The opinion of the court was delivered by: James E. Boasberg United States District Judge
Plaintiff Whidden Memorial Hospital here challenges a final decision by the Administrator of the Centers for Medicare & Medicaid Services (CMS) denying two of its claims for reimbursement under the Medicare program. First, after it underwent a statutory merger with another hospital, the Melrose-Wakefield Hospital Association (MWHA), Whidden sought reimbursement for the depreciation of its assets. The Administrator denied this claim on two independently dispositive grounds: it concluded both that the Whidden-MWHA merger did not constitute a bona fide sale and that the parties to the merger were not unrelated. Second, Whidden requested additional reimbursement for costs incurred by its new Transitional Care Unit (TCU) under the "new-provider" exemption to the usual limitations placed on such reimbursements. The Administrator denied this claim, too. She determined that the Whidden TCU had previously been owned by another institution, Care Well Manor Nursing Home, that had also operated as the equivalent of a skilled nursing facility, meaning the TCU did not qualify as a "new" provider of such services. In addition, she found that the facility's relocation from Malden, Massachusetts (where Care Well had been located), to Everett, Massachusetts (where the Whidden TCU was located), did not qualify the TCU under the "relocated-provider" provision of the new-provider exemption.
In bringing this suit, Whidden maintains that the Administrator's denials of its two claims were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence" in violation of the Administrative Procedure Act. Both parties now seek summary judgment. The Court's ultimate decision is split, awarding the first round to the Administrator and the second to Whidden.
On the first issue, our Circuit has twice upheld the agency's interpretation of the relevant regulations to authorize reimbursement for a depreciation loss on a statutory merger only when that merger constitutes a bona fide sale, and the Administrator's determination that the merger here did not so qualify was supported by substantial evidence in the record. On the second question, even if the Administrator was correct that Care Well was the previous owner of the Whidden TCU for purposes of the regulation, her subsequent determination that Care Well had operated as the equivalent of a skilled nursing facility was arbitrary and capricious and unsupported by substantial evidence. Such a determination moots analysis of the relocated-provider provision. The Court, accordingly, will grant summary judgment for Defendant on the statutory-merger issue and remand the matter to HHS on the new-provider issue.
The Medicare program, which is administered by CMS on behalf of the Secretary of the Department of Health and Human Services, provides federally funded health insurance for the elderly and the disabled. See 42 U.SC. § 1395 et seq. Providers of Medicare services like Whidden are statutorily entitled to reimbursement for the "reasonable cost" of Medicare services. Id. § 1395f(b)(1). As articulated above, this case concerns two of Whidden's claims for reimbursement under the Medicare program. Each claim implicates a distinct regulatory framework and a distinct set of facts, which the Court will set out separately.
A. Depreciation Loss on Merger
Medicare regulations provide that "an appropriate allowance for depreciation on buildings and equipment used in the provision of patient care is an allowable cost." 42 C.F.R. § 413.134(a); see Forsyth Mem'l Hosp., Inc. v. Sebelius, 639 F.3d 534, 536 (D.C. Cir. 2011); St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901 (D.C. Cir. 2010). The depreciation allowance for a given asset is determined by prorating the "historical cost" of that asset - i.e., "the cost incurred by the present owner in acquiring the asset" - over its "estimated useful life." See 42 C.F.R. § 413.134(a)-(b); St. Luke's, 611 F.3d at 901. Medicare will reimburse providers for a percentage of that allowance equal to the portion of the asset's use devoted to Medicare services. See 42 C.F.R. § 413.134(a)-(b); St. Luke's, 611 F.3d at 901. "In other words, the annual reimbursable allowance is equal to the actual cost divided by the number of years of its useful life and then multiplied by the percentage of the asset's use devoted to Medicare services in the given year." St. Luke's, 611 F.3d at 901.
This methodology, however, "only approximate[s] the actual decline in an asset's value." Forsyth, 639 F.3d at 536 (quoting Via Christi Reg'l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1262 (10th Cir. 2007)) (internal quotation marks omitted) (alteration in original). Because Medicare reimbursement mechanisms aim to compensate for the costs "actually incurred," 42 U.S.C. § 1395x(v)(1)(A), the regulations provide for an adjustment of the allowable depreciation cost in certain circumstances when the disposal of an asset indicates that it in fact depreciated more quickly or more slowly than the formula had predicted. See 42 C.F.R. § 413.134(f)(1); see also Forsyth, 639 F.3d at 536; St. Luke's, 611 F.3d at 901-02. If the consideration obtained upon disposal is less than the asset's "net book value" - i.e., its historical cost minus previous depreciation payments, id. § 413.134(b)(9) - the provider has experienced a "loss." See 42 C.F.R. § 413.134(f)(1). Conversely, if a provider receives consideration in excess of the net book value, it has experienced a "gain." See id.
