Flood-Damaged Hospital Won’t Get Another $20M

CHICAGO (CN) - An Indiana hospital that was given $70 million in federal funds to offset flood damage cannot get another $20 million, the 7th Circuit ruled.

Columbus Regional Hospital was one of many entities affected by a series of floods that ravaged Midwest states in June 2008. The flood inundated the hospital's basement, destroying medical and lab equipment.

After President Barack Obama authorized the Federal Emergency Management Agency to provide disaster relief, the hospital received approximately $70 million.

Believing FEMA had mishandled the award distribution, Columbus Regional sued the agency to recover an additional $20 million in aid. The hospital brought claims under the Administrative Procedure Act and Federal Tort Claims Act, in addition to alleging violations of its due process rights.

The hospital appealed after U.S. District Judge Sarah Evans Barker granted FEMA summary judgment.

A three-judge panel of the 7th Circuit nevertheless affirmed, after refusing to send the dispute to the Court of Federal Claims.

The panel shot down claims that FEMA had improperly calculated damaged property reimbursements by basing its valuation on cost less depreciation, instead of replacement cost.

"FEMA's stance would compel [Columbus Regional] to buy used equipment to replace the lost gear, yet insurers and regulators (and prudent management) call for new medical equipment," Chief Judge Frank Easterbrook wrote for the panel (parentheses in original). "Since it must replace the damaged equipment with new equipment, the hospital contends, it is entitled to the cost of new equipment."

But the Stafford Act, which governs disbursement of FEMA aid, does not require the agency to reimburse replacement cost, according to the ruling. Moreover, such a policy would result in an "absurd" windfall for aid recipients, Easterbrook said.

"At oral argument we asked the hospital's lawyer what should happen if the flood had carried away a box of single-use syringes that initially contained 20 syringes, 19 of which had been used," the ruling states. "The hospital obviously would replace this with a new box of 20 syringes rather than scour eBay for a box with only one left. What, we asked, should FEMA pay for the lost box containing one syringe?

"Counsel answered: the cost of a new box of 20 syringes. This answer has the virtue of consistency but exposes the silliness of the Hospital's position, since all it lost was one syringe."

The panel similarly dismissed the Columbus Regional's argument that a FEMA employee had promised replacement-cost reimbursement, noting that no field worker could commit the agency to pay more than is required by statute.

Furthermore, without evidence that other disaster relief recipients received aid based on their property's replacement cost, the hospital cannot claim that FEMA discriminated based on economic status.

Though Columbus Regional claimed that FEMA should not have allocated any of its insurance proceeds to property damage, Easterbrook said the Stafford Act does not allow reimbursement if a disaster victim has another source of payment.

Because the hospital's insurance provider paid out the policy limit of $25 million, without allocating between property loss and business-interruption loss, FEMA reduced its aid award.

Though Columbus Regional denied using the money on new equipment and supplies, the agency deducted roughly $16 million based on the insurer's payments, which it attributed to property.

"According to the Hospital, insurance coverage must be attributed to whatever the proceeds are used for," Easterbrook. "But why? Money is fungible."

"The hospital might have endorsed the $25 million check over to someone to pay for land on which a new building was to be constructed, or might have spent the whole $25 million on new equipment, but neither choice should affect disaster relief, because neither choice would affect either (a) how much the hospital lost, or (b) how much it recovered from another source," he added. "How a hospital (or any other insured) spends insurance proceeds has nothing to do with what those proceeds represent."

In fact, FEMA may have been entitled to impute all insurance proceeds to the hospital's covered claim, Easterbrook mused.

"FEMA did the hospital a favor when it allocated a third of the proceeds to losses outside the scope of the Stafford Act," he wrote.

The ruling quickly dispatched of the due process arguments, calling them "feeble."

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