Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-13-05090/USCOURTS-caDC-13-05090-0/pdf.json

Parties Involved:
Catholic Healthcare West
Appellant
Kathleen Sebelius
Appellee

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 11, 2014 Decided April 11, 2014

No. 13-5090

CATHOLIC HEALTHCARE WEST,

APPELLANT

v.

KATHLEEN SEBELIUS, IN HER OFFICIAL CAPACITY AS 

SECRETARY OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:11-cv-00459)

Jeffrey A. Lovitky argued the cause and filed the briefs for 

appellant.

David L. Hoskins, Attorney, U.S. Department of Health 

& Human Services, argued the cause for appellee. With him 

on the brief were Stuart F. Delery, Assistant Attorney 

General, Ronald C. Machen Jr., U.S. Attorney, Michael S. 

Raab and Joel McElvain, Attorneys, William B. Schutlz, 

General Counsel, U.S. Department of Health & Human 

Services, Janice L. Hoffman, Associate General Counsel, and 

Susan Maxon Lyons, Deputy Associate General Counsel for 

USCA Case #13-5090 Document #1487947 Filed: 04/11/2014 Page 1 of 9
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Litigation. R. Craig Lawrence, Assistant U.S. Attorney, 

entered an appearance.

Before: KAVANAUGH and PILLARD, Circuit Judges, and 

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: Plaintiff Catholic 

Healthcare West (“CHW”), a non-profit Catholic hospital

system, was the surviving entity after a merger between 

Marian Medical Center and the hospitals previously 

constituting CHW. Its claim here relates to depreciation taken 

by Marian in the years before the merger. CHW argues that 

the merger transaction revealed the inadequacy of that 

depreciation and that, under the statute and regulations 

applicable to the merger, the deficiency was subject to 

recoupment as part of Medicare providers’ general entitlement 

to compensation for the “reasonable cost” of services

rendered, 42 U.S.C. § 1395f(b)(1). The defendant Secretary 

of Health and Human Services rejected the claim, reasoning 

that the implicit selling price (namely, the value of CHW’s 

assumption of Marian’s liabilities) showed a transfer for much 

less than Marian’s true worth, so that the merger did not 

represent a “bona fide sale” between “unrelated parties,” a 

prerequisite for use of the transaction as evidence that the 

prior depreciation had been inadequate, 42 C.F.R. § 413.134. 

In reaching this conclusion the Secretary estimated Marian’s 

true worth on a basis of “cost”—meaning roughly, in this 

context, replacement cost as of the time of the merger, 

adjusted for depreciation. CHW objects, arguing that the 

choice of “cost” over other valuation approaches was arbitrary 

and was based on a guidance document that the Secretary had 

adopted without notice and comment rulemaking, namely, 

Clarification of the Application of the Regulations at 42 

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C.F.R. 413.134(l) to Mergers and Consolidations Involving 

Non-profit Providers, Program Memorandum A-00-76 (Oct. 

19, 2000) (“PM”). 

In the end we find it unnecessary to evaluate the PM’s 

effectiveness. Even under the valuation methods permitted 

prior to the PM and in fact championed by CHW here and in 

the administrative proceedings, there was a gross disparity 

between Marian’s value and the implicit price paid. We 

therefore affirm the district court’s judgment affirming the 

Secretary.

* * *

The Secretary’s regulations governing a Medicare 

provider’s reasonable costs have long provided for an 

“appropriate allowance” for depreciation in assets used for 

Medicare services. 42 C.F.R. § 413.134(a). The annual

allowance is calculated by dividing the cost of acquiring the 

asset by the asset’s years of estimated useful life, 

§ 413.134(a), and then multiplying by the fraction of the asset 

applied to Medicare services. 

The regulations also provide that for assets disposed of 

before December 1, 1997—the CHW-Marian merger occurred 

in August 1997—the Secretary will recognize gains or losses 

on the sale of an asset (defined in a way that includes this 

merger), calculated as the difference between the 

consideration received for the asset and its “net book value” 

(i.e., the cost of acquisition less previous depreciation 

payments, § 413.134(b)(9)). (The Balanced Budget Act of 

1997, Pub. L. No. 105–33, § 4404, 111 Stat. 251, 400 (1997),

amended 42 U.S.C. § 1395x(v)(1)(O) so as to eliminate the 

statutory basis for such adjustments for assets sold after 

December 1, 1997. But the recoupment scheme continues for 

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prior transactions such as the Marian-CHW merger.) So, 

subject to some conditions discussed below, if an asset is sold 

for less than its net book value, the Secretary makes an 

additional payment to the provider, reflecting an 

understanding that the previous depreciation payments fell 

short of reflecting true cost. Conversely, of course, the 

provider pays the government if the asset is sold at above 

book value. 

