Court Opinion

ID: 8921229
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:17:22.921343+00
Date Added: 2024-06-11T17:09:18.247411
License: Public Domain

WELLFORD, Circuit Judge.
The appellant, the Cincinnati General Hospital (Cincinnati General), is operated by a state university, the University of Cincinnati (University), and is a provider of Medicare services under the federal Health Insurance for the Aged and Disabled Act (Act), 42 U.S.C. § 1395, et seq. Cincinnati General appeals the order dismissing its complaint by the United States District Court for the Southern District of Ohio, Western Division, and affirming a final decision rendered by the Provider Reimbursement Review Board (P.R.R.B./Board), which denied Medicare reimbursement to Cincinnati General for interest paid on the Hospital’s obligations to the University.
Cincinnati General, as a provider of Medicare services, is entitled generally to recover its reasonable costs of services provided to Medicare beneficiaries. See 42 U.S.C. § 1395cc(a)(1) and § 1395x(u). Initial determination of the reimbursement due a provider is delegated to fiscal intermediaries selected by the Secretary of Health and Human Services. See 42 U.S.C. § 1395h(a). The Secretary’s designated intermediary in this case is the Blue Cross Association/Blue Cross of Southwest Ohio (Blue Cross).
If the provider disputes a designated intermediary’s determination of reimbursement costs within 180 days of the intermediary’s decision and the amount in dispute exceeds $10,000.00, a de novo hearing by the Board may be obtained. 42 U.S.C. § 1395oo (a), (d). A decision of the Board on the dispute is a final agency determination unless the Secretary sua sponte reverses, affirms or modifies the decision within sixty days. 42 U.S.C. § 1395oo (f)(1). Jurisdiction for federal judicial review of the final action by the Secretary is vested in federal courts, and in this case, the district court affirmed the Secretary’s decision to deny Cincinnati General’s claim for interest reimbursement.
Cincinnati General is a general care public hospital a,nd has historically been providing acute and general surgical services to low income recipients, including Medicare beneficiaries, in Cincinnati and its environs. It also provides acute surgical and medical care to area indigents who do not have eligibility for welfare, Medicaid and Medicare benefits.
The City of Cincinnati conveyed operational control of Cincinnati General to the University in 1961. A few years later, an agreement between the State of Ohio and the University resulted in the University becoming state-affiliated and therefore “deemed to be an instrumentality also of *1173the state.” Ohio Rev.Code Ann. § 3349.33 (Page 1980). Following these two occurrences, the Board of Directors of the University became the ultimate administrative body for the University and the Hospital.
Cincinnati General was apparently not funded by the State of Ohio despite its state affiliation. It consequently depended upon patient care revenues in large measure for its economic support. During the early 1970’s, the Hospital’s financial position began to decline; by 1977, a serious cash-flow problem had developed, which it claimed threatened its continued economic viability. As a state instrumentality, the Hospital was precluded from negotiating loans with commercial sources. See Ohio Const., art. VIII, § 3.
The University made available short-term investment funds to the Hospital and funded Cincinnati General from month to month during fiscal 1977. Interest was charged on these outstanding advances in an amount equal to the prevailing prime interest rate quoted by local banking institutions, which averaged 6.6 percent during fiscal 1977. While the Secretary determined that this rate was “reasonable,” she did not intervene in the disallowance of the interest expense reimbursement, based upon the relationship between the University and Cincinnati General under 42 C.F.R. § 405.419. Appellant challenges the interpretation of this regulation, the substance of which provides, in pertinent part, that:
(b) (3)(ii) [Interest] be paid to a lender not related through control or ownership or personal relationship to the borrowing organization____
(c) (1) To be allowable, interest expense must be incurred on indebtedness established with lenders or lending institutions not related through control, ownership, or personal relationship to the borrower. (Emphasis added.)
