Court Opinion

ID: 3199112
Source: CourtListenerOpinion
Date Created: 2016-04-29 15:01:13.209148+00
Date Added: 2024-06-11T14:28:58.797160
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 3, 2015              Decided April 29, 2016

                       No. 15-5089

VIA CHRISTI HOSPITALS WICHITA, INC., AS SUCCESSOR TO ST.
          FRANCIS REGIONAL MEDICAL CENTER,
                      APPELLANT

                             v.

SYLVIA MATHEWS BURWELL, AS SECRETARY OF HEALTH AND
                 HUMAN SERVICES,
                    APPELLEE

        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:09-cv-02060)

    Robert E. Mazer argued the cause for appellant. With
him on the briefs was James P. Holloway.

    Debra Michelle Laboschin, Attorney, U.S. Department of
Health & Human Services, argued the cause for appellee.
With her on the brief were Benjamin C. Mizer, Principal
Deputy Assistant Attorney General, Vincent H. Cohen Jr.,
Acting U.S. Attorney, Joel McElvain, Attorney, William B.
Schultz, General Counsel, U.S. Department and Health and
Human Services, Janice L. Hoffman, Associate General
Counsel, Susan Maxson Lyons, Deputy Associate General
Counsel for Litigation, and David L. Hoskins, Attorney. R.
                                2
Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.

   Before: ROGERS and PILLARD, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

    Opinion for the Court filed by Circuit Judge PILLARD.

     PILLARD, Circuit Judge: Via Christi Health Center seeks
an upward adjustment of the capital-asset depreciation
reimbursement paid to its predecessor hospitals under a since-
curtailed Medicare regulation. As a general matter, the
Secretary of the Department of Health and Human Services
reimburses Medicare providers for their reasonable costs
actually incurred, including an appropriate share of
depreciation on buildings or equipment used to supply
Medicare services.         See 42 U.S.C. §§ 1395f(b)(1),
1395x(v)(1)(A); 42 C.F.R. §§ 413.130, 413.134(a). The
depreciation allowance is ordinarily based on the Secretary’s
estimates of assets’ useful life, see 42 C.F.R. § 413.134(a),
but certain providers may claim a Medicare-reimbursable
share of supplemental losses (or be liable for repayment of
gains) incurred in qualifying pre-December 1997 transactions,
see id. § 413.134(f), (l); see generally St. Luke’s Hosp. v.
Sebelius, 611 F.3d 900, 901-02 (D.C. Cir. 2010).1 Via Christi
contends that the transaction that led to its formation—the
1995 consolidation of St. Francis and St. Joseph Hospitals—is
a qualifying sale. See 42 C.F.R. § 413.134(f)(2), (l)(3)(1).
Via Christi argues that it received St. Francis’s and St.
Joseph’s assets at a lower value, i.e., more depreciated, than
1
   In 2000, 42 C.F.R. § 413.134(l) was designated, without
substantive change, as subsection (k). See St. Luke’s Hosp. v.
Sebelius, 611 F.3d 900, 901 n.2 (D.C. Cir. 2010) (citing 65 Fed.
Reg. 8660, 8662 (Feb. 22, 2000)). We refer to it as subsection (l)
throughout this opinion.
                               3
was reflected in the Secretary’s earlier depreciation
reimbursements. As the hospitals’ successor-in-interest, Via
Christi thus seeks additional reimbursements to cover the
proportional Medicare share of the depreciation.

     Via Christi sought reimbursements relating to each of its
predecessor hospitals, and the Secretary denied both claims
on the ground that the 1995 consolidation was not a bona fide
sale qualifying for adjusted depreciation under the
regulations. The Secretary concluded that: (1) The parties
neither engaged in arm’s-length bargaining nor exchanged
reasonable consideration, so the loss did not arise from a bona
fide sale, see id. § 413.134(f); and (2) the transaction was
between related parties, see id. § 413.134(l)(3)(i). The Tenth
Circuit sustained the Secretary’s denial of Via Christi’s claim
for $9.7 million relating to St. Joseph’s assets. See Via
Christi Reg’l Med. Ctr. v. Leavitt, 509 F.3d 1259, 1261 (10th
Cir. 2007). In this case, relating to St. Francis’s assets, the
district court sustained the Secretary’s denial of Via Christi’s
claim for a $59 million depreciation adjustment.

