Forsyth Memorial Hosp. Inc. v. Sebelius

Decision Date05 November 2009
Docket NumberCivil Action No. CCB-07-1828.
Citation667 F.Supp.2d 143
PartiesFORSYTH MEMORIAL HOSPITAL INC., et al. v. Kathleen SEBELIUS, as Secretary of Health and Human Services.
CourtU.S. District Court — District of Columbia

Harold G. Belkowitz, Ober, Kaler, Grimes & Shriver, Washington, DC, for Forsyth Memorial Hospital Inc., et al.


CATHERINE C. BLAKE, District Judge.

Now pending before the court are cross motions for summary judgment. Plaintiffs Forsyth Memorial Hospital, Inc. ("Forsyth"), Medical Park Hospital, Inc., and Foundation Health Systems, Corp. d/b/a The Oaks at Forsyth and as successor in interest to Carolina Medicorp Enterprises, Inc. d/b/a Edwin H. Martinat Outpatient Rehabilitation Center (collectively "plaintiffs") have sued Kathleen Sebelius, as Secretary of Health and Human Services ("Secretary"), seeking reimbursement for the alleged loss that occurred on their depreciable assets upon merging into Presbyterian Health Services Corporation ("Presbyterian"). The issues in this case have been fully briefed and no oral argument is necessary. For the reasons stated below, the Secretary's motion will be granted and the plaintiffs' motion will be denied.


Prior to the merger, plaintiffs, all non-profit medical facilities, were certified as Medicare "providers of services" under 42 U.S.C. § 1395x(u). Carolina Medicorp, Inc. ("CMI") controlled each of the plaintiffs at this time, owning title to all of the providers' land, buildings, and land improvements and fixed equipment, which the providers leased from CMI. Each of the plaintiffs owned its own movable equipment. When CMI was created in 1983 to take title to Forsyth's assets from the Forsyth County Government, the Forsyth County Board of Commissioners ("Commissioners") placed certain restrictions on CMI. The Commissioners were to retain final control over Forsyth and would be allowed to appoint 12 of 19 members on CMI's board of trustees. Furthermore, CMI had to maintain Forsyth as a community hospital in which no county resident would be turned away for lack of ability to pay.

After negotiations that began in December 1996, CMI and Presbyterian merged on June 30, 1997, using Novant Health Management Company, LLC ("Novant") as a vehicle for the merger. Novant later dissolved on December 31, 1998. Because of CMI's special relationship with Forsyth County, it had to seek the Commissioners' approval before merging into Presbyterian. The Commissioners conditioned their consent on receiving one position on Novant's governing board, retaining their majority rights on Forsyth's governing board, being assured Forsyth would remain a community hospital, and on CMI contributing $10 million, to be managed by the Commissioners, for improving health care in Forsyth County. CMI complied, and the Commissioners allowed the merger to proceed.

Through the merger, Presbyterian received all of CMI's assets in exchange for assuming its liabilities. At the time, CMI's liabilities totaled approximately $230 million. Medicare had valued the assets at approximately $399 million, of which $122 million consisted of depreciable assets and $17 million was attributed to the land. Neither CMI nor Presbyterian conducted an independent appraisal of CMI's assets prior to the merger. In addition, the plaintiffs never placed their assets for sale in the open market. According to the findings of the Administrator for the Centers for Medicare and Medicaid Services ("CMS")1, the amount of consideration from the merger that the plaintiffs allocated towards land and depreciable assets equaled 25 percent of the alleged appraisal value (conducted post-merger). (J.A. 29.)

As Medicare providers, the plaintiffs are eligible to receive payments from Medicare for 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). The Secretary's regulations classify "depreciation on buildings and equipment used in the provision of patient care" as a reasonable cost. 42 C.F.R. § 413.134(a). Thus Medicare reimburses providers annually for these depreciation costs. 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. § 413.134(a)(3), (b)(1). After depreciation costs are deducted, the remaining value of the asset is called its "net book value." § 413.134(b)(9).

