Court: Court of Appeals for the Third Circuit; July 24, 2009; Federal Appellate Court
Sewickley Valley Hospital and The Medical Center, both non-profit hospitals in Pennsylvania, appealed a summary judgment from the U.S. District Court for the Western District of Pennsylvania that favored the Secretary of Health and Human Services. This case stemmed from a 1996 consolidation into Valley Medical Facilities, where Sewickley and the Medical Center transferred substantial assets and debts to Valley Medical. Following the consolidation, both hospitals submitted claims to the Centers for Medicare and Medicaid Services (CMS) for reimbursement related to depreciable assets lost in the transaction. Their claims were denied by Medicare’s fiscal intermediary.
The Provider Reimbursement Review Board upheld the denial for the Medical Center but reversed it for Sewickley. However, the CMS Administrator later ruled both claims were impermissible, citing that the transaction was not a bona fide sale and constituted a related party transaction. The District Court, after reviewing the matter and a magistrate judge's recommendation affirming the Administrator's decision due to the lack of a bona fide sale, granted summary judgment to the Secretary.
Under the Medicare Act, service providers can be reimbursed for reasonable service costs, including depreciation on assets. However, relevant regulations require that for asset disposal via merger to allow for Medicare loss or gain adjustments, the transaction must involve unrelated parties and be a bona fide sale. A bona fide sale requires arms' length negotiation and reasonable consideration. Although the regulations explicitly refer to mergers, guidance indicates they apply similarly to consolidations.
Sewickley and the Medical Center seek a readjustment of claims, arguing the Administrator's denial was based on an unpublished program memorandum that contradicts prior interpretations of regulations. However, their first argument is negated by the precedent set in *Albert Einstein Med. Ctr. v. Sebelius*, which established that the Program Memorandum A-00-76 clarified the 'Bona Fide Sale Provision' without inconsistency. The key remaining issue is whether the Valley Medical consolidation qualifies as a bona fide sale, where the Administrator's finding must be upheld if supported by substantial evidence. The evidence indicates that neither Sewickley nor the Medical Center engaged in an arms-length transaction, evidenced by the absence of pre-consolidation appraisals and lack of negotiation over asset prices. A comparison of assets exchanged against assumed debts reveals that the consideration received was unreasonable, as the monetary assets contributed far exceeded the liabilities assumed. The appellants argue that negotiation and reasonable consideration are not inherent in consolidations, but this contradicts the interpretation set forth in Program Memorandum A-00-76. Consequently, the District Court's summary judgment favoring the Secretary is affirmed, with the court not needing to address the related parties issue since the bona fide sale conclusion was decisive. The burden of proof rests with the provider to demonstrate compliance with the bona fide sale provision, which they failed to do, as indicated by the lack of evidence for actual negotiations over asset values.
