Court Opinion

ID: 2667071
Source: CourtListenerOpinion
Date Created: 2014-04-04 13:14:02.457263+00
Date Added: 2024-06-11T13:02:52.494515
License: Public Domain

IN THE UNITED STATES DISTRICT COURT
                     FOR THE DISTRICT OF COLUMBIA

PROVENA HOSPITALS               *
                                *
v.                              *
                                *   Civil Action No. WMN-08-1054
KATHLEEN SEBELIUS, as           *
SECRETARY OF HEALTH AND         *
HUMAN SERVICE                   *
                                *
 *   *   *   *      *   *   *   *   *    *   *   *   *   *   *

                            MEMORANDUM

     This action arises out of the November 30, 1997,

consolidation of three Illinois hospital systems.      Plaintiff

Provena Hospitals (Provena), the entity into which the three

systems consolidated, brings this action as the successor-in-

interest to Mercy Center for Health Care Services (Mercy

Center), one of the consolidating entities.      Provena challenges

the decision of the Secretary of Health and Human Services (the

Secretary) denying Mercy Center’s reimbursement claims for

approximately $4.5 million in depreciation-related losses that

Provena asserts resulted from the consolidation.     The Secretary

denied Provena’s claim for reimbursement on two grounds: (1)

that the consolidation was not between “unrelated parties” as

required under 42 C.F.R. § 413.134(k); and (2) that no “bona

fide sale” occurred as required under 42 C.F.R. § 413.134(f).

     Provena argues that the “related party” and “bona fide

sale” policies used to deny Mercy Center’s claim were adopted
only after the 1997 consolidation and that it was impermissible

for the Secretary to apply them retroactively.    In the

alternative, Provena argues that, even if those policies were in

place when Provena was formed, the consolidation satisfied the

requisite conditions.    The parties have filed cross motions for

summary judgment, Paper Nos. 15 (Provena’s) and 16 (the

Secretary’s), and the motions are fully briefed and

supplemented.    Upon review of the pleadings and the applicable

case law, the Court finds that the Secretary properly

interpreted and applied the policy disqualifying from

depreciation reimbursement consolidations that were not bona

fide sales.1    Accordingly, the decision of the Secretary will be

affirmed.2

I. GENERAL STATUTORY AND REGULATORY FRAMEWORK

     Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395

et seq. (the Medicare Act) establishes a federally funded health

insurance program for the aged and disabled.    The Centers for

1
  Because the Court’s finding that the consolidation did not
satisfy the “bona fide sale” requirement is dispositive, it need
not reach the “related party” issue.
2
  Although Provena has requested oral argument, the decision as
to whether to hold oral argument on a motion is left to the
Court’s discretion and in this instance, the Court finds that
oral argument is not necessary given the complete and
comprehensive written submissions. See Local Civil Rule 7(f).

                                  2
Medicare and Medicaid Services (CMS)3 administers the Medicare

program on behalf of the Secretary, but the Secretary also

contracts with private fiscal intermediaries to make the initial

determination as to how much a Medicare provider should be

reimbursed for services.   See id. § 1395h.    If the provider

disagrees with the intermediary’s reimbursement determination,

it can appeal that decision to the Provider Reimbursement Review

Board (PRRB).   Id. § 1395oo(a).    After sixty days, the decision

of the PRRB becomes the final decision of the Secretary unless

the Secretary, through the CMS Administrator, elects to review

it within that time period.   Id. § 1395oo(f)(1).    A Medicare

provider can seek judicial review of a final decision of the

PRRB or the CMS Administrator in a federal district court.       Id.

     Under the Medicare Act, providers of Medicare services are

entitled to be reimbursed for the “reasonable cost of [Medicare]

services.”   Id. § 1395f(b)(1).    The statute defines the

“reasonable cost” of a service to be “the cost actually

incurred, excluding therefore any part of incurred cost found to

be unnecessary in the efficient delivery of needed health

services.”   42 U.S.C. § 1395x(v)(1)(A) (emphasis added).

Furthermore, the reasonable cost is to be “determined in

accordance with regulations establishing the method or methods

3
  Until 2001, CMS was known as the Health Care Financing
Administration (HCFA). See 66 Fed. Reg. 35437.
                                   3
to be used,” as promulgated by the Secretary.   Id.   In addition

to promulgating regulations, the Secretary also issues manuals,

such as the Provider Reimbursement Manual (PRM) and the Medicare

Intermediary Manual (MIM), to assist Medicare providers and

fiscal intermediaries in administering the reimbursement system.

     Of particular relevance here, the regulations in effect at

the time of the 1997 consolidation stated that a provider could

claim reimbursement for “[a]n appropriate allowance for

depreciation on buildings and equipment used in the provision of

patient care.”   42 C.F.R. § 413.134(a).   This allowance for

depreciation was calculated by prorating “the cost incurred by

the present owner in acquiring the asset” (its “historical

cost”) over the asset’s “estimated useful life,” and then

estimating the percentage of the depreciation attributable to

providing services to Medicare patients.   Id. § 413.134(a)(3)

and (b)(1).   Providers were then reimbursed annually based upon

this depreciation calculation.

