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Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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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

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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-

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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

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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 A00-76 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

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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.

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