Upmc-Braddock Hospital v. Kathleen Sebelius, as the Secretary of the United States Department of Health

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 08-4247
UPMC-BRADDOCK HOSPITAL,
Appellant
v.
KATHLEEN SEBELIUS,
as the Secretary of the United States
Department of Health and Human Services
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
Argued October 6, 2009

-- 1 of 44 --

2
Before: RENDELL and GARTH, Circuit Judges,
and PADOVA, District Judge*.
(Filed: January 20, 2010)
__________
Samuel W. Braver, Esq. [ARGUED]
Brendan G. Stuhan, Esq.
Jan O. Wenzel, Esq.
Buchanan Ingersoll & Rooney
301 Grant Street
One Oxford Centre, 20th Floor
Pittsburgh, PA 15219
Robert B. Ramsey, III, Esq.
Titus & McConomy
Four Gateway Center, 20th Floor
Pittsburgh, PA 15222
Counsel for Appellant
Joel L. McElvain, Esq. [ARGUED]
United States Department of Justice
Civil Division, Federal Programs Branch
450 Golden Gate Avenue, Room 7-5395
San Francisco, CA 94102
____________________
* Honorable John R. Padova, Senior Judge of the United
States District Court for the Eastern District of Pennsylvania,
sitting by designation.

-- 2 of 44 --

3
Michael S. Raab, Esq.
United States Department of Justice
Civil Division
Room 7237
950 Pennsylvania Avenue, N.W.
Washington, DC 20530
Jessica L. Smolar, Esq.
Office of United States Attorney
700 Grant Street, Suite 4000
Pittsburgh, PA 15219
Counsel for Appellee
OPINION OF THE COURT
RENDELL, Circuit Judge.
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

-- 3 of 44 --

4
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.
I.
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

-- 4 of 44 --

5
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

-- 5 of 44 --

Section § 413.134(f)(1) provides:1
Depreciable assets may be disposed of through
sale, scrapping, trade-in, exchange, demolition,
abandonment, condemnation, fire, theft, or other
casualty. If disposal of a depreciable asset results
in a gain or loss, an adjustment is necessary in the
provider’s allowable [reimbursable] cost. . . . The
treatment of the gain or loss depends upon the
manner of disposition of the asset, as specified in
paragraphs (f)(2) through (6) of this section.
Statutory mergers between unrelated parties were later included
as a means of disposal of an asset that could result in an
adjustment:
Statutory merger between unrelated parties. If the
statutory merger is between two or more
corporations that are unrelated (as specified in §
413.17), the assets of the merged corporation(s)
acquired by the surviving corporation may be
revalued . . . . Statutory merger between related
parties. If the statutory merger is between two or
more related corporations (as specified in §
413.17), no revaluation of assets is permitted for
6
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). As is discussed more fully below, the1

-- 6 of 44 --

those assets acquired by the surviving
corporation.
42 C.F.R. § 413.134(l)(2). At the time of the merger, the
statutory merger subsection was designated as 42 C.F.R. §
413.134(l); in 2000 it was redesignated as subsection (k) without
alteration to its content. Medicare Program; Payment Amount
if Customary Charges Are Less Than Reasonable Costs:
Technical Amendments, 65 Fed. Reg. 8660 (Feb. 22, 2000)
(codified at 42 C.F.R. § 413.134). All references to the Code of
Federal Regulations will be to the 1997 version unless otherwise
noted.
7
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

-- 7 of 44 --

8
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

-- 8 of 44 --

The statute provides that “[t]he consent of the parties allows2
a magistrate judge . . . to direct the entry of a judgment of the
district court in accordance with the Federal Rules of Civil
Procedure.” 28 U.S.C. § 636(c)(3). Accordingly, we refer to
the judgment, conclusions, and reasoning of the Magistrate
Judge as the judgment, conclusions, and reasoning of “the
District Court.” See Eshelman v. Agere Systems, Inc., 554 F.3d
426, 430 n.1 (3d Cir. 2009).
The District Court had jurisdiction pursuant to 42 U.S.C. §3
1395oo(f)(1). We have appellate jurisdiction pursuant to 28
9
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. UPMC-Braddock2
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.3

