1

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

____________________________________

)

CENTRAL IOWA HOSPITAL )

CORPORATION, successor-in-interest )

to Iowa Lutheran Hospital, )

)

Plaintiff, )

) Civil Action No. 07-cv-00295 (RCL)

v. )

)

KATHLEEN SEBELIUS,1

of Health and Human Services, )

as Secretary )

)

Defendant. )

____________________________________)

MEMORANDUM OPINION

Before the Court is plaintiff’s Motion [14] for Summary Judgment, defendant’s CrossMotion [17] for Summary Judgment, and plaintiff’s Motion [28] for Leave to Amend Complaint. 

Upon consideration of the summary judgment motions, the memoranda in support thereof, the 

parties’ supplemental authority, the record, and the applicable law, the Court will DENY 

plaintiff’s Motion for Summary Judgment and GRANT defendant’s Cross-Motion for Summary 

Judgment. Upon consideration of plaintiff’s Motion for Leave to Amend Complaint, defendant’s

opposition, the reply thereto, the record, and the applicable law, the Court will DENY plaintiff’s 

motion. The Court’s reasoning is set forth below.

I. BACKGROUND

 1 This action was originally filed against Michael Leavitt in his official capacity as Secretary of 

the Department of Health and Human Services. Kathleen Sebelius, Mr. Leavitt’s successor as 

Secretary, has been substituted here as defendant. See Fed. R. Civ. P. 25(d).
2

This case arises from the merger of a non-profit Medicare provider, Iowa Lutheran 

Hospital (Lutheran), into Iowa Methodist Medical Center (Methodist), which has since been 

renamed Central Iowa Hospital Corporation (Central Iowa). Central Iowa, as successor-ininterest to Lutheran, sought Medicare reimbursement for losses incurred by Lutheran in the 

merger. On December 8, 2006, the Administrator of the Centers for Medicare and Medicaid 

Services (CMS) denied Central Iowa’s claim. Central Iowa challenges that denial here.

A. Statutory and Regulatory Framework

Under the Medicare statute, a provider is entitled to compensation for the “reasonable 

cost” of Medicare services. 42 U.S.C. § 1395f(b)(1). This includes an “appropriate allowance for 

depreciation on buildings and equipment.” 42 C.F.R. § 413.134(a). An asset’s depreciation 

allowance is based on its “historical cost”—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 depreciation allowance is reimbursable to the extent 

that a provider uses the asset to provide Medicare services.

In addition to annual depreciation payments, the Secretary of Health and Human Services 

has determined that the disposition of a depreciable asset may result in a gain (or loss), for which 

a provider may receive a credit (or debit). 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”—i.e., its historical cost less any previous Medicare depreciation payments. Id. § 

413.134(b)(9). If the disposition of an asset results in a loss, a provider may be reimbursed for 

Medicare’s share of that loss; conversely, if the disposition of an asset results in a gain, the 

provider must reimburse Medicare for Medicare’s share of that gain. See id. § 413.134(f).
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Under subsection (f) of the depreciation regulation, the manner in which Medicare treats 

such gains or losses “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,” subsection (f) is straightforward: Medicare 

reimburses the provider for any loss incurred in the sale, while the provider reimburses Medicare 

for any gain. Id. § 413.134(f)(2). If the transaction is not a bona fide sale, however, subsection (f) 

does not provide for any adjustment. If an asset is disposed of through a “statutory merger”—i.e., 

“a combination of two or more corporations under the corporation laws of the State, with one or 

more of the corporations surviving”—the merged corporation is subject to subsection (f)’s 

provisions on gains and losses. Id. § 413.134(k)(2)(i). This case involves such a statutory merger.

In October 2000, the Secretary issued a guideline document regarding asset disposition in 

statutory mergers. Program Memorandum A-00-76 (Oct. 19, 2000) (PM A-00-76). This

document clarifies that subsection (f)’s provisions apply to mergers involving for-profit and nonprofit providers. PM A-00-76 at 1. In both kinds of statutory merger, Medicare will recognize a 

gain or loss on the disposition of assets if two requirements are met. First, the merger “must 

occur between or among parties that are not related.” Id. Second, “the transaction must involve 

one of the events described in 42 CFR 412.134(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[)].” Id. (emphasis added). PM A-00-76 thus effectively imposes the bona 

fide sale requirement on statutory mergers.

