                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


1-19-2005

Mercer Street Friend v. USA
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-1258




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                                                                NOT PRECEDENTIAL

                     UNITED STATES COURT OF APPEALS
                          FOR THE THIRD CIRCUIT
                                __________

                                    NO. 04-1258
                                    __________

                     MERCER STREET FRIENDS, New Jersey,
                                     Appellant

                                           v.

                        UNITED STATES OF AMERICA,
                     Department of Health and Human Services,
                     Centers for Medicare & Medicaid Services
                                   __________

                   On Appeal from the United States District Court
                             for the District of New Jersey
                             (D.C. Civil No. 02-cv-05487)
                   District Judge: Honorable Garrett E. Brown, Jr.
                                      __________

                     Submitted Under Third Circuit LAR 34.1(a)
                               on December 7, 2004

             Before: RENDELL, FISHER and YOHN*, Circuit Judges.

                              (Filed: January 19, 2005)

                                     __________

                             OPINION OF THE COURT
                                   __________

__________________________________

   * Hon. William H. Yohn, Jr., Senior Judge of the United States District Court for the
     Eastern District of Pennsylvania, sitting by designation.
YOHN, District Judge.

       Mercer Street Friends, New Jersey (“appellant”) appeals from an order of the

district court granting summary judgment to the United States Department of Health and

Human Services, Centers for Medicare and Medicaid Services (“appellee”). Our

jurisdiction arises under 28 U.S.C. § 1291. We will affirm.

                                             I.

       Appellant is a unit of Mercer Street Friends Center, a New Jersey non-profit

corporation. (App. at 253.) Among its programs, appellant provides home health care

services to the elderly and infirm in the Trenton area. (App. at 002.)

       The Friends Center Fund, Inc. is a non-profit corporation that manages appellant’s

endowment. (App. at 003.) Cadwalder Properties, Inc. (“Cadwalder”) was a non-profit

corporation established to hold title to the property rented by appellant. (App. at 253-54.)

Cadwalder was dissolved as an entity in October 1996, and all of its assets were returned

to Mercer Street Friends Center. (App. at 254.) Appellant borrowed money from and

paid interest to the Friends Center Fund, Cadwalder, and commercial banks during fiscal

year 1996.

       In its 1996 fiscal year, appellant received approximately $3 million in Medicare

reimbursements. In its annual cost report, appellant claimed $113,000 paid in working

capital interest on loans of approximately $1.2 million. (App. at 003.) The claimed

interest reflected $43,000 paid on loans from commercial banks and $70,000 paid on



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loans from the Friends Center Fund. (Id.) In addition, appellant claimed $10,994 in

interest paid to Cadwalder. (Id.)

       In the spring of 1998, United Government Services (“UGS”), appellant’s fiscal

intermediary, performed an audit of appellant’s finances, reviewed the cost report that

appellant had submitted, and issued a “notice of program reimbursement” (“NPR”)

denying reimbursement for the interest paid on the loans. (App. at 004.) Appellant

appealed UGS’s decision to the Provider Reimbursement Review Board (“PRRB”), and a

hearing was held on August 25, 1999. In a decision dated June 29, 2000, the PRRB,

recognizing a need for working capital due to the lag in Medicare payments to providers

of services, allowed interest reimbursements on one month’s average operating expenses.

(App. at 264.) Appellant then sought review in the United States District Court for the

District of New Jersey, but on March 19, 2001, the parties agreed to (and the district court

entered) an order remanding the matter to the PRRB for a decision on the applicability of

the “donor restricted funds” exception to Medicare’s related party rule. See 42 C.F.R.

§ 413.153(c)(2). 1 On September 19, 2002, the PRRB issued a new decision, finding that

the Friends Center Fund was a donor restricted fund as defined in 42 C.F.R.

§ 413.153(c)(2), but also concluding that this finding had no effect on its previous




  1
    42 C.F.R. § 413.153(c)(2) provides that “[i]f the general fund of a provider ‘borrows’
from a donor-restricted fund and pays interest to the restricted fund, this interest expense
is an allowable cost.” This allowance is an exception “to the general rule regarding
interest on loans from controlled sources.”

                                             3
decision regarding the allowance of interest reimbursements based on one month’s

expenses. (App. at 87.)

                                             II.

       Appellant again sought review in the district court, both sides eventually moved

for summary judgment, and by memorandum opinion dated December 30, 2003, the court

granted appellee’s motion and denied that of appellant. (App. at 2-15.) The district court

found that the PRRB’s decision was “a determination based upon already established

regulations under the Medicare statute,” and thus fit “into the category of an ‘interpretive’

rule or adjudication.” The court rejected appellant’s argument that the decision amounted

to prohibited rule-making. The court also found that the PRRB decision was supported

by substantial evidence, as it held that “the PRRB properly assessed whether the loan for

working capital was a necessary expense under the regulations.”

