# Petition for Writ of Certiorari — Humana Inc. v. Bowen

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1986
- **Citation:** 474 U.S. 1055

## Text

Supreme Court, U.S,
FILED

-431 ) SEP 14 1995

0. JOSEPH F. SPANIOL, JR.

85

Lowe

IN THE
Supreme Court of the United States

OCTOBER TERM, 1985

HuMANA INC. ef al,
Petitioners,
V.

MARGARET M. HECKLER, Secretary,
Department of Health and Human Services,
Respondent

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA

THOMAS H. BROCK

CASSON, CALLIGARO & MUTRYN
900 Watergate Office Building
2600 Virginia Avenue, N.W.
Washington, D.C. 20037

(202) 462-3200

Counsel for Petitioners

ali IY

i
QUESTION PRESENTED

Whether Congress, in providing for reimbursement to
hospitals for their “direct and indirect” costs of furnishing
hospital services to Medicare beneficiaries, see 42 U.S.C.
§ 1395x(v)(1)(A), intended that investor-owned hospitals be
reimbursed for their actual costs of attracting and maintaining
equity capital used in the provision of patient care.

li
PARTIES TO THE PROCEEDING

In addition to petitioner Humana Inc., the other parties
appearing as appellants in the proceeding below were: Humana
of Kentucky, Inc., Humana of Alabama, Inc., Humana Medical
Corporation, Humana of Tennessee, Inc., Humana of Texas,
Inc., Beaumont Hospital, Inc., Humana of Louisiana, Inc.,
Winnfield Convalescent Home, Inc., Many Clinic & Hospital,
Inc., Brentwood Hospital, Inc., Jefferson Hospital, Inc., Hu-
mana of South Carolina, Inc., Humana of Virginia., Inc.,
Humana of West Virginia, Inc., Humana of North Carolina,
Inc., Humana of Florida, Inc., Humana of Illinois, Inc., Hu-
mana of Mississippi, Inc., Humana of Aurora, liic., Humana of
New Mexico, Inc., Humana of Kansas, Inc., and Humana of
Utah, Inc. All of these additional corporations are wholly-
owned subsidiaries of petitioner Humana Inc.*

Appellee below and Respondent here is Margaret M.
Heckler, in her official capacity as Secretary of the United
States Department of Health and Human Services.

* Humana Inc. is a publicly-traded company with stock traded on the
lew York Stock Exchange. In addition to the other petitioners, Humana Inc.
does business through a number of other wholly-owned subsidiaries.

ill

TABLE OF CONTENTS

Page

QUES TIONS PRESEN TED ........ccccocccccscssoressssscesenseccecess i
PARTIES TO THE PROCEEDING .......................ccseeeeees i
i. nascenensqeipilinennentnane l
FI hicdasinieiitctiditiinsichaseiniitnliinsasanpenaansvnnesuteinasenvess 2
STATUTES AND REGULATIONS INVOLVED......... 2
STATEMENT OF THE CASE .................cccccccssssccscesssscees 4

iis os sncuttponbbbanneend 6

Ba. UE FIER inns ccc ccciccesscecccsrecs 9
REASONS FOR GRANTING THE WRIT.................... 11

I. THE DECISION BELOW IGNORES ESTAB-
LISHED PRINCIPLES WHICH HAVE HIS-
TORICALLY RECOGNIZED THE ACTUAL
COSTS OF CAPITAL AS A COST OF GOODS
PEED AE FP se senrerninnsceenggpacerstnnincotnennerornansees ll

Il. THE DECISION BELOW IGNORES THE
CONGRESSIONAL MANDATE THAT IN-
VESTOR-OWNED HOSPITALS BE REIM-
BURSED FOR THEIR DIRECT AND IN-
DIRECT COSTS OF PATIENT CARE .............. 13

A. Congress Intended That Proprietary Costs
Be Reimbursed As “Direct And Indirect”
Costs Under Medicare ....................0......20000 13

B. The 1966 Amendment Establishing A For-
mula For Determining A Return On
Equity To Nursing Homes Is Irrelevant To
I OI bic diciniinnntchindihiakdiciesinecateniene 16

FT icinaticvesneutstiberabennssanecireinavinaniacinesedactoes 17

iv

TABLE OF AUTHORITIES*

CASES:

American Medical International v. Secretary, 466 F.
Supp. at 613 (D.D.C. 1979), aff'd 677 F.2d 118
ER a BB siicsiitninsineitenernciiaiaiiiibceianecnitbacciio

Bluefield Waterworks & Improvement Co. v. Public
Service Commission, 262 U.S. 679 (1922) ............++.

