Memorial Hermann Hospital v. Kathleen Sebelius

REVISED JULY 18, 2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 12-20654 July 12, 2013
Lyle W. Cayce
Clerk
MEMORIAL HERMANN HOSPITAL,
Plaintiff - Appellant
v.
KATHLEEN SEBELIUS, SECRETARY, DEPARTMENT OF HEALTH AND
HUMAN SERVICES,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, DAVIS, and PRADO, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This appeal presents a question of Medicare reimbursement arising when
Hermann Hospital (“Hermann”) merged with Memorial Hospital System
(“Memorial”), creating the Memorial Hermann Hospital System (“MHHS”).
Following the merger, the Administrator for the Centers of Medicare and
Medicaid Services (“Administrator”) denied MHHS’s request for a loss payment,
pursuant to 42 C.F.R. § 413.134(l), holding the merger was not a bona fide sale
as required by statute; the district court agreed with these conclusions and
dismissed MHHS’s case on summary judgment. MHHS now appeals, contending
No. 12-20654
the bona fide sale requirement does not apply to mergers, and, alternatively,
that this merger was a bona fide sale. Every other circuit to consider whether
mergers must constitute bona fide sales to qualify under 42 C.F.R. § 413.134(l)
has concluded that they must. In this appeal, MHHS has presented no
compelling reason to create a circuit split, and thus we join all other circuits that
have ruled on the question by holding statutory mergers must be bona fide sales
in order to be eligible for a depreciation adjustment under 42 C.F.R. § 413.134(l).
We further find that substantial evidence supports the Administrator’s
conclusion that this merger failed to constitute a bona fide sale. We therefore
AFFIRM the judgment of the district court.
I.
Hermann began its operations as a charitable hospital in 1925; it was
operated by Hermann Hospital Estates, a testamentary trust established by
George H. Hermann. Memorial is a Texas non-profit corporation that began
providing healthcare services in Houston in 1907. The two completed their
statutory merger on November 4, 1997, after receiving approval from the Harris
County Probate Court and the Attorney General of Texas. The Harris County
Probate Court noted, in particular, that the “Merger Agreement and
transactions contemplated thereby are consistent with and in furtherance of . . .
the fiduciary duties of the Trustees.” Thereafter, the merged entity requested
from the Secretary of Health and Human Services (“Secretary”) a depreciation
adjustment, under 42 C.F.R. § 413.134(l), in the amount of $21,731,800.00, on
behalf of Hermann.
Depreciation adjustments are authorized by the Social Security Act, which
entitles Medicare providers to reimbursement for the “reasonable cost” of
furnishing Medicare services, including “an appropriate allowance for
depreciation on buildings and equipment used in the provision of patient care.”
42 C.F.R. § 413.134(a). The allowance is generally determined by taking the
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No. 12-20654
asset’s “historical cost,” defined as “the cost incurred by the present owner in
acquiring the asset,” 42 C.F.R. § 413.134(b)(1), and prorating it over the asset’s
estimated useful life. 42 C.F.R. § 413.134(a)(3).
The Secretary has further determined that certain disposals of depreciable
assets, including sales, may give rise to recognition of a “gain” or “loss.” How the
regulations treat gains or losses “depends upon the manner of disposition of the
asset, as specified in paragraphs (f)(2) through (6) of [42 C.F.R. § 413.134(f)].”
42 C.F.R. § 413.134(f)(1). For example, for bona fide sales, gains or losses are
calculated by comparing the consideration the provider obtains for the asset to
the asset’s “net book value,” i.e., its historical cost minus any previous Medicare
depreciation payments. 42 C.F.R. § 413.134(f)(2). If the consideration is less
than the asset’s net book value, the provider may claim a “loss,” as MHHS has
tried to do here.
Statutory mergers are sometimes eligible for such loss payments, as
described in 42 C.F.R. § 413.134(l)(2)(i):
Statutory merger between unrelated parties.1 If the statutory merger
is between two or more corporations that are unrelated (as specified
in § 413.17), the assets of the merged corporation(s) acquired by the
surviving corporation may be revalued in accordance with
paragraph (g) of this section. If the merged corporation was a
provider before the merger, then it is subject to the provisions of
paragraphs (d)(3) and (f) of this section concerning recovery of
accelerated depreciation and the realization of gains and losses.
