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MONONGAHELA VALLEY HOSP., INC. v. BOWEN

January 16, 1990

MONONGAHELA VALLEY HOSPITAL, INC.
v.
OTIS R. BOWEN, SECRETARY OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES



The opinion of the court was delivered by: COHILL

 Plaintiff Hospital challenges the Secretary's decision concerning Medicare reimbursement for the fiscal year ending June 30, 1984. At issue is the Secretary's interpretation of regulations regarding interest offset when applied to a multi-corporation organizational structure.

 Plaintiff Monongahela Valley Hospital, Inc. (Hospital) is a tax exempt non-profit corporation under the Internal Revenue Code, 26 U.S.C. § 501(c)(3), operating a hospital in Monongahela, Pennsylvania. Plaintiff was formed in 1976 as a result of the merger of two smaller hospitals.

 In 1982 the Hospital underwent a corporate restructuring. The Hospital survived as a separate non-profit corporation, but it became a wholly owned subsidiary of a newly created parent corporation, Mon Vale Health Resources, Inc. (Mon Vale). This parent corporation also attained tax exempt status as a non-profit corporation. Plaintiff claims that this restructuring permitted greater flexibility in management, financing and regulatory concerns.

 In June, 1982, the Hospital decided that a radiation therapy and oncology center was necessary to serve the people of the area, and so the Hospital applied to the Commonwealth's Department of Health for permission to build it. The projected cost of the center was $ 2.7 million. In July, 1983, the Hospital also applied to the Commonwealth for approval of the purchase of digital subtraction angiography equipment for $ 1.7 million. In March, 1984, the Hospital decided to replace its CAT scanner at a cost of $ 1.2 million.

 These projects were approved by the Department of Health, but instead of being carried out by the original applicant (i.e., the Hospital) each project was carried out by Mon Vale with funds transferred to it by the Hospital. Upon completion of the projects, Mon Vale then transferred title to the Hospital. Simply put, the Hospital made the applications, obtained the necessary approvals, provided the funds, and ultimately received and operated the completed projects, but Mon Vale served as a middleman or conduit for each project.

 In the Spring of 1984, Blue Cross, acting in its capacity as Medicare Intermediary, audited the Hospital for the fiscal year ending June 30, 1983. At that time the auditor raised questions about the details of the corporate restructuring and the transfer of $ 3.4 million from the Hospital to Mon Vale earmarked for the above-described projects.

 At this point the reader is probably asking "So what?" If the projects were completed and ultimately titled in the entity that paid for them, where's the harm? The answer lies in the interstices of the Medicare regulatory scheme. The reader may follow at his peril as we step gingerly into the maze.

 Medicare reimburses health care providers for certain types of medical care provided to aged and disabled patients eligible for Medicare. Reimbursement is made on the basis of certain computations which are horribly complicated. These computations are made by a middleman known as a "Fiscal Intermediary," which in this case was Blue Cross of Western Pennsylvania.

 Apparently hospitals receive interim reimbursements during the course of the year and at the close of the fiscal year a final audit is performed by the Fiscal Intermediary to balance accounts.

 These unfathomable reimbursement computations in some manner include consideration of interest. To grossly oversimplify, it appears that interest expense on borrowed money is somehow included in the computation of reimbursable costs, while interest income on invested funds is in some manner offset against such costs.

 We trust that the patient reader will begin to see the focus. Beginning with the 1982-83 fiscal year, the Hospital claimed interest expense on money it had borrowed and sought to include such expense in the computation to determine reimbursable costs. But the Fiscal Intermediary noted that the Hospital had transferred $ 3.4 million to its parent, Mon Vale, and Mon Vale had earned a considerable amount of interest on these funds. The auditing intermediary thus sought to offset the interest earned by Mon Vale against the interest expense incurred by the Hospital, thereby reducing the Medicare reimbursement due the Hospital.

 Fortunately for the Hospital, the auditing intermediary backed off from this position for the 1982-83 fiscal year. The final audit report for that year, issued only four days before the close of the succeeding fiscal year, did not include the interest earned by Mon Vale as an offset against reimbursable costs.

 The Hospital was not so fortunate in the audit for the fiscal year 1983-84. During that fiscal year, while the auditor was raising serious questions about the interest earned by Mon Vale on the $ 3.4 million transferred from the Hospital in 1982-83, the Hospital transferred an additional $ 2.1 million to Mon Vale. On January 29, 1985 the Health Care Financing Administration (HCFA), the federal agency which administers the Medicare program, issued an internal memo to Fiscal Intermediaries requiring the inclusion of interest earned by a parent or related corporation when computing a provider's reimbursement. On this basis the Fiscal Intermediary, conducting its audit for the 1983-84 fiscal year, offset Mon Vale's interest income of $ 386,998 against the Hospital's expenses for the year, resulting in a significantly reduced Medicare benefit.

 The Hospital made timely appeals through the appropriate administrative channels. Although a minor adjustment was made ($ 9,700 interest earned on donations made directly to Mon Vale could not be offset against the Hospital), the auditor's position on the core of the dispute was affirmed.

 The Hospital then filed this suit pursuant to 42 U.S.C. § 1395(f) seeking to overturn the Secretary's decision and obtain reimbursement of the higher sum due when the offset is not applied.

 The parties have filed cross motions for summary judgment with briefs and the administrative record. A variety of issues are ...


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