Opinion ID: 170058
Heading Depth: 1
Heading Rank: 7

Heading: The Bona Fide Sale Requirement

Text: We agree with the Secretary that, in order for consolidating Medicare providers to obtain reimbursement for a depreciation adjustment, the consolidation must meet the bona fide sale requirements of 42 C.F.R. § 413.134(f). As with the related parties determination, the Secretary's interpretation of the regulations here is controlling . . . unless it is plainly erroneous or inconsistent with the regulation, and we must defer to it unless an alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation. Thomas Jefferson Univ., 512 U.S. at 512, 114 S.Ct. 2381 (citations and internal quotation marks omitted). The bona fide sale requirement is a reasonable construction of 42 C.F.R. § 413.134( l )(3)(i), supported by the text of the regulations. Section 413.134(f) is the only section expressly permitting depreciation adjustments and defining the exact circumstances under which a provider can seek such an adjustment. Several other sections refer to it directly for this purpose. For instance, § 413.130 alludes to § 413.134(f) for determining any depreciation adjustments under the regulations: Capital-related costs and an allowance for return on equity are limited to the following: (1) Net depreciation expense as determined under § § 413.134, 413.144, and 413.149, adjusted by gains and losses realized from the disposal of depreciable assets under § 413.134(f). 42 C.F.R. § 413.130(a) (emphasis added). Likewise, § 413.134( l )(2)(i) references § 413.134(f) as concerning recovery of accelerated depreciation and the realization of gains and losses in the statutory merger context. If the Secretary is going to construe § 413.134( l )(3)(i) as permitting depreciation adjustments for consolidations, [13] then the Secretary is perfectly reasonable in maintaining consistency and only allowing depreciation adjustments that comply with § 413.134(f). St. Joseph's construction, in contrast, would make depreciation adjustments easier for providers attempting consolidations than for providers undergoing asset sales or statutory mergers  a strange result, to say the least. Compliance with § 413.134(f) is also consistent with interpretive materials that the Secretary issued both before and after the consolidation in the instant case. For instance, the 1987 Letter from William Goeller stated that, in the nonprofit consolidation context, an adjustment to recognize any gain or loss to the merged/consolidated corporations would be required in accordance with regulations section 42 CFR 413.134(f). . . . 1987 Letter from William Goeller (emphasis added). Other interpretive materials likewise refer to § 413.134(f) explicitly. See 1994 Letter from Charles Booth; PM A-00-76. Of the disposals of depreciable assets listed in § 413.134(f), the only one that would apply here is the bona fide sale of § 413.134(f)(2), and the Secretary has reasonably interpreted it as applying in this case. The Secretary originally provided for depreciation adjustments under § 413.134(f) because the yearly reasonable cost depreciation reimbursements only approximated economic reality. See 44 Fed.Reg. at 3,980. In theory, at least, a bona fide sale under § 413.134(f) provided an objective measurement of an asset's worth, allowing both the Secretary and the provider to calculate the actual depreciation incurred to that point  and meriting an adjustment to previous depreciation payments. See id. Even if a consolidation or statutory merger is not a sale per se, treating it as a sale pursuant to § 413.134(f)(2) ensures that any depreciation adjustment will represent economic reality, rather than mere paper losses. [14] Additionally, the Secretary's definition of a bona fide sale in this context is reasonable and entitled to deference. See Thomas Jefferson Univ., 512 U.S. at 512, 114 S.Ct. 2381 ([T]he agency's interpretation must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation. (citations and internal quotation marks omitted)). In the instant case, the Secretary explained that a bona fide sale includes (1) arm's length bargaining, [including] an attempt to maximize any sale price, and (2) reasonable consideration. CMS Decision, ROA, Vol. II, at 755-56. This definition is consistent with the regulations and early interpretive materials. See 42 C.F.R. § 413.134(b)(2) (defining fair market value as the price that the asset would bring by bona fide bargaining between well-informed buyers and sellers at the date of acquisition, and explaining that [u]sually the fair market price is the price that bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition); Jan. 11, 1989, Memorandum; see also N. Iowa Med. Ctr. v. Dep't of Health & Human Servs., 196 F.Supp.2d 784, 787 (N.D.Iowa 2002) (Under 42 C.F.R. § 413.134(f), a sale of depreciable assets is bona fide if (a) fair market value is paid for the assets, and (b) the sale is negotiated (i) at arms' length (ii) between unrelated parties.). [15] Even if the Secretary further clarified the definition of bona fide sale in interpretive materials issued after the consolidation in this case, e.g., PM A-00-76; CHOW Workgroup P.R.M. Draft, St. Joseph was on notice that § 413.134(f) and its bona fide sale requirement would be more than a nullity. Finally, substantial evidence justified the Secretary's finding that no bona fide sale occurred here. This was not an arm's length transaction. St. Joseph admitted that it was not attempting to get the full value for its assets, but rather its primary goal was to make a decision that would advance its ministry. The principals of St. Joseph did not approach any other entity about a consolidation, and they rejected the idea of putting St. Joseph up for sale because of their desire to perpetuate Catholic health care ministry in the community. Substantial evidence thus supported the Secretary's conclusion that there is no evidence in the record of arm's length bargaining, nor an attempt to maximize any sale price as would be expected in an arms' length transaction. CMS Decision, ROA, Vol. II, at 755. Further, reasonable consideration was notably absent from the transaction, and the economic case for revaluing the depreciable assets was highly questionable. Cf. Frank Lyon Co. v. United States, 435 U.S. 561, 573, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978) (holding, in the taxation context, that the doctrine of substance over form requires the Court to look[] to the objective economic realities of a transaction rather than to the particular form the parties employed). In the bona fide sale context, the reasonable consideration inquiry involves determining whether the provider received fair market value for its assets. See Jeanes Hosp., 453 F.Supp.2d at 903; N. Iowa Med. Ctr., 196 F.Supp.2d at 787; PM A-00-76, at 3 ([I]n 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 required aspect of such analysis.). In the instant case, neither St. Joseph nor the Secretary conducted an appraisal of the assets' fair market value, and there has been some suggestion that we should remand for such a determination. See, e.g., Jeanes Hosp., 453 F.Supp.2d at 904 (remanding to the Administrator for further fact finding or similar proceedings . . . on whether the Jeanes Hospital merger was a bona fide sale). We decline to do so in this case, for two reasons. First, St. Joseph had the burden of showing that the transaction fit within § 413.134(f)'s bona fide sale provision. See Mercy Home Health v. Leavitt, 436 F.3d 370, 380 (3d Cir.2006) (The governing statutes and regulations indicate that the burden of proof remains on the provider. . . . With regard to reimbursement generally, the statute itself prohibits payment `unless [the provider] has furnished such information as the Secretary may request in order to determine the amounts due such provider' for the particular cost period at issue. (quoting 42 U.S.C. § 1395g(a)) (second alteration in original)). As early as the PRRB Hearing, St. Joseph contended that even if the bona fide sale requirement applied, the consolidation nonetheless qualified as a bona fide sale. See PRRB Decision, ROA, Vol. II, at 692. Despite this contention, St. Joseph never provided any evidence of the assets' fair market value. Second, no evidence suggests that a remand would change the result in this case. Even assuming the book value of St. Joseph's depreciable assets did not equal their fair market value, St. Joseph's cash and cash equivalents were $3.7 million, with total current assets at $29 million. As noted, the consideration for the transaction (Via Christi's assumption of St. Joseph's liabilities) was only $26.1 million. [16] Absent some record evidence to suggest that the current assets were impaired or worth significantly less, it seems purely speculative to remand to determine why St. Joseph would have sold its current assets at a material discount and its depreciable Medicare assets for nothing. As PM A-00-76 explains, the sales price (assumed liabilities) is allocated first to the cash, cash equivalents, and other current assets, so in situations where the current assets are worth more than the assumed liabilities, effectively the current assets have been sold, and the fixed assets have been given over at minimal or no cost. PM A-00-76, at 4 (Example 3). In such a situation, [b]ecause no part of the purchase price was allocated to the fixed assets, a bona fide sale of those assets has not occurred and Medicare would not recognize a loss as a result of the transaction. Id. Regardless of the fair market value of St. Joseph's depreciable assets, the consolidation at issue did not involve the reasonable consideration that a bona fide sale would produce, and St. Joseph is not entitled to Medicare reimbursement for a depreciation adjustment. Affirmed.