Albert Einstein v. Secretary HHS

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit

5-22-2009

Albert Einstein v. Secretary HHS
Precedential or Non-Precedential: Precedential

Docket No. 07-3807

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 07-3807

ALBERT EINSTEIN MEDICAL CENTER,
SUCCESSOR IN INTEREST TO
GERMANTOWN HOSPITAL AND
MEDICAL CENTER, INC.,
Appellant
v.

†Kathleen
Sebelius, Secretary of the United States
Department of Health & Human Services

(†Kathleen Sebelius is substituted for her predecessor
Michael O. Leavitt, as Secretary of the
United States Department of Health & Human Services,
pursuant to Fed. R. App. P. 43(c)(2))

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 04-cv-06059)
District Judge: Honorable Ronald L. Buckwalter

Argued October 31, 2008

Before: SLOVITER, STAPLETON and TASHIMA * ,
Circuit Judges

*
Honorable A. Wallace Tashima, Senior Judge of the
United States Court of Appeals for the Ninth Circuit, sitting by
designation.
 (Filed May 22, 2009)
_________

Carel T. Hedlund (Argued)
Ober, Kaler, Grimes & Shriver
Baltimore, MD 21202

Attorney for Appellant

Joel L. McElvain (Argued)
United States Department of Justice
Civil Division, Federal Programs Branch
San Francisco, CA 94102

Michael S. Raab
United States Department of Justice
Washington, DC 20530

Attorneys for Appellee
____

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Germantown Hospital and Medical Center (“Old
Germantown”) submitted to the representative of the Secretary
of Health and Human Services, the Centers for Medicare and
Medicaid Services (“CMS” or “Administrator”), a
reimbursement claim for loss on depreciable assets resulting
from its 1997 statutory merger into Germantown Hospital and
Community Health Services (“New Germantown”). The
Administrator denied the claim because he found that the Old
Germantown merger was between “related parties” and did not
constitute a “bona fide sale.” Albert Einstein Medical Center,
Inc. (“Einstein”), as successor-in-interest to Old Germantown
and New Germantown, filed an action in federal court
challenging the Administrator’s interpretations of the relevant

2
regulations and, in the alternative, challenging the
Administrator’s factual findings based on those regulatory
interpretations. The District Court, the Honorable Ronald L.
Buckwalter of the United States District Court for the Eastern
District of Pennsylvania, granted summary judgment to the
Secretary upholding the decision of the Administrator. Einstein
appeals.

I.

Factual and Procedural Background

Prior to the 1997 merger at issue in this case, Old
Germantown was a not-for-profit hospital, located in
Philadelphia, Pennsylvania. David Ricci, who had served as
President and CEO, testified before the Provider Reimbursement
Review Board (“PRRB”) that as a result of the development of
managed care and healthcare systems in Philadelphia in the early
1990s, small hospitals realized that they needed to “join[]
stronger organizations in order for them to have a future.” App.
at 685. By the mid-nineties, Old Germantown had seen a decline
in admissions and was operating only 125-150 of its 255
licensed beds. Ricci stated that this reduction in patient volume,
combined with a “feeding frenzy for acquiring physician
practices,” caused Old Germantown difficulty in retaining
specialists. App. at 685. As a result, Old Germantown
experienced yearly operating losses, with its 1996 operating loss
amounting to between $2.3 and $2.5 million. In 1996, Old
Germantown’s outstanding liabilities totaled more than $30
million, including approximately $11.6 million in long-term
debt. At about that time, Old Germantown’s primary lender
decided that the hospital was such a credit risk that it would no
longer extend credit to Old Germantown.

By 1997, Old Germantown’s assets included endowment
funds of approximately $37.9 million in principal, but the
hospital could use only the annual interest from these funds.
Accordingly, the principal could not be used to satisfy Old
Germantown’s debts or serve as collateral on future loans. In
1996, the interest income from these endowments was roughly

3
$1.3 million, but there were also restrictions on the permissible
uses of the interest income of many of these funds. Therefore,
even much of the interest income from these restricted funds
could not be used to pay Old Germantown’s debts.

Acknowledging the seriousness of its financial
predicament, Old Germantown sent a request for proposal
(“RFP”) to several healthcare systems on December 10, 1996,
seeking a merger or a sale of assets. Old Germantown’s RFP
stated:

The principal objectives the [Old] Germantown Board
expects to consider in evaluating proposals will be to: (i)
ensure that Germantown continues to serve the health
care needs of its community; (ii) enhance the health care
services available at Germantown; (iii) maintain, to the
extent possible, Germantown’s workforce; (iv) achieve a
fair value for Germantown’s business and assets; and (v)
consummate any acceptable transaction expeditiously.

App. at 252.

