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St. Francis Hospital Center v. Margaret Heckler Secretary

August 12, 1983


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. Nos. 80 C 500, 80 C 89, 80 C 206, 80 C 272 -- S. Hugh Dillin, Judge.

Before BAUER, WOOD and ESCHBACH, Circuit Judges.Per Curiam. Sixty-eight nonproprietary hospitals ("the Hospitals") appeal from the district court's decision denying them reimbursement under the Medicare Act, 42 U.S.C. §§ 1395 through 1395pp, for a return on equity capital and for certain bad debt and charity expenses. 544 F. Supp. 1167 (S.D. Inc. 1982). We affirm the decision of the district court and adopt those portions of the court's excellent opinion reproduced as an appendix to our opinion. We have deleted certain portions of the opinion, primarily those dealing with a separate suit that was not appealed and those addressing issues not raised on appeal. We add the supplemental sections immediately below to address arguments raised on appeal that are not specifically answered by the district court's opinion.

Standard of Review

In their attempt to secure a return on equity capital, the Hospital were successful in convincing the Provider Reinbursement Review Board ("PRRB") that such a return was a "reasonable cost" for nonproprietary facilities. The Secretary, through the Deputy Administrator of the Health Care Financing Administrator, reversed this ruling and held that the Hospitals could not recover a return on equity. On appeal, the Hospitals contend that the district court erred in giving deference to the Secretary's interpretation of the statute of and in failing to give adequate weight to the decision of the PRRB.

The standard of review for reimbursement decisions rendered under 42 U.S.C. § 1395oo is found in "the applicable provisions under chapter 7 of Title 5." 42 U.S.C. § 1395oo(f). Thus the standards of the Administrative Procedure Act, 5 U.S.C. §§ 701-706, govern. Section 706 provides that "the reviewing court shall decide all relevant questions of law, [and] interpret constitutional and statutory provisions. . . ." The court must "hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. . . ." Id.

In the instant case, we do not have a challenge to any findings of fact -- the facts are essentially undisputed.Neither do we have a dispute over the interpretation of an agency regulation. The present regulatory scheme denying return on equity for nonproprietary hospitals has been firmly and unambiguously in place since 1969. The challenge the Hospitals raise is that the regulatory scheme is in violation of the Medicare statute and the Constitution.

We note at the outset that to the extent the Hospital challenge the constitutionality of the statute or the regulatory scheme, their non-deference argument is unnecessary. Deference to administrative expertise does not extend to judging the constitutionality of a statute or regulatory scheme. As far as construing the Medicare statute, a court should give deference to the interpretation of the agency charged with administration of the statute. See Blum v. Bacon, 457 U.S. 132, 141, 72 L. Ed. 2d 728, 102 S. Ct. 2355 (1982); Griggs v. Duke Power Co., 401 U.S. 424, 433-34, 28 L. Ed. 2d 158, 91 S. Ct. 849 (1971). Congress has charged the Secretary of Health and Human Services ("HHS") with administration of the Medicare program. 42 U.S.C. § 1395kk. Nevertheless, deference to the Secretary must yield to the clear meaning of the statute as revealed by its language, purpose and history. See Southeastern Community College v. Davis, 442 U.S. 397, 411, 60 L. Ed. 2d 980, 99 S. Ct. 2361 (1979).

The Hospitals suggest that these well established principles are altered in this case because the Secretary reversed the PRRB on the issue of return on equity capital. For support they point to St. John's Hickey Memorial Hospital v. Califano, 599 F.2d 803 (7th Cir. 1979), in which we declined to defer to the Secretary's determination that the costs of a certain educational program were not reimbursible under the Medicare regulations. In particular, the Hospitals point to the following passage:

This special provision for judicial review 42 U.S.S. § 1395oo(f) is not surprising in light of the statutory scheme. Here the plaintiff is not the beneficiary of the government program, but a necessary participant in carrying out the program. The Secretary is obligated by statute to reimburse all reasonable costs of such providers. It would be inappropriate to allow his subordinates to be the final arbiter of what is reasonable, particularly when they have overruled the decision of the Provider Reimbursement Review Board which was set up to mediate disputes between providers and intermediaries acting for the agency.

