Opinion ID: 1469075
Heading Depth: 2
Heading Rank: 2

Heading: Substantial Evidence Supported the Administrator's Decision

Text: The Administrator's finding that the Old Germantown/New Germantown merger was not a bona fide sale is supported by substantial evidence in the record. First, it does not appear that Old Germantown and AEHN negotiated at arm's length. Instead, the record shows that Old Germantown consistently acted with the well-being of the new entity in mind and had no incentive of its own to bargain for more. It negotiated for $6 million in contingent consideration from AEHN, which would only benefit New Germantown. App. at 64. Indeed, Ricci conceded in his testimony before the PRRB that Old Germantown never tried to get this $6 million as part of the sale price to Old Germantown. Moreover, Old Germantown was concerned with structuring the transaction in order to maximize Medicare reimbursement, a gain that would also benefit only New Germantown. In essence, the evidence showed that the motivation of Old Germantown's Board in negotiating with AEHN was not to maximize the consideration paid by AEHN but rather to assure the success of Old Germantown's mission in the future (i.e., delivering quality health services to its community). We do not suggest that there was anything inappropriate in such a motivation. Old Germantown's willingness to bargain for benefits that would only inure to New Germantown  while laudable with respect to its commitment to the community  shows that the parties did not negotiate the terms of this merger at arm's length. Second, the Administrator's finding that New Germantown did not give reasonable consideration was supported by ample evidence. Einstein does not dispute that Old Germantown surrendered $72.4 million in assets for New Germantown's assumption of $34.2 million in debt and $6 million in contingent consideration, a discrepancy of approximately $32 million. [10] Einstein argues that Old Germantown chose `the best deal that was on the street at that time.' Appellant's Reply Br. at 25 (quoting Ricci Testimony, App. at 693). However, the Administrator found that the PHS proposal could have resulted in a net gain of $27 million. Einstein now argues that the PHS offer actually would have resulted in a loss of $10 million because Old Germantown's total debt was $34 million, which it could not cover with its $18 million in non-endowment fund assets, and it could not access the $37.9 million in principal of the endowment funds to pay this debt. The Administrator rejected Einstein's current explanations because these reasons were not on [their] face self-evident at the time of the proposal and in part are comprised of conjectures. Thus, they do not explain the Provider's failure to follow-up at that time on [PHS's] proposal. It does suggest that interests, other than monetary, were more primary to a successful deal for the Provider. App. at 64. The Administrator concluded that, at the very least, Old Germantown should have followed up with PHS to negotiate more favorable terms. Einstein also argues that the consideration was reasonable because the almost $38 million in endowment funds were. . . limited use assets and were not the equivalent of $38 million in cash that New Germantown could immediately use as necessary. Appellant's Br. at 55. That is admittedly so. However, as the Secretary points out, Einstein's own accountant (albeit not on this transaction) testified before the PRRB that approximately $37 million was the fair market value of the endowments. Even if the fair market value of these funds should have been discounted to adjust for the fact that they were limited-use, that adjustment could hardly make up for a discrepancy of $32 million. [11] In addition, Einstein argues that the Secretary's argument that Old Germantown received no benefit in exchange for `surrendering' its Medicare loss claim makes no sense because that would be the case in every merger, because all the assets (including a Medicare claim) pass, by operation of law, to the surviving entity. Appellant's Reply Br. at 22-23. That is an inadequate response to the point made by the Secretary. The merger between the two healthcare providers was structured to maximize Medicare reimbursement. There was nothing improper in that effort, but the Secretary was not obliged to accommodate that wish. Medicare determined how much it would owe Old Germantown by comparing the consideration received in the merger for the assets with the assets' net book value (i.e., their original purchase price, minus the actual recognized annual depreciation). The difference would determine whether Old Germantown received a loss or a gain. It therefore appears that the only reason that Old Germantown was able to claim a loss was because it sold its assets for far less than their value. Because Old Germantown was a non-profit organization  rather than a corporation with equity stake holders  it suffered no loss by selling its assets for less than their value. The Administrator could reasonably conclude that it was not a bona fide sale. Therefore, because we conclude that the Administrator's interpretation of the Bona Fide Sale Provision was reasonable and his application of the rule to the Germantown merger was based on substantial evidence, we uphold the Administrator's denial of the loss claim on the ground that the merger did not in fact constitute a bona fide sale. Because this is an independent ground upon which the Administrator denied the claim, we need not address whether the parties were related within the meaning of 42 C.F.R. § 413.17, and decline to do so.