In response, Old Germantown received proposals from
the Albert Einstein Healthcare Network (“AEHN”),1 Temple

1
Albert Einstein Medical Center, Inc. (“Einstein”), the
appellant in this case, must be distinguished from the Albert
Einstein Healthcare Network (“AEHN”), “a diversified
organization that includes a network of healthcare facilities and
services located throughout the [Philadelphia] metropolitan area.”
App. at 284. AEHN negotiated the 1997 statutory merger with Old
Germantown and created a new subsidiary, New Germantown, for
the purpose of that merger. Due to New Germantown’s continuing
losses, it was merged into Einstein, a preexisting subsidiary of
AEHN, on July 1, 1999. As Einstein explained to the District
Court, “The assets of New Germantown, including Old
Germantown’s claim for Medicare reimbursement for the loss
incurred upon its merger into New Germantown, passed by
operation of law to [Einstein].” Plaintiff’s Memorandum in

4
University, and Primary Health Systems, Inc. (“PHS”).2

AEHN proposed to create a new subsidiary within its
healthcare network that would assume all of Old Germantown’s
assets and liabilities. AEHN’s proposal also provided that the
Board of the new entity would “include current members of the
[Old] Germantown Board of Trustees, current management and
medical staff leadership as well as AEHN designees.” App. at
276. In addition, AEHN would invest $6 million in the new
entity over the course of its first five years of existence in order
“to increase services to the community and to insure continued
access to current healthcare services.” App. at 280.3

PHS proposed to purchase the physical assets of Old
Germantown for $15 million, with Old Germantown retaining all
its other assets and liabilities (including its limited-use
endowments) to pay off its debts and liabilities. The proposal
was silent as to any continuing role of Old Germantown
principals within the governing structure of the hospital after the
sale.

Old Germantown opted to pursue a merger with AEHN.
The parties entered negotiations and the terms agreed upon were
reflected in a non-binding Letter of Intent from AEHN’s
president, dated February 28, 1997. The letter stated that AEHN
would create a new subsidiary that would merge with Old
Germantown, that members of Old Germantown’s management
would have places on the Board of Trustees of the new entity,
and that additional members of the Board would be appointed
from the community served by the hospital “based upon

Support of Motion for Summary Judgment at 12 n.9, Albert
Einstein Medical Center, Inc. v. Leavitt, No. 04-6059 (E.D. Pa.
Mar. 14, 2006).
2
PHS is a hospital management company headquartered in
Wayne, Pennsylvania.
3
Temple made a similar proposal (absent the pledge of the
$6 million). The parties do not discuss Temple’s offer on appeal.

5
recommendations submitted by [Old] Germantown” to AEHN.
App. at 308. However, the Letter of Intent noted that the “above
stated board composition shall be subject to the parties’
intentions to maximize Medicare recapture.” App. at 308. In
addition, the Letter of Intent stated that the members of Old
Germantown’s Board who were not offered places on the new
entity’s Board of Trustees would be “offered the opportunity to
serve on AEHN’s Board of Directors.” App. at 309. The Letter
of Intent also stated that the “parties intend to preserve, to the
extent possible, [Old] Germantown’s existing senior
management.” App. at 309. Finally, AEHN reiterated its plan to
contribute $6 million in funds to the new entity over the first five
years of its existence.

Old Germantown and AEHN signed a definitive
agreement (“Agreement”) on May 30, 1997. In large part, the
Agreement preserved the terms reflected in the Letter of Intent,
except with respect to the composition of the new entity’s Board
of Trustees and AEHN’s Board of Directors. The new entity,
New Germantown, would have a Board of Trustees of up to
forty members and include four members from Old
Germantown’s Board, three members of Old Germantown’s
medical staff, at least two of whom had not previously sat on its
Board, the President and CEO of Old Germantown, twelve
members from the Germantown community (not to be
recommended by Old Germantown, as the Letter of Intent had
contemplated), and up to twenty members chosen by AEHN. All
Board members would be subject to the approval of the AEHN
“Nominating Committee, which approval shall not be
unreasonably withheld.” App. at 338. Old Germantown’s
Chairman of the Board as of the date of the merger would serve
as the initial Chairman of the Board of New Germantown. Two
members of Old Germantown’s Board of Trustees would serve
on the “Executive Committee of [AEHN]’s Board of Directors,”
and in addition AEHN would offer the remaining members of
Old Germantown’s Board “the opportunity to serve on
[AEHN]’s Board of Directors.” App. at 338. Finally, the
President and CEO of Old Germantown would become the
President and CEO of New Germantown.

6
 With respect to the composition of the new Board, David
Ricci, who had served as President and CEO of Old
Germantown, and now served as President and CEO of New
Germantown, later conceded at the hearing before the PRRB that
Old Germantown was worried about having more than twenty
percent representation on the new Board because it wanted to
“minimize anything that would jeopardize the loss of those
[Medicare] dollars we believe we were rightfully owed.” App.
at 710.

In June of 1997, AEHN created a subsidiary under the
name of Germantown Hospital and Community Health Services
(“New Germantown”), a non-profit corporation, and on
September 1, 1997, the parties completed the merger of Old
Germantown into New Germantown according to the terms of
the Agreement. Effective as of this merger, Old Germantown
ceased to exist and all of its assets and liabilities passed to New
Germantown by operation of law. The monetary assets assumed
by New Germantown were valued at $57.9 million (including
the $37.9 million in endowment funds), and the fixed assets were
valued at $14.5 million, totaling slightly over $72 million. In
exchange for gaining these assets, New Germantown assumed
Old Germantown’s liabilities of $34 million. As anticipated,
AEHN also pledged $6 million in “contingent consideration” to
be paid to New Germantown over the next five years. App. at
64.

