Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. Civil No. 07-cv-01618). Magistrate Judge: Honorable Robert C. Mitchell.
The opinion of the court was delivered by: Rendell, Circuit Judge.
Before: RENDELL and GARTH, Circuit Judges, and PADOVA, District Judge*fn1.
UPMC-Braddock Hospital appeals from the order of the District Court for the Western District of Pennsylvania granting summary judgment in favor of appellee Kathleen Sebelius, Secretary of the United States Department of Health and Human Services ("Secretary"), denying a reimbursement claim for loss on depreciable assets resulting from the merger between Braddock Medical Center ("BMC") and University of Pittsburgh Medical Center System ("UPMCS"). A statutory merger may result in a depreciation adjustment-a reassessment of the value of assets-under Medicare regulations, but only if the merger was between "unrelated parties" and constituted a "bona fide sale." The District Court here determined that the merger between BMC and UPMCS was not a bona fide sale, but did not reach the issue of whether the merger was between unrelated parties. We conclude that the District Court's determination that the merger was not a bona fide sale was not based on substantial evidence, in light of errors made in determining the value of certain assets. Thus, remand is required in order for the agency to consider the bona fide sale issue anew. However, we will also address the issue of whether the parties were "related" because, if they were, the merger cannot satisfy the two prong test and remand would be a useless act.
We find that the Secretary's interpretation of the related party regulations-requiring examination of whether the parties were related pre- and post-merger-is contrary to the plain language of the regulations, and we conclude that, under the proper, pre-merger test, the parties were not related at the time of the transaction. We will therefore vacate the District Court's order and remand for further proceedings consistent with this opinion.
We recently confronted one of the issues raised in this appeal, regarding whether the transaction was a "bona fide sale," in a similar context. See Albert Einstein Med. Ctr. v. Sebelius, 566 F.3d 368 (3d Cir. 2009). While Einstein informs our analysis as to that aspect of the case, the facts here are markedly different.
On November 30, 1996, Heritage Health Systems ("Heritage") and its subsidiaries, BMC and the Heritage Health Foundation ("Foundation"), entered into an Agreement to Merge and Affiliate with UPMCS. BMC was a nonprofit corporation located in Pittsburgh, Pennsylvania, with Heritage as its sole corporate member. UPMCS is a nonprofit corporation also based in Pittsburgh. The Foundation is a Pennsylvania nonprofit corporation with a pre-merger purpose of providing support of a charitable nature to BMC through fund-raising and other similar activities. As part of the agreement, BMC transferred its assets and liabilities to UPMCS pursuant to a merger of BMC into a to-be-formed subsidiary of UPMCS that was named UPMC-Braddock. The Agreement also provided for the structure of the governing board of UPMC-Braddock and for various other rights and responsibilities pertaining to the governance of the newly created UPMC-Braddock. Specifically, two-thirds of the voting directors of the board of UPMC-Braddock were to be appointed by UPMCS, and not less than one-third of the voting directors were to be appointed by the Foundation. At the same time, the Foundation entered into a separate agreement with UPMCS setting up a Fund consisting of $3 million dollars that was "subject to exclusive supervision and control" of the Foundation, but which was to be used to "support" various activities of UPMC-Braddock. App. 592-93, 601. Following the merger, UPMC-Braddock, acting as BMC's successor, filed a claim with Medicare for reimbursement of losses related to the transfer of depreciable medical equipment through the merger pursuant to 42 C.F.R. § 413.134(f) and 413.134(l)(2).*fn2 As is discussed more fully below, the regulations permit the loss adjustment only if the transaction was a "bona fide sale" between "unrelated parties." The claim was denied by Medicare's fiscal intermediary, Veritus Medicare Services ("Intermediary"). UPMC-Braddock subsequently appealed the Intermediary's denial of its claim to the Provider Reimbursement Review Board ("PRRB").
The PRRB ruled in favor of UPMC-Braddock, disagreeing with the Intermediary's conclusion and determining that the statutory merger between BMC and UPMCS was not between related parties. In particular, the PRRB rejected the Intermediary's argument that the phrase "between related parties" in the regulations applies not only to the relationship between the pre-merger entities, but also to the relationship that exists between the pre-merger entities and the entity that results post-merger-in this case, the relationship between BMC and UPMC-Braddock. The PRRB concluded that the Intermediary's reading of the related parties requirement was contrary to the plain language of the regulation, which was "unambiguous in its meaning that the related party concept will be applied to the entities that are merging as they existed prior to the transaction." App. 756 (emphasis in original). The PRRB dealt with the bona fide sale requirement in conclusory terms, stating that "the merger is not required to meet the bona fides of sales transactions addressed in 42 C.F.R. § 413.134(f)(2)." App. 755. The PRRB remanded several issues regarding consideration to the Intermediary, but only for purposes of computing the reimbursable loss.
The PRRB's ruling was then reversed by the Deputy Administrator ("Administrator") of Centers for Medicare and Medicaid Services ("CMS"), who denied UPMC-Braddock's claim for reimbursement, disagreeing with the PRRB on both the related parties issue and the bona fide sale issue. The Administrator found that the bona fide sale requirement did apply to the merger, and that the difference between the value of the transferred assets and the consideration received for them in the course of the merger indicated the absence of a bona fide sale. App. 50-52. Additionally, the Administrator found that the transaction was not consummated at "arm's length," as required by the bona fide sale provision. App. 50. The Administrator further concluded that the PRRB's interpretation of the "related parties" provision was incorrect and adopted the Intermediary's position that the related parties inquiry should properly consider the relationship between both the pre- and post-merger entities. App. 41-47. Using this interpretation of the related parties provision, the Administrator concluded that BMC and UPMC-Braddock were "related parties," and disallowed the loss claim. App. 48. The Administrator's decision became the final decision of the Secretary.