     We review de novo the district court’s grant of summary
judgment, “as though on direct appeal from the agency,”
Catholic Healthcare W. v. Sebelius, 748 F.3d 351, 353 (D.C.
Cir. 2014), and we affirm. The Secretary reasonably
interpreted the bona fide sale requirement as limited to arm’s-
length transactions between economically self-interested
parties. The Secretary concluded that St. Francis’s transfer of
its assets to Via Christi was not an arm’s-length transaction in
which each party sought to maximize its economic benefit.
Her determination was supported by substantial evidence, and
was not arbitrary, capricious or otherwise unlawful. See
Forsyth Mem’l Hosp., Inc. v. Sebelius, 639 F.3d 534, 537
(D.C. Cir. 2011). In the absence of a qualifying transaction,
                                4
Via Christi is not entitled to additional depreciation
reimbursement.

                                I.

                                A.

     As just noted, federal law requires the Secretary to
compensate medical-care providers for the actual, reasonable
costs of supplying Medicare services, see 42 U.S.C. §§
1395f(b)(1), 1395x(v)(1)(A), and reasonable costs include an
appropriate allowance for depreciation, see 42 C.F.R. §§
413.130, 413.134(a). The Secretary calculates depreciation
by prorating the asset’s purchase price over its anticipated
useful life and reimburses a share of the depreciation to cover
the use of assets in providing Medicare services. Id.
§ 413.134(a), (b)(1). At any given time, purchase price minus
cumulative depreciation reflects the asset’s “net book value.”
Id. § 413.134(b)(9). That value is only an estimate of the
asset’s fair market value. “[I]f an asset is sold for less than its
net book value, the Secretary makes an additional payment to
the provider, reflecting an understanding that the previous
depreciation payments fell short of reflecting true cost.”
Catholic Healthcare W., 748 F.3d at 352-53.

    The Secretary, consistent with the relevant Medicare
regulations, makes that payment only when the loss results
from a bona fide sale.2          See Medicare Provider

2
  As noted above, the Secretary amended the relevant regulations
after Congress eliminated the statutory basis for adjustments of
reimbursements based on transactions occurring after December 1,
1997. See Balanced Budget Act of 1997, Pub. L. No. 105-33,
§ 4404, 111 Stat. 251, 400 (1997).             Because St. Francis
consolidated with St. Joseph to form Via Christi in 1995, the
transaction remains subject to the regulation.
                               5
Reimbursement Manual § 104.24 (Manual or PRM) (May
2000), J.A. 1020; see also Pinnacle Health Hosps. v. Sebelius,
681 F.3d 424, 426 (D.C. Cir. 2012). The provider bears the
burden of showing that a bona fide sale has occurred.
Forsyth, 639 F.3d at 539.

     Nonprofit entities are, by design, driven by purposes
other than profit. The Secretary in 2000 issued Program
Memorandum A-00-76 to guide application of section
413.134(f)(1) to mergers and consolidations of nonprofit
Medicare providers, specifying that, “[a]s with transactions
involving for-profit entities,” nonprofits’ transactions support
depreciation reimbursement adjustments only if they are
between unrelated parties and “involve one of the events
described in 42 C.F.R. [§] 413.134(f) as triggering a gain or
loss recognition by Medicare.” See Clarification of the
Application of the Regulations at 42 C.F.R. [§] 413.134(l) to
Mergers and Consolidations Involving Non-profit Providers,
Program Memorandum A-00-76 (Oct. 19, 2000), at 2, J.A.
1031. The type of qualifying event that Via Christi asserts
occurred in this case is a consolidation, amounting to a type of
“sale,” which the Secretary treats as a qualifying event only if
it is a “bona fide sale” between unrelated parties. Id.
(emphasis omitted).

     Any number of valid reasons may motivate a medical
care provider to consolidate through a transaction that is not
arm’s length or economically self-interested, and a provider
that does so receives reimbursement of capital costs as part of
the reasonable costs of the services it provides. It is also,
however, “perfectly reasonable” for the Secretary to decline
to provide additional, adjusted compensation to non-profit
providers that dispose of depreciable assets at a relative loss
in a consolidation when that loss does not result from a bona
fide sale. Pinnacle, 681 F.3d at 426. We thus reject Via
                                6
Christi’s contention that St. Francis’s sale of its assets did not
need to be bona fide to trigger a loss adjustment.3

                                B.

