SHALALA, SECRETARY OF HEALTH AND HUMAN SERVICES v. GUERNSEY MEMORIAL HOSPITAL
Legal provision: Medicare--provisions of the Social Security Act
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument next in Number 93-1251, Donna Shalala v. Guernsey Memorial Hospital.
We'll hear from you, Mr. Jones.
Mr. Jones: Mr. Chief Justice and may it please the Court:
Under the Medicare Act and section 413.9 of its implementing regulations, the United States reimburses the reasonable cost of services provided to Medicare beneficiaries.
The Secretary of HHS makes the reimbursement determinations under the act subject to judicial review under the APA.
This case concerns whether, in making these determinations, the Secretary is required by her regulations to apply generally accepted accounting principles even when she rationally determines in a particular case that application of those principles will not arrive at the reasonable cost for the services provided during the reimbursement period.
In our view, the language of the regulations contains no such requirement.
Section 413.20 of the regulations, on which the court of appeals relied, specifies that providers are to maintain their cost records by use of standardized definitions and accounting procedures and practices, and states, and I quote,
"that essentially reimbursement under the act involves making use of that cost data to arrive at equitable and proper payment. "
while nothing in these general admonitions about maintaining and using cost data to arrive at equitable and proper payment represents a clear, unambiguous and firm undertaking by the Secretary that she will always apply GAAP in reimbursement determinations.
Unknown Speaker: Well, Mr. Jones, you say that this regulation, 413.20, just governs how Medicare providers are to report their costs to the HHS--
Mr. Jones: To maintain their costs.
Unknown Speaker: --or to the intermediary, and if that's so, then what regulations say how HHS will determine the method to be used in providing reimbursement?
Mr. Jones: Section 413.9 of the regulation is the substantive standard that provides that all payments will be made with respect to reasonable costs.
That's the substantive standard.
Unknown Speaker: Well, if you mandate the provider to follow generally accepted accounting principles, and I guess you concede that under generally accepted accounting principles these amounts would be reportable and recoverable up front--
Mr. Jones: --No, we--
Unknown Speaker: --then I don't know why the Secretary shouldn't follow the same program in determining what's reimbursable.
Mr. Jones: --I think the easiest way for me to explain that is to point out that, even if a provider follows a particular format in submitting the costs, that does not mean that the costs thus submitted are reasonable costs to be reimbursed under Medicare.
For example, under accrual accounting, which is what the regulation talks about, or even under GAAP, a hospital with gold plumbing could arrive at a valid accounting statement for its actual depreciation costs.
Unknown Speaker: Well, but now wait a minute, I thought the Secretary had said, yes, the costs we're talking about here in this case are reimbursable, we're just going to do it annually, we're not going to do it up front.
Don't we assume that these are reasonable reimbursable costs?
Mr. Jones: Well, as the administrator pointed out in this case, the timing, the coordination of the timing of the cost with the periods benefited by that cost is as important in the determination of reasonable cost as the amount of the cost.
Unknown Speaker: Well, but this isn't gold-plated plumbing.
This is something that the Secretary says, yes, we'll let you have, but we're going to do it annually.
Isn't that right?
Mr. Jones: Well, there's... there are several points involved in your question, and let me see if I can address them.
The first point is whether these regs require that we imply... employ GAAP, and our point is, the text of the regulations doesn't require it, and it would be illogical for any such requirement to exist, because GAAP has only a remote relationship to whether costs are reasonable.
Unknown Speaker: Mr. Jones, if you could give an answer to Justice O'Connor's question, did the reporter report accurately, that would be helpful.
I think it was clear up until your brief in this case that you conceded that the hospital's report form was okay.
It was a proper report.
I couldn't tell for sure whether you were continuing to make that concession in your brief here.
Did the hospital report properly?
Mr. Jones: The hospital reported its expenses in a proper amount, and by interpretation of the agency's regulations, what the hospital is required to do is to apply the accrual basis of accounting, and it applied an accrual basis of accounting.
The question is, having met the format requirement of the reimbursement requirement, whether the costs thus reported are reasonable with respect to the services provided during the--
Unknown Speaker: Just... did the hospital report properly?
You seem to be saying, the reimbursement doesn't have to match the report, but the hospital asked the question, we have to fill out this form and claim our costs.
Was that cost report proper in compliance with the statute and regulations?
Mr. Jones: --It was proper as to amount and not as to the timing of the attribution of the costs to the periods benefited by the expense.
Unknown Speaker: So it was an improper cost report.
You're not making the argument that, yes, the report was proper, but the reimbursement doesn't have to correspond to the report?
Mr. Jones: Well, that is... maybe I'm misunderstanding your question about what is a cost report.
Unknown Speaker: What the hospital filed, should the hospital, instead of taking this all at once have split it up, have amortized it, as you did in your reimbursement?
Mr. Jones: Yes.
If they had followed PRM 233, that is the way they would have submitted their cost report.
It makes little sense for the Secretary to require its intermediaries to recast these expenses when they're submitted in a manner that doesn't correspond to the Secretary's reimbursement rules.
Unknown Speaker: But if they follow generally accepted accounting principles, they could have filed it exactly as they did.
Mr. Jones: They did follow, and did file--
Unknown Speaker: They did do that, didn't they?
Mr. Jones: --based upon generally accepted accounting principles for this type of transaction.
Unknown Speaker: And in theory, the regulation 413.20 says if you do that you're... that's proper for your report.
I don't know what 413.20 means, if it doesn't mean that.
It seems to me you have to concede that the report filed was proper, or else 413.20 has no meaning.
Mr. Jones: I will concede it for purposes of this argument, that we don't have a problem with providers estimating their costs in an accurate manner, which they did, and submitting them to us for us to make a determination of what reasonable cost is.
Unknown Speaker: Not don't have a problem, you've told them to do that in 413.20.
Mr. Jones: Well, I don't want to quibble, but on the other hand, this is our regulation, and we're entitled to interpret it, and all that that regulation--
Unknown Speaker: No, but there's... may I just raise this basic question about your interpretation?
