HINSDALE HOSPITAL CORPORATION, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant-Appellee

CUDAHY, Circuit Judge,

dissenting.

In its progress through the review process this matter has drawn dissent — either formally or in practical effect — at every level. Thus, in the Provider Reimbursement Review Board, Member Sloan dissented on the ground that, when Hinsdale transferred the $5.9 million to Glendale Heights, Glendale Heights was “under Hinsdale’s corporate structure” and “should be treated as if it were a hospital department.” And “all Medicare regulations allow borrowing when it is to benefit a provider department.” This seems to me to put the matter succinctly and accurately.

Later, Magistrate Judge Guzman said in his recommended decision, “Hinsdale is correct when it argues that [the disputed $5.9 million] was in fact a necessary and reasonable cost because it was being used to satisfy a financial need of the provider and was reasonably related to patient care.” The magistrate judge, as the majority indicates, recommended that Hinsdale should prevail.

I am as sensitive as the majority to the need to defer to the Secretary in the difficult task of interpreting the Medicare Regulations. But I do not believe deference should be carried to the point of defeating the essential statutory purpose, which is that Medicare should reimburse provider hospitals for the reasonable and necessary costs of earing for Medicare patients. Here the cost of providing working capital to enable patient care in Glendale Heights (then an “extension” or, in Member Sloan’s words, a “department,” of Hinsdale) to continue seems to me an eminently valid and reasonable cost for Medicare to reimburse. The effect of the majority decision is to shift those Medicare patient care costs onto non-Medicare patients — a violation of the statute. See 42 U.S.C. § 1395x(v)(l)(A) (1988). “[T]he necessary costs of efficiently delivering the covered services to individuals covered by the [Medicare Program] ... will not be borne by individu*1403als not so covered_” 42 U.S.C. § 1395x(v)(l)(A)(i) (1988).

The majority decision, as did the decision of the Review Board before it, seems to turn primarily on the argument that Hinsdale’s advance or transfer of funds sprang not from some internal or “intrinsic” need of its own but from an “artificial” need arising from the requirements of Adventist in acquiring Glendale Heights. It is not my position that the intent of Hinsdale in transferring the funds is wholly irrelevant, or that the part played by other actors in inducing the transfer is irrelevant. But I believe that the facts as they existed at the time of transfer are the critical facts. Cf. St. Bernard’s Hospital v. Sullivan, 781 F.Supp. 576 (E.D.Ark.1991); St. Francis Hospital v. Sullivan, 1990 WL 284514, 1991 U.S.Dist. Lexis 10719 (Dist. Del.). The surrounding circumstances are only of concern if they somehow violated the letter or the spirit of the statute or of the regulations, evidenced imprudence or in any way interfered with the central purpose of cost-sharing. In my view it defeats the key purpose of cost-sharing to ignore Hinsdale’s responsibilities for patient care at Glendale Heights, merely because Glendale Heights’ patients became Hinsdale’s patients partly as a result of Adventist’s efforts to acquire Glendale Heights. The objective reality at the time of transfer was that Hinsdale and Glendale Heights were both the responsibility of Hinsdale’s board, that Glendale Heights’ patient care needs required a cash infusion and that Hinsdale responded appropriately to this need. Medicare should share in the cost of meeting this need since Medicare patients were benefited.

The basic facts of the surrounding circumstances leading up to Hinsdale’s responsibility for Glendale Heights’ patients are not in dispute. Glendale Heights was financially distressed and highly unereditworthy. Adventist proposed to buy the failing hospital and bring it into its system. Presumably, the transaction could not be financed on Glendale Heights’ credit from third party sources, at least not at reasonable rates of interest. There is no doubt that, had funds been found somewhere even at extortionate rates of interest, the debt representing those funds could have been incorporated into the Glendale Heights capital structure and the inflated interest would have been quite properly reimbursable by Medicare. That interest would have met a financial need of Glendale Heights and would have been reasonably related to patient care — the statutory and regulatory tests.

In its footnote 6, the majority notes that the funds might have been provided by Adventist itself. Possibly they could have been (although this is pure speculation), but, as the majority notes, the interest on Adventist’s loan would have been reimbursable to Glendale Heights, and Medicare would thereby have paid its fair share. However, footnote 6 goes on to indicate the financial consequences to Adventist if it had had to borrow money as a “replacement” for its advance to Glendale Heights. But, the issue of interest reimbursement on the “replacement” would be irrelevant unless, as on the facts of the case before us, the “loan” were uncollectible and instead amounted to a gift. On those facts, certainly, there would have been no duty under the statute or the regulations for hospital systems like Adventist to make gifts of working capital to their constituent hospitals in ways which relieve Medicare of its duty to share in the costs of hospital care to Medicare patients. The reality here is that the Secretary has not pointed to any impropriety, imprudence or law violation in the way the Adventist system provided for the various steps in financing the acquisition of Glendale Heights. Nor has the Secretary shown that Medicare would have been charged with more than its fair share of the working capital costs at Glendale Heights if Hinsdale’s argument had prevailed. Therefore, it seems to me that the surrounding and motivating circumstances are essentially neutral, and we ought properly to focus on the crucial problem of Hinsdale’s need to advance funds, at the particular time of the advance, to provide patient care in Glendale Heights.1

