St. Vincent Randolph Hospital, Inc. v. THOMAS E. PRICE, Secretary of Health and Human Services

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-3956
ST. VINCENT RANDOLPH HOSPITAL, INC.,
Plaintiff-Appellant,
v.
THOMAS E. PRICE, Secretary of Health and Human Services,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:15-cv-00768-TWP-DML — Tanya Walton Pratt, Judge.
____________________
ARGUED APRIL 11, 2017 — DECIDED AUGUST 22, 2017
____________________
Before WOOD, Chief Judge, and FLAUM and EASTERBROOK,
Circuit Judges.
EASTERBROOK, Circuit Judge. When St. Vincent Health
group acquired Randolph County Hospital in 2000, the
building was 80 years old and needed to be refurbished or
replaced. St. Vincent Health decided to build a replacement
facility, to be operated by St. Vincent Randolph Hospital,
Inc. (the Hospital). In 2002 the Hospital financed the project
by borrowing about $15.3 million from St. Vincent Hospital

-- 1 of 7 --

2 No. 16-3956
and Health Care Center, Inc. (St. Vincent Indianapolis), a fra-
ternal corporation in the St. Vincent Health group. Within a
year the whole St. Vincent Health group was acquired by
Ministries of Ascension Health, the nation’s largest Roman
Catholic health-care system. Ascension Health then loaned
about $15.6 million to the Hospital; both Ascension Health
and the Hospital treated this as a refinancing of the loan
from St. Vincent Indianapolis. This appeal presents the ques-
tion whether Medicare will reimburse some of the cost of fi-
nancing the new hospital’s construction.
Statutes require the reimbursement of a medical provid-
er’s reasonable costs to care for Medicare patients, see 42
U.S.C. §§ 1395f(b)(1), 1395x(v)(1)(A), and a regulation, 42
C.F.R. §413.153, adds that these include the necessary and
proper costs of financing medical facilities. No one has ques-
tioned the Hospital’s decision to replace the old facility or
the commercial reasonability of the terms (such as the rate of
interest) on which the Hospital borrowed the money. But the
body responsible for evaluating hospitals’ Medicare claims
(then called a fiscal intermediary) rejected the Hospital’s re-
quest for payment. It gave two reasons. First, a regulation
disqualifies loans from affiliated entities—and although
there is an exception for loans within groups controlled by a
religious denomination, that exception applies only to loans
from parent corporations rather than fraternal ones. See 42
C.F.R. §413.153(c); Hinsdale Hospital Corp. v. Shalala, 50 F.3d
1395 (7th Cir. 1995). Second, an administrative handbook
disqualifies loans that lack documents showing the advances
to be “[n]ecessary and proper for the operation, mainte-
nance, or acquisition of … facilities.” Provider Reimburse-
ment Manual 15–1 §202.1. (Both sides treat this manual as
having the status of a regulation.) See also 42 C.F.R. §413.24.

-- 2 of 7 --

No. 16-3956 3
The arrangement between the Hospital and its fraternal cor-
poration was poorly documented. It was reflected in resolu-
tions adopted by both corporations’ boards and in an amor-
tization table, but not in a note or security agreement.
Recognizing these problems, the Hospital withdrew its
request that Medicare cover any of the expense for time be-
fore fiscal year 2004 but again requested compensation for
2004 through 2008, after Ascension Health had refinanced
the loan in a way that complies with §413.153(c)(2) and en-
tails the paperwork usual for construction-financing loans.
After the intermediary again said no, the Hospital appealed
to the Provider Reimbursement Review Board, which re-
versed and ordered the 2004 to 2008 claims paid. The Board
concluded that the problems with the 2002 loan did not taint
the refinancing in 2003—that none of the voluminous regula-
tions either prohibits refinancing or provides that problems
with one loan cannot be fixed by refinancing.
The intermediary then appealed to the Administrator of
the Centers for Medicare and Medicaid Services, who makes
the final decision on behalf of the Secretary of Health and
Human Services. The Acting Principal Deputy Administra-
tor reversed the Board. The entirety of the reasoning is this
paragraph:
The Administrator finds that the documentation submitted by
the [Hospital] was insufficient to establish that the loans were
necessary and proper and related to patient care. The [Hospital]
did not produce a signed loan contract for the first loan between
related providers. The only evidence of the terms of the loans
[sic] were [sic] amortization tables. Thus, the initial loan between
the [Hospital] and St. Vincent Health was not “proper” accord-
ing to the regulations or the [Provider Review Manual]. Addi-
tionally, the [Hospital] did not submit sufficient evidence to es-
tablish that the initial loan was paid off by the [loan from Ascen-

