Villa View Community Hospital, Inc. v. Heckler
Opinion of the Court
The Secretary of Health and Human Services (Secretary) disallowed reimbursement under the Medicare Act
A. FACTS
Villa View was formed as a nonprofit corporation to (1) purchase the ongoing hospital operation of Villa View Hospital, Inc. (VVH), a proprietary corporation, and the land, building and equipment which VVH was leasing from a partnership; and (2) expand the hospital from 52 to 99 beds. Villa View proposed to finance the acquisitions and expansion by issuing tax-exempt subordinated hospital revenue notes.
Normally, Villa View could not issue tax-exempt bonds and notes. However, in Revenue Ruling 63-20; the Internal Revenue Service held that nonprofit corporations, such as Villa View, could issue tax-exempt securities “on behalf of” a political subdivision if the corporation and political subdivision fulfilled certain requirements.
Villa View undertook the actions necessary to fulfill the requirements of Revenue Ruling 63-20. These actions consisted primarily of (1) obtaining the participation of the City of San Diego as the political subdivision;
Villa View then sought to amortize certain costs in connection with the land which Villa View had acquired from the partnership.
Following the filing of the cost reports, Villa View’s fiscal intermediary,
On review, the Secretary affirmed the ultimate result of the Board, but the Secretary supplied his own findings and legal conclusions. The Secretary concluded that Villa View’s interest in the property is not necessarily limited in duration. The Secretary further concluded that Medicare regulations and principles preclude reimbursement for land use costs, and that generally accepted accounting principles prohibit amortization of the costs. Finally, the Secretary concluded that the City and Villa View are “related organizations” within the context of 42 C.F.R. § 405.427, which would also preclude reimbursement. It is these findings and conclusions which we must review.
Following the Secretary’s decision, Villa View sought judicial review.
B. STANDARD OF REVIEW
The standard of review is governed by 42 U.S.C. § 1395oo(f)(l) (Supp. 1983). This section provides that the Administrative Procedure Act, 5 U.S.C. §§ 701, et seq., governs the review of the Secretary’s decision. Under 5 U.S.C. § 706(2), our review is limited to determining whether the agency action was arbitrary, capricious, an abuse of discretion, not in accordance with law, or unsupported by substantial evidence on the record taken as a whole.
Under the arbitrary and capricious standard, we will give due deference to the Secretary’s interpretation of his own regulations where he has expertise in the substantive area involved and where the regulations were promulgated pursuant to congressional authorization. White Memorial Medical Center v. Schweiker, 640 F.2d 1126, 1129 (9th Cir. 1981). However, the deference which we afford the Secretary’s interpretation of his regulations is not total:
We must ... examine the interpretation itself in light of the language of the regulations. The words must be reasonably susceptible to the construction placed upon them by the Secretary, both on their face and in light of their prior interpretation and application. The interpretation must sensibly conform to the purpose and wording of the regulations.
Pacific Coast Medical Enterprises v. Harris, 633 F.2d 123, 131 (9th Cir. 1980) (citations omitted).
Under the substantial evidence standard of review, we must affirm a finding where there is “ ‘such relevant evidence as a reasonable mind might accept as adequate to support a conclusion,’ ” Consolo v. Federal Maritime Comm’n, 383 U.S. 607, 619-20, 86 S.Ct. 1018, 1026-27, 16 L.Ed.2d 131 (1966), quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938), even if it is possi
C. DISCUSSION
The Secretary based his decision to disallow Villa View’s amortization of land use costs on four conclusions.
I. Title to the Land will Vest in 2008
Unless Villa View’s land use rights are limited in duration, Villa View cannot amortize the cost of acquiring the rights.
The Secretary first argues that the City merely has an option to accept title to the property in 2008; the City can refuse to accept title if it so chooses. Therefore, title will not necessarily ever vest in the City.
The evidence in the record, however, contradicts this argument. Although the Bond Indenture provides the City with an option to take title to the property, this option can be exercised only if Villa View defaults on the Bonds. Upon default, the City has an option to purchase the property for an amount sufficient to redeem the outstanding Bonds. The evidence in the record is clear, however, that the City is obligated to take title to the property following Villa View’s retirement of the indebtedness. The City Council adopted a Resolution which obligated the City to accept title.
