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Central Iowa Hospital Corporation, Successor-In-Interest To Iowa Lutheran Hospital v. Kathleen Sebelius

February 1, 2011

CENTRAL IOWA HOSPITAL CORPORATION, SUCCESSOR-IN-INTEREST TO IOWA LUTHERAN HOSPITAL, PLAINTIFF,
v.
KATHLEEN SEBELIUS,*FN1 AS SECRETARY OF HEALTH AND HUMAN SERVICES, DEFENDANT.



The opinion of the court was delivered by: Royce C. Lamberth, Chief Judge

MEMORANDUM OPINION

Before the Court is plaintiff's Motion [14] for Summary Judgment, defendant's Cross-Motion [17] for Summary Judgment, and plaintiff's Motion [28] for Leave to Amend Complaint. Upon consideration of the summary judgment motions, the memoranda in support thereof, the parties' supplemental authority, the record, and the applicable law, the Court will DENY plaintiff's Motion for Summary Judgment and GRANT defendant's Cross-Motion for Summary Judgment. Upon consideration of plaintiff's Motion for Leave to Amend Complaint, defendant's opposition, the reply thereto, the record, and the applicable law, the Court will DENY plaintiff's motion. The Court's reasoning is set forth below.

I.BACKGROUND

This case arises from the merger of a non-profit Medicare provider, Iowa Lutheran Hospital (Lutheran), into Iowa Methodist Medical Center (Methodist), which has since been renamed Central Iowa Hospital Corporation (Central Iowa). Central Iowa, as successor-in-interest to Lutheran, sought Medicare reimbursement for losses incurred by Lutheran in the merger. On December 8, 2006, the Administrator of the Centers for Medicare and Medicaid Services (CMS) denied Central Iowa's claim. Central Iowa challenges that denial here.

A.Statutory and Regulatory Framework

Under the Medicare statute, a provider is entitled to compensation for the "reasonable cost" of Medicare services. 42 U.S.C. § 1395f(b)(1). This includes an "appropriate allowance for depreciation on buildings and equipment." 42 C.F.R. § 413.134(a). An asset's depreciation allowance is based on its "historical cost"-i.e., "the cost incurred by the present owner in acquiring the asset," id. § 413.134(b)(1)-"[p]rorated over the estimated useful life of the asset." Id. § 413.134(a)(3). The resulting annual depreciation allowance is reimbursable to the extent that a provider uses the asset to provide Medicare services.

In addition to annual depreciation payments, the Secretary of Health and Human Services has determined that the disposition of a depreciable asset may result in a gain (or loss), for which a provider may receive a credit (or debit). Under the depreciation regulation, an asset's gain or loss is equal to the difference between the consideration received upon disposition and its "net book value"-i.e., its historical cost less any previous Medicare depreciation payments. Id. § 413.134(b)(9). If the disposition of an asset results in a loss, a provider may be reimbursed for Medicare's share of that loss; conversely, if the disposition of an asset results in a gain, the provider must reimburse Medicare for Medicare's share of that gain. See id. § 413.134(f).

Under subsection (f) of the depreciation regulation, the manner in which Medicare treats such gains or losses "depends upon the manner of disposition of the asset." Id. § 413.134(f)(1). If an asset is disposed of through a "bona fide sale," subsection (f) is straightforward: Medicare reimburses the provider for any loss incurred in the sale, while the provider reimburses Medicare for any gain. Id. § 413.134(f)(2). If the transaction is not a bona fide sale, however, subsection (f) does not provide for any adjustment. If an asset is disposed of through a "statutory merger"-i.e., "a combination of two or more corporations under the corporation laws of the State, with one or more of the corporations surviving"-the merged corporation is subject to subsection (f)'s provisions on gains and losses. Id. § 413.134(k)(2)(i). This case involves such a statutory merger.

In October 2000, the Secretary issued a guideline document regarding asset disposition in statutory mergers. Program Memorandum A-00-76 (Oct. 19, 2000) (PM A-00-76). This document clarifies that subsection (f)'s provisions apply to mergers involving for-profit and nonprofit providers. PM A-00-76 at 1. In both kinds of statutory merger, Medicare will recognize a gain or loss on the disposition of assets if two requirements are met. First, the merger "must occur between or among parties that are not related." Id. Second, "the transaction must involve one of the events described in 42 CFR 412.134(f) as triggering a gain or loss recognition by Medicare (typically, a bona fide sale, as defined in the [Provider Reimbursement Manual (PRM)] at § 104.24[)]." Id. (emphasis added). PM A-00-76 thus effectively imposes the bona fide sale requirement on statutory mergers.

Under PRM § 104.24, a "bona fide sale contemplates an arm's length transaction . . . for reasonable consideration." PRM § 104.24 (emphasis added). In other words, a bona fide sale requires payment of reasonable consideration for depreciable assets. PM A-00-76 further explains what constitutes reasonable consideration:

As with for-profit entities, in evaluating whether a bona fide sale has occurred in the context of a merger or consolidation between or among non-profit entities, a comparison of the sales price with the fair market value of the assets acquired is a requires aspect of such analysis. . . . Thus, a large disparity between the sales price (consideration) and the fair market value of the assets sold indicates the lack of a bona fide sale.

PM A-00-76 at 3.

B.Factual and Procedural Background

Lutheran's merger with Methodist became effective on November 22, 1993. A.R. 356. Methodist, the surviving entity, was originally renamed Iowa Health System Hospital Corporation. A.R. 186. It has since been renamed Central Iowa. A.R. 235. Methodist's sole member, renamed as Iowa Health System, continued to be the surviving entity's sole member. A.R. 186, 511. As part of the merger agreement, Iowa Health System's board had 23 members, 11 of whom were appointed from Lutheran. A.R. ...


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