Tenet HealthSystems HealthCorp. v. Thompson, 99-5064

• Decision Date: 06 July 2001
• Docket Number: No. 99-5064,99-5064
• Citation: 254 F.3d 238
• Parties: (D.C. Cir. 2001) Tenet HealthSystems HealthCorp., f/k/a OrNda Healthcorp., Appellee v. Tommy G. Thompson, Secretary of Health and Human Services, Appellant
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 238

254 F.3d 238 (D.C. Cir. 2001)

Tenet HealthSystems HealthCorp., f/k/a OrNda Healthcorp., Appellee v. Tommy G. Thompson, Secretary of Health and Human Services, Appellant

No. 99-5064

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2000

Decided July 6, 2001

[Copyrighted Material Omitted] Appeal from the United States District Court for the District of Columbia (No. 97cv02723)

Anne Murphy, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the briefs were David W. Ogden, Assistant Attorney General, Anthony J. Steinmeyer, Assistant Director, and Wilma A. Lewis, U.S. Attorney at the time the briefs were filed. R. Craig Lawrence and Scott S. Harris, Assistant U.S. Attorneys, entered appearances.

Joanne B. Erde argued the cause for appellee. With her on the brief was Harry R. Silver.

Before: Tatel and Garland, Circuit Judges, and Silberman, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Garland.

Garland, Circuit Judge:

Tenet HealthSystems HealthCorp., a Medicare provider, contends that the Department of Health and Human Services (HHS) inadequately reimbursed it for its losses on the sale of a hospital. The district court agreed and remanded the case to HHS for redetermination of the amount due. We disagree and reverse the judgment of the district court.

I

We begin with an exposition of the Medicare regulations applicable to this appeal, and then describe the proceedings below.

A

During the period relevant to this case, and with caveats unnecessary to discuss here, HHS reimbursed health care providers for their capital-related costs in providing services to Medicare patients.¹ Under the pertinent regulations, these costs include Medicare's share of a provider's depreciation expenses and capital losses.² The regulations use the "cost basis" of the depreciable assets of a provider's hospital in determining both the provider's annual depreciation allowances and its gain or loss when the hospital is sold. 42 C.F.R. 413.134(f), (g). Annual depreciation is calculated as a yearly fraction of the hospital's basis, distributed over its useful life. 42 C.F.R. 413.134(d). Gain or loss upon sale is determined by subtracting (with appropriate adjustments) the hospital's basis from its selling price.³ Hence, the higher the basis, the higher the depreciation expenses that HHS will reimburse and the smaller the gain or greater the loss it will calculate upon sale. See Nursing Ctr. of Buckingham & Hampden, Inc. v. Shalala, 990 F.2d 645, 646 (D.C. Cir. 1993).

The Medicare regulations permit a provider that purchased a hospital after July 31, 1970 and before July 18, 1984--as Tenet did--to "step-up," or increase, the basis of the facility above that of the previous owner. See Nursing Ctr., 990 F.2d at 646.⁴ Pursuant to 42 C.F.R. 413.134(g)(1) and (2), the basis of such a hospital's depreciable assets may not exceed the lowest of: (1) the allocated price paid for the facility by the purchaser, (2) the allocated fair market value of the facility at the time of the sale, or (3) the "current reproduction cost depreciated on a straight-line basis over the life of the asset to the time of the sale." Id.⁵ The last category, depreciated reproduction cost, reflects the depreciated cost of reproducing the assets at current market prices.⁶

A health care provider generally establishes its entitlement to Medicare reimbursement by submitting a cost report to a fiscal intermediary. See 42 U.S.C. §§ 1395f(a), 1395h; 42 C.F.R. §§ 413.24(f), 421.1-.128. If the provider is dissatisfied with the intermediary's determination of the amount due, it may seek review from HHS' Provider Reimbursement Review Board. See 42 U.S.C. 1395oo(a), (b). The Board's decision in a case is final, unless the Administrator of the Health Care Financing Administration accepts the case for review. See 42 U.S.C. 1395oo(f); 42 C.F.R. 405.1875. After a final administrative decision, providers may obtain judicial review. 42 U.S.C. 1395oo(f).

B

In September 1983, Tenet purchased two hospitals, Nautilus Memorial Hospital and Gibson General Hospital, from Humana of Tennessee, Inc.⁷ Tenet paid Humana $12,100,000 for both hospitals. Based on an appraisal performed by Valuation Counselors Southwestern, Inc., Tenet allocated $4,516,202 of the total purchase price to Nautilus Memorial.

