F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
APR 14 1998
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
ST. MARK’S CHARITIES
LIQUIDATING TRUST, GEORGE E.
BATES, TRUSTEE,
Plaintiff-Appellant,
v. No. 97-4047
DONNA E. SHALALA, Secretary of
Health and Human Services,
Defendant-Appellee.
Appeal from United States District Court
for the District of Utah
(D.C. No. 93-CV-565)
Charles P. Sampson (Carl F. Huefner with him on the brief), of Suitter Axland, Salt Lake
City, Utah, for the appellant.
Anthony J. Steinmeyer, Department of Justice, Washington, D.C., for the appellee.
Before BRISCOE, McWILLIAMS, and LUCERO, Circuit Judges.
BRISCOE, Circuit Judge.
Plaintiff St. Mark’s Charities Liquidating Trust, the successor to St. Mark’s
Hospital, a former provider of Medicare services, appeals the district court’s judgment
affirming a final administrative decision of the Secretary of Health and Human Services.
We affirm.
I.
St. Mark’s opened in 1973 and participated as a provider in the Medicare program
until 1987. Pursuant to Medicare regulations, it claimed an annual allowance for
depreciation using the straight-line method and a forty-year estimated useful life for its
facility, as specified in the guidelines of the American Hospital Association. The hospital
was sold on December 31, 1987, for $39,400,000, plus the net book value of patient
accounts receivable, prepaid expenses, and inventory on the date of sale. Based upon an
appraisal, $27,438,284 was allocated to the building and fixed equipment. The historical
cost of these assets was $15,515,754. Over its fourteen-year period of operation, St.
Mark’s reported $7,866,716 in depreciation for these assets, of which $4,025,005 had
been reimbursed by Medicare since not all patients served by St. Mark’s had been
Medicare patients.
St. Mark’s did not report any gain in its 1987 Medicare cost report for its sale of
the building and fixed assets. Blue Cross and Blue Shield of Utah, the Secretary’s
appointed fiscal intermediary, determined the entire amount of depreciation paid to St.
Mark’s should be “recaptured” in light of its overall gain on the sale of the building and
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the fixed assets. St. Mark’s challenged the determination by filing an administrative
appeal with the Provider Reimbursement Review Board (PRRB). Following an
evidentiary hearing, a majority of the PRRB affirmed the decision. St. Mark’s appealed
to the Administrator of the Health Care Financing Administration, which upheld the
decision of the PRRB, constituting final agency action under delegation from the
Secretary. St. Mark’s then filed this action for judicial review. The district court
affirmed the Secretary’s decision.
II.
Scope of review
We review the district court’s decision de novo. See Board of Trustees of Knox
County Hosp. v. Shalala, 135 F.3d 493, 499 (7th Cir. 1998). However, our review of the
Secretary’s underlying decision is governed by 42 U.S.C. § 1395oo(f), which incorporates
the standard of review of the Administrative Procedure Act (APA). Id.; see Kidney
Center of Hollywood v. Shalala, 133 F.3d 78, 84 (D.C. Cir. 1998). Under the APA, we
may set aside agency action only if it is “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law.” 5 U.S.C. § 706(2)(A). Because St. Mark’s
contends the Secretary’s depreciation recapture regulation is not in accordance with the
express language of the Medicare Act, our review is governed by the familiar test set
forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837
(1984). See Kidney Center, 133 F.3d at 86; Good Samaritan Hosp. Reg. Med. Ctr. v.
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Shalala, 85 F.3d 1057, 1060 (2d Cir. 1996).
Depreciation reimbursement under Medicare Act
Under the statutory scheme developed by Congress, Medicare providers are
reimbursed for the “reasonable cost” of providing services to Medicare patients. 42
U.S.C. § 1395f(b)(1). Reasonable cost is defined as “the cost actually incurred, excluding
therefrom any part of incurred cost found to be unnecessary in the efficient delivery of
needed health services,” and is determined pursuant to regulations established by the
Secretary. 42 U.S.C. § 1395x(v)(1)(A). “An appropriate allowance for depreciation on
buildings and equipment used in the provision of patient care is an allowable cost.” 42
C.F.R. § 413.134(a) (previously codified as 42 C.F.R. § 405.415(a)). However, the
regulations also authorize “recapture” of depreciation if disposal of a depreciable asset
“results in a gain.” 42 C.F.R. § 413.134(f)(1) (previously codified as 42 C.F.R. §
405.415(f)(1)). In such circumstances, recapture “is limited to the amount of depreciation
previously included in Medicare allowable costs.” Id.