Chicago v. FPC, 385 F.2d 629 (D.C. Cir. 1967), cert.
Rented, Fae TF ee 6 AIRED entticsetinttinrineceninee

Federal Power Commission v. Natural Gas Co., 315
FR ey BN | | | 5 BR eemonr roneres Fae eet y eee ot een venN

Federal Power Commission v. United Gas Pipeline
Ca; FOB AEE: ZEe ERR D citeeniensnrweninitantianetianinnnnces

Feres v. United States, 340 U.S. 135 (1950)................

Humana Inc., PRRB Dec. No. 81-D12 (Feb. 5,
OIE E Pedal Seti teticeacncinbodidiinaninickesncdachevcnnissiociaiitaleepsabiatinanen

SDS ) ao clinic scccctncieistinnctiasictésienssecteinencbesbavbenuienveorecens

Humana of South Carolina, Inc. v. Califano, 590
eB Peck Eo | SOR apt ae hess

Smyth v. Ames, 169 U.S. 467 (1898 3 occ eccecteeeeeeeeee
Willcox v. Consolidated Gas Co., 212 U.S. 19 (1908).

STATUTES:
4&8 Tt fp SERIO SEES oan sennerinare caaihiale
Oe Ue SD vetaeriinicancediecnmioninin
42 UE ie ee eB i ih tdiiin
SE er ED dias soccnctevsateroesnsenaciaseeereruints
Ce atresia disinterest
GE OE Oe Se 6 IRD censecesstcncecennanenttientnde
ght So e.g EB, | Ree cmarmnneeerneen
Oe ee i cc teiethih ce tccininensaksnsctsinincasinsvahientabintinds
ek te GS Biiictcinnsvccccheeresendnastansatetietiits

REGULATIONS:
a Oe Ica icacicsicsancaaritsidienianermmeabeniniands

id

en

MISCELLANEOUS:
48 Fed. Reg. 39811 (Sept. 1, 1983)...
112 Cong. Rec. 23644 (Sept. 22, 1966) 0.0.00...
Public Law No. 89-713, §7, 80 Stat. 1111
fg MRIS RSE Tek
Reimbursement Guidelines for Medicare, Hear-
ing Before the Senate Committee on Finance,
89th Cong. 2d. Sess. (May 25, 1966)..........00....

Page

IN THE

SUPREME COURT OF THE UNITED STATES

OctTosBer TERM, 1985

No.

HuMANA INC. ef ai.,
Petitioners,
Vv.

MarGarReT M. HECKLER, Secretary,
Department of Health and Human Services,

Respondent

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA

Humana Inc. ef ai. petition for a writ of certioran to review
the judgment and opinion of the United States Court of
Appeals for the District of Columbia in this case.

OPINION BELOW

The per curiam opinion of the United States Court of
Appeals for the District of Columbia ( App., la-22a) is reported
as Humana Inc. v. Heckler, 758 F.2d 696 (D.C. Cir. 1985). On
Apnil 26, 1985, the Court, sua sponte, issued an amendment to
the decisien (App., 23a-24a). The August 19, 1982 memo-
randum opinion of the district court is unreported and is
reproduced in the Appendix. (App., 25a-37a).

2

JURISDICTION

The judgment of the Court of Appeals was issued on April
2, 1985 as amended, April 26, 1985. See Appendix K. A timely
petition for rehearing was denied on June 18, 1985. See
Appendix L. This petition for certiorari is being filed within
ninety (90) days of that date. This Court’s jurisdiction is being
invoked under 28 U.S.C. § 1254(1).

STATUTES AND REGULATIONS INVOLVED

1. Tithe XVIII of the Social Secunty Act requires the
Federal Hospital Insurance Trust Fund to reimburse hospitals
for the “reasonable costs” of services provided to Medicare
patients. 42 U.S.C. § 1395(b)( 1); 42 U.S.C. § 1395g(a). The
Act defines “reasonable costs” as follows (42 U.S.C.
§ 1395x(v)(1)(A):

The reasonable cost of any services shall be the cost
actually incurred * * * and shall be determined in
accordance with regulations establishing the method
of methods to be used, and the items to be included,
in determining such costs for various types or classes
of institutions, agencies, and services***. Such
regulations shall (i) take into account both direct and
indirect costs of providers of services (excluding
therefrom any such cests, including standby costs,
which are determined in accordance with regulations
to be unnecessary in the efficient delivery of services
covered by the insurance programs established under
this subchapter) in order that, under the methods of
determining costs, the necessary costs of efficiently
delivering covered services to individuals covered by
the insurance programs established by this subchap-
ter will not be borne by individuals not so covered,
and the costs with respect to individuals not so
covered will not be borne by such insurance
programs, and (ii) provide for the making of suitable
retroactive corrective adjustments where, for a

3

provider of services for any fiscal period, the aggre-
gate reimbursement produced by the methods of
determining costs proves to be either inadequate or
excessive.

