The opinion of the court was delivered by: STANLEY S. HARRIS
Plaintiff Mercy Hospital has brought this action to challenge the Secretary's decision to deny plaintiff certain Medicare reimbursements claimed under the Medicare Act, 42 U.S.C. § 1395ww. Judicial review of the decision is established under 42 U.S.C. § 1395oo(f). The case is now before the Court on cross-motions for summary judgment, which have been fully briefed.
Although findings of fact and conclusions of law are unnecessary in ruling on summary judgment motions, Fed. R. Civ. P. 52(a), the Court does set forth its reasoning.
Plaintiff is a nonprofit corporation operating an acute care hospital in Miami, Florida. In the late 1970's, plaintiff experienced an increase in demand for its services and began planning an expansion project, called the North Tower Project, to add a 200-bed structure to the existing hospital complex. Contrary to plaintiff's expectations, the demand for hospital services declined sharply in 1983, rendering the project unnecessary. In the summer of 1983, plaintiff decided to abandon the project; this decision was formally executed on November 23, 1983. By that time, plaintiff had spent $ 3,153,948 on architectural, engineering, and other plans, although actual construction never began. The $ 3,153,948 in "abandoned planning costs" was therefore lost.
Plaintiff claimed these losses as capital-related costs on its Medicare reimbursement application. Under the Medicare system, certain costs are reimbursed on a reasonable-cost basis and others on an incentive scheme. The Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") implemented the target rate reimbursement system that applies to this case. TEFRA target amounts are determined by a hospital's costs for its base year and increased by a specific percentage in each subsequent year. 42 U.S.C. § 1395ww(b)(3). These targets determine the rate of reimbursement by the Medicare program: if a hospital's operating costs per year exceed the target amount, only a certain percentage of the cost overrun is reimbursed; if operating costs are below the target amount, the hospital is awarded a bonus payment in addition to its reimbursement. 42 U.S.C. § 1395ww(b)(1). Capital-related costs, which are classified separately from operating costs, are excluded from this target system and reimbursed according to the reasonable-cost method. 42 U.S.C. § 1395ww(a)(4). By classifying its abandoned planning costs as capital-related, plaintiff sought reasonable-cost reimbursement for the Tower Project losses.
Plaintiff's cost assessments were reviewed by a fiscal intermediary responsible for evaluating plaintiff's claims under the Medicare program. The fiscal intermediary allowed $ 2,788,434 of plaintiff's abandoned planning costs claim, but reclassified the costs as operational. The costs were therefore included in plaintiff's TEFRA calculation for the 1984 cost reporting period.
On May 29, 1986, plaintiff asked the Health Care Financing Administration ("HCFA") to grant an exception or adjustment and subtract the abandoned planning costs from plaintiff's TEFRA amount pursuant to 42 C.F.R. § 405.463 (redesignated as § 413.40). On April 2, 1987, the HCFA denied this request, stating that an exception cannot be granted to a hospital seeking to increase its incentive payment, but only where a hospital has exceeded its TEFRA cost limit and would not receive reimbursement for its total reasonable costs without an adjustment.
Plaintiff appealed the HCFA's decision on its adjustment claim and the classification of abandoned planning costs as operational to the Provider Reimbursement Review Board. See 42 U.S.C. § 1395oo. The Board ruled that the abandoned planning costs should be classified as capital-related, but added that if the costs were not capital-related, plaintiff had no right to an adjustment or exception. Admin. Record (AR) at 30-44.
In the final stage of the administrative proceedings, the HCFA Administrator reversed the Board's finding that the abandoned planning costs were capital-related and affirmed the Board's refusal to grant exception or adjustment relief. AR at 2-9. The Administrator's rulings are the final decision of the Secretary in this matter. Plaintiff challenges both rulings in this lawsuit.
The Medicare Act provides for judicial review of the Secretary's decision. 42 U.S.C. § 1395oo(f)(1). The Administrative Procedure Act, 5 U.S.C. § 706(2), supplies the applicable standard of review. Memorial Hosp./Adair County Health Ctr. v. Bowen, 264 U.S. App. D.C. 326, 829 F.2d 111, 116 (D.C. Cir. 1987). An agency decision should only be overturned if unsupported by the evidence in the record, 5 U.S.C. § 706(2)(E), or if arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). The Court must consider whether the agency's decision is based on relevant factors, but "is not empowered to substitute its judgment for that of the agency." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814.
A. Whether Abandoned Planning Costs Are Capital-Related
Plaintiff argues that its abandoned planning costs should be classified as capital-related because the abandoned plans were for a capital project. The Secretary's contrary decision is arbitrary and capricious, according to plaintiff. Plaintiff also challenges the Secretary's reliance on a regulatory definition of capital-related, arguing that the regulation did ...