United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 30, 2000 Decided March 23, 2001
No. 00-5141
Lake Medical Center,
Appellant
v.
Tommy G. Thompson, Secretary of the Department of
Health and Human Services,
Appellee
Appeal from the United States District Court
for the District of Columbia
(96cv01389)
Patric Hooper argued the cause and filed the briefs for
appellant.
Sonia M. Orfield, Attorney, U.S. Department of Health
and Human Services, argued the cause for appellee. With
her on the brief were Harriet S. Rabb, General Counsel,
Sheree R. Kanner, Associate General Counsel, Henry R.
Goldberg, Deputy Associate General Counsel, David W. Og-
den, Assistant Attorney General, U.S. Department of Justice,
and Wilma A. Lewis, U.S. Attorney.
Before: Edwards, Chief Judge, Sentelle and Randolph,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Randolph.
Opinion concurring in part and dissenting in part filed by
Circuit Judge Sentelle.
Randolph, Circuit Judge: At issue is the valuation of
hospital assets for purposes of reimbursement under the
Medicare statute, 42 U.S.C. s 1395 et seq. Nu-Med, Inc.,
through its subsidiary Nu-Med Lake, purchased a general
hospital in Florida--the Lake Medical Center--in 1985 for
about $29 million. Three years later, Nu-Med sold the
medical center and its associated assets to Leesburg Regional
Medical Center for $14.4 million.
Medicare providers such as Nu-Med are entitled--with
certain limitations not relevant here--to compensation for
"the reasonable cost" of services provided to Medicare pa-
tients. See 42 U.S.C. s 1395f(b)(1). Providers are reim-
bursed by "fiscal intermediaries"--typically private insurance
companies under contract to the Health Care Finance Admin-
istration to determine the cost basis of medical service and
make periodic payments. See 42 C.F.R. s 400.202 (1999).
Among the costs reimbursed is the depreciation on buildings
and equipment used to provide Medicare services. See 42
C.F.R. s 413.134 (1999). The intermediary makes deprecia-
tion payments to a provider based on an estimated deprecia-
tion method. See 42 C.F.R. ss 413.64(b); 413.134(b) (1999).
When an asset is sold, it may become apparent that the
intermediary has paid either too much or too little deprecia-
tion because the sales price was either higher or lower than
expected. Cf. Glenn A. Welsch & Charles T. Zlatkovich,
Intermediate Accounting 476 (8th ed. 1989) (noting that
depreciation is only an estimate). The Medicare regulations
permit the intermediary to recover overpayment of deprecia-
tion when an asset is sold for more than its cost basis less
reimbursed depreciation. See 42 C.F.R. s 413.134(f) (1999).
In this case, Nu-Med filed a Medicare cost report on
March 18, 1988, and claimed a loss on its sale of the Lake
Medical Center. The intermediary, Blue Cross and Blue
Shield of Florida, responded with a Notice of Program Reim-
bursement denying Nu-Med additional payments. Because
there was a lump sum sales price, the intermediary allocated
the price among the assets and, having done so, calculated a
gain on the sale of the depreciable assets. Nu-Med appealed
this determination to the Provider Reimbursement Review
Board. The Board found that the intermediary had erred in
allocating all of the proceeds to depreciable assets, that it
should obtain an independent appraisal to establish the fair
market value of all the assets, and that it should then allocate
the purchase price among the depreciable and nondepreciable
assets (such as land) to determine what Nu-Med realized in
the sale. See Lake Medical Ctr. v. Blue Cross & Blue Shield,
No. 96-D28, slip op. at 10 (Provider Reimbursement Review
Bd. Apr. 16, 1996). After the intermediary obtained an
appraisal, it issued a new Notice of Program Reimbursement
calculating Nu-Med's total loss on the sale of $1,757,660.
The Board affirmed. See Lake Medical Ctr. v. Blue Cross &
Blue Shield, No. 97-D107, slip op. at 12 (Provider Reimburse-
ment Review Bd. Sept. 26, 1997). Nu-Med challenged this
recalculated loss as too low. The district court (Flannery, J.)
rejected Nu-Med's contentions in a thorough and well-
reasoned opinion. See Lake Medical Ctr. v. Shalala, 89
F.Supp.2d 83 (D.D.C. 2000).
I.
For depreciable assets, that is for assets that lose value
over time, an owner's gain or loss on the sale of the asset is
the difference between the purchase price (the cost basis) less
accumulated depreciation (the net book value) and the sales
price. See Welsch & Zlatkovich, supra, at 447. If a provid-
er sells a Medicare-depreciable asset at a loss, the Secretary
assumes that more depreciation occurred than originally esti-
mated and therefore provides additional reimbursement to
the provider. If a gain results, the Secretary recaptures the
previously paid reimbursement. See Lake Medical Ctr., 89
F.Supp.2d at 85.