The regulatory conditions are aimed at ensuring that the 

consideration exchanged for a depreciable asset constitutes a 

meaningful indication of the asset’s market value, and hence a 

sound basis to assess whether a depreciation recoupment to 

(or from) the provider is in order. In particular, the Secretary 

makes such adjustments only for depreciation discrepancies 

evidenced by “bona fide sales” of depreciable assets,

§ 413.134(f)(2); the adjustments and the “bona fides” 

requirement are extended to transfers in a “statutory merger,” 

as here, by § 413.134(k)(2)1 and its incorporation of 

§ 413.134(f)’s requirements. The regulations further specify

that a triggering merger must not be between “related” parties, 

§ 413.134(k)(2)(i)-(ii), as defined in § 413.17. 

After the merger here, CHW filed a claim for a loss of 

roughly $8.1 million on the disposal of depreciable assets. In 

pursuit of that claim it then suffered a string of adjudicatory 

defeats—before a Medicare contractor, the Provider 

Reimbursement Review Board (“PRRB”), and ultimately the 

Administrator of the Centers for Medicare and Medicaid 

Services (“CMS”), whose decision was the Secretary’s final 

 1 At the time of the merger this provision was designated 

§ 413.134(l)(2). It has since then been redesignated as subsection 

(k) without change. See Medicare Payment Amounts and Technical 

Amendments, 65 Fed. Reg. 8,660, 8,662 (Feb. 22, 2000). 

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action. CMS found a large disparity between the 

consideration received and Marian’s “fair market value,” 

calculated, as we noted, on the basis of replacement cost 

adjusted for depreciation, and thus found no bona fide sale. It 

also decided that CHW and Marian were related parties for 

the purposes of the regulations, an aspect of the decision we 

needn’t address. CHW appealed to the district court, which 

dismissed the case on a motion for summary judgment. 

Catholic Healthcare West v. Sebelius, 919 F. Supp. 2d 34 

(D.D.C. 2013).

* * *

Our review is de novo, as though on direct appeal from 

the agency, Tenet HealthSystems HealthCorp. v. Thompson, 

254 F.3d 238, 244 (D.C. Cir. 2001), and under the 

Administrative Procedure Act we set aside an agency action if 

it is “arbitrary, capricious, an abuse of discretion, or otherwise 

not in accordance with law,” 5 U.S.C. § 706(2)(A); Pharm. 

Research & Mfrs. of Am. v. Thompson, 362 F.3d 817, 821 

(D.C. Cir. 2004). 

Under the Secretary’s interpretation of the regulations, 

“reasonable consideration” must be exchanged in a merger to 

support a finding of a bona fide sale. We have previously 

upheld this interpretation, St. Luke’s Hosp. v. Sebelius, 611 

F.3d 900, 905-06 (D.C. Cir. 2010), which CHW doesn’t 

contest. Recoupment may be disallowed under the regulations

either on the ground that no bona fide sale occurred, 

§ 413.134(f), or that the transaction was between related 

parties, § 413.134(k)(2). 

CHW commissioned an appraisal of Marian, which 

included a calculation of its value under three methods—

market value, income, and the Secretary’s “cost” approach. 

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CMS used the latter, arriving at a figure of approximately 

$51.1 million. That estimate excludes working capital, such 

as cash and cash equivalents. So CMS then added $15.9 

million in cash and cash equivalents transferred from Marian 

to CWH, arriving at a total of about $67 million. By 

comparison, the total consideration received by Marian was 

$32.7 million in the form of assumed liabilities, implying a 

disparity of over $34 million.

CHW argues that the Secretary erred in disregarding the 

two rival methods of valuation used in the appraiser’s report 

(the income and market approaches). The Secretary did so on 

the basis of the PM’s interpretation of the regulations. We 

have affirmed the Secretary’s invocation of the PM in two 

prior cases, Forsyth Mem’l Hosp., Inc. v. Sebelius, 639 F.3d 

534, 536-37 (D.C. Cir. 2011), and St. Luke’s Hosp., 611 F.3d 

at 905-07, but in both cases only for the anodyne view that the

regulations require a “reasonable consideration.” Neither 

involved flat-out preclusion of either the market value or the 

income method. Indeed, the PM itself, while precluding both

those methods for non-profits, offers an explanation only as to 

the income approach. See PM at 3-4. 