As I understand you, you're saying 413.9 is the operative regulation on reimbursement, 413.20 and 413.24 are simply accounting and reporting regulations, and accounting does not necessarily determine reimbursability.
Mr. Jones: --Yes.
Unknown Speaker: Isn't it very odd, should we not consider it very odd in trying to make sense of 413.20 and 413.24 that the only regulation on reimbursement is at this very high level of generality, 413.9, whereas all of the detailed regulations, or regulations of comparatively greater detail, do not even address the ultimate issue of reimbursability.
That seems to me an unreasonable way for us to read, and, with respect, for you to read, 413.20 and 413.24.
Mr. Jones: It is easy to gloss over the specific words of these regs, and I certainly don't want to do that, but I think that it's also important to realize that the statute and the reg 413.9 are the substantive standard.
Congress adopted reasonable cost as the substantive standard.
We couldn't alter that standard if we wanted to, and we don't want to.
Unknown Speaker: Well, true, but in trying to make sense of 20 and 24, there's something very strange about your going to the trouble of greater detail in those, when you never go to the trouble, or the Secretary never goes to the trouble, on your reading, of addressing in detail the question of reimbursability.
Mr. Jones: Well, the only detail referred to in 413.20 is advice that you should use standard definitions in accounting practices.
Unknown Speaker: Which is the detail upon which this case turns.
Mr. Jones: No, the detail on which this case turns is--
Unknown Speaker: I mean, it's a pretty important detail.
Mr. Jones: --is whether these costs are--
Unknown Speaker: If generally accepted accounting principles drives reimbursability, the case is going to go one way, and if it doesn't, it's going to go the other way.
Mr. Jones: --The detail that should answer this case is whether these are reasonable costs.
All that the regs that have been relied on by the courts below refer to is how you are to prepare and maintain and submit your cost data.
Unknown Speaker: I realize that, but what about the oddity of addressing accounting in so much greater detail than addressing reimbursability?
Is that in fact a reasonable way for us to read 20 and 24?
Mr. Jones: I don't see all of the detail in 413.20 and 24 that you're referring to.
Let me explain--
Unknown Speaker: Well, there is the detail of reference, in effect, to generally accepted accounting principles.
Mr. Jones: --Not by words, and not by interpretation.
Unknown Speaker: Not by words, but you concede that in fact it is picked up by the words that are used, do you not?
Mr. Jones: No, I don't concede that, Justice Souter.
The statute... the reg 413.24 refers to submitting your cost data on the accrual basis of accounting.
It defines that term in the reg simply in a manner that differentiates that from cash basis accounting.
Unknown Speaker: Yes.
Mr. Jones: Now, the decisions of the Accounts Principles Board are quite clear that GAAP is just a subset and not an exhaustive list of all accrual accounting methodologies, and it's with that thought in mind that I think the Court should consider the consistent interpretation of the Secretary since these regs were adopted over 20 years ago.
Unknown Speaker: Let me... if I may, let me just go to 20, leaving aside the specific reference, what was it, in 24 on accrual basis... does 20 pick up generally accepted accounting principles?
Mr. Jones: --I don't see it in the text, and more importantly--
Unknown Speaker: It doesn't use that phrase--
Mr. Jones: --It certainly--
Unknown Speaker: --but it refers to--
Mr. Jones: --It says standard accounting practices.
Unknown Speaker: --standards of national organizations, and it refers to... I believe it refers, in effect, to insurance organizations.
Mr. Jones: No.
Actually, you're... that's the statute.
The statute makes a reference to--
Unknown Speaker: I'm sorry.
Mr. Jones: --considering, among other things, the reimbursement criteria of national organizations.
The reg that you're talking about just says, maintain your cost data so we can audit it, and we want you to maintain it by reference to standard definitions and accounting practices, and then the last sentence explains the context that I'm trying to inarticulately establish, and that's, last sentence says, essentially reimbursement under the act involves making use of this data to arrive at equitable and proper payment.
Now, I understand essentially means mainly involve, making use of means we're going to do something to the data that you've given us to arrive at something else, and that something else is equitable and proper payment, and to know what that means we go to the statute and 413.9, which says reasonable cost.
Unknown Speaker: I understand, Mr. Jones.
However, the statute requires that the manner of determining reimbursement be prescribed by regulations.
Is it your contention that the only regulation the Secretary has issued to comply with that statutory mandate is 413.9?
I mean, Congress goes to the trouble to say, you know, the reasonable costs shall be actually incurred, and shall be determined in accordance with regulations establishing the method or methods to be used.
Mr. Jones: That's what it says.
Unknown Speaker: Congress does not always require regulations to be issued.
Here, it specifically does, and you tell us that the only thing the Secretary did to comply with that was 14.9, which is what, you know... almost nothing.
Mr. Jones: Justice Scalia, the statute doesn't say the Secretary shall issue regs, it says, reasonable costs shall be determined in accordance with the regs.
These reasonable cost cases--
Unknown Speaker: Not the regs.
In accordance with regulations--
Mr. Jones: --regulations adopted by the Secretary.
Unknown Speaker: --You don't think that's a requirement to issue regulations?
Mr. Jones: I think that for the last 20-some years the Secretary, as in this case, has been making determinations as to reimbursable costs under section 413.9, which is the requirement that payment shall be made of reasonable costs.
Unknown Speaker: Are there other indications, other illustrations, apart from this one, where the report from the hospital is correct, it's a proper report, it reports the cost--
Mr. Jones: Yes.
Unknown Speaker: --which is reasonable, a reasonable cost, so the debate is, as here, not whether you can take this cost, but when?
Mr. Jones: Yes.
Yes, there's a very good example that I'd like to describe in some detail for you.
It came out of the Research Medical Center case in the Eighth Circuit, and what the court held... what that was about was where, in preconstruction of a facility, interest was accruing on a debt.
It was reasonable interest.
It was reasonably related to the construction of this facility.
What the Secretary determined in a PRM was that this type of preconstruction interest should not be paid by Medicare, it should be capitalized until the building is finished, and then it should be reimbursed over an amortized period while the building's being used.