On May 27, 1998, New Germantown submitted a final
cost report to Medicare’s fiscal intermediary on behalf of Old
Germantown, claiming that it had “incurred a loss on sale of
depreciable assets” through its merger with New Germantown,
and sought reimbursement. App. at 620. Because the
consideration (liabilities assumed by New Germantown) was less
than the assets’ “net book value” (described below), New
Germantown’s position was that the assets had depreciated more
than Medicare had estimated and that, as a result, Medicare’s
share of that loss was $4,876,356, later revised to $4,793,668.

On May, 26, 1999, Medicare’s fiscal intermediary denied
the claimed loss, and New Germantown appealed the decision to

7
the PRRB, which allowed the claim on September 1, 2004.
However, the Administrator reversed the PRRB decision,
disallowing the loss because he concluded that the merger was
between “related parties” and did not constitute a “bona fide
sale.” Einstein, as successor-in-interest to New Germantown
and Old Germantown, sought review of the Administrator’s
decision in the District Court for the Eastern District of
Pennsylvania, which granted summary judgment in favor of the
Secretary on August 1, 2007. Albert Einstein Medical Center,
Inc. v. Leavitt (Einstein), No. 04-6059, 2007 WL 2221417 (E.D.
Pa. Aug. 1, 2007). The District Court held that the Secretary’s
interpretations of 42 C.F.R. § 413.17 (“Related Party
Regulation”), 42 C.F.R. § 413.134(k)(2) (“Statutory Merger
Provision”), and 42 C.F.R. § 413.134(f)(2) (“Bona Fide Sale
Provision”) were reasonable and consistent with CMS’ prior
interpretations. Einstein, 2007 WL 2221417 at *10-12. In
addition, the District Court found that the Secretary’s factual
findings were based on substantial evidence. Id. at *11, 14.
Einstein timely filed a notice of appeal with this court.

II.

Jurisdiction and Standard of Review

The District Court had jurisdiction to review the
Administrator’s decision under 42 U.S.C. § 1395oo(f)(1) and we
have jurisdiction under 28 U.S.C. § 1291. We review the
agency’s decision under the standards set forth in the
Administrative Procedure Act (“APA”), 5 U.S.C. § 706. 42
U.S.C. § 1395oo(f)(1). As such, we “can set aside the
Administrator’s decision only if it is ‘unsupported by substantial
evidence,’ is ‘arbitrary, capricious, an abuse of discretion, or [is]
otherwise not in accordance with law.’” Mercy Home Health v.
Leavitt, 436 F.3d 370, 377 (3d Cir. 2006) (quoting 5 U.S.C. §§
706(2)(A), (E)) (alteration in original). “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, 436 F.3d at 380 (quoting
Richardson v. Perales, 402 U.S. 389, 401 (1971)).

8
 Moreover, we “must afford substantial deference to an
agency’s interpretation of its own regulations.” Mercy Home
Health, 436 F.3d. at 377 (citing Thomas Jefferson Univ. Hosp. v.
Shalala, 512 U.S. 504, 512 (1994)). As we have noted, “[t]his
broad deference is particularly appropriate in contexts that
involve a ‘complex and highly technical regulatory program,
such as Medicare, which requires significant expertise and
entail[s] the exercise of judgment grounded in policy concerns.’”
Id. (quoting Thomas Jefferson Univ. Hosp., 512 U.S. at 512).

“In sum, so long as an agency’s factfinding is supported
by substantial evidence, reviewing courts lack power to reverse
either those findings or the reasonable regulatory interpretations
that an agency manifests in the course of making such findings
of fact.” Monsour Med. Ctr. v. Heckler, 806 F.2d 1185, 1191
(3d Cir. 1986). Because this court applies the same standard of
review as the District Court, we “proceed de novo with respect
to our review of the district court disposition.” Mercy Home
Health, 436 F.3d at 377.

III.

Statutory and Regulatory Framework

A. Provider Reimbursement

Title XVIII of the Social Security Act (“Medicare Act”)
establishes a healthcare program for the aged and disabled
known as “Medicare,” 42 U.S.C. § 1395 et seq., which
reimburses healthcare providers for the “reasonable cost” of
providing services to Medicare beneficiaries, 42 U.S.C. §
1395f(b)(1). The Medicare Act defines “reasonable costs” as
“the cost actually incurred, excluding therefrom any part of
incurred cost found to be unnecessary in the efficient delivery of
needed health services.” 42 U.S.C. § 1395x(v)(1)(A).