Under PRM § 104.24, a “bona fide sale contemplates an arm’s length transaction . . . for 

reasonable consideration.” PRM § 104.24 (emphasis added). In other words, a bona fide sale 

requires payment of reasonable consideration for depreciable assets. PM A-00-76 further 

explains what constitutes reasonable consideration:
4

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 requires aspect of such analysis. . . . 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.

PM A-00-76 at 3.

B. Factual and Procedural Background

Lutheran’s merger with Methodist became effective on November 22, 1993. A.R. 356. 

Methodist, the surviving entity, was originally renamed Iowa Health System Hospital 

Corporation. A.R. 186. It has since been renamed Central Iowa. A.R. 235. Methodist’s sole 

member, renamed as Iowa Health System, continued to be the surviving entity’s sole member. 

A.R. 186, 511. As part of the merger agreement, Iowa Health System’s board had 23 members, 

11 of whom were appointed from Lutheran. A.R. 201–02, 352–53, 379. The surviving entity’s 

board had 19 members, 9 of whom were appointed from Lutheran. A.R. 202, 386–87.

Central Iowa submitted a cost report to Medicare that treated the merger as a sale of 

Lutheran’s assets. According to this report, Lutheran surrendered all of its assets, valued at $64.9 

million, to Central Iowa. As consideration to Lutheran, Central Iowa assumed Lutheran’s 

liabilities in the amount of $28.1 million. Def.’s SJM at 12, ECF No. 17; A.R. 167–68, 190–91, 

756. It is undisputed that Lutheran received no consideration for its assets beyond the assumption 

of its liabilities. See Pl.’s SJM at 36, ECF No. 14; Def.’s SJM at 12. In its cost report, Central 

Iowa claimed that it was entitled to a Medicare reimbursement of $5.4 million. This claim treated 

the difference between the net book value of Lutheran’s depreciable assets and the allocated 

consideration (i.e., the value of Lutheran’s liabilities) as a loss. A.R. 236–37.
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Medicare’s fiscal Intermediary denied the loss claim, finding that the merger was 

between related parties. A.R. 1535. Central Iowa appealed to the Provider Reimbursement 

Review Board (PRRB), which reversed the Intermediary’s denial on October 6, 2006. A.R. 56–

68. The PRRB stated that the transaction was a statutory merger, and that Lutheran and 

Methodist were unrelated parties prior to the merger. A.R. 64–67. Although Lutheran’s 

principals continued to participate on the surviving entity’s board, the PRRB found that the 

related-party determination is based on the merging entities “as they existed prior to the 

transaction.” A.R. 65–66 (emphasis in original). The PRRB then remanded the action to the 

Intermediary for a calculation of Central Iowa’s loss. A.R. 67.

On December 8, 2006, CMS reversed the PRRB’s decision, disallowing the loss claim for 

two independent reasons. A.R. 1–31. First, CMS determined that the merger was between related 

parties, noting that Lutheran’s principals continued to participate on the surviving entity’s board 

and as executives of that entity. A.R. 27. Second, CMS determined that the merger was not a

bona fide sale as required for the realization of a loss on the disposition of depreciable assets. It

found no arm’s-length bargaining, nor any attempt by Lutheran to seek fair value for its assets. 

A.R. 29. It further found that the discrepancy between the reported value of Lutheran’s assets 

and their sales price (i.e., the value of Lutheran’s liabilities) indicated that no bona fide sale had 

occurred. A.R. 29. CMS thus concluded that the merger was not a transaction that accurately 

reflected Lutheran’s actual and reasonable costs in the disposition of its Medicare assets. Its 

decision constituted the Secretary’s final decision with regard to Central Iowa’s claim for 

Medicare payment.

Central Iowa has moved for summary judgment, challenging the denial of its loss claim. 

Specifically, Central Iowa challenges CMS’s reliance on PM A-00-76, asserting that the 
6

Secretary’s regulations do not impose the bona fide sale requirement on statutory mergers. 

Central Iowa further argues that the merger was between unrelated parties and that, even if the 

bona fide sale requirement applies, the assumption of Lutheran’s debts was fair consideration for 

its assets. Finally, Central Iowa raises several procedural arguments with regard to the 

Secretary’s ability to interpret her regulations to require the denial of its loss claim. 