Now, the reason that she did it that way was because it is extremely important in Medicare to align the costs incurred over the periods benefited by this cost, precisely because the hospital's level of reimbursement, the percentage of its costs that are repaid, fluctuates depending upon the level of service.
And in the Research Medical Center case, the court gave the example of a cost incurred by a hospital in year 1 that provides benefits for 10 years, and the court said that if the Medicare payment, if Medicare paid that whole cost in year 1, and then the hospital stopped covering Medicare patients in years 2 and thereafter, the result would be Medicare fully paid for costs that benefited non-Medicare patients in other years.
That result would precisely contradict the statutory cross-subsidization rule, which is that Medicare funds shall not be used to provide benefits for non-Medicare patients.
Unknown Speaker: That depends on whether you regard these charges as charges that are attributable to what was done in the past, or, rather, as charges that are attributable to the new financing, which is really a very theological question.
Mr. Jones: It--
Unknown Speaker: And I, you know, I don't know, you could answer it either way, and generally accepted accounting principles have answered it the other way.
Now, if you had wanted to answer it your way and had put that answer down in regulations instead of in what you call the Secretary's Provider Reimbursement Manual, we would have a lot more information in front of us from that regulation which might have been challenged in court at the time it was issued, but you didn't do that.
You just put it in your manual.
Mr. Jones: --No one has doubted that this particular application of the amortization principle in this case is a rational application.
What you seem to be referring to, Justice Scalia, is the question of whether the only way the Secretary could adopt a reasonable rule--
Unknown Speaker: In fact, it not only is rational, it's the one that GAAP itself used up until 1972, isn't it?
Mr. Jones: --And when GAAP adopted a different rule, 4 of the 18 members of the board didn't like it--
Unknown Speaker: Do I understand you correctly--
Mr. Jones: --said, let's stay with the old method.
Unknown Speaker: --that there's no debate between the two sides that this is a reasonable choice for her to make, and she could have made it in a regulation, the only question is, must she do it in the regulation and not stick it in the PRM?
Mr. Jones: Right.
And there's two aspects to that question.
The first is whether she has to do it in a regulation because her regs require GAAP, which I don't think they do.
They don't plausibly do that by their terms, or by interpretation.
The only other way that she could be required to adopt this by regulation would be if some statute compelled that requirement.
The only statute is the one Justice Scalia... that's applicable is the one Justice Scalia referred to, which says reimbursement shall be determined in accordance with the regs establishing methods.
She has such regs.
The question is whether she has to adopt every detailed subconcept as a regulation, and this Court has never held any agency to that requirement.
Unknown Speaker: Mr. Jones, can I ask you a question about exactly what regulation is being interpreted--
Mr. Jones: --Yes, sir.
Unknown Speaker: --in the interpretive bulletin?
I think you rely primarily on the general 413.9.
Is it not arguable that that was really an interpretation of the interest expense regulation, because that's where it appears in the manual?
Mr. Jones: This is a form of interest expense issue, but most of the other subregs refer to... for example, in the capital expense area... say reimbursement is limited to the following types of costs, and then talk about those costs, types of capital costs, but the substantive ceiling on these types of capital costs is in 413.9, which is the reasonable cost limit.
Unknown Speaker: You do not contend that this bulletin is an interpretation of 413.153?
Mr. Jones: I think it's an... I think the administrator was quite clear that it was an interpretation of 413.9, and we agree with that.
Moreover, I would direct the Court--
Unknown Speaker: But it falls in the interest expense portion of the manual.
That's what puzzles me.
Mr. Jones: --Well, I suppose every reasonable expense would be probably an expense... I'm not sure.
My guess is that every type of expense is addressed somewhere in the manual, but all of those descriptive provisions... I mean, in the regulations, but all of those other descriptive provisions are subject to 413.9, which is what the administrator relied on here.
Unknown Speaker: Are there any other regulations... I'm not... maybe I asked this before, but I'm not sure I got a clear answer.
The statute says that costs shall be determined in accordance with regulations establishing the method or methods to be used and the items to be included, and the only regulation the Secretary has issued to which that could possibly apply is 413.9.
Mr. Jones: No, I... if I said that, I didn't mean that.
What I mean is--
Unknown Speaker: --What else is there?
Mr. Jones: --Okay, exactly what Justice Stevens was talking about.
There are other provisions, including the accounting provisions--
Unknown Speaker: In regulations?
Mr. Jones: --Yes, in regulations, that set out the methods by which costs should be submitted, the types of--
Unknown Speaker: Not submitted.
I'm not talking about submission.
I understand 413.20 deals with submission.
I'm talking about how costs are to be determined.
Mr. Jones: --Costs... again, as Justice Stevens referred to, 42 C.F.R. 413.153 sets out limits on the capital, the types of capital costs that may be reimbursed, but the bottom line substantive answer to your question that the Secretary has relied on for over 20 years is that her authority is by statute and regulation to make determinations of reasonable costs, and that that is the manner in which these determinations are made.
Now, under NLRB v. Bell Aerospace, this Court has acknowledged that it's up to the agency to decide whether to proceed by adjudication or by regulation, and in this case the--
Unknown Speaker: Bell Aerospace did not involve a statute that requires the Secretary to act by regulation, or the... I guess it was laid on an agency.
Mr. Jones: --I don't think this statute requires the agency to act by regulation.
It says, reasonable costs shall be determined in accordance with regulations.
It doesn't say that every minute substandard as to what's a reasonable cost must be set forth in a substantive rule.
Unknown Speaker: Mr. Jones, you reported in your brief that in fact, before you put this in the PRM, there was extensive consultation, prior consultation.
If you were engaging in that, why didn't you just have it done by notice and comment rulemaking?
Mr. Jones: Of course, I haven't talked to those people, and so I would be hypothesizing, but I can tell you from representing Government agencies there's always a tension, if not a risk, involved in making a concrete, substantive rule that's binding that reduces the flexibility.
