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Parties Involved:
Pinnacle Health Hospitals
Appellant
Kathleen Sebelius
Appellee

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Submitted May 11, 2012 Decided June 5, 2012 

No. 10-5277 

PINNACLE HEALTH HOSPITALS, AS SUCCESSOR-IN-INTEREST TO 

HARRISBURG HOPSITAL, SEIDLE MEMORIAL HOSPITAL, AND 

POLYCLINIC MEDICAL CENTER, 

APPELLANT

v. 

KATHLEEN SEBELIUS, AS SECRETARY OF HEALTH AND HUMAN 

SERVICES, 

APPELLEE

Consolidated with 10-5279 

Appeals from the United States District Court 

for the District of Columbia 

(No. 1:09-cv-00186) 

Robert E. Mazer was on the briefs for appellant. 

Tony West, Assistant Attorney General, U.S. Department 

of Justice, Ronald C. Machen Jr., U.S. Attorney, Michael 

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

Acting General Counsel, U.S. Department of Health and 

Human Services, Janice Hoffman, Associate General 

Counsel, Mark D. Polston, Deputy Associate General Counsel 

USCA Case #10-5279 Document #1377082 Filed: 06/05/2012 Page 1 of 5
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for Litigation, and Jonathan C. Brumer, Attorney, were on the 

brief for appellee. R. Craig Lawrence, Assistant U.S. 

Attorney, and David S. Cade, Attorney, U.S. Department of 

Health and Human Services, entered appearances. 

Before: GARLAND, BROWN, and GRIFFITH, Circuit 

Judges. 

Opinion for the Court by Circuit Judge BROWN. 

BROWN, Circuit Judge: In 1995, two non-profit hospitals 

in Pennsylvania consolidated to form Pinnacle Health 

Hospitals. Pinnacle subsequently submitted a Medicare 

reimbursement claim for the losses the hospitals had incurred 

through the sale of their depreciable assets in the 

consolidation. The Administrator of the Centers for Medicare 

and Medicaid Services denied Pinnacle’s claim, and that order 

became the final decision of the Secretary of Health and 

Human Services. On Pinnacle’s Administrative Procedure 

Act (APA) challenge, the district court upheld the Secretary’s 

decision in full. See Pinnacle Health Hosps. v. Sebelius, 719 

F. Supp. 2d 16 (D.D.C. 2010). 

 Pinnacle now appeals. We review de novo the district 

court’s entry of summary judgment for the Secretary, 

Calhoun v. Johnson, 632 F.3d 1259, 1261 (D.C. Cir. 2011), 

and will uphold the judgment as long as the Secretary’s ruling 

was not “arbitrary, capricious, an abuse of discretion, or 

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

Pinnacle’s primary argument is that the Secretary 

impermissibly required it to prove there had been a “bona fide 

sale” of depreciable assets to obtain reimbursement. We have 

covered much of this ground before. In St. Luke’s Hospital v. 

Sebelius, 611 F.3d 900 (D.C. Cir. 2010), we considered 

USCA Case #10-5279 Document #1377082 Filed: 06/05/2012 Page 2 of 5
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whether the Secretary reasonably applied the bona fide sale 

requirement to a reimbursement request from a participant in 

a “statutory merger.” See id. at 903–04 . Our answer was yes 

because the Secretary’s interpretation of the relevant 

Medicare regulations (42 C.F.R. § 413.134(f) and (l)), as 

memorialized in a 2000 Memorandum (PM A-00-76), was 

“not plainly erroneous or inconsistent with the regulation.”1

 

611 F.3d at 906. We explained: 

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 for 

recognizing gains and losses upon “the bona 

fide sale . . . of depreciable assets before 

December 1, 1997”). 

Id. at 905. 