At issue is the claim of interest reimbursement by Cincinnati General of $931,-310.00 in interest paid in fiscal 1977 to the University. The net reimbursement effect of this amount is estimated at $278,000.00 Blue Cross disallowed the claim and the Hospital made a timely request to the P.R. R.B. for de novo review of the intermediary’s decision.
On May 19, 1981, the Board issued its decision after a full hearing. Based on 42 C.F.R. § 405.419, which it noted was drafted to prevent reimbursement of “collusive loans with inflated interest rates that are designed to benefit enterprises associated with Provider,” the Board concluded that the language of the regulations precluded the reimbursement.1 The Board also found “that the loans were not evidenced by any documentation.”
The district court carefully reviewed the record, relevant regulations and precedential court opinions and reluctantly concluded to affirm the decision of the Secretary. On this appeal, our scope of review is governed by the jurisdictional statute, 42 U.S.C. § 1395oo (f), which provides that an appeal of a final decision by the Board must be pursued under the judicial review portions of the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq. The APA provides that federal courts “shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning of applicability of the terms of an agency action.” 5 U.S.C. § 706. Under the APA, a court of review may set aside agency action only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
In making a determination of the action by P.R.R.B. and the Secretary, it must be recognized that an administrative agency’s interpretation of its own regulation is accorded considerable deference on *1174judicial review unless it is inconsistent with the terms of the regulation, especially in areas like Medicare reimbursements. See, e.g., Loma Linda University v. Schweiker, 705 F.2d 1123, 1126 (9th Cir.1983); Abbott-Northwestern Hospital, Inc. v. Schweiker, 698 F.2d 336, 340 (8th Cir.1983); Chesire Hospital v. N.H.-V.T. Hospitalization Service, 689 F.2d 1112, 1117 (1st Cir.1982).
There is no question that the rate of interest reimbursement sought is reasonable, if it is allowable at all. See 42 C.F.R. § 405.419(c). Nor does the Secretary challenge the basis of the claim that the funds advanced were utilized to satisfy a financial need of the provider and for a purpose related to patient care. See 42 C.F.R. § 405.419(a) and (b). The Secretary urges that portions of (b) and (c) of the regulation, which preclude reimbursement between related entities, however, are necessary to effectuate the purposes of the Medicare statute and to limit potential collusion and unfair dealing between the provider and a related lender.
We are directed in this appeal to the qualifications established by subsection (c)(1), which provide that the general rule of reimbursement of the reasonable cost of services is not applicable where loans are executed between related entities. The University and Cincinnati General are certainly related entities. On appeal, the Secretary asserts that the general rule admits of no relevant qualification or exception. The validity of Reg. 405.419 has been considered in Jackson Park Hospital Foundation v. United States, 228 Ct.Cl. 448, 659 F.2d 132, which held that subsection (c) bars all interest, “not so much because of the nature of the transaction for which the loan is obtained but becaúse of the source of the loan .... The Secretary considers it more likely that, when a loan is made between unrelated parties bargaining at arms length, the interest rate will prove reasonable and the loan itself necessary.” Id. at 138. Thus, the court concluded that “the across-the-board scope of § 405.419(c) is reasonable,” and that the Secretary was not required to “examine the bona fides and reasonableness of the loan,” because this was “precisely the kind of investigation the regulation is designed to avoid.” Id. at 138, 139. This court considered the same regulation in Shaker Medical Center Hosp. v. Secretary of Health and Human Services, 686 F.2d 1203 (6th Cir.1982), and rejected the argument that it was arbitrary and capricious to condemn all related loans, and likewise rejected the claim that “the Secretary should be required to scrutinize the costs line-by-line and item-by-item in every transaction between related entities.” Id. at 1209. The basis for this court’s Shaker ruling was stated:
[I]t is within the power of an agency to promulgate prophylactic regulations which are broad in scope in order to effectuate the purposes of the enabling legislation. Mourning v. Family Publications Service, 411 U.S. 356, 372-73, 93 S.Ct. 1652, 1662, 36 L.Ed.2d 318 (1973). The regulations at issue in this appeal reasonably support the legitimate goals of avoiding payment of collusive or improperly increased costs with a minimum of administrative burden. While the prophylactic regulations might prove “in particular cases to be ‘underinclusive’ or ‘overinclusive,’ in light of [their] presumed purpose, nonetheless [they are] ... widely accepted response[s] to legitimate interests in administrative economy and certainty of coverage for those who meet [their] terms.” Weinberger v. Salfi, 422 U.S. 749, 776, 95 S.Ct. 2457, 2472, 45 L.Ed.2d 522 (1975) (discussing a prophylactic statutory rule). Our inquiry in reviewing the regulations and their applications is whether the agency in following its statutory directives "could rationally have concluded both that the particular limitation or qualifications would protect against its occurrence, and that the expense and other difficulties of individual determinations justified the inherent imprecision of a prophylactic rule.” Id. at 777, 95 S.Ct. at 2472. We conclude that the regulations satisfy this standard.
