Via Christi Regional Medical Center, Inc. v. Sebelius , 78 F. Supp. 3d 416 ( 2015 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
VIA CHRISTI REGIONAL MEDICAL
CENTER, INC.,
Plaintiff,
v.
Civil Action No. 09-2060 (CKK)
SYLVIA M. BURWELL, Secretary,
Department of Health and Human Services,
Defendant.
MEMORANDUM OPINION
(January 28, 2015)
Plaintiff, Via Christi Regional Medical Center, Inc. (“Via Christi”), brings this action
against Defendant Sylvia Matthews Burwell (“Secretary”), in her official capacity as Secretary
of Health and Human Services,1 to review the final decision of the Administrator for the Centers
for Medicare and Medicaid Services (“CMMS”) denying Plaintiff, as successor-in-interest to St.
Francis Regional Medical Center, reimbursement under the Medicare program of the Social
Security Act, 42 U.S.C. §§ 1395 et seq., for an alleged loss that Plaintiff incurred as part of the
consolidation that resulted in Via Christi’s formation. Specifically, Plaintiff seeks an order
reversing and setting aside the final decision of the CMMS Administrator, and declaring that
Plaintiff is entitled to $59,176,291 or such other amount of Medicare reimbursement determined
to be due for the loss that St. Francis Regional Medical Center incurred on its consolidation. See
1
Pursuant to Fed. R. Civ. P. 25(d), Sylvia Matthews Burwell has been automatically
substituted for Kathleen Sebelius, whom the parties’ pleadings name as Defendant.
1
Compl. at 20, ECF No. [1]. Presently before the Court are the parties’ cross-motions for
summary judgment. Upon consideration of the pleadings,2 the relevant legal authorities, and the
record as a whole, the Court GRANTS Defendant’s [25] Motion for Summary Judgment and
DENIES Plaintiff’s [23] Motion for Summary Judgment. Accordingly, judgment shall be
entered for Defendant.
I. BACKGROUND
A. Regulatory Framework
Title XVIII of the Social Security Act (“Medicare program”), 42 U.S.C. §§ 1395 et seq.,
provides a system of federally funded health insurance for aged and disabled persons. Relevant
to the instant action, the statute permits providers of Medicare services to be reimbursed for
“reasonable costs” of supplying such services. 42 U.S.C. § 1395f(b)(1). Reasonable costs are
2
This matter was stayed by the joint request of the parties on April 6, 2010, pending the
United States Court of the Appeals for the District of Columbia Circuit’s ruling in St. Luke’s
Hosp. v. Sebelius, 611 F.3d 900 (D.C. Cir. 2010), and Forsyth Mem. Hosp., Inc. v. Sebelius, 639
F.3d 534 (D.C. Cir. 2011). The Court lifted the stay on September 9, 2011, after the D.C. Circuit
issued in its opinion in both matters. The Court denied a subsequent request to stay the
proceedings pending resolution by the Supreme Court of the United States of the writ of
certiorari filed in Forsyth Mem. Hosp., Inc., and ordered briefing of the parties’ dispositive
motions. The parties filed cross-motions for summary judgment. Pl.’s Mot. for Summ. J., ECF
No. [23] (“Pl.’s Mot.”); Pl.’s Errata to Pl.’s Mot., ECF No. [34]; Def.’s Mot. for Summ. J. &
Opp’n to Pl.’s Mot. for Summary Judgment, ECF No. [25] (“Def.’s Mot.”); Pl.’s Reply to Def.’s
Opp’n to Pl.’s Mot. for Summ. J. and Def.’s Cross-Mot. for Summ. J., ECF No. [29] (“Pl.’s
Reply”); Pl.’s Errata to Pl.’s Reply, ECF No. [35]; Def.’s Reply in Supp. of Def.’s Mot. for
Summ. J., ECF No. [31] (“Def.’s Reply”). Further, supplemental briefing was filed after the
D.C. Circuit’s ruling in Pinnacle Health Hosps. v. Sebelius, 681 F.3d 424 (D.C. Cir. 2012), and
after other relevant opinions were issued, including the D.C. Circuit’s ruling in Catholic
Healthcare West v. Sebelius, 748 F.3d 351 (D.C. Cir. 2014) and Central Iowa Hospital
Corporation v. Sebelius, 446 Fed. App’x 6 (D.C. Cir. 2012). Pl.’s Notice of Supp. Auth., ECF
No. [36]; Def.’s Notice of Updated Info., ECF No. [38]; Pl.’s Notice of Develop., ECF No. [40].
The motion is fully briefed and ripe for adjudication. In an exercise of its discretion, the Court
finds that holding oral argument would not be of assistance in rendering its decision. See LCvR
7(f).
2
defined as “the cost actually incurred, excluding therefrom any part of incurred cost found to be
unnecessary in the efficient delivery of needed health services,” as determined in accordance
with regulations promulgated by the Secretary. 42 U.S.C. § 1395x(v)(1)(A). The Secretary has
promulgated several regulations for determining “reasonable costs” under this section.
