The Department of Health and Hospitals won an appeal in a Medicare reimbursement challenge in the Third Circuit Court of Appeals this week.
In an unpublished opinion, the Third Circuit affirmed the district court’s decision denying Jeanes Hospital’s (Jeanes) claim for reimbursement based on depreciation losses incurred as a result of a statutory merger.
In 1994, Jeanes Hospital, a non-profit Quaker institution, was forced to explore partnership possibilities with several regional service providers to ensure its survival due to poor economic conditions. After evaluating its options and conducting due diligence, Jeanes entered into an Affiliation Agreement with Temple University Health System, Inc. (Temple).
Based on a disparity between the value of its depreciable assets as estimated under the income approach and their net book value, Jeanes recognized a "loss" from the merger and submitted a claim for depreciation reimbursement to Medicare's fiscal intermediary, Mutual of Omaha Insurance Company (Intermediary).
The Intermediary denied the claim on the grounds that the merger was between related parties and failed to qualify as a bona fide sale. After multiple appeals, the Centers for Medicare and Medicaid Services (CMS) Administrator also denied Jeanes's claim as between related parties.
Medicare regulations in effect during the merger allowed Medicare providers to claim reimbursements for depreciation losses upon transfer of asset ownership, including a statutory merger, provided that the merger was a bona fide sale. According to CMS guidance, a bona fide sale is a transaction that has been negotiated at arm's length and results in exchange of reasonable consideration.
In its opinion, the Third Circuit Court of Appeals noted that it must defer to an agency's interpretation of its own regulations "unless an alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation."
Here, although the Administrator's determination that the Jeanes-Temple merger was not an arm's-length transaction was not supported by substantial evidence, the Third Circuit Court of Appeals deferred to his conclusion that reasonable consideration was not exchanged and, therefore, that the merger was not a bona fide sale.
What does this mean for hospitals considering mergers in our still-stagnant economy?
Hospitals should be aware that the courts will give defer to the CMS Administrator's assessment of whether or not a bona fide sale occurred, so a hospital should not enter into a statutory merger with an expectation of CMS reimbursement of depreciation losses.
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