We note that the referenced IRS regulations require the vesting in the City of the property acquired with the tax exempt bonds and note proceeds upon retirement of the debt. This transaction has been structured and the documents drafted by the corporation to insure that*1092 requirement.... The City must take title when the bonds and notes are retired. While the City may not then be bound legally to continue to hold title or to operate the property as a hospital facility, title will vest in the City upon retirement of the bonds and notes. This is not an optional requirement under the documents.
Although the Secretary acknowledges the existence of the above evidence, the Secretary makes no attempt to refute the evidence. Moreover, the Secretary offers no evidence to support his position that the City is not obligated to accept title in 2008.
The Secretary next argues that Villa View’s Articles of Incorporation allow the corporation to retain title by extending the debt. The Articles of Incorporation provide that the City will receive title to the property on the retirement of all indebtedness incurred to acquire and expand the hospital facility. The Secretary claims that Villa View will need to incur additional indebtedness to finance maintenance and repairs, and that this additional debt will preclude a transfer of title to the City.
The evidence in the record again fails to support the Secretary’s argument. The indebtedness referred to in the Articles of Incorporation (to acquire and expand the hospital facility) is the obligation secured by the Bonds. The Bond Indenture requires these obligations to be repaid by 2008, and upon repayment, the City will receive title to the land. The Bond Indenture also prohibits Villa View from incurring any additional long term debt and requires Villa View to place certain sums in a renewal and replacement fund for repairs, renewal or replacement of the facility. The record also shows that Villa View executed a Bill of Sale and Grant Deed for the hospital facility and property. Villa View placed these documents in an irrevocable escrow, with instructions that they be delivered to the City on redemption of the Bonds and Notes. Thus, the Secretary’s second argument lacks support in the record.
The Secretary’s third argument concerns a provision of the Bond Indenture which allows the release of land from the Indenture.
Once again, the Secretary ignores the evidence in the record. In the Bond Indenture, Villa View agreed to rebuild in the event of any damage to or destruction of the facility.
In summary, the Secretary’s conclusion that title will not necessarily vest in City upon repayment of the Bonds is based on unsupported speculation and is contradicted by the evidence in the record. Villa View’s rights to use the land will cease to exist no later than 2008, when the Bonds are repaid. Therefore, the cost of acquiring the land use rights can be amortized if generally accepted accounting principles so provide and there are no contrary regulations.
2. Medicare Regulations
The Secretary argues that even if the land use rights have a determinable life, several Medicare regulations and policies preclude reimbursement for land use costs.
The Secretary’s reliance on these regulations and policies is misplaced. As a general rule, the cost of acquiring rights to land is not subject to amortization or depreciation. This general rule, however, is inapplicable here. Land is not generally amortizable or depreciable because it has a perpetual existence and is not normally subject to wear and tear or obsolescence.
The Secretary also argues that reimbursement of the land use costs would re-suit in an abuse of the Medicare Trust Fund. The Secretary, however, fails to provide us with any evidence to support this argument. The Secretary further argues that the costs should be disallowed because “[o]ne of the primary policy goals is to conserve the Medicare Trust Funds.” We find this argument unpersuasive. If a provider’s claim for reimbursement is in conflict with the Medicare Act and regulations, then reimbursement must be disallowed, Where the provider’s claim is consistent with the Act and regulations, however, reimbursement must be allowed. The Secretary cannot deny reimbursement simply to save money.
The regulations and policies which the Secretary cites do not, in fact, apply to Villa View’s amortization of the land use costs, Therefore, the Secretary cannot rely on them to disallow the costs. Since the Secretary failed to cite any regulation which does apply, generally accepted accounting princi-pies must be examined to determine whether the land use costs are reasonable costs and should be reimbursed.
3. Generally Accepted Accounting Principles
The Secretary argues that generally ae-cepted accounting principles prohibit the amortization of the land use costs. The Secretary, however, fails to cite any portion of the record in which there is testimony or other evidence to the effect that the land use costs should not be amortized. Ai-though the Secretary had a full opportunity before the Board
Although the Secretary fails to support his argument with any evidence in the record, there is extensive evidence to support Villa View’s position that generally accepted accounting principles require amortization of the land use costs. Each of the accounting experts who testified at the hearing agreed that the costs should be amortized. The independent accounting firm which prepared Villa View’s certified financial statements concluded that generally accepted accounting principles allow amortization of the land use costs. Also, three national accounting firms contacted by the intermediary stated that the costs in question were properly amortized,
We cannot affirm a finding by the Seere-tary which lacks any support in the record. The Secretary’s finding that generally accepted accounting principles preclude amortization of the land use costs is completely unsupported by the evidence in the record, The only finding supported by the evidence in the record is that generally accepted accounting principles allow amortization of the land use costs,
4. Related Organizations Principle
The Secretary’s final basis for disallowing the reimbursement of the costs is the “related organizations” regulation, 42 C.F.R. § 405.427. This regulation provides that where a provider obtains facilities from a
We find no merit in the Secretary s application of the doctrine to Villa View and the City. The related organizations principle in ,. ... .. , , ,, the regulation applies only where the or- • I- • . .. . , T, ., , gamzation is related to the provider by “common ownership” or “control.” 42 C.F.R. § 405.427(a).