     In recognition of the fact that these annual payments might

overstate or understate the true depreciation of the asset,

Medicare regulations provided, under certain circumstances, for

an adjustment to reconcile the previous annual depreciation

payments with the asset’s actual value upon the disposal of the

depreciable asset.   The principal Medicare regulation that

addressed the depreciation of assets, 42 C.F.R. § 413.134,

                                 4
stated that the treatment of the gains or losses from a disposal

of those assets “depends on the manner of disposition of the

asset, as specified in paragraphs (f)(2) through (6) of this

section.”   Id. § 413.134(f)(1).   Subsection (f)(2), entitled

“Bona fide sale or scrapping,” provided that gains and losses

realized from the bona fide sale of depreciable assets could be

considered in calculating allowable costs.4

     When allowable, this adjustment under paragraph (f) was

based upon the difference between the “net book value” (i.e.,

its initial depreciable basis minus subsequently recognized

annual depreciation) and the consideration received for the

asset at its disposal.   If the consideration received was

greater than the asset’s net book value, then the provider

realized a gain and was required to remit that difference to

Medicare on the assumption that the annual allowances overstated

the actual depreciation.   If the consideration received was less

than the asset’s net book value, then the provider was deemed to

have incurred a loss and received an additional depreciation

reimbursement as a result of the disposition of the asset.    If

the Medicare provider sells multiple assets for a “lump sum

sales price,” the provider must allocate the price received

among the assets sold, “in accordance with the fair market value

4
   Subsections (f)(3) through (f)(6) address methods of
disposition of assets not relevant to the instant action.

                                   5
of each asset.”   Id. § 413.134(f)(2)(iv).   It must be remembered

that the purpose of this adjustment upon disposal of an asset

was to assure that “Medicare pays the actual cost incurred in

using the asset for patient care.”   Via Christi Reg’l Med. Ctr.

v. Leavitt, 509 F.3d 1259, 1262 (10th Cir. 2007).

     Paragraph (k)5 of § 413.134, which is at the center of this

controversy, addressed three particular types of transactions:

(1) the acquisition of a provider’s capital stock; (2) a

statutory merger; and (3) a consolidation.    Although paragraph

(k) was denominated as a provision related to “[t]ransactions

involving a provider’s capital stock,” the Secretary has always

interpreted it as applying in the non-profit sector as well, Via

Christi, 509 F.3d at 1263 n.4 and 1272 n.12, and neither party

disputes that the Secretary was correct in so doing.    Under this

paragraph, a consolidation was defined as a “combination of two

or more corporations resulting in the creation of a new

corporate entity.”   Id. § 413.134(k)(3).    There is no dispute in

this litigation that the formation of Provena was a

consolidation within the meaning of this provision.

     The portion of paragraph (k) addressing consolidations

where at least one of the original entities was a Medicare

provider, § 413.134(k)(3), draws a distinction between the

5
   This paragraph had been designated as 42 C.F.R. 413.134(l)
prior to 2002. In this opinion, the Court will refer to it by
its new designation.
                                 6
treatment of consolidations involving “related” parties and

those involving parties that are “unrelated.”    If the parties to

the consolidation were unrelated, the regulation permitted the

assets of the provider corporation(s) to be revalued.    Id. §

413.134(k)(3)(i).   If the consolidation was between two or more

related corporations, no revaluation of provider assets was

permitted.   Id. § 413.134(k)(3)(ii).6

     The portion of paragraph (k) related to statutory mergers

contains a similar distinction between related and non-related

entities.    § 413.134(k)(2).   As in the consolidation provision,

no revaluation of assets was permitted if the merging entities

were related.   Unlike the provision addressing consolidations,

however, the statutory merger provision goes on to state that

“[i]f 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 and the realization of gains and losses.”    §

413.134(k)(2)(i).   As discussed above, paragraph (f) provides

that a depreciation adjustment is only allowed if a sale was a

“bona fide sale.”    Although the consolidation provision, §

413.134(k)(3), does not contain a parallel reference to

6
   Section 413.17 provides the definition of “related:” “Related
to the provider means that the provider to a significant extent
is associated or affiliated with or has control of or is
controlled by the organization furnishing the services,
facilities, or supplies.”
                                   7
paragraph (f), the Secretary has interpreted it as containing a

similar provision.   See infra.   The propriety of that

interpretation is one of the central issues in this litigation.

     One additional provision in the regulations is potentially

relevant here.   Under the “general rules” section of 42 C.F.R. §

413.134, the term “fair market value” is defined in terms of a

“bona fide sale:”

     Fair market value is the price that the asset would
     bring by bona fide bargaining between well-informed
     buyers and sellers at the date of acquisition.
     Usually 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.

42 C.F.R. § 413.134(b)(2).   Here, the Secretary relies on this

provision to incorporate a “fair market value” or “reasonable

consideration” element into the requirement of a bona fide sale.

This interpretation of the regulations is also a major issue in

this litigation.

     To understand the arguments put forth by Provena, some

discussion of the historical development of Medicare policy

related to depreciation and adjustments allowable on the

disposal of depreciable assets is helpful.   Medicare regulations

issued in November 1966 first designated depreciation as an

“allowable cost,” and required that gains and losses from

disposal of assets be included in the allowable cost

determination.   31 Fed. Reg. 14,808, 14,810-11 (Nov. 22, 1966).

                                  8
The regulations, however, did not specify the procedures for

calculating the gain or loss on disposal.

