United States District Court, S.D. Indiana, Indianapolis Division
ST. VINCENT RANDOLPH HOSPITAL, INC., Plaintiff,
SYLVIA M. BURWELL, Secretary of the United States Department of Health and Human Services, Defendant.
ENTRY ON CROSS MOTIONS FOR SUMMARY JUDGMENT
WALTON PRATT, JUDGE
matter is before the Court on the parties' cross motions
for summary judgment filed pursuant to Federal Rule of Civil
Procedure 56 by Plaintiff St. Vincent Randolph Hospital,
Inc., (“St. Vincent”) (Filing No. 20),
and by Defendant Sylvia Burwell, Secretary of the United
States Department of Health and Human Services (“the
Secretary”) (Filing No. 23). St. Vincent
asserts that the Secretary's final decision to deny its
Medicare reimbursement request for interest expenses incurred
during 2004 through 2008, was arbitrary, capricious, and
unsupported by substantial evidence pursuant to the
Administrative Procedure Act (“APA”), 5 U.S.C.
§§ 701-706. St. Vincent filed for relief in this
Court, requesting that the Court reverse the Secretary's
decision and award reimbursement of interest expenses
incurred during the 2004 through 2008 fiscal years. The
parties each moved for summary judgment on the Complaint. For
the following reasons, the Court DENIES St.
Vincent's Motion for Summary Judgment and
GRANTS the Secretary's Cross-Motion for
following material facts upon which this case is based are
The Medicare Act and Reimbursement
established the Medicare Program under Title XVIII of the
Social Security Act, 42 U.S.C. § 1395 et seq.,
to provide subsidized health insurance primarily for elderly
and disabled individuals. Michael Reese Hosp. and Med.
Ctr. v. Thompson, 427 F.3d 436, 438 (7th Cir. 2005).
Medicare “is administered, in part, through contractual
arrangements with providers of health care services.”
Adventist Living Ctrs. v. Bowen, 881 F.2d 1417, 1419
(7th Cir. 1989) (citing 42 U.S.C. § 1395cc). Under the
Medicare Act, health care providers are entitled to
reimbursement for the “reasonable costs” of
medical services they provide to Medicare beneficiaries. 42
U.S.C. § 1395f(b)(1); 42 C.F.R. § 413.9(a). These
reimbursements are subject to certain limitations created by
the Secretary. 42 U.S.C. § 1395x(v)(1)(A).
Secretary, pursuant to her authority, promulgated
“regulations establishing the methods for determining
reasonable cost reimbursement.” Abraham Lincoln
Mem'l Hosp. v. Sebelius, 698 F.3d 536, 542 (7th Cir.
2012) (citing Shalala v. Guernsey Mem'l Hosp.,
514 U.S. 87, 92 (1995)); see also 42 U.S.C. §
1395x(v)(1)(A). “Reasonable costs” are defined
as, the cost actually incurred that are “necessary and
proper in furnishing [Medicare] services.” Id;
42 C.F.R. § 413.9(a). “Necessary and proper”
is defined as “costs that are appropriate and helpful
in developing and maintaining the operation of patient care
facilities and activities. They are usually costs that are
common and accepted occurrences in the field of the
provider's activity.” 42 C.F.R. § 413.9(b)(2).
In addition to publishing regulations, the Secretary issues
the Provider Reimbursement Manual (“PRM”) to give
guidance in interpreting the regulations. Abraham Lincoln
Mem'l Hosp. v. Sebelius, 698 at 542, (citing
Mem'l Hosp. of Carbondale v. Heckler, 760 F.2d
771, 772 (7th Cir. 1985). The PRM “is best viewed as an
administrative interpretation of regulations and
corresponding statutes, and as such it is entitled to
‘considerable deference' as a general
matter.” Daviess Cty. Hosp. v. Bowen, 811 F.2d
338, 345 (7th Cir. 1987) (citing Bedford Med. Ctr. v.
Heckler, 766 F.2d 321, 323 (7th Cir. 1985).
the PRM, interest reimbursements are allowable under the
Medicare program if they are: “1) supported by evidence
of an agreement that the funds were borrowed and that payment
of interest and repayment of the funds are required; 2)
identified in the party's accounting records; 3) related
to the reporting period in which the costs were incurred; and
4) necessary and proper for the operation, maintenance, or
acquisition of the party's facilities”. PRM-1
§ 202.1, CMS Pub. No. 15-1. The PRM clarifies that only
necessary and proper interest expenses are reimbursable under
the Medicare program. Id. at § 202.2. An
interest expense is “necessary” if it is: 1)
incurred on a loan that is made to satisfy a financial need,
2) for a purpose related to patient care, and 3) incurred on
a loan that is reduced by investment income. Id.
