Gundry/Glass Hosp v. Shalala, Secretary ( 1999 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
GUNDRY/GLASS HOSPITAL,
Plaintiff-Appellant,
v.
DONNA E. SHALALA, SECRETARY OF
HEALTH AND HUMAN SERVICES;
HEALTH AND HUMAN SERVICES,
No. 98-1954
Defendants-Appellees,
and
BLUE CROSS AND BLUE SHIELD OF
MARYLAND; HEALTH CARE FINANCING
ADMINISTRATION,
Defendants.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Frederic N. Smalkin, District Judge.
(CA-96-3986-S)
Argued: March 4, 1999
Decided: April 5, 1999
Before NIEMEYER and WILLIAMS, Circuit Judges, and
SMITH, United States District Judge for the
Eastern District of Virginia, sitting by designation.
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Affirmed by unpublished per curiam opinion.
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COUNSEL
ARGUED: Michael Edward Glass, MICHAEL E. GLASS, P.A., Bal-
timore, Maryland, for Appellant. Tamera Lynn Fine, Assistant United
States Attorney, Baltimore, Maryland, for Appellee. ON BRIEF:
Lynne A. Bataglia, United States Attorney, Baltimore, Maryland, for
Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
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OPINION
PER CURIAM:
Gundry/Glass Hospital (Gundry/Glass), a Medicare provider,
sought reimbursement for costs incurred in the acquisition of a certifi-
cate of need (CON) under the Medicare Act, 42 U.S.C.A. §§ 1395-
1395ggg (West 1992 & Supp. 1998). The Secretary of Health and
Human Services (the Secretary), who must reimburse Medicare pro-
viders for the reasonable or customary costs associated with caring for
Medicare participants, engaged Blue Cross/Blue Shield of Maryland
(Blue Cross/Blue Shield) to administer the reimbursement program in
Maryland. Blue Cross/Blue Shield denied the requested reimburse-
ment and Gundry/Glass appealed to the Provider Reimbursement
Review Board (the Board). Blue Cross/Blue Shield's decision was
affirmed and the reimbursement disallowed. Gundry/Glass appealed
the Board's decision to the United States District Court for the Dis-
trict of Maryland, which had jurisdiction pursuant to 42 U.S.C.A.
§ 1395oo(f)(1) (West Supp. 1998). The district court affirmed the
Board's denial of reimbursement and Gundry/Glass now appeals to
this Court. We affirm the district court's judgment, but for somewhat
different reasons.
I.
The facts of the case are not disputed. In 1988, Gundry/Glass
acquired all of the assets of the Rachel Gundry Hospital, which
2
included a CON. According to the testimony of Gundry/Glass's CEO,
the Rachel Gundry Hospital originally acquired the CON at relatively
little or no cost in the early 1970's through a state law grandfathering
mechanism. The CON was an important acquisition because under
Maryland law Gundry/Glass could not operate without it. See Md.
Code Ann. Health-Gen. II §§ 19-115(e), 19-319(c) (Supp. 1998).
Gundry/Glass paid a total of $3.2 million to acquire the Rachel
Gundry Hospital. Of that amount, only about $375,000 was allocated
to the hospital's tangible assets. According to testimony, loan agree-
ments, and valuation documents, the remainder of the purchase price
was assigned to intangibles such as goodwill, the CON, and the lease
assignment. Arthur Andersen, Gundry/Glass's independent auditor,
deemed goodwill to account for only a small portion of the total
amount assigned to intangible assets. Although no specific value was
assigned to the CON, a consensus of the evidence in the record points
to the CON as being the most valuable asset, tangible or intangible.
Gundry/Glass's CEO stated that the CON's value had increased
because Maryland was no longer issuing new CON's since "[t]here
was no bed need available."
After the acquisition, the former Rachel Gundry Hospital began
operating as the Gundry/Glass Hospital. The patient population and
professional staff quickly turned over, but the institution continued
operating without interruption. In 1989, Glass submitted its cost struc-
ture to Blue Cross/Blue Shield for reimbursement under the terms of
Medicare. The cost structure included $376,537 in interest expense
attributed to the debt incurred to purchase the intangible assets and
$72,435 in amortization of the intangible assets' value. Based upon
the amount of Medicare service provided, these expenses translated
into a requested Medicare reimbursement of $137,405 for interest
expense and $26,433 for amortization expense. Blue Cross/Blue
Shield declined to reimburse these amounts because it contended that
the costs were insufficiently related to patient care to be reimbursable
under Medicare and that, in any event, Medicare would limit the
value of the CON to a nominal amount and thus negate reimburse-
ment. Gundry/Glass appealed Blue Cross/Blue Shield's disallowance
to the Board in accordance with 42 C.F.R. § 405.1835 (1998), but the
Board upheld the denial. On appeal to federal district court, the deci-
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sion to disallow the disputed costs was once again affirmed. Gun-
dry/Glass now appeals to this Court.
II.
Under 42 U.S.C.A. § 1395oo(f) (West Supp. 1998), the Board's
decision should be reviewed in accordance with the standard
announced in 5 U.S.C.A. § 706 (West 1996), and the decision should
not be overturned unless it is not supported by substantial evidence,
is arbitrary or capricious, or is contrary to law."When reviewing an
agency's decision to determine if that decision was arbitrary and
capricious, the scope of our review is narrow. Like the district court,
we look only to see if there has been a clear error of judgment."