Under the Medicare Act, the Secretary of Health and
Human Services is authorized to promulgate “regulations
establishing the method or methods” of calculating reasonable,
and therefore reimbursable, costs. 42 U.S.C. § 1395x(v)(1)(A);

9
42 C.F.R. § 413.9. The CMS (known as the Health Care
Financing Administration (“HCFA”) until July 2001)
administers this program on behalf of the Secretary. Centers for
Medicare & Medicaid Services; Statement of Organization,
Functions and Delegations of Authority, Reorganization Order,
66 Fed. Reg. 35,437 (July 5, 2001). Reimbursement for
reasonable costs to providers is made through private “fiscal
intermediaries” with which Medicare contracts. 42 U.S.C. §§
1395h, 1395kk-1. In addition to promulgating regulations, the
Secretary issues manuals to assist healthcare providers and fiscal
intermediaries in administering the system, such as the Provider
Reimbursement Manual (“PRM”) and the Medicare Intermediary
Manual (“MIM”).

In order to obtain a Medicare reimbursement, a health
care provider files an annual cost report with its fiscal
intermediary. 42 C.F.R. §§ 413.20(b), 413.24(f). The
intermediary then determines the amount of the reimbursement
and issues a Notice of Amount of Program Reimbursement to
the provider. 42 C.F.R. § 405.1803. If a provider disagrees with
the intermediary’s determination, it may file an appeal with the
PRRB. 42 U.S.C. § 1395oo; 42 C.F.R. § 405.1835. The
decision of the PRRB becomes the final administrative decision
after sixty days unless the Secretary, through the Administrator,
elects to review the decision within that time period. 42 U.S.C.
§ 1395oo(f)(1). A provider may seek judicial review of the final
decision of the PRRB or the Administrator in a federal district
court. 42 U.S.C. § 1395oo(f)(1).

B. Depreciable Assets

The Medicare regulation governing claims for losses on
depreciable assets provides that “[a]n appropriate allowance for
depreciation on buildings and equipment used in the provision of
patient care is an allowable cost” for which a provider may claim
reimbursement. 42 C.F.R. § 413.134(a). The annual
depreciation for which the provider is reimbursed by Medicare is
calculated by prorating the “historical cost” (i.e., the price the
provider paid to acquire the asset) over the asset’s estimated
useful life. 42 C.F.R. §§ 413.134(a)(2), (a)(3), (b)(1). As the

10
PRRB explained in this case, the CMS reimbursed providers
annually “for a percentage of the yearly depreciation equal to the
percentage the asset was used for the care of Medicare patients.”
App. at 69.4 The historical cost of an asset, minus the annual
recognized depreciation, is known as its “net book value.” 42
C.F.R. § 413.134(b)(9).

The PRRB explained that because the net book value is
based on estimates of the yearly depreciation, “the regulation at
42 C.F.R. § 413.134(f) provided for the determination of a
depreciation adjustment where a provider incurred a gain or loss
on the disposition [e.g., a sale] of a depreciable asset.” App. at
69 (alteration added). As the Administrator noted,

Basically, when there is a gain or loss, it means either that
too much depreciation was recognized by the Medicare
program resulting in a gain to be shared by Medicare, or
insufficient depreciation was recognized by the Medicare
program resulting in a loss to be shared by the Medicare
program. An adjustment is made so that Medicare pays
the actual cost the provider incurred in using the asset for
patient care.

App. at 42.

C. The Statutory Merger Provision

The Statutory Merger Provision of the regulation
governing depreciable assets provides for a possible adjustment
where assets are disposed of through a statutory merger, which is
defined as: “[A] combination of two or more corporations under

4
As the PRRB noted, “[a] depreciation adjustment for a
gain or loss was removed from the [Medicare] program’s
regulations effective December 1, 1997.” App. at 69 n.3; see also
Medicare Program; Limit on the Valuation of a Depreciable Asset
Recognized as an Allowance for Depreciation and Interest on
Capital Indebtedness After a Change of Ownership, 63 Fed. Reg.
1379 (Jan. 9, 1998).

11
the corporation laws of the State, with one of the corporations
surviving. The surviving corporation acquires the assets and
liabilities of the merged corporation(s) by operation of State
law.” 42 C.F.R. § 413.134(k)(2).5

However, a statutory merger results in a Medicare gain or
loss adjustment only if the merger was between “unrelated
parties,” as defined by 42 C.F.R. § 413.17. 42 C.F.R. §
413.134(k)(2)(i).6 In addition, the Statutory Merger Provision
states that if “the merged corporation was a [healthcare] provider
before the merger, then it is subject to the provisions of
paragraph[] . . . (f) of this section concerning recovery of
accelerated depreciation and the realization of gains and losses.”
42 C.F.R. § 413.134(k)(2)(i). It is the referenced provision of 42
C.F.R. § 413.134(f) that is at issue here. Section (f), the Bona
Fide Sale Provision, covers gains and losses resulting from the
disposition of depreciable assets through “sale, scrapping, trade-
in, exchange, demolition, abandonment, condemnation, fire,
theft, or other casualty.” 42 C.F.R. § 413.134(f). At the time of
the transaction in this case, a sale of assets that resulted in a gain
or loss would trigger a Medicare adjustment only if it was a
“bona fide sale.” 42 C.F.R. § 413.134(f).7