At the relevant time period, “reasonable costs” included capital-related costs, such as the
costs related to the depreciation of buildings and equipment used for patient care under the
Medicare program. 42 C.F.R. §§ 413.130(a) & 413.134(a) (1995).3 Such a depreciation was
calculated based on the historical cost of the asset, id. at § 413.134(a)(2), defined as “the cost
incurred by the present owner in acquiring the asset,” id. at § 413.134(b)(1), and was prorated
over the estimated useful life of the asset, id. at § 413.134(a)(3). The regulation specifies:
If disposal of a depreciable asset results in a gain or loss, an adjustment is
necessary in the provider’s allowable cost. The amount of a gain included in the
determination of allowable cost is limited to the amount of depreciation
previously included in Medicare allowable costs. The amount of a loss to be
included is limited to the undepreciated basis of the asset permitted under the
program.
42 C.F.R. § 413.134(f)(1). The treatment of a gain or a loss under the Medicare program
depends on the manner of disposition of the asset. Id. Pursuant to 42 C.F.R. § 413.134(f), gains
and losses realized from the bona fide sale of depreciable assets are included in the determination
of allowable costs. Id. at § 413.134(f)(2)(i). Accordingly, it is clear that the regulations
contemplate that a provider may recover gains or losses realized as a result of disposing of assets
through a bona fide sale.
3
Unless otherwise specified, all citations to the Code of Federal Regulations reference
the 1995 version that was in effect at the time of the consolidation at issue.
3
Also relevant to the instant action is 42 C.F.R. § 413.134(l) which addresses transactions
involving a provider’s capital stock. Notably, the section addressing the consolidation of two
providers, like the transaction at issue in the instant matter, is silent on the issue of whether an
entity formed through a consolidation may recover gains or losses resulting from that transaction
under the Medicare program.4 See 42 C.F.R. § 413.134(l)(3) (defining consolidations as “the
combination of two or more corporations resulting in the creation of a new corporate entity”). In
contrast, the section addressing statutory mergers between unrelated parties expressly provides
that the merged corporation may recover for losses pursuant to 42 C.F.R. § 413.134(f), the
section that provides for the recovery of losses for assets disposed of through a bona fide sale.
42 C.F.R. § 413.134(l)(2)(i). Accordingly, it is clear from the regulatory scheme that an entity
formed as the result of a statutory merger may recover losses if that merger was a bona fide sale.
However, the regulatory scheme does not expressly provide that an entity formed through a
consolidation may recover losses.
On October 19, 2000, CMMS’s predecessor5 issued Program Memorandum A-00-76
(“PM A-00-76”) in order to “clarify” the application of 42 C.F.R. § 413.134(l) to mergers and
consolidations involving non-profit providers. A.R. at 1428 (Program Memorandum A-00-76).
Specifically, PM A-00-76 was created because 42 C.F.R. § 413.134(l) was drafted to address
mergers and consolidations involving for-profit providers. Id. As set forth in PM A-00-76, a
gain or a loss adjustment for both merged and consolidated assets of non-profit providers is
4
In 2000, section 413.134(l) was redesignated without change as 413.134(k). Pinnacle
Health Hosps. v. Sebelius, 681 F.3d 424, 426 n.1 (D.C. Cir. 2012). However, the Court will refer
to this provision as subsection (l) as it is appeared at the time of the consolidation.
5
CMMS formerly was known as the Health Care Financing Administration (“HCFA”).
4
recognized as long as the asset was disposed of through a bona fide sale as required pursuant to
42 C.F.R. § 413.134(f).6 Id. at 1429. As explained in the PM A-00-76:
[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.
Id. at 1430. In addition, PM A-00-76 indicated that in determining whether two parties are
related for the purposes of the Medicare regulations, “consideration must be given to whether the
composition of new board directors, or other governing body or management team, includes
significant representation from the previous board(s) or management team(s).” Id. at 1429. The
parties dispute the applicability of PM A-00-76 to this action as discussed infra.
B. Factual and Procedural Background
The relevant facts in this case are undisputed. Plaintiff’s claim centers around the
October 1, 1995, consolidation of two entities, St. Francis Regional Medical Center and St.
Joseph Medical Center (“constituent hospitals”), that formed Plaintiff, Via Christi Regional
Medical Center. Specifically, Plaintiff brings this suit as successor-in-interest to St. Francis
Regional Medical Center, alleging that it incurred a loss as a result of the consolidation and that
it is entitled to Medicare reimbursement as a result of that loss. Plaintiff also sought to recover
6
Pursuant to 42 C.F.R. § 413.134(f), recovery of a gain or loss for an asset disposed of
through scrapping, demolition, abandonment, or involuntary conversion also is recognized.
However, the only applicable provisions of 42 C.F.R. § 413.134(f) is the bona fide sale
requirement because the assets in question were disposed of through a consolidation. Further,
the Court notes that the bona fide sale requirement only applies to mergers or consolidations
occurring before December 1, 1997, A.R. at 1428 (Program Memorandum A-00-76), making the
requirement applicable to the instant consolidation that took effect on October 1, 1995, A.R. at
1712-13 (Stipulation, Apr. 23, 2007). The Medicare regulations were amended to eliminate the
recognition of gains and losses for transactions finalized after December 1, 1997. A.R. at 1409-
13 (63 Fed. Reg. 1379-83 (Jan. 9, 1998)).
5
losses as a result of this consolidation as successor-in-interest to St. Joseph. However, the
United States Court of Appeals for the Tenth Circuit (“Tenth Circuit”) held that Plaintiff was not
entitled to Medicare reimbursement for a depreciation adjustment in that matter. See generally
Via Christi Reg’l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259 (10th Cir. 2007).