      On January 19, 1979, the regulations were amended to

address certain types of disposal of assets, including by “bona

fide sale.”    44 Fed. Reg. 3980, 3982-83 (Jan. 19, 1979).    This

amendment added what is now § 413.134(f), discussed above.

Included in this amendment was the provision that, in the case

of “lump sum sales,” the sales price would be allocated to each

asset according to its fair market value.    44 Fed. Reg. 3980,

3983.    In issuing these amended regulations, the agency stated

that they “are intended to assure that the depreciation allowed

under Medicare accurately reflects providers’ costs of using

assets for patient care.”    44 Fed. Reg. 3980.

        On February 5, 1979, the regulations were amended again to

add what is now paragraph (k) of § 413.134, including the

consolidation provision discussed above.    44 Fed. Reg. 6912,

6915 (Feb. 5, 1979).    When these amendments to the regulations

were first proposed in 1977, the Secretary clarified that they

were simply to describe the intention of existing programs

regulations and principles when applied to “complex financial

transactions.”    42 Fed. Reg. 17485 (Apr. 1, 1977).   “The

proposed amendments are a specific interpretation of existing

program policy based on previously promulgated regulations.”

Id.

                                   9
     The next development related to the recognition of gains or

losses upon the disposal of a depreciable asset came not from

the Secretary, but from Congress.     On July 18, 1984, Congress

enacted Section 2314(a)(ii) of the Deficit Reduction Act of 1984

(“DEFRA”) (Pub. L. No. 98-369), which required Medicare

regulations to “provide for recapture of depreciation in the

same manner as provided under the regulations in effect on June

1, 1984.”   Although the language in DEFRA referred to “recapture

of depreciation,” courts, as well as the Secretary, have

recognized that this provision applied both to transactions that

result in a gain and to transactions that result in a loss.     See

Lake Med. Center v. Thompson, 243 F.3d 568 (D.C. Cir. 2001); 57

Fed. Reg. 43,906, 43,907 (Sept. 23, 1992).

     In 1987, the Secretary issued two pronouncements relevant

to the consolidation provision in § 413.134.    In April 1987, the

Secretary included an explanation in the MIM that “Medicare

program policy permits a revaluation of assets affected by

corporate consolidations between unrelated parties.”    AR at

4197-98, MIM, 04-87, § 4502.7.   On May 11, 1987, William

Goeller, Director of HCFA’s Division of Payment and Reporting

Policy of the Office of Reimbursement Policy, Bureau of

Eligibility, Reimbursement and Coverage, responded to an inquiry

concerning “the revaluation of assets and adjustments for gains

and losses when two nonprofit hospitals merge or consolidate.”

                                 10
Administrative Record (AR) 4413-14.     Goeller explained that,

notwithstanding 413.134(k)’s reference to capital stock, that

provision also governs mergers and consolidations of nonstock,

nonprofit providers.    He continued:

     If the transaction you have described meets the
     definition of either a statutory merger or
     consolidation as set forth in the regulations section
     ..., then a revaluation of assets and/or an adjustment
     to recognize realized gains and losses may occur.

     To determine whether a revaluation of assets or a
     gain/loss adjustment will occur, we must turn to the
     question of whether the assets will be donated or
     whether any consideration will be exchanged for the
     assets. . . .

     [I]f the assets will be exchanged for consideration, a
     donation would not occur and the consideration given
     would be the acquisition cost of the assets to the new
     owner. In a situation where the surviving/new
     corporation assumes liability for outstanding debt of
     the merged/consolidated corporations, the assumed debt
     would be viewed as consideration given. Thus, in a
     merger or consolidation of nonstock, nonprofit
     corporations in which the surviving or new corporation
     assumes debt of the merged or consolidated
     corporations, . . . 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). For purposes of
     calculating gain or loss, the amount of the assumed
     debt would be used as the amount received for the
     assets . . . .

Id. (emphasis added).

     On August 24, 1994, Charles Booth, the Director of the

Office of Payment Policy, Bureau of Policy Development, sent a

letter to counsel for a provider hospital responding to an

inquiry about a potential consolidation under which Hospital C

                                 11
would acquire the assets of Hospitals A and B in exchange for

the assumption of all liabilities of each organization.   AR

4416-17.   Booth replied that “based on our understanding of the

transaction, [] it appears to be a consolidation as defined in §

413.134(k)(3)(i) requiring a determination of gain or loss under

§ 413.134(f).”   Id. at 4416 (emphasis added).   He went on to

discuss the methodology to be used to apportion the sales price.

     There is evidence in the record that, beginning in the

1990s, the dynamics of the health care industry changed such

that change of ownership (CHOW) transactions began to generate

significant losses where once they had generated gains.   See AR

4237, 4249-51, June 1997 Report of Office of Inspector General,

“Medical Losses on Hospital Sales” (1997 OIG Report).   To

address this issue, a “CHOW Workgroup” was convened for the

purpose of “[reviewing] existing regulations and program manual

provisions relating to provider changes in ownership for the

purposes of making recommendations to HCFA [] to modify, update

and expand program instructions considered necessary in order to

provide current and complete guidance to fiscal intermediaries

and providers, regarding proper treatment of change of ownership

transactions to determine appropriate Medicare reimbursement.”