The purpose behind both the Related Parties Regulation

5
At the time of the Germantown merger, this subsection
was designated as 42 C.F.R. § 413.134(l); in 2000 it was
redesignated as subsection (k) without alteration to its content.
Medicare Program; Payment Amount if Customary Charges are
Less Than Reasonable Costs: Technical Amendments, 65 Fed.
Reg. 8660 (Feb. 22, 2000) (codified at 42 C.F.R. § 413.134).
6
According to CMS, this regulation originally contemplated
only mergers between for-profit providers. See App. at 653.
7
This regulation provides that adjustments for gains or
losses are required with respect to the bona fide sale or scrapping
of assets only if the assets were disposed of before December 1,
1997, 42 C.F.R. § 413.134(f)(2), and the merger in this case was
effective September 1, 1997.

12
and the Bona Fide Sale Provision is to eliminate the potential for
self-dealing and ensure that Medicare only reimburses providers
for their actual costs. See, e.g., Monsour Med. Ctr., 806 F.2d at
1191 n.15 (discussing related parties); Via Christi Reg’l Med.
Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1262-63 (10th Cir. 2007)
(discussing bona fide sale).

D. Bona Fide Sale Provision

In May 2000, the Secretary amended the PRM with
regard to the Bona Fide Sale Provision through a transmittal of
changes to the PRM (“2000 PRM Amendment”):

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. An arm’s-length transaction is a
transaction negotiated by unrelated parties, each acting in
its own self interest.

PRM § 104.24; App. at 649. This additional language was listed
under the section of the transmittal setting forth changes “added
to clarify existing instructions;” the agency did not list it as new
material requiring an effective date. App. at 648.

Similarly, on October 19, 2000, the CMS issued a
Program Memorandum on the “Clarification of the Application
of the Regulations at 42 CFR 413.134(l)8 to Mergers and
Consolidations Involving Non-profit Providers” (“2000 PM”).
App. at 653.9 The 2000 PM notes that “non-profit organizations
. . . associate or affiliate through mergers or consolidations for
reasons that may differ from the traditional for-profit merger or
consolidation.” App. at 654. “Because there is no similar
regulation specifically addressing mergers and consolidations
between or among non-profit entities, we are clarifying the

8
Now at 42 C.F.R. § 413.134(k).
9
The 2000 PM expired in 2001. An identical PM was
issued in 2001, but the parties refer to and cite the 2000 PM.

13
applicability of the [Bona Fide Sale Provision and Related
Parties Regulation] sections to such mergers or consolidations.”
App. at 653.

With respect to the Bona Fide Sale Provision, the 2000
PM clearly stated that a merger must constitute a bona fide sale,
noting:

Unlike for-profit mergers or consolidations, which are
typically driven by the ownership equity interests to seek
fair market value for the assets involved in the
transaction, many non-profit mergers and consolidations
have only the interests of the community-at-large to drive
the transaction.

App. at 655. The 2000 PM defined a bona fide sale as one
negotiated at “arm’s-length” between unrelated parties and
involving “reasonable consideration.” App. at 655. It continued
that “a large disparity between the sales price (consideration) and
the fair market value of the assets sold indicates the lack of a
bona fide sale.” App. at 655 (emphasis omitted).

Regarding its interpretations of both the Bona Fide Sale
Provision and the Related Parties Regulation, the 2000 PM
stressed that it was not establishing new rules: “This PM does
not include any new policies regarding mergers or consolidations
involving non-profit entities.” App. at 656.

IV.

Discussion

The Administrator denied Einstein’s claim because he
concluded that the 1997 merger did not constitute a bona fide
sale and because the merger occurred between related parties.
Because either of these findings, if correct, was a sufficient
independent basis on which to deny Einstein’s claim, we will
limit our focus to the bona fide sale issue. See Robert F.
Kennedy Med. Ctr. v. Leavitt, 526 F.3d 557, 563 (9th Cir. 2008)
(declining to reach the related parties issue because the bona fide

14
sale issue “is dispositive in this case”).

A. The Administrator’s Regulatory Interpretation

Einstein argues that a merger is not a sale and, therefore,
is not subject to the Bona Fide Sale Provision. In support of this
argument, Einstein relies on a letter written by William Goeller
in 1987 when he was HCFA’s Director of the Division of
Payment and Reporting Policy in the Office of Reimbursement
Policy at the Bureau of Eligibility, Reimbursement and
Coverage. This letter does not mention that a merger must be a
bona fide sale and instead states that, “[f]or purposes of
calculating the gain or loss, the amount of the assumed debt
would be used as the amount received for the assets.” App. at
129. The significance of this letter as support for Einstein’s
position is questionable as the letter also states that whether a
gain or loss is recognized will be governed by 42 C.F.R. §
413.134(f), which encompasses the Bona Fide Sale Provision.