You come up with the rule that you say, if A, B, and C happen, then you won't get reimbursement, and the hospitals then say, well, A and B happened, but we did D instead of C. I'm not saying that... what I'm trying to say is, it's somewhat like in this Court sometimes when you want to see an issue percolate in the court of appeals some more before you adopt a substantive decision.
The agency wants to retain its flexibility before it makes sure, and sometimes it does when it, after sufficient experience, issues substantive rules.
What the agency... the cost the agency pays for not issuing the substantive rule is that it has to do what it did in this case.
It has to defend its determination on the facts.
It has to show that it wasn't arbitrary or capricious.
Unknown Speaker: Well, is your case weaker or stronger without the manual?
Mr. Jones: I don't think our case depends on the manual.
I think what the man... what... the relevance of the manual to this case is, it shows that the hospital had advance notice, it shows that we're behaving in a consistent fashion, and it provides some additional credibility to the administrator's finding, but it's the administrator's findings that the Court needs to look to to decide whether this is arbitrary or capricious.
Unknown Speaker: Mr. Jones, I hate to keep coming back to this, but I really consider it central to the case, and I am frankly quite surprised the Government takes the position that the Secretary has no obligation to act in this field by regulation.
Mr. Jones: No, it's--
Unknown Speaker: --How does one describe--
Mr. Jones: --It's--
Unknown Speaker: --the requirement that such regulations may provide for a determination of the costs of services on a per diem, per unit, per capita, or other basis?
Mr. Jones: --I'm not suggesting--
Unknown Speaker: You're saying that those regulations which may or may not be issued, if they are issued have to provide for that, but if they're not issued it doesn't make any difference.
Mr. Jones: --Justice Scalia, I don't mean to suggest that we don't have to issue regulations.
We have issued regulations.
That's really not the question that you have to consider.
The question is whether, in articulating substantive standards under the reasonable cost statutory and regulatory threshold, we have to issue minute subregulations in as detailed an issue as this one, advance refunding on indebtedness.
I mean, the Provider Reimbursement Manual is several inches thick.
These... this is not--
Unknown Speaker: I would think it's a reasonable position, however, that if you intend to depart from those general practices and principles generally applied by national organizations which are referred to in the statute, at least those departures would be expected to be by regulation.
Mr. Jones: --Well, there's no sub... unless you interpret the substantive regulation in a way that requires GAAP to be applied, whether it results in reasonable costs or not, whether it results in reasonable timing or not, and unless you're willing to ignore the consistent interpretation of the Secretary for 20 years to the contrary, that question isn't presented.
Under this Court's decision as recently as last year in Thomas Jefferson University, the Secretary's consistent, rational, and contemporaneous interpretation of her regulations is entitled to controlling weight, and since both the court of appeals and the district court agreed that it was not arbitrary or capricious to require amortization in this context, and because the regs don't, by their terms, require an unthinking application of GAAP in every situation, under the APA the Court's... I'm sorry, the Secretary's decision should be affirmed.
Unknown Speaker: Can I ask you, what is special about this reg?
That is, what is special about 233?
That is, if I read the thing to say, okay, normally apply GAAP, not always, we have some discretion there.
Well, okay, going along with you that far, what's special about this one?
I mean, if in fact--
Mr. Jones: Yes.
Unknown Speaker: --they bought all their medicine in this year and wrote... and didn't write the check till next year, they'd accrue the expense this year.
Mr. Jones: I--
Unknown Speaker: So what's different about setting up a trust fund which is irrevocable to pay back the premiums on the--
Mr. Jones: --What's different is that what they did was, in this kind of transaction the logic is very simple.
You incur some costs today to save more costs tomorrow.
Unknown Speaker: --Right.
Mr. Jones: You... the Secretary has reasonably concluded that it more accurately coordinates the extended benefit of this transaction with the costs incurred to affect it to amortize those costs--
Unknown Speaker: Maybe it doesn't do that.
Mr. Jones: --over a future period.
Unknown Speaker: I take it the reg is, reading it back, that you pay it back amortizing it over the difference between the time that you issue the refunding bonds and the time that the holders of the refunded bonds get their principal back, which could be next year, it could be next month.
It bears no particular relationship to the period of time over which the interest will be payable on the refunding bond--
Mr. Jones: It does in this--
Unknown Speaker: --so it doesn't correlate with the medical costs.
Mr. Jones: --My first point is... and time's running short... that simply all you have to decide is whether there's a rational basis for the Secretary to have had a different view, and both the courts below agreed that there was.
More importantly, in my view, these interest costs of these bonds that are going to be extinguished continue to accrue as an economic fact until they are in fact extinguished, which in this case doesn't happen for 7 years, and so what the Secretary... I'm sorry, what the hospital has attempted to do is prepay the economic costs of the old bonds, even though they remain in existence, and what the Secretary has concluded is that amortizing those prepayments over the remaining periods more accurately coordinates the real benefits of this transaction with the costs incurred.
I'd like to save my remaining time for rebuttal, if I may.
Unknown Speaker: Very well, Mr. Jones.
Mr. Taebel, we'll hear from you.
Argument of Scott W. Taebel
Mr. Taebel: Thank you, Mr. Chief Justice, and may it please the Court:
The issue in this case is one of timing.
That is, under the plain language of the general Medicare reimbursement regulations, the Secretary can put off payment for this admittedly reimbursable loss.
Eight Federal courts, including two circuits, have addressed this precise question, and they have all answered it in the negative.
If the Secretary wants to amend or supplement her existing reimbursement regulations, she must do so through the promulgation of another regulation.
Unknown Speaker: Well, Mr. Taebel, what would have happened if the Secretary had issued no regulations whatever pursuant to the statutory section we're talking about here?
Mr. Taebel: I believe, Mr. Chief Justice, as Justice Scalia was indicating, the Secretary has an obligation under the statute to promulgate her methods of reimbursement.
Unknown Speaker: Yes, but my hypothesis was, she didn't do that.
Mr. Taebel: If she did not do that, Your Honor, and she initially determined that these costs should be amortized, then perhaps she could do that.
However, in this case we have a sharp contrast between her positions taken with respect to advance for funding losses.
