bonds issued in four denominations between August 1974 and February 1977. The $26 million in bond proceeds were kept in a separate account administered by a trustee, and, pursuant to terms of the bond indenture, were used exclusively to fund the cost of constructing the new medical center.
In its Medicare cost reports for 1976, 1977, and 1978, PAMC sought Medicare reimbursement for the "interest expense" on the full amount of mortgage bonds it had issued to finance construction of the new hospital facility. "Interest expense" is a cost element which the Secretary has prescribed to be reimbursable under Part A of Medicare. 42 C.F.R. 405.419. However, for interest expense to be reimbursable it must be "necessary and proper." 42 C.F.R. 405.419(a). When presented with PAMC's request for reimbursement, the intermediary allowed most of the interest cost claimed. But, the intermediary found that some of the interest on the mortgage bonds for the new hospital facility did not meet the Medicare regulatory requirement that interest incurred by the provider be "necessary." The intermediary based this determination on the fact that during the same period that PAMC was issuing mortgage bonds, it was also regularly lending substantial funds interest-free to its subsidiary, VertiCare. The intermediary therefore proceeded to reduce the amount of PAMC's interest claim by calculating a rate of 9% interest on the funds that PAMC had provided to VertiCare. It determined that amount by multiplying the average rate of interest on the mortgage bonds (9%) by the average balance of the accounts receivable from VertiCare for each year. In essence, the intermediary treated the interest-free loan to VertiCare as if the loan were earning interest income for PAMC, and then deducted that imputed interest income from the mortgage bond's reimbursable interest expense, thereby reducing PAMC's reimbursement. The intermediary's downward adjustment decreased PAMC's reimbursement by about $65,000 a year over the 40 year depreciable life of PAMC's new hospital.
PAMC appealed the partial disallowance decision to the Board, which affirmed the intermediary's decision. The Board held that some of the interest for which PAMC sought reimbursement was not "necessary" within the meaning of the Medicare interest rule. The Board found that PAMC had disbursed a substantial amount of funds from its working capital to VertiCare, which provided services unrelated to patient care at the hospital, and that because of this disbursement, the hospital had been required to borrow excess funds for its own construction program. The Board therefore found that the intermediary had properly reduced PAMC's interest claim.
The Secretary, through the Deputy Administrator of the Health Care Financing Administration, affirmed the Board's decision. In affirming the Board, the Deputy Administrator rejected all of PAMC's arguments in support of its claim, including the very arguments it now presses before this Court.
This Court has jurisdiction by virtue of the Medicare Act, 42 U.S.C. § 1395oo(f).
PAMC concedes that the expenses of the VertiCare program are non-reimbursable under Part A of Medicare, but claims that here it is seeking reimbursement only for the interest expense of the bonds. The Secretary concedes that normally the interest expense on the mortgage bonds is reimbursable, but claims that the interest expense claimed by PAMC was inflated due to the interest-free loan advanced to VertiCare.
In support of its claim that the interest-free loan to VertiCare should not affect its reimbursement, PAMC presents four arguments: first, that the Medicare Act and its regulations mandate reimbursement; second, that the Secretary's decision is inconsistent with the Secretary's general policy of not penalizing providers by imputing interest; third, that in numerous statutes Congress has encouraged the establishment of outpatient clinics such as VertiCare and PAMC should therefore not be penalized under the Medicare Act for conforming to Congress's expressed desires; fourth, that the imputation of interest by the Secretary violated the Medicare Act by interfering with PAMC's operation of its health care institution.
As a preliminary matter, the Court notes the narrow standard governing judicial review of the Secretary's determination. Under the Medicare Act, 42 U.S.C. § 1395oo(f)(1), the applicable standard of review is found in the Administrative Procedure Act, whereby the Secretary's determination may be set aside only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" under 5 U.S.C. § 706(2)(A). Richey Manor, Inc. v. Schweiker, 221 U.S. App. D.C. 356, 684 F.2d 130, 133-34 (D.C.Cir. 1982). Furthermore, because of the complexity of the Medicare Act, the Secretary's determination merits special deference.
Where the decision under review involves an agency's interpretation of its own regulations, forming part of a complex statutory scheme which the agency is charged with administering, the arguments for deference to administrative expertise are at their strongest. . . . A reviewing court may not set aside the agency's interpretation merely because another interpretation was possible and seems better, so long as the agency's interpretation is within the range of reasonable meanings that the words of the regulation admit.
Psychiatric Institute of Washington, D.C., Inc. v. Schweiker, 216 U.S. App. D.C. 14, 669 F.2d 812, 813-14 (D.C.Cir.1981) (citation omitted). Given that deferential standard, the Court turns to plaintiff's individual claims.
PAMC'S first claim is that it is entitled to full reimbursement under the language of the Medicare Act and its regulations. The Medicare Act provides that a provider shall be reimbursed for "reasonable cost," defined as follows:
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.