Opposition Brief — Shalala v. Mother Frances Hospital

Supreme Court brief1995

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In The

Supreme Court of the United States

October Term, 1994 ¢

DONNA E. SHALALA, SECRETARY OF HEALTH

AND HUMAN SERVICES,

Petitioner,

MOTHER FRANCES HOSPITAL OF TYLER, TEXAS,

Respondent.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

Dan M. Pererson*

THomas E, Dowpvet

FutsricHt & Jaworski L.L.P.

801 Pennsylvania Avenue, N.W.

Suite 500

Washington, DC 20004

(202) 662-0200

*Counse! of Record

QUESTIONS PRESENTED

1. Are 42 C.F.R. §§ 413.20(a) and 413.24 properly used to

determine timing of reimbursement of costs that are

admittedly reimbursable by Medicare?

2. Is PRM § 233 invalid because it constitutes a substan-

tive rule that was not promulgated in accordance

with the Administrative Procedure Act?

Is the decision of the Administrator invalid because it

is not supported by substantial evidence as required

by 5 U.S.C. § 706 and 42 U.S.C. § 139500(d)?

LIST OF PARTIES

Pursuant to Supreme Court Rules 15, 24, and 29,

Respondent states that the following persons are parties

to this case:

(1) Mother Frances Hospital of Tyler, Texas;

(2) Donna E. Shalala, in her official capacity as Sec-

retary of Health and Human Services; and

(3) Bruce C. Vladeck in his official capacity as

Administrator of the Health Care Financing Administra-

tion.

Mother Frances Hospital has no parent company or

subsidiaries other than wholly owned subsidiaries. The

Medicare fiscal intermediaries for Mother Frances Hospi-

tal, Blue Cross and Blue Shield of Texas, Inc. and Blue

Cross and Blue Shield Association, are not parties but are

acting as agents for the Secretary and may have an inter-

est in the outcome of this case.

ill

TABLE OF CONTENTS

Page

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STATUTORY AND REGULATORY PROVISIONS

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I. Comparison Of Issues In This Case And Guer-

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Il. Disagreements With The “Statement” In The

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REASONS FOR DENYING THE PETITION......... 8

I. There Is No Conflict Among The Circuits On

ee I CI, os ccncbtievcseenduwaces 8

II. The Rulemaking Question Furnishes No Basis

For Granting Certiorari ..................+-- 19

Ill. The Substantial Evidence Question Does Not

Justify Granting The Petition................ 25

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TABLE OF AUTHORITIES

Page(s)

CASES

American Medical Int'l, Inc. v. Secretary of HEW, 466

F. Supp. 605 (D.D.C. 1979), aff'd, 677 F.2d 118

Gc ly SEIN Saw ns ent ccévcveseees 11, 12, 14,

Baptist Hosp. East v. Sullivan, 767 F. Supp. 139

Se GE PE oc we ecccessecésesavowbucseecees

Charlotte Memorial Hosp. & Medical Center, Inc. v.

Bowen, 860 F.2d 595 (4th Cir. 1988).............

Graham Hosp. Assn v. Sullivan, 832 F. Supp. 1235

a Ee BOUND cee eseceeeeweuysieweineurevenus

Guernsey Memorial Hosp. v. Secretary of HHS, 996

F.2d 830 (6th Cir. 1993), cert. granted, 114 S. Ct.

Bee Cs ok neces nugs cb¥suwis Keke steaeeerees

HCA Health Services of Midwest, Inc. v. Bowen, 869

a Bi go ge | rer err rrr errr rer

Mercy Hosp. v. Sullivan, Medicare & Medicaid

Guide (CCH) ] 40,227 (D. Me. 1991)........ 9,

Methodist-Evangelical Hosp., Inc. v. Shalala, Medi-

care & Medicaid Guide (CCH) 4 42,017 (D.D.C.

Ne le SOR RG ha tep cues sai eccebaeesi carte 9,

Methodist Hosp. of Indiana, Inc. v. United States, 626

Ae SNe Gale le. Ss cow chencescrednasenss 11,

Mother Frances Hospital of Tyler, Texas v. Shalala, 15

F.3d 423 (5th Cir. 1994), petition for cert. filed

NT Dey HOE 2 6 és 8c ccevoudesessevercuaneseads

National Medical Enterprises v. Bowen, 851 F.2d 291

Se Gt: Eas cheastévesckvriesecsounssrcess

National Medical Enterprises v. Sullivan, 916 F.2d

542 (9th Cir. 1990), cert. denied, 500 U.S. 917

SEE $0deGnanesvbakbanecebehertsnsoekiaelsase

15, 17

11, 26

10, 14

15, 16

TABLE OF AUTHORITIES —- Continued

Page(s)

North Clackamas Community Hosp. v. Harris, 664

POG FOR Cle Cae FOGG s os vce cs sccdcstagecescas 11, 15

Queen's Medical Center v. Sullivan, 797 F. Supp. 821

TED, Mim TIES oi devas ksdonccxnterucsieatsuress 11, 15

Ravenswood Hosp. Medical Center v. Schweiker, 622

F. Supp. 338 (N.D. [fl 1985) .....--ecceccessaves 9, 11

Richey Manor, Inc. v. Schweiker, 684 F.2d 130 (D.C.

Ce, BOGE b.0vvccecnvnescesecssneeeerceeee 11, 14

St. John’s v. Shalala, Medicare & Medicaid Guide

(CCH) ¥ 41,700 (E.D. Mich. Aug. 18, 1993)..9, 10, 26

Sun Towers, Inc. v. Heckler, 725 F.2d 315 (5th Cir.),

cert. denied, 469 U.S. 823 (1984) 11, 12, 13, 14, 15, 17

Villa View Community Hosp., Inc. v. Heckler, 720

F.2d 1006 (9th Cie. T9G8). onc snccdedessesecdveces 10

STATUTES AND REGULATIONS

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£2 CER. & BGM occccvsvacecianswsnnvenceats 23, 24

TABLE OF AUTHORITIES - Continued

Page(s)

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42 CBR. § GOBAIG 0 ccccvevtvcccceveaseseces 23, 24, 25

42 C.BR. © GOG.419 2. vccsscecvccvccvscesccessess 23, 24

42 CPR. & 405.455 2. cccccvcvesessccevencesseuss 23, 24

42 C.RR. $6 412.22-412.30.....ccccccccvccnccccesvecs 29

42 C.BR. & GUS.Da) nc ccccccsnvsececsssseccsessusees 22

42 C.R.R. © SIS.SING) oo ccccccveccssccscvcccenes 22, 23

42 CBR. © GIDD,. vccccccvvccccvevcssctsnvester 1, 21, 22

42 C.B.R. § 413.QBM1) ... nc ccvccccceveres 6, 21, 22, 2

42 CBR. & SIS.QOMZ) 00 ccvenceccccovevcessessesucc 22

42 CER. 6 GES OEMS). 5 oc cccccccccvevenseeneswens 12, 22

42 C.BR. & GES.OB. oc vccccescvsscouscssteuuesaussouss 10

42 C.BRR. § 4I3D.20la) .. cc ccccecccccnvsesnsevevess passim

42 C.BR. @ GIS26. ci cccessvvcsconsssevesens: 10, 16, 20

42 C.ER. © SID. ZELMA)... cccscveccccsesssesenssuses 29

42 C.B.R. § 413.290 . occ cvescevcccncsccesesessscsess 23

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42 C.E.R. §& 423. 190faM IG) ..0 ccc snccsccnvcocsvesss 22, 23