Unknown Speaker: So you say that she would have been better off if she had issued no regulation under the statute than if she'd issued the one she did?
Mr. Taebel: No, Your Honor.
She has already issued a regulation.
She's issued a regulation calling for the GAAP approach.
Unknown Speaker: Now, which regulation is that?
Mr. Taebel: That is regulation, it's currently codified at section 413.20, and it indicates, Your Honor--
Unknown Speaker: That doesn't call for the GAAP approach, I didn't think, when I read it.
It... certainly not in terms--
Mr. Taebel: --With due respect, Mr. Chief Justice, that's all it can call for.
There can be no more standardized accounting practices widely accepted in the hospital and related fields than GAAP.
In fact, we count seven times in the Government's appellee's brief before the Sixth Circuit where they agreed that that statute referred to GAAP.
There is no issue with respect to that.
Under GAAP, if a cost was--
Unknown Speaker: --The statute or the regulation?
Mr. Taebel: --I'm sorry, Your Honor, the--
Unknown Speaker: The statute or the regulation?
Mr. Taebel: --The regulation.
Unknown Speaker: The regulation--
Mr. Taebel: Yes.
Unknown Speaker: --referred to GAAP.
Mr. Taebel: Yes.
Unknown Speaker: Standardized definitions, accounting statistics, and reporting practices that are widely accepted in the hospital and related fields are followed.
You say that requires GAAP?
Mr. Taebel: Yes, Your Honor, because GAAP by definition is the most standardized accounting practice, widely accepted, that there is.
There really is no issue with respect to that, or there had not been until the briefs before this Court.
Unknown Speaker: Mr. Taebel, can I ask you kind of a basic question that's running through my mind in this case?
As I understand your basic position, it is that this issue is of sufficient importance that it ought to be addressed by regulation following notice and comment.
Mr. Taebel: That is correct, Your Honor.
Unknown Speaker: Then how is it that if, when, prior to 1972, GAAP had a rule that was consistent with the Secretary's present rule, then GAAP changed its rule, there was no notice and comment, but the effect of that under your view is, that changed the rule?
Mr. Taebel: Your Honor, there was no GAAP pronouncement prior to 1972.
That's exactly why APB Opinion Number 26 came out to clarify different treatments of this particular type of cost.
Unknown Speaker: Let's assume it was clear under GAAP it was permissible before, because there's no suggestion that before 1972 it would have violated GAAP to follow this procedure.
That's correct, isn't it?
Mr. Taebel: Yes.
Unknown Speaker: All right, so assume this had been spelled out in a GAAP ruling that was in existence from 1966 to 1972.
Is it your position that GAAP, without any public notice or comment, could in effect change the regulation?
Mr. Taebel: Your Honor, the regulation does not refer to GAAP as it existed in 1966.
Unknown Speaker: Well, but from '66 to '72, it certainly fell into the language of the regulation as well as it does since 1972.
Mr. Taebel: That is true, Your Honor.
However, this has been the law, as it were, for the accounting profession since 1972.
If the Secretary wants to change her general--
Unknown Speaker: No, no.
My question is, assume the law in the accounting profession was just as clear before '72 with the other rule as it has been since '72 with the rule they have now.
Could GAAP have changed the effect of the Secretary's regulation by simply changing its rule without notice and comment?
Mr. Taebel: --No, Your Honor, we are not claiming that GAAP can turn an otherwise unallowable cost into a cost related to patient care.
That is not the--
Unknown Speaker: No, but doesn't that beg the question?
I thought you were reading section 20... 419.20, and I thought you were also reading the statute in such a way that the appropriate phrases there simply pick up whatever the generally accepted accounting principles are at the time and incorporate them, so that if those principles do in fact change, if a new bulletin is issued, then the statute and the regulation would incorporate the change.
I thought that was... that is not your position?
Mr. Taebel: --That is our position, Your Honor.
Unknown Speaker: Well, but--
--That's what I thought it was, too, and I thought--
--Why did you answer Justice Stevens the way you did?
Mr. Taebel: Well, because I believe Justice Stevens was referring to the GAAP pronouncement prior to 1972, and there had been no official--
Unknown Speaker: Now, but he gave you a hypothesis in which he assumed that there was a position which then changed.
I assumed that your answer to Justice Stevens would be that that would be no change in the Department's policy at all, since the Department's policy is to follow GAAP, whatever that is.
Mr. Taebel: --That's correct, Your Honor.
Unknown Speaker: And therefore the amendment of GAAP would not change the Department's policy.
It continues to be, to follow GAAP.
Mr. Taebel: I agree with that, Justice--
Unknown Speaker: That's what I thought you meant.
Mr. Taebel: --Scalia, because--
I appreciate the assistance, Your Honor.
Unknown Speaker: Mr. Taebel, let me ask you to respond to the question that was raised about this PRM being hundreds of pages, and if the Secretary had to do all of the fine things that she's done in the PRM by regulation we would have regulations of monstrous size, and she would be bogged down all the time, having a manual that gets changed monthly, maybe even weekly, having to go through notice and comment for every... what is in that big, fat manual that doesn't have to go through notice and comment, and what would have, under your fix on this case?
Mr. Taebel: Your Honor, the Government does complain that they will have to promulgate regulations for every cost item.
We don't think that that's the case.
Most cost items, as we've been indicating here, are recognized consistent with GAAP.
When she wants to promulgate, or she wants to use a different method that deviates from the GAAP approach, that's when she has to go forward with APA rulemaking.
She did not do that here.
Her method is plainly inconsistent with the prescribed GAAP approach.
Unknown Speaker: Do you have any notion about how many items in this manual are inconsistent with GAAP?
Mr. Taebel: I do know, Your Honor, that based on other court decisions, the Secretary has sought to promulgate by regulation several of her manual provisions.
That's discussed in the amicus brief.
It's a 1991 notice in the Federal Register.
She has the ability to do that, but bear in mind, please, that most costs are reported and paid consistent with generally accepted accounting principles.
That's exactly why the program utilizes GAAP.