The Secretary issued a guidance document in October 2000 further
illuminating how to determine whether a statutory merger is eligible for
depreciable gain / loss status. Clarification of the Application of the Regulations
at 42 C.F.R. § 413.134(l) to Mergers and Consolidations Involving Non-profit
1
It is undisputed in this appeal that Hermann and Memorial were unrelated parties
prior to their merger. In her opinion, the Secretary found the two were related parties because
we must consider their relationship post—not pre—merger. The district court, however, found
this analysis was incorrect. Neither party appeals this finding.
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No. 12-20654
Providers, Program Memorandum A–00–76 (Oct. 19, 2000) (PM A–00–76)
(republished as PM A–00–96 (2001)), available at
http://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/downl
oads/A0196.pdf. This document explains that subsection (l)’s cross reference to
subsection (f) requires that, for “mergers and consolidations involving non-profit
providers[,] . . . as with transactions involving for-profit entities, in order for
Medicare to recognize a gain or loss on the disposal of the assets, the merger or
consolidation must occur between or among parties that are not related as
described in the regulations at 42 C.F.R. 413.17 and the transaction must
involve one of the events described in 42 C.F.R. 413.134(f) as triggering a gain
or loss recognition by Medicare (typically, a bona fide sale, as defined in the
[Provider Reimbursement Manual (PRM)] at § 104.24.” PM A–00–76, at 1-2
(emphasis added); see also id. at 3 (“Notwithstanding the treatment of the
transaction for financial accounting purposes, no 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) and as defined in the PRM
at § 104.24.”). The document elaborates:
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, a 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. With regard to
non-profit mergers or consolidations, often the sales price consists
of assumed debt only, but may also include cash and/or new debt.
Non-monetary consideration, such as a seller’s concession from a
buyer that the buyer must continue to provide care for a period of
time or to provide care to the indigent, may not be taken into
account in evaluating the reasonableness of the overall
consideration (even where such elements may be quantified in
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No. 12-20654
dollar terms). These factors are more akin to goodwill than to
consideration.
PM A–00–76 at 3.2 This document further notes that it establishes no new rules.
Id. at 4 (“This PM does not include any new policies regarding mergers or
consolidations involving non-profit entities.”).
Hoping to benefit from the statutory depreciation gain / loss scheme,
MHHS filed a request for a loss payment post-merger. The Intermediary for the
Secretary of Health and Human Services (“Intermediary”) concluded the merged
hospital was not entitled to a loss payment because the merging parties were
related after the merger. MHHS requested review by the Provider
Reimbursement Review Board (“PRRB”), which rejected the Intermediary’s
reliance on the “related party” requirement. The PRRB still denied MHHS’s
request, however, as it found the merger was not a bona fide sale. The
Administrator of the Centers for Medicare & Medicaid Services (“CMS”) upheld
the PRRB’s decision on the bona fide sale issue, but reversed its decision on the
related party issue. The Administrator concluded that using the net book value
of Hermann’s assets to ascertain whether Memorial paid fair market value was
appropriate because no appraisal was conducted; it then specifically found:
The record shows that the consideration received by the Provider
was assumed liabilities of approximately $373 million. The record
shows that on October 31, 1997, the total assets acquired from the
Provider were approximately $755.5 million. This included total
current assets of $141 million, total non-current assets whose “use
is limited-investments” of $331 million, and “PPE” (property, plant
and equipment) [i.e., depreciable assets] of $252 million. The
merged entity in turn assumed the approximately $373 million of
liabilities. Thus, regardless of the determined fair market value of
depreciable assets, the record shows that the liabilities assumed
2
PRM § 104.24 provides: “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.”
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No. 12-20654
were approximately equal to the value of the current and
noncurrent (non-depreciable) assets. Hence, in essence, the
depreciable assets were transferred for no consideration. Therefore,
the Administrator finds that the transaction did not result in a bona
fide sale for reasonable consideration.
A.R. at 20. The Administrator’s decision constitutes the final decision of the
Secretary.
