Charlotte Memorial Hospital and Medical Center, Inc. v. Otis R. Bowen, Secretary of Health and Human Services
Docket: 87-3745
Court: Court of Appeals for the Fourth Circuit; September 15, 1988; Federal Appellate Court
The United States Court of Appeals for the Fourth Circuit affirmed a district court decision granting Medicare reimbursement to Charlotte Memorial Hospital and Medical Center, Inc. for the cost years 1979-81. The hospital sought reimbursement for salaries deferred under its Executive Compensation Plan, which allowed doctors to postpone receiving a portion of their salaries in exchange for the hospital setting aside those funds for retirement. Although the deferred amounts were placed in accounts not fully protected from the hospital's creditors, the court concluded that under the accrual accounting method, the hospital incurred a reimbursable expense when doctors provided services and the hospital invested their deferred salaries. The Medicare intermediary, Blue Cross and Blue Shield of North Carolina, had previously denied reimbursement, citing non-compliance with the Secretary's regulatory interpretations regarding deferred compensation plans. However, the court determined that the reimbursement should be granted despite some doctors potentially breaching covenants tied to the plan, as no doctor had forfeited their rights to the deferred amounts at that time.
The Provider Reimbursement Review Board upheld Blue Cross' denial of reimbursement, but the district court reversed this decision. The district court found the Secretary's regulatory interpretations inconsistent with 42 C.F.R. Sec. 413.24 (1987), which mandates that hospitals be reimbursed for costs incurred. It ruled that the Secretary's interpretations regarding deferred compensation plans could not be used to deny reimbursement for earned salaries. The Secretary argued that Memorial Hospital did not incur a cost by merely placing salary reductions in savings accounts without providing employees an immediate, secured payout. The Secretary claimed that its regulations, specifically PRM Sec. 2140 and IL 75-34, align with accrual accounting principles, requiring only that deferred salaries be entrusted to a custodian or acceptable fund for reimbursement eligibility. Although the Secretary acknowledged a departure from Generally Accepted Accounting Principles (GAAP), it justified this by asserting that GAAP does not accurately represent patient care costs versus business operating costs.
Memorial Hospital contended that the Secretary's interpretations conflict with 42 C.F.R. Sec. 413.24, which stipulates that Medicare must reimburse providers for costs when incurred. The case centers on whether a hospital incurs a reimbursable cost for services rendered when doctor compensation is deposited into savings accounts as retirement funds and remains subject to creditors and forfeiture conditions. The Medicare Act states that providers are reimbursed the lesser of their charges or reasonable costs for services to beneficiaries, defining "reasonable cost" as the actual incurred costs necessary for efficient service delivery. The Secretary is required to create regulations interpreting "reasonable cost," which include 42 C.F.R. Sec. 413.24, adopting accrual accounting for reimbursement calculations. Providers must submit adequate, verifiable cost data based on financial records and approved cost-finding methods, with revenues reported when earned and expenses when incurred, irrespective of payment timing.
Section 413.24 of 42 C.F.R. specifies that in determining reimbursement, the focus is on the incurrence of debt rather than actual payment. Hospitals accrue reimbursable costs for doctors' salaries when a debt is created for services rendered. Generally Accepted Accounting Principles (GAAP) guide the determination of when hospitals incur such debts, particularly concerning deferred compensation plans. The Medicare Act mandates that the Secretary considers GAAP in cost reimbursement regulations. Case law supports that GAAP must be followed unless specific regulations provide otherwise. GAAP applies primarily to record-keeping and is relevant for cost determination only when not addressed by Medicare regulations or the Provider Reimbursement Manual. Under GAAP, the accrual accounting method is used for deferred compensation, allowing cost deductions when obligations are incurred for services rendered. However, deductions will be disallowed if payments are for future services. The GAAP framework ensures that Medicare reimbursements reflect real debts incurred for services provided during a reporting period. Despite these principles favoring GAAP, the Secretary has issued regulatory interpretations that significantly diverge from the GAAP approach regarding deferred compensation plans.