-- 3 of 7 --

4 No. 16-3956
sion Health], nor did they provide sufficient evidence as to what
interest payments were attributable to the initial loan. Thus, the
Administrator finds that the Intermediary’s disallowance of the
interest expense for the [Hospital’s] 2004, 2005, 2006, 2007, and
2008 fiscal years was proper.
A federal district court was the Hospital’s next stop. The
judge found two themes in this explanation: first that the ini-
tial loan was poorly documented, and second that the Hos-
pital had not established that the loan from Ascension
Health refinanced the initial loan. The judge found the first
of these reasons lacking. The Acting Principal Deputy Ad-
ministrator did not cite any regulation or handbook for his
(apparent) view that errors can never be fixed by refinanc-
ing, while the Board, which evaluated that question in detail,
had explained cogently that problems with one loan do not
“taint” future loans. So the judge rejected the first reason.
But the judge thought the second reason sufficient and
granted summary judgment in the Secretary’s favor. 2016
U.S. Dist. LEXIS 131212 (S.D. Ind. Sept. 26, 2016).
The Secretary’s brief in this court defends both of the
Acting Principal Deputy Administrator’s reasons. But the
appellate brief, like the final administrative decision, does
not explain what rule or equivalent legal standard forbids
refinancing to replace a disqualified loan with a proper one.
In the years 2004 through 2008 the Hospital incurred financ-
ing costs to pay for the new hospital. Why should the fact
that it cannot recoup earlier financing costs stand in the way
of reimbursement for costs actually and prudently incurred
in later years to provide medical services to Medicare pa-
tients? The Acting Principal Deputy Administrator did not
give a reason—which means that there is no reason, for un-
der the Chenery doctrine an administrative decision stands or

-- 4 of 7 --

No. 16-3956 5
falls on the agency’s explanations. SEC v. Chenery Corp., 318
U.S. 80, 87–88 (1943). When the agency just asserts an ipse
dixit, then the decision falls for the lack of a reason. And alt-
hough this does not matter under Chenery, the Secretary’s
brief not only lacks legal authority on this issue but also
doesn’t explain why the Medicare system would want to
forbid refinancing.
Documentation, by contrast, is a real requirement. 42
C.F.R. §413.24(a)–(c). But the Acting Principal Deputy Ad-
ministrator did not find that the loan from Ascension Health
is inadequately papered. The objection, rather, seems to be
that documents do not adequately show that the new loan
replaced the old one—that this was a refinancing transaction
rather than an infusion of additional capital. We say “seems
to be” because the Acting Principal Deputy Administrator’s
language is opaque, but this is our best understanding.
Yet the Acting Principal Deputy Administrator did not
explain what is missing. The Hospital submitted voluminous
documentation—auditors’ reports, ledgers, tax returns, and
more—tending to show that refinancing occurred. The Act-
ing Principal Deputy Administrator did not mention any of
this or say why it is inadequate. Again we have an ipse dixit.
The Secretary has considerable discretion under the regula-
tion and the manual to decide what paperwork is needed to
demonstrate that a loan meets the substantive criteria for re-
imbursement, but it will not do to set a trap by insisting after
the fact that a given loan was not documented in a way nev-
er before required by any regulation or opinion. A reader of
the final administrative decision would have had no idea,
not even an inkling, what is missing, why that missing thing
is required, or how to fix the problem.

-- 5 of 7 --

6 No. 16-3956
At oral argument the Secretary’s appellate lawyer told us
what he thought the critical omission was: a “debt discharge
notice” evincing St. Vincent Indianapolis’s acknowledgment
that its loan had been repaid. The administrative decision
did not mention this as a shortcoming or explain what regu-
lation or manual calls for a “debt discharge notice”, so again
we have a Chenery problem. And again we must wonder
what sense this makes. St. Vincent Indianapolis could
acknowledge repayment on the back of an envelope and
doubtless would do so for its fraternal institution. Require-
ments of documentation ought to be designed to protect the
Treasury from spurious or commercially unreasonable
claims and so should emphasize documents that are verified
by third parties or costly to sign because they create legal ob-
ligations; why make reimbursement depend on a document
that costs no one anything and thus has no ability to sepa-
rate real from spurious claims?
The Secretary’s appellate brief makes a final argument:
the second loan is larger than the first. The Hospital bor-
rowed approximately $15.3 million from its fraternal corpo-
ration and refinanced with a loan of some $15.6 million from
Ascension Health. But during 2002 and 2003 it should have
paid down some of the indebtedness on the 2002 loan; that’s
what the amortization table provided. So the amount of
credit needed to refinance in 2003 should have been lower
than the principal amount of the 2002 loan. Instead the new
loan was higher. This suggests—though it does not show—
that Ascension Health provided the Hospital with some
working capital as well as a refinancing of the 2002 loan. The
cost of working capital may or may not be compensable un-
der the Medicare program, see 42 C.F.R. §413.130(i), but the

-- 6 of 7 --

No. 16-3956 7
documents in this case file (and the arguments of counsel)
do not shed light on the issue.
Yet again, however, we have a Chenery problem. The Act-
ing Principal Deputy Administrator did not make anything
of the difference in the amounts loaned by St. Vincent Indi-
anapolis and Ascension Health. His decision therefore can-
not be enforced on that ground—which at all events would
not justify refusing to reimburse all costs of the full loan.
This problem, if it is a problem at all, would justify no more
than limiting reimbursement to the financing costs needed
for the new hospital’s construction.
Once problems in an administrative decision have been
identified, a court remands to the agency for further consid-
eration. Negusie v. Holder, 555 U.S. 511, 523–24 (2009). The
“taint” theory is legally untenable and cannot be reasserted
on remand, but the agency is free to ask the Hospital for
more or better documentation and to explore the significance
of the difference in the principal amounts of the two loans.
The judgment of the district court is vacated, and the case is
remanded with instructions to remand the proceeding to the
Secretary for proceedings consistent with this opinion.

-- 7 of 7 --