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Via Christi Reg'l Med. Ctr., Inc. v. Burwell

United States District Court, D. Columbia.

January 28, 2015

VIA CHRISTI REGIONAL MEDICAL CENTER, INC., Plaintiff,
v.
SYLVIA M. BURWELL, Secretary, Department of Health and Human Services, Defendant

Page 417

For VIA CHRISTI REGIONAL MEDICAL CENTER, INC., successor to ST. FRANCIS REGIONAL MEDICAL CENTER, Plaintiff: James P. Holloway, LEAD ATTORNEY, OBER KALER GRIMES & SHRIVER, PC, Washington, DC.

For KATHLEEN SEBELIUS, as Secretary of Health and Human Services, Defendant: Peter C. Pfaffenroth, LEAD ATTORNEY, U.S. ATTORNEY'S OFFICE, Civil Division, Washington, DC.

Page 418

MEMORANDUM OPINION

COLLEEN KOLLAR-KOTELLY, United States District Judge.

Plaintiff, Via Christi Regional Medical Center, Inc. (" Via Christi" ), brings this action against Defendant Sylvia Matthews Burwell (" Secretary" ), in her official capacity as Secretary of Health and Human Services,[1] to review the final decision of the Administrator for the Centers for Medicare and Medicaid Services (" CMMS" ) denying Plaintiff, as successor-in-interest to St. Francis Regional Medical Center, reimbursement under the Medicare program of the Social Security Act, 42 U.S.C. § § 1395 et seq., for an alleged loss that Plaintiff incurred as part of the consolidation that resulted in Via Christi's formation. Specifically, Plaintiff seeks an order reversing and setting aside the final decision of the CMMS Administrator, and declaring that Plaintiff is entitled to $59,176,291 or such other amount of Medicare reimbursement determined to be due for the loss that St. Francis Regional Medical Center incurred on its consolidation. See Compl. at 20, ECF No. [1]. Presently before the Court are the parties' cross-motions for summary judgment. Upon consideration of the pleadings,[2] the relevant

Page 419

legal authorities, and the record as a whole, the Court GRANTS Defendant's [25] Motion for Summary Judgment and DENIES Plaintiff's [23] Motion for Summary Judgment. Accordingly, judgment shall be entered for Defendant.

I. BACKGROUND

A. Regulatory Framework

Title XVIII of the Social Security Act (" Medicare program" ), 42 U.S.C. § § 1395 et seq., provides a system of federally funded health insurance for aged and disabled persons. Relevant to the instant action, the statute permits providers of Medicare services to be reimbursed for " reasonable costs" of supplying such services. 42 U.S.C. § 1395f(b)(1). Reasonable costs are defined as " the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services," as determined in accordance with regulations promulgated by the Secretary. 42 U.S.C. § 1395x(v)(1)(A). The Secretary has promulgated several regulations for determining " reasonable costs" under this section.

At the relevant time period, " reasonable costs" included capital-related costs, such as the costs related to the depreciation of buildings and equipment used for patient care under the Medicare program. 42 C.F.R. § § 413.130(a) & 413.134(a) (1995).[3] Such a depreciation was calculated based on the historical cost of the asset, id. at § 413.134(a)(2), defined as " the cost incurred by the present owner in acquiring the asset," id. at § 413.134(b)(1), and was prorated over the estimated useful life of the asset, id. at § 413.134(a)(3). The regulation specifies:

If disposal of a depreciable asset results in a gain or loss, an adjustment is necessary in the provider's allowable cost. The amount of a gain included in the determination of allowable cost is limited to the amount of depreciation previously included in Medicare allowable costs. The amount of a loss to be included is limited to the undepreciated basis of the asset permitted under the program.

42 C.F.R. § 413.134(f)(1). The treatment of a gain or a loss under the Medicare program depends on the manner of disposition

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of the asset. Id. Pursuant to 42 C.F.R. § 413.134(f), gains and losses realized from the bona fide sale of depreciable assets are included in the determination of allowable costs. Id. at § 413.134(f)(2)(i). Accordingly, it is clear that the regulations contemplate that a provider may recover gains or losses realized as a result of disposing of assets through a bona fide sale.

Also relevant to the instant action is 42 C.F.R. § 413.134( l ) which addresses transactions involving a provider's capital stock. Notably, the section addressing the consolidation of two providers, like the transaction at issue in the instant matter, is silent on the issue of whether an entity formed through a consolidation may recover gains or losses resulting from that transaction under the Medicare program.[4] See 42 C.F.R. § 413.134( l )(3) (defining consolidations as " the combination of two or more corporations resulting in the creation of a new corporate entity" ). In contrast, the section addressing statutory mergers between unrelated parties expressly provides that the merged corporation may recover for losses pursuant to 42 C.F.R. § 413.134(f), the section that provides for the recovery of losses for assets disposed of through a bona fide sale. 42 C.F.R. § 413.134( l )(2)(i). Accordingly, it is clear from the regulatory scheme that an entity formed as the result of a statutory merger may recover losses if that merger was a bona fide sale. However, the regulatory scheme does not expressly provide that an entity formed through a consolidation may recover losses.

