CCH® Medicare — 5/16/11

Medicare and Medicaid

Court upholds denial of loss claims after merger The district court properly upheld the CMS Administrator’s denial of a hospital group’s reimbursement claims arising from the merger of two hospital corporations, according to the U.S. Court of Appeals for the D.C. Circuit. The hospital group argued unsuccessfully that the denial of their claims was arbitrary and capricious, an abuse of discretion, contrary to law, or unsupported by substantial evidence.

After a 1997 merger, several nonprofit hospitals claimed losses from the disposal of depreciable assets in their cost reports for the fiscal year ending June 30, 1997. The regulations at 42 C.F.R. §413.134(f)allow providers to request reimbursement for the difference between the net book value and the compensation actually received in exchange for assets disposed of prior to December 1, 1997, depending on the method of disposition. 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.

CMS issued Program Memorandum (PM) A-00-76 on October 19, 2000 (see ¶151,459), to help clarify the “bona fide sale” standards under which mergers between nonprofit organizations should be analyzed. The CMS Administrator relied in part upon the PM’s interpretation and found that the merger was not a “bona fide” transaction because of the great disparity between the consideration received in the merger and the fair market value of the hospital assets. The Administrator concluded that there had been no good faith bargaining between the parties to establish the fair market value of the assets because there was no appraisal prior to the merger nor did the hospitals place the assets for sale in the open market. Furthermore, contrary to the hospitals’ arguments, the Administrator did not retroactively apply a new definition of “bona fide sale” by relying on PM A-00-76, because the PM was consistent with prior CMS policy. The district court upheld the Administrator’s decision (see ¶303,156).

The ruling

On appeal, the hospital group argued that the district court should have set aside the Administrator’s decision on the ground that it relied upon an interpretation of the regulation in PM A-00-76, which the hospital contended was unlawful. The group argued that the Administrator should not have applied PM A-00-76’s requirement that reasonable costs be revalued after a statutory merger only if the statutory merger constituted a bona fide sale, for reasonable consideration. Because the D.C. circuit had previously upheld PM A-00-6 insofar as is relevant to this case, it dismissed the hospital corporation’s arguments on this front (see St. Luke’s Hospital v. Sebelius, 611 F.3d 900, July 6, 2010, ¶303,486). It was neither arbitrary and capricious nor contrary to law for the Administrator to apply PM A-00-76 to his analysis.

The appeals court also agreed with the district court that the Administrator’s determination that one hospital corporation did not receive reasonable consideration for its assets in the statutory merger with another hospital corporation was supported by substantial evidence and was not otherwise arbitrary and capricious.

Forsyth Memorial Hospital v. Sebelius, D.C. Cir., April 26, 2011, ¶303,766

For more information on this and related topics, consult the CCH® Medicare and Medicaid Guide.

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