United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 7, 2010 Decided July 6, 2010
No. 09-5352
ST. LUKE’S HOSPITAL,
APPELLANT
v.
KATHLEEN SEBELIUS, SECRETARY OF
HEALTH AND HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:08-cv-00883-JR)
Robert E. Mazer argued the cause for the appellant. Leslie
DeMaree Goldsmith was on brief. James P. Holloway entered
an appearance.
Joel McElvain, Attorney, United States Department of
Justice, argued the cause for the appellee. Ronald C. Machen,
Jr., United States Attorney, and Michael S. Raab, Attorney,
David S. Cade, Acting General Counsel, and Janice Hoffman,
Associate General Counsel, United States Department of Health
and Human Services, were on brief. R. Craig Lawrence,
Assistant United States Attorney, entered an appearance.
Before: GINSBURG, HENDERSON and GARLAND, Circuit
Judges.
2
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: Appellant St.
Luke’s Hospital (St. Luke’s), a non-profit hospital located in
Bethlehem, Pennsylvania, submitted to the Centers for Medicare
and Medicaid Services (CMS)1 a claim for reimbursement
regarding a $2.9 million loss allegedly incurred by Medicare
provider Allentown Osteopathic Medical Center (Allentown)
when it merged with St. Luke’s through a “statutory merger.”
St. Luke’s claimed as its loss the difference between the portion
of the merger consideration ($4,848,188.60 in debt assumption)
allocable to its depreciable assets and those assets’ net book
value. CMS disallowed the claim on the ground the merger
lacked “reasonable consideration” and was therefore not a “bona
fide” transaction as required for revaluation and loss
reimbursement under 42 C.F.R. § 413.134(f) and (l).2 St.
Luke’s sued the HHS Secretary in district court challenging the
denial of its reimbursement claim. The district court granted
summary judgment to the Secretary holding, inter alia, the
Secretary had reasonably interpreted her own regulation to
require that reasonable consideration be paid before depreciable
assets may be revalued and the resulting losses reimbursed. St.
Luke’s Hosp. v. Sebelius, 662 F. Supp. 2d 99 (D.D.C. 2009).
We affirm.
1
CMS, formerly the Health Care Financing Administration
(HCFA), administers the Medicare program on behalf of the Secretary
of the United States Department Health and Human Services (HHS).
St. Elizabeth's Med. Ctr. of Boston, Inc. v. Thompson, 396 F.3d 1228,
1230 (D.C. Cir. 2005).
2
The statutory merger provisions appeared in subsection (l) of 42
C.F.R. § 413.134 at the time of the merger in January 1997 and we
therefore cite thereto. The subsection has since been redesignated
without change as subsection (k). See 65 Fed. Reg. 8660, 8662 (Feb.
22, 2000).
3
I.
A Medicare provider is entitled to compensation for the
“reasonable cost” of Medicare services, 42 U.S.C. § 1395f(b)(1),
which, pursuant to the Secretary’s depreciation regulation,
includes an “appropriate allowance for depreciation on buildings
and equipment.” 42 C.F.R. § 413.134(a). The depreciation
allowance for an asset is generally based on its “historical cost,”
id. § 413.134(a)(2)—i.e., “the cost incurred by the present owner
in acquiring the asset,” id § 413.134(b)(1)—“[p]rorated over the
estimated useful life of the asset.” Id. § 413.134(a)(3). The
resulting annual allowance is reimbursable to the extent the asset
is used to provide Medicare services. In other words, the annual
reimbursable allowance is equal to the actual cost divided by the
number of years of its useful life and then multiplied by the
percentage of the asset’s use devoted to Medicare services in the
given year.
In addition to an annual depreciation reimbursement,
historically, a provider could receive a credit (or debit) upon
disposition of the asset if the disposition resulted in a gain (or
loss).3 Under the depreciation regulation, an asset’s gain or loss
is equal to the difference between the consideration received
upon disposition and its “net book value,” which consists of the
Medicare depreciable basis (generally the historical cost) less
past Medicare depreciation allowances, 42 C.F.R.