2. In 1966, Coiugress amended the Medicare Act to specify
the method to be used to calculate the rate of return on equity
capital to be paid to nursing homes ( Public Law No. 89-713, 7,
80 Stat. L111 (November 2, 1966), codified at 42 U.S.C.
§ 1395x(v)(1)(B):

Such regulations in the case of extended care services

furnished by proprietary facilities shall include provi-

sion for specific recognition of a reasonable return on
equity capital, including necessary working capital,
invested in the facility and used in the furnishing of
such services, in lieu of other allowances to the extent
that they reflect similar items. The rate of return
recognized pursuant to the preceding sentence for
determining the reasonable cost of any services fur-
nished in any fiscal period shall not exceed one and
one-half times the average of the rates of interest, for
each of the months any part of which is included in
such fiscal period, on obligations issued for purchase
by the Federal Hospital Insurance Trust Fund.

3. The Secretary of Health and Human Services has
promulgated regulations to govern the return on equity payable
under Medicare both to hospitals and nursing homes (42
C.F.R. § 405.429(a)(1)-(2)):

(1) A reasonable return on equity capita! in-
vested ard used in the provision of patient care is
allowable as an element of the reasonable cost of
covered services furnished to beneficiaries by pro-
prietary providers. The amount allowable on an
annual basis is determined by applying to the provid-
er’s equity capital a percentage equal to one and one-
half times the average of the rates of interest on
special issues of public debt obligations issued to the
Federal Hospital Insurance Trust Fund for each of
the months during the provider’s reporting period or
portion thereof covered under the program.

4

(2) For the purposes of this subpart, the term
“propmetary providers” is intended to distinguish
providers, whether sole proprietorships, partnerships,
or corporations, that are organized and operated with
the expectation of earning profit for the owners, from
other providers that are organized and operated on a
nonprofit basis.

STATEMENT OF THE CASE

Few sectors of the American economy have experienced
the degree of government intervention in the marketplace that
has been visited upon the acute care hospital industry since
1965 after passage of the Medicare Act. In the past two
decades, nevertheless, this Court has not interpreted the
substantive reimbursement provisions of the Act as they relate
to hospitals. In the absence of guidance from this Court, the
Secretary of Health and Human Services has implemented the
Medicare Act on the assumption that she is writing on a clean
slate, and therefore has unlimited discretion to define the rights
of investor-owned companies that operate hospitals providing
services to Medicare patients. In implementing the Program,
however, the Secretary has acted contrary to both longstanding
precedent of this Court and congressional intent underlying the
Act by refusing to compensate investor-owned hospitals for the
actual costs associated with equity capital invested and used in
furnishing medical care to Medicare patients.

During the past 100 years the Supreme Court consistently
has enforced the basic principle that private enterprise is
entitled to compensation for their capital costs, including both
the return on equity that must be paid to shareholders for use of
their investment capital and the attendant income tax liability
incurred by the corporation in generating that return. The
Court initially relied on the constitutional prohibition of a
taking of private property for public use without just com-
pensation to protect public utilities subject to state or federal
ratemaking programs. Subsequently, the Court concluded that

_—s

5

statutes prescribing compensation levels to investor-owned
companies other than public utilities were “coextensive” with
the Constitution’s “just compensation” standard, thus making it
unnecessary to invoke the constitutional provision directly.