Prior to 1984, the Medicare Act was silent with respect to reimbursement for, or
recapture of, depreciation. In 1984, the Act was amended by the Deficit Reduction Act of
1984, Pub. L. No. 98-369, 98 Stat. 494 (1984), which added the following provision to
the definition of “reasonable costs”: “[The Secretary’s] regulations shall provide for
recapture of depreciation in the same manner as provided under the regulations in effect
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on June 1, 1984.” 42 U.S.C. § 1395x(v)(1)(O)(ii).
Between 1974 and 1987, St. Mark’s was reimbursed by Medicare for depreciation
on its buildings and equipment. When the hospital was sold in 1987, the Secretary
determined all of the reimbursed depreciation would be recaptured because the sale had
resulted in a gain to St. Mark’s and the gain exceeded the entire amount of reimbursed
depreciation during the fourteen-year period.
Although St. Mark’s all but concedes recapture of depreciation for 1984 through
1987 is proper in light of the 1984 amendments to the Medicare Act, it contends the
Secretary is not authorized to recapture any reimbursement payments made prior to that
time period. First, St. Mark’s argues the recapture regulation is contrary to the pre-1984
direction to reimburse providers for actual costs incurred. Second, it argues even though
the 1984 amendments authorized the recapture, application of that method to pre-1984
depreciation payments would be impermissibly retroactive.
Intent of pre-1984 Medicare Act
According to St. Mark’s, the Secretary’s method of recapture precludes payments
for “reasonable costs,” i.e., actual costs incurred in providing services to Medicare
patients. More specifically, it argues the Secretary’s method of determining whether
depreciation payments have been excessive (i.e., by determining whether the sales price
exceeds the depreciated basis for a particular asset) fails to take into account other factors
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that might explain why an asset was sold for more than its depreciated basis (e.g.,
inflation, governmental regulation of entry, economic forces of supply and demand) and
does not properly account for the fact that depreciable assets are consumed each time they
are used to provide patient services.
To ascertain the validity of the depreciation recapture regulation, we apply the
familiar two-set test of Chevron. If Congress has “directly spoken to the precise question
at issue,” then we “must give effect to the unambiguously expressed intent of Congress.”
467 U.S. at 842-43. However, if the statute “is silent or ambiguous with respect to the
specific issue,” we must defer to the Secretary’s interpretation if it is reasonable in light
of the structure and purpose of the statute. Id. at 843.
It is uncontroverted that prior to 1984, Congress did not speak directly to the
precise question at issue, i.e., how depreciation payments should be recaptured (if at all).
Thus, the critical question is whether the depreciation recapture method is reasonable in
light of the structure and purpose of the Medicare statute. To date, the D.C. Circuit, the
Seventh Circuit, the Eleventh Circuit, and the Court of Claims have considered this
precise issue. See Whitecliff, Inc. v. Shalala, 20 F.3d 488 (D.C. Cir. 1994); Mercy
Community Hosp. v. Heckler, 781 F.2d 1552 (11th Cir. 1986); Stewards Foundation v.
United States, 654 F.2d 28 (Ct. Cl. 1981); Professional Medical Care Home, Inc. v.
Harris, 644 F.2d 589 (7th Cir. 1980). The First Circuit and the Eighth Circuit have
considered similar issues. See Creighton Omaha Reg. Health Care Corp. v. Sullivan, 950
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F.2d 563 (8th Cir. 1991); Hoodkroft Convalescent Center, Inc. v. State of New
Hampshire, 879 F.2d 968 (1st Cir. 1989) (reviewing similar recapture rules for Medicaid
providers). Of these courts, four have affirmed the Secretary’s method of recapture and
two have rejected it as contrary to the Medicare Act. The First, Seventh, and Eighth
Circuits, as well as the Court of Claims, have concluded the depreciation recapture
regulation is consistent with Congress’ directive to reimburse providers for “reasonable
costs,” i.e., costs actually incurred. Creighton, 950 F.2d at 565-66; Hoodkroft, 879 F.2d
at 972-75; Stewards, 654 F.2d at 34; Professional Medical Care, 644 F.2d at 592-94.
In Professional Medical Care, the court noted even though depreciable assets age
over time, “a depreciation formula necessarily produces an inexact estimate of the partial
consumption of a physical asset, and it is difficult to be certain that any particular amount
is a cost actually incurred.” 644 F.2d at 593-94. Accordingly, the court concluded the
depreciation recapture regulation was “a valid implementation of the [Medicare] statute.”
Id. at 594.
In Hoodkroft, the court agreed the depreciation recapture rules were a reasonable
and lawful interpretation of the federal statute, offering five reasons for its conclusion.