Unknown Speaker: Yes, but what if you have a period where there is no answer in GAAP, as I gather is your view from 1966 to 1972, and the Secretary establishes a policy that GAAP later disagrees with.
Now, she must automatically follow GAAP even though GAAP is silent up to that point.
That's your view.
Mr. Taebel: That's what the regulation says, Your Honor.
She has to follow GAAP--
Unknown Speaker: Even though, if there was already a regulation on the book which had been interpreted in an interpretive bulletin that had been on the books for several years and no one had questioned, she would nevertheless have to abandon that interpretive bulletin and follow GAAP?
Mr. Taebel: --Her regulations control over the manual provision, Your Honor.
She has adopted GAAP--
Unknown Speaker: But at the time, under my hypothesis, at the time the manual was promulgated it correctly explained what the regulation was.
Mr. Taebel: --Actually, it did not, Your Honor.
Her method is not even consistent with one of the GAAP methods.
Unknown Speaker: Well, I was assuming that as a hypothesis, that nevertheless she would have to change it when GAAP plugged what was previously a loophole.
Mr. Taebel: Once she's adopted GAAP, if GAAP changes she would have to change her regulation.
Unknown Speaker: What are you relying on for the proposition... you're simply saying that the language of 413.20 adopts GAAP?
Mr. Taebel: Yes, it does, Your Honor.
It refers to, again, standardized definitions, accounting statistics, and reporting practices--
Unknown Speaker: Yes, with commas after each of them, so standardized accountings and a number of other things, and you say that incorporates GAAP without any further elaboration?
Mr. Taebel: --Yes, and it also indicates, Your Honor, that changes in those methods will not be required in order to determine costs payable under the Medicare program.
Unknown Speaker: What if there's a conflict between, say, a standard accounting and a standard statistic, or standard reporting practice?
Mr. Taebel: Well, I think in this case, Your Honor, we rely on GAAP to report our costs, and we claim that when a cost is incurred, according to GAAP, it then must be payable under the Medicare program.
We think that's the nexus that the Sixth Circuit found here in the regulatory language.
Unknown Speaker: Why isn't the Government's explanation of 413.20 a lot more reasonable than yours?
The first sentence, after all, says that the principles require that providers maintain sufficient financial records, and it's speaking of what records have to be maintained, and then the second sentence, the one you're relying on, says standardized definitions, et cetera, are followed.
Changes will not be required.
We won't make you change your books.
You can keep your books the way you've been doing it, but that still doesn't mean that we're going to make our determinations on the basis of those decisions.
Mr. Taebel: But the regulatory provision you're citing, Justice Scalia, continues, and it says, to determine costs payable under the program.
That is, if a--
Unknown Speaker: It says, changes will not be required in order to determine costs payable, and they're saying that.
We're not going to make you change these systems.
We can determine your costs without you making any changes in those systems.
Just submit this information, although today I guess they said you do have to change them, that you weren't complying, but I had thought they said you can submit it this way, and we'll make any adjustments needed.
Why isn't that a reasonable reading of it?
Mr. Taebel: --Because in this case, Your Honor, there's no disagreement that this particular loss is a reimbursable cost.
The only question we need to answer now is when is that cost payable, and this language here, which is the general rule, indicates that it's payable when it's incurred, basically, and under GAAP, it's incurred in 1985, the year of the refinancing.
Unknown Speaker: But what about the last sentence of 413.20, which says, essentially the methods of determining costs payable under Medicare involve making use of data available from institutions' basic accounts, as usual, to arrive at equitable and proper payment for services to beneficiaries.
That sounds like the Secretary has a good deal of latitude.
Mr. Taebel: The problem with that, though, Mr. Chief Justice, is that she has to promulgate her methods of reimbursement by regulation.
She claims that we can report under one method and she can pay under an entirely different method.
Unknown Speaker: Why isn't this a promulgation of her system of reimbursement?
She's going to arrive at equitable and proper payments.
Mr. Taebel: She is, and it indicates that changes in those practices will not be required in order to determine costs payable.
Unknown Speaker: But that's changes in the practices for the hospitals reporting to her.
It doesn't say that she's necessarily going to conform exactly to the same principles that may govern the hospital in reporting to her, as I read it.
Mr. Taebel: Your Honor, I think the problem here was articulated in one of the amicus briefs.
It talks about the black hole theory.
If she's going to pay us under a different method that deviates from the general GAAP approach, she has to put that into regulation form.
We don't know what that method is.
Unknown Speaker: Why isn't the last sentence of 413.20 perfectly good?
You know, beggars can't be choosers.
You're coming to get some money, and she says she's going to make equitable and proper payments.
Mr. Taebel: That particular sentence, Your Honor, indicates that payment will be made based on our financial reports as usually maintained.
The way we usually maintain our books, Your Honor, is according to GAAP.
Unknown Speaker: May I ask, Mr. Taebel, following up on the Chief Justice's thought... all of this is under the subheading of Subpart B. Accounting Methods and Reports is the whole... what you'd look at, but Subpart C is what deals with limits on cost reimbursement, which is an entirely different subpart, but it does suggest that the regulation thought that reporting information is subject to one set of information and limits on cost reimbursement are in another group, which include things like interest expense, depreciation expense, and all of that, and we're fighting about the treatment of an item of interest expense here.
Mr. Taebel: But prior to 1986, Your Honor, when the regulations were redesignated, 413.20 had been part of former part 405, and the subchapter heading it was under at that time was "Reasonable Cost Reimbursement General Rules".
That changed when the designation of the regulations changed, beginning in 1986.
The advanced refunding here occurred in 1985.
If I can--
Unknown Speaker: In effect, you're saying that unless you read 419.20 as a reimbursement reg, the Secretary has not issued adequate regs as required by the statute.
That's your major premise.
Mr. Taebel: --That is correct, Your Honor.
Unknown Speaker: Yes.
And what follows as a result of that, when she doesn't issue adequate regs?
Mr. Taebel: Exactly what the Sixth Circuit held, Your Honor, and that is her manual provision, which is a substantive rule, when it conflicts with the regulatory language, is invalid.