Tenet changed Nautilus Memorial's name to Three Rivers Community Hospital and operated it as an acute care facility for the next six years. In its first Medicare cost report for Three Rivers, covering the period from October 1, 1983 to August 31, 1984, Tenet claimed depreciation allowances calculated by using a stepped-up basis that reflected the allocated price it paid in 1983. That price, Tenet said, was lower than both the hospital's fair market value and its depreciated reproduction cost as determined by the Valuation Counselors appraisal, and was thus the appropriate figure for the hospital's basis pursuant to 42 C.F.R. 413.134(g).⁸ However, the Medicare intermediary, Blue Cross & Blue Shield of Tennessee, refused to recognize the step-up on the ground that Tenet had failed adequately to document the hospital's depreciated reproduction cost. Instead, Blue Cross limited Tenet's basis to that of the previous owner, adjusted for subsequent capital improvements, disposals, and accumulated depreciation, which it referred to as the hospital's "net book value" as of the date of Tenet's 1983 purchase. As a consequence of the lower basis, Blue Cross reduced Tenet's allowable depreciation expenses for 1984.

Tenet did not appeal Blue Cross' 1984 determination. Nonetheless, Tenet continued to claim depreciation allowances using the stepped-up basis (with adjustments) in each of its next four annual cost reports. Each time, Blue Cross limited Tenet's basis to adjusted 1983 net book value, and reduced Tenet's allowable depreciation expenses accordingly. Tenet did not appeal any of those four annual determinations.

In 1989, Tenet sold Three Rivers for $1,000,000, with the purchase agreement between Tenet and the buyer allocating $770,000 of the sales price to depreciable assets. That year, Tenet submitted a cost report that again used the 1983 purchase price (with adjustments) as the hospital's basis. Using that basis, Tenet calculated its loss on the sale as $5,062,801 and billed Medicare for its share. See 42 C.F.R. 413.134(f). Once again, Blue Cross reduced Tenet's basis to the adjusted 1983 net book value of the assets. The substitution of net book value for Tenet's claimed basis reduced Tenet's loss from $5,062,801 to $642,512.⁹ For the first time, Tenet appealed the reduction of the basis to the Provider Reimbursement Review Board (PRRB).

After an evidentiary hearing, the PRRB sustained the intermediary's decision. The Board held that, under the Medicare regulations, a hospital's basis may not exceed its depreciated reproduction cost, and that Tenet "had failed to adequately document ... its value for current depreciated reproduction cost." Three Rivers Cmty. Hosp., PRRB Dec. No. 97-D97, at 11 (Sept. 10, 1997) [hereinafter "PRRB Op."]. The Board further held that because a reliable value for depreciated reproduction cost was unavailable, a stepped-up basis was inappropriate and the intermediary's decision to use the previous owner's basis (net book value) was reasonable. Id. The Administrator of the Health Care Financing Administration declined to review the Board's decision, rendering that decision final.

Tenet then filed suit against HHS in the United States District Court for the District of Columbia. On cross-motions for summary judgment, the court found the PRRB's decision arbitrary and capricious, principally because the court read the Medicare regulations to bar the use of net book value as a purchaser's basis. Tenet HealthSystems HealthCorp. v. Shalala, No. 97cv2723, slip op. at 1 (D.D.C. Jan. 12, 1999). HHS now appeals.

II

Our standard for reviewing a decision of the PRRB is the same as that which the district court must apply: We may set aside a Board decision only if it is "unsupported by substantial evidence," or if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. 706(2)(E), (A); see 42 U.S.C. 1395oo(f)(1) (providing that judicial review of PRRB decisions shall be pursuant to the provisions of 5 U.S.C. §§ 701 et seq.); HCA Health Servs. of Okla., Inc. v. Shalala, 27 F.3d 614, 616 (D.C. Cir. 1994). In addition, we must defer to HHS' reading of its own regulations, unless that reading is "plainly erroneous or inconsistent with the regulation[s]." Auer v. Robbins, 519 U.S. 452, 461 (1997) (internal quotation omitted); see Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Because we apply the same standard of review as the district court, we proceed de novo, as if Tenet had brought the case here on direct appeal. See County of L.A. v. Shalala, 192 F.3d 1005, 1012 (D.C. Cir. 1999); Biloxi Reg'l Med. Ctr. v. Bowen, 835 F.2d 345, 348-49 (D.C. Cir. 1987).

Tenet emphasizes that it does not challenge the lawfulness or reasonableness of the Medicare regulations, but rather only the way in which the PRRB applied them to its reimbursement request. Tenet Br. at 11-14. The provider raises two principal objections to the PRRB decision, contending that: (1) the Board's determination that the Valuation Counselors appraisal was inadequate to warrant a stepped-up basis is unsupported by substantial evidence; and (2) the Board's determination that net book value was a reasonable basis for the hospital is arbitrary, capricious, and not in accordance with law. We consider these two arguments below.

A

The PRRB did not dispute that Tenet would have been eligible for a stepped-up basis had it submitted adequate supporting data. PRRB Op. at 10-11. It concluded, however, that Tenet failed to do so. Id. at 11. Although Tenet contends...