There is little doubt that a line-by-line, item-by-item examination of the costs in *1175every transaction between related parties could prove to be expensive and time consuming, thereby reducing the amount of funds available for the payment of services. Further, the danger of collusive or improperly increased costs in transactions involving related entities is particularly great. Under proper standards of review, these regulations must be upheld as valid. See, e.g., Jackson Park Hospital, supra, 659 F.2d at 136-37; Goleta Valley Community Hospital v. Schweiker, supra, 647 F.2d at 897 (9th Cir.1981).
Id. at 1209-10 (emphasis added).
In Shaker, this court did go further and placed the burden on the provider to prove the “bona fides” of the transaction and to prove whether there were “special circumstances” justifying an exception to the rule against allowance of costs arising out of related entity transactions, citing Indiana University v. United States, 223 Ct.Cl. 88, 618 F.2d 736 (1980), and other cases which dealt with rent or interest reimbursement claims in respect to related entities. It concluded that “[t]he burden is on the provider to ‘keep its house in order’ and justify its expenses to the Secretary.” Shaker, 686 F.2d at 1210. This court noted, furthermore, that “Indiana University involved very special circumstances, and after that case was decided the Court of Claims upheld the validity of § 405.419. Jackson Park Hospital Foundation v. United States [228 Ct.Cl. 448], 659 F.2d 132, 137 (Ct.Cl.1981).” Id. at 1209.
Indiana University is similar in many respects to this controversy. In that case
the relationship of the University to the State was observed as “unique”:
They are state teaching hospitals [Indiana University Hospitals], but receive no money from the State for their operations. Although the State of Indiana provides funds for the University, State law prohibits the use of any of these funds for the hospital. Since the hospitals are not a separate legal entity, they cannot borrow money from outside the University.
618 F.2d at 737 (emphasis added).
The Court of Claims created an exemption from the “prophylactic” regulation, which generally bars reimbursement of interest payments to related persons without the necessity of the Secretary making inquiry into the particular circumstances involved, cf. Pasadena Hospital Ass’n. v. United States, 223 Ct.Cl. 72, 618 F.2d 728 (1980), because of the “particular and unusual circumstances.” Indiana University, 618 F.2d at 740.2
We can only surmise how important the circumstance was in Indiana University that state law precluded state funds for a state university operated hospital. In the instant case, the record is silent as to any similar Ohio law prohibition3 that would prevent state money from flowing into Cincinnati General, where the City retained its ownership. The State of Ohio, Hamilton County, or the City of Cincinnati on this record may well have been a source of necessary funds for Cincinnati General’s operations, unlike the Indiana University Hospital situation where it, according to the Court of Claims, was prohibited from using any state funds for its operation.4
*1176The district court in this case made no reference as to whether the University was, as a matter of fact or as a matter of law, the sole source from which Cincinnati General might obtain necessary funds. It did find that Regulation 405.419 was “in conformity, not at variance” with statutory purposes and that subsection (c) represented “an attempt by the Secretary to assure that only reasonable costs will be reimbursed, while at the same time avoiding an unreasonable administrative burden.” Thus, despite the fact that the district court found that “there was a valid and bona fide loan between the University and plaintiff, notwithstanding that the agreement was not evidenced in writing,” it concluded “reluctantly” that the regulation at issue prohibited reimbursement because “the danger of collusive loans is, in the Secretary’s view, unreasonably high” in that “the loans involved were between parties related through control.”