Prior to the consolidation, St. Francis Regional Medical Center (“St. Francis”) was a
hospital in Wichita, Kansas, that had a licensed bed capacity of approximately 880. A.R. at 740
(Testimony from PRRB hearing, Apr. 30, 2002). St. Francis was a nonprofit corporation under
the laws of Kansas and its sole corporate member was St. Francis Ministry Corporation (“St.
Francis Ministry”). Id. at 1712 (Stipulation, Apr. 23, 2007). The religious sponsor of both St.
Francis and St. Francis Ministry was Sisters of the Sorrowful Mother – U.S. Health Systems, Inc.
(“Sisters of Sorrowful Mothers”). Id. St. Joseph Medical Center (“St. Joseph”) was an acute
care hospital in Wichita licensed for 600 beds prior to the consolidation. Id. at 740 (Testimony
from PRRB hearing, Apr. 30, 2002). St. Joseph also was a nonprofit corporation under the laws
of Kansas and its sole corporate member was CSJ Health System of Wichita, Inc. (“CSJ”). Id. at
1712 (Stipulation, Apr. 23, 2007). The religious sponsor of both CSJ and St. Joseph was Sisters
of St. Joseph of Wichita, Kansas (“Sisters of St. Joseph”). Id. Prior to the consolidation, there
was no common ownership between St. Francis and St. Joseph, nor did the constituent hospitals
have common officers or board members. Id. at 741 (Testimony from PRRB hearing, Apr. 30,
2002); id. at 1713 (Stipulation, Apr. 23, 2007).
The constituent hospitals entered into a consolidation that took effect on October 1, 1995,
and was consummated pursuant to the Agreement of Consolidation and the Master Plan of
Consolidation. Id. at 1712-13 (Stipulation, Apr. 23, 2007). Via Christi Regional Medical
Center, Inc. (“Via Christi Medical Center”) came into existence as a result of the consolidation
6
and both constituent hospitals ceased to exist. Id. at 1713. By virtue of the consolidation, good
title to all of St. Francis’ assets passed to Via Christi Medical Center and Via Christi Medical
Center became legally responsible for all of St. Francis’ liabilities. Id. at 1712-13.
After the consolidation, Plaintiff, as successor-in-interest to St. Francis, sought Medicare
reimbursement for an alleged loss it incurred as a result of the consolidation with St. Joseph. Id.
at 59-60 (PRRB Decision); id. at 1713-14 (Stipulation, Apr. 23, 2007). On March 6, 1996, a
letter was submitted to the fiscal intermediary (“Intermediary”), estimating the Medicare portion
of St. Francis’ loss at $35 million. Id. On March 31, 1997, an amended cost report was
submitted to the Intermediary, reflecting that the Medicare portion of St. Francis’ loss was
approximately $58.5 million. Id. at 1714. Ultimately, the Intermediary disallowed Plaintiff’s
claim on the basis that the consolidation involved two related organizations and, accordingly,
recovery under the Medicare program was not permitted. Id. Pursuant to 42 U.S.C. § 1395oo(a),
Plaintiff appealed the Intermediary’s denial of its request to the Provider Reimbursement Review
Board (“PRRB”). The PRRB overturned the Intermediary’s conclusion and found that St.
Francis’ loss should be recognized after determining that the constituent hospitals were unrelated
prior to the consolidation. Id. at 54-76 (PRRB Decision). The PRRB rejected the Intermediary’s
argument that the consolidation was between related parties, and found that the constituent
hospitals were unrelated parties as required for recovery under the regulation. Id. at 66.
Further, the PRRB noted, relying on the appraised value of St. Francis’ assets arrived at by
employing the income approach, that the fair market value of St. Francis’ assets approximated
the consideration paid even though the correlation was “purely coincidental in the consolidation
context.” Id. at 76.
7
The CMMS Administrator then exercised its discretion to review the final decision of the
PRRB on behalf of the Secretary and found that Plaintiff was not entitled to recover for the loss
on two grounds. First, the Administrator concluded that there was a continuity of control
between the constituent hospitals and Via Christi after the consolidation and, accordingly, the
consolidation was one between related parties such that recovery for any loss was barred under
the regulations. Id. at 26-27 (CMMS Administrator Decision). Second, the Administrator found
that the transfer of assets in this case did not constitute a bone fide sale because the consolidation
did not involve an arm’s length transaction. Id. at 27-30. Further, the Administrator found that
the consolidation was not a bona fide sale because a comparison of the net book value of St.
Francis’ assets to the consideration exchanged, i.e. St. Francis’ liabilities that were assumed as
part of the consolidation, did not support a finding that there was reasonable consideration
exchanged for the consolidation. Id. at 30-31. As an alternative ground for finding that there
was not reasonable consideration, the Administrator found that even relying on the appraised
value of St. Francis’ assets as calculated by the cost approach, there was too large of a
discrepancy between the value of the assets and the consideration exchanged for the
consolidation to meet the bona fide sale requirement. Id. at 31-33. As a result, the Administrator
found that recovery of a loss was not allowed under the regulations and Provider Reimbursement
Manual. Id. at 33-34. The Administrator’s decision became the final decision of the Secretary.