If the disposition of an asset that took place before December 1, 1997, resulted in a loss or gain, the regulations provide for an adjustment of the reimbursable depreciation cost. See id.; St. Luke's, 611 F.3d at 902.*fn1 Under subsection (f) of the depreciation regulation, "[t]he treatment of the gain or loss depends upon the manner of disposition of the asset." Id. § (f)(1). For example, "[i]f an asset is disposed of through a bona fide sale, the treatment is straightforward: If there is a gain, the selling provider must compensate Medicare therefor; if there is a loss, Medicare reimburses the provider." St. Luke's, 611 F.3d at 902 (citing 42 C.F.R. § 413.134(f)(2)). More relevant here, if an asset is disposed of through a "statutory merger between unrelated parties," subsection (l) provides that the merged corporation may recover for any depreciation loss incurred under the same framework applicable to asset sales. See 42 C.F.R. § 413.134(l) (1997) (now § 413.134(k)) ("If the merged corporation was a provider before the merger, then it is subject to the provisions of paragraphs (d)(3) and (f) of this section concerning recovery of accelerated depreciation and the realization of gains and losses.").
2. Factual and Procedural Background
Prior to August 1, 1996, Everett Cottage Hospital d/b/a Whidden Memorial Hospital was a Massachusetts non-profit corporation that owned and operated a general acute-care hospital in Everett, Massachusetts. See A.R. at 23 (Whidden Mem'l Hosp. v. Blue Cross Blue Shield Assoc., Decision of the Administrator, Centers for Medicare & Medicaid Servs.); Provider -- Whidden Mem'l Hosp. Everett, Mass. v. Intermediary -- Bluecross Blueshield Ass'n/Nat'l Gov't Servs. -- Maine, 2009 WL 3231747, at *4 (P.R.R.B. Jul. 28, 2009). Effective August 1, 1996, Whidden consummated a statutory merger into another Massachusetts non-profit corporation, Melrose-Wakefield Hospital Association, which operated a community hospital in Melrose, Massachusetts. See A.R. at 23; Provider -- Whidden, 2009 WL 3231747, at *4. Following this merger, Whidden ceased to exist as a corporate entity, though the hospital retains its name. See id. at 23; Provider -- Whidden, 2009 WL 3231747, at *4. MWHA acquired all of Whidden's assets and assumed all of its liabilities. See Provider -- Whidden, 2009 WL 3231747, at *4.
Whidden submitted a terminating cost report for the period ending July 31, 1996, which included a claim for a depreciation loss realized upon its statutory merger. See A.R. at 23; Provider -- Whidden, 2009 WL 3231747, at *5. Associated Hospital Service of Maine, the Intermediary designated by HHS to process Whidden's claims for reimbursement, disallowed the claimed loss. See A.R. at 23; Provider -- Whidden, 2009 WL 3231747, at *4. It denied reimbursement because it understood the regulation concerning depreciation losses on mergers to provide for reimbursement only when a merger constitutes a bona fide sale, and it determined that the Whidden--MWHA merger was not a bona fide sale. See A.R. at 23; Provider -- Whidden, 2009 WL 3231747, at *4. In addition, it concluded that Whidden and MWHA were not "unrelated parties," as required by the regulation. See A.R. at 3; Provider -- Whidden, 2009 WL 3231747, at *9.
Pursuant to 42 U.S.C. § 1395oo(a), Whidden appealed the Intermediary's denial of its request for reimbursement to the Provider Reimbursement Review Board (PRRB). See Provider -- Whidden, 2009 WL 3231747, at *4. The PRRB overturned the Intermediary's disallowance, concluding that the regulations did not require statutory mergers to meet the requirements of bona fide sales in order for depreciation losses to be compensable. See id. at *11. "[O]nce a transaction is acknowledged to be a statutory merger between unrelated parties," it emphasized, "the conclusion follows immediately that the provider is entitled to recognition of a loss or gain on disposition of its assets." Id. The PRRB further determined that, even if the regulations required statutory mergers to constitute bona fide sales, the record established that the Whidden-- MWHA merger was, in fact, a bona fide sale. See id. at *11-*12. Additionally, the PRRB rejected the Intermediary's argument that the parties to the merger were not "unrelated," as required by the regulation. Id. at *10.
The Administrator of CMS, which has the discretion to review any final decision of the PRRB on behalf of the Secretary, see 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875(a)(1), reversed, disagreeing with the PRRB at nearly every juncture. See A.R. at 2, 24-29. First, she concluded that the PRRB had erred in concluding that a statutory merger need not amount to a bona fide sale for a loss to be cognizable. See id. at 24. "The application of the bona fide sale criteria," the Administrator stated, "is consistent with the plain language of the controlling regulation and Medicare policy." Id. Second, she found that the Whidden--MWHA merger did not amount to a bona fide sale because, inter alia, "there was a significant disparity of consideration tendered in exchange for [Whidden's] assets." Id. at 26. Third, even if she had come out the other way on the bona fide-sale question, the Administrator would have denied reimbursement on the distinct ground that Whidden and MWHA were not "unrelated parties." See id. at 27-29.