Hospital Authority of Floyd County, Georgia, Plaintiff-appellant, v. Margaret M. Heckler, Secretary, U.S. Department of Health &human Services, Defendant-appellee, 707 F.2d 456 (11th Cir. 1983)

Appellant, a public nonprofit hospital providing medicare, sought a return on its equity capital as a "reasonable cost" reimbursable under the Medicare Act, 42 U.S.C.A. sections 1395 et seq. (1974). After the Health Care Financing Administration declined to review the Provider Reimbursement Board's denial of appellant's claim, appellant brought an action in the district court which then granted appellee's motion for summary judgment, holding, (1) the denial by the Department of Health and Human Services since 1969 of reimbursement to nonprofit hospitals for return on equity capital was consistent with the Medicare statutes, and (2) the denial was not inconsistent with nonprofit hospitals' rights of equal protection. We affirm the district court's carefully reasoned decision. 522 F. Supp. 569 (N.D. Ga. 1981).

Appellant challenges the Secretary's regulation, 42 C.F.R. sec. 405.429, providing for reimbursement to only proprietary hospitals for return on their equity capital. This regulation was formulated in light of the 1966 Amendments to the Medicare Act, P.L. 89-713, 42 U.S.C.A. sec. 1395x(v) (1) (B), providing in part as follows:

... Regulations [defining reasonable cost] in the case of extended care services provided by proprietary facilities shall include provision for specific recognition of a reasonable return on equity capital ...

Appellant argues, as it did to the district court, that the statute's legislative history indicates that Congress intended that both proprietary and nonprofit hospitals would receive an allowance for return on equity. In making this argument, appellant points to a special additional allowance--existing in medicare's early days--of two percent of total specified costs. The Secretary of Health, Education and Welfare proposed this special allowance in June 1966, the month before the Medicare Act became effective. The Secretary apparently intended that the two percent would compensate both proprietary and nonprofit hospitals for otherwise unspecified costs, one of which was return on equity capital. The Secretary effected his two-percent proposal in fall 1966. Thus, it was contemporaneous with the above-cited amendment creating 42 U.S.C. § 1395x(v) (1) (B), which Congress approved October 19, 1966. Appellant finds support for its argument in the contemporaneity of the origins of the allowance and the amendment. Indeed, in the wake of the amendment's approval, the Secretary decreased the two-percent allowance for proprietary hospitals to one and one-half percent, but left the two-percent allowance for nonprofit hospitals intact. The Secretary paid the two-percent allowance to the nonprofit hospitals from fall 1966 through summer 1969, when he stopped in part for budgetary reasons.

Appellant argues that the contemporaneity of the origins of the allowance and the amendment, along with the three-year survival of the allowance after the amendment's enactment, demonstrate that Congress did not intend the amendment to eliminate reimbursement to nonprofits for return on equity capital. However, a close examination of the amendment's legislative history indicates that Congress did so intend.

First, the two-percent allowance covered more than a return on capital equity. During senate hearings on the question of reimbursement guidelines, Mr. Robert Ball, Commissioner of Social Security, testified in part as follows:

We believe this 2-percent allowance is necessary to carry out [the] objective [of paying "the full cost for medicare patients so that none of the cost of services to them will fall on nonmedicare patients"]. Difficulty in measurement, lack of adequate data and other considerations have precluded specific recognition of various elements which are germane to costs of services for beneficiaries.

For example, as indicated earlier, the other principles do not provide for specific recognition of a return on equity capital and it is recognized that historical depreciation may not be fully adequate for a determination of costs. Moreover, although the methods to be utilized by providers for allocating the cost to be attributable to beneficiaries are the best available, there is a lack of precision in the methods which may well result in understating the cost of rendering services to older people--for example, the likelihood of somewhat greater cost of rendering nursing and related services to older people.

It is the established practice of a significant number of large third party purchasers to include in payment for cost of services a factor in the form of an allowance to cover various elements not specifically recognized in the formula or not precisely measured....

Reimbursement Guidelines for Medicare: Hearing before the Senate Comm. on Finance, 89th Cong., 2nd Sess. 56 (1966). Thus, in addition to covering return on equity, the Secretary sought, through the two-percent allowance, to cover imprecision in cost measurement and costs above the norm due to the age of medicare patients. The Hearing occurred late in May 1966 and the medicare program was to begin only about a month later. The administrators were anxious to attract hospitals to the program and wished to insure the adequacy of the financial incentive. See Saline Community Hospital Ass'n v. Schweiker, 554 F. Supp. 1133 (E.D. Mich. 1983). The two-percent allowance was tolerated until the program was soundly underway.

The district court was correct in finding that the exchanges between senators and administrators at the Hearing "make it quite unequivocal that the Senate Committee members believed that a return on equity capital was not, and should not, be provided [by the Medicare Act]," 522 F. Supp. at 572, although it is also clear that the administrators believed a return should be provided.¹  These exchanges took place in May; the amendment was enacted only a few months later in October. At the time of the amendment's enactment, Congressman Byrnes stated,

The amount that will be paid to the individual nursing home or facility ... shall be, and I quote, "the reasonable cost" of furnishing such care. In other words, as the law now stands, fundamentally all the Social Security Administration can pay are the costs, with no allowance for profits or a return on equity.² 

112 Cong.Rec. 28220 (1966). This is more evidence that Congress believed that "return on equity was not an allowable cost under medicare and that a specific provision was needed to reimburse proprietary hospitals for this cost." Saline Community Hosp., 554 F. Supp. at 1141.

The district court found further evidence of congressional intent in the amendment itself. The amendment expressly instructs the Secretary to reimburse proprietary providers with a reasonable return on equity capital and fails altogether to mention nonprofit providers. The district court also reasoned that Congress's failure to overrule the Secretary's 1969 cancellation of the two-percent allowance ratifies that cancellation. Indeed, Congress amended the Medicare Act in 1972 and left the provisions in question intact. In a report issued by the Senate Finance Committee a full eight months after the two-percent allowance had been discontinued, the committee staff stated:

The 2-percent bonus on top of accounted-for costs was added to Medicare reimbursement by HEW regulation in 1966; it was subsequently removed by HEW regulation in 1969. The bonus had been rationalized as a "growth" factor by hospitals and by Social Security as an allowance for costs actually incurred but unidentifiable due to problems in cost-finding during the initial stages of Medicare. Either way, the bonus was not justifiable, in our opinion.

Medicare and Medicaid--Problems, Issues and Alternatives, Staff of Senate Comm. on Finance, 91st Cong., 1st Sess. (Comm. Print 1970).

Thus, for the reasons the district court amply set forth, we conclude that the denial by the Department of Health and Human Services to nonprofit hospitals of an allowance for return on equity capital is consistent with the Medicare statutes.

Appellant asserts that the denial was not consistent with its equal protection rights. The district court was correct in concluding that the statutory scheme and the regulations have a rational basis. As the district court in Saline Community Hospital Association v. Schweiker noted:

Congress drew a distinction between providing a return for investors and providing funds to enable hospitals to finance new capital expenditures. At the time the Medicare Act was passed, non-profit hospitals had other advantages over proprietary hospitals. They are not taxed, they now can obtain financing through tax free bonds, previously they were able to obtain funds for new construction through Hill-Burton grants, and Medicare allows non-profit hospitals to obtain reimbursement for some expenses not recognized for proprietary institutions ...

554 F. Supp. at 1143.

AFFIRMED.