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St. Vincent Randolph Hospital, Inc. v. Burwell

United States District Court, S.D. Indiana, Indianapolis Division

September 26, 2016

SYLVIA M. BURWELL, Secretary of the United States Department of Health and Human Services, Defendant.



         This 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 Summary Judgment.

         I. BACKGROUND

         The following material facts upon which this case is based are undisputed.

         A. The Medicare Act and Reimbursement Procedures

         Congress 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).

         The 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).

         Under 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.

         B. Reimbursement Procedures

         To 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.

         C. Factual and Procedural Background

         St. 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”).[1] (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 Randolph. Id.

         On July 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.

         Thereafter, 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. ...

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