WASHINGTON -- The Clinton Administration urged the Supreme Court yesterday to allow the secretary of health and human services to determine how to reimburse Medicare hospitals that incur upfront losses when they refinance debt.
Also yesterday, the court issued orders deciding what cases it will review, but it held off on deciding whether to take a case important to bond lawyers, Arvey Hodes v. Kline and Knops.
The case involves a lower court ruling that the National Association of Bond Lawyers said would adversely broaden its members' liability under antifraud provisions of securities law. Attorneys hoped the court would say yesterday whether it would review the ruling because it was on a list of cases the justices considered on Friday for placing on their agenda.
At issue in the Medicare case, Shalala v. Guernsey, is whether Health and Human Services Secretary Donna Shalala should have applied generally accepted accounting principles to reimburse Guernsey Memorial Hospital in Cambridge, Ohio, for a one-time Medicare-related loss of $314,000. The hospital incurred the loss in 1985 when it advance refunded two issues of 501(c)(3) bonds originally sold in 1972 and 1982.
In deciding the case, the justices may clarify the extent to which courts must defer to an administrative agency's interpretation of laws and regulations it administers.
The outcome of the case is also expected to affect at least 126 other Medicare hospitals involved in similar administrative or court cases, which could cost the department an estimated $100 million, government lawyers have said.
The Guernsey refundings were carried out by the city of Cambridge on behalf of the hospital to save about $12 million in debt service costs over the remaining original terms of the bond issues. The total refunding loss, including the $314,000 Medicare portion, was $672,581, which resulted from payment of a call premium and write-off of unamortized bond discount and financing costs.
Shalala departed from generally accepted accounting principles when she ruled that the department would repay the Medicare portion of the loss on an amortized basis, from the date of issuance of the refunded debt to the date it is repaid, rather than in a lump sum.
The U.S. Court of Appeals for the Sixth Circuit struck down Shalala's ruling, holding that Medicare regulations call for adherence to GAAP unless a regulation specifically provides otherwise.
Shalala had relied on a provider reimbursement manual, rather than a regulation, in deciding to reimburse Guernsey over time. But Guernsey said the manual does not have the weight of a regulation and does not supersede the Medicare requirement that GAAP should apply.
At yesterday's argument, Justice Sandra Day O'Connor said she was perplexed that department regulations require hospitals to submit cost data for advance refundings in accordance with GAAP, but do not provide for complying with GAAP in making reimbursements.
O'Connor told Kent Jones, an assistant to the solicitor general who argued for Shalala, that "if you mandate the provider to follow generally accepted accounting principles, and you concede that these amounts are ... recoverable, then I don't know why the secretary shouldn't follow the same principles in determining what's reimbursable."
Jones said the amount to be reimbursed is not at issue, and that the secretary has discretion to make sure that any Medicare reimbursement match up with actual benefits provided in a specific year to recipients. The refunding losses cannot be tied to actual benefits provided in 1985, he said.
But "this isn't gold-plated plumbing" for which providers are seeking reimbursement, O'Connor said. Whether charges incurred in refinancing debt can be linked to specific Medicare benefits in a given year "is a very theological question," said Justice Antonin Scalia.
A group of hospitals told the court in a brief that "it is primarily the time value of money that is at stake."
The group consists of 28 hospitals that are involved in a similar case before the U.S. Court of Appeals for the Sixth Circuit, and 14 hospitals in a similar administrative proceeding by the department.
Not only are the hospitals deprived of timely reimbursements, but their Medicare reimbursements would be about 7% less under the manual procedures, compared with what payments would be under GAAP, the group said.
In the cases involving the hospital group members, Medicare achieves a "huge savings" of $274 billion as a result of the advance refunding of debt, which outweighs the small increase in up-front reimbursement of associated losses in accord with GAAP, the group told the court.
Scalia, Justice Ruth Bader Ginsburg, and Justice David Souter said they were puzzled why the department spelled out in specific regulations how hospitals must submit cost figures, but then addressed reimbursement methods in a manual not subject to notice and comment. Scalia said the question of whether the secretary is obligated to act by regulation is "central to the case."
Jones said the department did provide advance notice to hospitals in the manual and is "behaving consistently." He told the justices that all they have to decide is whether Shalala's ruling is rational.
Attorney Scott Taebel of Columbus, who argued for Guernsey, said the secretary's reasoning was "irrational." But Justice John Paul Stevens told Taebel he would "have to sell me on that one."
Taebel said GAAP should apply because the hospital no longer has a connection with the bonds, and the reimbursement should not be amortized as if Guernsey still were paying off the bonds.
In its brief supporting Guernsey, the hospital group said the manual "ignores the reality" that when refinancing debt, hospitals are discharged from the refunded debt because the proceeds are placed in an escrow account under the responsibility of a trustee.
Shalala's payment policy "results in a mismatch of costs and years in which [a hospital] provides services," and thereby results in an illegal subsidy of Medicare recipients by non-Medicare recipients and vice versa, the hospital group said.