This does not support the Hospitals' argument that the district court should have deferred to the PRRB's decision. Final responsibility for rendering a decision lies in the agency itself, not with subordinate hearing officers, and it is this decision that the district court reviewed. See American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F. Supp. 605, 611 (D.D.C. 1979), aff'd, 219 U.S. App. D.C. 267, 677 F.2d 118 (D.C. Cir. 1981). The decision of the PRRB can be considered no more expert than the decision of the Secretary.

Under 42 U.S.C.A. § 1395oo(f) and 42 C.F.R. § 405.1875 (1979), the Secretary, on her own motion and at her discretion, may review a decision of the PRRB and on review has all the powers she would have if making the initial determination. 5 U.S.C.A. § 557(b). Thus the decision of the PRRB carries no more weight on review by the Secretary than any other interim decision made along the way in an agency where the ultimate decision of the agency is controlling. The argument that the court should recognize the expertise of the members of the PRRB must be met with the assumption that those person within the agency who assisted the Secretary in a contrary decision must be regarded as being equally expert.

Homan & Crimen, Inc. v. Harris, 626 F.2d 1201 (5th Cir. 1980).

The Hospitals argue that the prior contrary decision of the PRRB lessens the degree of deference due the Secretary's decision. We note first that the passage from St. John's, quoted above, is primarily a comment on the propriety of judicial review, and does not directly address the question of whether deference is lessened when the Secretary has reversed the PRRB. We did state in that case that the degree of deference accorded the Secretary in implementing regulations varies with the circumstances of each case. St. John's Hickey Memorial Hospital v. Califano, supra, 599 F.2d at 812. In that case, we found extreme deference inappropriate when the court merely disagreed with an unofficial interpretation of a regulation. Id. In contrast, in the instant case, we are faced with the Secretary's judgment that her regulatory scheme denying a return on equity capital to nonproprietary hospitals, in place since 1969, is consistent with the statute she is charged with administering. In these circumstances, we believe the district court's deference to the Secretary's decision was appropriate.

Supplement -- Is a Return on Equity Capital a Reasonable Cost for Nonproprietary Providers Under 42 U.S.C. § 1395x(v)(1)(A)?

While we have adopted the district court's analysis on this point and the point following, we add these supplemental sections to answer arguments raised on appeal and not specifically addressed by the district court.

All providers are entitled to reimbursement of the "reasonable cost" of the services provided. 42 U.S.C. § 1395f(b). Reasonable costs are defined generally in 42 U.S.C. § 1395x(v)(1)(A), with authorization for the Secretary to prescribe regulations further defining reasonable costs. 42 U.S.C. § 1395x(v)(1)(B), added in 1966, directs the Secretary to include in the regulations a provision for return on equity capital for extended care services provided by proprietary facilities. The Hospitals contend that the services of proprietary hospital do not fit the literal language of § 1395x(v)(1)(B), and therefore their return on capital must come under the general provisions for reasonable costs, § 1395x(v)(1)(A). If a return on equity capital is a reasonable cost under this section for proprietary hospitals, the appellants argue that it is also a reasonable cost for nonproprietary hospitals.

The reasons Congress had for singling out proprietary facilities providing extended care service i.e., skilled nursing facilities) are not clear. The legislative history is scant. There is some indication, however, that Congress intended a return on equity capital to be extended to all proprietary providers. The Managers on the Part of the House submitted a statement to explain the recommended action of the committee of conference considering the proposed 1966 amendment. The committee recommended the amendment, which is now codified at § 1395x(v)(1)(B), the house managers explaining:

The conferees expect that the Secretary of Health, Education, and Welfare will apply similar or comparable principles in determining reasonable costs for reimbursement of proprietary hospitals for services furnished by them.

