Upmc-Braddock Hosp. v. Sebelius

• Decision Date: 20 January 2010
• Docket Number: No. 08-4247.,08-4247.
• Parties: UPMC-BRADDOCK HOSPITAL, Appellant v. Kathleen SEBELIUS, as the Secretary of the United States Department of Health and Human Services.
• Court: U.S. Court of Appeals — Third Circuit

592 F.3d 427

UPMC-BRADDOCK HOSPITAL, Appellant v. Kathleen SEBELIUS, as the Secretary of the United States Department of Health and Human Services.

No. 08-4247.

United States Court of Appeals, Third Circuit.

Argued October 6, 2009.

Filed: January 20, 2010.

Samuel W. Braver, Esq., [Argued], Brendan G. Stuhan, Esq., Jan O. Wenzel, Esq., Buchanan Ingersoll & Rooney, Robert B. Ramsey, III, Esq., Titus & McConomy, Pittsburgh, PA, for Appellant.

Joel L. McElvain, Esq., [Argued], United States Department of Justice, Civil Division, Federal Programs Branch, San Francisco, CA, Michael S. Raab, Esq., United States Department of Justice Civil Division, Washington, DC, Jessica L. Smolar, Esq., Office of United States Attorney, Pittsburgh, PA, for Appellee.

Before: RENDELL and GARTH, Circuit Judges, and PADOVA, District Judge^*.

OPINION OF THE COURT

RENDELL, Circuit Judge.

UPMC-Braddock Hospital appeals from the order of the District Court for the Western District of Pennsylvania granting summary judgment in favor of appellee Kathleen Sebelius, Secretary of the United States Department of Health and Human Services ("Secretary"), denying a reimbursement claim for loss on depreciable assets resulting from the merger between Braddock Medical Center ("BMC") and University of Pittsburgh Medical Center System ("UPMCS"). A statutory merger may result in a depreciation adjustment— a reassessment of the value of assets— under Medicare regulations, but only if the merger was between "unrelated parties" and constituted a "bona fide sale." The District Court here determined that the merger between BMC and UPMCS was not a bona fide sale, but did not reach the issue of whether the merger was between unrelated parties. We conclude that the District Court's determination that the merger was not a bona fide sale was not based on substantial evidence, in light of errors made in determining the value of certain assets. Thus, remand is required in order for the agency to consider the bona fide sale issue anew. However, we will also address the issue of whether the parties were "related" because, if they were, the merger cannot satisfy the two prong test and remand would be a useless act.

We find that the Secretary's interpretation of the related party regulations—requiring examination of whether the parties were related pre- and post-merger—is contrary to the plain language of the regulations, and we conclude that, under the proper, pre-merger test, the parties were not related at the time of the transaction. We will therefore vacate the District Court's order and remand for further proceedings consistent with this opinion.

I.

We recently confronted one of the issues raised in this appeal, regarding whether the transaction was a "bona fide sale," in a similar context. See Albert Einstein Med. Ctr. v. Sebelius, 566 F.3d 368 (3d Cir.2009). While Einstein informs our analysis as to that aspect of the case, the facts here are markedly different.

On November 30, 1996, Heritage Health Systems ("Heritage") and its subsidiaries, BMC and the Heritage Health Foundation ("Foundation"), entered into an Agreement to Merge and Affiliate with UPMCS. BMC was a nonprofit corporation located in Pittsburgh, Pennsylvania, with Heritage as its sole corporate member. UPMCS is a nonprofit corporation also based in Pittsburgh. The Foundation is a Pennsylvania nonprofit corporation with a pre-merger purpose of providing support of a charitable nature to BMC through fund-raising and other similar activities. As part of the agreement, BMC transferred its assets and liabilities to UPMCS pursuant to a merger of BMC into a to-be-formed subsidiary of UPMCS that was named UPMC-Braddock. The Agreement also provided for the structure of the governing board of UPMC-Braddock and for various other rights and responsibilities pertaining to the governance of the newly created UPMC-Braddock. Specifically, two-thirds of the voting directors of the board of UPMC-Braddock were to be appointed by UPMCS, and not less than one-third of the voting directors were to be appointed by the Foundation. At the same time, the Foundation entered into a separate agreement with UPMCS setting up a Fund consisting of $3 million dollars that was "subject to exclusive supervision and control" of the Foundation, but which was to be used to "support" various activities of UPMC-Braddock. App. 592-93, 601. Following the merger, UPMC-Braddock, acting as BMC's successor, filed a claim with Medicare for reimbursement of losses related to the transfer of depreciable medical equipment through the merger pursuant to 42 C.F.R. § 413.134(f) and 413.134(l)(2).¹ As is discussed more fully below, the regulations permit the loss adjustment only if the transaction was a "bona fide sale" between "unrelated parties." The claim was denied by Medicare's fiscal intermediary, Veritus Medicare Services ("Intermediary"). UPMC-Braddock subsequently appealed the Intermediary's denial of its claim to the Provider Reimbursement Review Board ("PRRB").