Therefore, we are entitled to reimbursement for the full Medicare portion of our advanced refunding loss in the year it was incurred, 1985.
Unknown Speaker: Well, I would think your argument would be that we shouldn't read it to be an invalid reg, that if, indeed, the Secretary would not have complied with the law adequately unless 413.20 is read to be a substantive requirement and not just a reporting requirement, we should not assume that the Secretary was not complying with the law, and therefore we should read it as a substantive requirement.
I guess that's your argument.
Mr. Taebel: It is, Your Honor, and we're maintaining that interpretation here should not be deferred to, because it's inconsistent with the plain language of the regulation.
Unknown Speaker: The plain language says... it says that they are followed.
It says they are followed, but the language has to do with reporting, so you'd have to imply that the substantive reimbursement also follows it, which is not what it says, but maybe it's a fair implication.
But if it's a fair implication, I take it it would be normally.
So what's wrong with their argument that this is unusual, the accounting profession has danced around on this all the time, they've come up both ways, this is unusual, and that's why we went the other way?
Mr. Taebel: The problem with it, Justice Breyer, is that the regulation calls for the GAAP approach, and we are not arguing that the Secretary can choose another method.
Unknown Speaker: It calls for it on reporting.
It doesn't call for it on reimbursement unless you imply that, I take it.
Mr. Taebel: Well, it indicates that changes in these practices will not be required in order to determine costs payable.
We have the argument here that the cost is already reimbursable.
There's no dispute about that.
The only question is, when is it payable?
Unknown Speaker: So doesn't she get some leeway interpreting her own regulation, which is hers, in a way that would be fair, that would allow the whole thing to function well, with 248 million different items of reimbursement, which I take it she couldn't take 10 years to put in regs?
Mr. Taebel: Well, the other problem, Your Honor, besides the plain language, is her interpretation of these regulations.
As I indicated, with due respect to the Secretary and Mr. Jones, there has been actually inconsistency across the board on this issue.
The prior manual provision that she applied to advanced refunding losses between December 31, 1976, and the issuance of manual provision 233, under that manual provision, Guernsey Memorial Hospital would have been entitled to the full Medicare portion of its advanced refunding loss in the year of the refinancing.
That is because, under the prior manual provision 215, Guernsey Memorial's loss qualified as a small loss, which was meaning it was less than 50 percent of what its interest expense otherwise would have been.
Therefore, under that manual provision, we would have received the full Medicare portion quite unlike what her treatment is now, when she's issued 233.
So we have inconsistencies between 233 and the underlying regulations, we have inconsistencies between 233 and manual provision 215, and we also have a problem, I think, just in a vacuum.
This manual provision is a substantive rule under the APA because it creates a complicated new method for reimbursing advanced refunding losses.
Mr. Jones indicated this Court's decision last term in Thomas Jefferson.
I think in stark contrast to the case here, you had a particular regulation dealing with the specific cost item in question there.
We don't have any regulation here.
All we have is the general regulation indicating that GAAP ought to be followed.
The manual provision does not interpret 413.9.
We find that somewhat curious, because that regulation reiterates the statutory requirement that she promulgate her methods by regulation.
Unknown Speaker: How detailed is that requirement, Mr. Taebel?
Why does it extend to this particular item and not to... you know, you can go very far down into the details of cost accounting.
How far down into the details does she have to go?
How do we know that this is at a high enough level that really it had to be handled by regulation?
Mr. Taebel: Because, Your Honor, she readily admits that it is inconsistent with GAAP.
GAAP prohibits the amortization of the loss.
Unknown Speaker: Your position is that any cost accounting principles which the Secretary requires that are contrary to generally accepted accounting principles, at least those must be adopted by regulation?
Mr. Taebel: Yes.
She's called for it here in this regulation.
We report consistent with GAAP.
We put the loss in our tax statement, in our financial reports, and now we suddenly have to come up with a whole new set of bookkeeping requirements for Medicare reimbursement.
If she wants to do that, she has to put it in a regulation.
I will also add that--
Unknown Speaker: Could she get out of it by changing 413.20, by not saying that the standardized whatever, that GAAP is the rule unless there's a regulation to the contrary?
Could she change 413 to have something other than GAAP apply to what has to be reported?
Mr. Taebel: --I believe so, Your Honor.
She claims that her interpretation has been, we utilize GAAP unless there's a regulation or a manual provision to the contrary.
The problem with that is, she's using a forward to the PRM to apply GAAP so that she can now get out from underneath GAAP to another manual provision.
Somewhere along the way here, I think she needs to promulgate her methods of reimbursement by regulation.
That's what Congress intended since the inception of the Medicare program in 1965.
That's what the plain language of 42 U.S.C. 1395(x)(Lv)(1)(A) states.
It's reproduced at page 2 of the petition.
Unknown Speaker: So could she then simply promulgate the manual as it now is, subject to notice and comment, and then that would be a governing regulation?
Mr. Taebel: Yes, she could, Your Honor.
However, we would indicate on the record of this case... we certainly don't have much of a record, because we haven't gone through the APA... but on the record of this case, I think the regulation would still be subject to rationality attacks, because the overwhelming record evidence here indicates that the loss does not relate to future periods.
Unknown Speaker: The court of appeals didn't agree with you on that, did it?
Mr. Taebel: The court of appeals... that's correct, Mr. Chief Justice.
The court of appeals indicated the Secretary could make a respectable argument that that type of treatment in a regulation would be rational.
However, in this record, the overwhelming evidence indicates that the loss does not relate to future periods, and the hospital doesn't incur any costs related to that loss.
Unknown Speaker: The analogy to spending a couple of million dollars to put a new wing on the hospital and depreciating it over the next 10 years is pretty much like this case, isn't it?
Mr. Taebel: No, it's--
Unknown Speaker: They spent a lot of money to reduce their future interest expense.
Mr. Taebel: --No, it's not, Justice Stevens, because in that case you have an asset on the books.
Here, the bonds have been defeased entirely.
The hospital's been discharged.