H. R. Rept. No. 2317, 89th Cong., 2d Sess. 166, reprinted in 1966 U.S. Code Cong. & Ad. News 3676, 3692-93.

The legislative enactments at issue here are not a model of clarity. However, they do not alter our conclusion that Congress did not intend a return on equity capital for nonproprietary providers to be reimbursable as a "reasonable cost" under § 1395x(v)(1)(A). Any ambiguity we find goes to the issue of whether proprietary hospitals are entitled to such a return under either § 1395x(v)(1)(A) or (B), an issue we need not decide at this point. We agree with the Secretary, the district court, and the other courts that have faced the issue presently before us -- Congress did not intend nonproprietary facilities to collect a return on equity capital as part of the "reasonable cost" of providing services.

Supplement -- Does the Statutory or Regulatory Scheme Violate the Just Compensation Provision of the Fifth Amendment?

The Hospitals argue that those cases in which the Supreme Court held government-prescribed rates to be confiscatory, e.g. Smyth v. Ames, 169 U.S. 466, 42 L. Ed. 819, 18 S. Ct. 418 (1898), are directly analogous to the instant case. They correctly point out that the government cannot prescribe rates so low that the result is a taking of property without just compensation, see id. at 526, and that the government cannot defend setting low rates in one market segment by arguing that the regulated enterprise can set higher rates for another segment and thus turn a net profit, see id. at 541.

The Hospitals' argument might well prove persuasive if participation in the Medicare program were mandatory. However, Medicare is a federally sponsored insurance program for the aged and disabled, 42 U.S.C. § 1395c, and provider participation is voluntary, 42 U.S.C. § 1395cc. Providers who opt not to participate are free to serve persons not covered by Medicare and those potential Medicare recipients who are willing to forego Medicare benefits for the services provided. As a practical matter, perhaps few of those persons eligible for Medicare would choose a non-participating hospital, but the fact that practicalities may in some cases dictate participation does not make participation involuntary. Even those hospitals that have an obligation to participate in the Medicare program because of their receipt of funds under the Hill-Burton Act, 42 U.S.C. § 291; 42 C.F.R. § 124, made a voluntary choice to accept both the obligations and the benefits of Hill-Burton funding. Cf. Johnson County Memorial Hospital v. Schweiker, 698 F.2d 1347, 1350 (7th Cir. 1983) (Medicare does not reimburse for charity costs accrued under the Hill-Burton Act because "the government has already paid through contractual agreements for [that] indigent care"). We therefore find Smyth v. Ames, supra, and its progeny to be inapposite, and conclude, with the district court, that there has been no violation of the Fifth Amendment just compensation provision. Cf. Pharmacist Political Action Committee v. Harris, 502 F. Supp. 1235, 1242-43 (D. Md. 1980) (Maximum Allowable Cost regulations for prescription drugs dispensed under Medicare and Medicaid programs did not constitute taking of property, in part because participation in programs is voluntary).


The Hospitals and the amici curiae, the American Hospital Association and the Catholic Health Association of the United States, have presented strong arguments in favor of allowing nonproprietary hospitals a return on equity capital under Medicare. Those arguments, however, are made to the wrong forum. This court cannot require what may seem wise, but only what is required by the Medicare statute and the Constitution. Having found that neither the statute, due process or equal protection requires a return on equity capital for nonproprietary hospitals, we affirm the district court's judgment and adopt those portions of the district court's opinion reproduced below.



ST. FRANCIS HOSPITAL CENTER, et al., Plaintiffs v. RICHARD S. SCHWEIKER, Secretary Department of Health and Human Services, PROVIDER REIMBURSEMENT REVIEW BOARD, THOMAS TIERNEY, Chairman, Defendants.

No. IP 80-89-C; No. IP 80-206-C; No. IP 80-272-C; No. IP 80-500-C


The facts and legal issues presented by these cases are complex and will be dealt with in greater detail in the body of this memorandum. In brief, these suits present challenges to Medicare reimbursement statutes, regulations and policies by 68 Indiana hospitals and the Indiana Hospital Association, Inc., to which the 68 hospitals belong.

