contexts in 1984 and in that sense follows the same procedure
now. Further, to follow plaintiff's interpretation would require
defendant to value an asset at its actual historical cost for
annual depreciation purposes throughout the period when a
provider was using the asset, and then suddenly reject this
valuation when adjusting that same depreciation on resale.
Defendant's approach, by comparison, is far more conceptually
consistent; defendant simply treats historical cost uniformly at
all points in the calculation of depreciation. This is an
eminently reasonable approach on its face.
The reasonableness of this uniform treatment of historical cost
is also bolstered by the text of § 1395x(v)(1)(O)(i), which
directs the Secretary to apply the DEFRA limit when "establishing
an appropriate allowance for depreciation."
42 U.S.C. § 1395x(v)(1)(O)(i). Although plaintiff would restrict the meaning
of "an appropriate allowance for depreciation" to the calculation
of the annual depreciation allowance and exclude the subsequent
depreciation adjustment, these are most reasonably understood as
two phases of the same overall determination of allowable
depreciation costs. In making a final depreciation adjustment,
the Secretary is still making a calculation intended to determine
"an appropriate allowance for depreciation." Thus, application of
the DEFRA limit to determine both the annual depreciation
payments and the ultimate depreciation adjustment is reasonable.
Plaintiff argues that its interpretation is the only reasonable
one. Plaintiff argues that gain or loss should be calculated
without any reference to DEFRA. Plaintiff asserts that the
historical cost should be limited only by plaintiff's own
purchase price, the asset's reproduction costs and the asset's
fair market value, Pl.Mem. at 20, and that the DEFRA limit (in
this case, the previous owner's acquisition cost) was "not
intended to have an effect on the calculation of a Medicare gain
or loss on the sale of an asset." Pl.Mem. at 17 (emphasis added).
This is an unreasonable interpretation because by allowing
plaintiff to recover loss up to its own purchase price, it would
substantially defeat the intention of Congress. In the
Congressional Conference Report, it was stated:
The conferees are concerned that Medicare has been
paying for the same capital assets more than once.
Thus, the provision [codified at 1395x(v)(1)(O)(i)]
is intended to limit the revaluation of an asset to
the cost of acquisition to the individual or entity
who is the owner, for medicare purposes, at the time
of enactment of the legislation.
H.R.Conf.Rep. 98-861 at 1339, reprinted in 1984 U.S.S.C.A.N.
1445, 2027 (emphasis added). Under plaintiff's interpretation,
the effect of the DEFRA limit is chiefly to put off this
revaluation until resale. Plaintiff's interpretation would still
allow it to eventually obtain the revaluation that Congress
intended to preclude.
Plaintiff argues that its interpretation has been expressly
adopted by the Secretary's current regulations. Plaintiff points
to two excerpts from the Secretary's Medicare Intermediary Manual
("Manual"), which is issued to give intermediaries direction in
calculating reimbursable costs. Even assuming that the Manual is
binding, however, the statements plaintiff relies on do not
advance its position. The first statement is that "[a]djustment
to depreciation (i.e., the gain or loss) computation is based
upon Medicare rules in effect on June 1, 1984." Admin.Rec. at 76.
This is a merely a restatement of the DEFRA provision which
defendant has reasonably interpreted. Plaintiff's second excerpt
states that "the gain/loss computation to be applied to the
seller is always based upon the allocated purchase price,
regardless of the limitation which will be applied to the buyer
for revaluation of assets." Admin.Rec. at 74 (emphasis in
original). Plaintiff asserts that this is a clear statement that
the gain/loss computation is based on plaintiff's own purchase
price. However, the "purchase" in this context is the purchase
from plaintiff acting as seller, i.e. plaintiff's resale of
the asset. Thus, the statement merely confirms that the loss
should be determined by comparing the asset's net book value with
the allocated resale price of the asset.
Because defendant's interpretation of the DEFRA provisions and
the relevant provisions of its internal Manual is reasonable and
consistent with the plain language of those provisions,
plaintiff's first claim of error is rejected.
C. Allocation of the Purchase Price to the Medical Records
The regulations specifically provide that the allocation of the
lump sum price must be "among all the assets sold in accordance
with the fair market value of each asset. . . ." 42 C.F.R. § 413.134
(f)(2)(iv) (1999) (emphasis added). Plaintiff asserts that
the medical records were assets sold. Further, pursuant to an
expert appraisal performed at defendant's direction, the fair
market value of the medical records was calculated as $1,500,000.
Nevertheless, defendant declined to allocate any of the purchase
price to the medical records. Plaintiff asserts that this was an
Defendant's view is that the term "assets sold" chiefly refers
to "tangible" assets. She asserts that under the regulation,
intangible assets such as medical records are treated as
equivalent to "going concern" value, and asserts that "going
concern" should be considered a "sold asset" and assigned a
portion of the purchase price only if that purchase price exceeds
the value of the "tangible" assets. In that event, the excess or
"residual" value is assigned to going concern.
Although presented in broad terms, defendant's reasoning is
most appropriately reviewed as a factual conclusion, i.e. a
conclusion that the medical records only have a "going concern"
value and that in this case, the buyer should not be considered
to have paid anything for the "going concern" value of the
facility. Cf. Universal Health Services of Nevada, Inc. v.