Pursuant to 42 U.S.C. § 1395oo(f)(1), Plaintiff filed the instant action in this Court requesting
judicial review of the Administrator’s decision. See Compl., ECF No. [1].
II. LEGAL STANDARD
A. Summary Judgment
8
Summary judgment is appropriate where “the movant shows that there is no genuine
dispute as to any material fact and [that he] . . . is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a). The mere existence of some factual dispute is insufficient on its own to bar
summary judgment; the dispute must pertain to a “material” fact. Id. Accordingly, “[o]nly
disputes over facts that might affect the outcome of the suit under the governing law will
properly preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248 (1986). Nor may summary judgment be avoided based on just any disagreement as to
the relevant facts; the dispute must be “genuine,” meaning that there must be sufficient
admissible evidence for a reasonable trier of fact to find for the non-movant. Id.
In order to establish that a fact is or cannot be genuinely disputed, a party must (a) cite to
specific parts of the record—including deposition testimony, documentary evidence, affidavits or
declarations, or other competent evidence—in support of his position, or (b) demonstrate that the
materials relied upon by the opposing party do not actually establish the absence or presence of a
genuine dispute. Fed. R. Civ. P. 56(c)(1). Conclusory assertions offered without any factual
basis in the record cannot create a genuine dispute sufficient to survive summary judgment.
Ass’n of Flight Attendants-CWA, AFL-CIO v. U.S. Dep’t of Transp., 564 F.3d 462, 465-66 (D.C.
Cir. 2009). Moreover, where “a party fails to properly support an assertion of fact or fails to
properly address another party’s assertion of fact,” the district court may “consider the fact
undisputed for purposes of the motion.” Fed. R. Civ. P. 56(e).
B. Medicare Disbursement Disputes
The parties agree that 42 U.S.C. § 1395oo(f)(1) provides the applicable standard of
review and incorporates the review standard of the Administrative Procedure Act (“APA”), 5
U.S.C. §§ 701 et seq. See Pls.’ Mot. at 12; Def.’s Mot. at 14-15. Pursuant to the APA, the
9
reviewing court shall set aside the Secretary’s findings if the findings “unsupported by
substantial evidence.” 5 U.S.C. § 706(2)(E); Forsyth Mem. Hosp., Inc. v. Sebelius, 639 F.3d 534,
537 (D.C. Cir. 2011). Further, “[t]he reviewing court shall . . . hold unlawful and set aside
agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
Under the narrow “arbitrary and capricious” standard, a court may not substitute its own
judgment for that of the agency. Motor Vehicle Mfrs. Ass’n of the United States, Inc., 463 U.S.
29, 43 (1983). “Nevertheless, the agency must examine the relevant data and articulate a
satisfactory explanation for its action including ‘a rational connection between the facts found
and the choice made.’” Id. (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156,
168 (1962)). “In reviewing that explanation, ‘[the court] must consider whether the decision was
based on a consideration of the relevant factors and whether there has been a clear error of
judgment.’” Id. (quoting Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc.,
419 U.S. 281, 285 (1975)); see also Cellco P’ship v. Fed. Commc’ns Comm’n, 357 F.3d 88, 93-
94 (D.C. Cir. 2004) (noting “arbitrary and capricious” review is “highly deferential . . .
presum[ing] the validity of agency action . . . [which] must [be] affirm[ed] unless the
Commission failed to consider relevant factors or made a clear error in judgment”). Moreover,
the Court “must affirm if a rational basis for the agency’s decision exists.” Bolden v. Blue Cross
& Blue Shield Assoc., 848 F.2d 201, 205 (D.C. Cir. 1988). The degree of deference a court
should pay an agency’s construction is, however, affected by “the thoroughness, validity, and
consistency of an agency’s reasoning.” Fed. Election Comm’n v. Democratic Senatorial
Campaign Comm., 454 U.S. 27, 37 (1981).
10
Courts must also “give substantial deference to an agency’s interpretation of its own
regulations.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). This deference is
particularly appropriate in contexts that involve a complex and highly technical regulatory
program, such as Medicare, which requires significant expertise and entails the exercise of
judgment grounded in policy concerns. Id.; Methodist Hosp. of Sacramento v. Shalala, 38 F.3d
1225, 1229 (D.C. Cir. 1994) (“[I]n framing the scope of review, the court takes special note of
the tremendous complexity of the Medicare statute. That complexity adds to the deference
which is due to the Secretary’s decision.”). Thus, a court does not have the “task . . . to decide
which among several competing interpretations best serves the regulatory purpose,” but instead,
“the agency’s interpretation must be given controlling weight unless it is plainly erroneous or
inconsistent with the regulation.” Thomas Jefferson Univ., 512 U.S. at 512 (internal quotations
omitted).
III. DISCUSSION
Plaintiff provides two bases for overturning the Secretary’s final determination that
Plaintiff as successor-in-interest to St. Francis was not permitted to recover losses suffered as a
result of the consolidation with St. Joseph under the Medicare program. First, Plaintiff argues
that the Secretary improperly required Plaintiff to show that the consolidation at issue was a bona
fide sale in order for Plaintiff to recover Medicare reimbursement for St. Francis’ losses resulting
from the consolidation. In the alternative, Plaintiff argues that if it was required to show that the
consolidation was a bona fide sale, the Secretary incorrectly found that Plaintiff did not meet this
requirement. Second, Plaintiff argues that the Secretary incorrectly examined the continuity of
control between St. Francis and St. Joseph, and the entity formed as a result of the consolidation,
Via Christi, in determining whether the parties were “related” within the meaning of the
11
Medicare regulations. As discussed herein, the Court finds that the Secretary properly found that
Plaintiff is required to, and failed to demonstrate that the consolidation is a bona fide sale. The
Court does not reach the issue of whether the parties were “related” because it has determined
that Plaintiff’s claim fails on the basis that the consolidation was not a bona fide sale.
