AMISUB, Inc., (St. Joseph Hosp.) v. Shalala

• Decision Date: 05 January 1994
• Docket Number: No. 93-1623,93-1623
• Citation: 12 F.3d 840
• Parties: -879, 62 USLW 2515, 43 Soc.Sec.Rep.Ser. 263, Medicare&Medicaid Guide P 42,002 AMISUB, INC., (ST. JOSEPH HOSPITAL), Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 840

12 F.3d 840

73 A.F.T.R.2d 94-879, 62 USLW 2515,

43 Soc.Sec.Rep.Ser. 263,

Medicare&Medicaid Guide P 42,002

AMISUB, INC., (ST. JOSEPH HOSPITAL), Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services,

Defendant-Appellee.

No. 93-1623.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 9, 1993.

Decided Jan. 5, 1994.

Byron J. Gross, Los Angeles, CA, argued (Patric Hooper and Gina M. Reese, on the brief), for plaintiff-appellant.

Jamie G. Crawford, of DHS, Kansas City, MO, argued, for defendant-appellee.

Before BEAM, Circuit Judge, LAY, Senior Circuit Judge, and BOGUE, ^* Senior District Judge.

LAY, Senior Circuit Judge.

AMISUB, Inc. (St. Joseph's Hospital) ("AMISUB") appeals the district court's affirmance of a final decision of the Secretary of Health and Human Services (the "Secretary") concerning the application of the Deficit Reduction Act of 1984 ("DEFRA") to AMISUB's purchase of St. Joseph Hospital in Omaha, Nebraska. At issue is whether an Agreement in Principle, pursuant to which AMISUB purchased St. Joseph Hospital, would allow AMISUB to step-up the basis of its depreciable assets from their historical cost to their acquisition cost for Medicare reimbursement purposes. The district court ¹ affirmed the Secretary's finding that the Agreement in Principle was not an "enforceable agreement" under Sec. 2314(c)(1) of DEFRA, and thus denied AMISUB a step-up in basis. We now affirm.

I.

Title XVIII of the Social Security Act of 1965, 42 U.S.C. Sec. 1395 et seq. (the "Medicare Act"), provides federal reimbursement for the "reasonable cost" of providing services related to the care of Medicare beneficiaries. Id. at Sec. 1395f(b)(1); 42 C.F.R. Sec. 413.9(a). Among the reasonable costs related to patient care which are reimbursable are capital-related costs, including an appropriate allowance for depreciation of buildings and equipment used in the provision of patient care. 42 C.F.R. Secs. 413.130, 413.134(a), 413.153(a)(1). Prior to 1984, when a provider acquired an entire facility as an ongoing operation, the provider's basis in all assets of the facility for the purposes of determining reimbursable depreciation expenses was equal to the total purchase price the provider paid for the facility, not to exceed the fair market value of the facility or the combined fair market value of all assets of the facility. 42 C.F.R. Sec. 134(g)(2). In other words, a purchaser of a health care provider was allowed to increase ("step-up") the basis in the acquired provider's depreciable assets to the full purchase price, regardless of what the seller's basis had been. See H.R.Conf.Rep. No. 861, 98th Cong., 2d Sess. 1338 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 2026. On July 18, 1984, Congress enacted the Deficit Reduction Act of 1984 ("DEFRA"), Pub.L. No. 98-369, 98 Stat. 494 (1984). Section 2314(a) of DEFRA (codified at 42 U.S.C. Sec. 1395x(v)(1)(O)), amended the Medicare Act by imposing a limitation on the revaluation of assets when a change of ownership occurs for purposes of determining reimbursement of capital-related costs under the Act. As a result, the Medicare Act no longer permits a "step-up" in the cost basis of depreciable assets from the historical costs of the prior owner to the acquisition cost of the new owner. Under Sec. 2314(a), the purchaser of a Medicare provider is limited to a basis equal to "the lesser of the allowable acquisition cost of such asset to the owner of record as of July 18, 1984 (or, in the case of an asset not in existence as of such date, the first owner of record of the asset after such date), or the acquisition cost of such asset to the new owner." 42 U.S.C. Sec. 1395x(v)(1)(O)(i). However, there is a "grandfather" exception to the valuation limitation of DEFRA. Section 2314(c)(1) provides that the basis limitation under Sec. 2314(a) "shall not apply to changes of ownership of assets pursuant to an enforceable agreement entered into before the date of the enactment of this Act [July 18, 1984]." Pub.L. No. 98-369, Sec. 2314(c)(1), 98 Stat. 1079 (1984). The issue in the case is whether American Medical International, Inc. (AMI), AMISUB's corporate parent, entered into an enforceable agreement with Creighton Omaha Regional Health Care Corporation (CORHCC) to purchase St. Joseph Hospital on or before July 17, 1984.

