United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 21, 2011 Decided April 26, 2011
No. 09-5448
FORSYTH MEMORIAL HOSPITAL, INC., ET AL.,
APPELLANTS
v.
KATHLEEN SEBELIUS, SECRETARY OF HEALTH AND HUMAN
SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:07-cv-01828)
Robert E. Mazer argued the cause and filed the briefs for
appellants. Harold G. Belkowitz and James P. Holloway entered
appearances.
Joel McElvain, Senior Counsel, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Ronald C. Machen Jr., U.S. Attorney, Michael S. Raab,
Attorney, and Janice Hoffman, Associate General Counsel, U.S.
Department of Health & Human Services.
Before: SENTELLE, Chief Judge, HENDERSON and
GARLAND, Circuit Judges.
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Opinion for the Court filed by Chief Judge SENTELLE.
SENTELLE, Chief Judge: Forsyth Memorial Hospital, Inc.,
and other medical providers (collectively, “appellants”) appeal
from the district court’s grant of summary judgment in favor of
the Secretary of Health and Human Services (respectively, the
“Secretary” and “HHS”), which upheld the denial of their
reimbursement claims arising from the merger of Presbyterian
Health Services Corporation (“Presbyterian”) and Carolina
Medicorp, Inc. (“Carolina”). Appellants argued before the
district court and this court that the denial of their claims was
arbitrary and capricious, an abuse of discretion, contrary to law,
or unsupported by substantial evidence. Finding no error in the
district court’s disposition, we affirm.
I.
According to the undisputed facts before the district court,
prior to the events at issue in this case, Carolina was a private
non-profit corporation that held title to certain land, buildings,
land improvements, and fixed equipment. Carolina leased these
assets to Forsyth Memorial Hospital, Inc., Medical Park
Hospital, Inc., Foundation Health Systems Corp., and Carolina
Medicorp Enterprises (together, the “individual providers”),
which were non-profit Medicare service providers under the
control of Carolina. The individual providers used the assets
leased to them by Carolina for the provision of Medicare
services.
Effective July 1, 1997, Carolina statutorily merged into
Presbyterian, a previously independent corporation. Pursuant to
North Carolina law, under which the statutory merger was
executed, Carolina dissolved and Presbyterian assumed all of
Carolina’s assets and liabilities, including its leases with the
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individual providers and its land and depreciable assets.
Presbyterian subsequently renamed itself Novant Health, Inc.
At the time of the merger, Carolina’s known liabilities
stood at $230.7 million. The value of its assets at that time is,
however, disputed. No appraisal of Carolina’s assets was
conducted prior to the merger and Carolina did not place its
assets on the open market. At the time of the merger, the net
book value of Carolina’s total assets—i.e., the assets’ purchase
price less the total depreciation already taken on them—was
$399.8 million. An appraisal conducted after the merger found
that Carolina’s land and depreciable assets were worth $215
million.
After the merger, the individual providers sought
reimbursement for approximately $11 million in losses on their
depreciable assets, under 42 C.F.R. § 413.134(l). Blue Cross
Blue Shield Association, a private intermediary designated by
HHS to process the providers’ claims for reimbursement, denied
the claims. The individual providers appealed to the HHS
Provider Reimbursement Review Board (“PRRB”), pursuant to
42 U.S.C. § 1395oo(a), which reversed the intermediary’s
determination and ordered reimbursement. The Administrator
of the Centers for Medicare & Medicaid Services (respectively,
the “Administrator” and “CMS”), which administers the
Medicare Program on behalf of the Secretary and has the
discretion to review any final decision of the PRRB, 42 U.S.C
§ 1395oo(f)(1); 42 C.F.R. § 405.1875(a)(1), reversed the
PRRB’s determination, finding that appellants were not entitled
to reimbursement because in the merger between Carolina and
Presbyterian no bona fide sale took place and the parties were
related.
Pursuant to 42 U.S.C § 1395oo(f)(1), the individual
providers—excluding one whose interest had passed to another
4
of the providers—sought judicial review of the Administrator’s
decision in the District Court for the District of Columbia. On
cross motions for summary judgment, the district court granted
summary judgment in favor of the Secretary and denied
appellants’ motion. Forsyth Mem’l Hosp. Inc. v. Sebelius, 667
F. Supp. 2d 143 (D.D.C. 2009). Appellants now appeal the
district court’s judgment.