§ 413.134(b)(9). See Lake Med. Ctr. v. Thompson, 243 F.3d
568, 569 (D.C. Cir. 2001). If the disposition of an asset before
December 1, 1997 result[ed] in a gain or loss under this regime,
3
In 1997, the Congress amended the Medicare Act to eliminate
depreciation adjustments for assets after December 1, 1997, Balanced
Budget Act of 1997, Pub. L. No. 105-33, § 4404, 111 Stat. 251, 400
(1997), and the Secretary amended the regulation accordingly, 63 Fed.
Reg. 1379, 1380-82 (Jan. 9, 1998).
4
“an adjustment is necessary in the provider’s allowable cost.”
42 C.F.R. § 413.134(f)(1).
Under subsection (f) of the depreciation regulation, the
“treatment of the gain or loss depends upon the manner of
disposition of the asset.” Id. § 413.134(f)(1). If an asset is
disposed of through a “bona fide” sale, the treatment is
straightforward: If there is a gain, the selling provider must
compensate Medicare therefor; if there is a loss, Medicare
reimburses the provider. Id. § 413.134(f)(2). If the sale of the
assets is not a bona fide transaction, the regulation does not
provide for any adjustment.4 Under subsection (l), if the
disposition is through a “statutory merger”—i.e., “a combination
of two or more corporations under the corporation laws of the
State, with one of the corporations surviving”—the merged
corporation “is subject to the provisions of paragraph[] . . . (f) of
[section 413.134] concerning . . . the realization of gains and
losses.” Id. § 413.134(l) (1997) (now § 413.134(k)). According
to the preamble to the proposed rule, subsection (l)(2) “points
out that a statutory merger is treated as a sale of assets.” Fed.
Health Ins. for the Aged and Disabled, Establishment of Cost
Basis on Purchase of Facility as an Ongoing Operation, and
Transactions Involving Provider’s Capital Stock, 42 Fed. Reg.
17,485, 17,485 (proposed Jan. 17, 1977). This case involves
such a statutory merger.
Allentown and St. Luke’s, each a Medicare provider, signed
a merger agreement on October 16, 1996, under which the
4
Under subsection (f)(2), an asset disposed of by “scrapping” is
treated like one disposed of in a bona fide sale. Other provisions of
subsection (f) govern disposal of assets by sale within one year
following termination of the provider’s Medicare participation,
exchange, trade-in or donation, demolition or abandonment,
involuntary conversion and sale of a replacement or restored asset. 42
C.F.R. § 413.134(f)(3)-(8).
5
former was to merge with the latter effective January 1, 1997,
with St. Luke’s as the surviving entity.5 For its part, St. Luke’s
agreed to (1) continue operating an acute inpatient services
hospital at Allentown’s campus for a minimum of two years
(provided that a specified operating loss was not incurred) and
indefinitely thereafter (provided that a cumulative operating
surplus was maintained) and (2) invest in the Allentown
“campus plant, equipment, programs, and services based on a
well-defined plan that meets community needs and is
economically responsible and feasible.” Confidential Merger
Agreement § 2.5, JA 188-89.
The merger went through as planned and all of Allentown’s
assets totalling approximately $25.1 million were transferred to
St. Luke’s. As consideration to Allentown, St. Luke’s assumed
Allentown’s debt in the amount of approximately $4.8 million.
After allocating the consideration among all of the transferred
assets, St. Luke’s filed a Medicare reimbursement claim
totalling approximately $2.9 million for fiscal year 1996,
treating the difference between the net book value of the
5
The “statutory merger” was effected pursuant to Pennsylvania
state law which provides: “Any two or more domestic nonprofit
corporations . . . may, in the manner provided in this subchapter, be
merged into one of such domestic nonprofit corporations, hereinafter
designated as the surviving corporation . . . .” 15 Pa. Cons. Stat.
§ 5921. Once merged, “the several corporations parties to the merger
or consolidation shall be a single corporation” and “[t]he separate
existence of all corporations parties to the merger . . . shall cease,
except that of the surviving corporation.” Id. § 5929(a). “Except as
otherwise provided by order, if any, obtained pursuant to section
5547(b) (relating to nondiversion of certain property), all the property,
real, personal and mixed, and franchises of each of the corporations
parties to the merger or consolidation, and all debts due on whatever
account to any of them . . . shall be deemed to be vested in and shall
belong to the surviving or new corporation . . . .” Id. § 5929(b).