After exhausting agency review of its claim, MHHS filed this lawsuit in
district court under the Administrative Procedure Act (“APA”). The parties filed
cross-motions for summary judgment, and the district court granted the
defendant’s motion. The district court first concluded the correct time for
ascertaining whether two parties are “related” for purposes of the loss
depreciation calculation is pre-merger. As it was undisputed that Hermann and
Memorial were unrelated before the merger,3 the district court next analyzed
whether the bona fide sale requirement applied. Relying upon the plain
language of the statute as well as the conclusions of all the other circuit courts
to have reached this issue, the district court held the merger must constitute a
bona fide sale to be eligible for a loss payment. Memorial Hermann Hosp. v.
Sebelius, 882 F. Supp. 2d 882, 886 (S.D. Tex. 2012) (citing Forsyth Memorial
Hosp. v. Sebelius, 639 F.3d 534 (D.C. Cir. 2011); St. Luke’s Hosp. v. Sebelius, 611
F.3d 900 (D.C. Cir. 2010); Albert Einstein Med. Ctr. v. Sebelius, 566 F.3d 368 (3d
Cir. 2009); Robert F. Kennedy Med. Ctr. v. Leavitt, 526 F.3d 557 (9th Cir. 2008);
Via Christi Regional Med. Ctr. v. Leavitt, 509 F.3d 1259 (10th Cir. 2007)).
Finally, the district court found substantial evidence supported the
Administrator’s conclusion that the Hermann-Memorial merger was not a bona
fide sale, primarily because Hermann was motivated to ensure the continued
operation of the hospital as a health care facility for the poor, indigent, and
3
This issue is not contested in this appeal.
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No. 12-20654
infirm residents of Houston (as intended by the Testator), rather than receiving
fair market value for its assets.
II.
We review a grant of summary judgment de novo, applying the same
standard as the district court. Bd. of Miss. Levee Com’rs v. United States EPA,
674 F.3d 409, 417 (5th Cir. 2012). “Under the APA, a federal court may only
overturn an agency’s ruling ‘if it is arbitrary, capricious, an abuse of discretion,
not in accordance with law, or unsupported by substantial evidence on the record
taken as a whole.’” Id. (quoting Buffalo Marine Servs. v. United States, 663 F.3d
750, 753 (5th Cir. 2011). We begin with “a presumption that the agency’s
decision is valid, and the plaintiff has the burden to overcome that presumption
by showing that the decision was erroneous.” Id. (quoting Buffalo Marine Servs.,
663 F.3d at 753). We review the agency’s legal determinations de novo. Id. But
with respect to questions of statutory interpretation, we owe “substantial
deference to an agency’s construction of a statute that it administers,” id., and
must give an agency’s interpretation “ ‘controlling weight unless it is plainly
erroneous or inconsistent with the regulation.’ ” Thomas Jefferson Univ. v.
Shalala, 512 U.S. 504, 512 (1994) (quoting Udall v. Tallman, 380 U.S. 1, 16-17
(1965)).
We review an agency’s factual findings only for substantial evidence, i.e.,
“that which is relevant and sufficient for a reasonable mind to accept as
adequate to support a conclusion.” Spellman v. Shalala, 1 F.3d 357, 360 (5th
Cir. 1993). Ultimately, “[w]e must be highly deferential to the administrative
agency whose final decision is being reviewed.” Bd. of Miss. Levee Com’rs, 674
F.3d at 417 (internal quotation marks and citations omitted).
III.
MHHS makes two arguments in this appeal, which it contends warrant
reversal of the district court: (1) the bona fide sale requirement does not apply
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No. 12-20654
to statutory mergers; and (2) even if this requirement were applicable, the
Memorial-Hermann merger constituted a bona fide sale. After thoroughly
reviewing the case law and the record, we find neither argument compelling.
A.
MHHS argues the bona fide sale requirement does not apply here because
(1) this requirement was implemented without notice or opportunity for public
comment, thereby violating the APA; and (2) the definition of bona fide sale
reflected in PM A–00–76 is entirely inconsistent with the agency’s prior
definition and was improperly applied retroactively to MHHS.
First, MHHS contends the bona fide sale requirement does not apply
because it was not implemented pursuant to the APA’s rulemaking procedure.
As other circuits have already found, however, this requirement was not added
in PM A–00–76, but is established by the plain language of 42 C.F.R. §
413.134(l). For example, the Ninth Circuit analyzed the same argument that
MHHS is now making and concluded:
The Secretary’s interpretation that the realization of gains or losses
on a statutory merger requires a “bona fide sale” is a reasonable
construction of the Medicare regulations. The regulation governing
statutory mergers, 42 C.F.R. § 413.134[(l)](2), incorporates 42 C.F.R.