AR at 4280 (Sept. 30, 1996, letter forwarding CHOW Workgroup

recommendations).   The CHOW Workgroup’s recommendations were

passed on to the Office of the Inspector General (OIG) for

                                12
Health and Human Services which issued its own report and

recommendations.   June 1997 OIG Report.

     One of the recommendations coming out of the CHOW Workgroup

and the OIG Report was for Congress to eliminate the

restrictions it had put in place in 1984 with the passage of

DEFRA and to allow the Secretary to change the Medicare

reimbursement provisions related to the disposal of depreciable

assets.    Congress acted on that recommendation in the Balanced

Budget Act of 1997.   Pub. L. No. 105-33, § 4404(a), 111 Stat

251, 400 (1997).   In response, the Secretary promulgated what is

now 42 C.F.R. § 413.134(f)(1), which prohibits the recognition

of gains or losses for sales or scrappings that take place on or

after December 1, 1997.   The consolidation at issue here,

however, was consummated prior to that effect date, albeit by

one day.

     One of the other outcomes of the CHOW Workgroup was the

issuance of an amendment to the PRM through a Transmittal of

Changes dated May 2000 providing a definition of the “bona fide

sale” requirement.    AR 4714-16, Transmittal 415.   Added to the

PRM was § 104.24 which read, “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 a transaction

negotiated by unrelated parties, each acting in its own self

                                 13
interest.”    AR at 4716.   This additional language was identified

as being “added to clarify existing instructions,” and thus, no

effective date was deemed necessary.    AR at 4714.

      In a similar vein, HCFA issued a Program Memorandum on

October 19, 2000, (the 2000 PM) which stated it was being issued

“to clarify application of the regulations at 42 CFR

413.134[(k)] to mergers and consolidations involving non-profit

providers.”   AR at 5421, PM A-00-76.   The 2000 PM explained that

non-profit organizations “differ in significant ways from for-

profit organizations,” in that they exist for reasons other than

to provide goods and services for a profit, inter alia, and, as

a result, these organizations may engage in mergers and

consolidations for reasons that may differ from those of for-

profit organizations.   AR at 5422.    Because the regulations at

42 C.F.R 413.134(k) were written to address for-profit mergers

and consolidations, “certain special considerations” must be

regarded in applying that regulation section to non-profits.

Id.

      One of the differences identified between non-profits and

for-profits is that, with non-profits, there is more often a

continuation, in whole or part, of the composition of the

management of the consolidating entities and that of the

resulting consolidated entity.    Where there is that continuation

of management, the 2000 PM observed, no real change in control

                                  14
of the assets has occurred.    For that reason, the 2000 PM stated

that, where the board of the resulting entity includes a

significant number of directors from the consolidating entities,

the consolidation “can be deemed to be between related parties”

and no gain or loss will be recognized, regardless of the fact

that the consolidating entities were themselves unrelated before

the transaction.

     The 2000 PM also addressed the “bona fide sale” requirement

of the regulations, making the unremarkable observation that,

because many non-profit mergers and consolidations “have only

the interest of the community-at-large” as opposed to interests

related to ownership equity, these transactions “do not always

involve engaging in a bona fide sale or seeking fair market

value for the assets given.”   AR at 5424.   The 2000 PM stated

further,

     [N]o gain or loss may be recognized for Medicare
     payment purposes unless the transfer of the assets
     resulted from a bona fide sale as required by
     regulation 413.134(f). . . . The regulations at 42
     CFR 413.134[(k))]) do not permit recognition of a gain
     or loss resulting from the mere combining of multiple
     entities' assets and liabilities without regard to
     whether a bona fide sale occurred. . . .

     [F]or Medicare payment purposes, a recognizable gain
     or loss resulting from a sale of depreciable assets
     arises after an arm's-length business transaction
     between a willing and well-informed buyer and seller.
     An arm's-length transaction is a transaction
     negotiated by unrelated parties, each acting in its
     own self interest in which objective value is defined
     after selfish bargaining. . . .

                                 15
     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 required aspect of
     such analysis. As set forth in PRM 104.24, reasonable
     consideration is a required element of a bona fide
     sale. 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.

AR at 5424.

     The 2000 PM concluded with the declaration that, because

“[t]his PM does not include any new policies,” it should be

applied to all cost reports for which a final notice of program

reimbursement has not been issued.   Id. at 5425.

     With that regulatory background and history in mind, the

Court now turns to the particular transaction at issue in this

litigation.

II. FACTUAL AND PROCEDURAL BACKGROUND

     Until November 1997, Mercy Center was a not-for-profit

corporation that operated a hospital in Aurora, Illinois.    Mercy

Center’s sole corporate member was Mercy Health Corporation

(MHC).   MHC was sponsored by the Sisters of Mercy of the

Americas, a Catholic religious order.   In early 1997, the

Sisters of Mercy and two other Catholic orders that also

operated acute care hospitals, Franciscan Sisters of the Sacred

Heart and Servants of the Holy Heart of Mary, determined that it

would be advantageous in terms of economies of scale, greater

                                16
coordination of services, and other considerations for the three

orders to consolidate their acute care hospital facilities.      On

July 3, 1997, the three orders entered into a Master Affiliation

Agreement providing for the creation of a single Catholic-

identified integrated healthcare and human services delivery

system.