 In that same Memorandum—PM A-00-76—the Secretary 

also found the bona fide sale requirement applied to 

consolidations involving non-profit Medicare providers, like 

the one here. We hold that too was not “plainly erroneous or 

inconsistent with the regulation.” Id. at 906. 42 C.F.R. § 

 

1

 42 C.F.R. 413.134(l) was redesignated without alteration as 

subsection (k) in 2000. See St. Luke’s Hosp., 611 F.3d at 901 n.2. 

We will continue to refer to it as subsection (l) because that is how 

it appeared at the time of the consolidation. 

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413.134(l)(3)(i) states that in consolidations “between two or 

more corporations that are unrelated . . . the assets of the 

provider corporation(s) may be revalued in accordance with 

paragraph (g) of this section.” Paragraph (g) does not 

explicitly or implicitly foreclose the reimbursement of losses 

from the sale of depreciable assets, which means the Secretary 

could permissibly interpret the regulations to authorize such 

reimbursement. See id. § 413.134(g). And “[i]f the Secretary 

. . . construe[s] § 413.134(l)(3)(i) as permitting depreciation 

adjustments for consolidations, then the Secretary is perfectly 

reasonable in maintaining consistency and only allowing 

depreciation adjustments that comply with § 413.134(f)”—the 

subsection that requires a bona fide sale. Via Christi Reg’l 

Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1274–75 (10th Cir. 

2007). It would be a “strange result, to say the least,” if 

consolidating providers did not have to satisfy the same bona 

fide sale requirement as merging providers. Id. at 1275. 

 As a fallback, Pinnacle contends it satisfied the bona fide 

sale requirement, but substantial evidence supports the 

Secretary’s finding to the contrary. See 42 U.S.C. § 

1395oo(f)(1) (subjecting the Secretary’s findings to the 

APA’s substantial evidence test). A bona fide sale requires 

the exchange of “reasonable consideration” for the 

depreciable assets. St. Luke’s Hosp., 611 F.3d at 905; see also 

Forsyth Mem’l Hosp., Inc. v. Sebelius, 639 F.3d 534, 538 

(D.C. Cir. 2011). Here, the Secretary determined that in the 

consolidation Pinnacle gained title to current assets that had a 

total value several million dollars greater than the total 

liabilities it took on. See Pinnacle Health Hosps., 719 F. 

Supp. 2d at 25–26. In effect, that meant Pinnacle gained title 

to the consolidating hospitals’ depreciable assets for no cost. 

That is substantial evidence the consolidating hospitals did 

not receive reasonable consideration for their depreciable 

assets, and, as a result, substantial evidence a bona fide sale 

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did not occur. See Forsyth Mem’l Hosp., 639 F.3d at 538–39 

(reaching the same conclusion). 

 Pinnacle is left to argue that the Secretary inaccurately 

calculated the value of the relevant assets and liabilities. Its 

three claims to that end are unpersuasive. First, the 

Secretary’s analysis did “reflect each Consolidating Entity’s 

precarious financial situation,” Petitioner’s Br. 29, because 

the appraisals on which the Secretary relied expressly 

accounted for demographic and structural factors that would 

affect the hospital’s future financial health. Second, whether 

or not Pinnacle is right that the analysis improperly 

considered the “net reproduction costs” rather than the “fair 

market value” of the depreciable assets, Pinnacle, which has 

the burden, did “not provide[] any evidence of the fair market 

value of the facilities determined according to its preferred 

methodology.” Pinnacle Health Hosps., 719 F. Supp. 2d at 

25 n.12. Finally, though the analysis did not explicitly 

consider the hospitals’ contingent and unknown liabilities, 

Pinnacle has not “put forth evidence tending to show . . . that 

[the hospitals’] unknown liabilities were likely particularly 

substantial,” so as to make up the several-million dollar 

disparity between the value of the assets and liabilities that 

were transferred in the consolidation. Forsyth Mem’l Hosp.,

639 F.3d at 539. 

 

 Accordingly, the district court’s order entering judgment 

for the Secretary is 

Affirmed. 

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