There's nothing on the books.
The trustee is now--
Unknown Speaker: You're not seriously arguing the Secretary's position is irrational.
Are you really?
Mr. Taebel: --On the record of this case, yes, we are, Your Honor, because the statute--
Unknown Speaker: You're never going to sell me on that one.
Mr. Taebel: --The statute requires that costs must be incurred.
Unknown Speaker: Then, if I understand this, it's rather like a hospital that would say... suppose you could set up an irrevocable trust with $1 million in it to prepay meals over the next 10 years... it might be rational to say you incurred the expense in year 1.
That's what you'd like to say.
It might also be rational to accrue it as the transaction, namely the meals are delivered, in which case you'd have to amortize it.
I take it this is a little bit like that.
It's rational to say you incurred the whole prepayment expense when you put it in the trust, or it's rational to say the expense was incurred as the trust paid out the prepaid interest to the original bondholders with their principal.
Is that right?
I'm asking you to correct me if I'm wrong.
Mr. Taebel: The problem with that, Justice Breyer, is, after the refinancing these costs are on the books of the trustee.
They're not on the books of the hospital.
These are not costs of the hospital after the refinancing.
I think you're referring to a situation where there may have been some relation between the hospital and the escrow fund.
There is none here.
Those costs after 1985 are no longer costs of the hospital.
Mr. Jones indicated a decision from the Eighth Circuit in Research Medical Center where interest was capitalized over the life of the asset.
In that case, that approach is consistent with GAAP.
It's the normal practice.
You have interest during construction.
You attach it to the underlying asset, and it is amortized, very similar to... as what Justice Stevens was referring to, depreciation.
By analogy, if you sell or dispose of a depreciable asset, since it's off your books, you don't have it any more, you recognize the loss or gain on the sale the time you transfer it.
That is the analogy that the Provider Reimbursement Review Board utilized in its opinion in this case.
Unknown Speaker: Of course, that opinion wasn't unanimous, either.
Mr. Taebel: Yes, it was, Your Honor.
Unknown Speaker: I thought you were referring to the accounting bulletin.
That was not unanimous, the GAAP ruling.
There were dissents from that.
Mr. Taebel: There were 18 voting members, Your Honor, and 3 dissented, and the dissents are not consistent with the Secretary's position here, either.
Unknown Speaker: They do suggest the contrary view is not irrational, at least.
Mr. Taebel: They suggest, Your Honor, that there had been different methods at that time, and that because the loss relates to the prior period, or the period when the refunded bonds were in existence, that's why the APB decided it had to be only one method, and that is, you recognize it currently in income.
In conclusion, then, Your Honor, we respectfully request that this Court affirm the decision of the Sixth Circuit below.
Unknown Speaker: Thank you, Mr. Taebel.
Mr. Jones, you have 2 minutes remaining.
Rebuttal of Kent L. Jones
Mr. Jones: Thank you.
There are two questions of interpretation.
The first is whether the Secretary is required by her regulations to apply GAAP in reimbursement determinations.
Her consistent and contemporaneous interpretation of the regs has been that it does not.
That interpretation has been set out in the manual, which makes quite clear that GAAP applies only if there is no other applicable manual provision.
It's been made clear in her litigation over the last 15 years on this subject, and her rational and contemporaneous, consistent interpretation should be given controlling weight in understanding her own regulation.
Now, the other question of interpretation is whether the amortization of these types of advance refunding costs are rationally to be related to the periods over which they benefit the hospital by reducing its costs.
For the reasons that we've explained, it seems eminently rational.
The courts below agreed with that.
And not to quibble, but there were three dissents to the GAAP opinion, but one of the part... one of the members of that opinion who assented to the opinion also believed that amortization would have been proper.
This is an issue on which accrual accounting could reach different conclusions, and the conclusion reached by the Secretary as to that substantive question was not unreasonable or arbitrary, and I should point out that in Thomas Jefferson University, when the Court emphasized the deference which the Secretary's decision should be given... the Court emphasized that these kinds of determinations involve the application of policy judgments to the facts of the--
Chief Justice Rehnquist: Thank you, Mr. Jones.
Mr. Jones: --Thank you.
Chief Justice Rehnquist: The case is submitted.
Argument of Speaker
Mr. Jones: The opinion of the court order number 93-1251, Shalala against Guernsey Memorial Hospital will be announced by Justice Kennedy.
Argument of Justice Kennedy
Mr. Kennedy: This case begins with a rather splendid accounting problem.
It arises from a dispute between a hospital which is Medicare provider and the Secretary of Health and Human Services.
The hospital is the Guernsey Memorial Hospital in Cambridge, Ohio.
Like many borrowers, when interest rates change, the Guernsey Memorial Hospital decided that it would refinance bonds that it had issued and so they retired the old bonds and purchased new ones.
Now, this gave it an accounting loss for the first year, or a group of years and that's the question before us.
The accounting loss was for the refinancing cost of the bonds.
Everyone agrees that the loss is reimbursable as the Medicare covered loss to the extent that the hospital participates in the Medicare.
The argument is about whether the entire loss must be reimbursed upfront, which is what the hospital wants or whether it must be threaded with the life of the old bonds which is what the Secretary contends for.
Now, the accounting dispute intern involves a more significant legal question.
It is whether the Secretary’s regulations resolved the issue by requiring reimbursement and in accordance with generally accept with accounting principles or whether the Secretary is free to promulgate policy guidelines that depart from those principles.
Now, we agree with the Secretary, that the regulations do not require reimbursement according to the generally accepted accounting principles, nor must the regulations resolved every accounting issue in precise detail.
The guideline announced by the Secretary is valid and controls the adjudication of procedures followed to resolve these cost disputes.
The policy of the Secretary requiring that the cost be spread on over a period of years is a reasonable implementation of the Secretary’s duty to avoid distortions in the reimbursement process.
The Court Of Appeals for the Sixth Circuit reach the opposite conclusion.
So, its judgment must be reversed.
Justice O'Connor has filed a dissenting opinion, joined by Justices Scalia, Souter and Thomas.