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42 CER. & GIS. 1SMOME) 2 6 vesicccveccscctscvescncnss me

48 Fed. Reg. 39752 (Sept. 1, 1983).............-eeees 23

Vii

TABLE OF AUTHORITIES — Continued

Page(s)

48 Fed. Reg. 39809 (Sept. 1, 1983)................ 23, 24

45 Fed. Reg. 39610 (Sept. 1, 1963).......ccsvecveccss 23

MiIscCELLANEOUS

Provider Reimbursement Manual § 233.......... passim

Provider Reimbursement Manual § 2905.1........... 29

Pub. L. 92-603, § 243(a), 1972 U.S. Code Cong. &

Admin. News (92 Stat.) 1161-63................05. 16

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Be ER BE A bk on bo decane casecaneseadeeese ee 2

De Ee B, BE 0 v 26 hen denscdcadd doutseenesdieaenaee ii

Be Ge PE Oe ahdccd vaveontcnvecenaemmsssneeiiea ee:

Socens Socurlty ACt & Tasos asec tiknenevescavae vier 24

Social Security Act, § 1861(v)(1)(A)...............05. 17

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

42 C.FR. § 413.9 Cost related to patient care

(b) Definitions — (1) Reasonable Cost. Reasonable

cost of any services must be determined in accordance

with regulations establishing the method or methods to

be used, and the items to be included. The regulations in

this part take into account both direct and indirect costs

of providers of services. The objective is that under the

methods of determining costs, the costs with respect to

individuals covered by the program will not be borne by

individuals not so covered, and the cost with respect to

individuals not so covered will not be borne by the pro-

gram. These regulations also provide for the making of

suitable retroactive adjustments after the provider has

submitted fiscal and statistical reports. The retroactive

adjustment will represent the difference between the

amount received by the provider during the year for

covered services, from both Medicare and the benefici-

aries and the amount determined in accordance with an

accepted method of cost apportionment to be the actual

cost of services furnished to beneficiaries during the year.

5 U.S.C. § 706. Scope of review

... The reviewing court shall -

(2) hold unlawful and set aside agency

action, findings, and conclusions found to be -

(A) arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance

with law;

(E) unsupported by substantial evi-

dence in a case subject to sections 556 and

557 of this title or otherwise reviewed on

the record of an agency hearing provided by

statute;

In making the foregoing determinations, the court shall

review the whole record or those parts of it cited by a

party... .

STATEMENT OF THE CASE

On May 31, 1994, Petitioner Donna E. Shalala, Secre-

tary of the Department of Health and Human Services

(the “Secretary”) filed a Petition for a Writ of Certiorari in

this case. The Petition, after the Statement, contained no

detailed arguments as to why the Petition should be

granted. Instead, it referenced the case of Shalala v. Guer-

nsey Memorial Hospital, in which a Petition for a Writ of

Certiorari to the United States Court of Appeals for the

Sixth Circuit was granted on April 4, 1994. Under the

heading “Reasons for Granting the Petition” Petitioner

stated:

This case presents the same questions that are

presented in Shalala v. Guernsey Memorial Hospi-

tal, cert. granted, 114 S.Ct. 1395 (1994) (No.

93-1251). The petition should therefore be held

and disposed of as appropriate in light of the

Court's disposition of Guernsey Memorial Hospi-

tal.

M. Fr. Pet. at 12. On June 30, 1994, Respondent Mother

Frances Hospital of Tyler, Texas (the “Hospital”) filed and

served a letter pursuant to S. Ct. Rule 15.4, waiving its

right to file an opposition to the Petition. By letter dated

July 15, 1994, the Clerk of this Court advised counsel for

the Hospital that although the Hospital had waived its

right to file a response to the Petition, the Court had

nevertheless directed the Clerk to request that a response

be filed.

I. Comparison Of Issues In This Case And Guernsey.

As will be explained more fully below, two out of the

three questions presented by the instant case ere identical

to the two questions presented in Guernsey. Those ques-

tions are the GAAP question and the rulemaking question

(Nos. 1 and 2 in Questions Presented, above). A third

issue in this case, not listed by the Secretary as a “Ques-

tion Presented” in the Mother Frances Petition, is

whether the decision of the Administrator is supported

by substantial evidence, as required by the Administra-

tive Procedure Act (“APA”) and the Medicare statutes.

This issue was pleaded and briefed in the Mother Frances

case in the District Court and the Court of Appeals, and it

is properly presented in connection with the Petition in

this case. The “substantial evidence” question is not listed

as one of the “questions presented” in the Guernsey case,

although Mother Frances Hospital believes it is neces-

sarily presented in the Guernsey case as well.!

If either the GAAP or rulemaking arguments were to

be decided in favor of the Respondent hospital in Guer-

nsey, the outcome in that case would control the outcome

of the instant case. An adverse decision to the hospital in

' 42 U.S.C. § 139500(d) requires that a decision of the PRRB

“shall be based upon the record made at such hearing,” and

“shall be supported by substantial evidence when the record is

viewed as a whole.” (emphasis added) Judicial review of agency

decisions in this context is made “pursuant to the applicable

provisions under Chapter 7 of title 5,” which include 5 U.S.C.

§ 706. See 42 U.S.C. § 139500(f). As set forth above, 5 U.S.C.

§ 706(2)(E) provides that an agency decision must be reversed if

it is “unsupported by substantial evidence in a case. .

reviewed on the record of an agency hearing provided by stat-

ute.”

Counsel for Mother Frances Hospital is informed that the

substantial evidence issue was pleaded and discussed in the

briefs in the Guernsey case in the lower federal courts.

Guernsey on both the GAAP and rulemaking arguments

would control the decision of those two issues in this

case.*

It is legally possible that a different result could be

reached on the substantial evidence issues in the two

cases. The substantial evidence issue is expressly listed as

a “Question Presented” in this case (see above), and there

are differences in the administrative records between the

two cases. See discussion in “Reasons for Denying the

Writ,” Part III, below. However, the Hospital believes that

in both cases the Administrator’s decisions are not sup-

ported by substantial evidence.

Because of the identical GAAP and rulemaking issues

in the Guernsey case and the instant case, and because the

Hospital believes that the decisions of the Administrator

in both cases are not supported by substantial evidence,

the Hospital initially determined to waive its right to file

a response to the Petition.

In the Hospital’s view, a different result could be

reached in Guernsey and Mother Frances only under the

following circumstances, assuming that the Mother

Frances case is held in abeyance during the pendency of

Guernsey as requested by the Secretary.

e First, the Court would have to decide adversely to the

hospital both of the two issues expressly presented by

Guernsey.

e Second, the Court would either not reach the substan-

tial evidence question in Guernsey, or would decide it

based on the Guernsey record.

2 Throughout this discussion, the Hospital assumes that the

issues in Guernsey will be decided on their merits, as opposed to

being decided on some procedural ground. The Hospital is

unaware of any procedural ground that would prevent the

issues expressly presented in Guernsey and Mother Frances from

being decided on their merits.

e Third, the Court would remand Mother Frances to con-

sider whether the decision of the Administrator was sup-

ported by substantial evidence in the record.

e Fourth, on remand the lower court would conclude

that a decision favorable to the Hospital would be

reached in Mother Frances because the substantial evi-

dence argument, which had not been considered by this

Court in Guernsey, would be considered and would cause

the Hospital to prevail; or, if this Court had considered

the substantial evidence argument in Guernsey, the lower

court would render a different decision than was ren-

dered in Guernsey on grounds that the administrative

records in the two cases justified differing outcomes.

