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Monsour Medical Center v. Heckler

argued: October 28, 1986.


On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civ. No. 84-1938.

Author: Higginbotham

Before: ADAMS and HIGGINBOTHAM, Circuit Judges, and GARTH, Senior Circuit Judge.



These two appeals consider the proper treatment under the Medicare Act of interest and depreciation costs incurred by a health care provider in converting from for-profit to non-profit legal status, in providing hospital food services, and in operating a hospital snack bar. The district court, in an unpublished opinion,*fn1 entered summary judgment for appellant, the Monsour Medical Center ("Center") on the "conversion costs" issue. It found that the Provider Reimbursement Review Board ("PRRB" or "Board") decision denying reimbursement for these costs*fn2 was not supported by substantial evidence on the record, and remanded the matter to the PRRB "with instructions to properly reimburse [appellant] for these costs." Cross-Appellant, the Secretary of Health and Human Services ("Secretary"), appeals form this judgment. We will direct that the district court's award of summary judgment on this issue to the Center be vacated and that summary judgment be entered in favor of the Secretary. The district court also entered summary judgments for the Secretary, finding that the PRRB's decisions allocating certain dietary costs to the Center's nonreimbursable snack bar and denying reimbursement for employee snack bar meals were supported by substantial evidence. The Center appeals from these judgments. We will affirm these summary judgments of the district court.

Factual Background

This complicated story began, for our purposes, with the establishment in 1952 of a private hospital, the Monsour Hospital and Clinic, Inc. of Jeanette, Pennsylvania. The founders and sole shareholders of this Pennsylvania for-profit corporation were three brothers, Doctors Howard, Robert and Roy Monsour, and their parents. A fourth brother, Doctor william Monsour, became involved in this corporation at a later date. In 1966, subsequent to the passage of Title XVIII of the Social Security Act, 79 Stat. 291, as amended, 42 U.S.C. § 1395 et seq. (1982), commonly known as the Medicare Act, Robert, Roy and William Monsour, their mother, Eva Monsour, and their cousin, Doctor Omar Ayoub, created the Monsour Medical Foundation ("Foundation"), a Pennsylvania non-profit corporation. Their plan, soon realized, was for the Foundation to assume control of the hospital. On May 17, 1975, these five Monsour family members, who at that time owned all of the Monsour Hospital and Clinic stock, together sold 3.5 percent of this stock in their hospital to the Foundation for $500,000. At or about the same time, the family members donated an additional 46.7 percent of their outstanding stock, valued at $7,064,765, to the Foundation.*fn3 The hospital then redeemed the remaining 49.8 percent of its outstanding stock form these Monsour family members by signing a fifteen-year installment note of $7.5 million. Interest due on this note was, after the first five years,*fn4 pegged to the prime rate,*fn5 and the note was secured by a second mortgage on the hospital's real estate holdings. These three transactions, which left the Foundation as the sole stockholder in the hospital and the five Monsour family members as its mortgagees, constituted the financial aspects of the Foundation, was subsequently reorganized as a Pennsylvania non-profit corporation and renamed the Monsour Medical Center.

In addition to these financial complexities, this case also involves a web of corporate governing bodies. As the incorporators of and stockholders in the original for-profit hospital, the Monsour brothers sat on its corporate board and served as its corporate officers. Prior to the May, 1975 stock sale, donation and redemption, they resigned. The Foundation, at the May 19, 1975 meeting where it approved the conversion, appointed a new hospital board and slate of officers consisting of no Monsour family members. In addition, five family members (Howard, Robert, Roy and william Monsour, and Ayoub) were the Foundation's original trustees, and they appointed the eight additional trustees who served with them as the Foundation Board of Directors. This Board subsequently created a six-member Executive Committee to oversee operations of both the Foundation and the Center.

