Catholic Healthcare W. v. Sebelius

Decision Date29 January 2013
Docket NumberCivil Action 11–459 (GK).
Citation919 F.Supp.2d 34
PartiesCATHOLIC HEALTHCARE WEST, Plaintiff, v. Kathleen SEBELIUS, in her official capacity as Secretary of Health and Human Services, Defendant.
CourtU.S. District Court — District of Columbia


Jeffrey A. Lovitky, Jeffrey A. Lovitky, Attorney at Law, Washington, DC, for Plaintiff.

Javier M. Guzman, U.S. Attorney's Office, Jeremy S. Vogel, Special Assistant U.S. Attorney, Washington, DC, for Defendant.


GLADYS KESSLER, District Judge.

Plaintiff, Catholic Healthcare West (CHW), brings this action against Defendant Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services (respectively, the “Secretary” and “HHS”), pursuant to Title XVII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. (“the Medicare Act). CHW seeks judicial review of a final agency decision denying Marian Medical Center's (“Marian”) reimbursement claim arising from the merger of Marian, Mercy Healthcare Ventura County (“Mercy”), and CHW.1

This matter is before the Court on Plaintiff's Motion for Summary Judgment [Dkt. No. 14] and Defendant's Motion for Summary Judgment [Dkt. No. 15]. Upon consideration of the parties' cross-motions, the administrative record, and the entire record herein, and for the reasons stated below, Plaintiff's Motion for Summary Judgment is denied and Defendant's Motion for Summary Judgment is granted.


On March 15 1997, Marian entered into an Agreement of Merger with Mercy, a two-hospital system whose sole corporate member was CHW. Administrative Record (“A.R.”) 20, 409. CHW is a Catholic healthcare system co-sponsored by several Catholic women's religious orders. Id. at 20. CHW oversees and coordinates the activities of a healthcare system consisting of over 30 acute care hospitals in California, Arizona, and Nevada. Id. Marian was a general acute care hospital located in Santa Maria, California. Id. Marian was owned and operated by the Sisters of St. Francis of Penance and Christian Charity, St. Francis Province (Sisters of St. Francis”). Id. The merger between Marian, Mercy and CHW became effective April 24, 1997. Id. at 20, 411, 413–14, 493–95. Mercy, renamed CHW–CC, remained as the surviving corporation. Id. at 20, 411, 413–14.

A. Statutory and Regulatory Framework

Congress created the Medicare program in 1965 to pay for certain specified, or “covered,” medical services provided to eligible elderly and disabled persons. See42 U.S.C. §§ 1395 et seq. Under the program, health care providers are reimbursed for a portion of the costs that they incur treating Medicare beneficiaries pursuant to an extremely “complex statutory and regulatory regime.” Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). That regime is administered by the Centers for Medicare & Medicaid Services (“CMS”), under the supervision of the Secretary. CMS contracts with a network of fiscal intermediaries to review and process Medicare claims in the first instance.

The Medicare Act provides for reimbursement of the “reasonable cost of [Medicare] services.” 42 U.S.C. § 1395f(b)(1). “Reasonable” costs are those “actually incurred ... [as] determined in accordance with regulations.” 42 U.S.C. § 1395x(v)(1)(A). Under the Secretary's regulations in effect at the time of the transaction at issue, [a]n appropriate allowance for depreciation on buildings and equipment used in the provision of patient care [was] an allowable cost.” 42 C.F.R. § 413.134(a) (1997).2 The costs are calculated by dividing the asset's purchase price by its “estimated useful life” and then prorating this amount by the percentage of the asset's use dedicated to Medicare services. 42 C.F.R. §§ 413.134(a)(3), (b)(1). Medicare reimburses providers for these depreciation costs on an annual basis.

The Secretary determined that certain disposals of depreciable assets may give rise to recognition of a “gain” or “loss.” That figure effectively adjusts the annual Medicare depreciation payments to more accurately reflect the actual cost of providing covered services to Medicare beneficiaries. Entities that were Medicare providers prior to statutorily merging with an unrelated party are able to recoup gains and losses from the merger subject to 42 C.F.R. § 413.134(f). Subsection (f) allows providers to request reimbursement for the difference between the “net book value” 3 and the compensation actually received in exchange for assets disposed of prior to December 1, 1997.442 C.F.R. § 413.134(f)(1). Subsection (f)(2) permits the inclusion of “gains and losses realized from the bona fide sale ... of depreciable assets” in the determination of allowable cost. 42 C.F.R. § 413.134(f)(2).5

The Secretary issued Program Memorandum (“PM” or “Memorandum”) A–00–76 in order to clarify the application of 42 C.F.R. § 413.134( l ), the statutory merger regulation, to non-profit providers. PM A–00–76 (Oct. 19, 2000) (A.R. 1676–79). The Memorandum describes the “related organizations” and bona fide sale” standards under which mergers between non-profit organizations should be analyzed. Id.

