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From Health Law Daily, April 30, 2013

Hospital was not entitled to reimbursement for asset depreciation after merger

By Sheila Lynch-Afryl, JD, MA

The HHS Secretary’s decision to deny Medicare reimbursement for a hospital’s loss due to asset depreciation was not arbitrary and capricious because substantial evidence supported the conclusion that the hospital did not receive reasonable consideration when it merged with another hospital (New England Deaconess Hospital v Sebelius, April 29, 2013, Howell, B). Under pre-1997 regulations, if a provider merged with another entity, the surviving entity was eligible for reimbursement on any loss realized as a result of depreciation of the merged provider’s Medicare assets, as long as the merger was an arm’s-length transaction between unrelated parties. The evidence supported the Secretary’s conclusions that the hospital’s attempts to merge were driven by matters other than sale price and that, even using the hospital’s retrospective appraisal, the depreciable assets were transferred for 60 percent of their fair market value.

Merger. In 1996, New England Deaconess Hospital (Deaconess), a struggling referral hospital that specialized in vascular diseases, merged with Beth Israel Hospital Association (Beth Israel), a large teaching and research hospital. As a result, Deaconess ceased to exist and Beth Israel changed its name to Beth Israel Deaconess Medical Center, Inc. (BIDMC). BIDMC assumed all of Deaconess’s liabilities, totaling $251 million, and acquired all of its assets, with a net book value of $355 million.

Claimed loss. In August 1998, Deaconess filed an amended terminating cost report claiming a loss of $8.37 million as a result of the merger. The intermediary denied the claimed loss. While waiting for a hearing before the Provider Reimbursement Review Board (PRRB), Deaconess performed a retrospective appraisal of the fair market value of its depreciable assets at the time of the merger and changed the amount of loss it was claiming to either $15.5 million or $19 million, depending on the method of calculation.

The PRRB reversed the intermediary’s decision and CMS reversed the PRRB. CMS’s reversal was based on Deaconess’s failure to show that there was a bona fide sale of its depreciable assets. Deaconess filed a complaint in federal court challenging the decision of CMS, and the parties filed cross-motions for summary judgment.

Reasonable consideration. The court concluded that the Secretary’s finding of a lack of consideration in the merger was supported by the evidence. While Deaconess argued that the sales price was over 78 percent of the fair market value of its assets, that calculation did not use the cost approach, which is required by Program Memorandum A-00-76. Under the cost approach, Deaconess received only 61 cents on the dollar for its depreciable assets, a sufficient disparity to uphold the Secretary’s determination that reasonable consideration had not been received.

The court also considered the context of the transaction and noted the Secretary’s finding that Deaconess’s negotiations involved a multitude of non-economic factors. The court found that the Secretary did not err in concluding that Deaconess was motivated by survival rather than seeking reasonable consideration for its assets.

The case number is 09-1787 (BAH).

Attorneys: Deborah Kantar Gardner (Ropes & Gray, LLP) for New England Deaconess Hospital. Javier M. Guzman (U.S. Attorney’s Office) for Kathleen Sebelius, Secretary, United States Department of Health and Human Services.

Companies: New England Deaconess Hospital; United States Department of Health and Human Services

MainStory: TopStory CostReportNews PartANews IPPSNews DistrictofColumbiaNews

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