Pinnacle Health Hospitals Ex Rel. Harrisburg Hospital v. Sebelius , 681 F.3d 424 ( 2012 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Submitted May 11, 2012 Decided June 5, 2012
No. 10-5277
PINNACLE HEALTH HOSPITALS, AS SUCCESSOR-IN-INTEREST TO
HARRISBURG HOPSITAL, SEIDLE MEMORIAL HOSPITAL, AND
POLYCLINIC MEDICAL CENTER,
APPELLANT
v.
KATHLEEN SEBELIUS, AS SECRETARY OF HEALTH AND HUMAN
SERVICES,
APPELLEE
Consolidated with 10-5279
Appeals from the United States District Court
for the District of Columbia
(No. 1:09-cv-00186)
Robert E. Mazer was on the briefs for appellant.
Tony West, Assistant Attorney General, U.S. Department
of Justice, Ronald C. Machen Jr., U.S. Attorney, Michael
Raab and Joel McElvain, Attorneys, William B. Schultz,
Acting General Counsel, U.S. Department of Health and
Human Services, Janice Hoffman, Associate General
Counsel, Mark D. Polston, Deputy Associate General Counsel
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for Litigation, and Jonathan C. Brumer, Attorney, were on the
brief for appellee. R. Craig Lawrence, Assistant U.S.
Attorney, and David S. Cade, Attorney, U.S. Department of
Health and Human Services, entered appearances.
Before: GARLAND, BROWN, and GRIFFITH, Circuit
Judges.
Opinion for the Court by Circuit Judge BROWN.
BROWN, Circuit Judge: In 1995, two non-profit hospitals
in Pennsylvania consolidated to form Pinnacle Health
Hospitals. Pinnacle subsequently submitted a Medicare
reimbursement claim for the losses the hospitals had incurred
through the sale of their depreciable assets in the
consolidation. The Administrator of the Centers for Medicare
and Medicaid Services denied Pinnacle’s claim, and that order
became the final decision of the Secretary of Health and
Human Services. On Pinnacle’s Administrative Procedure
Act (APA) challenge, the district court upheld the Secretary’s
decision in full. See Pinnacle Health Hosps. v. Sebelius, 719
F. Supp. 2d 16 (D.D.C. 2010).
Pinnacle now appeals. We review de novo the district
court’s entry of summary judgment for the Secretary,
Calhoun v. Johnson, 632 F.3d 1259, 1261 (D.C. Cir. 2011),
and will uphold the judgment as long as the Secretary’s ruling
was not “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A).
Pinnacle’s primary argument is that the Secretary
impermissibly required it to prove there had been a “bona fide
sale” of depreciable assets to obtain reimbursement. We have
covered much of this ground before. In St. Luke’s Hospital v.
Sebelius, 611 F.3d 900 (D.C. Cir. 2010), we considered
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whether the Secretary reasonably applied the bona fide sale
requirement to a reimbursement request from a participant in
a “statutory merger.” See id. at 903–04 . Our answer was yes
because the Secretary’s interpretation of the relevant
Medicare regulations (42 C.F.R. § 413.134(f) and (l)), as
memorialized in a 2000 Memorandum (PM A-00-76), was
“not plainly erroneous or inconsistent with the regulation.”1
611 F.3d at 906. We explained:
Subsection (l) by its express terms makes the
merged provider “subject to the provisions of
paragraph[ ] . . . (f) of this section concerning
. . . the realization of gains and losses.” The
Secretary reasonably read this unrestricted
cross-reference to subsection (f) as
incorporating subsection (f)(2)’s requirement
that a transaction be “bona fide” if the provider
is to revalue the assets it transfers therein. See
42 C.F.R. § 413.134(f)(2) (rules for
recognizing gains and losses upon “the bona
fide sale . . . of depreciable assets before
December 1, 1997”).
Id. at 905.
In that same Memorandum—PM A-00-76—the Secretary
also found the bona fide sale requirement applied to
consolidations involving non-profit Medicare providers, like
the one here. We hold that too was not “plainly erroneous or
inconsistent with the regulation.” Id. at 906. 42 C.F.R. §
142 C.F.R. 413.134(l) was redesignated without alteration as
subsection (k) in 2000. See St. Luke’s Hosp., 611 F.3d at 901 n.2.
We will continue to refer to it as subsection (l) because that is how
it appeared at the time of the consolidation.
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413.134(l)(3)(i) states that in consolidations “between two or
more corporations that are unrelated . . . the assets of the
provider corporation(s) may be revalued in accordance with
paragraph (g) of this section.” Paragraph (g) does not
explicitly or implicitly foreclose the reimbursement of losses
from the sale of depreciable assets, which means the Secretary
could permissibly interpret the regulations to authorize such
reimbursement. See id. § 413.134(g). And “[i]f the Secretary
. . . construe[s] § 413.134(l)(3)(i) as permitting depreciation
adjustments for consolidations, then the Secretary is perfectly
reasonable in maintaining consistency and only allowing
depreciation adjustments that comply with § 413.134(f)”—the
subsection that requires a bona fide sale. Via Christi Reg’l
Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1274–75 (10th Cir.
2007). It would be a “strange result, to say the least,” if
consolidating providers did not have to satisfy the same bona
fide sale requirement as merging providers. Id. at 1275.
As a fallback, Pinnacle contends it satisfied the bona fide
sale requirement, but substantial evidence supports the
Secretary’s finding to the contrary. See 42 U.S.C. §
1395oo(f)(1) (subjecting the Secretary’s findings to the
APA’s substantial evidence test). A bona fide sale requires
the exchange of “reasonable consideration” for the
depreciable assets. St. Luke’s Hosp., 611 F.3d at 905; see also
Forsyth Mem’l Hosp., Inc. v. Sebelius, 639 F.3d 534, 538
(D.C. Cir. 2011). Here, the Secretary determined that in the
consolidation Pinnacle gained title to current assets that had a
total value several million dollars greater than the total
liabilities it took on. See Pinnacle Health Hosps., 719 F.
Supp. 2d at 25–26. In effect, that meant Pinnacle gained title
to the consolidating hospitals’ depreciable assets for no cost.
That is substantial evidence the consolidating hospitals did
not receive reasonable consideration for their depreciable
assets, and, as a result, substantial evidence a bona fide sale
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did not occur. See Forsyth Mem’l Hosp., 639 F.3d at 538–39
(reaching the same conclusion).
Pinnacle is left to argue that the Secretary inaccurately
calculated the value of the relevant assets and liabilities. Its
three claims to that end are unpersuasive. First, the
Secretary’s analysis did “reflect each Consolidating Entity’s
precarious financial situation,” Petitioner’s Br. 29, because
the appraisals on which the Secretary relied expressly
accounted for demographic and structural factors that would
affect the hospital’s future financial health. Second, whether
or not Pinnacle is right that the analysis improperly
considered the “net reproduction costs” rather than the “fair
market value” of the depreciable assets, Pinnacle, which has
the burden, did “not provide[] any evidence of the fair market
value of the facilities determined according to its preferred
methodology.” Pinnacle Health Hosps., 719 F. Supp. 2d at25 n.12. Finally, though the analysis did not explicitly
consider the hospitals’ contingent and unknown liabilities,
Pinnacle has not “put forth evidence tending to show . . . that
[the hospitals’] unknown liabilities were likely particularly
substantial,” so as to make up the several-million dollar
disparity between the value of the assets and liabilities that
were transferred in the consolidation. Forsyth Mem’l Hosp.,
639 F.3d at 539.
Accordingly, the district court’s order entering judgment
for the Secretary is
Affirmed.