Hughes River Watershed Conservancy v. Johnson, 165 F.3d 283, 287
(4th Cir. 1999) (internal quotation marks omitted). It is not necessary
that we would interpret the evidence in the same manner as the
agency. Instead, the agency's decision must be supported only by sub-
stantial evidence, i.e., evidence that a reasonable mind would accept
to support a conclusion. See Pleasant Valley Hosp., Inc. v. Shalala,
32 F.3d 67, 70 (4th Cir. 1994).
III.
Four issues are presented on appeal. First, whether interest expense
related to the acquisition of a CON is an allowable expense under
Medicare regulations. Second, what amount of interest expense would
be allowable under Medicare reimbursement regulations. Third,
whether the Secretary violated Gundry/Glass's due process rights by
changing her position on the reimbursement of CON-related expenses
in midstream and without notice. And fourth, whether the failure to
consider certain testimony and documentary evidence at the Board
hearing unfairly jeopardized Gundry/Glass's position.1
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1 We note that on appeal Gundry/Glass also presses a claim for reim-
bursement of amortization expense related to the cost of the CON. But
as the Secretary notes in her brief, this claim was expressly abandoned
in the proceeding before the district court. Gundry/Glass's statement in
its motion for summary judgment to the district court was unequivocal:
"Gundry/Glass, however, is not appealing the Secretary's decision to dis-
allow the amortization of the CON acquisition." (J.A. at 754.) Because
this claim was abandoned in the court below, it is not properly before us
on appeal.
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We need address only the second question, however, because
assuming the CON-related expense is reimbursable, the Medicare reg-
ulations undisputably prevent reimbursement due to the CON's negli-
gible historical cost, or alternately, cost basis. This determination
renders moot more troublesome issues such as the reasonableness of
the Secretary's narrow view of whether a CON is sufficiently related
to patient care as to warrant reimbursement.
The Medicare Act and accompanying regulation provide for the
reimbursement of a Medicare provider's reasonable costs in caring for
Medicare participants. See 42 U.S.C.A. § 1395f(b) (West Supp.
1998). Capital costs, including certain interest expenses, are allowable
costs to the extent necessary to provide patient care. See 42 C.F.R.
§ 413.153(a)(1) & (a)(2) (1998). Interest expense on capital indebted-
ness is limited, however, to the amount of interest expense attribut-
able to the debt required to finance the historical cost or the cost basis
of the asset acquired. Any interest expense on capital indebtedness
exceeding that amount is not considered reasonably related to patient
care. See 42 C.F.R. § 413.153(d)(1).
Under these regulations, we have a relatively straightforward task.
Section 413.153(d)(1) specifically prohibits reimbursement of interest
that is incurred on a loan amount that exceeds the cost basis under 42
C.F.R. § 413.134(b) (1998), or the historical cost under § 413.134(g).
See 42 C.F.R. 413.153(d)(1)(i).2 Both of these provisions, inter alia,
limit the permissible amount of the underlying debt to "[t]he allow-
able acquisition cost of the asset to the owner of record as of July 18,
1984." 42 C.F.R. § 413.134(b)(1)(ii)(A)(1) & .134(g)(3)(i). In the
case before us, neither party disputes that the Rachel Gundry Hospi-
tal, the CON's owner on July 18, 1984, paid little or nothing to
acquire the CON. Therefore, the loan amount and interest expense
relating to patient care is nominal at most. Under the plain language
of the regulations, Gundry/Glass is not entitled to any reimbursement
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2 This provision reads: "The following types of loans are not considered
to be for a purpose reasonably related to patient care: (i) For loans made
to finance [the] acquisition of a facility, that portion of the cost that
exceeds -- (A) Historical cost as determined under§ 413.134(b); or (B)
The cost basis determined under § 413.134(g) .. . ." 42 C.F.R.
§ 413.153(d)(1).
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for interest expenses deriving from the loan obtained to finance the
CON acquisition.
Despite this plain language, Gundry/Glass argues that the legisla-
tive history of the authorizing statutes indicates Congress's intent to
restrict reimbursement only in limited instances. Quoting legislative
history, Gundry/Glass maintains that the restrictions on reimburse-
ment were established to prevent the government from paying twice
for the same asset -- i.e., once for the cost to the original Medicare
provider and a second time for the subsequent provider's cost of pur-
chasing the asset from the original provider. Using this logic, it fol-
lows that because the Rachel Gundry Hospital paid little or nothing
for the original asset, there is no risk of the government paying twice.
The fatal flaw in Gundry/Glass's reasoning is, of course, that what-
ever the intentions of the individual members of Congress speaking
on the record or the language used in various committee reports, we
must consider only the language employed by Congress acting as a
body in the constitutionally prescribed manner. See, e.g., Roy v.
County of Lexington, 141 F.3d 533, 539 (4th Cir. 1998) ("The
remarks of individual legislators, even sponsors of legislation, how-
ever, are not regarded as a reliable measure of congressional intent.").
Gundry/Glass presents no argument that either the authorizing statute
or the implementing regulations allow an exception in these circum-
stances, and we find none. We must therefore implement the govern-
ing law as written, without engrafting our own amendments.
We conclude that the regulations clearly prevent any reimburse-
ment for interest expense because the loan proceeds were used to
finance the purchase of an asset at a cost in excess of the defined his-
torical cost or cost basis. Therefore, we need not address the other
issues raised on appeal.
IV.
The district court's judgment affirming the Board's decision is
therefore affirmed.
AFFIRMED
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