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From Health Law Daily, August 23, 2017

HHS must explain denial of $15M hospital loan

By Brian Craig, J.D.

The U.S. Court of Appeals for the Seventh Circuit vacated a decision from the district court holding that HHS failed to provide sufficient reasoning for denial of a $15.3 million loan for a hospital to provide care for Medicare patients. In applying the Chenery doctrine stemming from the 1943 U.S. Supreme Court case SEC v. Chenery Corp., the Seventh Circuit held that "[w]hen the agency just asserts an ipse dixit [He himself said it], then the decision falls for the lack of a reason." The court of appeals remanded the case to the agency, where HHS can ask the hospital for more or better documentation surrounding the loans (St. Vincent Randolph Hospital, Inc. v. Price, No. 16-3956, August 22, 2017).

The court recognized that documentation is a requirement under 42 C.F.R. Sec. 413.24(a)–(c) when a hospital seeks costs of financing medical facilities for Medicare. Although the hospital submitted voluminous documentation—auditors’ reports, ledgers, tax returns, and more—to show that refinancing occurred, HHS did not indicate why the documentation was inadequate. Under the Chenery doctrine, an administrative decision stands or falls on the agency’s explanations. Since HHS failed to explain both at the administrative level and in the appellate brief why the Medicare system would want to forbid refinancing, the court recognized a Chenery problem.

Procedural history. When St. Vincent Health group acquired Randolph County Hospital located in eastern Indiana in 2000, the building was 80 years old and needed to be refurbished or replaced. St. Vincent Health decided to build a replacement facility. In 2002, the hospital financed the project by borrowing $15.3 and later refinanced for $15.6 million from the parent health system. The hospital sought reimbursement from Medicare to cover the cost of financing the new hospital’s construction (see Provider’s debt restructuring counts as a ‘Motherhouse’ loan, February 27, 2015). The CMS Administrator found that the documentation submitted by the hospital was insufficient to establish that the loans were necessary and proper and related to patient care (see Interest disallowed due to provider’s lack of paperwork, May 5, 2015). The hospital sought judicial review and the U.S. District Court affirmed the HHS decision denying the claim.

Decision. The court held that the HHS Secretary has considerable discretion to decide what paperwork is needed to demonstrate that a loan meets the substantive criteria for reimbursement, but HHS cannot set a trap by insisting after the fact that a given loan was not documented in a way never before required by any regulation or opinion. The Seventh Circuit found a Chenery problem with the HHS decision that the initial loan was poorly documented and the second loan is larger than the first loan. The Seventh Circuit remanded the case to the agency where HHS can ask the hospital for more or better documentation surrounding the loans and to explore the significance of the difference in the principal amounts of the two loans.

The case is No. 16-3956.

Attorneys: N. Kent Smith (Hall, Render, Killian, Heath & Lyman, P.C.) for St. Vincent Randolph Hospital, Inc. Bob Wood, Office of the U.S. Attorney, for Thomas E. Price, Secretary, U.S. Department of Health and Human Services.

Companies: St. Vincent Randolph Hospital, Inc.; U.S. Department of Health and Human Services

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