Shalala v. Guernsey Memorial Hospital

Guernsey Memorial Hospital (Guernsey) (defendant) provided Medicare services. In 1985, Guernsey refinanced existing capital improvement bonds, resulting in both substantial debt savings and an accounting loss, also called a defeasance loss, of approximately $675,000. Guernsey determined that $314,000 of the defeasance loss was eligible for Medicare reimbursement. Guernsey submitted a reimbursement claim and demanded full reimbursement within the same year the claim was submitted. Donna Shalala, the Secretary of Health and Human Services (Secretary) (plaintiff), did not dispute the amount of the reimbursement but determined that the reimbursement must be amortized over the lifespan of the old bonds, not reimbursed all at once in a single year. This decision was in accordance with the interpretive guidelines in the Medical Provider Reimbursement Manual (PRM), which stated that defeasance losses must be amortized for Medicare reimbursement. The PRM was a nonregulatory series of guidelines issued to providers regarding Medicare’s interpretation of the Medicare statute. Guernsey challenged, arguing that (1) the Secretary’s ruling was improper because amortizing the reimbursement was contrary to generally accepted accounting principles (GAAP); and (2) the Medicare statute, under 42 CFR § 413.20(a), required the Secretary to comply with GAAP in issuing reimbursement determinations. Internal administrative review of the Secretary’s decision ultimately upheld it. On judicial review, the district court also sustained the Secretary’s position; however, on appeal, the appellate court reversed. The United States Supreme Court granted certiorari.