Forsyth Mem'l Hosp. Inc. v. Sebelius

Decision Date26 April 2011
Docket NumberNo. 09–5448.,09–5448.
Citation639 F.3d 534
PartiesFORSYTH MEMORIAL HOSPITAL, INC., et al., Appellantsv.Kathleen SEBELIUS, Secretary of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

OPINION TEXT STARTS HERE

Appeal from the United States District Court for the District of Columbia (No. 1:07–cv–01828).Robert E. Mazer argued the cause and filed the briefs for appellants. Harold G. Belkowitz and James P. Holloway entered appearances.Joel McElvain, Senior Counsel, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Ronald C. Machen Jr., U.S. Attorney, Michael S. Raab, Attorney, and Janice Hoffman, Associate General Counsel, U.S. Department of Health & Human Services.Before: SENTELLE, Chief Judge, HENDERSON and GARLAND, Circuit Judges.Opinion for the Court filed by Chief Judge SENTELLE.

SENTELLE, Chief Judge:

Forsyth Memorial Hospital, Inc., and other medical providers (collectively, appellants) appeal from the district court's grant of summary judgment in favor of the Secretary of Health and Human Services (respectively, the “Secretary” and “HHS”), which upheld the denial of their reimbursement claims arising from the merger of Presbyterian Health Services Corporation (“Presbyterian”) and Carolina Medicorp, Inc. (“Carolina”). Appellants argued before the district court and this court that the denial of their claims was arbitrary and capricious, an abuse of discretion, contrary to law, or unsupported by substantial evidence. Finding no error in the district court's disposition, we affirm.

I.

According to the undisputed facts before the district court, prior to the events at issue in this case, Carolina was a private non-profit corporation that held title to certain land, buildings, land improvements, and fixed equipment. Carolina leased these assets to Forsyth Memorial Hospital, Inc., Medical Park Hospital, Inc., Foundation Health Systems Corp., and Carolina Medicorp Enterprises (together, the individual providers), which were non-profit Medicare service providers under the control of Carolina. The individual providers used the assets leased to them by Carolina for the provision of Medicare services.

Effective July 1, 1997, Carolina statutorily merged into Presbyterian, a previously independent corporation. Pursuant to North Carolina law, under which the statutory merger was executed, Carolina dissolved and Presbyterian assumed all of Carolina's assets and liabilities, including its leases with the individual providers and its land and depreciable assets. Presbyterian subsequently renamed itself Novant Health, Inc.

At the time of the merger, Carolina's known liabilities stood at $230.7 million. The value of its assets at that time is, however, disputed. No appraisal of Carolina's assets was conducted prior to the merger and Carolina did not place its assets on the open market. At the time of the merger, the net book value of Carolina's total assets—i.e., the assets' purchase price less the total depreciation already taken on them—was $399.8 million. An appraisal conducted after the merger found that Carolina's land and depreciable assets were worth $215 million.

After the merger, the individual providers sought reimbursement for approximately $11 million in losses on their depreciable assets, under 42 C.F.R. § 413.134( l ). Blue Cross Blue Shield Association, a private intermediary designated by HHS to process the providers' claims for reimbursement, denied the claims. The individual providers appealed to the HHS Provider Reimbursement Review Board (“PRRB”), pursuant to 42 U.S.C. § 1395oo(a), which reversed the intermediary's determination and ordered reimbursement. The Administrator of the Centers for Medicare & Medicaid Services (respectively, the “Administrator” and “CMS”), which administers the Medicare Program on behalf of the Secretary and has the discretion to review any final decision of the PRRB, 42 U.S.C § 1395oo(f)(1); 42 C.F.R. § 405.1875(a)(1), reversed the PRRB's determination, finding that appellants were not entitled to reimbursement because in the merger between Carolina and Presbyterian no bona fide sale took place and the parties were related.

Pursuant to 42 U.S.C § 1395oo(f)(1), the individual providers—excluding one whose interest had passed to another of the providers—sought judicial review of the Administrator's decision in the District Court for the District of Columbia. On cross motions for summary judgment, the district court granted summary judgment in favor of the Secretary and denied appellants' motion. Forsyth Mem'l Hosp. Inc. v. Sebelius, 667 F.Supp.2d 143 (D.D.C.2009). Appellants now appeal the district court's judgment.

II.

