The opinion of the court was delivered by: McLAUGHLIN, District Judge.
This is a civil action pursuant to 42 U.S.C. § 1395. Plaintiff
Bradford Hospital seeks judicial review of a final decision of
the Secretary of Health and Human Services denying Plaintiff's
request for a redetermination of its hospital-specific rate as
untimely. Presently pending before the Court are cross-motions
for summary judgment. For the reasons set forth below, the
Plaintiff's motion is granted and the Defendant's motion is
A. The Medicare Statute and Its Regulations
In 1965, Congress enacted Medicare, which is a federally funded
health insurance program. See 42 U.S.C.A. §§ 1395-1395zz (West
1992 & Supp. 1999). Part A of the program, which is at issue in
this case, provides hospital insurance for the elderly and
disabled. See id. § 1395d. Under it, the federal government
reimburses eligible hospitals for the "reasonable costs" of
covered services provided to Medicare beneficiaries. See id.
Prior to 1983, hospitals were reimbursed retroactively for the
actual reasonable costs of furnishing care to Medicare patients.
See Monongahela Valley Hosp., Inc. v. Sullivan, 945 F.2d 576,
580 (3d Cir. 1991); Kean v. Heckler, 799 F.2d 895, 897 (3d Cir.
1986). At the end of each fiscal year, the hospital would submit
a cost report detailing their actual costs of treating the
patients and the intermediary would perform an audit to determine
whether the costs were reasonable. See Monongahela Valley, 945
F.2d at 580. In 1983, however, Congress enacted the Prospective
Payment System, under which hospitals are reimbursed
prospectively for their treatment of Medicare beneficiaries on
the basis of predetermined fixed rates which vary according to
the type of services rendered. See Social Security Amendments
of 1983, Pub.L. No. 98-21, § 601, 97 Stat. 65, 152-62 (codified
at 42 U.S.C. § 1395ww(d)(e)); see also Kean, 799 F.2d at 897.
The purpose of this new system was "to reform the financial
incentives hospitals face, promoting efficiency in the provision
of services by rewarding cost-effective hospital practices."
H.R.REP. No. 98-25, 1st Sess. 132 (1983), reprinted in 1983
U.S.Code Cong. & Admin.News 143, 187; see also County of Los
Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir. 1999).
Initially, the Prospective Payment System was limited to
operating costs of inpatient hospital services.*fn1 However, in
1987, Congress directed that the HCFA extend the system to
capital-related expenses*fn2, effective in 1991. See Pub.Law
100-203 § 4006(b)(1) (1987) (amending
42 U.S.C. § 1395ww(g)(1)(B)). Accordingly, the HCFA promulgated regulations
that established a standard rate for capital costs. The standard
rate was not effective immediately, however; the regulations
provided for a ten-year transition period during which the amount
of a hospital's capital reimbursement would be determined by the
provider's hospital-specific rate. See 42
477 C.F.R. § 412.308, 412.324(a) (1999); 56 Fed. Reg. 43,358 (1991).
The hospital-specific rate is based on the hospital's capital
cost per discharge during its 1990 cost-reporting period. See
42 C.F.R. § 412.324(a), 412.344.
The regulations provide that two different payment
methodologies apply to capital-related costs: the "fully
prospective payment" methodology and the "hold harmless"
methodology. 42 C.F.R. § 412.324(a); 56 Fed. Reg. at 43,363. If
the hospital-specific rate is less than the standard federal
rate, then Medicare reimburses the hospital under the fully
prospective payment methodology. See 42 C.F.R. § 412.324(a),
412.340; 56 Fed. Reg. at 43,363. This methodology pays a blend of
the hospital-specific rate and the federal rate; each year of the
transition period, the federal rate proportion increases and the
HSR proportion decreases, until the hospital is paid based on
100% of the federal rate in the year 2001. See
42 C.F.R. § 412.340; 56 Fed. Reg. at 43,363. Conversely, if the
hospital-specific rate exceeds the federal rate, then Medicare
reimburses the hospital under the hold-harmless payment
methodology. See 42 C.F.R. § 412.324(a), 412.344; 56 Fed. Reg.
at 43,363. This methodology pays the higher of either 100% of the
federal rate or the sum of 85% of reasonable costs for old
capital plus an amount for new capital based on a proportion of
the federal rate. See 42 C.F.R. § 412.344; 56 Fed. Reg. at
Additionally, the amount of the reimbursement is affected by
whether the costs are categorized as old capital or new capital.
Old capital costs are "capital-related costs for land and
depreciable assets that were put in use for patient care on or
before . . . December 31, 1990." 42 C.F.R. § 412.302(b).