II.
Under the Social Security Act, providers of Medicare
services are statutorily entitled to reimbursement for the
“reasonable cost” of certain Medicare services. See 42 U.S.C.
§ 1395f(b)(1). The implementing regulations, promulgated by
the Secretary as required by the Act, 42 U.S.C § 1395x(v)(1)(A);
42 U.S.C. § 1395hh, provide that “an appropriate allowance for
depreciation on buildings and equipment used in the provision
of patient care is an allowable cost” for which a Medicare
provider can seek reimbursement. 42 C.F.R. § 413.134(a). The
regulations also set forth the manner in which the appropriate
allowance for such depreciable assets is determined: The
“historical cost” of the asset, § 413.134(a)(2)—which is “the
cost incurred by the present owner in acquiring the asset,” §
413.134(b)—is “[p]rorated over the estimated useful life of the
asset,” § 413.134(a)(3). In most cases, the annual reimbursable
cost of a depreciable asset will be the asset’s “actual cost
divided by the number of years of its useful life.” St. Luke’s
Hosp. v. Sebelius, 611 F.3d 900, 901 (D.C. Cir. 2010).
Recognizing that the methodology for calculating
reimbursable depreciation “only approximate[s] the actual
decline in an asset’s value,” Via Christi Reg’l Med. Ctr., Inc. v.
Leavitt, 509 F.3d 1259, 1262 (10th Cir. 2007), the regulations
require adjustment to the allowable depreciation cost of an asset
in specified circumstances. Relevant here, when a provider
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disposes of a depreciable asset through sale or statutory merger,
if the asset’s net book value is not identical to the consideration
received for the asset, a revaluation of the allowable cost is
required. Upon revaluation, if the net book value is greater than
the consideration received, the provider has realized a loss for
which the provider may claim reimbursement. In contrast, if the
net book value is less than the consideration received, the
provider has realized a gain and HHS may appropriately adjust
or deny reimbursement. See § 413.134(f), (l); St. Luke’s, 611
F.3d at 901-02; Robert F. Kennedy Med. Ctr. v. Leavitt, 526
F.3d 557, 559 (9th Cir. 2008); Via Christi, 509 F.3d at 1262.
A provider may receive reimbursement for a loss on the
sale of a depreciable asset by meeting additional criteria.
Specifically, subsection (f) of the regulation governing
depreciation mandates that a provider may be reimbursed for a
loss on a sale only when the sale was a “bona fide sale.” §
413.134(f); St. Luke’s, 611 F.3d at 902. Subsection (l) of the
same regulation, which governs revaluation of assets after their
disposal through a statutory merger, does not specifically
incorporate the bona-fide-sale requirement of subsection (f) but
provides that compliance with subsection (f) is a prerequisite for
revaluation after a statutory merger.
In a guidance document issued in October 2000, HHS
clarified that subsection (l)’s cross reference to subsection (f)
mandates that, when a corporation disposes of depreciable assets
through a statutory merger, CMS will permit an adjustment to
the corporation’s allowable depreciation costs only if the merger
constituted a “bona fide sale,” as defined in the Provider
Reimbursement Manual (“PRM”), or some other triggering
event irrelevant here, and was consummated by “parties that are
not related.” Clarification of the Application of the Regulations
at 42 C.F.R. § 413.134(l) to Mergers and Consolidations
Involving Non-Profit Providers, Program Memorandum A-00-
6
76 (Oct. 19, 2000) (hereinafter “PM A-00-76 ”). The PRM in
turn provides that a “bona fide sale contemplates an arm’s length
transaction between a willing and well informed buyer and
seller, neither being under coercion, for reasonable
consideration” and that an “arm’s length transaction is a
transaction negotiated by unrelated parties, each acting in his
own self interest.” PRM § 104.24. We have previously upheld
PM A-00-76’s interpretation of subsection (l): A statutory
merger will not give rise to a reimbursable loss unless the
merger constitutes a bona fide sale, and “reasonable
consideration is a required element of a bona fide sale.” St.
