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June 22, 1994

DONNA E. SHALALA, Secretary, Department of Health and Human Services, Defendant.


The opinion of the court was delivered by: JAMES H. ALESIA

Plaintiff Hinsdale Hospital Corporation ("HHC") brought this action pursuant to 42 U.S.C. § 1395oo(f) providing for judicial review of final determinations by the defendant, the Secretary of the Department of Health and Human Services ("the Secretary"), concerning disputed claims for Medicare reimbursement. Plaintiff challenges the amount of reimbursement to which it is entitled under the Medicare Act, 42 U.S.C. 1395 et seq. Plaintiff and defendant have filed cross-motions for summary judgment. For the reasons set forth below, plaintiff's motion is denied and defendant's motion is granted.


 This case arises under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., commonly referred to as the Medicare Act. Under Part A of the Medicare program, the federal government reimburses eligible hospitals and other facilities for the reasonable costs of certain services they provide to Medicare beneficiaries. 42 U.S.C. § 1395d. Reasonable costs are those "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" established by the Secretary. 42 U.S.C. § 1395x(v)(1)(A). In order to be eligible for reimbursement, a hospital must first become a Medicare "provider" by filing an agreement with the Secretary. 42 U.S.C. § 1395cc. Reimbursements are usually arranged through a fiscal intermediary who serves as the Secretary's agent for reviewing claims and making payments equal to the provider's reasonable costs. 42 U.S.C. § 1395h. Each provider files an annual cost report with the intermediary, who audits the report and informs the Provider of the amount of reimbursement to which the provider is entitled.

 A provider who is dissatisfied with the intermediary's disposition may request a hearing before the Provider Reimbursement Review Board ("Review Board") of Health and Human Services. 42 U.S.C. § 1395oo(a). The Review Board's decision becomes the final decision of the agency, unless the Secretary, on her own motion, decides to reverse, affirm or modify the Review Board's decision within sixty days. 42 U.S.C. § 1395oo(f)(1). After the final opinion of the Secretary is determined, a Provider may seek judicial review in federal district court. 42 U.S.C. § 1395oo(f)(1).

 The intermediary in this case denied certain Medicare reimbursements sought by plaintiff Hinsdale Hospital. Plaintiff sought review of the denial before the Review Board. The Review Board affirmed the denial. The Secretary allowed the Review Board's decision to become final by not acting on it within sixty days. Plaintiff now appeals to this court.

 The facts of this case are complicated but basically undisputed. The Provider, Hinsdale Hospital (HH), is a 456-bed acute tertiary care, non-profit hospital located in Hinsdale, Illinois. It is part of the nationwide Adventist Health Care System (AHS), which is sponsored by the Seventh-Day Adventist Church and controlled through a corporate parent and four regional corporations. In November 1982, AHS decided to acquire a financially distressed, 149-bed acute care hospital located in Glendale Heights, Illinois. This hospital, previously named Midwest Community Hospital, was renamed Glendale Hospital (GH).

 On November 18, 1982, AHS created a new Illinois non-profit corporation, Glendale Heights Community Hospital, Inc. (GHCH), to purchase and operate GH. However, GHCH could not independently secure financing for the purchase price of approximately $ 33.8 million because of restrictive covenants in outstanding bonds issued by the Provider in 1978 and 1981. Consequently, AHS directed the Provider to enter into an agreement to purchase GH. In order to obtain the necessary interim financing of the purchase price, the lenders required GH to be placed in the Provider's corporation, plaintiff Hinsdale Hospital Corporation (HHC), where it remained for about 7-9 months until permanent financing could be arranged.

 The acquisition was completed on November 24, 1982. During the period from November 1982 until July 1983, the Provider transferred $ 5.9 million to GH in the form of interest-bearing promissory notes. When permanent financing was arranged on July 12, 1983, GH was transferred to GHCH.

 The permanent financing consisted of two separate tax-exempt municipal bond issues. First, on May 20, 1983, the Village of Glendale Heights issued $ 35 million in 5-year bonds (GH bonds) which were used to replace the interim financing with permanent financing and as reimbursement for other acquisition costs. Second, on July 12, 1983, the Village of Bolingbrook issued $ 44.8 million in refunding and improvement bonds (BLB bonds). Of that $ 44.8 million, approximately $ 38.9 million was used to refinance the Provider's outstanding 1978 and 1981 bonds and the remaining $ 5.9 million was used by the Provider to purchase equipment. The restrictive covenants in the Provider's 1978 and 1981 bonds that had precluded the transfer of GH to GHCH were then removed, and GH was transferred to GHCH on July 12, 1983. On December 31, 1984, the Provider asked for and received confirmation from GHCH that GHCH owed the Provider $ 7.5 million, which included the $ 5.9 million initial transfer, interest and other related amounts.

 The fiscal intermediary, Blue Cross and Blue Shield Association/Blue Cross and Blue Shield of Illinois ("the intermediary"), initially did not question the two borrowings and offset the interest income accrued on the $ 5.9 million loaned to GH against the Provider's interest expense for the fiscal years 1983 and 1984. In 1986, the Provider determined the $ 5.9 million loan was uncollectible and wrote it off, which caused the intermediary to review the entire matter. The intermediary then determined that the additional $ 5.9 million borrowed in BLB bonds in July 1983 was unnecessary and disallowed the interest expense for that amount on the Provider's cost reports for the fiscal years in dispute, FYE 1985 ($ 297,000), 1986 ($ 365,000), 1987 ($ 206,000) and 1988 ($ 202,000). The estimated aggregate amount of Medicare reimbursement in controversy during those years is $ 1,070,000.

 The Review Board affirmed the intermediary's decision. The Secretary, through the Administrator of the Health Care Financing Administration, declined to review that decision, so the Review Board's decision became the final decision of the Secretary. The Provider then filed suit in federal court. On March 21, 1994, the Magistrate Judge issued a Report and Recommendation ("Report") recommending that the Review Board's decision be reversed in favor of the ...

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