6
depreciable assets and their allocated consideration as a loss.
The Medicare fiscal intermediary denied St. Luke’s claim and
St. Luke’s filed an appeal with the Provider Reimbursement
Review Board (PRRB).6
In October 2000, while the appeal was pending, the
Secretary issued a guidance document to determine if a statutory
merger triggers a revaluation of the merged entity’s depreciable
Medicare assets. Clarification of the Application of the
Regulations at 42 CFR 413.134(l) to Mergers and
Consolidations Involving Non-profit Providers, Program
Memorandum A-00-76 (Oct. 19, 2000) (PM A-00-76)
(republished as PM A-00-96 (2001)). The document clarified
that subsection (l)’s cross reference to subsection (f) requires
that for “mergers and consolidations involving non-profit
providers[,] . . . as with transactions involving for-profit entities,
in order for Medicare to recognize a gain or loss on the disposal
of assets, the merger or consolidation must occur between or
among parties that are not related as described in the regulations
at 42 CFR 413.17 and the transaction must involve one of the
events described in 42 CFR 413.134(f) as triggering a gain or
loss recognition by Medicare (typically, a bona fide sale, as
defined in the [Provider Reimbursement Manual (PRM)] at
§104.24[)].” PM A-00-76 at 1 (emphasis added); see also id. at
6
A Medicare provider submits a yearly cost report to a fiscal
intermediary (typically a private insurance company acting on the
Secretary’s behalf), which determines the reimbursement amount
owed the hospital for the cost reporting year. Baptist Mem’l Hosp. v.
Sebelius, 603 F.3d 57, 60 (D.C. Cir. 2010) (citing 42 C.F.R.
§ 405.1803). A provider dissatisfied with the determination may
appeal to the PRRB. Id. (citing 42 U.S.C. § 1395oo(a), (f)). The
Secretary, on her own motion, may reverse, affirm or modify the
PRRB’s decision within 60 days. 42 U.S.C. § 1395oo(f)(1). The
provider may then seek review of the PRRB’s or the Secretary’s
decision in district court. Id.
7
3 (“Notwithstanding the treatment of the transaction for
financial accounting purposes, no gain or loss may be
recognized for Medicare payment purposes unless the transfer
of the assets resulted from a bona fide sale as required by
regulation 413.134(f) and as defined in the PRM at §104.24.”).
PRM § 104.24, referenced in PM A-00-76, provides that a “bona
fide sale” includes, inter alia, payment of “reasonable
consideration” for the depreciable assets: “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 (emphasis added). PM A-00-
76 elaborates on what constitutes reasonable consideration:
As with for-profit entities, in evaluating whether a
bona fide sale has occurred in the context of a merger
or consolidation between or among non-profit entities,
a comparison of the sales price with the fair market
value of the assets acquired is a required aspect of such
analysis. As set forth in PRM § 104.24, reasonable
consideration is a required element of a bona fide sale.
Thus, 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. With regard
to non-profit mergers or consolidations, often the sales
price consists of assumed debt only, but may also
include cash and/or new debt. Non-monetary
consideration, such as a seller’s concession from a
buyer that the buyer must continue to provide care for
a period of time or to provide care to the indigent, may
not be taken into account in evaluating the
reasonableness of the overall consideration (even
where such elements may be quantified in dollar
8
terms). These factors are more akin to goodwill than
to consideration.
PM A-00-76 at 3.
In January 2008, the PRRB issued its decision which
reversed the Medicare fiscal intermediary and allowed St.
