## Facts

- Guernsey Memorial Hospital, a Medicare provider, issued bonds in 1972 and 1982 for capital improvements and refinanced that debt in 1985 by issuing new bonds.
- The refinancing produced substantial future debt-service savings but generated an accounting “defeasance” (advance refunding) loss of $672,581.
- The hospital claimed roughly $314,000 of the loss was allocable to Medicare and sought full reimbursement in the year of refinancing.
- The Secretary of Health and Human Services required the loss to be amortized over the life of the old bonds, relying on Medicare Provider Reimbursement Manual (PRM) § 233, a subregulatory guideline not promulgated through notice-and-comment and not styled as a regulation.
- An intermediary applied PRM § 233 and required amortization; the Provider Reimbursement Review Board ruled for the hospital; the agency Administrator reversed; the district court upheld the Secretary; the Sixth Circuit reversed, holding Medicare regulations required GAAP and that PRM § 233 was a procedurally invalid substantive change.

## Issues

1. Whether Medicare reimbursement regulations in 42 C.F.R. Part 413 require reimbursement determinations to follow generally accepted accounting principles (GAAP).
2. Whether PRM § 233 is an invalid substantive rule for failure to undergo APA notice-and-comment procedures, or a valid interpretive rule exempt from those procedures.

## Decision

- The Supreme Court reversed the Sixth Circuit.
- The Court held the Secretary was not required to follow GAAP in Medicare reimbursement determinations under the cited regulations.
- The Court held PRM § 233 was a valid interpretive rule that could be issued without notice-and-comment rulemaking.
- The amortization approach for the defeasance loss was upheld.

## Legal Principles

- References in Medicare regulations to widely accepted accounting practices and accrual accounting primarily govern recordkeeping and reporting and do not, without clear text, bind the agency to GAAP as the reimbursement standard.
- A requirement that cost data be on an accrual basis does not mandate GAAP because GAAP is not the only accrual methodology.
- The Medicare statute’s direction that the Secretary “consider” generally accepted principles permits reasonable departures from GAAP in setting reimbursement methods.
- Courts defer to an agency’s reasonable interpretation of its own regulations where regulatory text leaves room for interpretation and the interpretation is not plainly inconsistent with the regulations.
- Interpretive rules that advise the public of an agency’s construction of existing statutes and regulations are exempt from APA notice-and-comment requirements; agency manuals may supply such interpretive guidance without creating new legal duties.

## Conclusion

The Court upheld the Secretary’s use of PRM § 233 to require amortization of a hospital’s advance-refunding loss, ruling that Medicare regulations did not mandate GAAP-based reimbursement and that the manual provision was an interpretive rule not subject to APA notice-and-comment procedures.


Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87 (1995)