The merger of just compensation standards and statutory
requirements is best reflected in the Court’s decision in Federal
Power Commission v. Natural Gas Co., 315 U.S. 575 (1942).
There the Court concluded that payment levels to natural gas
producers, established by agency regulation pursuant to the
statutory program, had to satisfy the constitutional principle of
just compensation. 315 U.S. at 586. Thus, natural gas
producers were entitled by statute to just compensation, in-
cluding the costs of attracting and maintaining equity capital,
even though their sales of natural gas under that statute were
entirely voluntary and therefore the constitutional protection
otherwise available to public utilities was not directly available
to them. ;

Humana Inc. is an investor-owned corporation that, with
its wholly-owned subsidiaries, furnishes hospital services to
individuals eligible for assistai ce under the Medicare Act.
Under the Act, Congress specified that hospitals are entitled to
reimbursement for their “direct and indirect costs” actually
incurred in furnishing hospital services to eligible beneficiaries.
42 U.S.C. § 1395x(v)(1)(A). In this litigation, Humana seeks
to vindicate its mght as an investor-owned corporation to
compensation for its actual costs of private equity capital which
it has employed in furnishing patient care, consistent with
congressional intent and with the protections afforded every
other investor-owned company in every other industry under
similar statutory control.

In the decision below, the United States Court of Appeals
for the District of Columbia Circuit ignored historic precedent
and rejected Humana’s claim that the cost of capital was a cost
of patient care. Indeed, the decision in itself is internally
inconsistent on the fundamental issue which Humana must ask
the Court to address. Citing the provisions of 4z U.S.C.
§ 139Sx(v)(1)(A) which require reimbursement of the “direct
and indirect costs” of patient care, the court of appeals

6

recognized that “Indirect costs include such items as return
on equity capital....” ' Nevertheless, the Humana court
concluded that a prior decision in its circuit “preclude{d] a
finding that return on equity is payable’ under
§ 1395x(v)(1)(A)....”2 As a result of this decision, Hu-
mana was not reimbursed for its actual costs of furnishing
patient care to Medicare patients, and it was denied the
procedural protections established by the Medicare Act to
govern disputes regarding reimbursement for “costs.”

The reasoning offered by the court of appeals to justify its
conciusion cannot withstand scrutiny under precedent of this
Court. Further, the court of appeals ignored the legislative
history of the Medicare Act that demonstrates Congress’
unequivocal intention that the actual capital costs of investor-
owned hospitals be treated as “costs” of patient care. There-
fore, Humana respectfully petitions the Court for a writ of
certiorari to the Court of Appeals for the District of Columbia
Circuit to review the decision below.

A. Procedural History.

1. During its fiscal years ending 1973 through 1977,
Humana furnished acute care hospital services to patients
eligible for benefits under the Medicare Program. Consistent
with the Medicare Act and their contracts with the Secretary,
Humana’s hospitals filed annual cost reports and successive
claims for payment at the close of each fiscal year. See 42
U.S.C. § 1395h; § 139500. Upon receiving these reports the
Secretary’s “fiscal intermediary,” an insurance company such as
Blue Cross which contracts with the Secretary to administer the
Program, audited Humana’s cost reports and rendered an initial
determination as to the amount of reimbursement to which it
believed Humana was entitled.

2. In the cost reports filed with the intermediaries Humana
included claims for reimbursement for three categories of costs

' App., 3a.
2 App., |4a, citing American Medical International v. Secretary, 466 F.
Supp. at 613 (D.D.C. 1979), aff'd, 677 F.2d 118 (D.C. Cir. 1981).

“<— eames

-

it incurred by reason of its status as a proprietary, investor-
owned organization. These “proprietary” costs include:

(1) Return On Equity. To attract and maintain equity
capital, Humana must earn a return on the equity capital of
the company, which is either distributed to shareholders as
a return on their investment or reinvested in the company.

(2) Income Taxes. The federal and state income
taxes levied on Humana’s return on equity reduce the total
earnings available to distribute to Humana’s shareholders.
Because shareholders make investment decisions on the
basis of the after-tax earnings of the company—i.e., the
total amount available for distribution to share-
holders—the after-tax return on equity earned by Humana
must be competitive in the capital markets from which it
obtains investment capital.

(3, Stock Maintenance Costs. Humana directly incurs
transactional costs to gain access to equity capital markets,
from which it obtains private investment capital. These
expenses include accounting and other costs related to
Securities and Exchange Commission filings, stock transfer
fees, and the costs of shareholder meetings and annual
reports.

Upon completing its audit of Humana’s cost reports, the fiscal
intermediaries denied in whole or in part Humana’s claims for
reimbursement of each of these costs.4

3 Humana sought reimbursement for Medicare’s share of Humana’s
stock maintenance costs and federal and state income tax liability. In
addition, Humana so-:ght Medicare reimbursement for Humana’s actual,
after-tax cost of attracting and maintaining equity capital invested in the
facility. While the Program reimburses investor-owned hospitals for a return
on equity capital at a rate established by a regulatory formula, see 42 C.F.R.
§ 405.429, Humana contends that the rate prescribed by regulation is illegal
because it yields an after-tax rate far below Humana’s actual cost of capital.
See infra at 16-17.