Luke’s claim. Shortly thereafter, CMS, reviewing the PRRB
decision pursuant to 42 U.S.C. § 1395oo(f)(1), supra note [6],
issued a final agency decision reversing the PRRB and denying
the claim. Allentown Osteopathic Med. Ctr. v. Blue Cross Blue
Shield Ass’n, Review of PRRB Dec. No. 2008-D15, 2008 WL
2550557 (Mar. 24, 2008) (CMS Decision). CMS noted that
Allentown did not obtain an appraisal to ascertain the assets’ fair
market value—although “a comparison of the sale price with the
fair market value of the assets acquired is . . . required,” id. at
20, 2008 WL 2550557, at *14—indicating that “factors other
than receiving the best price for its assets were motivations in
the transaction,” id. at 22, 2008 WL 2550557, at *14. In
addition, CMS found the value of the non-depreciable current
assets ($5.8 million) together with the non-current long-term
investments ($2.6 million) “well exceeded the value of the debt
assumed” ($4.8 million), which was the sole consideration for
the assets. Id. at 23, 2008 WL 2550557, at *15. Thus, CMS
observed: “As a practical matter the depreciable assets were
transferred for essentially no consideration.” Id. at 22-23, 2008
WL 2550557, at *15. “Accordingly,” CMS concluded, “as the
transaction did not involve an arm’s length transaction, the
transaction was not a bona fide sale as required under the
regulations and PRM for the recognition of a loss on the
disposal of assets.” Id. at 23, 2008 WL 2550557, at *15.
St. Luke’s sued the Secretary in district court, challenging
the denial of its claim. The district court granted summary
judgment to the Secretary on September 30, 2009, concluding
CMS did not act arbitrarily or capriciously in denying the claim
on the ground the merger was not a bona fide transaction
9
because St. Luke’s did not tender reasonable compensation for
Allentown’s assets. St. Luke’s filed a notice of appeal on
October 16, 2009.
II.
“Because we apply the same standard of review as the
district court, we proceed de novo, as if [the plaintiff] had
brought the case here on direct appeal.” Tenet HealthSystems
HealthCorp. v. Thompson, 254 F.3d 238, 244 (D.C. Cir. 2001).
Accordingly, we review the CMS Decision under the
Administrative Procedure Act to determine whether it is
“arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law,” 5 U.S.C. § 706(2)(A). See 42 U.S.C.
§ 1395oo(f)(1) (district court action “shall be tried pursuant to
the applicable provisions under chapter 7 of Title 5”). In so
reviewing, we “give substantial deference to an agency’s
interpretation of its own regulations,” according the agency’s
interpretation thereof “controlling weight” unless it be “plainly
erroneous or inconsistent with the regulation.” Thomas Jefferson
Univ. v. Shalala, 512 U.S. 504, 512 (1994). Our “broad
deference is all the more warranted when, as here, the regulation
concerns ‘a complex and highly technical regulatory program,’
in which the identification and classification of relevant ‘criteria
necessarily require significant expertise and entail the exercise
of judgment grounded in policy concerns.’ ” Id. (quoting Pauley
v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991)).
According the requisite deference, we uphold the Secretary’s
interpretation of subsections (f) and (l) of 42 C.F.R. § 413.134.
Subsection (l) by its express terms makes the merged
provider “subject to the provisions of paragraph[] . . . (f) of this
section concerning . . . the realization of gains and losses.” The
Secretary reasonably read this unrestricted cross-reference to
subsection (f) as incorporating subsection (f)(2)’s requirement
that a transaction be “bona fide” if the provider is to revalue the
assets it transfers therein. See 42 C.F.R. § 413.134(f)(2) (rules
10
for recognizing gains and losses upon “the bona fide sale . . . of
depreciable assets before December 1, 1997”). The Secretary
then interpreted “bona fide” to encompass only transactions
involving “reasonable consideration” that reflects the fair market
value of the assets transferred. This too was reasonable. Fair
market value is a hallmark of a bona fide transaction, as the
Secretary has long acknowledged. See United States v. Huber,
603 F.2d 387, 398 (2d Cir. 1979) (defining “ ‘fair market
value’ ” for Medicare asset depreciation as “ ‘price that the asset
would bring by bona fide bargaining between well-informed
buyers and sellers at the date of acquisition’ ”) (quoting 20
C.F.R. § 405.415(b)(2) (now 42 C.F.R. § 413.134(b)(2))
(emphasis added); see also Black’s Law Dictionary 534 (5th ed.