One of the principal cases relied upon by the district court to reach its conclusion was Goleta Valley Community Hospital v. Schweiker, 647 F.2d 894 (9th Cir.1981). We also find the following language of the Goleta case, which also involved a non-profit hospital corporation provider of Medicare services, to be persuasive:
Once a determination has been made that the organizations are related, the Board need not inquire into whether the reimbursements claimed were reasonable because Regulation 405.427 operates as a prophylactic rule and defines any charges in excess of actual cost as per se unreasonable. Marina Mercy Hospital v. Harris, 633 F.2d 1301 at 1304 (9th Cir.1980); American Hospital Management Corp. v. Harris, supra, 638 F.2d at 1212. We have recently found that:
[particularly in a program as complex and ripe with potential for abuse as Medicare, the Secretary has broad discretion to control excessive costs by adopting general prophylactic rules which, despite their inherent imprecision, eliminate the need for a cumbersome and expensive process of adjudicating item-by-item the reasonableness of costs.
Marina Mercy Hospital v. Harris, supra, 633 F.2d at 1304.
The Hospital also challenges the validity of Regulation 405.427 and Regulation 405.419. The Hospital argues that the application of these regulations automatically to deny reimbursement is contrary to both the Medicare Act and the United States Constitution. We have recently upheld both the statutory and constitutional validity of Regulation 405.427 by finding that the regulation is reasonably related to achieving a permissible objective. American Hospital Management Corp. v. Harris, supra, 638 F.2d at 1212, 1213. “The classification of ‘related entity’ ... was established to prevent the reimbursement of excessive charges resulting from self-dealing ____” Id. at 1213. The related entity classification was a reasonable method of achieving this objective. Id. The same related entity classification is used in Regulation 405.419 for exactly the same purpose: to ensure that entities deal with each other *1177at arm’s length. Thus, we find that Regulation 405.419 is also valid.
647 F.2d at 897.
We recognize that there is contrary authority to the Goleta ruling that Regulation 405.419 constitutes an absolute prohibition against related entity interest reimbursement claims. In Northwest Hospital, Inc. v. Hospital Service Corp., 687 F.2d 985 (7th Cir.1982), the court considered an interest reimbursement claim and concluded that “the blanket disallowance of related-party interest expense contained in section 405.419(c) is broader than either the language or the purpose of the Medicare statute____thus, it allowed the 4% per annum interest rate on “15-year promissory notes,” although the loan was between related entities. Id. at 992, 995-96. See also South Boston General Hospital v. Blue Cross of Virginia, 409 F.Supp. 1380 (W.D.Va.1976). Compare Caylor-Nickel Hosp. v. Califano, CCH Medicare and Medicaid Guide ¶ 29,619 (No. F-77-83, N.D.Ind. Mar. 1, 1979).
We conclude with some reluctance, as did the district judge, that the regulation in question precludes the interest reimbursement claim of Cincinnati General in this case. This Circuit in Shaker upheld the regulation in question as valid, and appellant concedes that it is valid; although the Shaker court did recognize that there may be an exception in very special circumstances. “Line-by-line, item-by-item examination ... in every transaction between related entities” would doubtless be a heavy burden to impose upon the Secretary in cases of this kind. Further, the “danger” of “improperly increased costs” in these transactions is “particularly great” as determined in Shaker.