Einstein also relies on a letter from Charles R. Booth,
another former agency official, and on the testimony of former
HCFA officials, Michael Maher and Eric Yospe. See
Appellant’s Br. at 45-46. Citing our decision in Mercy Home
Health, 436 F.3d at 378-79, the Secretary argues that “statements
from former subordinate officials are not owed deference;
instead, it is the Secretary’s announced interpretation to which
deference is due.” Appellee’s Br. at 49-50 n.14. Although
Mercy Home Health does not stand for the proposition that
statements of former officials are owed no deference, we agree
with the Secretary to the extent that his “announced
interpretation[s]” are owed greater deference.

We agree with Judge Buckwalter’s analysis of the
relationship between the Statutory Merger Provision and the
Bona Fide Sale Provision as follows:

[T]he Statutory Merger Regulation specifically references
42 C.F.R. § 413.134(f), stating, “If the merged
corporation was a provider before the merger, then it is
subject to the provisions of paragraphs (d)(3) and (f) of

15
 this section concerning recovery of accelerated
depreciation.” 42 C.F.R. § 413.134[(k)(2)(i)]. A
reasonable interpretation of this provision is that
recognition of a loss resulting from a statutory merger is
only permitted if otherwise allowed under paragraph (f).
Under paragraph (f), the treatment of the gain or loss
depends upon the manner of disposition of the asset. 42
C.F.R. § 413.134(f)(1). Paragraphs (f)(2) th[r]ough (f)(6)
identify the specific means through which a depreciable
asset can be disposed including, bona fide sale or
scrapping; exchange, trade-in or donation; demolition or
abandonment; or involuntary conversion. Id. at §
413.134(f)(2)-(f)(6). Of all the circumstances listed, the
disposition most applicable to the present case is the bona
fide sale requirement.

Einstein, 2007 WL 2221417, at *12. The Court concluded,
therefore, that the Administrator’s interpretation of the merger
regulation to require that the transaction constitute a bona fide
sale was reasonable.

In addition to arguing that the Bona Fide Sale Provision
does not apply to mergers, Einstein argues that the
Administrator’s interpretation of this provision is inconsistent
with prior agency statements. In its decision in this case, the
Administrator, quoting the 2000 PRM, held 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. An arm’s length
transaction . . . is negotiated by unrelated parties, each acting in
its own self-interest.” App. at 62. Einstein, noting that this
definition is found in the 2000 PRM Amendment and the 2000
PM, argues that this interpretation was impermissibly applied
here because it was not articulated until after the 1996 merger at
issue. Einstein, citing Black’s Law Dictionary, argues that a
“bona fide sale” is simply one in which “valuable consideration”
is given. It argues, therefore, that any disparity between the fair
market value of its assets and the amount of consideration it
received from New Germantown (in the form of assumption of
liabilities) is irrelevant.

16
 The Secretary responds that 42 C.F.R. § 413.134(b)(2)
requires that “a sale cannot be ‘bona fide’ if it is not an exchange
for fair value.” Appellee’s Br. at 31. This regulatory provision
defines “fair market value” as “the price that the asset would
bring by bona fide bargaining between well-informed buyers and
sellers at the date of acquisition.” 42 C.F.R. § 413.134(b)(2).
We note that the regulation may not have the significance
ascribed to it by the Secretary as it defines fair market value, not
bona fide sale. However, this regulation demonstrates the
agency’s understanding of a relationship between a bona fide
sale and fair market value.

The Secretary argues that the agency “has looked to the
reasonableness of consideration since long before the transaction
at issue in this case.” Appellee’s Br. at 31. For example, in
Hosp. Affiliates Int’l., Inc. v. Schweiker, Medicare denied
reimbursement because a sale was not bona fide and held:
“There is no evidence in the record that the purchase price bore
any relation to the actual value of the property. Without such
evidence, no determination of the transaction’s being bona fide
is appropriate.” 543 F. Supp. 1380, 1389 (D. Tenn. 1982)
(emphasis omitted). This case shows that, contrary to Einstein’s
contention, at least as early as 1982 the agency looked to the fair
market value when conducting the bona fide sale inquiry.

Einstein points to decisions that it contends hold that sales
were bona fide even though the consideration paid was less than
the appraised value of the assets. However, as the Secretary
correctly notes, in each of those cases “the Board found that
parties with adverse interests had negotiated at arm’s length to
arrive at reasonable consideration for the exchange.” Appellee’s
Br. at 32 n.8 (citing Vallejo Gen. Hosp. v. Bowen, 851 F.2d 229,
232 (9th Cir. 1988); Ashland Reg’l Med. Ctr. v. Blue Cross &
Blue Shield Ass’n/Blue Cross & Blue Shield of W. Pa., 1998
Medicare & Medicaid Guide 57,577 (P.R.R.B. 1998);
Edgecombe Gen. Hosp. v. Blue Cross & Blue Shield Ass’n/Blue
Cross & Blue Shield of N.C., 1993 Medicare & Medicaid Guide
37,394 (P.R.R.B. 1993); Lac Qui Parle Hosp. of Madison, Inc. v.
Blue Cross & Blue Shield Ass’n/Blue Cross & Blue Shield of
Minn., 1995 Medicare & Medicaid Guide 44,473 (P.R.R.B.