Provider contributions for deferred compensation plans are reimbursable only if they are incurred and met by the provider, requiring these plans to be funded. Payments under unfunded plans are reimbursable only when actually paid to employees and deemed reasonable. A "funded plan" entails systematic contributions to a funding agency, such as a trustee or insurance company, to secure retirement benefits. Regulatory interpretation IL 75-34 allows for a broader range of acceptable funds for deferred compensation but mandates that hospitals return any Medicare reimbursement for amounts forfeited by employees. The deferred compensation can be structured in annuities or insurance policies, with the provider as the beneficiary until payment conditions are satisfied. Hospitals must demonstrate that services were rendered, compensation was set aside, and placed in an acceptable fund to qualify for reimbursement. Failure to meet these conditions delays reimbursement until salary reductions are paid to employees. The Secretary's stringent approach to deferred compensation reimbursement diverges from the more flexible Generally Accepted Accounting Principles (GAAP), focusing on the timing of fund placement or payment delivery rather than merely the obligation to pay for services rendered. If the Secretary's regulatory interpretations conflict with GAAP, they would face heightened scrutiny, requiring justification that such deviations accurately reflect patient care costs rather than business operational costs.
The Secretary argues that the Generally Accepted Accounting Principles (GAAP) do not accurately represent patient care costs concerning reimbursement for payments made under deferred compensation plans. The Secretary points out that the forfeiture provisions in these plans create a risk that hospitals may not pay doctors' salaries, leading to potential reimbursements for costs that may not be incurred. This concern has prompted the Secretary to develop regulatory interpretations that deviate from the GAAP approach, which aligns with the IRS's accounting of deferred compensation.
However, it is determined that the GAAP approach accurately reflects patient care costs and should take precedence over the Secretary's interpretations. The GAAP framework stipulates that cost reimbursements should align with the actual financial obligations incurred by the employer for services rendered. The mere deferral of salary by an employee does not negate the employer's liability for payment. Denying hospitals reimbursement for set-aside funds would disrupt the correlation between costs and reimbursements, imposing financial strain on hospitals.
The Secretary's worries regarding the impact of employee forfeitures on reimbursement accuracy are deemed exaggerated. No forfeiture has occurred in Memorial Hospital's plan, and even if it did, it would not adversely affect the Medicare program, as the employee would bear the financial burden of the forfeiture. Medicare reimburses hospitals based on the reasonable value of services rendered, independent of any later forfeiture of deferred salary.
Ultimately, the GAAP approach is confirmed to accurately reflect the cost of patient care, overriding the Secretary's regulatory interpretations. The court applies the GAAP method to Memorial Hospital's deferred compensation plan to assess reimbursement eligibility for salary reductions set aside for participating doctors. The key consideration is whether Memorial Hospital incurred a present debt for services already delivered, evidenced by the segregation of deferred compensation in designated accounts.
The Secretary has not claimed that the funds allocated are compensation for future services; rather, they represent "salary reduction" for services already performed by the doctors. Consequently, under Generally Accepted Accounting Principles (GAAP), Memorial Hospital is entitled to reimbursement. The Secretary's regulatory interpretations regarding deferred compensation plans, specifically PRM Sec. 2140 and IL 75-34, contradict the relevant regulation, 42 C.F.R. Sec. 413.24, and conflict with the GAAP approach. Therefore, these interpretations are set aside in favor of the GAAP framework. According to this approach, Memorial Hospital incurred reimbursable costs when doctors provided services and when a portion of their salaries was invested in separate accounts. The district court's decision to award reimbursement to Memorial Hospital is affirmed. Additionally, while a forfeiture may create a temporary situation where the hospital has received reimbursement for a non-existent cost, it must deduct this overreimbursement from future applications, ultimately benefiting the Medicare program.