* Humana’s claims for reimbursement of Medicare’s share of its stock
maintenance costs and federal and state income taxes were denied outright.
Humana’s claims for reimbursement of its actual costs of equity capital were
denied to the extent they exceeded the amount permitted under 42 C.F.R.
§ 405.429. See Appendices D-J.

8

3. Pursuant to the Act, Humana appealed the inter-
mediary’s determination to the Provider Reimbursement Re-
view Board, an adjudicative panel within the Department of
Health and Human Services. See 42 U.S.C. § 139500.
Although the Board granted Humana’s claims for some of these
costs,5 the Secretary of Heaith and Human Services, acting
through the Administrator of the Health Care Financing Ad-
ministration, reversed those decisions and denied all of Hu-
mana’s claims. See 42 U.S.C. § 139500(f).

4. Exercising its mght to judicial review of the agency
decision, see 42 U.S.C. § 139500(f), Humana filed complaints
in the United States District Court for the District of Columbia
seeking review of each of the decisions of the Board (or the
Administrator) denying Humana’s claims for the five fiscal
years. In an unreported memorandum decision dated August
19, 1982, the district court entered summary judgment against
Humana on all of the claims for reimbursement of proprietary
costs. App., 25a-37a. On appeal, the United States Court of
Appeals for the District of Columbia Circuit affirmed the
district court decision. Humana Inc. v. Heckler, 758 F.2d 696
(D.C. Cir. 1985); App., la-24a.7

5 See 42 U.S.C. § 139500(f)(1). The Board upheld Humana’s claims
for stock maintenance costs for all fiscal years at issue and Humana’s claims
for income taxes in its fiscal years ending 1976 and 1977 to the extent those
taxes are attributable to the return on equity paid to Humana. See Humana
Inc., PRRB Dec. No. 81-D12 (Feb. 5, 1981) (App., Appendix D).

6 The fifth lawsuit, No. 82-1989, involves the separately-filed claims of
one of the Humana subsidiaries, Humana of South Carolina, Inc. In that
action the individual subsidiary challenged the legality of 42 C.F.R. § 405.429
without first presenting its claims to the Provider Reimbursement Review
Board. After it was determined that the district court did not have jurisdiction
to hear those claims until after they had been considered by the Board, see
Humana of South Carolina, Inc. v. Califano, 590 F 2d 1070 (D.C. Cir. 1978),
the case was consolidated with the others then pending in the district court.
See App., 4a n.7.

7 Throughout the administrative and judicial process, twelve of Hu-
mana’s hospitals also had asserted distinct claims for reimbursement of other
capital costs denominated by the court below as “stock acquisition costs.”
The Court of Appeals for the District of Columbia Circuit vacated the district
court decision denying Humana’s claims in the case of eight of the twelve
hospitals asserting stock acquisition cost claims. See App., 14a-22a. Humana
does not seek review of that portion of the District of Columbia Circuit’s
decision.

B. Statutory Framework.

1. This case calls for an interpretation of two sections of
the Medicare Act. The first provision, 42 U.S.C.
§ 1395x(v)(1)(A), which was part of the Medicare Act as
originally enacted in 1965, requires the Secretary to reimburse
hospitals for their “direct and indirect costs” of furnishing
hospital services. Humana claims that its capital costs are
indirect costs of patient care, and that reimbursement for its
capital costs must comply with the requirements of this section.

Endorsement of Humana’s interpretation of the statute has
two implications. First, Humana would be entitled to
reimbursement for its actual cost of obtaining equity capital,
which the District of Columbia Circuit recognized as an “in-
direct cost” of patient care. Second, Humana would be entitled
to an individualized determination of its actual costs of equity
capital and, if the methods adopted by the Secretary in
regulations to calculate payments to Humana produced
reimbursement that is inadequate, the Secretary would be
required to make “suitable retroactive corrective adjust-
ments” for each fiscal year at issue. See 42 U.S.C.
§ 1395x(v)(1)(A)(i).

