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Via Christi Hospitals Wichita, Inc. v. Burwell

United States Court of Appeals, District of Columbia Circuit

April 29, 2016

Via Christi Hospitals Wichita, Inc., as successor to St. Francis Regional Medical Center, Appellant
Sylvia Mathews Burwell, as Secretary of Health and Human Services, Appellee

Argued December 3, 2015

Appeal from the United States District Court for the District of Columbia (No. 1:09-cv-02060)

Robert E. Mazer argued the cause for appellant. With him on the briefs was James P. Holloway.

Debra Michelle Laboschin, Attorney, U.S. Department of Health & Human Services, argued the cause for appellee. With her on the brief were Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Vincent H. Cohen Jr., Acting U.S. Attorney, Joel McElvain, Attorney, William B. Schultz, General Counsel, U.S. Department and Health and Human Services, Janice L. Hoffman, Associate General Counsel, Susan Maxson Lyons, Deputy Associate General Counsel for Litigation, and David L. Hoskins, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: Rogers and Pillard, Circuit Judges, and Williams, Senior Circuit Judge.


Pillard Circuit Judge.

Via Christi Health Center seeks an upward adjustment of the capital-asset depreciation reimbursement paid to its predecessor hospitals under a since-curtailed Medicare regulation. As a general matter, the Secretary of the Department of Health and Human Services reimburses Medicare providers for their reasonable costs actually incurred, including an appropriate share of depreciation on buildings or equipment used to supply Medicare services. See 42 U.S.C. §§ 1395f(b)(1), 1395x(v)(1)(A); 42 C.F.R. §§ 413.130, 413.134(a). The depreciation allowance is ordinarily based on the Secretary's estimates of assets' useful life, see 42 C.F.R. § 413.134(a), but certain providers may claim a Medicare-reimbursable share of supplemental losses (or be liable for repayment of gains) incurred in qualifying pre-December 1997 transactions, see id. § 413.134(f), (l); see generally St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901-02 (D.C. Cir. 2010).[1] Via Christi contends that the transaction that led to its formation-the 1995 consolidation of St. Francis and St. Joseph Hospitals-is a qualifying sale. See 42 C.F.R. § 413.134(f)(2), (l)(3)(1). Via Christi argues that it received St. Francis's and St. Joseph's assets at a lower value, i.e., more depreciated, than was reflected in the Secretary's earlier depreciation reimbursements. As the hospitals' successor-in-interest, Via Christi thus seeks additional reimbursements to cover the proportional Medicare share of the depreciation.

Via Christi sought reimbursements relating to each of its predecessor hospitals, and the Secretary denied both claims on the ground that the 1995 consolidation was not a bona fide sale qualifying for adjusted depreciation under the regulations. The Secretary concluded that: (1) The parties neither engaged in arm's-length bargaining nor exchanged reasonable consideration, so the loss did not arise from a bona fide sale, see id. § 413.134(f); and (2) the transaction was between related parties, see id. § 413.134(l)(3)(i). The Tenth Circuit sustained the Secretary's denial of Via Christi's claim for $9.7 million relating to St. Joseph's assets. See Via Christi Reg'l Med. Ctr. v. Leavitt, 509 F.3d 1259, 1261 (10th Cir. 2007). In this case, relating to St. Francis's assets, the district court sustained the Secretary's denial of Via Christi's claim for a $59 million depreciation adjustment.

We review de novo the district court's grant of summary judgment, "as though on direct appeal from the agency, " Catholic Healthcare W. v. Sebelius, 748 F.3d 351, 353 (D.C. Cir. 2014), and we affirm. The Secretary reasonably interpreted the bona fide sale requirement as limited to arm's-length transactions between economically self-interested parties. The Secretary concluded that St. Francis's transfer of its assets to Via Christi was not an arm's-length transaction in which each party sought to maximize its economic benefit. Her determination was supported by substantial evidence, and was not arbitrary, capricious or otherwise unlawful. See Forsyth Mem'l Hosp., Inc. v. Sebelius, 639 F.3d 534, 537 (D.C. Cir. 2011). In the absence of a qualifying transaction, Via Christi is not entitled to additional depreciation reimbursement.



As just noted, federal law requires the Secretary to compensate medical-care providers for the actual, reasonable costs of supplying Medicare services, see 42 U.S.C. §§ 1395f(b)(1), 1395x(v)(1)(A), and reasonable costs include an appropriate allowance for depreciation, see 42 C.F.R. §§ 413.130, 413.134(a). The Secretary calculates depreciation by prorating the asset's purchase price over its anticipated useful life and reimburses a share of the depreciation to cover the use of assets in providing Medicare services. Id. § 413.134(a), (b)(1). At any given time, purchase price minus cumulative depreciation reflects the asset's "net book value." Id. § 413.134(b)(9). That value is only an estimate of the asset's fair market value. "[I]f 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 fell short of reflecting true cost." Catholic Healthcare W., 748 F.3d at 352-53.

The Secretary, consistent with the relevant Medicare regulations, makes that payment only when the loss results from a bona fide sale.[2] See Medicare Provider Reimbursement Manual § 104.24 (Manual or PRM) (May 2000), J.A. 1020; see also Pinnacle Health Hosps. v. Sebelius, 681 F.3d 424, 426 (D.C. Cir. 2012). The provider bears the burden of showing that a bona fide sale has occurred. Forsyth, 639 F.3d at 539.

Nonprofit entities are, by design, driven by purposes other than profit. The Secretary in 2000 issued Program Memorandum A-00-76 to guide application of section 413.134(f)(1) to mergers and consolidations of nonprofit Medicare providers, specifying that, "[a]s with transactions involving for-profit entities, " nonprofits' transactions support depreciation reimbursement adjustments only if they are between unrelated parties and "involve one of the events described in 42 C.F.R. [§] 413.134(f) as triggering a gain or loss recognition by Medicare." See Clarification of the Application of the Regulations at 42 C.F.R. [ยง] 413.134(l) to Mergers and Consolidations Involving Non-profit Providers, Program Memorandum A-00-76 (Oct. 19, 2000), at 2, J.A. 1031. The type of qualifying event that Via Christi ...

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