     The consolidation occurred on November 30, 1997.       On that

date, the three corporations sponsored by the three religious

orders merged to form a new entity, Provena, and surrendered all

of their assets to that new entity.      On that same date, Provena

Health was created through amendment to the Articles of

Incorporation of Mercy Center and Provena Health became the sole

corporate member of Provena.   Under Provena’s by-laws, the Mercy

Center board continued in existence as the local governing body

for the hospital that had been operated by Mercy Center.

Furthermore, the president of Mercy Center became the chief

executive of Provena Hospitals.

     As for the financial aspects of the consolidation, there

are some minor disagreements in the pleadings.      The Secretary

asserts that Mercy Center received approximately $45.6 million

for its assets in the form an assumption of all of Mercy

Center’s liabilities by Provena.       Secretary’s Opp’n at 11

(citing AR at 501, Mercy Center’s June 30, 1997, Balance Sheet).

In exchange, Provena received assets valued at $102.9 million,

                                  17
including $61.6 million in current assets and limited-use

assets.   Id.   From these figures, the Secretary opines that

Mercy Center sold its depreciable assets for nothing, and its

monetary assets at a steep discount.   Id. at 22.

     Relying on Mercy Center’s Balance Sheet from November 1997,

Provena avers that Mercy Center received approximately $43.7

million for its assets in the form of assumed liabilities.

Provena’s Mot. at 33 (citing AR at 4781).   Provena further

asserts that, of that compensation, more than $15 million was

assigned to its fixed assets and more than $11 million to its

depreciated assets (fixed assets excluding land).   Id.   Using

this assignment of the compensation received and a net book

value of Mercy Center’s depreciable assets (excluding land) of

about $36.5 million, Provena calculated a loss of over $25

million on depreciable assets from the consolidation, of which

it designated over $4.5 million as a loss attributable to

Medicare.   AR at 4781.

     Provena, acting as Mercy Center’s successor-in-interest,

submitted a cost report to its fiscal intermediary with a claim

for approximately $4.5 million for loss on disposal of

depreciated assets.   The intermediary denied the claim and

Provena appealed to the PRRB.   The PRRB affirmed the denial of

the claim on the ground that the consolidation was a “related

party” transaction for which the recognition of a gain or loss

                                 18
is not permitted.   AR at 41, PRRB Decision dated Feb. 15, 2008

(citing 42 C.F.R. § 413.134[(k)](3)(ii)).   The CMS Administrator

reviewed the decision of the PRRB and also affirmed the denial

of the claim.   AR at 2-26, Administrator’s Decision dated April

15, 2008.   The Administrator disallowed the claim on the ground

that the consolidation was a related party transaction, AR at

18-24, but also on the ground that Mercy Center’s transfer of

assets to Provena did not satisfy the “bona fide sale”

requirement which he concluded it must satisfy in order for

Mercy Center to realize a loss on the transactions.   Id. at 24-

25.   In addition to the absence of an arm’s-length negotiation

between unrelated parties, the Administrator found that there

was no “reasonable consideration” transferred for the

depreciable assets.   Id. at 25.

      Provena has sought judicial review of the Administrator’s

decision in this Court.   The parties have submitted the

Administrative Record from below and now both parties have moved

for judgment.

III. STANDARD OF REVIEW

      This Court’s review of the Secretary’s decision is governed

by the Administrative Procedures Act, 5 U.S.C. §§ 701 et seq.

(APA).   Under the APA, a court can set aside an agency’s

decision if it is “arbitrary, capricious, an abuse of discretion

or otherwise not in accordance with law.”   5 U.S.C. § 706(2)(A).

                                   19
In the context of a review of a Medicare reimbursement

determination, the Supreme Court has observed that the reviewing

court:

     must give substantial deference to an agency's
     interpretation of its own regulations. Our task is
     not to decide which among several competing
     interpretations best serves the regulatory purpose.
     Rather, the agency's interpretation must be given
     controlling weight unless it is plainly erroneous or
     inconsistent with the regulation. In other words, we
     must defer to the Secretary's interpretation 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. This broad 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 require significant
     expertise and entail the exercise of judgment grounded
     in policy concerns.”

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512

(1994)(internal quotations and citations omitted).

     Provena would add that to the standard of review that,

“‘where the challenged decision stems from an administrative

about-face,’” the review of the agency action must be “‘more

demanding.’”    Provena’s Mot. at 10 (quoting Greater Yellowstone

Coal. V. Kempthorne, 577 F. Supp. 2d 183, 189 (D.D.C. 2008)).

“[I]t is true that an agency's interpretation of a statute or

regulation that conflicts with a prior interpretation is

entitled to considerably less deference than a consistently held

agency view.”   Thomas Jefferson Univ., 512 U.S. at 515 (internal

                                 20
quotations omitted).   Of course, this maxim would be

inapplicable if it is shown that the Secretary’s interpretations

of the relevant regulations have been consistent.    Id.

     In reviewing the agency’s application of its regulations to

the facts of a particular case, the court must determine if the

agency’s decision is supported by “substantial evidence.”    5

U.S.C. § 706(2)(E).    Substantial evidence is “more than a mere

scintilla.   It means such relevant evidence as a reasonable mind

might accept as adequate to support a conclusion.”   Richardson

v. Perales, 402 U.S. 389, 401 (1971).