2. The Court of Appeals, however, sustained the Secre-
tary’s contention that proprietary costs are not indirect costs of
patient care.® This finding directly contradicts the Secretary’s
own regulations, which during ail relevant periods specified
that:

... a reasonable return on equity capital invested and used
in the provision of patient care is allowable as an element
of the reasonable cost of covered services furnished to
beneficiaries by proprietary providers.

8 See App., 8a-9a (stock maintenance costs ); id. 9a-12a (income taxes);
id. |2a-14a (return on equity capital ).

9 E.g., 20 C.F.R. § 405.429 (1976). The regulations regarding a return
on equity capital were amended in 1983 to reflect the implementation by
Congress of a new reimbursement program which included changes in
reimbursement levels for capital costs of proprietary hospitals. 48 Fed. Reg.
39811 (Sept. 1, 1983), codified at 42 C.F.R. § 405.429 (1984).

10

Similarly, as noted above, this finding is directly contrary to the
Humana court’s stated understanding that “Indirect costs in-
clude such items as return on equity capital....” App., 3a.

3. In reaching this conclusion, the Court agreed with the
Secretary’s contention that Humana’s hospitals could claim a
return on equity only as prescribed by a different section of the
Medicare Act that has absolutely nothing to do with investor-
owned hospitals.1° This provision of the Medicare Act, which
is the second section of the Act that must be evaluated in this
case, was adopted in 1966 to require the Secretary to guarantee
' nursing homes a formula-derived rate of return on equity
capital. See 42 U.S.C. § 1395x(v)(1)(B).11

4. Upon concluding that the claims of Humana’s hospitals
had to be evaluated under the 1966 nursing home amendment,
the court of appeals rejected Humana’s contention that it was
entitled to the protections of § 1395x(v)(1)(A). First, the
court reasoned that Humana was not entitled to reimbursement
for its actual costs of attracting and maintaining equity capital,
but instead was limited to the far lower rate of return on equity
capital established under the 1966 nursing home amendment.
App., 13a. Second, the court rejected Humana’s claim that it
was entitled to an individualized determination of its actual
amount of proprietary costs it incurred, because the right to that
adjudication does not exist for disputes over reimbursement
levels for payments under the 1966 nursing home amendment,
but instead extends only to disputes over reimbursement levels
for “costs.” App., 14a.

10 See App., 14a.
11 See infra at 16-17.

11
REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW IGNORES ESTABLISHED
PRINCIPLES WHICH HAVE HISTORICALLY REC-
OGNIZED THE ACTUAL COSTS OF CAPITAL AS A
COST OF GOODS AND SERVICES

In producing goods or supplying services, the expenses
incurred by an investor-owned corporation associated with its
proprietary status and the attraction of private investment
capital historically have been recognized as “costs” for which
the corporation must be reimbursed. This established principle
is best reflected in this Court’s decision in Federal Power
Commission v. Natural Gas Co., 315 U.S. 575 (1942). There, in
defining the statutory term “lowest reasonable rates” under the
Natural Gas Act, see 15 U.S.C. § 717, this Court concluded that
the “Congressional standard coincides with that of the Con-
stitution.” 315 U.S. at 586.

Indeed, any other construction would have been non-
sensical: Congress knew that it could not induce the voluntary
sale of adequate supplies of natural gas by prescribing statutory
payments that by definition were confiscatory. Similarly,
Congress could not have expected the participation of investor-
owned hospitals in Medicare without compensating them for
the costs of capital.

The just compensation principles, which have been devel-
oped by this Court in nearly a century of ratemaking litigation
under a variety of regulatory schemes, clearly established the
right to compensation for the costs of capital. For example, this
Court has held that “what the company is entitled to ask is a
fair return upon the value of that which it employs for the
public convenience.” Smyth v. Ames, 169 U.S. 467, 547 (1898).
“Rates which are not sufficient to yield a reasonable return on
the value of the property used at the time it is being used
to render the services are unjust, unreasonable and confisca-
tory....” Bluefield Waterworks & Improvement Co. v. Public
Service Commission, 262 U.S. 679, 690 (1922). The decision of
the Court below, by ignoring precedent, is directly contrary to
the historical concept of “costs.”

