Opinion ID: 1469075
Heading Depth: 2
Heading Rank: 1

Heading: The Administrator's Regulatory Interpretation

Text: Einstein argues that a merger is not a sale and, therefore, is not subject to the Bona Fide Sale Provision. In support of this argument, Einstein relies on a letter written by William Goeller in 1987 when he was HCFA's Director of the Division of Payment and Reporting Policy in the Office of Reimbursement Policy at the Bureau of Eligibility, Reimbursement and Coverage. This letter does not mention that a merger must be a bona fide sale and instead states that, [f]or purposes of calculating the gain or loss, the amount of the assumed debt would be used as the amount received for the assets. App. at 129. The significance of this letter as support for Einstein's position is questionable as the letter also states that whether a gain or loss is recognized will be governed by 42 C.F.R. § 413.134(f), which encompasses the Bona Fide Sale Provision. Einstein also relies on a letter from Charles R. Booth, another former agency official, and on the testimony of former HCFA officials, Michael Maher and Eric Yospe. See Appellant's Br. at 45-46. Citing our decision in Mercy Home Health, 436 F.3d at 378-79, the Secretary argues that statements from former subordinate officials are not owed deference; instead, it is the Secretary's announced interpretation to which deference is due. Appellee's Br. at 49-50 n.14. Although Mercy Home Health does not stand for the proposition that statements of former officials are owed no deference, we agree with the Secretary to the extent that his announced interpretation[s] are owed greater deference. We agree with Judge Buckwalter's analysis of the relationship between the Statutory Merger Provision and the Bona Fide Sale Provision as follows: [T]he Statutory Merger Regulation specifically references 42 C.F.R. § 413.134(f), stating, If the merged corporation was a provider before the merger, then it is subject to the provisions of paragraphs (d)(3) and (f) of this section concerning recovery of accelerated depreciation. 42 C.F.R. § 413.134[(k)(2)(i)]. A reasonable interpretation of this provision is that recognition of a loss resulting from a statutory merger is only permitted if otherwise allowed under paragraph (f). Under paragraph (f), the treatment of the gain or loss depends upon the manner of disposition of the asset. 42 C.F.R. § 413.134(f)(1). Paragraphs (f)(2) th[r]ough (f)(6) identify the specific means through which a depreciable asset can be disposed including, bona fide sale or scrapping; exchange, trade-in or donation; demolition or abandonment; or involuntary conversion. Id. at § 413.134(f)(2)-(f)(6). Of all the circumstances listed, the disposition most applicable to the present case is the bona fide sale requirement. Einstein, 2007 WL 2221417, at  12. The Court concluded, therefore, that the Administrator's interpretation of the merger regulation to require that the transaction constitute a bona fide sale was reasonable. In addition to arguing that the Bona Fide Sale Provision does not apply to mergers, Einstein argues that the Administrator's interpretation of this provision is inconsistent with prior agency statements. In its decision in this case, the Administrator, quoting the 2000 PRM, held that, a bona fide sale contemplates an arm's length transaction between a willing and well-informed buyer and seller, neither being under coercion, for reasonable consideration. An arm's length transaction . . . is negotiated by unrelated parties, each acting in its own self-interest. App. at 62. Einstein, noting that this definition is found in the 2000 PRM Amendment and the 2000 PM, argues that this interpretation was impermissibly applied here because it was not articulated until after the 1996 merger at issue. Einstein, citing Black's Law Dictionary, argues that a bona fide sale is simply one in which valuable consideration is given. It argues, therefore, that any disparity between the fair market value of its assets and the amount of consideration it received from New Germantown (in the form of assumption of liabilities) is irrelevant. The Secretary responds that 42 C.F.R. § 413.134(b)(2) requires that a sale cannot be `bona fide' if it is not an exchange for fair value. Appellee's Br. at 31. This regulatory provision defines 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. 42 C.F.R. § 413.134(b)(2). We note that the regulation may not have the significance ascribed to it by the Secretary as it defines fair market value, not bona fide sale. However, this regulation demonstrates the agency's understanding of a relationship between a bona fide sale and fair market value. The Secretary argues that the agency has looked to the reasonableness of consideration since long before the transaction at issue in this case. Appellee's Br. at 31. For example, in Hosp. Affiliates Int'l., Inc. v. Schweiker, Medicare denied reimbursement because a sale was not bona fide and held: There is no evidence in the record that the purchase price bore any relation to the actual value of the property. Without such evidence, no determination of the transaction's being bona fide is appropriate. 543 F.Supp. 1380, 1389 (D.Tenn. 1982) (emphasis omitted). This case shows that, contrary to Einstein's contention, at least as early as 1982 the agency looked to the fair market value when conducting the bona fide sale inquiry. Einstein points to decisions that it contends hold that sales were bona fide even though the consideration paid was less than the appraised value of the assets. However, as the Secretary correctly notes, in each of those cases the Board found that parties with adverse interests had negotiated at arm's length to arrive at reasonable consideration for the exchange. Appellee's Br. at 32 n.8 (citing Vallejo Gen. Hosp. v. Bowen, 851 F.2d 229, 232 (9th Cir.1988); Ashland Reg'l Med. Ctr. v. Blue Cross & Blue Shield Ass'n/Blue Cross & Blue Shield of W. Pa., 1998 Medicare & Medicaid Guide 57,577 (P.R.R.B.1998); Edgecombe Gen. Hosp. v. Blue Cross & Blue Shield Ass'n/Blue Cross & Blue Shield of N.C., 1993 Medicare & Medicaid Guide 37,394 (P.R.R.B. 1993); Lac Qui Parle Hosp. of Madison, Inc. v. Blue Cross & Blue Shield Ass'n/Blue Cross & Blue Shield of Minn., 1995 Medicare & Medicaid Guide 44,473 (P.R.R.B.1995)). For instance, in Vallejo Gen. Hosp. v. Bowen , the Administrator considered the sale of an asset from one hospital to another and deemed the sale price to be the fair market value because it is in the interest of both parties bargaining rationally at arm[']s-length to evaluate accurately the [assets]. 851 F.2d at 232. Having considered these cases, we conclude that the agency's requirement that a bona fide sale be one in which reasonable consideration is exchanged is not inconsistent with the agency's previous statements. The Tenth Circuit recently came to the same conclusion in Via Christi Reg'l Med. Ctr., 509 F.3d 1259 (10th Cir. 2007). It stated, [e]ven if the Secretary further clarified the definition of `bona fide sale' in interpretive materials issued after the consolidation in this case, [the hospital] was on notice that § 413.134(f) and its `bona fide sale' requirement would be more than a nullity. Id. at 1276; see also Robert F. Kennedy Med. Ctr., 526 F.3d at 563 (upholding the Administrator's decision that a transfer of $50 million in assets for $30.5 million in consideration was not a bona fide sale). Moreover, requiring reasonable consideration is in keeping with the underlying and long-standing purpose of the Medicare Act, i.e., to reimburse for only actual and reasonable costs. 42 U.S.C. § 1395x(v)(1)(A). For that reason, we conclude that an interpretation of the Bona Fide Sale Provision that would permit hospitals to sell their assets at less than reasonable value and, as a result, gain reimbursement for losses that do not reflect losses actually incurred would be impermissible as contrary to the Medicare statute. Therefore, we hold that the 2000 PRM Amendment and the 2000 PM offered a clarification of the Bona Fide Sale Provision that was not inconsistent with previous agency policy. It follows that the Administrator did not commit an error of law in applying the bona fide sale requirement to Einstein's claim.