     We already have upheld part of the Secretary’s definition
of bona fide sale: “A bona fide sale requires the exchange of
‘reasonable consideration’ for the depreciable assets.”
Pinnacle, 681 F.3d at 427; see St. Luke’s, 611 F.3d at 905-06.
We now sustain the remaining elements of the definition: The
Secretary reasonably concluded that a bona fide sale requires
an arm’s-length transaction between economically self-
interested parties. The arms-length transaction prong of the
rule requires that the seller aim to maximize return for the
assets, while the reasonable consideration prong looks to
whether the seller in fact received fair market value. The
absence of either reasonable consideration or an arm’s-length
transaction dooms a claim for supplemental reimbursement.

     In the Program Memorandum regarding nonprofit
mergers and consolidations, the Secretary defined bona fide
sale by incorporating the definition set forth in the Medicare
Provider Reimbursement Manual. Program Memorandum A-
00-76 at 3, J.A. 1032. The Manual defines a bona fide sale as
“an arm’s length transaction between a willing and well
informed buyer and seller, neither being under coercion, for
reasonable consideration.”      PRM § 104.24, J.A. 1020.
According to the Manual, “[a]n arm’s-length transaction is a
transaction negotiated by unrelated parties, each acting in his
own self interest.”       Id.     The Secretary’s Program
Memorandum further explained that, in such a transaction,

3
  Accordingly, we need not address the Secretary’s assertion that
the Tenth Circuit’s decision relating to St. Joseph collaterally
estopped Via Christi from challenging the applicability of the bona
fide sales rule to this transaction involving St. Francis.
                               7
“objective value is defined after selfish bargaining.” Program
Memorandum A-00-76 at 3, J.A. 1032.

     In her decision in this case, the Secretary found that St.
Francis did not negotiate at arm’s length. When St. Francis
and St. Joseph hospitals consolidated to form Via Christi
Health Center, each hospital was a nonprofit corporation
organized under Kansas law, and each had as a sponsor a
religious order associated with the Catholic Church. When
the hospitals consolidated, all their assets transferred to Via
Christi, which, in exchange, assumed responsibility for all the
hospitals’ existing liabilities. St. Francis and St. Joseph
ceased to exist, and the religious orders that had separately
sponsored St. Francis and St. Joseph became the joint
sponsors of Via Christi.

     The Secretary found that St. Francis did not negotiate at
arm’s length because it “never pursued any efforts to
maximize gains upon the consolidation or ‘sale’ of [its]
assets.” Ctr. for Medicare and Medicaid Servs., Decision of
the Administrator (Sept. 1, 2009) at 27, J.A. 167. Instead of
aiming to “maximize the proceeds received from selling its
assets,” the hospital sought to “advance [its] ministry.” Id. at
27-28, J.A. 167-68. The transaction thus plainly served
values important to the parties, but the Secretary determined
that it was not the kind of self-interested market transaction
that    yields    asset-valuation   information      warranting
depreciation adjustment under the regulation.

     Via Christi does not challenge the Secretary’s conclusion
that a bona fide sale requires arm’s-length bargaining, but
contends that transactions need not be motivated by financial
gain maximization to qualify as arm’s length under the
regulation. The Secretary’s contrary view, says Via Christi, is
inconsistent with the definition of bona fide sale in Program
                                8
Memorandum A-00-76 and the Manual. Those materials
speak of “self-interest,” but do not specify the type of self-
interest parties must pursue. St. Francis bargained at arm’s
length, Via Christi asserts, even though it did not seek the
highest price for its assets.

     We disagree. Because the bona fide sales rule “is a
creature of the Secretary’s own regulations, [her]
interpretation of it is . . . controlling unless plainly erroneous
or inconsistent with the regulation.” Auer v. Robbins, 519
U.S. 452, 461 (1997) (internal quotation marks omitted); see
St. Luke’s, 611 F.3d at 906. We owe “heightened deference
to the Secretary’s interpretation of a ‘complex and highly
technical regulatory program’ such as Medicare.” Methodist
Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C.
Cir. 1994) (quoting Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 512 (1994)). Just as it is not plainly wrong or
contrary to law for the Secretary to conclude that a bona fide
sale requires reasonable consideration, see Pinnacle, 681 F.3d
at 427, it is by the same token permissible for the Secretary to
conclude that a bona fide sale requires arm’s-length
bargaining between economically self-interested parties, see
Via Christi, 509 F.3d at 1275-76.