1979) (same definition); Ellis v. Mobil Oil, 969 F.2d 784, 787
(9th Cir. 1992) (“It is settled law that a bona fide offer under the
[Petroleum Marketing Practices Act] is measured by an
objective market standard. To be objectively reasonable, an
offer must approach fair market value.”) (internal quotation and
alteration omitted); accord LCA Corp. v. Shell Oil Co., 916 F.2d
434, 440 (8th Cir. 1990); and Slatky v. Amoco Oil Co., 830 F.2d
476, 483-84 (3d Cir. 1987). It is logical then to infer, as the
Secretary has done in PM A-00-76, that a “large disparity”
between the assets’ purchase price and their fair market value
indicates the underlying transaction is not in fact bona fide.
Indeed, not only is the Secretary’s a reasonable interpretation
but, unlike St. Luke’s, it leads to a reasonable result as well.
Requiring a “reasonable” sale price, which reflects real market
value, yields a gain or loss figure that approximates the actual
gain or loss the provider has incurred since acquiring the asset.
By contrast, the consideration paid in a transaction such as the
merger here—an amount that simply reflects the level of debt
the merged provider happens to carry at the time of the merger
regardless of the assets’ value—yields a figure unrelated to the
actual change in the assets’ value. Cf. St. Luke’s Hosp., 662 F.
Supp. 2d at 103 (“ ‘[I]t would be mere happenstance if the fair
11
market value of the merged entity’s assets was equal to its
known liabilities for which the surviving entity would become
responsible.’ ” (quoting Pl.’s Mot. Summ. J. 17-18 (filed Oct. 8,
2008))) (alteration in original). As a consequence, using St.
Luke’s approach, Medicare would reimburse costs the provider
has not in fact incurred—in contravention of the statutory goal
to provide reimbursement only for the “reasonable cost” of
healthcare services. 42 U.S.C. § 1395f(b)(1); see id.
§ 1395x(v)(1)(A) (“The reasonable cost of any services shall be
the cost actually incurred . . . .”); see also Depreciation:
Allowance for Depreciation Based on Asset Costs, 44 Fed. Reg.
3980, 3980 (Jan. 19, 1979) (adding provisions to 42 C.F.R. pt.
