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Catholic Healthcare West v. Sebelius

United States District Court, District of Columbia

January 29, 2013

Kathleen SEBELIUS, in her official capacity as Secretary of Health and Human Services, Defendant.

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[Copyrighted Material Omitted]

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Jeffrey A. Lovitky, Jeffrey A. Lovitky, Attorney at Law, Washington, DC, for Plaintiff.

Javier M. Guzman, U.S. Attorney's Office, Jeremy S. Vogel, Special Assistant U.S. Attorney, Washington, DC, for Defendant.


GLADYS KESSLER, District Judge.

Plaintiff, Catholic Healthcare West (" CHW" ), brings this action against Defendant Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services (respectively, the " Secretary" and " HHS" ), pursuant to Title XVII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. (" the Medicare Act" ). CHW seeks judicial review of a final agency decision denying Marian Medical Center's (" Marian" ) reimbursement claim arising from the merger of Marian, Mercy Healthcare Ventura County (" Mercy" ), and CHW.[1]

This matter is before the Court on Plaintiff's Motion for Summary Judgment [Dkt. No. 14] and Defendant's Motion for Summary Judgment [Dkt. No. 15]. Upon consideration of the parties' cross-motions, the administrative record, and the entire record herein, and for the reasons stated below, Plaintiff's Motion for Summary Judgment is denied and Defendant's Motion for Summary Judgment is granted.


On March 15 1997, Marian entered into an Agreement of Merger with Mercy, a two-hospital system whose sole corporate member was CHW. Administrative Record (" A.R." ) 20, 409. CHW is a Catholic healthcare system co-sponsored by several Catholic women's religious orders. Id. at 20. CHW oversees and coordinates the activities of a healthcare system consisting of over 30 acute care hospitals in California, Arizona, and Nevada. Id. Marian was a general acute care hospital located in Santa Maria, California. Id. Marian was owned and operated by the Sisters of St. Francis of Penance and Christian Charity, St. Francis Province (" Sisters of St. Francis" ). Id. The merger between Marian, Mercy and CHW became effective April 24, 1997. Id. at 20, 411, 413-14, 493-95. Mercy, renamed CHW-CC, remained as the surviving corporation. Id. at 20, 411, 413-14.

A. Statutory and Regulatory Framework

Congress created the Medicare program in 1965 to pay for certain specified, or " covered," medical services provided to eligible elderly and disabled persons. See 42 U.S.C. §§ 1395 et seq. Under the program, health care providers are reimbursed for a portion of the costs that they incur treating Medicare beneficiaries pursuant to an extremely " complex statutory and regulatory regime." Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). That

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regime is administered by the Centers for Medicare & Medicaid Services (" CMS" ), under the supervision of the Secretary. CMS contracts with a network of fiscal intermediaries to review and process Medicare claims in the first instance.

The Medicare Act provides for reimbursement of the " reasonable cost of [Medicare] services." 42 U.S.C. § 1395f(b)(1). " Reasonable" costs are those " actually incurred ... [as] determined in accordance with regulations." 42 U.S.C. § 1395x(v)(1)(A). Under the Secretary's regulations in effect at the time of the transaction at issue, " [a]n appropriate allowance for depreciation on buildings and equipment used in the provision of patient care [was] an allowable cost." 42 C.F.R. § 413.134(a) (1997).[2] The costs are calculated by dividing the asset's purchase price by its " estimated useful life" and then prorating this amount by the percentage of the asset's use dedicated to Medicare services. 42 C.F.R. §§ 413.134(a)(3), (b)(1). Medicare reimburses providers for these depreciation costs on an annual basis.

The Secretary determined that certain disposals of depreciable assets may give rise to recognition of a " gain" or " loss." That figure effectively adjusts the annual Medicare depreciation payments to more accurately reflect the actual cost of providing covered services to Medicare beneficiaries. Entities that were Medicare providers prior to statutorily merging with an unrelated party are able to recoup gains and losses from the merger subject to 42 C.F.R. § 413.134(f). Subsection (f) allows providers to request reimbursement for the difference between the " net book value" [3] and the compensation actually received in exchange for assets disposed of prior to December 1, 1997.[4] 42 C.F.R. § 413.134(f)(1). Subsection (f)(2) permits the inclusion of " gains and losses realized from the bona fide sale ... of depreciable assets" in the determination of allowable cost. 42 C.F.R. § 413.134(f)(2).[5]

The Secretary issued Program Memorandum (" PM" or " Memorandum" ) A-00-76 in order to clarify the application of 42 C.F.R. § 413.134( l ), the statutory merger regulation, to non-profit providers. PM A-00-76 (Oct. 19, 2000) (A.R. 1676-79). The Memorandum describes the " related organizations" and " bona fide sale" standards under which mergers between non-profit organizations should be analyzed. Id.

As to " related organizations," PM A-00-76 notes that consideration should be given to continuity of control, or the degree to which the pre-merged entities continue to exercise control over the post-merger entity. Id. As to " bo ...

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