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PORTLAND ADVENTIST MED. CTR. v. HECKLER

April 13, 1983

PORTLAND ADVENTIST MEDICAL CENTER, Plaintiff,
v.
Margaret M. HECKLER, Secretary of Health and Human Services, Defendant*



The opinion of the court was delivered by: PARKER

 BARRINGTON D. PARKER, District Judge.

 This is an action for judicial review of a final decision of the Secretary of Health and Human Services disallowing the claim of plaintiff, Portland Adventist Medical Center (PAMC), for certain interest costs for which PAMC sought Medicare reimbursement. Currently before the Court are cross-motions for summary judgment. Because there are only issues of law involved, this proceeding is before the court for a final determination on the merits. For the reasons stated below, the Court affirms the disallowance of plaintiff's claim and dismisses this proceeding.

 Plaintiff, PAMC, a nonprofit corporation organized under Oregon law, is licensed by the Department of Human Resources of the State of Oregon to operate as a general acute care hospital. Plaintiff operates a hospital as defined under § 1861(e) of the Medicare Act, 42 U.S.C. § 1395x(e), and is a provider of services eligible for reimbursement under Part A of the Medicare Act. The defendant is Margaret M. Heckler, Secretary of Health and Human Services (Secretary). The Secretary has delegated broad responsibility to the Administrator of the Health Care Financing Administration, to administer Medicare. See 42 F.R. 57353 (November 2, 1977).

 BACKGROUND

 The Medicare Act

 The Medicare program was established in 1965 to pay for specific types of medical care rendered to eligible aged and disabled Medicare beneficiaries. 42 U.S.C. §§ 1395, et seq. The program is divided into two main parts. Part A, entitled "Hospital Insurance Benefits," authorizes payment for Medicare patients receiving care from specified institutional providers -- primarily hospitals, nursing homes, and home health care agencies. 42 U.S.C. §§ 1395c-1395i-2. Part B, entitled "Supplementary Insurance Benefits," authorizes the Government to pay for certain other types of medical care, including physicians' services and supplemental home health payments. 42 U.S.C. §§ 1395j-1395w. This case involves reimbursement for "hospital services" under Part A of Medicare.

 The Medicare statute and the Secretary's regulations set out a detailed payment process. See 42 U.S.C. §§ 1395f, 1395g; 42 C.F.R. 405.401-405.488. The hospital must file a cost report with its fiscal intermediary. 42 C.F.R. 405.406. Interim payments must be made to the hospital on a monthly basis and subsequent adjustments made for overpayments and underpayments. See 42 U.S.C. § 1395g; 42 C.F.R. 405.405. A final determination of the amount of the provider's reimbursable costs under Medicare is made after the close of the hospital's fiscal year, based upon its cost report. 42 C.F.R. 405.405. After the intermediary analyzes and, if necessary, audits the cost report, it issues the provider a "notice of program reimbursement," setting forth the final amount of reimbursement to which it is entitled in the fiscal year. 42 C.F.R. 405.-1803.

 If the provider is dissatisfied with its intermediary's determination, and the amount in controversy is $10,000 or more, the provider may, within 180 days of its receipt of the final notice of reimbursement, request a hearing before the Secretary's Provider Reimbursement Review Board (the Board). 42 U.S.C. § 1395oo(a). Within 60 days after a final decision of the Board, the Secretary may, on his own motion, affirm, reverse, or modify the Board's decision (that is, exercise his "own motion review authority"). 42 U.S.C. § 1395oo(f); 42 C.F.R. 405.1875. If the provider is dissatisfied with the final decision of the Board or the affirmance, modification, or reversal of the Secretary, it may seek judicial review of that decision in the appropriate district court. 42 U.S.C. § 1395oo(f).

 The Facts

 The current dispute over reimbursement arises from two discrete projects upon which PAMC embarked in the 1970's. The first project was the establishment of a subsidiary corporation called "VertiCare." VertiCare was founded by PAMC on March 1, 1972, as a nonprofit corporation designed to establish a series of primary and ambulatory care centers in certain areas around Portland, Oregon, lacking adequate primary and ambulatory health services. Pursuant to a contract with PAMC, VertiCare was to operate group practice outpatient centers in and around the Portland area. In return, PAMC agreed to pay VertiCare certain costs relating to administrative overhead and capital expenses; to subsidize net income guarantees to the doctors working in those centers; and to provide subsidies to finance the facilities and land held by VertiCare for its future expansion.

 Between 1973 and 1978, PAMC advanced approximately $800,000 to fund the start-up and operating costs of the VertiCare program. PAMC initially expected all of the funds advanced to VertiCare, with the exception of approximately $200,000 in start-up costs, to be repaid once the VertiCare program became self-sustaining. Of crucial importance to this case is the fact that PAMC did not charge interest or earn any income on the funds advanced to VertiCare. In 1979, when it appeared that VertiCare would not become self-sustaining without further monetary advances, PAMC terminated the VertiCare program.

 The second project undertaken by PAMC was the construction of a new medical center. Built between 1974 and 1978 to replace PAMC's old facility, the center included a mechanical plant, a professional office building, and a 278 bed acute hospital. The $34.5 million project was funded, in part, by the issuance of $26 million in first mortgage 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 ...


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