In 1984, as part of the Deficit Reduction Act or "DEFRA,"
Congress set a limit on providers' historical cost of assets.
See Deficit Reduction Act of 1984, Pub. L. No. 98-369,
s 2314(a), 99 Stat. 494 (July 18, 1984), codified at 42 U.S.C.
s 1395x(v)(1)(O) (1994). Under 42 U.S.C. s 1395x(v)(1)(O)(i),1
when an asset changed hands, "the valuation of the asset ...
shall be the lesser of the allowable acquisition cost of such
asset to the owner of record as of July 18, 1984 ... or the
acquisition cost of such asset to the new owner." 42 U.S.C.
s 1395x(v)(1)(O)(i) (1994). A second clause required regula-
tions to "provide for recapture of depreciation in the same
manner as provided under the regulations in effect on June 1,
1984." 42 U.S.C. s 1395x(v)(1)(O)(ii) (1994).
Because Nu-Med sold the Lake Medical Center in 1988,
the Board found that the first of these provisions--clause
(i)--required the intermediary to consider the cost basis to be
the price paid for the facilities by the owner of record in
1984--namely, $11 million. See Lake Medical Ctr. v. Blue
Cross & Blue Shield, No. 97-D107, slip op. at 10 (Provider
Reimbursement Review Bd. Sept. 26, 1997). According to
Nu-Med this was error because clause (i) only specifies the
basis for calculating the depreciable value of an asset (and
thus the periodic reimbursement payments from the interme-
diary), whereas clause (ii) specifies the method for calculating
gain or loss from the sale of an asset. (Both parties agree
that even though clause (ii) refers only to "recapture" it
applies not only to transactions resulting in a gain but also a
loss.) Nu-Med's theory is that clause (i) did not exist in 1984
so the calculation in clause (ii) regarding gain or loss on a sale
must ignore the DEFRA cap on historical cost.
__________
1 The statute was amended in 1997, changing clause (i) and
deleting clause (ii). See 42 U.S.C. s 1395(v)(1)(O) (Supp. IV 1998).
The district court rightly rejected Nu-Med's arguments.
Nu-Med's interpretation of the interplay between clauses (i)
and (ii) does not exactly leap off the page. The Secretary's
reading, on the other hand, is perfectly logical. It treats
clause (ii) as dealing with the method of calculating deprecia-
tion (the clause uses the word "manner"), and clause (i) as
setting the depreciable basis of the asset from which the
clause (ii) calculation will be made. It is unnecessary to
discuss all of the various regulations in effect in 1984 dealing
with the method of calculating depreciation. The district
court mentioned one--42 C.F.R. s 405.415 (1984)--which is
enough to make the point: as in 1984, the Secretary under
DEFRA continued "to compare sales price with the depreci-
ated historical cost basis as defined in [the] existing regula-
tions." See Lake Medical Ctr., 89 F.Supp.2d at 87. The
district court gave other reasons for sustaining the Secre-
tary's interpretation but it would serve no useful purpose to
repeat them. Even if the case were not so overwhelming in
favor of the Secretary's reading, the respect a court must give
to an agency's statutory interpretation would cause us to
reach the same result. See National Medical Enters., Inc. v.
Shalala, 43 F.3d 691, 695 (D.C. Cir. 1995). Upholding the
Secretary here is not inconsistent with the dicta in Whitecliff,
Inc. v. Shalala, 20 F.3d 488, 489 n.1 (D.C. Cir. 1994), that "the
Deficit Reduction Act of 1984 ... codified at 42 U.S.C.
s 1395x(v)(1)(O)(ii), ratified the recapture of depreciation reg-
ulations that were in effect as of June 1, 1984." Clause (ii), as
we have said, did "ratify" those 1984 regulations dealing with
the manner in which depreciation is calculated.
II.
Nu-Med's alternative contention is that the intermediary's
loss valuation was too low because neither it nor the Provider
Reimbursement Review Board properly accounted for the
value of medical records in determining Nu-Med's reimbursa-
ble loss. When Nu-Med sold the Lake Medical Center in
1988 for $14.4 million, there was no allocation of the sales
price among the buildings, land, equipment, the name "Lake
Medical Center," patient files or "good will." Because not all
assets are depreciable under Medicare, see 42 C.F.R.
s 413.134(a) (1999), when assets are sold in a bundle "the
gain or loss on the sale of each depreciable asset must be
determined by allocating the lump sum sales price among all
the assets sold, in accordance with the fair market value of
each asset ... at the time of sale." 42 C.F.R.
s 413.134(f)(2)(iv) (1999).
