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May 27, 1981

Richard SCHWEIKER, Secretary of Health and Human Services, Defendant

The opinion of the court was delivered by: HART HART


The Court adopts the following Findings of Fact and Conclusions of Law in the above-captioned case.



 1.1 Sisters of St. Francis Health Services, Inc. ("Plaintiff"), is a not-for-profit corporation existing under the laws of the State of Indiana. Plaintiff owned and operated St. Joseph Hospital (the "hospital"), which was an 86-bed, short-term, acute care hospital located in Logansport, Indiana. The hospital was a "hospital" as defined in Section 1861(e) of the Medicare Act (42 U.S.C. § 1395x(e)), and was a "provider of services" participating in the Medicare program within the meaning of Section 1861(u) of the Medicare Act (42 U.S.C. § 1395x(u)) and 42 C.F.R. § 405.605.

 1.2 Defendant Richard Schweiker, Secretary of Health and Human Services ("Secretary"), or his predecessors in office, was and now is the federal officer responsible for the administration of the Medicare Act. The Secretary is designated as a real party in interest by 42 C.F.R. §§ 405.651(c) and 405.1877.

 1.3 The Medicare Act establishes a system of health insurance for the aged and the disabled. Under the Medicare Act, an eligible Medicare beneficiary is entitled to have payment made by the Medicare Program on his behalf for, inter alia, inpatient and outpatient hospital services provided to him or her by a hospital participating in the Medicare Program as a "provider of services" under 42 U.S.C. § 1395x(u). Payment to participating providers of services for hospital services which are rendered to Medicare beneficiaries and which are covered services under the provisions of the Act is made by defendant Secretary through "fiscal intermediaries." 42 U.S.C. § 1395h. The amount of that payment is required by statute to be the lesser of the "reasonable cost of such services" or "the customary charges with respect to such services." 42 U.S.C. § 1395f(b).

 In the event that a fiscal intermediary makes adjustments to a Medicare provider's cost report for a cost reporting period ending on or after June 30, 1973, that are disputed by a provider, and at least $ 10,000.00 is in controversy, the provider may appeal the disputed adjustments to the Provider Reimbursement Review Board (hereinafter referred to as the "PRRB"). 42 U.S.C. § 1395oo. The PRRB is a five-person board, all of the members of which are required by statute to be "knowledgeable in cost reimbursement," and at least one of the members of which must be a certified public accountant. 42 U.S.C. § 1395oo(h).

 1. 4 In 1893 Plaintiff opened the health care facility known as St. Joseph Hospital in Logansport, Indiana. (Record at 557).

 1.5 It served the public continuously from that date until December 31, 1974 when it officially closed. (Record at 573). Plaintiff acquired its present site in 1906 and, on July 14, 1909 after a period of construction, dedicated a four-story brick structure with a capacity of 60 beds. The facility stood as erected for 52 years subject only to normal maintenance. Plaintiff did, however, make numerous improvements inside the hospital in keeping with modern trends in hospital equipment and patient care. The structure itself, however, was given normal maintenance. (Record at 558).

 1.6 With the passage of time, due to numerous deficiencies, the hospital failed to meet fire and safety standards. In addition, time rendered Plaintiff's facility physically and functionally obsolete. Thus, in 1958, Plaintiff began planning a construction project. On December 4, 1960, the hospital completed construction of a $ 1,200,000 L-shaped wing, which increased the hospital's bed capacity from 60 to 144 beds. (Record at 558).

 1.7 Following construction of the new wing, the 1909 section of the facility was still in violation of fire/safety standards yet contained 60 beds, the surgical suite, X-ray room, emergency room, obstetrical department, central supply, laundry and kitchen. (Record at 558). Serious problems existed with regard to the boiler and boilerhouse and the plumbing. The roof was in need of substantial repair and possibly needed to be completely replaced. (Record at 559).

 1.8 Plaintiff's fire-safety deficiencies and low patient utilization rates forces the closing of the surgery suite, emergency room, and obstetrical department in the original building in 1965. (Record at 559). In 1966, the hospital began participating in the Medicare program. (Record at 36). In 1967, Plaintiff discontinued using the beds in the old building as acute care beds and received licensing to use a portion of the old building for an extended care unit. In 1969, due to adverse financial consequences the hospital converted back exclusively to an acute care facility. (Record at 55).

 1.9 Plaintiff's protracted low patient utilization caused the temporary closing of one floor of forty-two beds of its L-shaped wing in 1973. (Record at 36).

 1.10 In November 1974, there were but two physicians admitting patients to the hospital on a regular basis, although a number of physicians remained on the active staff. (Record at 36).