Although this scenario is possible, the chance that

precisely this outcome would occur was considered insuf-

ficiently likely that the decision was made to waive a

response to the Petition.

Because the Court has requested a response, how-

ever, the Hospital wil! respond to the contentions of the

Secretary in the Mother Frances Petition and the Guernsey

Petition. The contentions specific to Mother Frances Hos-

pital are contained in the “Statement” portion of the

Mother Frances Petition. Therefore, those contentions will

be responded to in the Statement of the Case herein.

The legal arguments raised by the Secretary are set

forth only in the “Reasons for Granting the Writ” in the

Guernsey Petition. Those arguments will therefore be

addressed in “Reasons for Denying the Writ” in this

Opposition.

In summary, aithough the Hospital recognizes that

the Court has granted the Petition in the Guernsey case,

the Hospital believes that certiorari should not be granted

in the Mother Frances case. With the benefit of hindsight,

having participated as an amicus curiae in the briefing in

the Guernsey case, the Hospital also respectfully suggests

that certiorari may have been improvidently granted in

Guernsey.

Il. Disagreements With The “Statement” In The Peti-

tion.

The Hospital disagrees with several contentions by

the Secretary in the “Statement” portion of the Mother

Frances Petition. The Secretary states that the Medicare

Act “authorizes the Secretary of Health and Human Ser-

vices to promuigate regulations ‘establishing the method

or methods to be used’” for determining reasonable costs.

M. Fr. Pet. at 5. The Medicare Act does not merely

“authorize” the Secretary to issue regulations establish-

ing such methods. The Act commands her to do so. The

pertinent portion of 42 U.S.C. § 1395x(v)(1)(A) states:

The reasonable cost of any services shall be the

cost actually incurred . . . and shall be determined

in accordance with regulations establishing the

method or methods to be used. . . . In prescribing the

regulations referred to in the preceding sentence,

the Secretary shall consider, among other things,

the principles generally applied by national

organizations . . . in computing the amount of

payment . . . to providers of services. . . . Such

regulations may provide for [determination of

costs according to different methods]. (emphasis

added)

42 U.S.C. § 1395hh also imposes an obligation upon the

Secretary to proceed by rulemaking in certain instances.*

See also 42 C.F.R. § 413.9(b)(1) (“Reasonable cost of any

services must be determined in accordance with regulations

establishing the method or methods to be used... . ”).

(emphasis added)

* 42 U.S.C. § 1395hh was amended after PRM § 233 was

issued. See discussion in Amicus Br. of M. Fr. Hosp. at 7 n.2.

It is not true, as the Secretary states in her description

of the 1983 bonds, that those bonds “bore interest at rates

ranging from 8.6% to 9.5%, and were scheduled to reach

maturity in 1998.” M. Fr. Pet. at 6. $7,190,000 in serial

bonds were due by 1998 at the interest rates cited by the

Secretary. Admin. Rec. 1114. However, most of the bonds

were term bonds. $19,365,000 in term bonds bore a rate of

9 3/4% and were due in the year 2007, and $25,780,000 in

term bonds bore a rate of 10 1/8% and were due in 2013.

Id.

Although the hospital estimated it would save

$2,714,975 under the new bonds as compared to the old

bonds, that estimate has little if any relevance to this case.

M. Fr. Pet. at 7. The Secretary has consistently sought to

imply that the Hospital would gain by a reduction in

interest expense, and at the same time receive a windfall

from Medicare for an “accounting loss” or “paper loss.”

See M. Fr. Pet. at 7 (“accounting loss”); Appellee’s 5th Cir.

Br. at 2 (“paper loss”). The Hospital’s annual interest

expense would be lower after thc refinancing due to

lower interest rates, but Medicare would share fully, dol-

lar for dollar, in those savings because Medicare would

reimburse the hospital based on those lower interest pay-

ments. The loss on defeasance, however, was a loss

incurred in fiscal year 1987 to defease or extinguish its

liability on the old bonds. The uncontradicted record

testimony was that this was not a paper loss, but a real

loss. Admin. Rec. 453-54, 457 (Valorz).4

+ The Secretary apparently seeks to create some confusion

regarding the amount of the loss. M. Fr. Pet. at 8. There should

be no doubt about this issue. The PRRB’s decision did not

determine the size of the loss, even though the Hospital

submitted figures showing the dollar amount of the loss

($11,671,393) and the estimated reimbursement impact

($4,565,362). Admin. Rec. 1012. The loss figure was taken from

REASONS FOR DENYING THE PETITION

I. There Is No Conflict Among The Circuits On The

GAAP Question.

The arguments advanced in the Guernsey Petition for

granting certiorari are seriously flawed. Mother Frances

Hospital therefore believes that certiorari should not be

granted in the instant case, and respectfully suggests that

the Petition in Guernsey may have been improvidently

granted based upon allegations of a conflict among the

circuits when such a conflict simply does not exist.

Both Guernsey and Mother Frances are “advance

refunding” or “loss on defeasance” cases. The ultimate

issue in each case is whether a loss on defeasance of debt

should be reimbursed by Medicare in the year in which

the defeasance occurred or whether it should be amor-

tized over a future period of years.

All extant Court of Appeals decisions and District

Court decisions in these “loss on defeasance” cases are in

complete accord and have reached the identical result.

The case law is unanimous. In every case presenting this

ultimate issue, the courts have held that the provider is

entitled under applicable Medicare statutes and regula-

tions to receive reimbursement in the year of defeasance.

There is not even arguably any conflict among circuits, or

the Intermediary’s own workpaper furnished by the

Intermediary to the Hospital. In the District Court, counsel for

the Secretary refused to admit the validity of the size of the loss

calculated by the Intermediary, shown on the Intermediary’s

own workpaper, and given to the Hospital. In any event, the

size of the loss and the reimbursement impact can be calculated

on remand should the Hospital prevail, as the Fifth Circuit

directed. M. Fr. Pet. at 10a.

among district courts, as to the proper result in these

cases. These cases are:

Courts of Appeals

Guernsey Memorial Hosp. v. Secretary of HHS, 996 F.2d

830 (6th Cir. 1993), cert. granted, 114 S. Ct. 1395 (1994);

Mother Frances Hosp. of Tyler, Texas v. Shalala, 15 F.3d 423

(5th Cir. 1994), petition for cert. filed (May 31, 1994).

District Courts

Methodist-Evangelical Hosp., Inc. v. Shalala, Medicare &

Medicaid Guide (CCH) ¥ 42,017 (D.D.C. Dec. 22, 1993);

St. John’s Hosp. v. Shalala, Medicare & Medicaid Guide

(CCH) J 41,700 (E.D. Mich. Aug. 18, 1993); Graham Hosp.

Ass‘n v. Sullivan, 832 F. Supp. 1235 (C.D. Ill. 1993); Mercy

Hosp. v. Sullivan, Medicare & Medicaid Guide (CCH)

{ 40,227 (D. Me. 1991); Baptist Hosp. East v. Sullivan, 767 F.