A. Bona Fide Sale Requirement Applies to this Consolidation
The parties dispute whether Plaintiff is required to establish that the consolidation was a
bona fide sale within the meaning of the Medicare regulations in order to recover losses.
Plaintiff argues that language of the statute and related regulations does not impose the bona fide
sale requirement on consolidations even though the requirement is imposed on mergers. Pl.’s
Mot. at 12-13. Specifically, Plaintiff argues that the Secretary should not have applied the
“clarifications” of 42 C.F.R. § 413.134(l) as embodied in the PM A-00-76 to the instant action
for a host of reasons. See Pl.’s Mot. at 9-11. However, Plaintiff’s claim fails as it relates to
application of the bona fide sale requirement to consolidations because binding precedent in this
jurisdiction supports the Secretary’s position on this issue.
In Pinnacle Health Hospitals v. Sebelius, 681 F.3d 424 (D.C. Cir. 2012), a case decided
after this matter was fully briefed, the United States Court of Appeals for the District of
Columbia Circuit (“D.C. Circuit”) held that the Secretary’s application of the bona fide sale
requirement as designated in PM A-00-76 to a 1995 consolidation of two non-profit hospitals
was not plainly erroneous or inconsistent with the regulation. Id. at 426. Plaintiff brought D.C.
Circuit’s decision in Pinnacle Health Hospitals v. Sebelius to the Court’s attention through the
filing of a Notice of Supplemental Authority. Pl.’s Notice of Supp. Auth., ECF No. [36]. In its
opinion, the D.C. Circuit noted that, “[i]t 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
12
providers.” Pinnacle Health Hospitals, 681 F.3d at 426. Accordingly, the Court has determined
that the Secretary’s application of the bona fide sale requirement to this 1995 consolidation of
two non-profit hospitals was proper. However, Plaintiff asserts that the D.C. Circuit’s decision is
not dispositive in this matter because the Administrative Record in this case does not support the
Secretary’s determination that the consolidation in the instant matter did not meet the bona fide
sale requirement. Pl.’s Notice of Supp. Auth. at 1-2. The Court now turns to this issue.
B. Substantial Evidence Supports the Secretary’s Finding of No Bona Fide Sale
The Court must next determine whether, on the facts of this case, the Secretary’s
determination that Plaintiff is not eligible to recover losses because the consolidation was not a
bona fide sale is unsupported by substantial evidence, or is otherwise arbitrary or capricious. See
Forsyth Mem. Hosp., Inc. v. Sebelius, 639 F.3d 534, 537 (D.C. Cir. 2011). Plaintiff bears the
burden of demonstrating that the transaction was a bona fide sale. Id. at 539. “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-interest.” A.R. at 1417
(Provider Reimbursement Manual § 104.24 (May 2000)); id. at 1430 (PM A-00-76) (adopting
this definition of a bona fide sale as applicable to consolidations involving non-profit entities
prior to 1997). The Secretary found that the consolidation at issue did not meet the bona fide
sale requirement because the consolidation was not an arm’s length transaction and there was not
reasonable consideration for the transaction. Id. at 27-34 (CMMS Administrator Decision). The
Court finds that substantial evidence supported the Secretary’s determination that St. Francis’
consolidation with St. Joseph was not a bona fide sale, and the Secretary’s finding was not
otherwise arbitrary or capricious for the reasons described herein.
13
First, the Secretary found that St. Francis failed to establish that its consolidation was an
arm’s length transaction. Id. at 27-28. Plaintiff argues that the consolidation at issue was an
arm’s length transaction because St. Francis and St. Joseph were unrelated prior to the
consolidation. Pl.’s Mot. at 21-22. However, the Court finds several other factors relevant to its
analysis as described herein. While Plaintiff properly points out that the D.C. Circuit has not
expressly applied the arm’s-length transaction requirement, id. at 21, because its decisions have
rested on other grounds, the Tenth Circuit addressed the issue of whether St. Joseph engaged in
arm’s length bargaining when entering into the instant consolidation. Via Christi Reg’l Med.
Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1276 (10th Cir. 2007). Notably, the Tenth Circuit found
substantial evidence supported the Secretary’s determination that this was not an arm’s length
transaction because:
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.
Id. While this Court is tasked with determining whether St. Francis, rather than St. Joseph,
engaged in an arm’s length transaction, the Court is nonetheless persuaded by the Tenth Circuit’s
analysis because the same pertinent facts are present before the Court in the instant action.