§ 413.134(f), which lists the categories of asset disposal that trigger
readjustment for gains or losses. See 42 C.F.R. § 413.134[(l)](2)(i)
(stating that merged providers are “subject to the provisions of
paragraph[] . . . (f) of this section concerning . . . the realization of
gains and losses.”). A “bona fide sale” is the only category listed in
§ 413.134(f) that arguably applies to a disposal of assets through
statutory merger. See id. § 413.134(f)(2)-(6); Via Christi Reg’l Med.
Ctr., 509 F.3d at 1275. Thus, the Secretary reasonably interpreted
these regulations as allowing gains or losses on the disposal of
depreciable assets only when the merger qualifies as a “bona fide
sale.”
526 F.3d at 562 (alterations in original). Several other circuits have reached this
same conclusion. See Albert Einstein, 566 F.3d at 376-77; Forsyth Memorial, 639
F.3d at 537-38 (noting the two requirement for reimbursement of depreciation
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No. 12-20654
losses are: (1) the statutory merger is a bona fide sale, and (2) the parties to the
transactions are not related); Via Christi, 509 F.3d at 1274 (“The ‘bona fide sale’
requirement is a reasonable construction of 42 C.F.R. § 413.134(l)(3)(i),
supported by the text of the regulations.”).
MHHS counters that several PRRB decisions have found the “bona fide
sale” requirement does not apply to statutory mergers. For example, in St.
Francis Regional Med. Ctr. v. BlueCross BlueShield Assoc., No. 2009-D29, 2009
WL 3231755, at *15 (P.R.R.B. July 8, 2009), the Board reached a conclusion
directly in contrast with the courts of appeals, finding:
The Board has consistently rejected the position that requires the
transaction to be a “bona fide sale,” finding instead that when the
regulation was amended to add 42 C.F.R. § 413.134[(l)], it expanded
the disposition methods listed in section (f) to include consolidations
and mergers; it did not require fitting consolidations and mergers
into one of the disposition methods already listed.
Id. at *15; see also Whidden Memorial Hosp. v. BlueCross BlueShield Assoc., No.
2009-D34, 2009 WL 3231747, at *11 (P.R.R.B. July 28, 2009) (“Historically, it is
clear that CMS has not applied a ‘bona fide’ sale requirement to statutory
mergers between unrelated organizations. . . . [O]nce a transaction is
acknowledged to be a statutory merger between unrelated parties, the conclusion
follows immediately that the provider is entitled to recognition of a loss or gain
on disposition of its assets. In no instance is there a requirement that the
merger meets the bona fide criteria applicable to sales.”); New England
Deaconess Hosp. v. BlueCross BlueShield Assoc., No. 2009-D24, 2009 WL
1973496, at *7 (P.R.R.B. May 29, 2009) (finding PM A–00–76 is “substantive,”
that “the changes were not published with the notice and comment period
required by the [APA],” and, therefore, that the bona fide sale requirement “is
a retroactive change that cannot be applied”).
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No. 12-20654
The circuit courts that have confronted this issue, however, have refused
to accept this line of reasoning, and we find they have the more convincing
position. First, as all circuits have recognized, § 413.134(l)(2)(i) states that a
merged provider “is subject to the provisions of paragraph[] . . . (f)”—indicating
that mergers fit within paragraph (f)’s listed means of asset disposal, not that
they form a separate avenue of asset disposal for purposes of the statute.
(Emphasis added.) This conclusion is further supported by PM A–00–76’s
statement that it “does not include any new policies regarding mergers[.]” PM
A–00–76 explained that statutory mergers must be bona fide sales in order to be
eligible for loss depreciation payments; its assertion that it established no new
rules therefore indicates the Secretary always maintained, based upon the plain
language of § 413.134(f) and (l)(2)(i), that the bona fide sale requirement applied
to mergers. This assertion is reasonable, especially given the fact that every
other circuit to address this assertion has found it so.
Indeed, the D.C. Circuit even noted that, “[a]ccording to the preamble to
the proposed rule, subsection (l)(2) ‘points out that a statutory merger is treated
as a sale of assets.’” St. Luke’s, 611 F.3d at 902 (quoting Fed. Health Ins. for the
Aged and Disabled, Establishment of Cost Basis on Purchase of Facility as an
Ongoing Operation, and Transactions Involving Provider’s Capital Stock, 42 Fed.