Supp. 139 (W.D. Ky. 1991); Ravenswood Hosp. Medical Cen-

ter v. Schweiker, 622 F. Supp. 338 (N.D. Ill. 1985).

To attempt to create a conflict where none exists, the

Secretary has endeavored to recast the issue in extremely

broad terms, and to bring in other cases that are not “loss

on defeasance” cases but have presented other issues

under some of the same regulations involved in this case.

Thus, she characterizes the question as “whether the Sec-

retary and fiscal intermediaries are required to follow

GAAP,” Guern. Pet. at 11, and “[w]hether [the regula-

tions] require that provider costs be reimbursed accord-

ing to ‘generally accepted accounting principles... . °”

M. Fr. Pet. at I.

But the Courts of Appeals and District Courts have

not painted with such a broad brush. Even if it were

necessary or appropriate for this Court to grant certiorari

to consider an alleged conflict that is not present in the

line of cases of which this case is a part, the decisions

cited by the Secretary in the Guernsey Petition do not

conflict with each other. They can be reconciled by using

precisely the analysis employed by the Fifth Circuit Court

of Appeals in the Mother Frances case; namely, that

§§ 413.20(a) and 413.24 are not necessarily used to deter-

mine which costs are “allowable” for Medicare reimbur-

sement but are properly used to determine accounting

issues, such as timing, for costs that are “allowable.”

The Secretary lists the following ten cases as standing

for the proposition that 42 C.F.R. §§ 413.20 and 413.24

“mandate the use of GAAP to determine allowable costs,

unless the Secretary has promulgated a more specific

regulation dealing with a particular cost issue” (Guern.

Pet. at 11):5

Courts of Appeals

Guernsey Memorial Hosp. v. Secretary of HHS, 996 F.2d

830 (6th Cir. 1993), cert. granted, 114 S. Ct. 1395 (1994);

HCA Health Services of Midwest, Inc. v. Bowen, 869 F.2d

1179 (9th Cir. 1989); Charlotte Memorial Hosp. & Medical

Center, Inc. v. Bowen, 860 F.2d 595 (4th Cir. 1988); National

Medical Enterprises v. Bowen, 851 F.2d 291 (9th Cir. 1988);

Villa View Community Hosp., Inc. v. Heckler, 720 F.2d 1086

(9th Cir. 1983).

District Courts®

Methodist-Evangelical Hosp., Inc. v. Shalala, Medicare &

Medicaid Guide (CCH) { 42,017 (D.D.C. Dec. 22, 1993);

Graham Hosp. Ass‘n v. Sullivan, 832 F. Supp. 1235 (C.D. Ill.

> The Secretary did not include the Mother Frances case,

because the decision in that case was rendered by the Fifth

Circuit after the Petition in Guernsey was filed. Presumably, she

would align it with Guernsey.

6 The Secretary omits St. John’s Hosp. v. Shalala, Medicare &

Medicaid Guide (CCH) { 41,700 (E.D. Mich. Aug. 18, 1993).

1993); Mercy Hosp. v. Sullivan, Medicare & Medicaid

Guide (CCH) ¥ 40,227 (D. Me. 1991); Baptist Hosp. East v.

Sullivan, 767 F. Supp. 139 (W.D. Ky. 1991); Ravenswood

Hosp. Medical Ctr. v. Schweiker, 622 F. Supp. 338 (N.D. Ill.

1985).

The only cases which allegedly establish a different

rule, according to the Secretary, are as follows:7

Courts of Appeals

Sun Towers, Inc. v. Heckler, 725 F.2d 315 (5th Cir.), cert.

denied, 469 U.S. 823 (1984); National Medical Enterprises v.

Sullivan, 916 F.2d 542 (9th Cir. 1990), cert. denied, 500 U.S.

917 (1991); North Clackamas Community Hosp. v. Harris, 664

F.2d 701 (9th Cir. 1980).

District Courts

American Medical Int'l, Inc. v. Secretary of HEW, 466 F.

Supp. 605 (D.D.C. 1979), aff'd, 677 F.2d 118 (D.C. Cir.

1981); Queen's Medical Center v. Sullivan, 797 F. Supp. 821

(D. Haw. 1991).

Court of Claims

Methodist Hospital of Indiana, Inc. v. United States, 626

F.2d 823 (Ct. Cl. 1980).

None of these cases establishes a rule that differs

from that applied in Mother Frances or Guernsey.

To see why this is so, the law in the Fifth Circuit is the

most instructive. The principal case cited by the Secretary to

show a supposed conflict is Sun Towers, which quoted from

and relied upon American Medical in its holding. What the

Secretary's argument overlooks, however, is that the “stock

7 The Secretary also cites Richey Manor, Inc. v. Schweiker, 684

F.2d 130 (D.C. Cir. 1982), but notes that any such expression of a

different rule was dictum.

maintenance” cost cases, such as Sun Towers and American

Medical, have to do with whether § 413.20(a) is to be used to

determine “costs allowable” under the Medicare program;

that is, “reimbursable costs.” Sun Towers, 725 F.2d at 329, citing

American Medical, 466 F. Supp. at 623. (emphasis added)

“Allowable costs” is a term of art, and means whether the

costs are of the kind for which Medicare will reimburse

providers. To be allowable, costs must be related to patient

care. 42 C.F.R. § 413.9(c)(3). In Sun Towers, the Court noted

that the Secretary had found that “these costs were not

related to actual patient care or necessary to the rendition of

patient care services. Therefore, she concluded, these costs

could not properly [be reimbursed].” Sun Towers, 725 F.2d at

326.

But the Mother Frances and Guernsey cases are not

about whether the loss on defeasance is an “allowable,”

reimbursable cost under Medicare. The loss is admittedly

a reimbursable cost.®

Instead, the question presented by loss on defeasance

cases such as Mother Frances and Guernsey is simply an

accounting question: in what year should the admittedly

allowable cost be recognized? It is solely a question of

timing.

After noting that Sun Towers is not contrary to its

decision in Mother Frances, the Fifth Circuit explained

exactly why there is no conflict:

In Sun Towers, this Court was called on to decide

whether certain costs were allowable under the

Medicare program. Among these costs were

’ The Secretary explicitly so stated in her summary judg-

ment brief filed in the District Court in this case: “There is no

dispute that the ‘loss’ represents costs which are reimbursable

under the Medicare program. Instead the dispute concerns the

time period over which the hospital may be reimbursed for this

loss.” Def. Summ. J. Br. at 7.

“stock maintenance costs.” The Secretary disal-

lowed reimbursement for these costs finding

that they were only tangentially related to the

care of Medicare beneficiaries. The district

court, however, reversed the Secretary’s deter-

mination.

Among the arguments the district court pre-

sented to support its decision in Sun Towers was

an argument based on GAAP. Under GAAP,

stock maintenance costs are recognized as gen-

eral and administrative expenses. Thus, the dis-

trict court argued that these costs were

allowable because 42 C.F.R. § 405.406 [the prede-

cessor to § 413.20] required GAAP to be applied

in determining reasonable costs.

We rejected this argument holding that GAAP

was not necessarily to be used in determining if

a particular cost was allowable. In particular, we

found that section 405.406 was not designed to

determine the “costs allowable under the Medi-

care Act. The regulation is directed at the type

of financial data and reports required of pro-

viders; it is not a regulation affecting the sub-

stantive provisions of the program as to what

constitutes reimbursable costs.” Hence, we

reversed the decision of the district court and

held that the Secretary’s determination was nei-

ther arbitrary nor capricious.

