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.
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.
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
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 ...