405 governing gain/loss upon disposal of depreciable assets
“intended to assure that depreciation allowed under Medicare
accurately reflects providers’ costs of using assets for patient
care”). For these reasons, we uphold the Secretary’s
interpretation of 42 C.F.R. § 413.134(f) and (l), memorialized in
PM A-00-76, because it is not “plainly erroneous or inconsistent
with the regulation.” Thomas Jefferson Univ., 512 U.S. at 512.7
Nonetheless, we address two arguments St. Luke’s makes
against applying the interpretation to the Allentown merger.8
First, St. Luke’s contends that the “reasonable
consideration” requirement is inconsistent with various HHS
authorities in existence before PM A-00-76 issued in 2000,
7
In so doing, we join the three other circuits that have addressed
the issue. See Albert Einstein Med. Ctr., Inc. v. Sebelius, 566 F.3d
368, 378 (3d Cir. 2009); Robert F. Kennedy Med. Ctr. v. Leavitt, 526
F.3d 557, 562 (9th Cir. 2008); Via Christi Reg’l Med. Ctr. v. Leavitt,
509 F.3d 1259, 1275-76 (10th Cir. 2007).
8
St. Luke’s offers a host of other arguments against the
Secretary’s application of the depreciation regulation, which we
summarily reject for the reasons stated by the district court. See 662
F. Supp. 2d at 104-05.
12
including a guidance document, opinion letters and individual
adjudications—none of which, St. Luke’s asserts, includes the
reasonable consideration requirement. We perceive no
inconsistency. While none of St. Luke’s’s authorities
affirmatively establishes a reasonable consideration
requirement, neither do they authorize reimbursement where the
consideration falls far short of fair market value. Some of the
cited documents simply recognize that depreciable assets may
be revalued under the proper circumstances, without addressing
what consideration may be required. See, e.g., Medicare
Intermediary Manual § 4502.6 (1987) (providing generic
example of merger where “gain/loss to the seller and a
reevaluation of the acquired assets to the buyer are computed”);
Letter from William Goeller, Director of the Division of
Payment and Reporting Policy, HCFA, to Irwin Cohen,
Fulbright & Jaworski, at 1 (May 11, 1997) (“[m]ergers and
consolidations of nonstock, nonprofit providers may give rise to
revaluations of assets . . . and/or adjustments to recognize
realized gains and losses” and “[i]f the transaction . . . meets the
definition of either a statutory merger or consolidation as set
forth in the regulations section . . . , then a revaluation of assets
and/or an adjustment to recognize realized gains and losses may
occur”); Letter from Charles R. Booth, Director, Office of
Payment Policy, HCFA, to Michael Maher, Partner, Coopers &
Lybrand, at 1 (Aug. 24, 1994) (agreeing transaction “appear[ed]
to be a consolidation as defined in §4.133.134(k)(3)(i) requiring
a determination of gain and loss” and addressing proper
methodology for apportioning lump sum sales price among
assets).9 The cited adjudications, on the other hand,
acknowledge, at least implicitly, the importance of bona fide
transactions and reasonable consideration, setting out
affirmative, individualized findings that the parties involved
9
Booth’s letter noted in passing that the “fair market value
exceed[ed] the sales price” but did not indicate by how much.
13
bargained in good faith and that the consideration tendered
reasonably reflected fair market value. See, e.g., Broadway Unit
of Vallejo Gen. Hosp. v. Blue Cross & Blue Shield Ass’n,
Medicare & Medicaid Guide (CCH) ¶ 34,529, at 9581-82
(HCFA Dec. 19, 1984) (noting PRRB finding that “contract met
the definition of FMV set forth in 42 CFR 405.415(b)(2)” and
“was the best evidence of FMV” and “sale was bona fide”),
aff’d, Vallejo Gen. Hosp. v. Bowen, 851 F.2d 229 (9th Cir.
1988); Ashland Regional Med. Ctr. v. Blue Cross & Blue Shield
Ass’n, 1998 WL 102268, at *12 (PRRB Feb. 27, 1998) (finding
“transaction was in fact a bona fide sale” and “parties negotiated
in good faith to establish a fair market value or sales price”); Lac
Qui Parle Hosp. v. Blue Cross, 1995 WL 933980, at *9 (PRRB
May 10, 1995) (finding “sale was an arm’s length transaction
and . . . negotiated in good faith” and upon inquiring of potential
buyers, hospital was informed, “[w]ith respect to the fair market
value of the facility, . . . the facility had very little value and
little suitability for alternative uses”); Edgecombe Gen. Hosp. v.
Blue Cross & Blue Shield Ass’n, Dec. No. 93-D87, Medicare &
Medicaid Guide (CCH) ¶ 41,704 at 37,404 (PRRB Sept. 9,
1993) (reconciling difference between repurchase price of
abandoned hospital and fair market value of functioning hospital
at time of original sale on ground each amount “recognize[d] the
reality and use of assets as of each transaction date”).10
Second, St. Luke’s contends the Secretary’s application of
the reasonable consideration requirement to the Allentown
merger was an impermissible retroactive imposition of a new
standard as set out in PM A-00-76. Again, we disagree. Within
the context of an agency adjudication, the Secretary generally
may lawfully interpret a regulation notwithstanding its
10
In any event, the PRRB’s decisions do not bind CMS or the
Secretary. See Community Care Found. v. Thompson, 318 F.3d 219,
226-27 (D.C. Cir. 2003).
14
retroactive effect; as for PM A-00-76, which memorialized the
Secretary’s interpretation, any potential retroactive effect “was
completely subsumed in the permissible retroactivity of the
agency adjudication.” Health Ins. Ass’n of Am., Inc. v. Shalala,
23 F.3d 412, 424 (D.C. Cir. 1994) (citing Clark-Cowlitz Joint
Operating Agency v. FERC, 826 F.2d 1074, 1081-86 (D.C. Cir.
1987) (en banc)). Accordingly, there was no impermissible
retroactivity.
For the foregoing reasons, the judgment of the district court
is affirmed.
So ordered.