     The Secretary’s interpretation of the bona fide sales rule
makes sense, and Via Christi cites no authority disallowing it.
The point of the bona fide sales rule is that certain
transactions involving providers’ assets yield data that are
more reliable indicators than the Secretary’s depreciation
estimates of the assets’ actual market value, and hence of
actual depreciation. For depreciation-adjustment purposes,
the Secretary 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). The requirement that a Medicare
                               9
provider show an arm’s-length transaction, as the Secretary
understands it, works in tandem with the requirement of
reasonable consideration to “ensure[] that any depreciation
adjustment will represent economic reality, rather than mere
‘paper losses.’” Via Christi, 509 F.3d at 1275. The arm’s-
length criterion helps to identify those transactions likely to
lead to the seller’s receipt of fair market value. The
reasonable consideration inquiry asks whether the seller
indeed received “the fair market value of the assets
transferred.” St. Luke’s, 611 F.3d at 905.

     The Secretary permissibly reads the regulation to provide
that, where parties to a transaction were not acting at arm’s
length, motivated by gain maximization, they have not
engaged in a bona fide sale. In such a case, it would not make
sense for the Secretary to treat the price paid for the assets as
accurately reflecting their market value. Consistent with our
analysis, the Third Circuit in Albert Einstein Medical Center
v. Sebelius, 566 F.3d 368, 378-79 (3d Cir. 2009), found a lack
of arm’s-length transacting where the record showed that the
pre-merger provider was not seeking “to maximize the
consideration paid” for its assets, but rather bargained for
benefits that would “only inure” to the entity that resulted
from the merger. Similarly, in UPMC-Braddock Hospital v.
Sebelius, 592 F.3d 427, 434 n.10 (3d Cir. 2010), that court
noted that the lack of record evidence that “receiving the best
possible price for the facilities was a major factor in the
negotiations” was an indication that the transaction was not
arm’s length.      Without reliable criteria for identifying
transactions that reflect fair market value, the Secretary could
not gauge whether a provider had incurred a real loss
warranting an augmented depreciation allowance.

    Via Christi counters that it could not have maximized
gain because it could not actually bargain. Kansas law, Via
                               10
Christi explains, required all of St. Francis’s assets to transfer
to Via Christi at the moment of consolidation. Via Christi has
not, however, shown how the Kansas transfer-timing rule
prevented St. Francis from negotiating a better price. State
law does not appear to limit St. Francis’s selling price to Via
Christi’s assumption of existing liabilities, see Kan. Stat. Ann.
§ 17-6709(a); St. Francis presumably could have bargained
for additional cash or other consideration for its assets.
Analogous to the nonprofit consolidation in this case, the
statutory merger in Forsyth proceeded under a state law
requiring the simultaneous dissolution of one provider and the
post-merger entity’s assumption of all the pre-merger entity’s
liabilities. 639 F.3d at 535. Here, as in Forsyth, the Secretary
permissibly applied the bona fide sales rule to disallow an
adjustment based on the exchange.

                               C.

    Via Christi further contends that, even accepting the
Secretary’s interpretation of arm’s-length bargaining, the
record does not contain substantial evidence that St. Francis
sold its assets other than at arm’s length. We disagree. The
evidence in several respects confirms that St. Francis was not
seeking to extract from the transaction the best, or even fair,
value for its assets.

     First, St. Francis did not attempt to discern the value of
its assets before the sale. Via Christi sought an appraisal after
the consolidation, and then only in order to calculate the
amount of adjusted depreciation Via Christi, as successor,
thought the government owed it. The record does not
demonstrate that St. Francis sought in any other way to
develop a sense of its assets’ value before the transaction. If
St. Francis did not even have an estimate of the value of its
assets at the time of the sale, it could hardly have been well
                              11
positioned to bargain for the best deal. See UPMC-Braddock,
592 F.3d at 434 n.10 (lack of pre-transaction appraisal
relevant to whether an arm’s-length transaction occurred); cf.
Forsyth, 639 F.3d at 535, 539 (lack of pre-transaction
appraisal relevant to whether bona fide transaction occurred).