We can resolve the case, however, without considering 

whether the PM (or the regulations themselves) provided an 

adequate basis for excluding the market and income 

approaches. E.g., Molycorp, Inc. v. EPA, 197 F.3d 543, 546 

(D.C. Cir. 1999) (an agency may not amend a rule “under the 

guise of reinterpreting it”). Even though those approaches 

yield lower figures than does the “cost” approach, they 

indicate a value high enough to sustain the Secretary’s finding 

of a gross disparity between value and the implicit price paid 

by CHW. 

The appraiser’s report indicates that the market and 

income approaches produce value estimates of $37 million, 

and $28.5 million, respectively, excluding working capital. 

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The appraiser’s report characterizes these estimates as 

“mutually supportive,” and concludes that the market value of 

the hospital is $30 million, “including working capital.” It 

appears inescapable that the word “including” is a typo, as it 

is inconsistent with every other page in the document, see, 

e.g., Appraiser’s Report 84, 92 (recording income and marketbased estimates of $37 and $28.5 million, respectively, 

excluding working capital; corresponding estimates of $47 

and $38.5 million including working capital), inconsistencies

CHW acknowledged at oral argument, Oral Arg. Tr. 5-6. 

The Administrator’s decision was based on the large 

disparity between Marian’s value and the consideration 

received. It is true that the Administrator discusses only the 

cost approach, not the income or market approaches, and that 

we do not affirm agency decisions on a legal analysis other 

than that expressed by the agency. SEC v. Chenery Corp., 

318 U.S. 80, 95 (1943). But here, even if CHW’s proposed 

appraisal method were used, the record shows a large 

disparity between the fair market value of Marian and the 

consideration received. In view of the conclusion the 

Administrator drew from valuation under the cost approach, it 

would be futile to remand for reassessment of whether a bona 

fide sale occurred under the income or market approach.

Consider the income approach, the one most favorable to 

CHW, yielding the most conservative appraised value for 

Marian. It produces an estimate of $28.5 million, excluding 

working capital. To this we then add the appraised value of 

Marian’s “other assets,” not reflected in the $28.5 million 

figure, including vacant sites and construction in progress, a 

total of roughly $5.3 million, as well as the $15.9 million in 

cash and cash equivalent assets. Grade-level arithmetic 

reveals that, after adding these three figures, the full marketbased estimate of Marian’s value would be $49.7 million. 

The disparity between this figure and the consideration 

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received by Marian is $17 million. Thus, even by the most 

conservative estimate of Marian’s value, CHW paid only 

about 66 cents on the dollar in this transaction ($32.7 million 

exchanged for $49.7 million).

Though the parties cite no sharp rule on the size of the

disparity between value and consideration relevant to 

determining whether a bona fide sale has occurred, CHW 

bears the burden to prove a bona fide sale, Forsyth Mem’l 

Hosp., Inc., 639 F.3d at 539, and nothing in the briefing or 

administrative record suggests that a bona fide sale could be 

found in the face of such a discrepancy. Cf. Via Christi Reg’l 

Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1277 (10th Cir. 

2007) (suggesting that the reasonable consideration 

requirement would not be satisfied if $32.7 million in assets 

are exchanged for $26.1 million in consideration). 

During oral argument, CHW advanced a new argument 

that the $15.9 million in cash and cash equivalents consisted

primarily of accounts receivable, and that CHW is unlikely to 

“collect dollar for dollar,” Oral Arg. Tr. 11, suggesting a 

closer alignment between the paid consideration and Marian’s 

true value. But we do not normally consider arguments first 

sprung at oral argument. Roth v. Dept. of Justice, 642 F.3d 

1161, 1181 (D.C. Cir. 2011). Under these circumstances, we 

cannot say that the Secretary failed to consider relevant 

factors or committed a clear error in judgment when she 

determined that a bona fide sale had not occurred. See also 5 

U.S.C. § 706 (“due account shall be taken of the rule of 

prejudicial error”); City of Portland, Or. v. EPA, 507 F.3d 

706, 711 (D.C. Cir. 2007); PDK Labs. Inc. v. DEA, 362 F.3d 

786, 799 (D.C. Cir. 2004).

* * *

The judgment of the district court is 

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Affirmed. 

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