Under the Social Security Act, providers of Medicare services are statutorily entitled to reimbursement for the “reasonable cost” of certain Medicare services. See 42 U.S.C. § 1395f(b)(1). The implementing regulations, promulgated by the Secretary as required by the Act, 42 U.S.C § 1395x(v)(1)(A); 42 U.S.C. § 1395hh, provide that “an appropriate allowance for depreciation on buildings and equipment used in the provision of patient care is an allowable cost” for which a Medicare provider can seek reimbursement. 42 C.F.R. § 413.134(a). The regulations also set forth the manner in which the appropriate allowance for such depreciable assets is determined: The “historical cost” of the asset, § 413.134(a)(2)—which is “the cost incurred by the present owner in acquiring the asset,” § 413.134(b)—is [p]rorated over the estimated useful life of the asset,” § 413.134(a)(3). In most cases, the annual reimbursable cost of a depreciable asset will be the asset's “actual cost divided by the number of years of its useful life.” St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901 (D.C.Cir.2010).

Recognizing that the methodology for calculating reimbursable depreciation “only approximate[s] the actual decline in an asset's value,” Via Christi Reg'l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1262 (10th Cir.2007), the regulations require adjustment to the allowable depreciation cost of an asset in specified circumstances. Relevant here, when a provider disposes of a depreciable asset through sale or statutory merger, if the asset's net book value is not identical to the consideration received for the asset, a revaluation of the allowable cost is required. Upon revaluation, if the net book value is greater than the consideration received, the provider has realized a loss for which the provider may claim reimbursement. In contrast, if the net book value is less than the consideration received, the provider has realized a gain and HHS may appropriately adjust or deny reimbursement. See § 413.134(f), (l ); St. Luke's, 611 F.3d at 901–02; Robert F. Kennedy Med. Ctr. v. Leavitt, 526 F.3d 557, 559 (9th Cir.2008); Via Christi, 509 F.3d at 1262.

A provider may receive reimbursement for a loss on the sale of a depreciable asset by meeting additional criteria. Specifically, subsection (f) of the regulation governing depreciation mandates that a provider may be reimbursed for a loss on a sale only when the sale was a “bona fide sale.” § 413.134(f); St. Luke's, 611 F.3d at 902. Subsection ( l ) of the same regulation, which governs revaluation of assets after their disposal through a statutory merger, does not specifically incorporate the bona-fide-sale requirement of subsection (f) but provides that compliance with subsection (f) is a prerequisite for revaluation after a statutory merger.

In a guidance document issued in October 2000, HHS clarified that subsection ( l )'s cross reference to subsection (f) mandates that, when a corporation disposes of depreciable assets through a statutory merger, CMS will permit an adjustment to the corporation's allowable depreciation costs only if the merger constituted a “bona fide sale,” as defined in the Provider Reimbursement Manual (“PRM”), or some other triggering event irrelevant here, and was consummated by parties that are not related.” Clarification of the Application of the Regulations at 42 C.F.R. § 413.134( l ) to Mergers and Consolidations Involving Non–Profit Providers, Program Memorandum A–00–76 (Oct. 19, 2000) (hereinafter “PM A–00–76”). The PRM in turn provides that a “bona fide sale contemplates an arm's length transaction between a willing and well informed buyer and seller, neither being under coercion, for reasonable consideration” and that an “arm's length transaction is a transaction negotiated by unrelated parties, each acting in his own self interest.” PRM § 104.24. We have previously upheld PM A–00–76's interpretation of subsection ( l ): A statutory merger will not give rise to a reimbursable loss unless the merger constitutes a bona fide sale, and “reasonable consideration is a required element of a bona fide sale.” St. Luke's, 611 F.3d at 903–06.

III.

Appellants ask us to reverse the district court's determination that the Administrator acted in accordance with the Administrative Procedure Act. See 5 U.S.C. § 706(2). In our review of the district court's grant of summary judgment, we consider de novo whether in the proceedings below there was a genuine dispute as to any material fact. See Fed.R.Civ.P. 56. When the judgment of the district court is on review of an administrative decision, our task is the same as that performed by the district judge. In other words, we review the administrative record to determine whether the agency's decision was arbitrary and capricious, and whether its findings were based on substantial evidence. Troy Corp. v. Browner, 120 F.3d 277, 281 (D.C.Cir.1997). We therefore review the administrative record directly to determine whether the agency violated the Administrative Procedure Act by taking action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or is “unsupported by substantial evidence.” See 5 U.S.C. § 706(2); Pharm. Research & Mfrs. of Am....

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