The Administrative Record supports the Secretary’s finding that St. Francis’ decision to
consolidate was not arm’s length transaction. The Secretary found that the record lacks any
evidence that St. Francis attempted to maximize its sale price. A.R. at 28 (CMMS Administrator
Decision). Instead, as the Secretary noted, “[t]he record shows that [St. Francis’] strategy for
consolidation focused on the formation of an entity that would advance their ministry, not
14
maximize the proceeds received from selling its assets.” Id. at 28-29. Indeed, the Secretary
pointed to testimony that the decision to consolidate was made at the sponsor level rather than at
the hospital level. Id. at 29. Further, the Secretary noted that St. Francis’ transferred assets
were not appraised until almost 27 months after the consolidation was complete. Id. at 28. The
Secretary found that “[t]he absence of a calculation and determination of the value of [St.
Francis’] assets by [St. Francis] before commencement of the transaction in order to ensure that
such assets were transferred to St. Joseph for reasonable consideration, is also strong indication
that this transaction did not involve a bona fide sale.” Id. at 29. For the foregoing reasons, the
Court finds that there was substantial evidence to support the Secretary’s finding that St. Francis
was not involved in a consolidation that involved bargaining at arms’ length between well-
informed parties, each acting in its own self interest. Id. at 29-30.
Second, the Secretary found that St. Francis did not receive reasonable consideration for
the transaction. Id. at 30-34. “Reasonable consideration” reflects the fair market value of the
assets transferred. St. Luke’s Hosp. v. Sebelius, 611 F.3d 900, 905 (D.C. Cir. 2010). Indeed, “a
‘large disparity’ between the assets’ purchase price and their fair market value indicates the
underlying transaction is not in fact bona fide.” Id. To determine whether there has been
reasonable consideration, the Court must examine the difference between the consideration
given, namely St. Francis’ transferred liabilities, and the fair market value of St. Francis’
transferred assets because no other consideration appears to have been exchanged in this
transaction.7 While D.C. Circuit has not adopted a sharp rule on the size of the disparity between
7
Plaintiff contends that it also incurred liabilities that were unknown at the time of the
consolidation and, accordingly, those risks should have been deemed “consideration” and given
weight by the Secretary. Pl.’s Mot. at 20-21. Here, Plaintiff has pointed to some testimony in
15
value and consideration relevant to determining whether a bona fide sale has occurred, it has
noted that Plaintiff bears the burden of proving a bona fide sale. See Catholic Healthcare West
v. Sebelius, 748 F.3d 351, 355 (D.C. Cir. 2014). Here, Plaintiff contends that the Secretary failed
to use a proper method for determining the fair market value of St. Francis’ assets and, because
of this error, incorrectly concluded that reasonable consideration was not exchanged.
The Secretary chose to rely on the total book value of St. Francis’ assets, noting that this
was the most accurate indicator of the assets’ value at the time of the transaction because St.
Francis had not appraised its assets at the time of the consolidation. Id. at 30 (CMMS
Administrator Decision). Based on St. Francis’ working papers, the Secretary determined that
St. Francis transferred a total of $369,964,118 in assets. Id.; see also id. at 225 (Balance Sheet).
As the Secretary noted, this total included:
 $116,577,387 in current and cash assets
 $148,044,951 in plant and property equipment
 $18,918,981 in deferred financing costs
 $7,418,270 of funds held in trust
 $79,004,529 in Board designated funds
the Administrative Record that there were unknown liabilities that could not have been
uncovered through due diligence, and that there was one fraud claim brought against St. Francis
after the consolidation that settled in excess of $3 million. A.R. at 330-31 (Testimony from
PRRB hearing, Apr. 25, 2007). The Court finds Plaintiff’s argument on this issue unpersuasive
as all Plaintiff has pointed to is evidence of the mere assumption of unspecified risks undertaken
as a result of this transaction, and has not proposed any way that this “consideration” should be
quantified for purposes of this analysis. See Forsyth Mem. Hosp., Inc. v. Sebelius, 639 F.3d 534,
537 (D.C. Cir. 2011) (noting that the provider bears the burden of demonstrating that the
transaction was a bona fide sale). Further, the Court notes that St. Francis was required to
indicate as of the date of the agreement that it had listed all material liabilities on its financial
statements and Plaintiff has not referenced that any such liabilities were listed. A.R. at 420
(Master Plan of Consolidation). The Tenth Circuit also rejected this claim as it related to St.
Joseph. Via Christi Reg’l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1277 n.16 (10th Cir. 2007).
16
Id. at 30-31; see also id. at 225. Further, the Secretary found that St. Francis also transferred
$214,641,617 in liabilities. Id. at 31; see also id. at 225; id. at 212 (Loss Computation). The
Secretary noted the significant difference between the transferred assets ($369,964,118) and the
transferred liabilities ($214,641,617). Id. at 31. The Secretary ultimately found that “[t]his
significant difference between the ‘sale’ price and the only contemporaneously determined
valuation of assets at the time of the transaction does not constitute reasonable consideration.”
Id.
Plaintiff objects to the Secretary’s use of the book value of its assets, arguing that this
amount differs from the fair market value of the assets. Instead, Plaintiff contends that the
Secretary should have adopted the valuation performed by Valuation Counselors using the
income approach. Pl.’s Mot. at 16; Pl.’s Reply at 15-16. Plaintiff provided an appraisal of St.