II. DISCUSSION

A. Standard of Review

Review of CMS’s decision is governed by 42 U.S.C. § 1395oo(f)(1), which incorporates 

the Administrative Procedure Act, 5 U.S.C. § 706. Accordingly, the Court may set aside final 

agency action only when it is “arbitrary, capricious, an abuse of discretion, or otherwise not in 

accordance with law” or “unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A),(E). Under 

familiar principles of agency review, the Court must “give substantial deference to an agency’s 

interpretation of its own regulations,” according the agency’s interpretation “controlling weight” 

unless it is “plainly erroneous or inconsistent with the regulation.” Thomas Jefferson Univ. v. 

Shalala, 512 U.S. 504, 512 (1994). “[B]road 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 requires 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)). 

B. Analysis

Central Iowa argues that the Secretary’s interpretation applying the bona fide sale 

requirement to statutory mergers is plainly contrary to her regulations. This argument fails in 

light of the Court of Appeals’ recent decision in St. Luke’s Hosp. v. Sebelius, 611 F.3d 900 (D.C. 
7

Cir. 2010). In St. Luke’s, which involved a transaction similar to the one at issue here, the Court 

of Appeals held that a merger or consolidation must qualify as a “bona fide sale” under 42 C.F.R.

§ 413.134(f) for a party to claim an adjustment to its Medicare depreciation allowance. Id. at 

905. The Court further held that the Secretary had reasonably interpreted “bona fide” to 

encompass only transactions involving “reasonable consideration” that reflects the fair market 

value of the assets transferred. Id. Accordingly, the Court upheld the Secretary’s interpretation in 

PM A-00-76 as not plainly erroneous or inconsistent with her regulations. Id. at 905–06.

Moreover, the St. Luke’s Court upheld CMS’s finding that the merger before it did not 

qualify as a bona fide sale. Id. The surviving entity, St. Luke’s Hospital, had claimed only that 

the assumption of the merged provider’s debts (valued at $4.8 million) was fair consideration for 

the surrender of its assets (valued at $25.1 million) in the merger. Id. at 903. The Court 

explained:

Requiring a “reasonable” sales 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.

Id. at 905. Under this reasoning, the assumption of liabilities will not constitute reasonable 

consideration where there is no indication that the value of the merged provider’s liabilities 

reasonably reflects the value of its assets. See St. Luke’s Hosp. v. Sebelius, 662 F. Supp. 2d 99, 

103 (D.D.C. 2009) (“If a merger involved the assumption of liabilities that closely mirrored the 

true value of depreciable assets, or involved the competitive bidding of those asserts, it might 

satisfy the bona fide sale requirements.”). 
8

Here, St. Luke’s makes clear that the Secretary’s interpretation applying the bona fide 

sale requirement to statutory mergers was reasonable. Thus, this Court need only determine 

whether CMS’s finding that Lutheran’s merger was not a bona fide sale was supported by

substantial evidence. The Court holds that there was substantial evidence to support CMS’s 

finding. As in St. Luke’s, there was a sizeable disparity between the value of Lutheran’s assets 

($64.9 million)2

 2 The parties dispute this figure in their pleadings. In its summary judgment motion, Central 

Iowa contends that Lutheran’s “business enterprise value” was only $35.5 million. Pl.’s SJM at 

35 n.8. The Secretary points out, however, that this figure excludes monetary assets. Def.’s SJM 

at 23 n.7; A.R. 917, 972. Moreover, the record indicates that Central Iowa submitted a cost report 

to Medicare claiming that Lutheran’s assets totaled $64.9 million. Def.’s SJM at 23 n.7; A.R. 38, 

46. Central Iowa does not dispute this fact. Indeed, Central Iowa concedes that “the net book 

value of all of Iowa Lutheran Hospital’s assets other than its physical assets, plus its 

construction in progress” was over $41 million. Pl.’s SJM at 34 (emphasis added). Based on the 

record, the Court finds that the total value of Lutheran’s physical and monetary assets was $64.9 

million. To the extent that Central Iowa quibbles with this figure, the Court finds that the record 

amply demonstrates that the value of Lutheran’s assets greatly exceeded the value of its 

liabilities. 

and the consideration received (the assumption of $28.1 million in liabilities) for 

those assets. Central Iowa does not suggest that Lutheran received any consideration beyond the 

assumption of its liabilities. See Pl.’s SJM at 12, 33–36; Pl.’s Reply at 18–20, ECF No. 20.