As to “related organizations,” PM A–00–76 notes that consideration should be given to continuity of control, or the degree to which the pre-merged entities continue to exercise control over the post-merger entity. Id. As to bona fide sale,” the Memorandum defines that term as an arm's length transaction for reasonable consideration. Id. PM A–00–76 explains that “a large disparity between the sales price (consideration) and the fair market value of the assets sold indicates the lack of a bona fide sale.” Id. The Memorandum recommends reviewing “the allocation of the sales price among the assets sold” to help determine whether a bona fide sale took place. Id.

PM A–00–76 explains that its effective date is not of consequence because it clarified, rather than changed, existing policy. Accordingly, the Memorandum concludes by stating that it should be applied to “all cost reports for which a final notice of program reimbursement has not been issued and to all settled cost reports that are subject to reopening....” Id.

B. Procedural Background

Marian claimed a loss on the disposal of assets on its final Medicare cost report for the hospital's fiscal year ending April 24, 1997. A.R. 65. On August 12, 1999, the fiscal intermediary engaged by the Secretary to administer the Medicare program denied Marian's claim for reimbursement. Id. at 1723–27, 1861–64.

Marian appealed the fiscal intermediary's determination to HHS' Provider Reimbursement Review Board (“PRRB”). On November 3, 2010, the PRRB affirmed the intermediary's denial of Marian's claim. Id. at 33–46. The PRRB concluded that the large disparity between the consideration received and the fair market value of the assets acquired indicated a lack of reasonable consideration and, therefore, the lack of a bona fide sale. Id. at 46. Having determined that there was no bona fide sale, the PRRB held that payment for the claimed loss on disposal of assets was not allowable. Id. The PRRB also concluded that the parties were not related. Id. 39, 43.

The CMS Administrator, who has the discretion to review any final decision of the PRRB, chose to review the PRRB's denial of Marian's claim. Id. at 2–25. On January 4, 2011, the CMS Administrator issued her decision and determined that, based on the cost appraisal approach, Marian transferred cash, cash equivalent assets, plant, and equipment worth approximately $67 million (comprised of cash and cash equivalent assets worth approximately $15.9 million and plant and equipment worth approximately $51.1 million) in exchange for the assumption of liabilities worth approximately $32.7 million. Id. at 22. Based on these figures, the CMS Administrator concluded that the merger did not qualify as a bona fide sale because Marian never sought and did not receive reasonable consideration for the transfer of its depreciable assets. Id. at 21–22. Like the PRRB, the CMS Administrator held that Marian was “not entitled to reimbursement for a loss on disposal of assets....” Id. at 22.

The CMS Administrator also disallowed the loss-on-sale claim for a second, independent reason, i.e., that the merger was a related-party transaction. Id. at 22–24. The CMS Administrator explained that the PRRB “incorrectly concluded that the related party concept only applied to the entities ['] relationship that existed prior to the merger” and that the principle in fact “applied to the parties' relationship pre and post merger.” Id. at 22. Although the CMS Administrator noted that “the record is lightly developed with respect to whether [Marian] was related to the merged entity through a continuity of control and ownership,” the Administrator nonetheless concluded that there was sufficient evidence demonstrating that the parties were related. Id. 23–24. The CMS Administrator's decision constitutes the finaldecision of the Secretary and is now before this Court for review.


The Medicare Act provides for judicial review of a final decision made by the Secretary. 42 U.S.C. § 1395 oo(f)(1). The Medicare Act instructs the reviewing court to apply the provisions of the Administrative Procedures Act (“APA”). Id. Under the APA, the agency decision can be set aside only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.” 5 U.S.C. §§ 706(2)(A), (2)(E).

“The arbitrary and capricious standard [of the APA] is a narrow standard of review.” Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). It is well established in our Circuit that [t]his court's review is ... highly deferential” and that we are ‘not to substitute [our] judgment for that of the agency’ but must ‘consider whether the decision was based on a consideration of the relevant factors and...

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1 cases
  • Catholic Healthcare W. v. Sebelius
    • United States
    • U.S. Court of Appeals — District of Columbia Circuit
    • June 5, 2014
    ...address. CHW appealed to the district court, which dismissed the case on a motion for summary judgment. Catholic Healthcare West v. Sebelius, 919 F.Supp.2d 34 (D.D.C.2013). * * * Our review is de novo, as though on direct appeal from the agency, Tenet HealthSystems HealthCorp. v. Thompson, ......

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