-- 9 of 44 --

U.S.C. § 1291.
Medicare ultimately phased out the cost reimbursement4
method of paying hospitals for capital-related costs, though the
cost reimbursement method was in effect at all times relevant to
this action.
10
II.
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)).
III.
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. 42 U.S.C. § 1395f(b)(1). An asset’s4
depreciable value is initially set at its “historical cost,” generally

-- 10 of 44 --

In order to obtain a Medicare reimbursement, a health care5
provider must file an annual cost report with its fiscal
intermediary. 42 C.F.R. §§ 413.20(b), 413.24(f). The
intermediary then determines the amount of the reimbursement
and issues a Notice of Amount of Program Reimbursement to
the provider. 42 C.F.R. § 405.1803. If a provider disagrees
with the intermediary’s determination, it may file an appeal with
the PRRB. 42 U.S.C. § 1395oo; 42 C.F.R. § 405.1835. The
decision of the PRRB becomes the final administrative decision
after sixty days unless the Secretary, through the Administrator,
elects to review the decision within that time period. 42 U.S.C.
§ 1395oo(f)(1). A provider may seek judicial review of the final
decision of the PRRB or the Administrator in a federal district
court. 42 U.S.C. § 1395oo(f)(1).
In 1997, Congress amended section 1861 of the Social
Security Act, 42 U.S.C. § 1395x(v)(1)(O)(i), setting the asset’s
value equal to the owner’s historical cost less depreciation
allowed, thereby eliminating the possibility of gains or losses
11
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 estimate of 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.5

-- 11 of 44 --

resulting from asset disposals after August 5, 1997. This
amendment has no effect on the merger at issue here, which
occurred on November 30, 1996.
A statutory merger is defined as “a combination of two or6
more corporations under the corporation laws of the State, with
one of the corporations surviving. The surviving corporation
acquires the assets and liabilities of the merged corporation(s)
by operation of State law.” 42 C.F.R. § 413.134(l)(2).
12
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). The6
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.
A. Bona Fide Sale
1.
In addition to promulgating regulations, the Secretary

-- 12 of 44 --

13
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

-- 13 of 44 --

14
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.
2.
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.
a.
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

-- 14 of 44 --

Many of these values are based on a post-merger appraisal7
conducted to determine the assets’ fair market value for
purposes of allocating consideration and calculating BMC’s
purported loss. App. 247-572.
15
involved.7
Assets transferred from BMC/Foundation to UPMC-
Braddock:
$13,325,000 in land, land improvements, buildings, and
equipment from BMC
$10,374,732 in current/cash assets from BMC
$ 3,000,000 obligation from the Foundation
Total: $26,699,732
Liabilities assumed by UPMC-Braddock:
$12,910,190 assumption of BMC debts by UPMC-
Braddock
Total: $12,910,190
The Administrator had little difficulty concluding that, given the
difference between $26.7 million and $12.9 million, reasonable
consideration was not exchanged. App. 51. After detailing the

-- 15 of 44 --

The only independent appraiser used by either side to assess8
the value of the BMC land and depreciable assets opined that
“the fair market value, as of November 29, 1996, of the business
enterprise of Braddock Medical Center entities is reasonably
represented by the following amount: $3,000,000.” App. 343.
16
above figures, the District Court concluded, with no additional
discussion, that “[t]he Secretary’s conclusion that the transaction
was not a bona fide sale is supported by substantial evidence in
the record, including [UPMC-Braddock’s] appraisals.” Dist. Ct.
Op. 21.
It is clear, however, that the figure of $13,325,000 as the
value of the land, land improvements, buildings, and equipment
from BMC is not accurate, and that the correct figure is closer
to $3 million. The mistake is explained in UPMC-Braddock’s8
opening brief, and the Secretary concedes the point in her
supplemental brief. Once this $10-million error is taken into
account, the reasonable consideration question becomes much
closer, with UPMC-Braddock receiving $16.4 million in assets
while assuming $12.9 million in liabilities. Under this
recalculation, the assets given are no longer double what was
received, but exceeded what was received by only $3.5 million.
We will accordingly vacate the District Court’s order and
remand for further consideration of the bona fide sale issue. We
note that there are two additional issues which may make the
consideration question even closer.