Instead, Central Iowa attempts to demonstrate that the transaction was a bona fide sale by 

arguing that Lutheran also transferred “untold, unknown liability potentials” in the merger. A.R. 

191; Pl.’s Reply at 20. But as the Secretary argues, Central Iowa has made no attempt to 

calculate the value of potential liabilities, nor has it asserted that the merging parties viewed the 

assumption of such liabilities as consideration for Lutheran’s assets. See Pl’s SJM at 35–36; Pl.’s 

Reply at 19–20. Rather, the record simply indicates that the “sales price” of Lutheran’s assets 

reflected its level of debt—not the real market value of its assets. 
9

Substantial evidence thus supports CMS’s finding that Lutheran did not dispose of its 

assets in a bona fide sale. Therefore, CMS properly denied Central Iowa’s claim for a loss in the 

value of those assets. As noted above, CMS cited two independent reasons for its denial. Because

there was substantial evidence to support the finding that the merger was not a bona fide sale, the 

Court need not address the related-party basis of CMS’s denial.

Central Iowa also raises several procedural arguments to dispute the Secretary’s ability to 

interpret her regulations to require the denial of its loss claim. Namely, Central Iowa contends 

that the Secretary changed her interpretation and failed to provide a rational explanation for 

doing so; that her interpretation violates the Deficit Reduction Act of 1984 and the Congressional 

Rule Act; that her interpretation is an impermissible retroactive imposition of a new standard, as 

memorialized in PM A-00-76; and that she did not follow APA rulemaking procedures to 

announce her new interpretation. The same arguments were raised in St. Luke’s, and the district 

court rejected each one in turn. See 662 F. Supp. 2d at 104–05. The Court of Appeals summarily 

rejected these arguments for the same reasons as the district court. See 611 F.3d at 906 n.8. With 

regard to the claim of impermissible retroactivity, the Court of Appeals explained that “the 

Secretary generally may lawfully interpret a regulation notwithstanding retroactive effect.” Id. at 

907. For those reasons enumerated by the district court and Court of Appeals in St. Luke’s, this 

Court rejects each of Central Iowa’s procedural arguments. 

III.PLAINTIFF’S MOTION FOR LEAVE TO AMEND COMPLAINT

On February 7, 2007, Central Iowa filed its complaint [14] in this case. On February 1, 

2008, well after the conclusion of briefing, Central Iowa filed a motion [28] for leave to amend 

its complaint. Its proposed amended complaint asserts that the Secretary violated 42 U.S.C. § 

1395hh(c)(1) by failing to timely list PM A-00-76 in the Federal Register. Under § 1395hh(c)(1), 
10

the Secretary must publish a list of all manual instructions, interpretive rules, statements of 

policy, and guidelines of general applicability every three months. PM A-00-76 was issued on 

October 20, 2000, and published in the Federal Register on June 28, 2002. The Secretary

opposes plaintiff’s motion on grounds of futility.

“While leave to amend ‘shall be freely given when justice so requires,’ a district court has 

discretion to deny a motion to amend on grounds of futility where the proposed pleading would 

not survive a motion to dismiss.” Nat’l Wrestling Coaches Ass’n v. Dept. of Educ., 366 F.3d 930, 

945 (D.C. Cir. 2004) (quoting Fed. R. Civ. P. 15(a)). Here, the Court finds that the proposed 

amendment would be futile. Central Iowa has failed to show that it suffered any prejudice from 

the publication of PM A-00-76 in June 2002, as opposed to October 2000. Indeed, the district 

court in St. Luke’s rejected a claim identical to that of Central Iowa, explaining that St. Luke’s 

Hospital had failed to show prejudice from the Secretary’s error. See 662 F. Supp. 2d at 104. The 

Court of Appeals upheld the district court’s rejection of the argument. See 611 F.3d at 906 n.8. 

Accordingly, this Court will deny Central Iowa’s motion for leave to amend its complaint.

IV.CONCLUSION

For the reasons stated herein, plaintiff’s Motion [14] for Summary Judgment will be 

DENIED, defendant’s Cross-Motion [17] for Summary Judgment will be GRANTED, and 

plaintiff’s Motion [28] for Leave to Amend Complaint will be DENIED.

A separate order consistent with this memorandum opinion shall issue this date.

Signed by Royce C. Lamberth, Chief Judge, on February 1, 2011.