UPMC-Braddock appealed the Administrator's decision to the District Court pursuant to the Administrative Procedures Act ("APA"), 5 U.S.C. §§ 551-59, and the parties consented to the exercise of jurisdiction by the Magistrate Judge pursuant to 28 U.S.C. § 636(c) and Fed. R. Civ. P. 73.*fn3 UPMC-Braddock and the Secretary each filed motions for summary judgment. The District Court denied UPMC-Braddock's motion for summary judgment and granted the Secretary's motion for summary judgment, affirming the decision of the Administrator. UPMC-Braddock timely appealed.*fn4
Our review of agency action is governed by the APA, 5 U.S.C. § 706. We may only set aside agency actions, findings, and conclusions that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E). "Substantial evidence is 'more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'" Mercy Home Health v. Leavitt, 436 F.3d 370, 380 (3d Cir. 2006) (quoting Richardson v. Perales, 402 U.S. 389, 401 (1971)).
Under the Medicare Act (the "Act"), 42 U.S.C. § 1395 et seq., Medicare service providers such as UPMC-Braddock are entitled to claim the depreciation of property and equipment used to provide health care to Medicare patients as a reimbursable cost.*fn5 42 U.S.C. § 1395f(b)(1). An asset's depreciable value is initially set at its "historical cost," generally equal to the purchase price, which is then prorated over its estimated useful life. 42 C.F.R. § 413.134(a)(3) and 413.134(b)(1). However, the calculated annual depreciation is only an estimateof the asset's declining value. When an asset is ultimately sold or disposed of by the provider for less than its "undepreciated basis" a "depreciation adjustment" is made, measured by the difference between the sales price and the estimated remaining value. The healthcare provider can submit a claim for additional reimbursement from the Medicare program on the basis of such a depreciation adjustment.*fn6
In 1979, CMS adopted regulations whereby transfers in statutory mergers qualified for such depreciation adjustment, subject to certain requirements. 42 C.F.R. § 413.134(l)(2).*fn7 The transfer of assets in a statutory merger can give rise to a depreciation adjustment only if the merger was between "unrelated parties" as defined by 42 C.F.R. § 413.17, and, if the merged corporation was a health care provider before the merger, only if the merger was a "bona fide sale." 42 C.F.R. § 413.134(l)(2)(i) and 413.134(f); Einstein, 566 F.3d at 376-78. Crucially, both of these requirements must be satisfied for there to be a depreciation adjustment entitling a provider to reimbursement for depreciation-related losses.
In addition to promulgating regulations, the Secretary issues manuals to assist healthcare providers and fiscal intermediaries in administering the system of reimbursement and in interpreting the promulgated regulations. In Einstein,566 F.3d at 375-76, we noted that two of these manuals are particularly relevant for determining the standards relevant to whether a "bona fide sale" has taken place: the Provider Reimbursement Manual ("PRM") and the Program Memorandum A-00-76 ("PM"), which was issued on October 19, 2000, and entitled "Clarification of the Application of the Regulations at 42 CFR 413.134(l) to Mergers and Consolidations Involving Non-profit Providers."
The PM provides that "no gain or loss may be recognized for Medicare payment purposes unless the transfer of the assets resulted from a bona fide sale as required by regulation 413.134(f) and as defined in the PRM at 104.24." The cited regulation, 42 C.F.R. § 413.134(f), introduces the "bona fide sale" language at subsection 413.134(f)(2), but does not define it. The referenced passage in the PRM clarifies the meaning:
A bona fide sale contemplates an arm's length transaction between a willing and well informed buyer and seller, neither being under coercion, for reasonable consideration. An arm's length transaction is a transaction negotiated by unrelated parties, each acting in its own self interest.
PRM, Ch. 1, § 104.24; App. 820. Thus, a "bona fide sale" in this context is a transaction that has been (1) negotiated at arm's length and (2) results in exchange of reasonable consideration. Einstein,566 F.3d at 377-78.
The District Court granted the Secretary's motion for summary judgment on the ground that the merger between BMC and UPMCS that gave rise to UPMC-Braddock did not constitute a bona fide sale. This conclusion was based on the District Court's finding that there was substantial evidence to support the Secretary's conclusion that reasonable consideration was not exchanged. The District Court did not discuss the issue of whether the transaction was negotiated at arm's length. We review de novo the District Court's conclusion that substantial evidence supported the Secretary's position. Mercy Home Health, 436 F.3d at 377.
In assessing whether reasonable consideration was exchanged, a determination must be made as to whether the exchange of value for value was close enough to qualify as reasonable consideration. Relevant questions include: Is there a disparity? How large is it? Both the Administrator and the District Court concluded that the instant transaction did not result in the exchange of reasonable consideration based on the following assessments of the value of the assets and liabilities involved.*fn8
Assets transferred from BMC/Foundation to UPMCBraddock:
$13,325,000 in land, land improvements, buildings, and equipment from BMC $10,374,732 in current/cash assets from BMC ...