Because these depreciation costs are merely estimates of the decline in an asset's value, the regulations in effect at the time of the merger granted providers the opportunity to adjust this estimate upon disposing of the asset. Entities that were Medicare providers prior to statutorily merging with an unrelated party were able to recoup gains and losses from the merger subject to 42 C.F.R. § 413.134(f). See § 413.134(k)(2)(i) (formerly § 413.134(1)). Subsection (f) allows providers to request reimbursement for the difference between the net book value and the compensation actually received in exchange for assets disposed of prior to December 1, 1997, depending on the method of disposition.2 § 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. § 413.134(f)(2).

CMS issued Program Memorandum A-00-76 on October 19, 2000 to help clarify the application of § 413.134(k) to mergers and consolidations involving non-profit providers. (J.A. 2467.) The Memorandum explained that these mergers required special consideration, given that non-profit providers are not driven by the same profit-maximizing goals as for-profit corporations (id. at 2468), and described the "related organizations" and "bona fide sale" standards under which mergers between non-profit organizations should be analyzed. (Id. at 2469-72.)

As to "related organizations," the Memorandum noted that consideration should be given to continuity of control, or the degree to which the management teams of the pre-merged organizations continue to exercise control over the post-merger organization. (Id. at 2469.) Therefore, parties that were completely unrelated prior to the merger would nonetheless be considered related if they both continued to exert influence over the newly merged organization. (Id.) The Memorandum also defined "bona fide sale" under § 413.134(f)(2) as "an arm's-length business transaction between a willing and well-informed buyer and seller." (Id. at 2470.) It further specified that an arm's-length transaction is one "negotiated by unrelated parties, each acting in its own self interest in which objective value is defined after selfish bargaining." (Id.) Furthermore, the Memorandum explained 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. at 2471.) The Memorandum recommended reviewing "the allocation of the sales price among the assets sold" to help determine whether a bona fide sale had taken place. (Id.)

The Memorandum concluded by stating that its effective date was not of consequence because it clarified, rather than changed, existing policy. (Id. at 2472.) Therefore, 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.)

The plaintiffs submitted their annual cost reports to Medicare for the fiscal year ending June 30, 1997, claiming a loss from the disposal of depreciable assets through the merger. The total loss claimed equaled $11,069,753, not including losses on individually owned movable equipment that never changed ownership. Cost reports are first submitted to private fiscal intermediaries that make initial reimbursement determinations pursuant to a contract with the Secretary. See 42 U.S.C. § 1395h. In this case, the plaintiffs submitted their reports to the Blue Cross Blue Shield Association ("BCBSA"). After the BCBSA denied the reimbursement request, the plaintiffs requested a group hearing before the Provider Reimbursement Review Board ("PRRB"), which reversed the BCBSA's decision. The PRRB concluded that CMI and Presbyterian were not "related parties" under the Medicare statute and regulations by looking to their relationship prior to the merger. (J.A. 227.) Furthermore, the PRRB found that the merger was a bona fide transaction under North Carolina corporate law. (Id.)

The Administrator subsequently notified the parties that he would review the PRRB's decision. BCBSA and Center for Medicare Management submitted comments requesting reversal. The Administrator ultimately reversed the PRRB's decision denying Medicare reimbursement for the plaintiffs' losses from the merger. In reaching his decision, the Administrator relied in part upon Program Memorandum A-00-76's interpretation of "related organizations" and found that CMI and Presbyterian were indeed related. (J.A. 26-27.) In addition, the Administrator concluded that the merger was not a bona fide transaction because of the great disparity between the consideration received in the merger and the fair market value of CMI's assets. (Id. at 28.) The fact that CMI did not seek an appraisal prior to the merger or place its assets for sale in the open market convinced the Administrator that there had been no good faith bargaining between CMI and Presbyterian to establish the fair market value of CMI's assets. (Id. at 29.) The plaintiffs have now filed a complaint for judicial review of the Administrator's final decision.


The court reviews the Administrator's decision under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 et seq. See 42 U.S.C. § 1395oo(f)(1). Under the APA, a court may set aside final agency...

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