“Proper” is defined as “interest incurred
at a rate not in excess of what a prudent borrower would have
had to pay in an arm's-length transaction in the money
market when the loan was made.” Id. at §
202.3. The PRM also makes clear that an interest is proper
only if it is “paid to a lender not related to [the
party] through common ownership or control. Id.
obtain reimbursement, health care providers who participate
in the Medicare program must “maintain sufficient
financial records” and submit an annual “cost
report” detailing the cost of services and the amount
of reimbursement a participating provider believes it is due.
42 C.F.R. §§ 413.20(a), (b), 413.24. The cost
reports are then reviewed by a fiscal intermediary, who
determines the amount of payments providers are entitled to
and issues a notice of program reimbursement
(“NPR”). 42 C.F.R. § 405.1803. A provider
has 180 days after receiving the NPR to file an appeal with
the Provider Reimbursement Review Board (“PRRB”)
if the provider is unsatisfied with the fiscal
intermediary's determination. 42 U.S.C. § 1395oo(a);
42 C.F.R. §§ 405.1835. The PRRB conducts a hearing
on the issues presented and has the power to affirm, modify,
or reverse the decision of a fiscal intermediary based upon
the record made at the hearing. 42 U.S.C. § 1395oo(d). A
PRRB's decision may then be reversed, affirmed, or
modified by the Secretary. 42 U.S.C. § 1395oo(f)(1).
Providers who are unsatisfied with the Secretary's or the
PRRB's decision may obtain judicial review in federal
district court. Id.
Factual and Procedural Background
Vincent Randolph is a critical access hospital located in
Winchester, Indiana. (Filing No. 24 at 13.) The
hospital was created in 2000 when its parent company, St.
Vincent Health, acquired Randolph County Hospital.
Id. Randolph County Hospital operated in a building
that was 80 years old, and needed replacement. (Filing
No. 21 at 4.) Shortly after the acquisition of Randolph
County Hospital, construction of a new hospital, now known as
St. Vincent Randolph, began. Id. The costs of
constructing St. Vincent Randolph amounted to approximately
$15.5 million. (Filing No. 21 at 4.) St. Vincent
Randolph borrowed $15, 281, 928.18 for the construction of
its hospital from its sister hospital, St. Vincent Hospital
and Health Care Center, Inc. (“St. Vincent
Indianapolis”). (Filing No. 24 at 13.) This loan
was documented through board resolutions and intercompany
journal entries. (Filing No. 25 at 5.) However, a
formal loan agreement was not drafted at that time and the
only documentation as to the terms of the 2002 loan was an
Amortization table dated October 9, 2002. (Filing No. 24
at 14.) Construction of St. Vincent Randolph was
completed by November 2001. (Filing No. 24 at 13.)
Soon thereafter, Ministries of Ascension Health
(“Ascension Health”), the largest Catholic Health
care system in the United States, acquired St. Vincent Health
and its subsidiary hospitals, including the new St. Vincent
1, 2003, St. Vincent Randolph became a member of the
Ascension Health obligated group. (Filing No. 21 at
5.) It was also the first day of St. Vincent
Randolph's 2004 fiscal year. Id. As a member of
the Ascension Health group, St. Vincent Randolph participated
in a bond financing program where Ascension Health agreed to
pay the costs associated with St. Vincent Randolph's
development and construction. (Filing No. 24 at 14.)
In exchange for the bond, St. Vincent Randolph agreed to pay
interest on the funds it received from Ascension Health.
Id. St. Vincent Randolph incurred a $15, 568, 979.88
debt through the Ascension Health group. Id. at 15.
The bond agreement was documented by formal bond documents
provided by Ascension Health. (Filing No. 25 at 5.)
St. Vincent Randolph states that it used the funds it
received from Ascension Health to repay, through an
intercompany transfer, the related-party loan it received
from St. Vincent Indianapolis. (Filing No. 21 at 5.)
St. Vincent Randolph then assumed its proportionate share of
responsibility for the bond obligation undertaken by
Ascension Health. Id.
St. Vincent Randolph filed a cost report for Medicare
reimbursement of the interest it paid during fiscal years
2002 and 2004 through 2008. (Filing No. 24 at 15.)
The 2002 interest expense regarded the related-party loan St.
Vincent Randolph received from St. Vincent Indianapolis.
Id. The 2004 through 2008 interest expense regarded
interest paid on the bond received from Ascension Health.
(Filing No. 21 at 5.) As noted above, in order to
receive a reimbursement under the Medicare program, certain
requirements must be met, including proper documentation. 42
C.F.R. §§ 413.20(a), (b), 413.24. The fiscal
intermediary denied St. Vincent's request for
reimbursements, asserting that the interest expense for the
2002 loan was not allowed because the loan was from a related
party, as well as insufficiently documented. (Filing No.