Francis’ assets as of September 30, 1995, A.R. at 1048-81 (Appraisal of St. Francis), indicating
that the fair market value of St. Francis’ nonoperating investments and other assets was
$219,000,000 at the time of the consolidation, id. at 1050. Plaintiff argues that using this figure,
it is clear that St. Francis received reasonable consideration during the transaction because there
was not a large disparity between the fair market value of its assets ($219,000,000) and its
transferred liabilities ($214,641,617). Pl.’s Mot at 16; Pl.’s Reply at 15-16.
The Secretary in her final decision addressed the appraisal conducted by the Valuation
Counselors even though she did not expressly accept the appraisal because it was not completed
contemporaneously with the consolidation. A.R. at 31-32 (CMMS Administrator Decision).
Indeed, the Secretary opined that the 27-month lag between the consolidation and the evaluation
of the value of St. Francis’ assets called into question the validity of the appraisal. Id. at 29.
Nonetheless, the Secretary rejected use of the valuation prepared using the income approach and
17
instead discussed the valuation submitted using the cost approach. Id. at 31. Specifically, the
Secretary noted that if it combined the depreciated reproduction value of the medical center
facilities (land, land improvements, building, and equipment) as determined through the cost
approach in the appraisal ($134,820,780), id. at 32; id. at 1167 (Appraisal of St. Francis), with
the figures for the current and cash assets ($116,577,387), and the board designated funds
($83,937,713), id. at 33; id. at 1029 (Balance Sheet), St. Francis’ assets still totaled more than
$100 million in excess of St. Francis’ liabilities. Accordingly, the Secretary found this analysis
further supported the finding that reasonable consideration was not exchanged during this
transaction. Id. at 33.
The issue before the Court is whether there is substantial evidence to support the
Secretary’s finding that St. Francis did not receive reasonable consideration in exchange for
consolidating with St. Joseph. Specifically, the Secretary relied on the net book value of the
assets to determine that there was not reasonable consideration after questioning the validity of
the appraisal that was completed over two years after the consolidation. Further, the Secretary
determined that even applying the valuation arrived at through the cost approach from the post-
merger appraisal, St. Francis still had not demonstrated that it received reasonable consideration
for the consolidation.
Turning first to the Secretary’s consideration of the net book value of St. Francis’ assets,
the D.C. Circuit has recognized that the Secretary may consider the net book value of assets even
if a provider offers an appraised value. C.f. Forsyth Mem. Hosp., Inc. v. Sebelius, 639 F.3d 534,
539 (D.C. Cir. 2011), cert. denied 132 S. Ct. 1107 (2012) (finding no error when the Secretary
considered the net book value of the provider’s land and depreciable assets, along with appraised
value); see also Whidden Mem. Hosp. v. Sebelius, 828 F. Supp. 2d 218, 226-27 (D.D.C. 2011)
18
(finding that the Secretary properly considered both the net book value of the property, plant, and
equipment as well as the appraised value of the property in making its determination). The Court
finds that the Secretary did not err in considering the net book value of assets in her analysis of
the reasonable consideration issue, particularly in light of the fact that the appraisal was not
available to parties at the time of the consolidation and the Secretary in her analysis also
specifically considered the appraised values. Here, it was reasonable for the Secretary to
consider that there was over a $155 million difference between the net book value of St. Francis’
assets and its liabilities at the time of the consolidation.
Turning next to Secretary’s treatment of the appraised values of St. Francis’ assets, the
Secretary’s reliance on the cost approach, rather than the income approach, is endorsed by the
language of PM A-00-76. A.R. at 31-32. As explained in the PM A-00-76, “[t]he cost approach
is the only methodology that produces a discrete indication of the value for the individual assets
of the business, and thus, is the approach that is used to allocate a lump sum sales price among
the assets sold.” Id. at 1431 (PM A-00-76). On the other hand, “[t]he income approach produces
a valuation through analysis of the predicted future stream of income.” Id. In relevant part, PM
A-00-76 provides the following explanation in support of applying the cost approach over the
income approach to consolidations like the one at issue in this case:
[T]he income approach produce[s] a valuation of the business enterprise as a
whole, without regard to the individual fair market values of the constituent
assets. As a result, . . . the income approach could produce an entity valuation that
is less than the market value of the current assets. Moreover, the income approach
has minimal application in the non-profit sector because 1) earnings are often
understated due to charity care, pricing limitations, and government regulations,
and 2) the approach uses complex formulae that include some factors that are of
questionable use in valuing non-profit entities (e.g., common stock risk premium).
For the foregoing reasons, the cost approach is the most appropriate methodology
to be used in establishing the fair market value of the assets sold for the purpose
of comparison with the sales price in a bona fide sale analysis.
19
Id. The D.C. Circuit has expressly left open the question of whether PM A-00-76 provides an
adequate basis for excluding the application of the income approach to the reasonable
consideration analysis of a transaction involving non-profit entities. Catholic Healthcare West v.
Sebelius, 748 F.3d 351, 354 (D.C. Cir. 2014), reh’g en banc denied No. 13-5090 (D.C. Cir. Jun.
