return for the hospital spending the FDA exclusively upon capital projects, HCFA omits the interest that the funds accumulate from the hospital's annual earnings since the earnings reduce the hospital's total annual cost which then reduces Medicare reimbursement, as follows:
Total cost of routine services x Medicare = Annual
Total number of inpatient days inpatient days reimbursement
St. Mary of Nazareth Hospital Center v. Heckler, 760 F.2d 1311, 1314 (D.C. Cir. 1985) (Interest earned on all accounts but FDAs reduce the fraction's numerator - "cost of routine services" - which in turn reduces annual reimbursement).
Not only must the hospital spend the FDA exclusively upon capital projects, but, to minimize the Medicare program's liability for interest expense reimbursement, the hospital also must use the fund to reduce borrowing for capital projects. HCFA executes the plan by:
1) noting the project cost
2) looking to see the amount of FDA available at the time the hospital makes its borrowing decision
3) noting how much the hospital borrows, and
4) deeming the borrowing unnecessary to the extent that the hospital has FDA monies available which it does not spend upon the project.
When HCFA determines the necessity of borrowing (step #4), Medicare regulations require that the interest expense be both "proper" - incurred in giving patient care, 42 C.F.R. § 413.153(a)(1), and necessary:
"(i) Incurred on a loan made to satisfy a financial need of the provider. Loans that result in excess funds or investments would not be considered necessary;
(ii) Incurred on a loan made for a purpose reasonably related to patient care; and
(iii) Reduced by investment income except if such income is from gifts or grants, whether restricted or unrestricted, and that are held separate and not commingled with other funds. Income from funded depreciation or a provider's qualified pension fund is not used to reduce interest expense."
42 C.F.R. § 413.153(b)(2).
Controversy and confusion arise in applying this "financial need/necessary" provision because even the hospitals that have created FDAs often need to borrow by issuing bonds when they commence major construction projects. True to that pattern, Hampton has claimed that it needed to borrow the entire cost of the ICU/CCU construction by issuing $ 14,675,000.00 in tax exempt bonds to satisfy a "financial need," while HCFA countered argue that Hampton did not have a financial need that included the $ 3,480,575.00 in its FDA. Pltf. Stmt. at para. 16. However, since the hospital's Certificate of Need required completion of the project during 1984, the Board voted to use $ 500,000.00 from the FDA to create a contingency account which it could use should the ICU project expenses exceed the $ 403,000.00 from the borrowed funds already set aside. Id. at para. 8.
To buttress its reimbursement claim, the plaintiff has added that the Board in 1982 expected to satisfy the following obligations by 1985 in addition to completion of the ICU/CCU:
1) a $ 1.5 million balloon payment due in 1985 on a 1975 bond issue
2) the cost of renovating the hospital's third floor
3) Purchase of new CAT scanner
4) Other capital expenditures discussed in long term plan between 1982 and 1985. Pltf. Stmt. at para. 17.
Yet even when the Board created the $ 500,000.00 contingency account and bought miscellaneous capital goods, the FDA still grew from 1982 through 1985:
Fiscal Year FDA Balance
1982 $ 4,918,449
1983 $ 5,296,000
1984 $ 6,158,000
1985 $ 6,927,063
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