Appeal from the Order of the Department of Public Welfare Office of Hearings and Appeals, in case of Re: Sewickley Valley Hospital, File No. 23-80-214.
Sanford V. Teplitzky, Ober, Grimes & Shriver, with him, Herman S. Harvey, Jr., Blaxter, O'Neill, Houston and Nash, for petitioner.
Jeffrey Gonick, Assistant Counsel, for respondent.
Judges Williams, Jr., Barry and Blatt, sitting as a panel of three. Opinion by Judge Barry.
[ 81 Pa. Commw. Page 299]
The issue in this case involves the correctness of a decision of the Department of Public Welfare (DPW) which required petitioner Sewickley Valley Hospital (Hospital) to revise allowable costs associated with a financing transaction in accordance with reimbursement principles developed under the Medicaid Program. DPW required the Hospital to include the total loss on defeasance of debt or advance refunding*fn1 in
[ 81 Pa. Commw. Page 300]
the amount of $1,765,507.00 in fiscal year 1977 rather than permitting the Hospital to amortize the loss on defeasance over the length of the new bond issue. This treatment, which included all of the loss in the year of defeasance, caused the Hospital to exceed its routine cost limitations, which resulted in the Hospital losing forever the amount of the loss which exceeded the cost limits.
On August 1, 1975, Sewickley Valley Authority issued $12,000,000.00 of gross revenue bonds with an average interest rate of 9%. On April 1, 1977, the authority issued $12,235,000.00 of gross revenue bonds and $7,030,000.00 of Special Obligation Refunding Bonds to pay off the August 1975 issue. The later issue had an average interest rate of 6.23%, which resulted in interest savings to Sewickley Valley Hospital of $3,281,713.00.*fn2 However, due to the fact that the
[ 81 Pa. Commw. Page 301]
Hospital had to borrow an amount of money which exceeded the balance of the debt outstanding on the 1975 bonds in order to obtain the lower interest rate on the later issue, the Medicare and Medicaid programs treat the additional principal owed on the new bonds as a loss caused by the defeasance. The loss on defeasance of debt amounts to $1,765,507.00.
Sewickley Valley Hospital participates in the Pennsylvania Medical Assistance Program as a provider of inpatient hospital services. The Hospital reports its costs for Medical Assistance purposes on a July 1-June 30 fiscal year.
The Hospital amortized the loss on defeasance of the bonds over a period of years and then claimed as an allowable cost for the cost reporting period ending June 30, 1977, June 30, 1978, and June 30, 1979, that portion of the loss on defeasance which applied to each reporting period. DPW disallowed amortization of the loss on defeasance, requiring instead that the entire loss be recognized in the year in which the refinancing occurred. Therefore, the auditors included the loss of $1,765,507.00 in the Hospital's cost for the fiscal year ending June 30, 1977. On appeal to the Secretary of Public Welfare, the action of the auditors was upheld. Hence, the Hospital ...