On October 19, 2000, CMMS's predecessor[5] issued Program Memorandum A-00-76 (" PM A-00-76" ) in order to " clarify" the application of 42 C.F.R. § 413.134( l ) to mergers and consolidations involving non-profit providers. A.R. at 1428 (Program Memorandum A-00-76). Specifically, PM A-00-76 was created because 42 C.F.R. § 413.134( l ) was drafted to address mergers and consolidations involving for-profit providers. Id. As set forth in PM A-00-76, a gain or a loss adjustment for both merged and consolidated assets of non-profit providers is recognized as long as the asset was disposed of through a bona fide sale as required pursuant to 42 C.F.R. § 413.134(f).[6] Id. at 1429. As explained in the PM A-00-76:

[F]or Medicare payment purposes, a recognizable gain or loss resulting from a sale of depreciable assets arises after an arm's-length business transaction between a willing and well-informed buyer and seller. An arm's-length transaction is a transaction negotiated by unrelated parties, each acting in its own self interest in which objective value is defined after selfish bargaining.

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Id. at 1430. In addition, PM A-00-76 indicated that in determining whether two parties are related for the purposes of the Medicare regulations, " consideration must be given to whether the composition of new board directors, or other governing body or management team, includes significant representation from the previous board(s) or management team(s)." Id. at 1429. The parties dispute the applicability of PM A-00-76 to this action as discussed infra.

B. Factual and Procedural Background

The relevant facts in this case are undisputed. Plaintiff's claim centers around the October 1, 1995, consolidation of two entities, St. Francis Regional Medical Center and St. Joseph Medical Center (" constituent hospitals" ), that formed Plaintiff, Via Christi Regional Medical Center. Specifically, Plaintiff brings this suit as successor-in-interest to St. Francis Regional Medical Center, alleging that it incurred a loss as a result of the consolidation and that it is entitled to Medicare reimbursement as a result of that loss. Plaintiff also sought to recover losses as a result of this consolidation as successor-in-interest to St. Joseph. However, the United States Court of Appeals for the Tenth Circuit (" Tenth Circuit" ) held that Plaintiff was not entitled to Medicare reimbursement for a depreciation adjustment in that matter. See generally Via Christi Reg'l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259 (10th Cir. 2007).

Prior to the consolidation, St. Francis Regional Medical Center (" St. Francis" ) was a hospital in Wichita, Kansas, that had a licensed bed capacity of approximately 880. A.R. at 740 (Testimony from PRRB hearing, Apr. 30, 2002). St. Francis was a nonprofit corporation under the laws of Kansas and its sole corporate member was St. Francis Ministry Corporation (" St. Francis Ministry" ). Id. at 1712 (Stipulation, Apr. 23, 2007). The religious sponsor of both St. Francis and St. Francis Ministry was Sisters of the Sorrowful Mother -- U.S. Health Systems, Inc. (" Sisters of Sorrowful Mothers" ). Id. St. Joseph Medical Center (" St. Joseph" ) was an acute care hospital in Wichita licensed for 600 beds prior to the consolidation. Id. at 740 (Testimony from PRRB hearing, Apr. 30, 2002). St. Joseph also was a nonprofit corporation under the laws of Kansas and its sole corporate member was CSJ Health System of Wichita, Inc. (" CSJ" ). Id. at 1712 (Stipulation, Apr. 23, 2007). The religious sponsor of both CSJ and St. Joseph was Sisters of St. Joseph of Wichita, Kansas (" Sisters of St. Joseph" ). Id. Prior to the consolidation, there was no common ownership between St. Francis and St. Joseph, nor did the constituent hospitals have common officers or board members. Id. at 741 (Testimony from PRRB hearing, Apr. 30, 2002); id. at 1713 (Stipulation, Apr. 23, 2007).

The constituent hospitals entered into a consolidation that took effect on October 1, 1995, and was consummated pursuant to the Agreement of Consolidation and the Master Plan of Consolidation. Id. at 1712-13 (Stipulation, Apr. 23, 2007). Via Christi Regional Medical Center, Inc. (" Via Christi Medical Center" ) came into existence as a result of the consolidation and both constituent hospitals ceased to exist. Id. at 1713. By virtue of the consolidation, good title to all of St. Francis' assets passed to Via Christi Medical Center and Via Christi Medical Center became legally responsible for all of St. Francis' liabilities. Id. at 1712-13.

After the consolidation, Plaintiff, as successor-in-interest to St. Francis, sought Medicare reimbursement for an alleged loss it incurred as a result of the ...


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