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Pinnacle Health Hospitals v. Sebelius

June 28, 2010


The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Re Document Nos.: 18, 19




This matter comes before the court on the parties' cross-motions for summary judgment. The plaintiff is a non-profit hospital system created in 1995 by the consolidation of two independent hospitals. Through this action, brought under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 553 et seq., the plaintiff challenges a decision by the Administrator of the Centers for Medicare and Medicaid Services ("the Administrator") disallowing the plaintiff's claim for the recovery of "losses" on depreciable assets that allegedly resulted from the consolidation that created the plaintiff. The Administrator denied the claim on two independent grounds: first, because the consolidation did not effect a bona fide sale of the depreciable assets, and second, because the consolidation was a transaction between related parties. The court concludes that the Administrator's imposition of a bona fide sale requirement was not arbitrary or capricious and that substantial evidence supported the Administrator's conclusion that the consolidation did not result in a bona fide sale. Accordingly, the court grants the defendant's motion for summary judgment and denies the plaintiff's cross-motion for summary judgment.


A. The Statutory and Regulatory Framework

Medicare provides health insurance to the elderly and disabled by entitling eligible beneficiaries to have payment made on their behalf for the care and services rendered by hospitals, termed "providers." See 42 U.S.C. §§ 1395 et seq. Providers, in turn, are reimbursed by insurance companies, known as "fiscal intermediaries," that have contracted with the Centers for Medicare and Medicaid Services ("CMS") to aid in administering the Medicare program. See id. § 1395h. Fiscal intermediaries determine the amount of reimbursement due to providers under the Medicare Act and applicable regulations. See id.

Providers obtain Medicare reimbursement by submitting an annual cost report to their fiscal intermediary demonstrating their costs from the previous year and the portion of those costs allocable to Medicare. 42 C.F.R. § 413.20. After receiving a provider's cost report, the fiscal intermediary is authorized to audit the report before determining the total amount of reimbursement to which the hospital is entitled. Id. § 405.1803. If the provider disagrees with the intermediary's determination, it may appeal that determination to the Provider Reimbursement Review Board ("PRRB"). 42 U.S.C. § 1395oo(a). The PRRB's determination may, in turn, be appealed to the Administrator. Id. § 1395oo(f)(1). The Administrator's ruling constitutes a final agency decision subject to review in a federal district court. Id.

At the time of the consolidation at issue in this case, CMS regulations authorized fiscal intermediaries to reimburse Medicare providers based on the costs they incurred in providing services to beneficiaries. Id. § 1395f(b). Included among these reimbursable costs was "depreciation on buildings and equipment used in the provision of patient care." 42 C.F.R. § 413.134(a) (1995).*fn1 Depreciation was reimbursed annually and calculated by taking the cost of acquiring the asset and dividing that amount first by the asset's estimated useful life and second by the portion of its use attributable to Medicare beneficiaries. Id. § 413.134(a)-(b). The initial cost of the asset minus any depreciation was referred to as the "net book value" of the asset, and represented an estimate of its current value. Id. § 413.134(b)(iii)(9).

Medicare regulations recognized, however, that an asset's "net book value" represented only an estimate of that asset's current value and that if the provider sold the asset before it reached the end of its useful life, the sale price would provide a more accurate indication of the asset's current value. See id. § 413.134(f). Accordingly, the regulations provided that if a provider disposed of an asset in a bona fide sale before the end of its useful life, an adjustment would be made in the amount of depreciation for which the provider had been reimbursed. Id. § 413.134(f)(2). Specifically, the regulations provided that if the sale price of the asset was higher than the asset's "net book value," this would establish that Medicare had excessively reimbursed the provider for depreciation, and the provider would be required to repay the difference to Medicare. Id. Conversely, if the sale price of the asset was lower than the asset's "net book value," this would indicate that Medicare had insufficiently reimbursed the provider for depreciable losses, and Medicare would provide an adjustment payment to make up the difference.*fn2 Id.

B. Factual & Procedural Background

In 1995, Harrisburg Hospital/Seidle Memorial Hospital*fn3 ("Harrisburg/Seidle") and Polyclinic Medical Center ("Polyclinic") (collectively with Harrisburg/Seidle, "the consolidating hospitals"), two non-profit hospitals in Harrisburg, Pennsylvania, consolidated to form the plaintiff, a new non-profit hospital system. A.R.P.*fn4 at 2156. Prior to the consolidation, Harrisburg/Seidle and Polyclinic were independent entities and were not subject to common ownership or control. Id. at 2157. As a result of the consolidation, the plaintiff acquired title to all of the consolidating hospitals' assets and assumed responsibility for all of their liabilities. Id. at 2156. Each consolidating hospital appointed half of the plaintiff's initial governing board. A.R.H. at 895.

Both Harrisburg/Seidle and Polyclinic included a claim for depreciation losses incurred as a result of the consolidation on their 1995 cost reports filed with the Medicare fiscal intermediary. A.R.P. at 2158-59. After the fiscal intermediary denied these claims for depreciation losses, both consolidating hospitals appealed to the PRRB. Id. The PRRB determined that the payments were ...

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