     Second, St. Francis disavowed any interest in putting its
assets up for sale on the open market. The objective of the
hospitals’ religious sponsors, who made the decision to
consolidate, was that the hospitals consolidate with each
other—and no one else—because they shared the same
religiously oriented vision of care. Via Christi’s chief
financial officer, who previously had been St. Joseph’s chief
financial officer, agreed that, “[b]ecause of their religious
affiliation,” J.A. 291, the religious sponsors “would not have
considered [a] public sale . . . in the marketplace,” J.A. 298-
99. That is not to say that St. Francis was generally
uninterested in operating cost effectively or holding a strong
market position. Indeed, those concerns apparently prompted
St. Francis to consolidate with another hospital in the first
place. But other, non-economic factors determined its choice
of St. Joseph’s as its consolidation partner and its decision to
transfer all of its assets to Via Christi. See Via Christi, 509
F.3d at 1276 (“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.”); cf. Forsyth, 639
F.3d at 539 (sustaining determination of no bona fide sale
where appellants “did not put [the hospital’s] assets for sale
on the open market”); St. Luke’s, 611 F.3d at 904 (sustaining
determination of no bona fide sale where “factors other than
receiving the best price for its assets were motivations in the
transaction”); Robert F. Kennedy Med. Ctr. v. Leavitt, 526
F.3d 557, 563 (9th Cir. 2008) (concluding that the provider
did not attempt to obtain fair market value for its assets where
                               12
the provider “gave several reasons for seeking a merger, none
of which involved the receipt of fair market value” and where
“none of [the provider’s] criteria for selecting a merger
partner involved receiving a fair price for its assets”).
Because assets’ fair market value is what matters under the
Secretary’s depreciation reimbursement regulations, and
because St. Francis did not seek through the consolidation to
maximize its financial return on the sale, the Secretary fairly
concluded that St. Francis had not engaged in arm’s-length
bargaining.

                               D.

     The Secretary may condition depreciation adjustment on
both the presence of an arm’s-length transaction and the
receipt of reasonable consideration for depreciable assets.
Because St. Francis did not bargain at arm’s length, we need
not address Via Christi’s challenge to the Secretary’s
determination that St. Francis also did not receive reasonable
consideration. And because the lack of a bona fide sale
justified the Secretary’s refusal to revalue St. Francis’s assets
and issue a loss reimbursement, we also need not decide
whether the Secretary was right that the sale was between
related parties. See Forsyth, 639 F.3d at 539 (declining to
address the Secretary’s related-party determination for this
same reason).

                               II.

     In addition to challenging the substance of the
Secretary’s determination that St. Francis’s asset sale was not
bona fide, Via Christi contends that the Secretary committed
several procedural errors. This court in other Medicare
reimbursement cases has already rejected such claims of
error. In St. Luke’s, we sustained application of the
Secretary’s interpretation of its regulations, as set forth in
                              13
Program Memorandum A-00-76, to a transaction that
occurred before the memorandum was issued. 611 F.3d at
907. We also rejected the argument that the bona fide sales
rule is inconsistent with the agency’s prior interpretations and
adjudications. See id. at 906. Finally, in both St. Luke’s and
Forsyth, we summarily rejected challenges of the remaining
types Via Christi raises, including that Program Memorandum
A-00-76 was not timely published and that it required notice-
and-comment rulemaking. See id. at 906 n.8 (endorsing the
reasoning of the district court in St. Luke’s Hosp. v. Sebelius,
662 F. Supp. 2d 99, 104-05 (D.D.C. 2009)); Forsyth, 639
F.3d at 537.

                             ***

     The Secretary has reasonably required a bona fide sale to
be an arm’s-length transaction, and has fairly interpreted the
arm’s-length criterion to refer to gain-maximizing bargaining.
Because substantial evidence supports the Secretary’s
conclusion that St. Francis did not engage in that kind of
bargaining, and because the Secretary’s decision is not
arbitrary and capricious or otherwise unlawful, we affirm the
district court’s grant of summary judgment to the Secretary.

                                                    So ordered.