Reg. 17485, 17485 (proposed Jan. 17, 1977)) (emphasis added). And several
circuits have recognized that applying the bona fide sale requirement aligns this
statutory right to repayment with the general Medicare principle that providers
should be compensated only for actual payments (in order to keep costs lower).
See, e.g., Albert Einstein, 566 F.3d at 378; Robert F. Kennedy Med. Ctr., 526 F.3d
at 562; Via Christi, 509 F.3d at 1275-76. Thus, we conclude that the Secretary’s
decision to apply the bona fide sale requirement to statutory mergers is not
arbitrary, capricious, an abuse of discretion, or in discordance with the law. Bd.
of Miss. Levee Com’rs, 674 F.3d at 417.
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No. 12-20654
Next, MHHS argues the Secretary’s definition of “bona fide sale”—which
requires “reasonable consideration” and a “comparison of the sales price with the
fair market value of the assets”—is completely at odds with its previous
definition—allegedly requiring only “valuable consideration”—and therefore not
entitled to deference. Again, however, several circuits have already considered
and rejected this argument. For example, in St. Luke’s, the D.C. Circuit
addressed this precise argument and reasoned that, “[w]hile none of St. Luke’s’s
authorities affirmatively establishes a reasonable consideration requirement,
neither do they authorize reimbursement where the consideration falls far short
of fair market value.” 611 F.3d at 906; see also id. at 906-07 (citing numerous
cases recognizing “at least implicitly, the importance of bona fide transactions
and reasonable consideration, setting out affirmative, individualized findings
that the parties involved bargained in good faith and that the consideration
tendered reasonably reflected fair market value”). The Third Circuit reached a
similar conclusion regarding the alleged inconsistency of the current and prior
agency definitions and, moreover, found that “requiring ‘reasonable
consideration’ is in keeping with the underlying and long-standing purpose of
the Medicare Act, i.e., to reimburse for only actual and reasonable costs.” Albert
Einstein, 566 F.3d at 378; see also id. at 377-78. Similarly, the Ninth and Tenth
Circuits recognized that the Secretary’s interpretation of “bona fide sale” is a
reasonable construction of the Medicare regulations. See Robert F. Kennedy
Med. Ctr., 526 F.3d at 562 (“As the Secretary noted when promulgating 42
C.F.R. § 413.134(f), ‘if a gain or loss is realized from [a] disposition,
reimbursement for depreciation must be adjusted so that Medicare pays the
actual cost the provider incurred.’ ” (emphasis added by the court)); Via Christi,
509 F.3d at 1275-76 (“Even if the Secretary further clarified the definition of
‘bona fide sale’ in interpretative materials issued after the consolidation in this
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No. 12-20654
case . . . St. Joseph was on notice that § 413.134(f) and its ‘bona fide sale’
requirement would be more than a nullity.”).
The analysis of these four circuits is persuasive, and on appeal MHHS has
proffered no unconsidered arguments as to why requiring “reasonable
consideration” and a close proximity to fair market value is an unreasonable
construction of “bona fide sale.” See St. Luke’s, 611 F.3d at 905 (“Fair market
value is a hallmark of a bona fide transaction, as the Secretary has long
acknowledged.”). Moreover, the Secretary’s interpretations of 42 C.F.R. §
413.134(f) and (l) are not “plainly erroneous or inconsistent with the regulation.”
Thomas Jefferson Univ., 512 U.S. at 512; see also St. Luke’s, 611 F.3d 900; Albert
Einstein, 566 F.3d 368; Robert F. Kennedy Med. Ctr., 526 F.3d 557; Via Christi,
509 F.3d 1259. Accordingly, we hold that statutory mergers must constitute
bona fide sales, defined as those consummated for “reasonable consideration”
and for which the sales price and fair market value are not in great disparity, in
order to be eligible for statutory loss payments under § 413.134(l).
B.