In Sun Towers, the issue was whether a particular

cost was allowable at all. In the case at bar, as it

was in the Guernsey case, the issue is when a cost

that was clearly allowable should have been

reimbursed. These are different questions and

we do not believe that Sun Towers speaks to the

issue of when reimbursement is to be made.

Accordingly, we adhere to our decision in Sun

Towers as to whether a particular cost is allow-

able. However, we follow Guernsey as to when

advance refunding costs are to be reimbursed.

M. Fr. Pet. at 9a-10a (all footnotes and citations omitted;

emphasis by Fifth Circuit). The Fifth Circuit further

stated in Mother Frances that Guernsey is “a case on all

fours with the case sub judice,” and that “[w]e agree with

the reasoning of Guernsey and adopt its holding that the

Medicare regulations provide for the use of GAAP in

determining the timing of Medicare reimbursement in

advance refunding transactions. ...” M. Fr. Pet. at 8a.

There can thus be no conceivable conflict between

Sun Towers and either Guernsey or Mother Frances, when

the Fifth Circuit expressly reconciled its decision in Sun

Towers with its decision in Mother Frances and with the

Guernsey case.

The Secretary cites a District Court case from the

District of Columbia, American Medical, as presenting a

conflict. But American Medical was also distinguished by

the District Court that decided it as presenting no conflict

with the line of decisions in advance refunding cases. In

Methodist-Evangelical, the United States District Court for

the District of Columbia considered two consolidated

advance refunding cases that had been brought by a total

of seven hospitals. That court noted that the “issues here

have been thoroughly and authoritatively resolved in the

Sixth Circuit’s opinion in Guernsey.” Methodist-Evangeli-

cal, Medicare & Medicaid Guide (CCH) ¥ 42,017 at 38,788.

It expressly distinguished American Medical (and Richey

Manor) on grounds that “each of these cases determines

reimbursability vel non; none addresses the timing of

reimbursement. Guernsey teaches that GAAP governs

reimbursement timing and is what is at issue here. The

law of this Circuit does not compel an interpretation

different from that in Guernsey.” Id. at 38,789.

Turning to the Ninth Circuit, the principal case that

the Secretary believes to have established a rule contrary

to Guernsey and Mother Frances is NME v. Sullivan. But

that case, too, like Sun Towers and American Medical, is a

“stock maintenance” costs case. It is distinguishable on

precisely the same basis that the Fifth Circuit and the

District Court for the District of Columbia distinguished

Sun Towers and American Medical.

The only other Ninth Circuit case cited by the Secre-

tary as being in conflict with Guernsey and Sun Towers is

North Clackamas. That case also dealt with whether certain

costs were related to patient care, and thus whether they

were “allowable,” reimbursable costs. The issue in North

Clackamas was whether certain intangible costs were

reimbursable. The Court, per Kennedy, J., held that the

costs were “not reimbursable.” 664 F.2d at 707. North

Clackamas is thus like Sun Towers, American Medical, and

NME v. Sullivan, because the issue in that case was

whether costs were “allowable” rather than how admit-

tedly allowable costs ought to be treated under applicable

accounting rules.’

This leaves only Methodist Hospital of Indiana as a case

supposedly in conflict with Guernsey and Mother Frances.

That case does not present a conflict for several reasons.

9 The Secretary also cites Queens as establishing a rule

contrary to Guernsey and Mother Frances. Guern. Pet. at 13 n.8.

But Queens is only a District Court case within the Ninth Circuit.

As shown above, there is no conflict between the two Ninth

Circuit cases cited by the Secretary, and Guernsey and Mother

Frances. In addition, the question in Queens was whether certain

malpractice costs were reimbursable at ail. The Court noted that

GAAP was not designed “for determining what health care

costs are reasonable and should be reimbursable under Medi-

care.” Queens, 797 F. Supp. at 826. Thus, its holding also does not

conflict with Mother Frances.

e First, it does not even involve the application of

§ 413.20(a), the GAAP regulation. It deals only with

accrual accounting issues.

e Second, like the cases cited above, the question in Method-

ist Hospital of Indiana was whether a cost was reimbursable at

all. The Court held that a cost that was legally required to be

paid but was not paid, could be determined not to have been

“incurred” and thus not be reimbursable. Methodist Hospital

of Indiana, 626 F.2d at 827.

e Third, the Court of Claims in this 1980 decision had

jurisdiction only because the statutory procedure which

established the PRRB and the present administrative and

judicial mechanisms for review of provider disputes was

not yet in effect for the cost year at issue. The mecha-

nisms established by 42 U.S.C. § 139500 are effective only

for provider cost reports ending on or after June 30, 1973.

See Pub. L. 92-603, § 243, 1972 U.S.Code Cong. & Admin.

News (92 Stat.) 1661-63. The dispute in Methodist Hospital

of Indiana was for the hospital's fiscal year ended Febru-

ary 28, 1969. Jurisdiction for judicial review of PRRB and

Administrator’s decisions is now vested exclusively in

the federal District Courts, not the Court of Federal

Claims. 42 U.S.C. § 139500(f). Thus, even if Methodist

Hospital of Indiana established some rule that was in con-

flict with Guernsey and Mother Frances — which it did not -

any such conflict would be essentially irrelevant at pre-

sent.

Thus, to attempt to show a conflict, the Secretary has

stated the “question presented” in an overly broad manner.'”

The advance refunding cases are unanimous. But even when

'0 The “question presented” is also phrased in a circular

fashion by the Secretary. By describing §§ 413.20(a) and 413.24

as “general Medicare record-keeping and reporting regula-

tions” the Secretary has attempted to insert her answer to the

question into the question itself.

the broader question is examined, the cases are reconcilable

on the basis expressed in Mother Frances.

The Petition should also be denied because the Secretary

is now arguing in this Court a considerably different case

than was argued below. Her arguments contradict the posi-

tions that she has taken in prior stages of this case and

elsewhere.

For example, a question considered in the proceedings

below was whether § 413.20(a) deals with reimbursement

under GAAP because it was meant to implement the lan-

guage of 42 U.S.C. § 1395x(v)(1)(A). That statute requires that

“In prescribing the regulations [to determine reasonable

costs], the Secretary shall consider . . . the principles applied

by national organizations or established prepayment organi-

zations . . . in computing the amount of payment. . . to

providers of services.... ”

At page 21 of the Guernsey brief on the merits, the

Secretary now argues that “[t]he available evidence thus

confirms what is in any event the natural reading of the

statutory language: that the ‘principles . . . applied by

national organizations or established prepayment organiza-

tions’ that the statute requires the Secretary to ‘consider’

have nothing specifically to do with GAAP.” However, that

position directly contradicts the Secretary’s administrative

decision in this case. In a discussion of GAAP principles, the

following statement appears in the Administrator’s decision:

Section 1861(v)(1)(A) of the Act only required the

secretary to “consider . . . the principles generally

applied by national organizations.” The Secretary

is not required to adopt them for determining

reimbursable costs. [citing three cases, including

Sun Towers and American Medical]. Neither Con-

gress nor the Secretary abdicated to the accounting

profession the responsibility for determining Medi-

care reimbursement policy. Moreover, the Fore-

word to the PRM indicates that GAAP should be

followed only in the absence of specific guidelines

and instructions in the PRM. [footnote omitted]

M. Fr. Pet. at 50a. As is evident from this passage in the

decision under review in this case, the Secretary entertained no

doubt that the statutory language relating to “principles

generally applied by national organizations” referred to

GAAP. Now, the Secretary urges this Court to adopt the

opposite position on a fundamental issue expressly treated in

the Administrator’s decision.

