Jeanes Hosp. v. Leavitt
| Decision Date | 29 September 2006 |
| Docket Number | Civil Action No. 04-CV-395. |
| Citation | 453 F.Supp.2d 888 |
| Parties | JEANES HOSPITAL, Plaintiff, v. Michael O. LEAVITT, Secretary of the United States Department of Health and Human Services, Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Gregory L. Liacouras, Liacouras & Smith, LLP, Philadelphia, PA, Terry S. Coleman, Ropes & Gray LLP, Washington, DC, for Plaintiff.
Joel L. McElvain, U.S. Department of Justice, Washington, DC, for Defendant.
Plaintiff Jeanes Hospital brings this action under 42 U.S.C. § 1395oo(f)(1), which provides for judicial review of final administrative decisions concerning disputed claims for Medicare reimbursement. Plaintiff seeks declaratory relief and money allegedly due under the health-costsreimbursement program of Title XIII of the Social Security Act ("Medicare")1 for a loss sustained on the sale of its assets. Presently before this Court are Plaintiff's Motion for Summary Judgment [Doc. No. 31], Defendant's Cross-Motion for, Summary Judgment and Opposition to Plaintiff's Motion for Summary Judgment [Doc. No. 37], and Plaintiff's Reply [Doc. No. 39]. The issue before the Court is whether substantial evidence supports the Administrator's denial of depreciation-reimbursement costs to Jeanes Hospital because the Jeanes Hospital merger involved a related-party transaction and was not a bona fide sale.
Beginning in 1994, Jeanes Hospital, a non-profit corporation operated by the Philadelphia Quakers since 1913, began to consider affiliating with other hospitals to respond to competitive pressures in the Philadelphia health-care market.2 Jeanes Hospital discussed its sale with several health-care systems and hospitals, including Allegheny Health, Education and Research Foundation, Jefferson Health Systems, Graduate Health System, Albert Einstein Healthcare Network, University of Pennsylvania Health System ("Penn"), and Temple University Health System, Inc. ("TUHS").3 Jeanes Hospital entered into extensive discussions with Penn, signing a memorandum of understanding expressing the intention of the parties that Penn would assume control over Jeanes Hospital following a period of due-diligence investigation and preparation of a formal agreement.4 Negotiations between Penn and Jeanes Hospital ended after three months of due-diligence review, however, as Jeanes Hospital's Board of Directors decided instead to pursue an agreement with TUHS.5
After several months of negotiations, an Affiliation Agreement ("Agreement") was entered into on November 17, 1995, by and among Temple University ("TU"), TUHS (of which TU is the sole member), Temple University Hospital, Inc. ("TUH") (of which TUHS is the sole member), Temple Central Hospital, Inc. ("TCH") (of which TUHS is the sole member), (collectively, the "Temple Corporations"), Jeanes System Management Company, and Jeanes Hospital, all of which were Pennsylvania non-profit corporations.6 The Agreement called for the merger of Jeanes Hospital into the newly-created TCH, which would then be renamed "Jeanes Hospital."7
The Agreement called for the members of Jeanes Hospital's Board of Directors to resign upon the effective date of the merger, and for them to be appointed as the members of the Board of Jeanes System Management Company, which would be renamed "Anna T. Jeanes Foundation."8 The Foundation would have the power to name a number of members to the board of the new Jeanes Hospital.9 The Agreement provides that the Foundation shall appoint 20 Directors to the Board, each having one vote for the entity, and that TUHS will appoint 11 Directors to the Board, each having two votes.10 Additionally, the agreement provides that the Foundation shall appoint two persons to serve on the TUHS Board of Directors and two persons to serve on the TUH Board of Governors.11
The Agreement also provided that TUHS would continue to support Jeanes Hospital's commitment to clinical pastoral education, and the Temple Corporations agreed to continue to support Jeanes Hospital's adult-day-care program.12 TUHS also agreed to maintain Jeanes Hospital's mission statement for a period of at least five years.13
The effective date of the Jeanes Hospital merger was July 1, 1996.14 In acquiring the assets of Jeanes Hospital through the merger, TCH, the surviving entity, assumed Jeanes Hospital's liabilities.15 TUHS also agreed to make a contribution of $1 million to the Anna T. Jeanes Foundation.16 At the time of the merger, the net book value of Jeanes Hospital was $98,708,000, while the total value of TCH's assumption of Jeanes Hospital's liabilities and additional consideration paid by TUHS totaled $69,214,000.17 Several members of Jeanes Hospital's Board of Directors became members of the surviving entity's Board of Directors upon completion of the merger.18 In total, the Board members that transferred over to the surviving entity constituted 47 percent of the voting positions of the surviving entity's Board of Directors.19 Additionally, senior officers from Jeanes Hospital became the President/CEO, Treasurer/CFO, and Secretary of the surviving entity.20