The PRRB ruled in favor of UPMC-Braddock, disagreeing with the Intermediary's conclusion and determining that the statutory merger between BMC and UPMCS was not between related parties. In particular, the PRRB rejected the Intermediary's argument that the phrase "between related parties" in the regulations applies not only to the relationship between the pre-merger entities, but also to the relationship that exists between the pre-merger entities and the entity that results post-merger—in this case, the relationship between BMC and UPMC-Braddock. The PRRB concluded that the Intermediary's reading of the related parties requirement was contrary to the plain language of the regulation, which was "unambiguous in its meaning that the related party concept will be applied to the entities that are merging as they existed prior to the transaction." App. 756 (emphasis in original). The PRRB dealt with the bona fide sale requirement in conclusory terms, stating that "the merger is not required to meet the bona fides of sales transactions addressed in 42 C.F.R. § 413.134(f)(2)." App. 755. The PRRB remanded several issues regarding consideration to the Intermediary, but only for purposes of computing the reimbursable loss.

The PRRB's ruling was then reversed by the Deputy Administrator ("Administrator") of Centers for Medicare and Medicaid Services ("CMS"), who denied UPMC-Braddock's claim for reimbursement, disagreeing with the PRRB on both the related parties issue and the bona fide sale issue. The Administrator found that the bona fide sale requirement did apply to the merger, and that the difference between the value of the transferred assets and the consideration received for them in the course of the merger indicated the absence of a bona fide sale. App. 50-52. Additionally, the Administrator found that the transaction was not consummated at "arm's length," as required by the bona fide sale provision. App. 50. The Administrator further concluded that the PRRB's interpretation of the "related parties" provision was incorrect and adopted the Intermediary's position that the related parties inquiry should properly consider the relationship between both the pre- and post-merger entities. App. 41-47. Using this interpretation of the related parties provision, the Administrator concluded that BMC and UPMC-Braddock were "related parties," and disallowed the loss claim. App. 48. The Administrator's decision became the final decision of the Secretary.

UPMC-Braddock appealed the Administrator's decision to the District Court pursuant to the Administrative Procedures Act ("APA"), 5 U.S.C. §§ 551-59, and the parties consented to the exercise of jurisdiction by the Magistrate Judge pursuant to 28 U.S.C. § 636(c) and Fed.R.Civ.P. 73.² UPMC-Braddock and the Secretary each filed motions for summary judgment. The District Court denied UPMC-Braddock's motion for summary judgment and granted the Secretary's motion for summary judgment, affirming the decision of the Administrator. UPMC-Braddock timely appealed.³

II.

Our review of agency action is governed by the APA, 5 U.S.C. § 706. We may only set aside agency actions, findings, and conclusions that are "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), (E). "Substantial evidence is `more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'" Mercy Home Health v. Leavitt, 436 F.3d 370, 380 (3d Cir.2006) (quoting Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 28 L.Ed.2d 842 (1971)).

III.

Under the Medicare Act (the "Act"), 42 U.S.C. § 1395 et seq., Medicare service providers such as UPMC-Braddock are entitled to claim the depreciation of property and equipment used to provide health care to Medicare patients as a reimbursable cost.⁴ 42 U.S.C. § 1395f(b)(1). An asset's depreciable value is initially set at its "historical cost," generally equal to the purchase price, which is then prorated over its estimated useful life. 42 C.F.R. § 413.134(a)(3) and 413.134(b)(1). However, the calculated annual depreciation is only an estimate of the asset's declining value. When an asset is ultimately sold or disposed of by the provider for less than its "undepreciated basis" a "depreciation adjustment" is made, measured by the difference between the sales price and the estimated remaining value. The healthcare provider can submit a claim for additional reimbursement from the Medicare program on the basis of such a depreciation adjustment.⁵

In 1979, CMS adopted regulations whereby transfers in statutory mergers qualified for such depreciation adjustment, subject to certain requirements. 42 C.F.R. § 413.134(l)(2).⁶ The transfer of assets in a statutory merger can give rise to a depreciation adjustment only if the merger was between "unrelated parties" as defined by 42...