Luke’s, 611 F.3d at 903-06.
III.
Appellants ask us to reverse the district court’s
determination that the Administrator acted in accordance with
the Administrative Procedure Act. See 5 U.S.C. § 706(2). In
our review of the district court’s grant of summary judgment, we
consider de novo whether in the proceedings below there was a
genuine dispute as to any material fact. See Fed. R. Civ. P. 56.
When the judgment of the district court is on review of an
administrative decision, our task is the same as that performed
by the district judge. In other words, we review the
administrative record to determine whether the agency’s
decision was arbitrary and capricious, and whether its findings
were based on substantial evidence. Troy Corp. v. Browner, 120
F.3d 277, 281 (D.C. Cir. 1997). We therefore review the
administrative record directly to determine whether the agency
violated the Administrative Procedure Act by taking action that
is “arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law” or is “unsupported by substantial
evidence.” See 5 U.S.C. § 706(2); Pharm. Research & Mfrs. of
Am. v. Thompson, 362 F.3d 817, 821 (D.C. Cir. 2004). If we
7
reach the same conclusion as the district judge, we affirm the
judgment of the court.
Appellants argue that the district court should have set aside
the Administrator’s decision on the ground that it relies upon the
interpretation of § 413.134(l) set forth in PM A-00-76, which
appellants contend is, for multiple reasons, unlawful.
Appellants make a host of arguments that the Administrator
should not have applied PM A-00-76’s requirement that
reasonable costs be revalued after a statutory merger only if the
statutory merger constituted a bona fide sale, for reasonable
consideration. Because this court has previously upheld PM A-
00-76 insofar as is relevant to this case, we dismiss appellants’
arguments on this front. See St. Luke’s, 611 F.3d 900. It was
neither arbitrary and capricious nor contrary to law for the
Administrator to apply PM A-00-76 to his analysis.
The only other question raised by this appeal is whether,
on the facts of this case, the Administrator’s determination that
appellants were ineligible for reimbursement on their claimed
depreciation losses was unsupported by substantial evidence or
was otherwise arbitrary and capricious. As discussed above, the
Administrator, upon review of the factual record, determined
that the transaction met neither of the requirements for the
reimbursement of depreciation losses: (1) the statutory merger
between Carolina and Presbyterian did not constitute a bona fide
sale; and (2) the parties to the transaction were related. Carolina
Medicorp ‘97 Claimed Loss Disallowance Group v. Blue Cross
Blue Shield Ass’n, Review of PRRB Dec. No. 2007-D42, at *26-
28 (June 15, 2007) (hereinafter Adm’r Decision). In support of
his conclusion that there was no bona fide sale, the
Administrator reasoned that Carolina did not receive reasonable
consideration for the sale of its assets and it did not engage in
arm’s length bargaining with Presbyterian. Id. at *27-28.
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We agree with the district court that the Administrator’s
determination that Carolina did not receive reasonable
consideration for its assets in the statutory merger with
Presbyterian was supported by substantial evidence and was not
otherwise arbitrary and capricious. The record discloses that,
pursuant to PM A-00-76, the Administrator conducted a
comparison of the value of the assets sold and the consideration
exchanged in the merger. Id. In other words, he compared the
value of Carolina’s assets and liabilities at the time of the
merger. Specifically, the Administrator compared the book
value of Carolina’s total assets ($399 million) to its known
liabilities ($230 million). Id. He also compared the appraised
value of Carolina’s land and depreciable assets, as calculated by
an appraisal conducted soon after the merger ($215 million), as
well as their net book value ($139 million), with the portion of
the consideration Carolina assigned to those assets ($54
million). As a third point of comparison, the Administrator
considered the net book value of Carolina’s depreciable assets
($122 million) against the consideration Carolina allocated to
those assets ($37 million). Id. at *28. Noting the sizable
disparities between these figures, the Administrator reasonably
concluded that “[t]he amount of consideration transferred and
the value of the assets received does not . . . support a finding
that [Carolina] transferred assets for reasonable consideration
and as a result of a bona fide sale.” Id.