Sullivan, 1992 WL 465444 (D.D.C. 1992), (reviewing for
substantial evidence defendant's assertion
that medical records were typically "expensed" and therefore
could not be claimed as depreciable assets), aff'd,
18 F.3d 954, 1994 WL 47155 (D.C.Cir. 1994) (unpublished opinion).
"Substantial evidence" is evidence which a "reasonable mind
might accept" as "adequate to support a conclusion." Dickinson
v. Zurko, 527 U.S. 150, 119 S.Ct. 1816, 1823, 144 L.Ed.2d 143
(1999) (citation and internal quotations omitted). This is
something less than the "weight of the evidence" and the
"possibility of drawing two inconsistent conclusions from the
evidence does not prevent an administrative agency's finding from
being supported by substantial evidence." Consolo v. Federal
Maritime Comm'n, 383 U.S. 607, 620, 86 S.Ct. 1018, 16 L.Ed.2d
The conclusion that the buyer did not provide any consideration
for Lake Medical as a going concern is reasonable in light of the
evidence. "Going concern" value refers to a market determination
that a business in operation is worth more than the fair market
value of its separately sold assets. See North Clackamas
Community Hospital v. Harris, 664 F.2d 701, 705 (9th Cir. 1980)
(Kennedy, J.) (noting Board's view that going concern value is
"an amount the Provider was willing to pay beyond the fair market
value of specific identifiable tangible assets in order to
conduct its business" and observing that this view was "in
accordance with standard accounting practices"); Dakota Midland
Hospital v. Blue Cross and Blue Shield Association/Blue Cross and
Blue Shield of Iowa, No. 97-D72, 1997 WL 383652, *5 (P.R.R.B.
June 25, 1997). If the purchase price is less than the fair
market liquidation value, then it is reasonable to assume that no
premium was paid to obtain the business as a going concern. Here,
the expert appraisal established that the lump sum sales price
was less than the fair market value of the tangible assets. The
Board's finding that there was no going concern value therefore
must be upheld. Indeed, the plaintiff has not challenged this
The only question, then, is whether defendant's conclusion that
medical records are intangible assets which possess, at most, a
going concern value is supported by the evidence. The Court finds
that it is. The appraiser noted several uses of medical records
which contributed to its conclusion that the records had value.
It noted that records
provide the Medical Center and its health care
practitioners with an invaluable source of
information concerning the status and progression of
health issues affecting each patient. . . .
Additionally, these clinical medical records serve as
a repository of medical information that is essential
in responding to third-party inquiries regarding the
care and treatments rendered. The nature and sources
of these inquiries are diverse and typically arise
from third-party payors, peer review and research
organizations, and state medical societies, as well
as from potential medical malpractice litigants.
Supp.Admin.Rec. at 76. These noted uses are consistent with the
conclusion that the records were valuable solely for their use
by Lake Medical as a going concern. Conversely, the appraiser
did not suggest that the records could be valued as an asset
independent of Lake Medical's ongoing operations. The Court
concludes that the Board had sufficient basis to conclude that
the medical records have only going concern value and that the
medical records were not a sold asset for that reason.
It is true that the sales agreement listed medical records
among the "assets sold." Admin.Rec. at 56. However, the agreement
also listed many other such "sold assets" including good will,
licenses, surveys, building plans, patient and staff lists, title
to "Certificates," and work product. Admin.Rec. at 56. Even
plaintiff does not suggest that any of these should also have
been accorded a fair market value and
allocated a portion of the sales price. The mere mention of the
medical records as "assets" establishes only that the records
were intended to be among the assets transferred in the sale, not
that they specifically were sold for independent value. Indeed,
the Board heard at least some testimony to the contrary from an
agent of the intermediary. See Admin.Rec. at 214 ("Q: And
there's no indication that [the buyer] when it paid 14.4 for the
hospital assets received some value of that 14.4 for the medical
records, is that correct? A: That's correct.").
Plaintiff notes that in Universal Health Services of Nevada,
Inc. v. Sullivan, 1992 WL 465444 (D.D.C. 1992), aff'd, 1994 WL
47155 (D.C.Cir. 1994) (unpublished opinion), the district court
observed that expert testimony had established that "purchasers
of hospitals reflect medical records as an asset and amortize
the acquisition cost over the asset's useful life." Id., 1992
WL 465444, *8 (emphasis added). Here, however, there is no
evidence that the buyer associated any acquisition cost with the
medical records specifically. Although the Board has previously
found that an agreement between a buyer and seller regarding
allocation of the purchase price to medical records is
controlling in the loss/gain calculation, see Sullivan Community
Hospital v. Blue Cross and Blue Shield Assoc., No. 94-D31, 1994
WL 928170, *6-7 (P.R.R.B. April 26, 1994), it is undisputed that
there is no such agreement in this case.
In sum, the Court finds that the defendant's determination is
supported by substantial evidence. Plaintiff's second claim of
error must therefore also be rejected and the Secretary's
decision upheld in all challenged respects. An appropriate order
will accompany this decision.
It is hereby
ORDERED that plaintiff's motion for summary judgment (22)
is DENIED; and it is further
ORDERED that defendant's motion for summary judgment (26)
is GRANTED and the action is dismissed in its entirety.