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 presented which we address seriatim.
1. Equitable Estoppel
Plaintiff seeks to apply equitable estoppel against the Secretary, arguing that the Fiscal Intermediary's decision not to offset Mon Vale's interest earnings in fiscal year 1982-83 lulled plaintiff into a state of repose, and the Secretary's change in policy for fiscal year 1983-84 caught plaintiff by surprise. Assuming for the moment that equitable estoppel may be applied against the government, a premise that is not entirely clear, see, Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 60, 81 L. Ed. 2d 42, 104 S. Ct. 2218 (1984) (hereinafter Heckler v. Crawford), we conclude that the Hospital's argument has several fatal flaws.
To invoke equitable estoppel a party must establish a material misrepresentation by the party to be estopped and reasonable detrimental reliance on that misrepresentation by the party asserting estoppel. E.g., Heckler v. Crawford, 467 U.S. at 59; Restatement 2d of Torts, § 894 (1979).
In the present case, the Hospital contends that the Fiscal Intermediary concluded the 1982-83 audit without applying the offset and assured the Hospital that the same result would obtain for 1983-84.
The Hospital claims that on the basis of this assurance, it did not alter its accounts for 1983-84, and thus was caught by surprise when the Secretary sought to offset Mon Vale's interest earnings. It is this alleged misrepresentation that plaintiff seeks to hold against the government to effect an estoppel.
The Hospital misapprehends the nature of the relationship between the Fiscal Intermediary and the Secretary. The Fiscal Intermediary is only a hired hand, an independent contractor selected by the government to conduct the audits. The Fiscal Intermediary cannot speak with finality for the Secretary on the interpretation of regulations and certainly cannot make policy pronouncements. Heckler v. Crawford 467 U.S. at 64, 65. Therefore the Secretary cannot be bound by the statements of the Fiscal Intermediary and, charged with this knowledge, the Hospital could not have reasonably relied on such statements.
The fallacy of plaintiff's position is further highlighted by the nature of the audits themselves. Medicare audits are subject to reopening and adjustment for a three year period. Thus the Hospital had to be aware that nothing was written in stone with the 1982-83 audit. Indeed plaintiff is fortunate that the Secretary applied the offset in the 1983-84 fiscal year and did not reopen the 1982-83 audit.
Finally, we fail to see how the 1982-83 audit and the alleged assurances from the Fiscal Intermediary caused plaintiff to suffer detriment in 1983-84. The 1982-83 audit was completed only four days before the end of the 1983-84 fiscal year. Mon Vale still held the $ 3.4 million transferred to it in 1982, and had received an additional $ 2.1 million from the Hospital in 1983-84. Mon Vale had already earned all but four days of interest for the 1983-84 fiscal year when the Fiscal Intermediary made its alleged misrepresentation. Furthermore, though the issue of offsetting Mon Vale's interest income had been raised as a serious matter by the Fiscal Intermediary months earlier, Mon Vale and the Hospital took no steps to avoid the effect of the offset rule in the event it was ultimately upheld. Having placed all its eggs in one basket, hoping to convince the Fiscal Intermediary that its interpretation was wrong, the Hospital cannot complain now that the basket was broken.
The Opinion in Heckler v. Crawford is most instructive. Like plaintiff here, the health care provider sought to estop the government from enforcing a new interpretation of the Medicare regulations. Like plaintiff here, it unreasonably relied on a verbal assurance from a Fiscal Intermediary on a matter of policy. Like plaintiff here, it knew or should have known that audits were subject to reopening for a three year period. Plaintiff seeks to distinguish this case by pointing out that here the Fiscal Intermediary conducted extensive investigation before choosing not to apply the offset in 1982-83. But the intensity of the Fiscal Intermediary's inquiry is of little relevance. The Fiscal Intermediary cannot set policy and the Hospital's reliance on any such pronouncements is misplaced.
For the reasons stated, we conclude that equitable estoppel is not available in the circumstances presented.
2. Secretary's Interpretation
We now consider whether the Secretary's interpretation of its Regulations was reasonable. We recognize that the scope of our review is limited. If the interpretation is reasonable and supported by substantial evidence, we must affirm. Monsour Medical Center v. Heckler, 806 F.2d 1185, 1191 (3rd Cir. 1986); Butler County Memorial Hospital v. Heckler, 780 F.2d 352, 355 (3rd Cir. 1985).
Interest expense as a reimbursable cost is treated in detail at 42 C.F.R. § 405.419 (1984), which provides in pertinent part:
(a)(1) Principle. Necessary and proper interest on both current and capital indebtedness is an allowable cost . . .
(b)(1) . . .