Appellants claim that the Administrator’s finding on this
point was unsupported by substantial evidence and was also
arbitrary and capricious for several reasons. First, they criticize
the Administrator’s failure to take into account that Presbyterian
assumed not only Carolina’s known liabilities but also its
unknown liabilities. Because Carolina’s unknown liabilities
might have been substantial, appellants explain, the
Administrator underestimated the consideration exchanged in
the statutory merger. Appellants also argue that the
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Administrator misjudged the fair market value of Carolina’s
assets by relying only on their net book value and appraised
value, which did not reflect their true market value. Third,
appellants contend that PM A-00-76 and case law require the
Administrator to find that reasonable consideration was
exchanged in a merger when the total consideration received by
the merged entity (i.e., its liabilities) is more than the current or
monetary assets it has sold. According to appellants, because
Carolina received approximately $230 million as consideration,
which is significantly more than the $19 million it possessed in
current assets, the Administrator should have determined that
Carolina received reasonable consideration.
As a preliminary note, we reject appellants’ argument
that PM A-00-76 or any court opinion cited by appellants may
reasonably be read to compel the Administrator to find that
reasonable consideration has been exchanged whenever a
merged entity’s current or monetary assets are less than the
consideration received. Although PM A-00-76 clearly indicates
that when current assets are more than the consideration
received a bona fide sale has not occurred, this does not imply
that the converse is true. When current and monetary assets are
less than the consideration received, the Administrator must
examine the merger to ensure that reasonable consideration was
exchanged for all assets. Appellants’ argument to the contrary
simply makes no sense. The Administrator certainly was not
arbitrary or capricious in comparing the consideration
exchanged and all assets without imposing any novel framework
supposedly limiting the comparison to the acquired entity’s
liabilities and current and monetary assets. Nor did the district
court err in upholding that determination by its summary
judgment.
Turning next to the figures upon which the Administrator
relied in making the determination that reasonable consideration
10
was not exchanged in the statutory merger, we again conclude
that there is no error. The burden of proof to show that a bona
fide sale occurred rested on appellants. 42 U.S.C. § 1395g(a);
42 C.F.R. § 413.24(a); Via Christi, 509 F.3d at 1277; Mercy
Home Health v. Leavitt, 436 F.3d 370, 380 (3d Cir. 2006); see
also Tenet HealthSystems HealthCorp, 254 F.3d 238, 245 (D.C.
Cir. 2001). Yet, as appellants have conceded, they did not
introduce or identify any evidence that reasonable consideration
was indeed exchanged in the merger of Carolina and
Presbyterian. They did not put forth evidence tending to show
either that Carolina’s unknown liabilities were likely particularly
substantial, such as to approach the value of its assets, or that the
net book value or appraised value of Carolina’s assets
inaccurately reflected their actual market value. Apart from the
appraisal conducted soon after the merger, which produced one
of the several figures whose accuracy appellants dispute,
appellants conducted no appraisal, and they did not put
Carolina’s assets for sale on the open market. Given the figures
before the Administrator, and in light of appellants’ failure to
introduce or identify any evidence tending to contradict the
accuracy of those figures, the Administrator’s determination was
neither unsupported by substantial evidence nor arbitrary and
capricious. See Allentown Mack Sales & Serv., Inc. v. NLRB,
522 U.S. 359, 366-67 (1998); Assoc. of Data Processing Serv.
Org., Inc. v. Bd. of Governors of the Fed. Res. Sys., 745 F.2d
677 (D.C. Cir. 1984). He did not act inappropriately in
concluding that the vast disparity between Carolina’s assets and
liabilities did not support a finding that the merger between
Carolina and Presbyterian was consummated for reasonable
consideration.
Because the Administrator’s finding that Carolina and
Presbyterian did not exchange reasonable consideration was an
independent and sufficient ground for refusing appellants their
requested reimbursement, we need not and do not address the
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Administrator’s determinations with respect to whether the
parties in the merger were related or whether they engaged in
arm’s length bargaining.
IV.
For the reasons set forth above, the order of the district
court is
Affirmed.