The question addressed by other courts in making exceptions to the regulation or holding it invalid, because of concern over a constitutional issue that is involved in subsection (c) of the regulation, is simply not a question that has been addressed in this case. No religious order is involved here. Appellant has not raised this as a challenge to the validity of Regulation 405.-419 in its brief nor in its reply brief. We do not, therefore, consider this to be a reason to find an exception to the disallowance of interest reimbursement involving related entities. We perceive that, for reasons stated, there are differences between the situation in the Indiana University ease and in the instant case, including resources for operating funds of Cincinnati General not available to the Indiana University Hospital.
Since we affirm the district court on the basis of the preclusive effect of 42 C.F.R. § 405.419, we need not address in detail the further issue raised by the Secretary in this case. Suffice it to say that in this case, “[tjhere existed no note or other proper writing which purported to serve as a ‘legal instrument’ which created the legal obligation to repay the money” advanced by the University to Cincinnati General. Appellant’s Brief at 8. There was, as conceded by appellant, simply “an open line of credit with no stated ceiling” (nor any stated interest rate involved). Appellant’s Brief at 8. This, of course, is an entirely different situation from that which existed in Northwest Hospital and in South Boston General Hospital, cases which challenged the applicability of the regulation in question to the related-party transactions there involved.
We are not prepared to overrule the contrary judgment of the district court in this case, and establish a precedent that public or non-profit hospitals for Medicare purposes may draw on funds held by a related entity on an open line of credit basis, without any loan documentation, and thereby obtain reimbursement for interest at prevailing prime interest rates. The circumstances in this case differ from those in which other courts have reached a contrary decision, even Indiana University, where it was clear that there was no other source of revenue for the University hospital but the University itself.
The judgment of the district court is accordingly AFFIRMED.

. Despite its conclusion, the Board also found that:
[N]one of the evils are present in the instant case, ...: 1) Neither party had a profit motive, 2) the University could have received a greater return on its money by investing it elsewhere, 3) the interest rate was reasonable, and, in fact, well below the going market rate, and 4) the University was the sole source of the loan money.

. The Court of Claims also reached its conclusion allowing reimbursement because it wished to avoid what it perceived to be “serious questions under the first amendment, which generally prohibits the government from giving special favored treatment to a religious entity.” 618 F.2d 740. Regulation 405.419(c)(1) has an exemption for interest paid to a religious order by members of the order.

. This, of course, is a different prohibition from that common to both Indiana and Ohio that precluded the state agency hospital from borrowing from commercial sources.

. The Court of Claims in Indiana University found that “the University was the sole source the hospitals could turn to for operating capital.” While the Review Board made the same finding that the University of Cincinnati was the "sole source of loan money” for Cincinnati General, nowhere does it state that the City of Cincinnati, or Hamilton County, or the State of Ohio were prohibited from charter or by state law from providing needed funds.
Indeed, Cincinnati Municipal Code, Chapter 705, Section 705-19, provides, in pertinent part:
[T]he board [of the University of Cincinnati] shall prepare for review of the city council *1176and the commissioners of Hamilton County a program budget for the future financing of the capital needs and the operating costs of the [Cincinnati] General Hospital, including the capital needs of the divisions of the College of Medicine which are essential to the effective operation of the hospital. This budget shall take into account all appropriate resources from the United States government, the State of Ohio, the County of Hamilton, the City of Cincinnati, and all private sources available.
At any time during each five year period when forecasts indicate that the estimated hospital income shall be insufficient to cover estimated expenses or costs required to permit the rendering of high quality medical care in a sensitive and responsive manner, there shall be joint discussions by the university board, the city and the county, to determine possible sources of additional income ____ (Emphasis added.)
We recognize that if these entities provided needed funds to Cincinnati General through loans (as opposed to grants, for example), Regulation 405.419 would bar reimbursement of interest payments between "related parties.”