                                             III.

       This Court reviews de novo a district court’s grant of summary judgment.

Greenberg v. United States, 46 F.3d 239, 242 (3d Cir. 1995). Because this case involves

judicial review of a M edicare reimbursement decision of the Secretary, that review is

governed by the judicial review provision of the Administrative Procedure Act (“APA”),

5 U.S.C. § 706, which is now incorporated into the M edicare statute. See 42 U.S.C.

§ 1395oo(f)(1). Thus, unless this Court finds that the reimbursement decision was

“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,”

we must defer to it. 5 U.S.C. § 706(2)(A).

                                              4
                                             IV.

       Part A of Medicare, a federally funded health insurance program for the elderly

and disabled, authorizes payments for covered inpatient hospital services and related post-

hospital services, including those furnished by home health agencies. 42 U.S.C.

§§ 1395c, 1395d, 1395i. Part A services are furnished by “providers of services,” which

receive reimbursements from Medicare “fiscal intermediaries,” which are typically

private insurance companies that act as agents in administering the program. 42 U.S.C.

§§ 1395x(u), 1395h.

       For the period at issue, Medicare paid directly to home health agencies the

“reasonable cost” of covered services furnished to plan beneficiaries. 42 U.S.C.

§ 1395f(b)(1). “Reasonable cost” is defined as “the cost actually incurred, excluding

therefrom any part of incurred cost found to be unnecessary in the efficient delivery of

needed health services.” 42 U.S.C. § 1395x(v)(1)(A).

       Beyond this statutory definition, federal regulations establish principles to be

followed in determining what is and is not a “reasonable cost.” Under the regulations,

“[n]ecessary and proper interest on both current and capital indebtedness is an allowable

cost.” 42 C.F.R. § 413.153(a)(1). Interest is “necessary” only if: (1) “[i]t is incurred on a

loan made to satisfy a financial need of the provider;” (2) “[i]t is incurred on a loan made

for a purpose reasonably related to patient care;” and (3) “[i]t is reduced by investment

income except income from” several enumerated sources. 42 C.F.R. § 413.153(b)(2).

“Proper” interest is that which is incurred at a rate not in excess of what a prudent

                                              5
borrower would have paid, and that which is paid to a lender not related through

ownership or control to the borrower. 42 C.F.R. § 413.153(b)(3).

       Appellant contends that the PRRB’s decision, instead of being adjudicative of this

particular case, imposes “a bright-line 30-day limitation on allowable interest expense for

all providers of home health agency services,” and thus impermissibly “implements a new

methodology for determining the amount of interest expense that may be claimed as an

allowable cost.” (Appellant’s Br. at 19-20, 25-33.) Appellant contends that this decision

amounts to prohibited rule-making. Appellant argues in the alternative that the PRRB’s

decision was unsupported by substantial evidence in that, instead of assessing whether the

loan for working capital was a necessary expense under the regulations, the PRRB simply

imposed the 30-day limit on interest. (Appellant’s Br. at 21, 34-43.) Appellant contends

that the “record makes clear that all of M ercer Street Friends’ borrowings were

necessitated by its needs for working capital and investment in capital acquisitions in

order to maintain quality patient care,” but that these facts were essentially ignored by the

PRRB.

       We conclude that the PRRB’s 30-day limitation on interest reimbursements was

meant to get at “a financial need of the provider,” 42 C.F.R. § 413.153(b)(2), and was

calculated to ascertain what amount of interest was “necessary” under that regulation and

what interest was thus allowable as reimbursement. It was the result of the application of

pre-existing policies to the facts of this case. Therefore, appellant’s “rule-making” claim



                                              6
fails, because the limitation was imposed pursuant to the standards set out in the

regulations, and was based on an analysis of appellant’s particular financial situation.

       In addition, appellant’s claim – that the PRRB’s 30-day limitation on interest

reimbursement was unsupported by substantial evidence and unrelated to the facts of the

case – is without merit. The PRRB found that there was a legitimate need for appellant to

borrow working capital because of the one month lag in payments it received from

payors. (App. at 263.) Further, the PRRB made findings of appellant’s working capital

needs based on its operating expenses, and a reasonable interest rate, and decided on an

amount allowable as a reimbursement. Therefore, the decision was supported by facts

gleaned from evidence presented at the PRRB hearing, was neither “arbitrary” nor

“capricious,” and was supported by substantial evidence.

                                             V.

       For the foregoing reasons, we will AFFIRM the judgment of the United States

District Court for the District of New Jersey.

_________________________




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