12

The concept of costs under precedent includes com-
pensation for taxes attributable to return on equity, contrary to
the decision of the court of appeals. See App., 9a-l la.
“Normally included as a cost of service is a proper allowance
for taxes, including federal income taxes.” FPC v. United Gas
Pipeline Co., 386 U.S. 237, 243 (1967). Taxes are “properly
treated by the company as part of its operating expenses, to be
paid out of its earnings before the net amount could be arrived
at applicable to dividends, and, if such latter sums were not
sufficient to permit the proper return on the property used by
the company for the public, then the rate would be in-
adequate.” Willcox v. Consolidated Gas Co., 212 U.S. 19, 51-52
(1908).12 The income taxes generated by the need of an
investor-owned corporation to compensate shareholders for the
use of their capital have always been treated as a “cost” of
furnishing services under ratemaking programs.

The rejection of this precedent by the Court below on the
ground that Medicare participation is voluntary (App., 10a-
lla), is without merit. The position of producers under the
Natural Gas Act and of hospitals under the Medicare Act is
indistinguishable. Unlike public utilities, neither gas producers
nor hospitals are required to sell their product or services, the
hallmark of a “taking” under the Fifth Amendment. Yet no
court has explained why compensation levels for voluntary
sales under the Medicare Act need not, under the statute,
similarly comply with constitutional standards. '3

12 Contrary to the lower court’s decision, the total exclusion of tax
liabilities from reimbursement calculations is not warranted because of the
disparate tax treatment of different proprietary facilities. See App., |0a-i!2
Ratemaking agencies have routinely “normalized” a regulated company’s
year-to-year tax liability “less future consumers be compelled to subsidize
present consumers being served by operations accruing tax liabilities.”
Chicago v. FPC, 385 F.2d 629, 633 (D.C. Cir. 1967), cert. denied, 390 U.S.
945 ( 1968).

'3 That Medicare reimbursement is retrospective rather than prospective
(App., lla), does not justify the result below. At most, a retrospective
compensation structure might provide greater security of investment, and
thereby warrant a lower rate of return than that paid under a prospective rate
structure. It does not, however, justify the wholesale exclusion of capital costs
from compensation calculations.

7

13

II. THE DECISION BELOW IGNORES THE CONGRES-
SIONAL MANDATE THAT INVESTOR-OWNED
HOSPITALS BE REIMBURSED FOR THEIR DIRECT
AND INDIRECT COSTS OF PATIENT CARE.

A. Congress Intended That Proprietary Costs Be Reim-
bursed As “Direct and Indirect” Costs Under Medi-
care.

Before the inviolate principles underlying the relationship
between the government and private enterprise are abandoned
in implementing the Medicare Act, the courts must look to the
legislative history of that Act to determine if Congress had that
intent. “We cannot impute to Congress such a radical depar-
ture from established law in the absence of express Congres-
sional command.” Feres v. United States, 340 U.S. 135, 146
(1950). When the legislative history of the Medicare Act is
consulted, it is immediately apparent that Congress explicitly
intended to follow universal practice.

The 1965 cost estimates prepared by the Secretary and
relied upon by Congress in enacting the “reasonable cost”
standard included provisions for the payment of the costs of
equity capital of investor-owned hospitals.'¢ Moreover, the
Senate Finance Committee understood that the reasonable cost
standard by necessity had to include reimbursement for capital
costs if Medicare was to have any chance of success:

Without expectation of a “return on capital” there
would be little incentive for the development and
Participation of proprietary institutions necessary to
the successful provision of services to beneficiaries of
this program. This point appears so obvious to the
staff—and to the chief actuary of the Social Security
Administration—that had Congress intended to deny

'4 Reimbursement Guidelines for Medicare, Hearings Before the Senate
Committee on Finance, 89th Cong. 2d. Sess. at 58, 110, (May 25, 1966)
(testimony of Robert G. Meyers, Chief Actuary, Social Security Adminis-
tration ).

14

a “cost of capital” factor to proprietary institutions,
it would have specifically exproprietary such an
expense. '5

The only reason that the cost of equity capital is even a
topic of discussion under Medicare is that a majority of acute
care hospitals in this country are government, charitable, or
otherwise non-profit facilities, whose capital needs are met by
government funding or charitable contributions, and who there-
fore do not have to compensate investors for the use of capital.
Congress understood and accommodated these differences.
The Senate Finance Committee observed that:

Section 1861(v)( 1) of Public Law 89-87 [42 U.S.C.
§ 1395x(v)(1)(A)], which defines ‘reasonable cost,’
provides for differentiation in reimbursement be-
tween proprietary and non-profit institutions. That
provision includes the following sentence:

‘The reasonable cost of any services shall be deter-
mined in accordance with regulations establishing the
method or methods to be used, and the items to be
included, in determining such costs for various types
or classes of institutions, agencies and services... .’