Similarly, the Secretary seeks to argue a different case in

this Court than it did in the lower courts with respect to the

effect of 42 U.S.C. § 413.20(a). Below, the Secretary merely

sought to argue that § 413.20(a) is not a payment or reimbur-

sement provision, but relates to recordkeeping only. Now, in

this Court, the Secretary argues in the Guernsey case that

§ 413.20(a) does not even refer to GAAP or relate to GAAP in

any way:

In any event, Section 413.20(a) by its terms does

not require use of GAAP. It refers only to practices

standard “in the hospital and related fields,” sug-

gesting if anything the use of “specially” rather

than “generally” accepted principles.

Guern. Pet. at 19. In both the Court of Appeals and the

District Court in this case, the Secretary explicitly admitted

and argued that § 413.20(a) referred to GAAP (although

contending that it did not govern payment or reimburse-

ment). In the Fifth Circuit, the Secretary argued that the

language of § 413.20:

[I]Jnforms providers that they need not “change”

their “standard accounting practices” in order to

participate in the Medicare program. It does not

direct that all costs found by such “standard prac-

tices” will be reimbursed. Such an approach would

improperly transfer the authority to determine

what costs are reimbursable under Medicare from

the Secretary to the American Institute of Certified

Public Accountants (“AICPA”), which promulgates

GAAP. (emphasis in original)

Appellees’ 5th Cir. Br. at 20. The Secretary stated in that same

brief, at 21, that by the provisions of § 413.20(a) “the Secre-

tary did not mandate that a provider's ‘standard practices’ in

keeping its accounting books and records (which is, after all,

what GAAP is) should govern the amount of reimbursement

payable under the program.”

In other cases, contrary to the position argued by the

Secretary below, the Secretary has taken the position that the

GAAP provisions of § 413.20(a) require reimbursement (not

mere recordkeeping) in accordance with GAAP. See cases

cited in Amicus Br. of AHA at 14-16.

Thus, the Hospital believes that it is unnecessary and

inappropriate to grant certiorari in this case to afford the

Secretary the opportunity to establish legal propositions that

are directly contrary to positions she has adopted in other

cases, and, indeed, in this very case.

Il. The Rulemaking Question Furnishes No Basis For

Granting Certiorari.

The Secretary does not claim in the Guernsey Petition

that there is any conflict among the circuits on the rulernak-

ing issue. Indeed, all courts that have considered the

rulemaking issue in this context have held that PRM § 233 is

invalid as a substantive rule. There is no asserted conflict as

to the legal standard to be applied on this issue. Thus, the

rulemaking question presents no special reason for granting

the petition in either the Mother Frances or Guernsey cases.

It is important to clarify the relationship of the GAAP

argument to the rulemaking argument. The Secretary claims

that the Court’s conclusion that § 233 is an invalid substan-

tive rule would have “no force independent of the court's

determination that the Manual provision .

conflicts with a GAAP accounting requirement embodied in

Sections 413.20 and 413.24 of the regulations .... ” Guern.

Pet. at 22. Mother Frances Hospital expressly argued before

the Fifth Circuit that the “rulemaking arguments urged

throughout this brief are logically independent of the GAAP

and accrual accounting arguments” set forth therein. Appel-

lant’s 5th Cir. Br. at 27. The brief continued: “If it is true that

42 C.F.R. § 413.20 requires GAAP to be followed in determin-

ing reimbursement, as the Guernsey court held and as argued

below, PRM § 233 unquestionably represents a change from

that regulatory requirement. But even if 42 C.FR. § 413.20

did not require GAAP to be followed, PRM § 233 is still a

substantive rule... . ” Id.

This rulemaking argument was set forth explicitly as

Count Il of the Complaint, and was briefed as an indepen-

dent argument in the District Court and the Fifth Circuit. PI.

Summ. J. Br. at 26-33; Appellant’s 5th Cir. Br. at 19-31.

There is an important shift between the Secretary’s posi-

tion in the Guernsey Petition, and in the brief on the merits

submitted by the Secretary in that case. In the Guernsey

Petition, the cited case law discussed only the definitions of

“substantive” as opposed to “interpretative” rules. Guern.

Pet. at 23. The Secretary then argued that “Section 233 of the

PRM is plainly an interpretative rule.” Id. Although the

Petition mentioned that “statements of policy” could be

exempted from APA notice and comment requirements, id.,

the Secretary did not argue that § 233 constituted a “general

statement of policy.” In the Secretary’s brie‘ on the merits,

however, she now argues that PRM § 233 is a “general

statement of policy.” Guern. Pet. Br. at 35.

The argument that § 233 is a “general statement of

policy” was never advanced by the Administrator in his

decision, by the Secretary in the District Court in Mother

Frances, or by the Secretary in the Fifth Circuit. Counsel for

Mother Frances is informed that it was not argued in the

Sixth Circuit in Guernsey. It is a new argument, advanced for

the first time in this Court, after the Petition was granted.

Case law demonstrating that PRM § 233 cannot be consid-

ered a “general statement of policy” is contained in the

Mother Frances Amicus Brief at 19.

The Secretary contends that certiorari should be granted

in this case because “an agency’s interpretation of its own

regulations should be given ‘controlling weight’ unless it is

plainly erroneous or inconsistent with the language of the

regulation.” Guern. Pet. at 26. She complains of “judicial

misinterpretation” of her regulations. Id.

As is clear from the history of the Mother Frances case,

however, the Secretary has been at a loss even to identify the

regulations of which PRM § 233 is allegedly interpretative.

The Administrator’s decision identified only one regula-

tion of which PRM § 233 was supposedly interpretative. That

regulation is 42 C.F.R. § 413.9(b)(1). The Administrator’s

decision asserts that § 233 “is interpretative of 42 C.FR.

413.9” which, according to the Administrator, “requires pay-

ments to be based on ‘the actual cost of services rendered to

beneficiaries during the year.’” M. Fr. Pet. at 49a.!! As shown

at length in the Mother Frances Amicus Brief at 12-15,

§ 413.9(b)(1) has nothing to do with the issues in this case.

The argument by the Administrator depends entirely upon

quoting a small portion of that regulation out of context. The

regulation does not pertain to attribution of costs to particu-

lar years. Instead, § 413.9(b)(1) deals with retroactive adjust-

ments, which are used simply to reconcile the final cost

amount shown in the Medicare cost report to the amounts

paid on an interim basis during the year.

In the District Court, the Secretary specifically claimed,

at several places in her brief, that PRM § 233 was interpreta-

tive of § 413.9(b)(1). For example, the Secretary argued that

1! The Administrator cites the regulation as 42 C.F.R.

§ 413.9, but the portion quoted is from § 413.9(b)(1).