-- 16 of 44 --

The other figures that are included in the $10,374,7329
figure, according to the Booth Pro-Rata Method of calculating
17
First, it is not obvious that the $3 million from the
Foundation is, as the Administrator describes it, a $3 million
dollar “cash asset.” App. 52. UPMC-Braddock argues that this
$3 million number is not cash or a cash asset, and is instead a
Fund that the Foundation can distribute to UPMC-Braddock at
the Foundation’s discretion. The relevant Agreement between
the Foundation and UPMCS states that during the term of the
Fund (comprised of the $3 million), the Foundation “shall apply
so much of the Fund as the Foundation shall, in its discretion,
deem adequate and appropriate.” App. 592. The issue, then, is
whether this asset should be valued at $3 million, or something
less. Neither the Administrator nor the District Court focused
on this issue, no doubt because it was unnecessary to reach it
due to the disparity in the consideration when the inaccurate
tangible asset value was used. However, the District Court
should focus on the question of the proper valuation of the
Foundation’s commitment for purposes of assessing reasonable
consideration on remand.
Second, the $10,374,732 million dollar “current/cash
assets” figure included only $2,328,991 in actual cash. App.
243. The rest of that figure includes, among other things,
$5,328,657 in accounts receivable, the details of which (such as
aging and collectability) were not addressed, and a variety of
other assets that may not be available for immediate use. In9

-- 17 of 44 --

fair market value, are:
Inventory: $390,945
Prepaids: $1,054,826
Workers Compensation Fund: $924,888
Other Long Term Assets: $200,000
Board Designated Capital Assets: $146,425
App. 243.
18
Einstein we intimated that it may be appropriate to discount fair
market value of assets “to adjust for the fact that they [are]
limited-use.” 566 F.3d at 379. This is an issue that the District
Court should consider on remand. Resolution of these two
issues could affect the apparent $3.5 million discrepancy that
still exists, possibly making the reasonable consideration issue
a very close call.
Given the significant difference between the correct
value and the figure the Administrator and District Court used
as the value of the land, land improvements, buildings, and
equipment from BMC, we find that the conclusion that the
transaction between BMC and UPMCS did not result in an
exchange of reasonable consideration was not supported by
substantial evidence. Accordingly, we will remand so that the
District Court may consider the question of the reasonableness
of the consideration in light of the correct figure and after taking
into account these two issues.

-- 18 of 44 --

While the Administrator found that “the transaction was not10
consummated through an arm’s length transaction” App. 50, its
discussion centered on the consideration question, rather than on
the relationship between the parties pre-merger or on other
details of the negotiations. The Administrator did note that
BMC did not seek out an appraisal of its land and realty assets
until after the merger and that “[t]he record does not show that
receiving the best possible price for the facilities was a major
factor in the negotiations.” App. 52. These are factors that the
District Court should consider, although they are not dispositive
of the issue.
We note that some facts in the record suggest that the
transaction was negotiated at arm’s length. Thomas Boyle, an
attorney who was involved as counsel for BMC in the
negotiations leading up to the merger and its completion,
attested to the efforts made by BMC to pursue transaction
partners in the years prior to the deal with UPMCS, which
included the following:
19
b.
As noted above, the District Court did not reach the issue
of whether the transaction between BMC and UPMCS was
conducted at “arm’s length,” since the District Court decided
that reasonable consideration was not exchanged and so there
was no bona fide sale. Whether the agreement to merge and
affiliate was arrived at through arm’s length negotiations is a
fact-intensive inquiry, and we will not attempt to resolve that
question for the first time here. On remand, the District Court10

-- 19 of 44 --

In 1992, BMC considered merger possibilities and
submitted requests for proposals to seven local
area hospitals or health systems, however, none
expressed an interest in acquiring or affiliating
with BMC. . . . Beginning in the Spring of 1996,
BMC/Heritage again solicited merger partners in
an attempt to survive in its market which was
characterized by being an underprivileged, poor
economic community by commencing discussions
with both UPMCS and St. Francis Health System.
St. Francis Health System, in September of 1996,
withdrew its interest in any further discussions;
however, discussions and negotiations continued
with UPMCS.
App. 236-37.
As to the need for the parties to be “unrelated” in order
for the transaction to be “arm’s length,” we conclude that this
condition has been satisfied in section III.B.3 below.
20
should consider whether the merger was negotiated at arm’s
length as part of determining whether the merger was a “bona
fide sale,” unless its decision regarding the question of the
reasonableness of the consideration exchanged again renders
this unnecessary.
B. Related Parties