As the district court noted, the material facts surrounding AMISUB's purchase of St. Joseph Hospital are not in dispute. On May 24, 1984, AMI and CORHCC entered into an Agreement in Principle whereby AMI agreed to purchase and CORHCC agreed to sell the assets of St. Joseph Hospital in Omaha, Nebraska, a teaching hospital affiliated with Creighton University. The Agreement in Principle required AMI to pay CORHCC approximately $99 million, and contained a detailed description of the terms of performance for both parties, including a summary of commitments by AMI to both Creighton University and CORHCC regarding the governing structure of the facility, as well as operational, spiritual, educational, and research commitments. The Agreement in Principle provided that the sale would be consummated upon satisfaction of four express conditions. First, the sale must be approved by all necessary state and local regulatory authorities. Second, CORHCC's balance sheet dated February 29, 1984, and related income statement, must fairly represent the financial condition of St. Joseph Hospital in accordance with generally accepted accounting principles. Third, there may be no material adverse deviation in the condition of the assets or the financial operation of the hospital as of the date of the balance sheet. Fourth, AMI must review all contracts with physicians and others employed at the hospital. The Agreement in Principle further specified that it was "subject to the execution of a definitive agreement by AMI and CORHCC." The definitive agreement was to contain, in addition to the terms and conditions of the Agreement in Principle, "such terms and conditions as are customarily found in such agreements." The Agreement in Principle also specified that the sale of the facility was contingent upon ratification by the boards of directors of CORHCC, Creighton University, and AMI.

On August 24, 1984, AMI and CORHCC signed the definitive agreement. Rather than an outright sale, as contemplated by the Agreement in Principle, the definitive agreement structured the conveyance of assets between the parties as a prepaid lease. It provided that the payments by AMI were to be made in exchange for a fourteen-year lease of the assets comprising St. Joseph Hospital, with title to pass to AMI at the end of the lease period through an option to purchase the assets at a cost of $1,000. The definitive agreement also contained express representations by both AMI and CORHCC that they had approved their eventual sale of the assets, and the sale was within their corporate powers. Simultaneously with the execution of the lease, CORHCC placed into escrow via an escrow document appropriate deeds, assignments, and bills of sale pursuant to which CORHCC would sell, assign, transfer, and deliver to AMI a good and marketable title of the assets free and clear of any liens. The definitive agreement provided that the escrow document would be delivered to AMI if AMI exercised its purchase option under the lease. On November 19, 1984, the actual lease was signed and notarized by AMI and CORHCC. Under the lease, AMI agreed that its "rent" would be the total purchase price of the assets comprising St. Joseph Hospital and that the basic rent shall be paid as specified in the Agreement in Principle.

In its Medicare cost reports for its fiscal years ending August 31, 1985 through 1987, AMISUB, believing that the Agreement in Principle was an enforceable agreement, claimed depreciation (and other ownership costs) based on the acquisition cost of the assets comprising St. Joseph Hospital. The Office of the General Counsel of the Health Care Financing Administration disagreed, and in an April 11, 1988 memorandum stated that the Agreement in Principle did not constitute an enforceable agreement and, therefore, AMISUB was not entitled to be grandfathered into a step up in the cost basis of the acquired assets. In June 1989 an intermediary reopened AMISUB's cost reports to apply the provisions of DEFRA and limit AMISUB's reimbursable acquisition costs to CORHCC's historical costs. The intermediary's adjustments denied the stepped-up basis of assets taken by AMISUB, resulting in a reduction in Medicare reimbursement of approximately $98,000 for FY 1985, $226,000 for 1986, and $120,000 for FY 1987.

Pursuant to 42 U.S.C. Secs. 1395oo(a), AMISUB requested a hearing on the intermediary's adjustments before the Provider Reimbursement Review Board (the "Board"). After a hearing, the Board issued a decision affirming the intermediary's adjustments. The Board concluded that the Agreement in Principle was not an enforceable agreement prior to July 18, 1984, and that AMISUB was not entitled to step up the basis of its assets for depreciation purposes. The Administrator of the HCFA subsequently declined to review the Board's decision, making it the final decision of the Secretary, and AMISUB sought judicial review in the district court. The district court affirmed the Secretary's decision, and this appeal followed.

II.

The district court affirmed the Board's decision, finding that the Board's decision was supported by substantial evidence in the record as a whole. The district court applied the "substantial evidence" standard of review under the Administrative Procedure Act. See 5 U.S.C. Sec. 706(2)(E). In doing so, the district court found that the term enforceable agreement as used in DEFRA was ambiguous and the Secretary's construction and application of the term were entitled to deference. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-45, 104...