17
1995)). For instance, in Vallejo Gen. Hosp. v. Bowen, the
Administrator considered the sale of an asset from one hospital
to another and deemed the sale price to be the fair market value
because “it is in the interest of both parties bargaining rationally
at arm[’]s-length to evaluate accurately the [assets].” 851 F.2d
at 232.

Having considered these cases, we conclude that the
agency’s requirement that a bona fide sale be one in which
“reasonable consideration” is exchanged is not inconsistent with
the agency’s previous statements. The Tenth Circuit recently
came to the same conclusion in Via Christi Reg’l Med. Ctr., 509
F.3d 1259 (10th Cir. 2007). It stated, “[e]ven if the Secretary
further clarified the definition of ‘bona fide sale’ in interpretive
materials issued after the consolidation in this case, [the
hospital] was on notice that § 413.134(f) and its ‘bona fide sale’
requirement would be more than a nullity.” Id. at 1276; see also
Robert F. Kennedy Med. Ctr., 526 F.3d at 563 (upholding the
Administrator’s decision that a transfer of $50 million in assets
for $30.5 million in “consideration” was not a “bona fide sale”).

Moreover, requiring “reasonable consideration” is in
keeping with the underlying and long-standing purpose of the
Medicare Act, i.e., to reimburse for only actual and reasonable
costs. 42 U.S.C. § 1395x(v)(1)(A). For that reason, we
conclude that an interpretation of the Bona Fide Sale Provision
that would permit hospitals to sell their assets at less than
reasonable value and, as a result, gain reimbursement for losses
that do not reflect losses actually incurred would be
impermissible as contrary to the Medicare statute. Therefore, we
hold that the 2000 PRM Amendment and the 2000 PM offered a
clarification of the Bona Fide Sale Provision that was not
inconsistent with previous agency policy. It follows that the
Administrator did not commit an error of law in applying the
bona fide sale requirement to Einstein’s claim.

B. Substantial Evidence Supported the
Administrator’s Decision

The Administrator’s finding that the Old

18
Germantown/New Germantown merger was not a bona fide sale
is supported by substantial evidence in the record. First, it does
not appear that Old Germantown and AEHN negotiated at arm’s
length. Instead, the record shows that Old Germantown
consistently acted with the well-being of the new entity in mind
and had no incentive of its own to bargain for more. It
negotiated for $6 million in “contingent consideration” from
AEHN, which would only benefit New Germantown. App. at
64. Indeed, Ricci conceded in his testimony before the PRRB
that Old Germantown never tried to get this $6 million as part of
the sale price to Old Germantown. Moreover, Old Germantown
was concerned with structuring the transaction in order to
maximize Medicare reimbursement, a gain that would also
benefit only New Germantown. In essence, the evidence showed
that the motivation of Old Germantown’s Board in negotiating
with AEHN was not to maximize the consideration paid by
AEHN but rather to assure the success of Old Germantown’s
mission in the future (i.e., delivering quality health services to its
community). We do not suggest that there was anything
inappropriate in such a motivation. Old Germantown’s
willingness to bargain for benefits that would only inure to New
Germantown - while laudable with respect to its commitment to
the community - shows that the parties did not negotiate the
terms of this merger at arm’s length.

Second, the Administrator’s finding that New
Germantown did not give reasonable consideration was
supported by ample evidence. Einstein does not dispute that Old
Germantown surrendered $72.4 million in assets for New
Germantown’s assumption of $34.2 million in debt and $6
million in contingent consideration, a discrepancy of
approximately $32 million.10 Einstein argues that Old

10
The District Court arrived at different figures, amounting
to a discrepancy of $35.2 million. We refer to the Administrator’s
findings, which both parties cite in their briefs. See Appellant’s
Br. at 53-55; Appellee’s Br. at 34-35. Einstein argues that the
balance sheets do not reflect fair market value because they include
unknown liabilities and because Old Germantown could not access

19
Germantown chose “‘the best deal that was on the street at that
time.’” Appellant’s Reply Br. at 25 (quoting Ricci Testimony,
App. at 693). However, the Administrator found that the PHS
proposal could have resulted in a net gain of $27 million.
Einstein now argues that the PHS offer actually would have
resulted in a loss of $10 million because Old Germantown’s total
debt was $34 million, which it could not cover with its $18
million in non-endowment fund assets, and it could not access
the $37.9 million in principal of the endowment funds to pay this
debt. The Administrator rejected Einstein’s current explanations
because “these reasons were not on [their] face self-evident at
the time of the proposal and in part are comprised of conjectures.
Thus, they do not explain the Provider’s failure to follow-up at
that time on [PHS’s] proposal. It does suggest that interests,
other than monetary, were more primary to a successful deal for
the Provider.” App. at 64. The Administrator concluded that, at
the very least, Old Germantown should have followed up with
PHS to negotiate more favorable terms.