CONCLUSION
vffla view>s land use ri Ms are limited in duration The ri htg wü] end when the , , ., ? AAAO , ,, bonds are repaid m the year 2008 and the , , . ,... , ,, , , , , ... City obtains title to the land and hospital » i... , , facilities. Since the Secretary failed to sug- , gest any Medicare regulation which m fact b & ,, , . precludes the costs, generally accepted 1 b. , , accounting practices must be applied to de- , . . , , termine whether the land use costs can be ...... , amortized and reimbursed. The uncontra- , . .. . . dieted expert evidence m the record requires a finding that generally accepted ^ f. .. . .. ... . accounting practices allow amortization of TT.„ _r. , , . , Villa View s land use costs. Therefore, amortization of Villa View’s land use costs are reasonable costs under the Medicare Act and g^ould be reimbursed.
,, . . . The District Courts decision is reversed , ,, . , , „ , ,, and the cause is remanded for further proceedings.
REVERSED AND REMANDED,
. For a discussion of the Act, see Pacific Coast Medical Enterprises v. Harris, 633 F.2d 123, 126-27 (9th Cir. 1980); American Medical International, Inc. v. Secretary of Health, Education and Welfare, 466 F.Supp. 605, 609-10 (D.D.C. 1979), aff’d, 677 F.2d 118 (D.C.Cir. 1981).
. Revenue Ruling 63-20 provides in part:
The Internal Revenue Service holds that obligations of a nonprofit corporation organized pursuant to the general nonprofit corporation law of a state will be considered issued “on behalf of” the state or a political subdivision thereof for the purposes of section 1.103-1 of the Income Tax Regulations, provided each of the following requirements is met: (1) the corporation must engage in activities which are essentially public in nature; (2) the corporation must be one which is not organized for profit (except to the extent of retiring indebtedness); (3) the corporate income must not inure to any private person; (4) the state or a political subdivision thereof must have a beneficial interest in the corporation while the indebtedness remains outstanding and it must obtain full legal title to the property of the corporation with respect to which the indebtedness was incurred upon the retirement of such indebtedness; and (5) the corporation must have been approved by the state or a political subdivision thereof, either of which must also have approved the specific obligations issued by the corporation.
. Villa View proposed that the City of San Diego, California become involved as the political subdivision on whose behalf the securities would be issued. After several months of negotiation with the City, the San Diego City Council adopted Resolution No. 208434. In this resolution, the City Council obligated the City to accept title to the hospital properties after the bonds were paid off. This Resolution states in part:
This Council, on behalf of the City of San Diego, hereby accepts from the Corporation the transfer of the hospital facility ... when all of the First Mortgage Hospital Bonds and said Subordinated Hospital Revenue Notes ... have been paid, and hereby agrees that title thereto will vest in the City of San Diego upon such payment and after delivery to the City of San Diego of the Grant Deed and the Bill of Sale on the hospital facility, and hereby accepts the option to purchase the hospital facility before that date upon certain events and conditions specified in said Indenture.
The City Council also approved the issuance of the tax-exempt bonds on the City’s behalf.
. Section 10 of the Articles of Incorporation provides that upon repayment of the bonds, title to the hospital facility shall be conveyed to the City. Section 10 provides in part:
[Ujpon retirement of all of the indebtedness of the Corporation incurred and to be incurred by the Corporation to acquire the hospital facility known as Villa View Hospital and to enlarge, improve and extend the same, the Corporation shall, without further action by the members of Board of Directors, transfer, convey and set over unto the City and its successors in interest, its entire right, title and interest in the Hospital Facility, as defined in the legal instruments securing such indebtedness without further consideration due.
