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Community Care Foundation v. Thompson

January 17, 2006


The opinion of the court was delivered by: James Robertson United States District Judge


The Provider Reimbursement Review Board (PRRB), acting pursuant to a delegation of authority from the Secretary of Health and Human Services, decides Medicare reimbursement disputes between health care service providers and the Medicare program. On May 6, 2004, the PRRB upheld the denial of plaintiff CommunityCare's reimbursement claim for a depreciation loss adjustment on assets CommunityCare disposed of in the 1996 cost year.

There are no factual disputes in the case. The sole question before this court is whether, on the facts of this case, a depreciation loss adjustment may be claimed for a provider's interest in a nominal lease. For the reasons laid out below, I believe the answer is no, and the defendant's motion for summary judgment will accordingly be granted.

1. Background

A. Medicare Reimbursement

The Medicare program was established in 1965 under Title VII of the Social Security Act to provide health insurance to the aged and disabled. 42 U.S.C. §§ 1395-1395cc. Centers for Medicare and Medicaid Services (CMS), neé Health Care Financing Administration (HCFA), administers the Medicare Program. The Secretary's payment and audit functions under the Medicare program are contracted out to insurance companies, known as Fiscal Intermediaries (FI). Using the Medicare statute and the interpretive guidelines published by CMS, FI's determine what Medicare owes its providers. Dkt. #9 at 7.

At the close of the fiscal year, a provider submits to the fiscal intermediary a report of costs it has incurred during that year. The report allocates a portion of those costs to Medicare. 42 C.F.R. § 413.20. The FI reviews the report and determines the total Medicare reimbursement due to the provider. Dkt. #1 at 4, ¶7. It publishes the amount in a notice of program reimbursement ("NPR"). A dissatisfied provider may file an appeal with the PRRB within 180 days of the NPR. See 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835.

For providers that own their facilities, depreciation on hospital assets (buildings and equipment) used to service Medicare patients is a reimbursable Medicare expense. 42 C.F.R. § 413.134; Dkt. #1 at 4, ¶8. The FI bases the depreciation reimbursement, in part, on the ratio of Medicare/Medicaid patients to a hospital's overall clientele. If, for example, one-fifth of a hospital's patients are eligible for Medicare, Medicare pays one-fifth of the hospital's annual depreciation costs. Medicare allows providers to estimate their depreciation costs using a straight-line method, a declining balance method, or, in certain situations, a sum-of-the-years' digits method. 42 U.S.C. § 1395f(b)(1); 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.134. A depreciable asset's basis is its "historical cost" -- generally, the purchase price. 42 C.F.R. § 413.134(a)(3). Depreciation is calculated annually and reported in the owner's fiscal year report. Id. Medicare's "fair share" of estimated depreciation is a percentage equal to the percentage of the provider's assets (buildings and equipment) used to service Medicare patients. 42 C.F.R. § 413.134(a); Dkt. #1 at 4, ¶9.

Because the annual percentage was based on estimates, the 1996 Medicare regulations provided for the recapture (or payment) of any over- (or under-) payments when a provider/owner appropriately disposed of a depreciable asset.*fn1 Dkt. #1 at 5, ¶11. If the owner disposed of the asset for less than its book value (its net depreciated basis), Medicare deemed a depreciation "loss" to have occurred, 42 C.F.R. § 143.134(b)(9), and provided additional reimbursement to cover the underpayment. Conversely, if the owner disposed of the asset for more than its book value, the asset had depreciated less than previously estimated, and Medicare recaptured any overpayment it had made on depreciation. 42 C.F.R. § 413.134(f)(1); Dkt. #1 at 5, ¶10. The regulation only recognized certain forms of disposal as qualified for Medicare recoupment/reimbursement, however: "sale, scrapping, trade-in, exchange, demolition, abandonment, condemnation, fire, theft, or other casualty," 42 C.F.R. 413.134(f), or transfers occasioned through mergers or consolidations between unrelated parties. 42 C.F.R. § 413.134(l)(2)-(3).

Medicare providers that did not own their facilities, but instead held them pursuant to a commercial lease, received Medicare reimbursement for a share of their rental costs. For providers that held their facilities pursuant to a nominal lease (i.e., one for $1.00 a year), Medicare's Provider Reimbursement Manual (PRM) § 112 treated lessor and lessee as one and the same and reimbursed nominal-lessee providers for a percentage of annual depreciation costs. PRM § 112.

B. Case History

This case arises from a July 1, 1996 Asset Transfer Assumption and Operating Agreement between Medical Center (Bates) and Northwest Health System, Inc. (Northwest). Dkt. #11-1 at 3. CommunityCare Foundation (CommunityCare), formerly Northwest, is Bates's successor in interest.

Prior to the July 1, 1996 transaction, Bates and Northwest were unrelated corporations, with independent boards of directors, management, and medical staffs. The two entities did not share any common board members or officers. Dkt. #1 at 8.

Bates Medical Center, Inc., a 501(c)(3) non-profit corporation located in Bentonville, Arkansas, was created to operate Bentonville's city hospital so that the hospital could more easily attract capital. The 501(c)(3) held the Medicare provider number and leased the hospital assets from the ...

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