Court Opinion

ID: 8598118
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:05:36.207432+00
Date Added: 2024-06-11T16:55:03.634046
License: Public Domain

KASHIWA, Judge,
dissenting:
I respectfully dissent.
As explained by the majority, hospitals participating in the Medicare program are in general paid the reasonable cost of covered services provided to Medicare beneficiaries. 42 U.S.C. § 1395f(b). Reasonable cost is determined in accordance with 42 U.S.C. § 1395x(v)(l)(A). That section specifies that reasonable cost of services is the cost actually incurred necessary to the efficient delivery of needed health services. Under section 1395x(v)(l)(A), the Secretary is granted authority to promulgate regulations establishing methods to be used and items to be included in determining reasonable cost. That authority, however, is limited by statute. The regulations promulgated by the Secretary
* * * shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. * * * Such regulations shall (i) take into account both direct and indirect costs of providers of services * * * in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance progarams, * * *. [42 U.S.C. § 1395x(v)(l)(A); emphasis supplied.]
The Secretary has promulgated regulations in accord with the statute. Nowhere in the statute or regulations, however, have franchise taxes been mentioned. It is only in the Secretary’s Provider Reimbursement Manual that fran*599chise taxes are first mentioned. The Manual is simply a statement of the Secretary’s position on an issue; it does not have the force of regulation. To be valid, the Manual must therefore be in accord with statute and regulation. See Whitecliff, Inc. v. United States, 210 Ct. Cl. 53, 536 F. 2d 347 (1976), cert. denied, 430 U. S. 969 (1977); Goldstein v. United States, 201 Ct. Cl. 888, cert. denied, 414 U. S. 974 (1973). Under the governing statute and regulations, the relevant question we must ask to decide this case is whether the California franchise tax is a reasonable cost necessary to the efficient delivery of health care services for Medicare patients.
The majority holds the California franchise tax is not reimbursable under Medicare simply because it is measured by net income. The majority opinion fails to recognize the very basic distinction between the purpose for which a tax is paid and the method by which a tax is measured. Whether a tax is a necessary cost of health care under the Medicare Act will logically depend upon the reason for its payment. The statute and regulations do not support the view that the way a tax is calculated is determinative of its necessity for health care delivery.
Taxes, in general, are considered indirect costs of health care and are reimbursable under Medicare. Provider Reimbursement Manual § 2122.1. Franchise taxes are licensing fees paid by a business to a state for the right to do business in that state. California Revenue & Taxation Code § 23151 states in pertinent part:
(a) With the exception of financial corporations, every corporation doing business within the limits of this state and not expressly exempted from taxation by the provisions of the Constitution of this state or by this part, shall annually pay to the state, for the privilege of exercising its corporate franchises within this state, a tax according to or measured by its net income, to be computed at the rate of 7.6 percent upon the basis of its net income for the next preceding income year. In any event, each such corporation shall pay annually to the state, for the said privilege, a minimum tax of one hundred dollars ($100).
Thus in California before a health care facility such as the plaintiffs’ may operate, it must pay a franchise tax. No health care facility can even open its doors to a Medicare *600patient unless it has paid the required franchise tax. Clearly a franchise tax is an indirect cost of health care. This fact is recognized by the Secretary by his reimbursement of franchise taxes that are measured by systems other than net income. See Provider Reimbursement Manual § 2122.4; Administrative Record, Sierra Vista Hospital & El Cajon Hospital v. Blue Cross of Southern California, Blue Cross Association Medicare Provider Appeal, Nos. 149 & 150 (1972).
It is not sufficient that an expense be related to health care under 42 U.S.C. § 1395x(v)(l)(A); it must be specifically related to the care of Medicare patients. The California franchise tax is computed in general as a percentage of net income for the preceding income year. A prerequisite to the operation of a hospital and the care of Medicare patients is the payment by a for-profit provider of that franchise tax. The Medicare statute draws no distinction between nonprofit and for-profit providers. 42 U.S.C. § 1395x(u). The regulations specifically recognize the for-profit health care provider. 42 C.F.R. § 405.429. The California franchise tax should therefore be considered an indirect expense that is part of the reasonable cost of Medicare patient care. The Government, however, contends that a franchise tax based on net income cannot be related to the cost of health care for Medicare patients because Medicare does not provide for profit. This simply is not true. 42 C.F.R. §405.429 provides in pertinent part:
§ 405.429 Return on equity capital of proprietary providers.
(a) Principle. (1) A reasonable return on equity capital invested and used in the provision of patient care is allowable as an element of the reasonable cost of covered services furnished to beneficiaries by proprietary providers. The amount allowable on an annual basis is determined by applying to the provider’s equity capital a percentage equal to one and one-half times the average of the rates of interest on special issues of public debt obligations issued to the Federal Hospital Insurance Trust Fund for each of the months during the provider’s reporting period or portion thereof covered under the program.
(2) For the purposes of this subpart, the term "proprietary providers” is intended to distinguish providers, *601whether sole proprietorships, partnerships, or corporations, that are organized and operated with the expectation of earning profit for the owners, from other providers that are organized and operated on a nonprofit basis.
A specific amount of the net income the California franchise tax is measured by is therefore attributable to the return on equity paid as part of the reasonable cost of health care for Medicare patients. Since franchise taxes attributable to Medicare patients are recognized as an indirect cost necessary to the efficient delivery of services, Manual §§2122.1, 2122.4, that portion of the franchise tax based on the return on equity is related to the Medicare patients’ care and is therefore properly reimbursable to the provider. Thus the amount of the California franchise tax paid by the plaintiffs as a result of the return on equity provided by 42 C.F.R. §405.429 is clearly related to the delivery of services for Medicare patients and is therefore part of the reasonable cost of care for Medicare patients and reimbursable by Medicare.
