, this regulation is not as sweeping in effect as the Secretary has argued. The regulation defines the general rule of subsection (b)(3)(ii), that reimbursable interest must be *1179“interest ... paid to a lender not related” to the provider; thereafter, subsection (c) of the regulation explicates the rule and provides specific exceptions to the applicaf. . ^ e. , , _ ,e tion of that general rule. One such excep- .. , . ? ,, . , tion, not at issue on this appeal, concerns ., ' . . ... providers affiliated with sectarian mstitu- .. /on-cin k tions. 42 C.F.R. § 405.419(c)(2).1
Fairly construed, subsection (c)(1) provides that the general rule is not applicable to loans which are executed in accordance with “terms and conditions that a prudent borrower would make m arms length tarns-actions with lending institutions so long as the loans are legitimate and needed, , . , , .. „ and ... the interest rate is reasonable . T .,. ,, . ., , , , ., . In this case, as the majority has noted, it is conceded by all parties that the loans to Cincinnati General by the University were legitimate and necessary. It is further conceded that the interest rate, settled at the prevailing prime rate, was manifestly reasonable. Finally, the terms and conditions of this loan bear all the characteristics reflective of those which the hospital could have obtained in an arm’s length transaction with a commercial lending institution.2
Of course, these are factual issues left to the determination of the Secretary, not a federal review court. However, here the P.R.R.B. concluded, “[fjaced with the severe cash problems [the hospital] was required to turn to the University of Cincinnati ‘to avoid financial disaster’ ” and, that “the interest rate was reasonable, and, in fact, well below the going market rate”. The Secretary has accepted the Board’s Hearing Decision with modification,
Qn ^ j the Secret has assert. ed that the general rule admitted to no , , , relevant qualification or exception, i.e., that . , . , , . ,. its purpose is exclusively prophylactic, . . , , ,, This interpretation conflicts with the ex- , L , press language and structure of the regulation and it is therefore not entitled to dis-positive deference. I.N.S. v. Stanisic, 395 U.S. 62, 72, 89 S.Ct. 1519, 1526, 23 L.Ed.2d 101 (1969). See also Batterton v. Francis, 432 U.S. 416, 425-26, 97 S.Ct. 2399, 2405-06, 53 L.Ed.2d 448 (1977). It is obvious „ , from an examination of the very language „ s ,i„ ,, . ., , , of § 405.419 that it does not reflect a , , , , br.ght-lme prophylactic rule but merely illu“tes the parameters of a relatively ™defmed accounting principle, to wit, that a Provlder 18 entltled to claim a11 necessary and proper interest expense” as a reimbursable cost of providing services to medicare beneficiaries. See Abbott-Northwestern Hospital, Inc. v. Schweiker, 698 F.2d 336, 341 (8th Cir.1983).
Similarly, the court in Northwest Hospital Inc. v. Hospital Services Corp., 687 F.2d 985 (7th Cir.1982) (all judges of the circuit concurring), viewed subsection (c) of § 405.419 as explicating the blanket rule in § 405.419(b) and outlining the scope of that rule. 687 F.2d at 989 (“405.419(c) explains the justification for and scope of this exclusion”). The Seventh Circuit in Northwest Hospital has aptly observed that “the stat*1180ute specifically creates the right to judicial review of the Secretary’s adverse ruling on what costs are reimbursable, thus reserving to the courts the final authority to interpret this aspect of the statute”. Id. at 991, quoting St. John’s Hickey Memorial Hospital v. Califano, 599 F.2d 803, 813 (7th Cir.1979) [emphasis added]. Thus in Northwest Hospital the interpretation of § 405.419 instantly advanced by the Secretary was not accorded precedence.
The Northwest Hospital court additionally noted that the intent of the rule, according to the regulatory language, was “to assure that loans are legitimate and needed, and that the interest rate is reasonable.” Id., 687 F.2d at 992. In that case, as in the case at bar, there was no dispute that the loans were necessary and that the interest charged was reasonable. The Seventh Circuit rejected the Secretary’s claim that, notwithstanding the settled bona fideness of the transactions at issue, § 405.419 prohibited recovery of interest expenses; the court concluded that “application of the related-party disallowance to the loan transaction involved in this case is inconsistent with the rationale offered for the regulation” in § 405.419(c).
