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From Health Law Daily, May 2, 2016

Yet again: nonprofit hospital consolidation not a bona fide sale

By Kayla R. Bryant, J.D.

A hospital was not entitled to additional depreciation reimbursement for assets obtained through the consolidation of two hospitals because the consolidation is not considered a bona fide sale. The U.S. Court of Appeals for the District of Columbia Circuit upheld the district court’s decision to sustain HHS’ denial of Via Christi Health Center’s (Via Christi) claim for a depreciation adjustment totaling $59 million. Although Via Christi claimed it received the assets of the two hospitals at a more depreciated value than reflected in its Medicare depreciation reimbursements, additional reimbursements are limited to transactions involving parties that negotiate to maximize the economic benefit of the sale (Via Christi Hospitals Wichita, Inc. v. Burwell, April 29, 2016, Pillard, C.).

Depreciation adjustment. Medicare providers are entitled to reimbursement of an appropriate share of depreciation of both buildings and equipment used to supply services to beneficiaries (42 C.F.R .secs. 413,130413.134). Although depreciation is typically based on HHS’ estimate of the useful life of an asset, some providers can claim a reimbursable share of losses incurred some in transactions that took place before December 1997. Via Christi claimed that when St. Francis Hospital (St. Francis) and St. Joseph Hospital (St. Joseph) consolidated to form the new entity, HHS did not provide an accurate Medicare depreciation reimbursement. In this case, Via Christi claimed a $59 million adjustment was appropriate for St. Francis’s assets, which was denied throughout the administrative appeal process, as well as in district court (see 20 years later; hospital consolidation still not a bona fide sale, January 30, 2015).

Bona fide sale. Depreciation is calculated "by prorating the asset’s purchase price over its anticipated useful life." The HHS Secretary "reimburses a share of the depreciation to cover the use of assets in providing Medicare services." If an asset is sold for less than its book value, HHS makes an additional payment to the provider to make up for the lack of compensation provided in the depreciation payments.

The opinion noted that nonprofit entities are not driven by the pursuit of profit. HHS’ guidance on handling mergers and consolidations of nonprofit Medicare providers stated that nonprofit transactions only support adjustment to depreciation reimbursements if they are between unrelated parties and involve an event that triggers a gain or loss recognition. Via Christi relied on a sale as a triggering event found in section 413.134. However, a sale is a qualifying event only as a bona fide sale (defined as exchange of reasonable consideration for depreciable assets) between parties that are not related.

HHS concluded, and the appeals court upheld, that the consolidation was not a bona fide sale consisting of an "arm’s-length transaction" between parties that have their own economic self-interests. When the hospitals consolidated, they transferred all assets to Via Christi, which assumed responsibilities for existing liabilities. St. Francis did not negotiate at arm’s length because it did not attempt to maximize gains upon the sale of its assets. The court found that HHS’ decision not to hold the consolidation as a bona fide sale was not arbitrary or capricious, and affirmed the district court’s grant of summary judgment to the agency.

The case is No. 15-5089.

Attorneys: James P. Holloway (Ober, Kaler, Grimes & Shriver, PC) for Via Christi Hospitals Wichita, Inc. R. Craig Lawrence, U.S. Attorney's Office, for Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services.

Companies: Via Christi Hospitals Wichita, Inc.; U.S. Department of Health and Human Services; St. Francis Regional Medical Center

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