IV. DISCUSSION

     As to the bona fide sale requirement, Provena makes four

primary arguments: (1) that the regulatory requirements for a

bona fide sale do not apply to consolidations; (2) that, if the

bona fide sale requirement does apply, the consolidation at

issue satisfied the requirement in that it was a consolidation

between unrelated entities which were at arm’s length from one

another; (3) that the bona fide sale requirement did not include

the requirement that there be “reasonable consideration;” and

(4) that, if a bona fide sale required reasonable consideration,

the consolidation at issue satisfied that requirement as well.

See Mot. at 24.   Perhaps the single focal point, however, of

Provena’s challenge is its contention that, in denying the

claim, the Secretary has retroactively applied to this 1997

                                 21
consolidation an interpretation of the regulations that was not

announced until the issuance of the 2000 PM.

     The Court would first observe that all of the arguments

Provena now advances regarding the Secretary’s alleged “about-

face” have been flatly rejected by every court that has

considered them.   See Via Christi, 509 F.3d at 1274 (holding

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)”)7; Sewickley Valley Hosp. v. Sebelius, No. 08-3360,

2009 WL 2195793 (3rd. Cir. 2009) (same); Albert Einstein Med.

Ctr., 566 F.3d 368 (3rd Cir. 2009) (holding 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” and it was not an error to apply that provision

to a claim arising from a 1997 statutory merger); Robert F.

Kennedy Med. Ctr. v. Leavitt, 526 F.3d 557 (9th Cir. 2008)

(following Via Christi and applying bona fide sale and

“reasonable consideration” requirement to 1996 statutory

7
  While affirming the Secretary’s denial of the provider’s claim
on the ground that the consolidation did not satisfy the bona
fide sale requirement, the Tenth Circuit in Via Christi rejected
the Secretary’s interpretation of the “related party”
requirement. 509 F.3d at 1272-74.

                                22
merger).8    Providers challenging the Secretary’s interpretation

in many of these cases mount their challenges on much of the

same regulatory history as Provena relies on here.9     The Court

notes that the evidence Provena presents here in arguing that

the consolidation satisfied the bona fide sale and reasonable

consideration requirements is also similar to, and just as

unpersuasive as, the evidence presented in these other actions.

     In Via Christi, the Tenth Circuit reached the ultimate

conclusion that “the ‘bona fide sale’ requirement is a

reasonable construction of 42 C.F.R. § 413.134[(k)](3)(i),

supported by the text of the regulations.”    509 F.3d at 1274.

The court began with the observation that, “[s]ection 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.”    Id. (emphasis in

original).    Thus, if the Secretary is to construe §

8
  See also, Lehigh Valley Hosp.-Muhlenberg v. Leavitt, 253 Fed.
App’x 190, 194-95 (3rd Cir. 2007) (applying bona fide
sale/reasonable consideration requirement to 1997 statutory
merger); St. Luke’s Hosp. v. Sebelius, No. 08-883 (D.D.C. Sept.
30, 2009); UPMC-Braddock Hosp. v. Leavitt, No. 07-1618, 2008 WL
4442056 (W.D. Pa. Sept. 29, 2008) (same); North Iowa Med. Ctr.
v. Dept. of Health & Human Servs., 196 F. Supp. 2d 784, 787
(N.D. Iowa 2002) (stating that “[u]nder 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”)
9
  That is not surprising as the law firm representing Provena in
this action is the same firm representing the providers in
several of these other actions.
                                 23
413.134(k)(3)(i) as permitting depreciation adjustments after

consolidations, it is reasonable for the Secretary to only allow

depreciation adjustments for transactions that comply with §

413.134(f).   Id. at 1274-75.   The court opines that it also

would have been reasonable for the Secretary to have interpreted

“the plain language of § 413.134[(k)] as precluding any

adjustment to depreciation payments.”   Id. at 1274 n.13.

     Once the Secretary determined to allow a depreciation

adjustment under § 413.134(f) for a consolidation, the Via

Christi court reasoned, the only disposal of depreciable assets

identified in section (f) that could even potentially apply is

the “bona fide sale” provision.    Id. at 1275.   Again, the court

opined that the Secretary could have reasonably concluded, as

Provena argues here, that consolidations simply are not the same

as sales.   The result of that conclusion, however, would be that

Provena would automatically lose its claim as a consolidation

would satisfy none of the other provisions of § 413.134(f)

permitting a depreciation adjustment.   See id. at 1275 n.14.

     In the final step of its evaluation of the Secretary’s

interpretation of the regulations, the Via Christi court

concluded that the Secretary’s inclusion in the definition of

“bona fide sale” “(1) arm’s length bargaining, [including] an

attempt to maximize any sale price, and (2) reasonable

consideration” was a reasonable interpretation and was entitled

                                  24
to deference.   Id. at 1275.     In reaching this conclusion, the

court relied on the relationship between “fair market value” and

“bona fide” established elsewhere in § 413.134, specifically in

the definition of “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.”     §413.134(b)(2).

This Court would add that, as the whole purpose of the

depreciation adjustment regulations was to assure that the

depreciation allowed “accurately reflects” the providers’ true

costs of using assets for patient care, 44 Fed. Reg. 3980,

supra, only a methodology that includes a means of determining

the fair market value of the assets at the time of the

consolidation could serve that purpose.