Einstein also argues that the consideration was reasonable
because the almost $38 million in endowment funds “were . . .
limited use assets and were not the equivalent of $38 million in
cash that New Germantown could immediately use as
necessary.” Appellant’s Br. at 55. That is admittedly so.
However, as the Secretary points out, Einstein’s own accountant
(albeit not on this transaction) testified before the PRRB that
approximately $37 million was the fair market value of the
endowments. Even if the fair market value of these funds should
have been discounted to adjust for the fact that they were
limited-use, that adjustment could hardly make up for a
discrepancy of $32 million.11

the principal of the endowment funds. However, Einstein does not
suggest alternate values for these assets that would make the
discrepancy reasonable.
11
Einstein also argues that New Germantown’s assumption
of unknown liabilities drove the sale price lower. Einstein points
to liabilities incurred after the merger as proof. However, at the
time of the Merger, Old Germantown warranted that it had no

20
 In addition, Einstein argues that the “Secretary’s
argument that Old Germantown received no benefit in exchange
for ‘surrendering’ its Medicare loss claim makes no sense
because that would be the case in every merger,” because all the
assets (including a Medicare claim) pass, by operation of law, to
the surviving entity. Appellant’s Reply Br. at 22-23. That is an
inadequate response to the point made by the Secretary. The
merger between the two healthcare providers was structured to
maximize Medicare reimbursement. There was nothing
improper in that effort, but the Secretary was not obliged to
accommodate that wish. Medicare determined how much it
would owe Old Germantown by comparing the consideration
received in the merger for the assets with the assets’ net book
value (i.e., their original purchase price, minus the actual
recognized annual depreciation). The difference would
determine whether Old Germantown received a loss or a gain. It
therefore appears that the only reason that Old Germantown was
able to claim a loss was because it sold its assets for far less than
their value. Because Old Germantown was a non-profit
organization - rather than a corporation with equity stake holders
- it suffered no loss by selling its assets for less than their value.
The Administrator could reasonably conclude that it was not a
bona fide sale.

Therefore, because we conclude that the Administrator’s
interpretation of the Bona Fide Sale Provision was reasonable
and his application of the rule to the Germantown merger was
based on substantial evidence, we uphold the Administrator’s
denial of the loss claim on the ground that the merger did not in
fact constitute a bona fide sale. Because this is an independent
ground upon which the Administrator denied the claim, we need
not address whether the parties were “related” within the
meaning of 42 C.F.R. § 413.17, and decline to do so.

undisclosed material liabilities. Moreover, it is hard to imagine
how an adjustment in price for this risk could account for such a
large discrepancy between consideration given and the market
value of the assets.

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 C. Einstein’s Other Arguments

Einstein makes numerous additional arguments, which the
District Court succinctly characterized as follows: “Generally,
Plaintiff is arguing that the Secretary’s continuity of control and
bona fide sale positions conflict with the Statutory Merger
[Provision’s] plain terms and/or prior interpretations, thus
effectively resulting in a new regulation, which was issued
contrary to numerous statutory safeguards.” Einstein, 2007 WL
2221417, at *14. For instance, Einstein argues that the 2000 PM
was a new rule that was a “‘fundamental modification of a
previous interpretation’” and, therefore, required formal notice
and comment rulemaking under the APA. Appellants Br. at 66
(quoting SBC Inc. v. FCC, 414 F.3d 486, 498 (3d Cir. 2005)).

These arguments hinge on whether the 2000 PM (stating
that mergers are subject to a “continuity of control test” and the
Bona Fide Sale Provision) and the 2000 PRM Amendment
(stating that a bona fide sale requires arm’s length negotiation
and reasonable consideration) are inconsistent with prior agency
interpretations. Essentially, the arguments turn on whether these
agency statements are legislative or interpretive rules. We have
previously described the difference in this way:

Legislative rules are subject to the notice and comment
requirements of the APA because they work substantive
changes in prior regulations or create new law, rights, or
duties. [Interpretive] rules, on the other hand, seek only to
interpret language already in properly issued regulations. .
. . [Interpretive], or procedural, rules do not themselves
shift the rights or interests of the parties, although they
may change the way in which the parties present
themselves to the agency. . . . [Interpretive] or
procedural rules and statements of policy are exempted
from the notice and comment requirement of the APA.

SBC Inc., 414 F.3d at 497-98 (quotations and citations omitted).

After consideration of the parties’ arguments, we
conclude that the agency’s interpretation of the Bona Fide Sale

22
Provision is consistent with previous agency statements and in
keeping with the underlying policy of the Medicare Act.
Moreover, these interpretations did not retroactively alter
Einstein’s legal rights or duties. As noted above, prior agency
statements, such as those in the 1982 case of Hosp. Affiliates
Int’l, 543 F. Supp. at 1389, put Old Germantown “on notice that
§ 413.134(f) and its ‘bona fide sale’ requirement would be more
than a nullity.” Via Christi, 509 F.3d at 1276. We hold that the
2000 PM and 2000 PRM Amendment are “interpretive rules”
that did not require notice and comment rulemaking. Therefore,
Einstein’s arguments with respect to improper rulemaking are
without merit.

V.

Conclusion

We will accordingly affirm the District Court order
granting summary judgment in favor of the Secretary for the
reasons set forth above.

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