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March 22, 2000


The opinion of the court was delivered by: Flannery, District Judge.


The plaintiff, nominally Lake Medical Center ("Lake Medical") but in fact its former owner Nu-Med, Inc. (hereinafter "Nu-Med" or "plaintiff") brings this action seeking review of the decision of Donna E. Shalala, Secretary of the Department of Health and Human Services (hereinafter "the Secretary" or "defendant") regarding the amount of reimbursement plaintiff is owed under Medicare, the federal health insurance program for the aged and disabled. 42 U.S.C. § 1395 et seq. Under Medicare, the Secretary will reimburse providers of health care services for the "reasonable cost" of furnishing such services to Medicare beneficiaries. 42 U.S.C. § 1395f(b)(1). Plaintiff seeks such reimbursement for a loss it suffered when it resold Lake Medical, a hospital licensed to provide Medicare services, for substantially less than it had originally purchased it.

Specifically, in April of 1985, plaintiff acquired the assets of Lake Medical for approximately $29 million, and subsequently invested an additional $11 million in land improvements, for a total investment of about $40 million. In 1988, plaintiff resold Lake Medical for only $14.4 million.

Defendant has already determined that plaintiff has suffered a reimbursable loss on the resale. However, plaintiff asserts that defendant miscalculated the amount of loss. Both plaintiff and defendant have moved for summary judgment. Upon careful consideration of the administrative record, the briefings and the oral argument, the Court finds that the Secretary committed no error. Judgment is therefore granted to defendant.

I. Regulatory Background

The calculated annual depreciation is only an estimate of the asset's declining value. If a asset is ultimately sold by the provider for less than the depreciated basis calculated under Medicare (equivalent to the "net book value" and equal to the historical cost minus the depreciation previously paid, see 42 C.F.R. § 413.134(b)(9)), then a "loss" has occurred since the sales price was less than the estimated remaining value.*fn1 In that event, the Secretary assumes that more depreciation has occurred than was originally estimated and accordingly provides additional reimbursement to the provider. Conversely, if the asset is sold for more than its depreciated basis, then a "gain" has occurred and the Secretary takes back or "recaptures" previously paid reimbursement. 42 C.F.R. § 405.415(f)(1); see Whitecliff, Inc. v. Shalala, 20 F.3d 488, 489 (D.C.Cir. 1994). Plaintiff alleges that defendant's calculation of this depreciation adjustment in connection with the resale of Lake Medical is incorrect.

Two further aspects of the loss calculation as performed by defendant are relevant in deciding plaintiff's claims. The first is an additional limit on depreciation reimbursement which Congress added in July of 1984 as part of the Deficit Reduction Act of 1984 ("DEFRA"), Pub.L. No. 98-369, § 2314(a), 99 Stat. 494 (July 18, 1984), incorporated at 42 U.S.C. § 1395x(v)(1)(O)(i) (1988). This provision limited an asset's "historical cost" (and thus its depreciable basis) to the lesser of the purchase price of the current owner and the purchase price of the owner as of July 18, 1984 (referred to hereinafter as the "DEFRA limit").*fn2 Thus, in this case, even though Nu-Med bought Lake Medical Center in 1985 for $29 million, its depreciable basis was initially (prior to Nu-Med's land improvements) capped at $11 million, the price paid by the owner as of July 18, 1984, and plaintiff's annual depreciation was calculated based on this DEFRA-limited historical cost. After the resale, defendant also calculated plaintiff's loss based not on plaintiff's own purchase price but on the DEFRA-limited historical cost, i.e. the previous owner's purchase price. Plaintiff now asserts that defendant should not have applied the DEFRA-limit in calculating its loss.

The second relevant aspect of the calculation is the procedure for calculating the loss when several assets are sold together for a lump sum price. Defendant calculates depreciation adjustment on an individual asset basis, comparing each asset's net book value with its individual sales price. Here, however, plaintiff sold a group of assets, including the Lake Medical building and equipment, as well as the land, goodwill, an adjacent medical office building and the facility's medical records, for a lump sum of $14.4 million.

Where several assets are sold together for a lump sum, depreciation adjustment for each individual asset is calculated by first allocating a part of the lump sum to each asset "in accordance with [its] fair market value . . . as it was used by the provider at the time of sale." 42 C.F.R. § 413.134(f)(2)(iv). An appropriate part of the purchase price is allocated to "all the assets sold" regardless of whether they are depreciable (and thus Medicare-reimbursable) or nondepreciable. Where depreciable and non-depreciable assets are sold together, the allocation of the lump sum can effect the ultimate calculation of loss because any allocation to the non-depreciable assets results in a smaller sales price being allocated to the Medicare-reimbursable assets, and thus a higher calculated loss. Here, for example, the medical office building was not a depreciable asset, but because it was part of the sale of assets, it was allocated a portion of the purchase price decreasing the price allocated to the depreciable assets.

However, defendant did not allocate any of the purchase price to the medical records, although they were listed in the sales agreement among the assets sold and despite the fact that an expert appraisal ordered by the Board determined the medical records to have a fair market value of $1,500,000. Plaintiff asserts that because of the failure to allocate any of the lump sum to the medical records, defendant's calculation of the loss is too low.

The amount of a provider's loss is initially calculated by a fiscal "intermediary," a private entity hired by the defendant to address Medicare reimbursement claims. A provider may appeal this calculation to the Provider Reimbursement Review Board ("Board"), whose decision is final unless reviewed by the Deputy Administrator of the Health Care Financing Administration ("HCFA"). 42 U.S.C. § 1395oo(f). In this case, the intermediary found that plaintiff's total loss, in light of the DEFRA limit and after refusing to allocate any of the lump sum to medical records, was equal to $1,757,660.*fn3 The Board affirmed the result on September 26, 1997.

Plaintiff claims that without the erroneous application of the DEFRA limit, its loss is in excess of $10 million. Further, plaintiff asserts that even accepting defendant's application of the DEFRA limit, an allocation of an appropriate amount of the purchase price to the ...

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