We thus turn to MHHS’s alternative argument that the merger was, in
fact, a bona fide sale. We start in the shadow of the backdrop that the burden
of proof to demonstrate that a bona fide sale occurred rests upon MHHS. See
Forsyth Memorial, 639 F.3d at 539 (citing 42 U.S.C. § 1395g(a); 42 C.F.R. §
413.24(a); Via Christi, 509 F.3d at 1277; Mercy Home Health v. Leavitt, 436 F.3d
370, 380 (3d Cir. 2006); Tenet HealthSystems HealthCorp. v. Thompson, 254 F.3d
238, 245 (D.C. Cir. 2001)).
MHHS did not conduct an appraisal of Hermann’s value pre-merger. It is
not disputed, however, that the total net book value of the assets acquired was
approximately $755.5 million. The Administrator found Memorial assumed only
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No. 12-20654
about $373 million in liabilities in consideration for these assets;4 and she
further found the assets Memorial acquired included (1) total current assets of
$141 million, (2) total non-current assets whose “use is limited-investments” of
$331 million, and (3) depreciable assets (such as property, plant, and equipment)
of $252 million. Because the value of the total current and non-current assets
was, itself, well over the $373 million purchase price, the Administrator
concluded Hermann sold these assets at a discount and essentially charged
nothing for its depreciable assets.
On appeal, MHHS contends the Administrator erred in considering the
value of the individual assets Memorial acquired; instead, she should have
discounted the value of the assets and considered the value of Hermann as a
going concern. The Secretary has made clear, however, that the “cost approach,”
which is “the only methodology that produces a discrete indication of the value
for the individual assets of the business,” 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.” PM A–00–76,
at 3-4. In fact, in this same document the Secretary warned against using an
approach to measuring an entity’s fair market value that appraises the entity
as a going concern for the precise reasons presented in this case—i.e.,
“produc[ing] an entity valuation that is less than the market value of the current
4
MHHS contends this number should be increased by $35 million, based on a loss
experienced on bond refinancing. The Administrator rejected this contention, finding this loss
was not part of the transaction and should not be utilized to increase the consideration. On
appeal, MHHS has not proffered any new evidence or arguments as to why the Administrator
was incorrect in this finding. While MHHS argues the merging parties “almost certainly”
contemplated costs deriving from bond refinancing, it offers no evidence that the parties
specifically viewed these costs as being part of the consideration of the merger, rather than
simply a potential expense of running the hospital post-merger. Moreover, there is no evidence
in the record as to how much the merging parties anticipated bond refinancing would cost; if
such costs were indeed included in the merger’s consideration, we would expect to find some
projected value; but MHHS points to none. Given the high level of deference we owe to the
Administrator, we cannot say this finding was error. Bd. of Miss. Levee Com’rs, 674 F.3d at
417.
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No. 12-20654
assets.” Id. at 4. Indeed, PM A–00–76 provides guidance on how to proceed in
the exact scenario we have here:
[I]n analyzing whether a bona fide sale has occurred, a review of the
allocation of the sales price among the assets sold is appropriate. In
some situations, the “sales price” of the assets may be barely in
excess of, or less than, the market value of the current assets sold,
leaving a minimal, or no, part of the sales price to be allocated to the
fixed (including the depreciable) assets. In such a circumstance,
effectively the current assets have been sold, and the fixed assets
have been given over at minimal or no cost. If a minimal or no
portion of the sales price is allocated to the fixed (including the
depreciable) assets a bona fide sale of those assets has not occurred.
In this regard, because consideration was exchanged for the
business as a whole, this type of transaction should not be
considered a donation of the fixed assets (see the PRM at § 104.16).
Rather, this should be viewed as a non-bona fide sale of the fixed
assets.5
PM A–00–76, at 4.
In this appeal, MHHS has not argued that the PM advocates an analysis
for discerning whether a bona fide sale has occurred that is either erroneous or
plainly inconsistent with the regulation. See Thomas Jefferson Univ., 512 U.S.
at 512. And we see no reason to draw such a conclusion. The depreciable
gain/loss provisions of Medicare intend to compensate providers for actual
economic gains/losses associated with assets themselves—not with gains or
losses associated with selling an entity, such as a hospital, as a going concern.
See, e.g., 42 U.S.C. § 1395oo(f) (providing that “[t]he reasonable cost of any
services shall be the cost actually incurred”); 44 Fed. Reg. 3980, 3980 (Jan. 19,
1979) (“Medicare pays the actual cost the provider incurred in using the asset
for patient care.”).