     The Via Christi court found no direct inconsistencies

between this understanding of the regulations and the prior

interpretive materials which are cited by Provena in this

action.   Nor does this Court.    For example, while the 1987

Goeller letter cited by Provena and the provider in Via Christi

stated that “a revaluation of assets and/or an adjustment to

recognize realized gains and losses may occur” when nonprofit

providers consolidate, it also specifically stated that any

adjustment to recognize a gain or loss to the

merged/consolidated corporations would be “in accordance with

regulations section 42 CFR 413.134(f).”      AR 4413-14 (emphasis

                                   25
added).   Similarly, the 1994 Booth letter discusses how gains or

losses would be computed if they were to be recognized.   The

letter expressly stated, however, that the “determination of

gain or loss” would be made “under § 413.134(f).”   AR at 4416.

Contrary to Provena’s contentions, there simply has not been a

definitive interpretive statement declaring that the bona fide

sale and reasonable consideration requirement would not apply to

the recognition of gains or losses on depreciable assets in a

consolidation.

     Furthermore, the Secretary provides reference to a decision

issued long before the consolidation at issue here in which the

Secretary and the district court reviewing the agency’s decision

took the position that the concept of bona fide sale included

the receipt of reasonable consideration.   Secretary’s Mot. at 20

(citing Hospital Affiliates Int’l, Inc. v. Schweiker, 543 F.

Supp. 1380 (D. Tenn. 1982)).   In Hospital Affiliates, the PRRB

denied a loss on depreciable assets claim arising from the sale

of a hospital to a non-profit.   The PRRB denied the claim, and

the district court affirmed that decision, on the ground that

the transaction was between related parties.   The court went on,

however, to note that “the present case could not be found to

involve a bona fide transaction on this record.   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

                                 26
determination of the transaction's being bona fide is

appropriate.”   543 F. Supp. 1380.

     In contrast to the reasonableness of the Secretary’s

interpretation, Provena’s would allow a provider to recognize a

loss on a consolidation whenever the liabilities assumed are

less than the net book value, regardless of whether the provider

actually experienced a true loss.    In a somewhat half-hearted

attempt to rationalize its position, Provena declares that

“there is frequently a direct relationship between hospital

assets and liabilities,” because when hospitals borrow for

capital projects, those projects add to the value of the

hospital’s assets.   Provena’s Reply at 8 n.2 (emphasis added).

Of interest, the Court notes that the firm representing Provena

in this action acknowledged in a similar action recently decided

by Judge Robertson, that it would be “mere happenstance” if the

fair market value of the merged entity’s assets were to be equal

to the assumed liabilities.   St. Lukes, Slip Op. at 10 (quoting

Pl.’s Mot. at 19).   This Court is inclined to agree with the

“mere happenstance” assessment and Provena provides no evidence

to support its current conjecture.   Regardless, whether it is by

“happenstance” or “frequently,” it would be an odd result that

the regulation would automatically base a loss calculation on a

“price” with no more certain relationship to actual value.    It

would be particularly odd given that the whole purpose of the

                                27
depreciation adjustment provision was to provide a more accurate

assessment of the costs “actually incurred” in providing

Medicare services than that provided by the net book value.

        For all these reasons, the Court finds that the Secretary’s

interpretation of the regulations is entitled to deference.

        The Court also finds that there was substantial evidence

supporting the Administrator’s determination under that

interpretation that the consolidation at issue was not a bona

fide sale.    There is no evidence that the 1997 consolidation was

an “arm’s length” transaction.    As clarified in the 2000 PM, an

arm’s length transaction is “a transaction negotiated by

unrelated parties, each acting in its own self interest in which

objective value is defined after selfish bargaining.”       AR at

5424.    While Provena argues at length that the three Catholic

health care systems were unrelated prior to the consolidation,

there is no evidence that they bargained or negotiated over the

sales price for Mercy Center’s assets.    This is not at all

surprising given the expressed purpose of the consolidation, as

set forth in the Master Affiliation Agreement signed on July 3,

1997.

        In that Agreement, Mercy Center and the other two

consolidating hospital systems stated that their goal was “to

effect a commonality of ownership and control between [the

consolidating systems] which will permit an integrated

                                  28
Affiliation of their respective organization . . . into a single

Catholic-identified integrated healthcare and human services

delivery system.”   AR at 5018.   The Agreement described the

“driving force behind the transactions” as “the strengthening

and preservation of the Catholic healthcare ministry of the

Sponsor Parties and their respective System Parties, together

with their mutual desire to create a new form of equal co-

sponsorship of the system.”   Id. at 5018-19.   The Agreement also

noted that the terms of the transactions and the resulting

system “will allow the Sponsor Parties to retain their separate

historical identities, unique traditions and constituencies

while combining their healthcare ministries and preserving their

local philanthropic support and protecting their donor-

restricted endowments.”   Id. at 5020.

     Given the nature of the institutions involved, these are

certainly appropriate reasons for entering into the transaction

and are certainly worthy goals.    They plainly are not, however,

indicia of an arm’s length transaction.   These expressed reasons

for entering into the consolidation also explain why Mercy

Center made no efforts to find another purchaser, nor did it

even obtain an appraisal of its assets prior to the

consolidation to determine what their value might be.

