# Opposition Brief — Shalala v. Mother Frances Hospital

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1995
- **Citation:** 514 U.S. 1011

## Text

In The

Supreme Court of the United States
October Term, 1994 ¢

e

DONNA E. SHALALA, SECRETARY OF HEALTH
AND HUMAN SERVICES,

Petitioner,

MOTHER FRANCES HOSPITAL OF TYLER, TEXAS,
Respondent.

4

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

S|

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)?

G2

ii
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
EE venkabencasad ss dckevsnsbhedns b¥ 006568 1
BeApemeeees OF} THE CABG... cccccccnscccpecesecs 2
I. Comparison Of Issues In This Case And Guer-
MOOT occ avecncvencuseeesasevecvecescccevevess 3
Il. Disagreements With The “Statement” In The
PG baduecenducds woe dcnthetiesoesnetees 5
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

SEND 5.0 4.460% 060060 0ies60ee6 chéevedeues ses 28

1V

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
S USL. 8 VGG:. cdcccctcsscausevssseseeee im
S USL. © FORME)... ccc ccctcscnvucsecesuceesentuunt 3
42 USA. © 1995aIV MINA) 0 vcs vvcevtvasssenececes 6, 17
42 UGC. & IDURD ooo ccccovaccisucesevtesudesiensens 6
42 UGK. B TRG. oc oc ccatVavdsexcctdessssmesoueens 16
42 USL. § TRGGORE)...ccccccncccciiosencisncoewncuss 3
42 USS. © IAG ORED occ cs ccs avcvucvensseyeteucees 3, 16

£2 CER. & BGM occccvsvacecianswsnnvenceats 23, 24

Vi

TABLE OF AUTHORITIES - Continued

Page(s)
42 CBR. © GOB AGS occ cccce cccdsouvesepeeusuneacsers 13
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
42 C.BR. & G13. 19GaMZ)... cc osnvccvetewsrsccssuveese 23
42 C.E.R. §& 423. 190faM IG) ..0 ccc snccsccnvcocsvesss 22, 23
42 C.RR. & G13. 190fa)... ccesccccnnsccscnscsesesseuse ae
42 CBR. & G2S.155 22. cove sevweccsevesasvesbasen 24, 27
42 C.R.R. & GIS. USSMaMT) . 0. cvcccccccccvccvecssessess 22
42 CER. & GIS. 1SMOME) 2 6 vesicccveccscctscvescncnss me
48 Fed. Reg. 39752 (Sept. 1, 1983).............-eeees 23

ee

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
De Ge PO Gr oa vs cancddweveccecceunedteasbasevsuevee ii
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

1

2

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.

3
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.

4

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.

5

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

6

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.

7

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

8

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.

9

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

10

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).

11

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.

12

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.

13

“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.

14

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.

15

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.

16

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.

17

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

18

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

19

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

20

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

21

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).

22

“ ... 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.

23

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.

24

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

25

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.

26

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

27

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

28

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,

29

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.

30

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_1211%3A2. Public record. Not legal advice.