For the hospital cost years in issue here, Blue Cross and Blue Shield of Western Pennsylvania ("Blue Cross") served as the government's fiscal intermediary under the Medicare program.*fn6 Until April, 1981, Blue Cross reimbursed the Center for the conversion-related interest and depreciation expenses; at the time, Blue Cross disallowed reimbursement for these expenses and reclaimed all such expenses it had previously paid to the Center, claiming that the conversion had not been an arm's length transaction between unrelated parties. The Secretary subsequently invoked this same reason for disallowing, in December, 1981, the reimbursement of appellant's conversion-related expenses. Appellant maintains that these actions affect "$2,117,842 in previously-reimbursed depreciation and interest expenses [for fiscal years 1977-1980] . . . [and] $1,560,482 in depreciation and interest expenses for [fiscal year] 1981." Brief for Appellant at 13. As a result, these actions in 1981 "reduced Medicare reimbursement to the [Center] by approximately $1,381,000." Id.*fn7

Blue Cross, seeking both recovery of damages in the amount of its previous reimbursements for what it subsequently determined were not reimbursable costs and a declaratory judgment that the Center's conversion costs were as a matter of law not reimbursable under Medicare, sued the Center, the Monsour brothers and the Monsour Hospital and Clinic, Inc., the former owner of the Center, in Pennsylvania state court in 1982. These defendants filed counterclaims against Blue Cross seeking damages for defamation and a declaration that the conversion costs were reimbursable as a matter of law. After a three-week bench trial, the state court*fn8 declared in 1983 for the defendants that, because the hospital sale involved unrelated parties,*fn9 the conversion costs were reimbursable under the Medicare program through Blue Cross, the intermediary. Blue Cross of W. Pa. v. Monsour Medical Center, No. GD 82-4968 (Pa. Ct. Common Pleas Feb. 2, 1983).*fn10 following the state court decision, the Secretary continued to disallow reimbursement for the Center's conversion-related costs. The Center than challenged the Secretary's refusal to reimburse by filing a complaint with the PRRB. On October 6 and 7, 1983, a PRRB hearing was held, as provided by statute, see 42 U.S.C. § 1395oo(a) (supp. III 1985), to assess the Center's contentions on six distinct Medicare reimbursement issues. The PRRB found, inter alia, that the Foundation trustees who approved the conversion transactions

were acting as surrogates of the [Monsour] family to implement the final stages of a corporate long-term plan [that] had been adopted by the Foundation in a prior period when it was controlled by the Monsour family . . . There is no question that the Family, the Foundation, and the [hospital] were related when the entire transaction was specifically planned. The fact that the transaction was executed almost precisely as planned demonstrates the continuation of substantial control in fact.

Monsour Medical Center v. Blue Cross & Blue Shield Ass'n/Blue Cross of W. Pa., PRRB Hearing Dec. No. 80-24, at 20 (June 14, 1984); Appellant's App. at A64. This June 14, 1984 PRRB decision*fn11 was subsequently adopted by the Secretary, and the Center appealed the Board's adverse determinations to the district court.


Federal court jurisdiction to review a final decision of the PRRB affirmed by the Secretary is conferred by 42 U.S.C. § 1395oo(f)(1) (Supp. III 1985). Under the express terms of the Administrative Procedure Act ("A.P.A."), 5 U.S.C. §§ 551-59 & 701-06 (1982), the "action, findings, and conclusions" of such "an agency hearing provided by statute" are to be held "unlawful and set aside" by the reviewing court if they are "unsupported by substantial evidence." 5 U.S.C. § 706(2)(E) (1982). "In making the foregoing determinations, the court shall review the whole record . . . " Id. Accord 42 U.S.C. § 405 (1982) ("The findings of the Secretary as to any fact, if supported by substantial evidence, shall be conclusive . . . ").

We are, in effect, the second "appellate" court to consider the factual bases of PRRB's challenged findings. Our review applies, as did the district court's the substantial evidence test. In an attempt to clarify the practical meaning of this test, we set forth the oft-quoted language of the Supreme Court:

"substantial evidence is more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." . . . Accordingly, it "must do more than create a suspicion of the existence of the fact to be established . . . [I]t must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury."

Universal Camera Corp. v. NLRB, 340 U.S. 474, 477, 95 L. Ed. 456, 71 S. Ct. 456 (1951) (citations omitted). See also D & D Distribution Co. v. NLRB, 801 ...

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