5
Moreover, this PM states that “the sales price (assumed liabilities) is allocated first
to the cash, cash equivalents, and other current assets,” and to the fixed assets last. The
Administrator allocated the $373 million assumption of liabilities in precisely this order.
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Furthermore, other circuits have applied the bona fide sale requirement
in a manner consistent with PM A–00–76. The Tenth Circuit in Via Christi, for
example, found that, “in the ‘bona fide sale’ context, the reasonable consideration
inquiry involves determining whether the provider received fair market value
for its assets.” 509 F.3d at 1276. That court then noted PM A–00–76 provides
that “the sale price (assumed liabilities) is allocated first to the cash, cash
equivalents, and other current assets,” and only lastly to depreciable assets. Id.
at 1277 (quoting PM A–00–76, at 4 (Example 3)). In that case, as here, the value
of the current assets consumed the entirety of the purchase price, meaning the
depreciable assets were essentially given away without consideration. Id; see
also Robert F. Kennedy Med. Ctr., 526 F.3d at 560, 563 (noting PM A–00–76
requires “a comparison of the sales price with the fair market value of the assets
acquired,” and finding that the parties “transferred approximately $50 million
in assets for $30.5 million in ‘consideration,’ ” meaning the acquiring party “paid
almost nothing for [the consumed party’s] hospital buildings and equipment
despite their appraised value of approximately $12 million”).
The Secretary’s position as articulated in PM A–00–76 thus aligns with
the provisions and the purpose of the Medicare statute at issue, and has been
readily applied by our sister circuits. We see no reason to depart from this
reasonable path, and, accordingly, apply the framework established in PM
A–00–76 to the case before us. We find substantial evidence supports the
Administrator’s conclusion that this merger was not a bona fide sale, as the fair
market value of Hermann’s assets was far below the purchase price. Indeed, the
record demonstrates that the value of the current and non-current non-
depreciable assets exceeded the purchase price, meaning Memorial paid no
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No. 12-20654
consideration for Hermann’s depreciable assets for purposes of calculating a loss
payment under 42 C.F.R. § 413.134(l).6 See PM A–00–76, at 4.
IV.
Because we have been given no reason to create a split, we join the other
circuits in holding that statutory mergers must constitute bona fide sales in
order to be eligible for depreciation adjustments under 42 C.F.R. § 413.134(l).
We further find that substantial evidence supports the Administrator’s
conclusion that the Hermann-Memorial merger was not a bona fide sale for
purposes of the regulations, as the district court recognized. The judgment of
the district court is, therefore,
AFFIRMED.
6
We note briefly that MHHS further argues the Administrator erred in concluding no
bona fide sale occurred because the Texas Attorney General and the Harris County Probate
Court could not have approved the sale if it were not bona fide. MHHS argues the probate
court necessarily had to find the trust was acting in accordance with its fiduciary duties under
Texas law in order to approve the merger, and that Texas law requires a fiduciary to use “care,
skill and judgment toward obtaining a fair market value.” Br. of Appellant at 42 (citing
InterFirst Bank of Dallas v. Risser, 739 S.W.2d 882, 888-89 (Tex. App.1987)). As the Secretary
notes, however, the probate court found, “the Trustees have, in the exercise of their fiduciary
duties, undertaken an extensive review of Hermann Hospital and how it can best fulfill the
intent and purpose of the Testator and the charitable mission of the Trust in the current
health care environment.” A.R. 1260-61. Accordingly, the probate court focused upon the
Testator’s desire to run a hospital that assists the indigent, rather than upon maximizing the
sale value of its assets. See PM A–00–76, at 3 (“Non-monetary consideration, such as a seller’s
concession from a buyer that the buyer must continue to provide care for a period of time or
to provide care to the indigent, may not be taken into account in evaluating the reasonableness
of the overall consideration (even where such elements may be quantified in dollar terms).
These factors are more akin to goodwill than to consideration.”). Again, other courts have
found this type of focus is at odds with receiving a fair market value. See, e.g., Robert F.
Kennedy Med. Ctr., 526 F.3d at 563.
Finally, MHHS disputes the Administrator’s finding that this was not an arm’s length
negotiation. Because we have already concluded this merger cannot be a bona fide sale due
to the absence of consideration for Hermann’s depreciable assets, we do not reach this
argument.
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