Naturally, Nu-Med would prefer that as much of Lake
Medical Center's sale price as possible be apportioned to non-
depreciable assets. This would lower the allocable sales price
of the depreciable assets, maximizing both Nu-Med's losses
and its Medicare cost recovery. To that end, Nu-Med thinks
that its reimbursement was inadequate because both the
intermediary and the Provider Reimbursement Review Board
assigned no value to the medical records transferred as part
of the sale. See Lake Medical Ctr., No. 97-D107, slip op. at
12.
It is true that the appraiser placed a fair market value of
$1.5 million on the medical records out of a total appraisal of
approximately $17 million for the Center, although everything
actually sold for $14.4 million. But those numbers show that
the purchaser paid nothing for residual going concern value:
the tangible assets were sold for less than their fair market
value. Medical records are, the Board determined, akin to
goodwill, assigned a positive value only when the sales price
of the other assets exceeds their fair market value. See Lake
Medical Ctr., No. 97-D107, slip op. at 11-12. In this respect
the Board's judgment comports with generally accepted ac-
counting practices. See Financial Accounting Standards
Board, Current Text: Accounting Standards B50.145;
B50.160 (1994) ("goodwill" only recorded when sale price of
assets exceeds fair market value); John Downes & Jordan
Elliot Goodman, Dictionary of Finance and Investment
Terms 239 (5th ed. 1998) ("going concern value" recorded as
"goodwill" in acquisition accounting). The Board sufficiently
supported its conclusion that Nu-Med's medical records could
not, as the district court put it, be "valued as an asset
independent of Lake Medical's ongoing operations." See
Lake Medical Ctr., 89 F.Supp.2d at 90. It is of no moment
that the sales agreement includes "all books and records of
the facility." The sales agreement also includes "good will,"
which only exists if the assets are sold for more than fair
market value. The mere fact that an asset was transferred
does not mean it had a positive fair market value.
We have considered and rejected Nu-Med's other argu-
ments. The judgment of the district court is
Affirmed.
Sentelle, Circuit Judge, concurring in part and dissent-
ing in part: I concur in most of the well reasoned opinion of
the court, but find that I am unable to join Part II. Although
I think the result reached by the Secretary, the district court,
and the majority is a reasonable one, I do not think it is
consistent with governing HHS regulations.
The applicable HHS regulation provides:
If a provider sells more than one asset for a lump sum
sales price, the gain or loss on the sale of each deprecia-
ble asset must be determined by allocating the lump sum
sales price among all the assets sold, in accordance with
the fair market value of each asset as it was used by the
provider at the time of sale. If the buyer and seller
cannot agree on an allocation of the sales price, or if they
do agree but there is insufficient documentation of the
current fair market value of each asset, the intermediary
for the selling provider will require an appraisal by an
independent appraisal expert to establish the fair market
value of each asset and will make an allocation of the
sales price in accordance with the appraisal.
42 C.F.R. s 413.134(f)(2)(iv) (emphasis added). The regula-
tion makes no distinction between tangible and intangible
assets, nor does it limit the allocation of sale prices to
depreciable assets. Most importantly for the purposes of the
present controversy, it does not adopt "generally accepted
accounting practices." Maj. Op. at 6.
The Secretary's argument that medical records primarily
have a "going concern" value and that assets with "going
concern" value should not be allocated a portion of the sale
price is certainly reasonable, and I accept that following
"generally accepted accounting practices" would dictate the
result reached by the court. Indeed, were the Secretary to
promulgate regulations to that effect, I have little doubt that
those regulations would withstand all challenge. But that is
not the state of the regulations that governed the sale before
us.
As appellant argued, the Secretary's regulations explicitly
require the intermediary to allocate the sales price "among
all the assets sold." There is little ambiguity in this state-
ment. If the medical records were among "the assets sold"
by Nu-Med, then they should be allocated a portion of the
sales price. The records were listed as a separate asset at
the time of sale even though all of the assets were sold for a
lump-sum price.
Since the buyer and seller did not agree on the value, if
any, to be assigned to the medical records, the intermediary
was required to submit this matter for independent appraisal,
which it did. Under the plain language of the regulation, this
appraisal, and not "generally accepted accounting practices,"
controls. The regulatory language leaves no room for the
intermediary, or the Secretary, to reallocate portions of the
sales price because they disapprove of the appraiser's judg-
ment. While the Secretary's view is most reasonable as a
policy matter, it is not the view embodied in the Secretary's
own regulations. If the medical records were "intended to be
among the assets transferred in the sale" then they were
among the "assets sold" and fall under the regulations. That
this produces an unreasonable or unconventional result does
not give the Secretary or the courts license to rewrite the
regulatory language.
In all other respects I join Judge Randolph's careful opin-
ion for the court.