*1404The advance of funds to provide working capital at Glendale Heights went to meet a financial need of the provider (Hinsdale, which then included Glendale Heights) and was reasonably related to patient care. At the time the advance or loan was made, Hinsdale and Glendale Heights shared the same corporate structure, and patient care at Glendale Heights was the responsibility of the Hinsdale Board. The funds were advanced for purposes reasonably related to patient care. Barring some claim of impropriety or imprudence in the process under which Glendale Heights came to occupy a place in the Hinsdale corporation, I see no reason to look beyond the facts as they existed when the funds were transferred. It seems to me irrelevant that, as the Board pointed out, the housing of Glendale Heights as an operating division of Hinsdale was “a short-term accommodation.” Nor is it relevant that this arrangement “facilitated Adventist’s goal.” It is certainly not relevant that Glendale Heights “was never held out to the public as a branch or subsidiary of Hins-dale.” Nor is it really material whether the $5.9 million was an “intra-corporate transfer” or a “loan.” The only relevant fact is that the transfer or loan was made to meet the patient care needs of the patients at Glendale Heights, which was for the time being a mere extension of Hinsdale and a responsibility of the Hinsdale Board. That Board would have been in breach of its fiduciary duty to Glendale Heights had it failed to advance the funds. Whether Adventist was pleased or displeased by this turn of events is totally irrelevant with respect to the fundamental objective of sharing patient care costs equitably between Medicare and non-Medicare patients.

In this ease, as the majority notes, the Board relied on the related organizations principle to conclude “that the diversion of funds by one related entity to another cannot create a bona fide need to borrow on behalf of the entity providing the diverted funds.” The majority concedes that the related organizations principle is not “technically applicable here” but cites certain cases where the courts have used the related organizations rule as a “guiding principle” in determining a provider’s “reasonable cost.” See Monongahela Valley Hosp., Inc. v. Sullivan, 945 F.2d 576, 591-92 (3d Cir.1991); Forsyth County Hosp. Auth., Inc. v. Bowen, 856 F.2d 668, 670 (4th Cir.1988). The majority also cites Portland Adventist Medical Center v. Heckler, 561 F.Supp. 1092, 1096-97 (D.D.C.1983), in connection with the assertion that the present facts show an attempt to shift costs from Adventist to Hinsdale.

It is true that Monongahela Valley, Forsyth County and Marymount Hosp. v. Shalala, 19 F.3d 658 (D.C.Cir.1994), implicitly support the proposition that investment income earned by a non-provider parent entity on funds donated by a provider should offset the provider’s otherwise allowable interest expense. However, although the Secretary urges that Portland Adventist and Marym-ount Hospital v. Shalala (and other imputed investment income offset cases) should control the outcome here, the present case is crucially different from the others:

1. The funds “diverted” in all the cases cited by the Secretary and the majority were diverted to separate corporations that did not participate in the Medicare program in order to capitalize other corporations that did not participate in Medicare. For example, in Portland Adventist, the funds were transferred from a provider corporation to a corporation that was engaged in a non-reimbursable activity of establishing ambulatory care businesses. Here, on the other hand, the recipient of the funds was a hospital providing hospital care to Medicare patients.

2. Hinsdale in all probability saved Medicare money by using internally generated funds while Hinsdale and Glendale Heights were under the same corporate umbrella.

*14053. As the religious order exception of § 413.153(c)(2) suggests, there is no evil in a religious health care system using a strong operating unit to subsidize a weaker one where both are serving patients as Medicare providers.

If there are such evils, neither the Secretary nor the majority has articulated them. It seems to me that the focus on the “intent” of Hinsdale in carrying out this work of mercy merely obfuscates the facts as correctly discerned by Member Sloan in his Review Board dissent.

I therefore respectfully dissent.

. The majority asserts in footnote 6 that the working capital loan was for the “benefit” of Adventist and that Adventist should “bear the risk that Glendale Heights will default on its loan.” This is tortured reasoning. The loan or transfer of funds was for the direct benefit of *1404patients (including Medicare patients) in Glendale Heights, who were at risk of loss of care. At the time the funds were transferred, Hinsdale was responsible for Glendale Heights' patient care. Hence, the funds were properly advanced by Hinsdale. After Glendale Heights' "default,” the Secretary had an obligation to share in the interest cost of replacement funds. This is not a "guaranty,” as generally understood, since loss of principal was not underwritten. And, in any event, there was no "benefit" to Adventist unless Adventist were under some obligation to advance working capital funds in the first place.