The key words here are ‘various types or classes of
institutions.’ Proprietary and non-profit facilities are
different types of institutions within the meaning of the
statute, 16

Senator Russell Long, Chairman of the Senate
Finance Committee, was more succinct:

[I]t was intended that there should be a return on
investment to proprietary institutions... .

{I]t is just unbelievable to think that anyone would
propose to use propnietary institutions without allow-
ing a return on equity capital....

'S Jd. at 34 (Senate Finance Committee Staff Report).
16 Jd. at 29.

een ee te nn re eee Eran

15

It seems inconceivable to me—to anyone who be-
lieves in the free enterprise system-—that if you have
one fellow competing with someone else, who paid
not a nickel for his plant and equipment, had it all
given to him by the Government, or had it donated,
where the people even made money by donating it
we would suggest that they not allow him something
on that.'7

With this background, the Senate Finance Committee reached
a very simple conclusion:

The difference between proprietary and non-profit
facilities can be summarized as follows:

(a) tax treatment;

(b) availability of grants-in-aid and charitable
contributions; and

(c) normal or traditional expectatior: of
reimbursement.

All of these factors persuade the staff that a dis-
tinction is called for by the statute.

. * *

. [R]Jeimbursement to proprietary institutions
should be based ...on a fair return for equity in-
vested in the facility.'8

In summary, the legislative history of the Medicare Act
displays a clear legislative intent that the uniform practice of
compensating owners for the use of their capital would be
continued.

17 Id. at 43, 58.
18 Id. at 30.

16

B. The 1966 Amendment Establishing A Formula For
Determining A Return On Equity To Nursing Homes
Is Irrelevant To Humana’s Claims.

An evaluation of the decision of the court of appeals rests
on its invocation of 42 U.S.C. § 1395x(v)(1)(B), which was
enacted in 1966 to establish a formula-derived rate of return to
be paid to nursing homes.'? The 1966 nursing home amend-
ment was passed by Congress in reaction to the regulations
adopted by the Secretary earlier in 1966 which had denied any
reimbursement to investor-owned companies for their cost of
capital. See 31 Fed. Reg. 7864 (June |, 1966). These
regulations did not comply with congressional intent underlying
the 1965 Act: In introducing the 1966 nursing home amend-
ment, Senator Long advised his coileagues that by omitting
reimbursement for costs of capital, “They have made a mis-
take.” 112 Cong. Rec. 23644 (Sept. 22, 1966). In this light, the
1966 nursing home amendment must be viewed as mandate to
the Secretary to promulgate regulations consistent with original
congressional intent.

Both the court of appeals and Secretary, nevertheless, insist
that the inadequate retum on equity to hospitals is subject to
the limitations of the 1966 nursing home amendment. App..,
13a-l4a. As a resuit, the court of appeals held that Humana is
not entitled to reimbursement for its actual costs of equity
capital, but instead is entitled to no more than the amount paid
under the formula established for nursing homes under the
1966 amendment. /d. l4a. Additionally, the court reasoned
that because reimbursement for the cost of capital is a legisla-
tive exception to the cost-based standard, Humana cannot
invoke the provision of § 1395x(v)(1)(A)(ii) for an individ-
ualized determination of its actual costs of equity. App., |4a.

19 Pub. L. No. 89-713, § 7, 80 Stat. L111 (Nov. 1, 1966), codified at 42
U.S.C. § 1395x(v)(1)(B).

17

In reaching the conclusion sought by the Secretary, the
court of appeals has misinterpreted the provisions of the 1966
nursing home amendment. The court recognizes that “the plain
language of § 1395x(v)(1)(B) must be our guide.” App., 23a-
24a. The court, nevertheless, _ ncludes that the “plain !an-
guage” of a statute that on its face refers only to nursing homes
is directly applicable to hosr‘:als. Jd. 13a-14a. In reaching this
conclusion, the court of appeals has abandoned this Court’s
precedent and has ignored the clear intent of Congress, which
warrants issuance of a writ of certiorari.

CONCLUSION
For these reasons, petitioners respectfully request that a
Writ of Certiorari be issued to review the judgment and opinion

of the court of appeals.

Respectfully submitted,

THOMAS H. Brock

CasSON, CALLIGARO & MUTRYN
900 Watergate Office Building
2600 Virginia Avenue, N.W.
Washington, D.C. 20037

(202) 462-3200

Counsel for Petitioners

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0729%3A1. Public record. Not legal advice.