First, the Secretary, who had broad legal power to determine the scope of the federal
statute, had concluded depreciation recapture was consistent with the statute (also noting
the 1984 amendment was evidence that Congress itself believed the recapture rules were
consistent with the statute). 879 F.2d at 972-73. Second,
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the law can, and often does, use the concept of “depreciation costs” to refer
not to a physical fact (e.g., that a piece of equipment is worn), nor to an
economic fact (e.g., that wear and tear make it less valuable than a new
piece of equipment), but rather to an accounting fact, namely, a certain
percentage of the nominal historical price paid for the item.
Id. at 973. The court concluded this “stylized allowance” “promises no more than that an
investor will eventually receive back the historical, nominal dollars that he invested in an
asset.” Id. Third, the court compared the Medicare/Medicaid program to public utility
regulation systems, which “typically promise[] the regulated firm only a reasonable dollar
profit calculated as a percentage of investment, as measured by historical, nominal dollar
costs.” Id. Fourth, the main reason for using historical, nominal dollars to calculate
depreciation and other costs was administrative efficiency. Id. at 974.
To try to measure the current value of a facility each year; to try to assess
the actual yearly economic losses caused by equipment wear and tear; to try
to determine the extent to which any gain on resale reflects (a) less-than-
expected wear and tear, (b) inflation, or (c) special market factors such as
shortages, all would pose formidable administrative difficulties.
Id. Finally, the court concluded “it [wa]s difficult to say that the ‘historical cost’ system,
despite its failure to take inflation into account, [wa]s seriously unfair, as long as a facility
and its investors underst[oo]d the ground rules in advance.” Id. at 975.
The Eleventh and District of Columbia Circuits have taken a different view. In
Mercy Community Hosp., the court concluded the Secretary’s interpretation of the
depreciation recapture regulation was not reasonably related to the purposes of the
enabling legislation. 781 F.2d at 1558. In reaching this conclusion, the court stated:
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The . . . sale of the unconsumed remainder of . . . depreciable assets
at a price in excess of their depreciated book value does not necessarily
imply . . . that the provider did not actually incur some portion of the costs it
was reimbursed for the consumption of the asset before it was sold. It may
indeed be the case that, upon the sale of a long-lived asset, it will become
apparent that some or all of the excess of selling price over depreciated
book value reflects some miscalculation of the consumption of the asset that
actually occurred while it was in the service of the Medicare program. . . .
A gain on the sale of depreciable assets might result from other
factors, however, that cannot possibly be said to suggest that the provider
was overcompensated for consumption that occurred or compensated for
consumption that did not occur. An increase in the demand for the
provider’s assets, for example, may cause the market value of the
unconsumed remainder of the provider’s assets to increase, although they
are still being consumed at precisely the rate used to calculate the
depreciation allowances that are paid under the Medicare program.
Id. at 1557. Similarly, in Whitecliff, the court noted “[t]he price of a hospital sold many
years after it was purchased will reflect a host of factors other than depreciation or wear
and tear.” 20 F.3d at 492-93. For example, “the role of inflation,” and “[c]hanges in the
availability of building materials and appropriate hospital sites.” Id. at 493. In light of
these other factors, the court concluded “a purchase in which the sale price exceeds the
depreciated basis does not necessarily indicate that depreciation payments made in the
past have been excessive. The two figures are, or at least may be, as apples and oranges
are to each other.” Id. Accordingly, the court concluded “the Secretary’s simplistic
linking of depreciation costs with diminished value” violated Congress’ decision that “the
cost actually incurred” be granted to Medicare providers. Id.
We adopt the majority position and conclude the Secretary’s depreciation recapture
regulation is a reasonable and lawful interpretation of the Medicare Act. As noted by the
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First and Eleventh Circuits, and as exemplified by the parties’ arguments in this case, it is
difficult, if not impossible, to devise a depreciation formula that will accurately reflect
actual consumption of a physical asset at a particular point in time. Thus, the Secretary
has chosen to focus on the historical cost of an asset rather than its economic value and to
base annual depreciation estimates on that historical cost and the estimated life of the
asset. The result is that a provider is guaranteed recovery of the historical nominal dollars
it invests in each depreciable asset. The fact that this formula may not precisely reward a
provider with the actual costs of consuming a particular asset does not make the
regulation contrary to the Medicare Act, nor does it justify adoption of a different formula
that would require complicated and expensive administrative analysis.
Having concluded the depreciation recapture regulation is a reasonable
interpretation of the pre-1984 Medicare Act, we find it unnecessary to address the
remaining argument concerning retroactivity of the 1984 amendment to the Medicare Act.
III.
The judgment of the district court is AFFIRMED.
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