Other courts have also articulated this result by concluding that the regulation is a broadly worded prohibition with certain narrow exceptions provided for in subsection (c). See Jackson Park Hospital Foundation v. United States, 228 Ct.Cl. 448, 659 F.2d 132 (1981); South Boston General Hospital v. Blue Cross of Virginia, 409 F.Supp. 1380 (W.D.Va.1976). Of particular relevance to the cause herein under review is Trustees of Indiana University v. United States, 223 Ct.Cl. 88, 618 F.2d 736 (1980). In that case the providers were non-profit hospitals affiliated with a state university, they were not funded by the state but depended on patient revenues for operating funds, and were prohibited by law from borrowing from commercial lenders and claimed as medicare reimbursement interest paid on loans from the university at a below-market rate of interest. The Indiana University court construed the regulation to have created a narrow exception to the preclusion of the interest charged by the affiliated university.
Additionally, contrary to the majority’s view, this circuit’s opinion in Shaker Medical Center Hospital v. Secretary of Health and Human Services, 686 F.2d 1203 (6th Cir.1982), is readily distinguished from this case. In Shaker, the medicare provider had claimed reimbursement for depreciation and interest expenses resulting from the purchase of a hospital building. On the appeal, the Shaker provided had challenged the propriety and application of two of the Secretary’s regulations promulgated pursuant to the “reasonable cost” statute, 42 U.S.C. § 1395x(v)(1)(A), supra, namely 42 C.F.R. § 405.427 and 42 C.F.R. § 405.419. The latter being the regulation at issue in the case before this court.
Of primary concern to the Shaker panel was § 405.427, which creates an exception to the general rule that depreciation on buildings is a reimbursable cost. This regulation, however, generally excludes reimbursement of “costs applicable to ... facilities ... furnished to the provider by organizations related to the provider by common ownership or control”. 42 C.F.R. 405.427. Section 405.427 also incorporates a proviso which permits reimbursement of “related-party” depreciation costs if such costs are shown “not to exceed the price of comparable” furnishings available from non-related organizations. The Shaker panel concluded therefrom that the qualified restriction of § 405.427 “[essentially ... seeks to insure that the costs reimbursed in such situations do not exceed what the costs would be if the provider obtained the services from an unrelated organization”. 686 F.2d at 1205. Thus, in purpose and effect, § 405.427 parallels § 405.419. The Shaker court was not, however, required to evaluate the contours of that similarity because it had concluded that the loan was not demonstrably bona fide and necessary. Because there was no bona fide transaction at issue, the Shaker court did not have an occasion to examine the breadth of § 405.419, but appropriately confined its analysis to the issue presented to it.
*1181Finally, on appeal, the Secretary argued, and the majority effectively holds, that although the necessity and propriety of the loans at issue had been investigated, and despite the affirmative conclusion of the Secretary that the loans were not collusive, improper, nor unnecessary and the interest reasonable, this court should nonetheless relieve the Secretary from the burden of conducting an investigation designed to verify the requirements of the enactments. Even were the regulation’s proscription as comprehensive as claimed by the Secretary, this court should not acquiesce in the-wasteful and foolish endeavor of protecting the Secretary from that which the Secretary has undertaken voluntarily. I would therefore reverse the district court and remand the cause with instructions to return the matter to the Secretary for a determination of the reimbursable amount due appellant on the rejected interest claim.

. Subsection (c)(2) has not been challenged on this appeal and the majority has appropriately declined to comment on its validity. It is worth noting, however, that the religion-based exception is broadly worded and seems to be an abdication by the Secretary of the authority to examine the bona fides and necessities of loans, which would be subject to review in instances involving interest payments made by a secular provider.

. Indeed, even if state law permitted the hospital to seek commercial loans, it is open to question whether an institution confronted with the financial burdens that threatened its existence would be capable of securing a loan at any rate of interest. On this issue, the Secretary argued that the probable unavailability of cooperative commercial lenders would force Cincinnati General "to face hard choices about its opera-lions” and would have thus precluded a medicare interest claim. It appears that this argument was intended to persuade the court that the within loan was not reflective of an arm's length commercial transaction. In view of the fact that Cincinnati General's "hard choice” in this case would be to close its doors, the argument is contrary to the intent of the Act, which ¡s lo promotc and ensure services to medicare recipients. Moreover, the regulation itself does not cons>cjer the availability of commercial loans, but is instead concerned with preventing collusive agreements for unnecessary loans at extraordinary interest rates. Accordingly, for the purpose of this appeal, it is appropriate to concentrate on the expressed purpose and intent of the regulations.