St. Vincent Randolph Hospital, Inc., Plaintiff-Appellant,
Thomas E. Price, Secretary of Health and Human Services, Defendant-Appellee.
April 11, 2017
from the United States District Court for the Southern
District of Indiana, Indianapolis Division. No.
l:15-cv-00768-TWP-DML - Tanya Walton Pratt, Judge.
WOOD, Chief Judge, and Flaum and Easterbrook, Circuit Judges.
Easterbrook, Circuit Judge.
St. Vincent Health group acquired Randolph County Hospital in
2000, the building was 80 years old and needed to be
refurbished or replaced. St. Vincent Health decided to build
a replacement facility, to be operated by St. Vincent
Randolph Hospital, Inc. (the Hospital). In 2002 the Hospital
financed the project by borrowing about $15.3 million from
St. Vincent Hospital and Health Care Center, Inc. (St.
Vincent Indianapolis), a fraternal corporation in the St.
Vincent Health group. Within a year the whole St. Vincent
Health group was acquired by Ministries of Ascension Health,
the nation's largest Roman Catholic health-care system.
Ascension Health then loaned about $15.6 million to the
Hospital; both Ascension Health and the Hospital treated this
as a refinancing of the loan from St. Vincent Indianapolis.
This appeal presents the question whether Medicare will
reimburse some of the cost of financing the new
require the reimbursement of a medical provider's
reasonable costs to care for Medicare patients, see 42 U.S.C.
§§ 1395f(b)(1), 1395x(v)(1)(A), and a regulation,
42 C.F.R. §413.153, adds that these include the
necessary and proper costs of financing medical facilities.
No one has questioned the Hospital's decision to replace
the old facility or the commercial reasonability of the terms
(such as the rate of interest) on which the Hospital borrowed
the money. But the body responsible for evaluating
hospitals' Medicare claims (then called a fiscal
intermediary) rejected the Hospital's request for
payment. It gave two reasons. First, a regulation
disqualifies loans from affiliated entities-and although
there is an exception for loans within groups controlled by a
religious denomination, that exception applies only to loans
from parent corporations rather than fraternal ones. See 42
C.F.R. §413.153(c); Hinsdale Hospital Corp. v.
Shalala, 50 F.3d 1395 (7th Cir. 1995). Second, an
administrative handbook disqualifies loans that lack
documents showing the advances to be "[n]ecessary and
proper for the operation, maintenance, or acquisition of ...
facilities." Provider Reimbursement Manual 15-1
§202.1. (Both sides treat this manual as having the
status of a regulation.) See also 42 C.F.R. §413.24. The
arrangement between the Hospital and its fraternal
corporation was poorly documented. It was reflected in
resolutions adopted by both corporations' boards and in
an amortization table, but not in a note or security
these problems, the Hospital withdrew its request that
Medicare cover any of the expense for time before fiscal year
2004 but again requested compensation for 2004 through 2008,
after Ascension Health had refinanced the loan in a way that
complies with §413.153(c)(2) and entails the paperwork
usual for construction-financing loans. After the
intermediary again said no, the Hospital appealed to the
Provider Reimbursement Review Board, which reversed and
ordered the 2004 to 2008 claims paid. The Board concluded
that the problems with the 2002 loan did not taint the
refinancing in 2003-that none of the voluminous regulations
either prohibits refinancing or provides that problems with
one loan cannot be fixed by refinancing.
intermediary then appealed to the Administrator of the
Centers for Medicare and Medicaid Services, who makes the
final decision on behalf of the Secretary of Health and Human
Services. The Acting Principal Deputy Administrator reversed
the Board. The entirety of the reasoning is this paragraph:
The Administrator finds that the documentation submitted by
the [Hospital] was insufficient to establish that the loans
were necessary and proper and related to patient care. The
[Hospital] did not produce a signed loan contract for the
first loan between related providers. The only evidence of
the terms of the loans [sic] were [sic] amortization tables.