 1.12 Plaintiff's facility operated at a net operating loss every year from 1966 through 1974 with the exception of 1967. (Record at 562).

 1.13 On December 31, 1974, the condition of Plaintiff's facility, its low patient utilization, lack of medical staff, annual financial losses, and inability to receive Hill-Burton funds, caused the Plaintiff to make a management decision to cease operations. (Record at 197).

 1.14 Following its closing, the hospital administration kept a minimal maintenance staff on the premises to try to maintain the facility for possible sale. (Record at 200).

 1.15 Following its closing, Plaintiff unsuccessfully attempted to sell the hospital that by 1974 consisted of eleven buildings located on 9.4 acres. (Record at 203-207). Plaintiff tried to sell the facility beginning in 1974, but the facility was not sold as of August 26, 1977, the date of the hearing before the PRRB. The reason the potential buyers lost interest in buying the facility was the cost of improvements needed at the facility. (Record at 211, 212).

 1. 16 In 1975, the facility was listed with a large realtor group in Chicago for $ 2,000,000, but the asking price was later reduced to $ 1,000,000 and still later to $ 300,000. The realtor group sent out ten thousand letters and a picture of the property but did not locate a buyer. (Record at 212-213, 641).

 1.17 During the middle of 1975, the county hospital in Logansport, Indiana (Memorial Hospital), retained a professional consultant to report on the feasibility of Memorial Hospital acquiring the St. Joseph Hospital plant and fixed and moveable assets. Following an indepth study of the St. Joseph Hospital facility, A. T. Kearney's recommendation to the county was "that Memorial Hospital should turn down St. Joseph Hospital, even if it is given to them." (Record at 564-565).

 1.18 An option to purchase the facility was executed on December 20, 1976, and after a number of extensions, the option was due to expire on October 1, 1977. (Record at 207). The purchase price was set at $ 300,000 (of which $ 120,000 was the appraised value of the land in 1974) in the option sales contract executed between the Plaintiff and SJU Mortgage Co. (Record at 641). The option was expressly subject to the optionee obtaining certain commitments from the Department of Housing and Urban Development ("HUD"). The numerous requirements imposed by HUD concerning upgrading of the facility included installing a sprinkler system throughout the entire facility, removing the fifth floor of the 1909 building, building an entire new kitchen, reworking the entire sewer system, and removing and installing all new windows. (Record at 645-647).

 1.19 Plaintiff's Certified Public Accountant determined that the net book value of the Plaintiff's buildings and movable equipment at December 31, 1974, as computed under the accelerated method of depreciation, totalled $ 807,478.00. (Record at 281).

 1.20 In addition, Plaintiff sold movable equipment for approximately $ 2,000, transferred equipment appraised at $ 69,015.00 to another hospital within the religious order, and transferred certain equipment to its central office, during December 1976 and January 1977. (Record at 679, 564).

 1.21 In its 1974 cost reporting period, the final cost report under the Program, the Plaintiff reported the value of the hospital plant and fixed and movable assets used in patient care activities as zero. (Record at 227).

 1.23 In its final Medicare cost report as amended, Plaintiff reported $ 37,737.24 in unemployment compensation payments, made subsequent to and as a result of termination of operations, as allowable costs. These costs represented reimbursement of the State of Indiana, on a dollar-for-dollar basis, for unemployment compensation benefits paid to former employees of Plaintiff, attributable to services with Plaintiff. The Intermediary disallowed the costs on the basis that such payments were paid subsequent to date of termination and thus were not allowable costs to Plaintiff. (Record at 717).

 1.24 In its final Medicare cost report as amended, Plaintiff reported some $ 15,299.84 in pension plan payments and $ 435.00 in administrative expenses relating thereto, made subsequent to and as a result of termination of operations, as allowable costs. The Intermediary disallowed such costs on the basis that the costs were paid subsequent to the date of termination, and thus were not allowable costs to Plaintiff. (Record at 721).

 1.25 The Intermediary applied the limitation on reimbursement to the lesser of reasonable costs or customary charges to Plaintiff's final Medicare cost report. (Record at 714).

 1.26 Pursuant to 42 U.S.C. § 1395oo(f) and 42 C.F.R. §§ 405.1801 et seq., Plaintiff appealed certain adverse determinations of its intermediary to the PRRB. The adverse determinations, which applied to the hospital's Medicare cost report for its final year of operation, ending December 31, 1974, specifically included the following determinations:

a. that Plaintiff was not entitled to reimbursement for a loss on disposal of its assets, including its hospital plant ...

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