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Catholic Healthcare West v. Sebelius

United States Court of Appeals, District of Columbia Circuit

April 11, 2014


Argued February 11, 2014.

Appeal fro the United States District Court for the District of Columbia. (No. 1:11-cv-00459).

Jeffrey A. Lovitky argued the cause and filed the briefs for appellant.

David L. Hoskins, Attorney, U.S. Department of Health & Human Services, argued the cause for appellee. With him on the brief were Stuart F. Delery, Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, Michael S. Raab and Joel McElvain, Attorneys, William B. Schutlz, General Counsel, U.S. Department of Health & Human Services, Janice L. Hoffman, Associate General Counsel, and Susan Maxon Lyons, Deputy Associate General Counsel for Litigation. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

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


Page 352

Williams, Senior Circuit Judge:

Plaintiff Catholic Healthcare West (" CHW" ), a non-profit Catholic hospital system, was the surviving entity after a merger between Marian Medical Center and the hospitals previously constituting CHW. Its claim here relates to depreciation taken by Marian in the years before the merger. CHW argues that the merger transaction revealed the inadequacy of that depreciation and that, under the statute and regulations applicable to the merger, the deficiency was subject to recoupment as part of Medicare providers' general entitlement to compensation for the " reasonable cost" of services rendered, 42 U.S.C. § 1395f(b)(1). The defendant Secretary of Health and Human Services rejected the claim, reasoning that the implicit selling price (namely, the value of CHW's assumption of Marian's liabilities) showed a transfer for much less than Marian's true worth, so that the merger did not represent a " bona fide sale" between " unrelated parties," a prerequisite for use of the transaction as evidence that the prior depreciation had been inadequate, 42 C.F.R. § 413.134. In reaching this conclusion the Secretary estimated Marian's true worth on a basis of " cost" --meaning roughly, in this context, replacement cost as of the time of the merger, adjusted for depreciation. CHW objects, arguing that the choice of " cost" over other valuation approaches was arbitrary and was based on a guidance document that the Secretary had adopted without notice and comment rulemaking, namely, Clarification of the Application of the Regulations at 42 C.F.R. 413.134( l ) to Mergers and Consolidations Involving Non-profit Providers, Program Memorandum A-00-76 (Oct. 19, 2000) (" PM" ).

In the end we find it unnecessary to evaluate the PM's effectiveness. Even under the valuation methods permitted prior to the PM and in fact championed by CHW here and in the administrative proceedings, there was a gross disparity between Marian's value and the implicit price paid. We therefore affirm the district court's judgment affirming the Secretary.

* * *

The Secretary's regulations governing a Medicare provider's reasonable costs have long provided for an " appropriate allowance" for depreciation in assets used for Medicare services. 42 C.F.R. § 413.134(a). The annual allowance is calculated by dividing the cost of acquiring the asset by the asset's years of estimated useful life, § 413.134(a), and then multiplying by the fraction of the asset applied to Medicare services.

The regulations also provide that for assets disposed of before December 1, 1997--the CHW-Marian merger occurred in August 1997--the Secretary will recognize gains or losses on the sale of an asset (defined in a way that includes this merger), calculated as the difference between the consideration received for the asset and its " net book value" (i.e., the cost of acquisition less previous depreciation payments, § 413.134(b)(9)). (The Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4404, 111 Stat. 251, 400 (1997), amended 42 U.S.C. § 1395x(v)(1)(O) so as to eliminate the statutory basis for such adjustments for assets sold after December 1, 1997. But the recoupment scheme continues for prior transactions such as the Marian-CHW merger.) So, subject to some conditions discussed below, if an asset is sold for less than its net book value, the Secretary makes an additional payment to the provider, reflecting an understanding that the previous depreciation payments

Page 353

fell short of reflecting true cost. Conversely, of course, the provider pays the government if the asset ...

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