“ ... PRM § 233 is interpretive of defendant's policy that a

Medicare provider will be reimbursed only for the actual

cost of providing services to beneficiaries during the year as

required by 42 C.FR. § 413.9(b)(1).” Def. Summ. J. Br. at

28-29.12

In the Fifth Circuit Court of Appeals, the Hospital in its

opening brief demonstrated that § 413.9(b)(1) has nothing to

do with apportionment of costs among years, by an argument

similar to that set out in the Mother Frances Amicus Brief at

12-15. The Secretary responded by listing a series of five

different regulations of which PRM § 233 is allegedly inter-

pretative, while § 413.9(b)(1) disappeared from that list. See

Appellees’ 5th Cir. Br. at 38. Those regulations were:

e 42 CER. § 413.5(b)(6)

e 42 CER. § 413.9(b)(2) with a “see generally” citation to

“Subpart G.”

¢ 42 C.FR. § 413.130(a)(10)

e 42 C.FR. § 413.153(a)(1) and (b)(1)

e 42 CFR. §§ 413.5(a) and 413.913

In the Fifth Circuit, the Hospital pointed out that 42

C.F.R. § 413.130(a)(10) was not promulgated until more than

12 See also id. at2 (“ ... PRM § 233 properly interprets the

regulation requiring that a provider be reimbursed only for the

actual cost of health care services furnished to Medicare bene-

ficiaries during the year. See 42 C.F.R. § 413.9(b)(1)"); id. at 5

(“Medicare payments in a given cost year must be based on the

‘actual cost of services furnished to beneficiaries during the year.’

42 C.F.R. § 413.9(b)(1).” (emphasis in Def. Br.))

13 42 C.F.R. §§ 413.5(a) and 413.9 were cited for the proposi-

tion that “regulations require that reimbursable costs be related

to Medicare patient care.” Appellees’ Sth Cir. Br. at 38. The

subsection of 413.9 that stands for that proposition is 42 C.F.R.

§ 413.9(c)(3), which confirms that “amounts not related to

patient care” are not “allowable,” that is, are not reimbursable

costs.

eight years after PRM § 233 became effective. See Amicus Br.

of M. Fr. Hosp. at 16. In this Court, the Secretary now cites a

group of regulations similar to those relied upon in the Fifth

Circuit, although 42 C.F.R. § 413.130(a)(10) has been

dropped, and two different regulations (42 C.F.R.

§§ 413.130(a)(7) and (g)) have been added. 42 C.F.R.

§ 413.5(b)(6) was dropped as well. A reference to the Admin-

istrator’s reliance on 413.9(b)(1) has also reappeared. Pet. Br.

at 39.

Arguments showing that PRM § 233 is not interpretative

of any of these regulations were set forth at pages 12-19 of

the Amicus Brief of Mother Frances Hospital, and will not be

repeated here. The two newly added regulations, however,

deserve special mention. In addition to arguing that

§§ 413.130(a){7) and (g) add nothing to the analysis in this

case, Mother Frances pointed out that those two subsections

were also published after PRM § 233 was issued. Amicus Br.

of M. Fr. Hosp. at 16. Sections 413.130(a)(7) and (g) were not

published as an interim final rule until September 1, 1983.

See 48 Fed. Reg. 39752, 39809, 39810 (Sept. 1, 1983). This was

approximately four months after the issuance of PRM § 233,

and two months after its effective date. See Amicus Br. of M.

Fr. Hosp. at 16-17.

In her reply brief in the Guernsey case, the Secretary

responded that the September 1, 1983 Federal Register notice

publishing 42 C.F.R. §§ 413.130(a){7) and (g) “merely reor-

ganized and clarified the preexisting regulations that had

authorized reimbursement of capital-related costs, such as

interest and ‘other costs related to . . . capital expenditures.’

See 42 C.FR. 405.402(c), 405.419, 405.435 (1982).”!4 Guern.

Pet. Reply Br. at 9 n.5.

The September 1, 1983, Federal Register notice did noth-

ing of the kind.

4 At the time of publication of the notice, what is now 42

C.F.R. § 413.130 was originally codified as 42 C.F.R. § 405.414.

Section 405.419, designated as “Interest expense,” is

merely the predecessor to § 413.153, the current interest

regulation. The September 1, 1983 Federal Register notice did

not amend, change, or reorganize § 405.419 in any fashion.

Section 405.435, captioned “Nonallowable costs related

to certain capital expenditures,” related to state capital

expenditure review activities under Section 1122 of the Social

Security Act. Section 1122 created a voluntary capital expen-

diture review program in which states could participate, and

is not relevant to the issues in this appeal. This section was

not changed or amended by the September 1 Federal Register

notice.

Section 405.402(c) was misquoted by the Secretary. She

contends in her Reply Brief that § 405.402(c) authorized

reimbursement for “other costs related to . . . capital expen-

ditures.” Guern. Pet. Reply Br. at 9 n.5. However, the rele-

vant text of 405.402(c), after discussing certain items under

the principles of reimbursement, stated as follows:

However, costs such as depreciation, interest on

borrowed funds, a return on equity capital (in the

case of proprietary providers), and other costs

related to certain capital expenditures are subject to

the provisions of § 405.435, “Nonallowable costs

related to certain capital expenditures.”

In other words, § 405.402(c) did not “authorize reimburse-

ment” of capital expenditures as the Secretary asserts, but

merely noted that certain capital expenditures were subject

to the Section 1122 state review program as referenced in

§ 405.435, discussed above.

Plainly, the September 1, 1983, Federal Register notice did

not “reorganize” or “clarify” any of these regulations. That

fact can be easily ascertained by examining the text of

§ 405.414 in the September 1, 1983 notice, beginning at 48

Fed. Reg. 39809. Similarly, a comparison of the 1982 and 1983

editions of the Code of Federal Regulations reveals that all

three regulations cited by the Secretary as being “reor-

ganized or clarified” by § 405.414 were unaffected by that

new regulation. |

The Secretary’s complaints about the aileged “disre-

gard” by the Court of Appeals of her interpretation of her

own regulations, Guern. Pet. at 26, are seriously undermined

by her shifts in position as to which regulations § 233

allegedly interprets, and her continued miscitation of regula-

tions that were not even in effect at the time § 233 was

issued.

III. The Substantial Evidence Question Does Not Justify

Granting The Petition.

Because the Secretary did not include a “substantial

evidence” issue in the “Questions Presented” in this case,

there would appear to be no reason to grant certiorari based

on that issue.

As noted above, the Hospital has presented a “substan-

tial evidence” challenge to the decision of the Administrator

throughout this lawsuit.'° Count I of the Hospital’s Com-

plaint stated that “The Decision and the findings and conclu-

sions therein are unlawful and should be set aside pursuant

to 5 U.S.C. § 706 because they are arbitrary, capricious, an

abuse of discretion or otherwise not in accordance with law;

are [in violation of other APA provisions]; and are unsup-

ported by substantial evidence.”

The substantial evidence argument was presented to the

District Court in the Hospital’s brief. See Pl. Summ. J. Br. at

15 Mother Frances Hospital is not attempting to distance

itself from the Guernsey case by outlining the substantial evi-

dence issue. The Hospital believes that in neither case is the

Administrator’s decision supported by substantial evidence.

The evidence has been summarized here briefly to acquaint the

Court with this issue for purposes of making an accurate pro-

cedural disposition of the case.