This result is in accord with the practices of Blue Cross of Southern California and Blue Cross of Northern California. One important consideration in the determination of reasonable cost is
* * * the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. [42 U.S.C. § 1395x(v)(l)(A).]
Blue Cross of Southern California includes franchise taxes in reimbursable cost to hospitals providing services to beneficiaries. Blue Cross of Northern California, which reimburses hospitals on a charge basis, reimburses hospitals for the franchise tax by including it in the rate structure for Northern California hospitals.
The majority attempts to avoid this conclusion in several ways. First, the majority says the reimbursement of the franchise tax would provide plaintiffs with a greater profit than that specified by regulation. This argument is fallacious. What we are deciding is not whether plaintiffs must *602receive a guaranteed profit, but whether their payment of a franchise tax is a cost related to health care. I certainly do not believe the statute and regulations guarantee plaintiffs an after-tax profit. I do, however, believe the statute mandates the reimbursement of the franchise tax, no matter how calculated, to the extent it relates to Medicare patients.
Similarly, the majority also says the franchise tax cannot be a cost under the statute because it reduces the profit the business gains from its operations. Webster’s Dictionary defines cost as "the amount or equivalent paid for something: PRICE * * *.” Webster’s Seventh New Collegiate Dictionary (1972). No special definition of cost is supported by statute, regulation, or legislative history. The California franchise tax is therefore the price paid for or cost of the right to do business in California. Further, it is not clear what the majority refers to when it speaks of profit. The word "profit” has no meaning within the Medicare statute nor any meaning within the California Revenue & Taxation Code. Net income as used in the California Revenue & Taxation Code is a specially defined term that includes income items and allows deductions for only certain business expenses. Net income is not synonymous with the common meaning of profit; i.e., business income minus business expenses.
Last, the majority says the record does not show whether California’s franchise tax is applied to the portion of net income attributable to the return on equity provided by Medicare regulation. This is a poor attempt to avoid the question at issue altogether. The plaintiffs in their brief specifically ask that the portion of the franchise tax attributable to the return on equity provided by Medicare regulation be reimbursed. In addition, an examination of the California Taxation & Revenue Code shows the franchise tax considers income from all sources with no exceptions specified for that income provided by Medicare. The Government does not contest this.
The Government claims it does not consider the issue whether the California franchise tax is an income tax. The majority says it is not necessary for it to decide whether the *603franchise tax is an income tax. Both, however, mischarac-terize the franchise tax as a "tax on net income.” In addition, the majority opinion expresses the fear that agreement with the plaintiffs’ arguments would lead to the requirement of reimbursement by Medicare of income taxes. The treatment of the California franchise tax by the Secretary and the majority is the same treatment accorded income taxes. For these reasons, I wish to emphasize that the California franchise tax is not an income tax.
The California franchise tax is a tax on the right to do business in California that is simply measured by net income. That there is a distinction between a franchise tax and an income tax has long been recognized by both the United States Supreme Court and the California Supreme Court. Murdock v. Pennsylvania, 319 U. S. 105 (1943); McGoldrick v. Berwind-White Co., 309 U. S. 33 (1940); Flint v. Stone Tracy Co., 220 U. S. 107 (1911); West Publishing Co. v. McColgan, 27 Cal. 2d 705, 166 P. 2d 861, aff’d 328 U. S. 823 (1946). In Flint, 220 U. S. at 145, the Supreme Court said:
While the mere declaration contained in a statute that it shall be regarded as a tax of a particular character does not make it such if it is apparent that it cannot be so designated consistently with the meaning and effect of the act, nevertheless the declaration of the lawmaking power is entitled to much weight, * * *.
The California franchise tax statute specifically states it is a tax on the right to do business in California. The State of California has a separate statute that provides for a corporate income tax. California Revenue & Taxation Code § 23501. There are several differences between the calculation of net income for purposes of the franchise tax and for purposes of the corporate income tax. The California Supreme Court has specifically recognized that California’s franchise tax is not an income tax but a licensing tax measured by net income. Judge Traynor in West Publishing, 27 Cal. 2d at 708, 166 P. 2d at 863, a decision affirmed by the Supreme Court, said:
The Corporation Income Tax Act is complementary to the Bank and Corporation Franchise Tax Act. Stats. 1919, ch. 13, p. 19, as amended, Deering’s Gen. Laws, Act *6048488. The subject of the tax under the first is net income. Under the second it is the privilege of exercising corporate franchises in this state. "A franchise tax is a tax imposed upon a corporation for the right or privilege of being a corporation or doing business in a corporate capacity.” Pacific Co., Ltd. v. Johnson, 212 Cal. 148, 154, 155, 298 P. 489, 492; Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas. 1912B, 1312.
Accord Rosemary Properties, Inc. v. McColgan, 29 Cal. 2d 677, 177 P. 2d 757 (1947). For all the reasons stated, I find the California franchise tax is a franchise tax and is to be treated as such for purposes of the Medicare statute.
In conclusion I would find that the franchise taxes paid by plaintiffs for the years 1967 and 1968 should be reimbursed by Medicare to the extent they are attributable to the return on equity provided by 42 C.F.R. § 405.429 since such franchise taxes are part of the reasonable cost of care of Medicare patients. I therefore dissent.