The Articles of Incorporation also grant the City the right to reject candidates for the Board of Directors and the right to have a non-voting representative at Board meetings.
. Under the terms of the Bond Indenture, Villa View executed and placed in escrow a Bill of Sale and Corporation Grant Deed to the hospi
. Normally, the cost of acquiring land is not subject to amortization or depreciation and Villa View accepts this. Villa View argues, instead, that its rights with respect to the land in question are different from the normal rights associated with land owned in perpetuity. One of Villa View’s accounting experts explained Villa View’s position to the Board this way:
Under generally accepted accounting principles, land which is owned in perpetuity is, generally, not subject to depreciation, nor are the costs of purchase of such land subject to amortization. This is usually accepted as true because land, unlike other fixed assets, generally does not have a limited useful life span. It does not deteriorate with the passage of time, and usually is not physically exhausted through use. The owner is assumed to have the right of enjoyment of the land until, at the owner’s option, that right is relinquished. Therefore, depreciation accounting — which aims to distribute the cost of a tangible capital asset over its estimated useful life — is inapplicable to land owned in perpetuity. Similarly, the cost of land owned with infinite service life to the present owner is not subject to amortization; this, again, is because land ordinarily is stable and permanent.
In those instances where the right to use land is for a period limited in duration and where the land after that period of use will not belong to the present user, the cost of obtaining that right is subject to amortization. For instance, the cost of a leasehold is subject to periodic amortization by reason of the determinable termination date of the right to use. Similarly, the costs of other interests in land which are limited in duration are properly amortized. This is consistent with and required by generally accepted accounting principles.
If land use rights are obtained under an arrangement where the land is nominally owned but must be surrendered without compensation at a future date, the cost of obtaining the use of such land (less salvage value) should be amortized over the anticipated duration of the use of the land.... Under such circumstances the land itself is not being depreciated; rather, the cost of obtaining the right to use the land is being amortized in such a manner as to permit the matching of revenues and expenses.
. To assist with the administrative task of determining the reasonable cost of a provider’s services to Medicare-covered patients, the Act authorizes a provider to appoint certain private organizations (with the approval of the Secretary) as “fiscal intermediaries” to act as agents for the Secretary. These intermediaries review claims for costs and administer payments due hospitals under the program. 42 U.S.C. § 1395h. To determine the costs reimbursed to a provider, the fiscal intermediary reviews and audits an annual cost report filed by the hospital. 42 C.F.R. § 405.406(b). After an audit of the provider’s report, the intermediary determines the “reasonable cost” of the reimbursable services which have been provided, and hence the amount due. See 42 C.F.R. § 405.-454(f).
. Providers dissatisfied with audit adjustments imposed by the fiscal intermediary may appeal the intermediary’s determination to the Provider Reimbursement Review Board. 42 U.S.C.
. A provider dissatisfied with the final decision of the Secretary may obtain judicial review of the decision in federal District Court. 42 U.S.C. § 1395oo(f)(l). •
. The substantial evidence test applies to the review of factual determinations based on a record made at a hearing. White Memorial Medical Center v. Schweiker, 640 F.2d 1126, 1129 (9th Cir. 1981). Therefore, this standard applies to the Secretary’s conclusion that there were no existing generally accepted accounting principles applicable to the subject transaction. The Secretary’s other conclusions involved applications of laws and regulations and are reviewable under the arbitrary and capricious standard. However, under any standard of review, all of the Secretary’s conclusions must be reversed, since they lack any basis.
. The Secretary also concludes that Villa View possesses both legal and equitable title to the land. From this conclusion, the Secretary argues that Villa View’s use of the land is perpetual. We need not decide whether Villa View or the City presently possesses equitable title to the land. As we describe more fully in the text of the opinion, title to the land must pass to the City by the year 2008. It is this fact which makes Villa View’s interest in the land determinable for accounting purposes, and requires amortization of the land use costs.
. See footnote 6, supra.
. See footnote 3, supra.
. The Secretary does state that one of the instructions for the escrowholder constitutes evidence that title need not necessarily pass to the City. This instruction provides that if the City refuses the Grant Deed and Bill of Sale when the escrowholder delivers them, then the documents should be returned to Villa View. The Secretary argues that this instruction establishes that title may not necessarily pass to the City. The record shows, however, that this instruction is a standard escrow instruction, included at the direction of the escrowholder. The instruction is not evidence that the City can legally refuse to accept title.