The hospitals claim that they are entitled to reimbursement of the portion of their return on equity capital and bad debt and charity costs that they claim are attributable to the Medicare patients they treat. The Medicare Act was passed in 1965. 42 U.S.C. §§ 1395, et seq. It provides for the reimbursement of the reasonable cost of providing services to Medicare beneficiaries. 42 U.S.C. § 1395f(b). The statutory definition of "reasonable cost" is found at 42 U.S.C.§ 1395x(v)(1)(A). Pursuant to the Medicare Act, the Secretary of Health and Human Services (hereinafter "the Secretary") has promulgated regulations which define the concept of reasonable cost more fully. 42 U.S.C. § 1395hh; and 42 C.F.R. §§ 405.401-405.488.

The 68 plaintiff hospitals have all made claims for reimbursement for return on equity capital and bad debt and charity costs for a variety of fiscal years with the "fiscal intermediary" which acts as the agent of the Secretary pursuant to 42 C.F.R. § 405.651. The fiscal intermediary which rules upon claims made by Indiana hospitals (termed "providers" under the Act) is Mutual Hospital Insurance, Inc. d/b/a Blue Cross of Indiana.

These plaintiffs filed claims ("Cost Reports") with Blue Cross. Blue Cross, by "Notices of Program Reimbursement" to each of the hospitals, denied payment under the Medicare Act for the return on equity, bad debt and charity claims. The hospitals then pursued the administrative appeals outlined by the Act and the Secretary's regulations. 42 U.S.C. § 1395oo(a); and 42 C.F.R. § 405.1837. The plaintiffs were granted permission to pursue their appeals as a group appeal, since their claims presented common questions of law.

The first level of appeal was to the Provider Reimbursement Review Board ("PRRB" or "Board" hereafter). The PRRB ruled that the hospitals were entitled to a return on equity, but sustained Blue Cross's denial of reimbursement for the bad debt and charity costs.

The Deputy Administrator of the Health Care Financing Administration, to whom the Secretary's power to review the PRRB's decisions has been delegated, reversed the Board's findings in regard to the return on equity issue and affirmed the decision to deny reimbursement of bad debt and charity costs.

The hospitals filed suit in district courts for judicial review of this decision. . . .

(3) Return on Equity Capital

The return on equity issue has been raised in several other courts. The hospitals' basic contention is that they should be reimbursed by the Medicare program for a reasonable rate of return on their net assets used in the treatment of Medicare patients. The plaintiffs rest their argument on the following grounds: (A) the Deputy Administrator had no power to reverse the PRRB's decision to grant these plaintiffs return on equity costs, therefore the PRRB's decision is final, [not at issue on appeal] (B) great deference should be given to PRRB's decision, (C) a return on equity is a "reasonable cost" of providing services under 42 U.S.C. § 1395x(v)(1)(A), (D) the denial of reimbursement for these costs constitutes a violation of the just compensation clause of the Fifth Amendment, and (E) since proprietary (for-profit) hospitals are given a return on net assets reimbursement, these plaintiffs, nonproprietary hospitals, are being denied their rights to equal protection.

In order to understand the plaintiffs' arguments, it is necessary to review some background and legislative history of the Medicare program. The terms "return on equity," "return on equity capital," "return on net assets," and "imputed interest" are all used to describe the hospitals' claims of entitlement to reimbursement for the opportunity cost of capital used in the treatment of Medicare patients. Under Part A of the Medicare Act, 42 U.S.C. §§ 1395c-1395i-2, which provides hospital insurance benefits to qualified elderly and/or disabled recipients, hospitals are reimbursed for the "reasonable cost" of providing services to these recipients. The thrust of the plaintiffs' position in this case is that a return on equity is a reasonable cost under the Act and should be reimbursed.Title 42 U.S.C. § 1395x(v)(1)(A) initially defines reasonable cost, for provider reimbursement purposes, as:

(v)(1)(A) The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in ...

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