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SACRED HEART HOSP. v. HECKLER

October 9, 1984

SACRED HEART HOSPITAL, Muhlenberg Medical Center and Easton Hospital
v.
Margaret M. HECKLER, Secretary of Health and Human Services



The opinion of the court was delivered by: HUYETT

 HUYETT, District Judge.

 Plaintiffs Sacred Heart Hospital, Muhlenberg Hospital and Easton Hospital (Hospitals) are non-profit, short term, acute care hospitals in Pennsylvania which are certified to participate in the Medicare program as "providers" of hospital care to Medicare beneficiaries, the national health insurance program for the elderly. Under Part A of the Medicare program, plaintiffs are entitled to reimbursement of their reasonable costs incurred in providing these services. 42 U.S.C. § 1395f(b). This case arose out of a dispute between plaintiffs and their designated fiscal intermediary, Blue Cross of Lehigh Valley, over plaintiff's cost reports for their fiscal years ending 1979, 1980, and 1981.

 The basic facts pertaining to these cost reports are not in dispute. During the past decade, each of the plaintiffs undertook capital construction projects directly related to their provision of patient care. To finance the projects, each plaintiff arranged tax-exempt financing through its local bonding authority. In each case, the hospital was required to establish a debt service reserve fund (DSFR) as protection for the bondholders. As required by the Trust Indentures, each DSFR was invested and earned a return.

 In performing audits on the cost reports at issue, the intermediary offset the income earned by the DSFRs against plaintiffs' otherwise allowable interest expenses. Under the Medicare regulations, providers are entitled to reimbursement for necessary and proper interest on both current and capital indebtedness. 42 C.F.R. § 405.419(a). Plaintiffs are now contesting this action by the intermediary. Blue Cross, the intermediary, stated that the basis for the challenged adjustments was the offset rule which requires that interest expenses "be reduced by investment income except where such income is from gifts and grants, whether restricted or unrestricted, and which are held separate and not commingled with other funds. Income from funded depreciation or a provider's qualified pension fund is not used to reduce interest expense." 42 C.F.R. § 405.419(o)(3). Blue Cross stated its belief that the DSFRs do not qualify as funded depreciation.

 Upon appeal of the plaintiffs, the Provider Reimbursement Review Board (PRRB) found that the DSFRs do not qualify as funded depreciation thereby affirming the intermediary's actions. Following receipt of the PRRB's decision, the Hospitals petitioned the Deputy Administrator of the Health Care Financing Administration, the Secretary's delegate under 42 U.S.C. § 1395oo(f), to reverse the PRRB's decision on the grounds that it was at odds with prior PRRB and Secretarial decisions on the issue and was unsupported by the regulations. The Deputy Administrator, on November 17, 1983, affirmed the decision of the PRRB; this decision is the final administrative decision of the Secretary. 42 U.S.C. § 1395oo(f).

 Plaintiffs contend that the Secretary's final decision should be reversed because it is contrary to governing regulation and the Secretary's established previous policy and is, therefore, arbitrary and capricious. Defendant maintains that the Medicare cost principles require her to limit the amount of plaintiffs' reimbursement to the actual or net cost of such borrowing less any benefit derived therefrom.

 Before me now are the parties' cross-motions for summary judgment.

 Plaintiff's principal contention is that the Secretary erred when she concluded that the interest expenses plaintiffs incurred during their capital construction projects had to be offset by the interest earned by the debt service reserve funds. When examining plaintiffs' contentions, it is necessary to keep in mind the limited scope of review of administrative decisions provided by statute. The federal courts are authorized to set aside agency findings, conclusions, and actions only if they are:

 
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
 
(B) contrary to constitutional right, power, privilege, or immunity;
 
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
 
(D) without observance of procedure ...

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