Sid Peterson Mem'l Hosp. v. Thompson,
No. 00-51138 (5th Cir. Dec. 12, 2001)

A Texas hospital sued the Secretary of Health and Human Services for denying a claim for reimbursement of interest expenses on capital indebtedness. The debt arose from the purchase of its hospital facility. A charitable foundation was the original owner of the hospital and it later spun off the hospital to a corporation. The corporation was formed for the exclusive purpose of operating the hospital and there was substantial overlap between the Boards of Directors of the foundation and the corporation. The Secretary claimed that the interest reimbursement was not allowed under the Medicare regulations because of the related-party rule, under which lenders in transactions with a hospital must be independent from the hospital. The district court upheld the Secretary's decision and the hospital appealed.

The United States Court of Appeals, Fifth Circuit, affirmed the decision of the lower court. The court ruled that the related-party rule served an important prophylactic purpose in stemming potential for abuse in the Medicare system. The court additionally found that the Secretary's interpretation of the rule was reasonable and that there was substantial evidence to support the finding that the foundation and the hospital were related parties under the regulation. The court was not persuaded that a good faith exception to the related-party rule should be applied when the interest rate on the transaction was reasonable.