Unpublished Disposition, 902 F.2d 40 (9th Cir. 1990)

Annotate this Case
US Court of Appeals for the Ninth Circuit - 902 F.2d 40 (9th Cir. 1990)

NATIONAL MEDICAL ENTERPRISES, INC., Doing Business ThroughVarious Wholly-Owned Hospital Subsidiaries,Plaintiff-Appellant,v.Otis R. BOWEN, Secretary, Department of Health and HumanServices, Defendant-Appellee.

No. 89-55045.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 10, 1990.Decided May 4, 1990.



In calculating their equity capital for several cost years, NME subsidiary hospitals excluded certain "deferred" tax liabilities for those years and included "prepaid taxes on deferred income" as assets. The fiscal intermediary excluded the "prepaid taxes" from the computation of equity capital. The Provider Reimbursement Board (PRRB) upheld the intermediary's adjustments. The district court upheld the decision of the PRRB and granted summary judgment in favor of the Secretary. We have jurisdiction pursuant to 28 U.S.C. § 1291 and affirm.

Under the Medicare Act, providers are reimbursed for "reasonable costs" of providing services to Medicare patients. 42 U.S.C. § 1395(f). These reimbursable costs include depreciation for certain assets. 42 C.F.R. Sec. 413.134. In addition to reimbursement for reasonable costs, providers are entitled to a certain percentage return on their equity capital. 42 U.S.C. § 1395x(v) (1) (B); 42 C.F.R. Sec. 413.157.

The parties agree that section 1217 of the Provider Reimbursement Manual-I (PRM-I) controls the outcome of this case. Section 1217 provides that current tax liabilities and "liabilities which are deferred due to a difference between the provider's method of accounting for Medicare purposes and the method of accounting used for tax purposes" must be included in the calculation of equity capital. PRM-I Sec. 1217. This section further provides that "an asset which results from ... a difference in accounting method would receive similar treatment." Id.1 

NME explains that since its hospitals use accelerated depreciation for Medicare, but straight-line depreciation and accrual accounting for their corporate books, the hospitals receive Medicare reimbursement for accelerated depreciation expenses in advance of "earning" the reimbursement on their books. Because they are cash-basis taxpayers, NME hospitals must treat the cash received from Medicare for depreciation expense reimbursement as current income on their tax returns, and pay taxes accordingly. These same Medicare cash payments, however, are treated as deferred income on their books, because those books are kept on a straight-line depreciation basis. NME contends that the taxes actually paid on the Medicare reimbursement are "prepaid taxes," which are assets. Finally, according to NME, these assets reflect a timing difference caused by the use of accrual accounting for Medicare and cash accounting for taxes, and therefore should be included in the equity capital calculation.

The "prepaid taxes," however, result from the providers' use of accrual accounting and straight-line depreciation for book purposes, not from the difference between the use of accrual accounting for Medicare and cash accounting for taxes. NME hospitals may well have a prepaid tax asset for the purposes of their books, but this is insufficient for inclusion in the calculation of equity capital under PRM-I Sec. 1217. Rather, as the Secretary determined, these "assets" are actually current tax liabilities which should be included as such in the providers' Medicare cost reports.



This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3


NME hospitals use accrual accounting and straight-line depreciation for their books; accrual accounting and accelerated depreciation for Medicare; and cash basis accounting and accelerated depreciation for their tax returns