Thus, the initial loan between the [Hospital] and St. Vincent
Health was not "proper" according to the
regulations or the [Provider Review Manual]. Additionally,
the [Hospital] did not submit sufficient evidence to
establish that the initial loan was paid off by the [loan
from Ascension Health], nor did they provide sufficient
evidence as to what interest payments were attributable to
the initial loan. Thus, the Administrator finds that the
Intermediary's disallowance of the interest expense for
the [Hospital's] 2004, 2005, 2006, 2007, and 2008 fiscal
years was proper.
federal district court was the Hospital's next stop. The
judge found two themes in this explanation: first that the
initial loan was poorly documented, and second that the
Hospital had not established that the loan from Ascension
Health refinanced the initial loan. The judge found the first
of these reasons lacking. The Acting Principal Deputy
Administrator did not cite any regulation or handbook for his
(apparent) view that errors can never be fixed by
refinancing, while the Board, which evaluated that question
in detail, had explained cogently that problems with one loan
do not "taint" future loans. So the judge rejected
the first reason. But the judge thought the second reason
sufficient and granted summary judgment in the
Secretary's favor. 2016 U.S. Dist. Lexis 131212 (S.D.
Ind. Sept. 26, 2016).
Secretary's brief in this court defends both of the
Acting Principal Deputy Administrator's reasons. But the
appellate brief, like the final administrative decision, does
not explain what rule or equivalent legal standard forbids
refinancing to replace a disqualified loan with a proper one.
In the years 2004 through 2008 the Hospital incurred
financing costs to pay for the new hospital. Why should the
fact that it cannot recoup earlier financing costs stand in
the way of reimbursement for costs actually and prudently
incurred in later years to provide medical services to
Medicare patients? The Acting Principal Deputy Administrator
did not give a reason-which means that there is no reason,
for under the Chenery doctrine an administrative
decision stands or falls on the agency's explanations.
SEC v. Chenery Corp., 318 U.S. 80, 87-88 (1943).
When the agency just asserts an ipse dixit, then the decision
falls for the lack of a reason. And although this does not
matter under Chenery, the Secretary's brief not
only lacks legal authority on this issue but also doesn't
explain why the Medicare system would want to forbid
by contrast, is a real requirement. 42 C.F.R.
§413.24(a)-(c). But the Acting Principal Deputy
Administrator did not find that the loan from Ascension
Health is inadequately papered. The objection, rather, seems
to be that documents do not adequately show that the new loan
replaced the old one-that this was a refinancing transaction
rather than an infusion of additional capital. We say
"seems to be" because the Acting Principal Deputy
Administrator's language is opaque, but this is our best
Acting Principal Deputy Administrator did not explain what is
missing. The Hospital submitted voluminous
documentation-auditors' reports, ledgers, tax returns,
and more-tending to show that refinancing occurred. The
Acting Principal Deputy Administrator did not mention any of
this or say why it is inadequate. Again we have an ipse
dixit. The Secretary has considerable discretion under the
regulation and the manual to decide what paperwork is needed
to demonstrate that a loan meets the substantive criteria for
reimbursement, but it will not do to set a trap by insisting
after the fact that a given loan was not documented in a way
never before required by any regulation or opinion. A reader
of the final administrative decision would have had no idea,
not even an inkling, what is missing, why that missing thing
is required, or how to fix the problem.
argument the Secretary's appellate lawyer told us what
he thought the critical omission was: a "debt
discharge notice" evincing St. Vincent
Indianapolis's acknowledgment that its loan had been
repaid. The administrative decision did not mention this as a
shortcoming or explain what regulation or manual calls for a
"debt discharge notice", so again we have a
Chenery problem. And again we must wonder what sense
this makes. St. Vincent Indianapolis could acknowledge
repayment on the back of an envelope and doubtless would do
so for its fraternal institution. Requirements of
documentation ought to be designed to protect the Treasury
from spurious or commercially unreasonable claims and so
should emphasize documents that are verified by third parties