. Section 7.13 of the Bond Indenture provides in part:
Release of Unimproved Land. The Corporation [Villa View] may at any time and from time to time request the Trustee to release from the lien of this Indenture and reconvey to the Corporation any portion of the land upon which no building, structure or permanently installed equipment has been placed, and the Trustee shall execute the necessary documents to effect such release and recon-veyance upon receipt of the following items:
(5) a written appraisal of the value of the land to be released and reconveyed prepared by a qualified appraiser approved by the Trustee; and
(6) a check or other payment for the land, in an amount not less than that established by the appraisal ....
(7) a resolution duly adopted by the City Council of the City approving the release and reconveyance.
. Villa View has requested, and the City Council has approved, the release of undeveloped land under this section. The original cost of acquiring this released land cannot, of course, be included in the cost of acquiring the land use rights to the unreleased land. Only the cost of acquiring the unreleased land can be amortized under our holding.
. In the alternative, Villa View may pay over to the trustee all insurance proceeds and other funds in an amount sufficient to redeem all outstanding bonds. At this point, the land would pass to the City.
. Hospitals are generally reimbursed for the “reasonable cost” of rendering services to hospital patients covered by Medicare. 42 U.S.C. § 1395f(b). The Medicare Act defines reasonable cost of a service as “the cost actually incurred ... and [this cost] shall be determined in accordance with regulations establishing the method or methods to be used .... In prescribing the regulations ... the Secretary shall consider, among other things, the principles generally applied by national organizations .. . . ” 42 U.S.C. § 1395x(v). Pursuant to this authorization, the Secretary has promulgated regulations governing the reimbursement of providers. See 42 C.F.R. §§ 405.401-405.488 (1981). As we recently stated, these regulations provide that costs shall normally be reimbursed in accordance with generally accepted accounting principles:
The Secretary normally follows generally accepted accounting practices, 42 C.F.R. § 405.406(a) (1979), but when these practices do not accurately reflect the cost of patient care, as opposed to the cost of running a business, the Secretary reserves the right to prescribe different accounting practices. See 42 Fed.Reg. 46,292 (1976).
North Clackamas Community Hospital v. Harris, 664 F.2d 701, 706 n. 16 (9th Cir. 1980). Thus, where the Secretary has not prescribed different accounting practices by regulation, the Secretary must apply generally accepted accounting principles to determine whether a particular cost claimed by a provider is reimbursable under the Medicare Act.
. The Provider Reimbursement Manual is a series of provisions issued by the Health Care Financing Administration (the Health and Human Services agency delegated the responsibility of administering the provisions of law which are at issue in this case). These provisions are intended to provide informal guidelines and policies for determining reasonable costs under Medicare.
. See footnote 6, supra.
. See footnote 18, supra.
. The Secretary is represented at the Board by his agent, the fiscal intermediary.
. Villa View called several accounting experts to testify before the Board. These witnesses were accepted by the intermediary and the Board as experts in accounting.
. The Secretary cites no judicial precedent for his novel interpretation of the statute. We need not decide whether the Secretary’s interpretation can stand, however, since we find that the City and Villa View are not related organizations under the statute.
. 42 C.F.R. § 405.427(a) provides in part:
Costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are includable in the allowable cost of the provider at the cost to the related organization.
. We note that there has been no showing that the land in this case was initially sold to villa View so that the City’s land use costs in perpetuity would be disguised as Villa View’s amortizable costs during the period of repayment on Villa View’s purchase money municipal bonds. In other words, this is not a case where the City transferred its land acquisition cost® to the federal government to pay for what ^ouW’ UP°" repayment of the bonds, be the City's own facility.
Concurring Opinion
concurring:
I concur in the majority opinion, but write separately to emphasize my understanding that in holding that the cost of Villa View’s land use rights is reimbursable under the Medicare Act, we intimate no view as to what that cost is. The cost of the land use rights is a factual determination, which the Secretary must make. The cost of the right to the use of the land for a limited period may be less than the cost of a fee simple interest in the land. To determine the dollar amount that may be amortized, the value of the benefit received by
Reference
- Full Case Name
- VILLA VIEW COMMUNITY HOSPITAL, INC., a nonprofit corporation v. Margaret H. HECKLER, Secretary of Health and Human Services
- Cited By
- 21 cases
- Status
- Published