     The Court also finds that there was substantial evidence in

support of the determination that Mercy Center did not receive

                                  29
reasonable consideration for its assets.   An appraisal of Mercy

Center’s fixed and intangible assets that was undertaken after

the consolidation, in March of 1998, determined that the fair

market value of Mercy Center’s fixed and intangible assets at

the time of the consolidation was $38,470,000.10   In addition, at

the time of the consolidation, Mercy Center had monetary assets

valued at approximately $61.6 million, including almost $33.3

million in current assets.   Thus, Provena received assets valued

at over $100 million in exchange for assuming just $45.6 million

of Mercy Center’s liabilities.   Courts have consistently found

that discrepancies of this scale demonstrate the absence of a

bona fide sale.   See, e.g., Lehigh Valley Hosp.-Muhlenberg, 253

Fed. App’x at 197 (holding that assumption of liabilities of

$43.7 million for hospital’s assets valued at over $100 million

did not constitute a bona fide sale); Robert F. Kennedy Hosp.,

526 F.3d at 563 (holding transaction lacked “reasonable

consideration” where approximately $50 million in assets were

transferred for the assumption of $30.5 in liabilities).

10
  The Secretary represents the value of these assets as $42.2
million. Secretary’s Mot. at 32 (citing AR at 4783-86).
Provena contests this figure, arguing that the $42.2 million
figure included the value of two medical office buildings that
were owned, not by Mercy Center, but by one of its sister
corporations. Provena’s Reply at 12 n.5 (citing AR at 438, Tr.
of PRRB Hearing and AR at 4785, March 3, 1998 Appraisal Report).

                                 30
     To avoid that finding here, Provena argues that it also

assumed contingent liabilities of Mercy Center that should have

been factored into the price paid for Mercy Center’s assets.

Provena’s Mot. at 34.   The Secretary notes that Provena made no

effort to prove the value of these contingent liabilities during

the administrative proceedings, and there is certainly no record

that these liabilities were considered in structuring the

transaction.   Courts have consistently rejected similar

arguments based upon the existence of “contingent liabilities.”

See, e.g., Via Christi, 509 F.3d at 1277 n.16 (noting that where

parties’ due diligence before consolidation considered these

risks acceptably low, provider could not, in arguing it received

reasonable consideration, “make a mountain out of what it

previously determined to be a molehill”); Albert Einstein Med.

Ctr., 566 F.3d at 379 n.11 (rejecting argument that assumption

of unknown liabilities drove the sale price lower, opining that

it is “hard to imagine how an adjustment in price for this risk

could account for” a $32 million discrepancy).

     Provena raises a number of additional challenges to the

Secretary’s determination that can be addressed collectively.

Provena argues: (1) that the Administrator’s decision was

arbitrary and capricious because it relied on a change in policy

set forth in the 2000 PM without a rational explanation for that

change in policy, Provena’s Mot. at 35-37; (2) that the May 2000

                                31
amendment of the PRM and 2000 PM effected “significant change in

Medicare program policy” and thus violated the restrictions put

in place under DEFRA, id. at 37-38; (3) that the Administrator’s

determination represented an impermissible retroactive

imposition of a new interpretive rule on a regulated party, id.

at 38-39; (4) that the 2000 PM “added substantive context – new

requirements” to the consolidation regulations and

“represent[ed] a significant departure from long established and

consistent practice” and thus, was subject to the APA’s notice

and comment requirements, with which the Secretary failed to

comply, id. at 39-41; (5) that the Secretary failed to timely

include the 2000 PM in the mandatory list of agency issuances

published in the Federal Register under 41 U.S.C. §

1395hh(c)(1), and thus, the policies set forth in the 2000 PM

could not be used to deny Provena’s claim, id. at 41; and (6)

that the 2000 PM represented the announcement of a “major rule”

under the Congressional Review of Agency Rule Making Act (“CRA”)

and, as such, had to be submitted to Congress before being put

into effect and, because it was not, it is unenforceable.    Id.

at 42-44.

     Each of these arguments, however, is premised on Provena’s

assertion that the Secretary had previously committed to a

position that reimbursements for “losses” could be realized on

consolidations without regard to whether any true loss occurred.

                               32
Because the Court rejects that premise, Provena’s additional

arguments fail.11

V. CONCLUSION

     For all these reasons, the Court finds that the Secretary’s

denial of Provena’s claim should be upheld.   Accordingly, the

Secretary’s motion for summary judgment will be granted and

Provena’s motion for summary judgment denied.   A separate order

will issue.

                           _______________/s/________________
                          William M. Nickerson
                          Senior United States District Judge
                          for the District of Maryland
                          (sitting by designation)

DATED: October 13, 2009

11
   Some of these arguments fail for additional reasons as well.
For example, Provena’s CRA claim also fails because the statute
expressly states that “[n]o determination, finding, action, or
omission under this chapter shall be subject to judicial
review.” 5 U.S.C. § 805. See Montanans for Multiple Use v.
Barbouletos, 568 F.3d 225, 229 (D.C. Cir. 2009) (holding that
this provision denies courts the power to void rules on the
basis of agency noncompliance with the CRA).
                                33