Conversely, new capital costs are "capital-related costs . . .
that are related to assets that were first put in use for patient
care after December 31, 1990." Id. § 412.302(a). Some assets
put into use for patient care after December 31, 1990 can be
considered old capital; these costs are called "obligated capital
costs." Id. § 412.302(c). Obligated capital costs are costs for
which the hospital became legally obligated prior to December 31,
1990 and which would be put into use before October 1, 1994. See
id.; 56 Fed. Reg. at 43,362; Provider Reimbursement Manual
("PRM") § 2807.3.C.1.
Hospitals seeking recognition of obligated capital are required
to notify their intermediary in writing of the existence of the
obligated capital and submit certain supporting documents by the
later of October 1, 1992, or within 90 days after the hospital's
first cost reporting period beginning on or after October 1,
1991. See 42 C.F.R. § 412.302(c)(1)(v); 56 Fed. Reg. at 43,393
(1991); PRM § 2807.3.C.1.c. The supporting documentation must
include the binding agreement, a project description and an
estimate of the total costs of the project. See
42 C.F.R. § 412.302(c)(1)(v).
After it receives the proper documentation, the intermediary is
required to advise the hospital of its determination by the later
of the close of the hospital's first 12 month cost reporting
period under the capital prospective payment system or nine
months after the date the hospital submitted its completed
documentation. See id. § 412.302(c)(1)(vii)(B); 56 Fed. Reg. at
43,393-94; PRM § 2807.3.C.5. The purpose of the intermediary's
deadline is to inform hospitals "in advance whether the project
will be recognized as old capital." 56 Fed. Reg. at 43,393-94. The
intermediary's determination, however, is contingent on the asset
being put into use by October 1, 1994. See
42 C.F.R. § 412.302(c)(1)(vii)(C); 56 Fed. Reg. at 43,394; PRM § 2807.3.C.5.
After it receives the request, the intermediary must decide
whether to redetermine the rate and whether the methodology must
be changed from fully prospective payment to hold harmless.
First, if the intermediary determines that the redetermined rate
is lower than the hospital's current rate, then it will deny the
request. See PRM § 2807.4.E.4. This denial will be issued
summarily if the estimated rate submitted by the hospital is
lower than the current rate. See 57 FedReg. 39,746, 39,794-95
(1992); PRM § 2807.4.E.4. According to the HFCA, this will avoid
"unwarranted requests" and relieve the intermediary of "an
unnecessary administrative burden." 57 Fed. Reg. at 39,795.
Second, if the intermediary determines that the redetermined rate
exceeds the hospital's current rate but is lower than the federal
standard rate, then the hospital will continue to receive
payments under the fully prospective methodology but the new rate
will be used in determining the payments. See PRM § 2807.4.E.6.
Third, if the intermediary determines that the redetermined rate
exceeds the current rate and the federal standard rate, then the
hospital will be reimbursed according to the hold harmless
methodology. See id.
B. Factual and Administrative History
Prior to December 31, 1990, Bradford Hospital entered into
several contracts for the construction of a four story addition
onto the hospital and for numerous renovations. We will refer to
this project as the "East Wing project" (AR 1273, 1287). The East
Wing project was placed into use in the spring of 1992.
By letter dated May 22, 1992, the intermediary in this case,
Blue Cross of Western Pennsylvania, issued an interim
determination of Bradford Hospital's hospital-specific rate
(Administrative Record "AR" at 901-02). It found that Bradford
Hospital's capital base period was June 30, 1990 and that its
interim hospital specific rate was $297.69 per discharge (AR
901). It concluded that the hospital-specific rate was lower than
the federal rate and that reimbursement would be made according
to the fully prospective payment method (AR 901). It also
notified Bradford Hospital that if it believed it had capital
costs that qualified as obligated capital, then it must submit
supporting documentation to the intermediary within 90 days of
the first affected cost period (AR 902). Subsequently, by letter
dated August 24, 1992, the intermediary notified the hospital
that the supporting documentation should include:
1. Board minute notes on the project which must
include estimated cost of the project.
2. Certificate-of-need request and approval.
3. Loan agreement or bond purchase contract.
4. Architect or construction contract for the actual
5. Documentation of amounts expended for the project
by December 31, 1990.
(AR 905). The letter also provided, "Failure to have this
required information will not allow the FI to include these
cost[s] as old capital." (AR 906)
On September 29, 1992, Bradford Hospital wrote a letter to the
intermediary and enclosed the following documentation "for `Old
(Obligated) Capital' for Bradford Hospital":
1) List of all capital assets acquired between
07/01/90 and 12/31/90 including useful life and
2) Letter from Bob Cummins Construction Co. relating
to the demolition of the building (destroyed in
fire) and construction of new parking lot. The
balance of the $167,565 that was capitalized was
for additional blacktop work (done by ...