5, 2014). However, other courts have accepted application of the cost approach to mergers and
consolidations between non-profit entities as expressed in PM A-00-76. Jeanes Hosp. v. Sec’y of
HHS, 448 Fed. App’x 202, 208 (3d Cir. 2011) (deferring to the Secretary’s use of the
reproduction-cost approach over the income approach for assessing a merging entity’s assets);
New Eng. Deaconess Hosp. v. Sebelius, 942 F. Supp. 2d 56, 67 (D.D.C. 2013) (holding based on
the D.C. Circuit’s acceptance of the application of PM A-00-76 in other contexts, that “it was
reasonable for the Secretary to use the cost approach in determining what portion of the sales
price was to be allocated to the plaintiff’s depreciable assets in deciding whether the plaintiff
received ‘reasonable consideration’ for those assets”). The Court finds that based on the facts of
this case, the Secretary’s reliance on the cost approach valuation instead of the income approach
valuation was supported by substantial evidence and was not arbitrary or capricious.
Here, the Secretary indicated that the reproduction cost approach was useful to determine
the fair market value of depreciable assets because the approach is the only methodology that
assigns a value to each individual asset. A.R. at 31 (CMMS Administrator Decision). The
Secretary went on to explain that the income approach was not useful because it “relies upon an
analysis of the predicted future income of the business enterprise as a whole without any regard
to the individual and inherent value of the depreciable assets.” Id. Plaintiff argues that “[t]he
Secretary has not offered a reasonable basis for the Administrator to have rejected the Income
20
Approach valuation relied on by the PRRB and to have used instead the Cost Approach.” 8 Pl.’s
Reply at 16. However, the Secretary in its final decision specifically raised concerns about the
appraiser’s application of the income approach to reach $219,000,000 value of St. Francis’ assets
relied on by Plaintiff in this case. A.R. at 32 n.51 & n.52. The Secretary noted that the income
approach was applied using the figure of $5 million for annual revenue for St. Francis despite the
fact that St. Francis’ revenue was $15 million in 1994 and $24.8 million in 1995. Id. at 32 n.51.
While St. Francis argued that this figure was correct, even with the aid of hindsight, the
Secretary noted that drop in St. Francis’ revenue coincided with the consolidation and may raise
doubts as to the initial success of the consolidation. Id. Moreover, the Secretary noted “the
swings [in revenue] demonstrate the difficulties of valuing a business based on predicted future
income.” Id. Further, the Secretary also noted that in the income approach appraisal, the net
working capital total appeared to already have been reduced by liabilities that made up the
consideration for the transaction. Id. at 32 n.52. For these reasons, the Court concludes that the
Secretary provided a reasonable basis for using the book value and the appraised value for the
assets arrived at through the cost approach in her analysis. Further, the Court finds that there is
substantial evidence in the record to support the Secretary’s finding that St. Francis did not
receive reasonable consideration for the transaction in light of the significant disparity between
the consideration exchanged and the fair market value of St. Francis’ assets.
Finally, the Court notes that Plaintiff in its Reply specifically indicates that the
Secretary’s calculation of its assets utilizing the cost approach is too high. Pl.’s Reply at 16. In
8
Despite Plaintiff’s reliance on the figure for St. Francis’ assets used by the PRRB,
Plaintiff in its Reply relies on the $214,641,617 figure for St. Francis’ liabilities, Pl.’s Reply at
15-16, even though the PRRB found that the total liabilities assumed were $212 million. A.R. at
76 (PRRB Decision).
21
particular, Plaintiff asserts that St. Francis’ board-designated funds were actually worth less than
$84 million, the value used by the Secretary in its analysis, and references the United States
Court of Appeals for the Third Circuit’s opinion in UPMC-Braddock Hosp. v. Sebelius, 592 F.3d
427 (3d Cir. 2010), in support of this argument. In UPMC-Braddock Hosp. v. Sebelius, the Third
Circuit remanded the case to the District Court in part so that the District Court would more
closely examine whether the figure used for current/cash assets by the Secretary was correct
when the figure included accounts receivable and other assets that may not have been available
for immediate use. Id. at 433-34. Here, Plaintiff, who bears the burden of establishing that the
transaction was a bona fide sale, does not offer any alternative for how the Secretary should have
calculated this figure, nor does it specify which amounts it believes should have been excluded
from the figure. See Pl.’s Reply at 16. Instead, Plaintiff relies on its argument that the Secretary
should have used the values for the assets arrived at through the income approach, and not the
cost approach without providing an analysis of the assets. Accordingly, the Court shall not
conduct a more searching examination of the figures used by the Secretary in her application of
the cost approach as Plaintiff has not made a record on which the Court can rule.
IV. CONCLUSION
For the foregoing reasons, the Court GRANTS Defendant’s [25] Motion for Summary
Judgment and DENIES Plaintiff’s [23] Motion for Summary Judgment. The Court finds that
substantial evidence supports the Secretary’s finding that Plaintiff as successor-in-interest to St.
Francis is barred from recovery of the claimed loss incurred during its consolidation with St.
Joseph under the Medicare regulations because Plaintiff has failed to establish that the
transaction at issue was a bona fide sale. The Court further finds that the Secretary’s finding that
St. Francis failed to satisfy the bona fide sale requirement is not otherwise arbitrary or
22
capricious. Accordingly, judgment shall be entered for Defendant. Further, the Court does not
reach the issue of whether the consolidation at issue was between related or unrelated parties
because it bases its opinion on Plaintiff’s failure to satisfy the bona fide sale requirement. An
appropriate Order accompanies this Memorandum Opinion.
Dated: January 28, 2015
__ /s/______________________
COLLEEN KOLLAR-KOTELLY
United States District Judge
23