Shalala v. Guernsey Memorial Hospital

1995-03-06

Headline: Medicare accounting guideline upheld; Court lets HHS use informal amortization rule instead of GAAP, making full one‑year reimbursement for bond-refunding losses harder for hospitals.

Holding: The Court held that Medicare regulations do not require reimbursement according to GAAP and upheld the Secretary’s PRM §233 as a valid interpretive rule allowing amortization of advance-refunding losses.

Real World Impact:

Allows HHS to amortize hospitals' bond-refunding losses instead of immediate full reimbursement.
Makes it harder for hospitals to recover large one-year accounting losses quickly.
Affirms agency use of interpretive manuals for Medicare payment timing decisions.

Topics: Medicare reimbursement, hospital accounting, agency rulemaking, payment timing

Summary

Background

A small hospital refinanced its bonds in 1985 and suffered an accounting loss of $672,581. The hospital sought about $314,000 in Medicare reimbursement for that loss in the year of the refinancing. The fiscal intermediary followed an informal agency guideline (PRM §233) that required amortizing such losses over the life of the old bonds. A review board and a federal appeals court sided with the hospital, but the agency and the Secretary favored amortization.

Reasoning

The Court asked whether Medicare regulations force reimbursements to follow generally accepted accounting principles (GAAP) and whether the agency’s manual entry (PRM §233) needed formal notice-and-comment rulemaking. The majority found the regulations set recordkeeping standards but do not bind the Secretary to GAAP for reimbursement timing. The Court treated PRM §233 as an interpretive rule and upheld its use because it reasonably prevents cross-subsidization and fits the statute’s reimbursement scheme.

Real world impact

Because the Court allowed the Secretary to apply PRM §233, hospitals cannot automatically demand immediate, full one-year reimbursement for advance-refunding losses simply by invoking GAAP. The decision affirms that the agency may use interpretive guidance to decide how and when Medicare pays certain costs, rather than issuing a formal regulation for every accounting question. The ruling is about payment timing, not the total allowable amount.

Dissents or concurrances

Justice O'Connor (joined by three colleagues) dissented, arguing §413.20 incorporates GAAP as the default for reimbursement and that PRM §233 was invalid because it was not adopted through required notice-and-comment rulemaking.