Jeanes Hospital filed a terminating cost report with the Department of Health and Human Services' (the "Agency") Centers for Medicare and Medicaid Services ("CMS") for the year ending June 30, 1996.21 Jeanes Hospital claimed entitlement to reimbursement from Medicare for a "loss-on-sale" in the merger, claiming depreciation payments for fiscal year 1996 and earlier years totaling $16,338,246.22 Medicare's fiscal intermediary, Mutual of Omaha Insurance Company ("Mutual" or the "Intermediary"), applying the relevant statutory regulations, issued a Notice of Amount of Medicare Program Reimbursement ("NPR") on May 28, 1998, denying the claimed loss.23 Mutual concluded that the Jeanes Hospital merger was a transaction among related parties, given Jeanes Hospital's continued participation in the management of the surviving entity.24 Mutual further concluded, without performing any financial analysis of the merger transaction, that "[Once there is a related party status between the parties at the execution of the merger agreement, this is not a bona fide sale of assets . . . ."25
Jeanes Hospital appealed Mutual's decision to the Secretary's Provider Reimbursement Review Board ("PRRB"). The PRRB held an evidentiary hearing in this case on July 1, 2002.26 The parties to the hearing were Jeanes Hospital and Mutual. On September 26, 2003, the PRRB issued its decision,27 holding:
[T]he plain language of the merger regulation [is] dispositive of the Intermediary's argument. The text, specifically, `if the merger is between two or more corporations that are unrelated' is crystal clear. The related party concept will be applied to the entities that are merging. The Board, therefore, concludes that the plain language of the regulation bars application of the related party principle to the merging parties' relationship to the new entity.28
Since it was undisputed that TCH and Jeanes Hospital were unrelated prior to the merger, the PRRB concluded that the regulation on mergers required Medicare to recognize the loss.29
The PRRB also concluded that, in light of the extensive negotiations undertaken by Jeanes Hospital with various health networks, the merger was a bona fide transaction.30
With respect to the concept of a bona fide sale, the Board notes that the Provider determined on its own initiative, absent any Temple involvement, that it should seek affiliation with a larger health system. The record indicates the provider discussed its sale with the Allegheny Health System, the University of Pennsylvania, the Jefferson Health System and the Albert Einstein Healthcare Network . . . . The Board finds that the affiliation agreement [with the Temple Corporations] included all the terms of the merger and covered items such as obtaining regulatory approval, opinions of counsel, approvals from lenders, as well as all other elements of due diligence. The record indicates a lengthy negotiation as to the acquisition price for the Provider's assets. Both sides were represented by counsel . . . . Based on a review of the evidence in the record, the Board concludes the merger transaction to be one which was at "arm's length."31
CMS's Administrator reviewed the PRRB decision under 42 C.F.R. § 405.1875(a). The Administrator issued a decision on November 25, 2003, reversing the PRRB's decision and denying Jeanes Hospital's claim.32 The Administrator found, in part, that:
[C]onsideration must be given as to whether the composition of the new Board of Directors at the surviving corporation included significant representation from the Provider's previous Board or management team. This involves determining whether former Board members of the Provider had the power, directly or indirectly, to significantly influence or direct the actions or policies of the surviving corporation.33
Applying this framework to the facts, the Administrator found that the common former Board members enabled the premerger Jeanes Hospital to significantly influence or direct the actions or policies of the surviving corporation and showed a continuity of control between the premerger Jeanes Hospital and the surviving corporation.34 The Administrator therefore concluded that the parties were related.35
Tracking the Intermediary's decision, the Administrator concluded that "since the parties to this transaction are related,. . . the transaction was not consummated through an arm's length transaction."36 The Administrator further held that the transaction was not an arm's-length transaction, because the assumption of the debt and consideration of $1 million, totaling $69,214,000 in consideration, was insufficient for an asset with a total net book value of $98,708,000.37
Jeanes Hospital now seeks review of the Administrator's decision in this...
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