13 (citing substantial evidence test and cases); and 22-26

(discussing and citing testimony in the record). It was also

explicitly briefed in the Fifth Circuit, as Issue No. 3 in the

“Statement of the Issues”. Appellant’s 5th Cir. Br. at 3. This

issue was not discussed by the Fifth Circuit in its opinion,

presumably because the resolution of the first two issues (the

GAAP and the rulemaking issues) in favor of Mother

Frances Hospital made consideration of the substantial evi-

dence issue unnecessary.

The record in the Mother Frances case consisted of

stipulated testimony by four «witnesses from three other

cases. The three cases were Guernsey, St. John’s, and Mercy.

The testimony of expert witness Douglas Langenfeld on

behalf of the provider in Guernsey was included in the record

in Mother Frances, and is, of course, part of the record in

Guernsey. Expert testimony on behalf of the provider in St.

John’s and Mercy, by John Valorz and Chris Corrie, also was

stipulated as part of the Mother Frances record. Stipulated

testimony on behalf of the intermediary was provided by

Wilson Leong, from the St. John’s case.

Some of the “substantial evidence” in the Guernsey case

was set forth in the amicus brief filed by Mother Frances

Hospital in that case. Amicus Br. of M. Fr. Hosp. at 26-28.

This evidence is pertinent to the Administrator's finding that

the loss on defeasance in “economic reality” relates to future

years after the defeasance. The evidence in the Mother

Frances record included the following:

e No cost is incurred by the provider in periods after the

refunding. Admin. Rec. 467-68 (Valorz); 679, 705 (Leong).

e “There is no future interest cost to the provider” after

defeasance. Admin. Rec. 703 (Leong).

e The loss on defeasance does not relate to any future

period. Admin. Rec. 559-60, 578 (Langenfeld).

e No future costs related to the defeasance are reflected on

the provider’s books, such costs are not a liability of the

provider, and interest costs are not being incurred on the old

debt by the provider in future years. Admin. Rec. 703, 705

(Leong). ?

e Providers are no longer liable for repayment of the old

debt after an advance refunding transaction. Admin. Rec.

467, 473 (Valorz); 506-07, 516 (Langenfeld); 595-96 (Corrie);

690 (Leong).

e The provider no longer makes any payment relating to

the refunded debt after the defeasance. Admin. Rec. 669

(Leong).

e The old debt ceases to exist for hospital purposes follow-

ing a refunding. Admin. Rec. 506, 514 (Langenfeld).

e If the loss on defeasance is related to any year other than

the year in which it was incurred, the loss relates to past

periods and not future periods. Admin. Rec. 504 (Langen-

feld); 603-04 (Corrie).

e The loss on advance refunding is a belated recognition of

past costs upon extinguishment of the old bonds, specifically,

the difference between the net carrying cost of the old bonds

and the price necessary to reacquire the bonds. Admin. Rec.

499, 505, 510-11 (Langenfeld); 603-04, 611 (Corrie).

e Mr. Leong, the Intermediary’s own witness, testified that

he would look to GAAP [rather than 42 C.FR. § 413.153, the

interest regulation] in considering the timing of reimburse-

ment. Admin. Rec. 663 (Leong).

e After contending that “the actuality of the situation is the

debt has not been liquidated,” Mr. Leong admitted that there

is no basis in regulation for this assertion. Admin. Rec. 672

(Leong).

This testimony thus served to show that the “economic

reality” argument — in which the loss on defeasance is said to

relate to future years — had absolutely no basis in the admin-

istrative record. Similarly, the “cross-subsidization” argu-

ment advanced by the Administrator depends upon a

finding that costs are attributable “in economic reality” to

future years, M. Fr. Pet. at 49a, 54a, a proposition that is

overwhelmingly refuted by the administrative record.

In the Guernsey appeal, the Secretary admits that the

issue of the periods to which the loss on defeasance relates is

a factual matter. See Guernsey Br. at 16 (“[t]he Secretary’s

conclusion that the costs at issue here must be apportioned

over several periods is entirely justified, both as a program-

matic and as a factual matter... ”); id. at 35 (“[b]oth as a

programmatic matter for Medicare reimbursement deter-

minations and as a factual matter in this case, the Secretary’s

conclusion that respondent's ‘loss’ on defeasance relates to

more than one accounting period [is allegedly justified]”). In

the Mother Frances case, the Administrator’s decision did not

cite to testimony of record to support the secretary’s “eco-

nomic reality” contention. In neither the District Court nor

the Court of Appeals did the Secretary undertake to support

the findings in the Administrator’s decision by making a

substantial evidence argument based upon citations to the

record.!©

CONCLUSION

There is no conflict among the circuits or other reason

that would make it necessary to grant certiorari in this

case.'7 Accordingly, certiorari should be denied in Mother

6 A few citations to the record appeared in the briefing

before the District Court and Court of Appeals, but never as

part of a substantial evidence argument advanced by the Secre-

tary.

17 The advance refunding issue is unlikely to be of

“continuing importance,” as the Secretary asserts. Guern. Pet. at

25, n.14. Because of the transition to the capital PPS system,

Guern. Pet. at 4,n.1, only a small percentage of hospitals or their

facilities are being reimbursed on a “reasonable cost” basis after

October 1, 1991. These consist principally of psychiatric,

Frances, and the Hospital respectfully suggests that certiorari

may have been improvidently granted in Guernsey as well.

Should the Court decide Guernsey on its merits, the

Hospital believes that the following dispositions would be

appropriate for the instant case. If the Court finds in favor of

Guernsey Memorial Hospital on either of the two questions

expressly presented in that case (the GAAP issue or the

rulemaking issue) and thus affirms the Sixth Circuit’s Guer-

nsey decision, the instant case would be governed by such

rulings and certiorari should be denied in this case. If the

Court finds against Guernsey Memorial Hospital on both

issues, certiorari should be granted in the instant case and

the case should be remanded to the Fifth Circuit for further

consideration in light of Guernsey, with leave for the lower

courts to consider the substantial evidence issue. Should the

Court reach the substantial evidence issue in Guernsey, the

Hospital also believes that granting certiorari and remanding

the Mother Frances case would be appropriate due to the fact

rehabilitation, and long term care facilities. 42 C.F.R.

§§ 412.22-412.30. Thus, for general acute care hospitals, losses

from advance refundings would rarely be appealed for cost

years after 1990. Cost reports must normally be settled within

fifteen months after the close of the hospital’s fiscal year. See 42

C.F.R. § 413.24(f)(2); PRM § 2905.1. Therefore, most of the

appeals likely to raise this issue have already been filed, and

many of them have been resolved. Instead of bringing certainty

to an uncertain area, granting of certiorari and reversal of

Mother Frances and Guernsey would disrupt the unanimous line

of decisions on advance refundings and cause determinations in

favor of dozens of hospitals to be overturned. See Amicus Br. of

Hospitals Participating in St. John Hospital et al. v. Shalala, 1-4 (28

hospitals in St. John appeal alone). Such a result is undesirable

when new advance refunding cases are unlikely to arise to any

significant extent in the future, most of the cases have either

been decided or are well into the process of appeal and judicial

review, and the lower courts are unanimous in their treatment of

these cases.

that there are different administrative records in the two

cases.

Respectfully submitted,

FucsriGHt & Jaworski L.L.P.

Dan M. Peterson *

THomas E. Dowbe..

FutsricHt & Jaworski L.L.P.

801 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2604

(202) 662-0200

*Counsel of Record

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.