-- 20 of 44 --

21
The second prong of the test for allowance of a
depreciation adjustment requires the merger to have been
between “unrelated parties” (as defined by 42 C.F.R. § 413.17).
Einstein, 566 F.3d 368, 376-78. The relevant regulation states
that “[i]f the statutory merger is between two or more related
corporations (as specified in § 413.17), no revaluation of assets
is permitted for those assets acquired by the surviving
corporation.” 42 C.F.R. § 413.134(l)(2). The referenced
provision, § 413.17, defines “related to the provider”as follows:
Related to the provider means that the provider to
a significant extent is associated or affiliated with
or has control of or is controlled by the
organization furnishing the services, facilities, or
supplies.
42 C.F.R. § 413.17(b)(1). The Secretary urges an interpretation
of these two provisions whereby the relationship of the parties
must be assessed both pre- and post-merger. This interpretation
would require us, in this case, to examine the association,
affiliation, and control not only of BMC and UPMCS, but also
the relationship of BMC and UPMC-Braddock. This
interpretation is set out in the Secretary’s PM. With respect to
“Related Organizations” the PM specifies:
In applying the related organizations principle at
42 C.F.R. 413.17, consideration must be given to
whether the composition of the new board of

-- 21 of 44 --

22
directors, or other governing body or management
team, includes significant representation from the
previous board(s) or management team(s). If that
is the case, no real change of control of the assets
has occurred and no gain or loss may be
recognized as a result of the transaction. The fact
that the parties are unrelated before the
transaction does not bar a related organizations
finding as a result of the transaction. That is, it is
appropriate to compare the governing
board/management team composition before the
transaction with the governing board/management
team composition after the transaction, even
though there was no contemporaneous co-
existence of those boards/teams.
PM A-00-76 (App. 207).
Although the related parties issue was briefed and
presented, the District Court did not rule on it, finding it
unnecessary to reach that issue given its ruling on the “bona fide
sale” prong. However, both the PRRB and the Administrator
had ruled on the related parties issue, with the PRRB concluding
that the merger was not between related parties, and the
Administrator reversing. A review of their respective positions
provides a roadmap for our discussion.
1.

-- 22 of 44 --

Section 413.134(l)(2) provides, in pertinent part:11
Statutory merger between unrelated parties. If the
statutory merger is between two or more
corporations that are unrelated (as specified in §
413.17), the assets of the merged corporation(s)
acquired by the surviving corporation may be
23
The PRRB considered the related parties question in
depth. The Intermediary had argued that the merger was a
related party transaction pursuant to § 413.17, because BMC has
the power to significantly influence or direct the actions and
policies of UPMC-Braddock. Relying on the PM, it urged that
the fact that the parties were unrelated prior to the transaction is
not controlling if there is the requisite association or control
between the parties post-transaction. In particular, the
Intermediary argued that the composition of UPMC-Braddock’s
governing post-merger board, which consisted of a total of 18
members—6 members from the pre-merger board of BMC and
12 members from UPMCS—was enough to establish that the
merger was between related parties, because there was
“continuity of control” between BMC and UPMC-Braddock.
On the other hand, UPMC-Braddock argued that pursuant
to the language of §§ 413.134(l) and 413.17, a statutory merger
is “between” unrelated corporations if the parties are unrelated
prior to the transaction, and that BMC and UPMCS were
unrelated prior to the transaction. They argued that an11

-- 23 of 44 --

revalued . . . . Statutory merger between related
parties. If the statutory merger is between two or
more related corporations (as specified in §
413.17), no revaluation of assets is permitted for
those assets acquired by the surviving
corporation.
42 C.F.R. § 413.134(l)(2).
24
interpretation that also considered the relationship post-merger
would be contrary to the plain language of the regulations.
Additionally, UPMC-Braddock argued that even if the
Intermediary’s interpretation governed, the fact that six board
members from BMC are on the UPMC-Braddock board is not
enough to establish the “control” necessary for a finding that
BMC and UPMC-Braddock were related. UPMC-Braddock
urged that to be related, one entity must “control” the other—in
this case, BMC must “control” UPMC-Braddock—and that
under 42 C.F.R. § 413.17(b), “[c]ontrol exists if an individual or
an organization has the power, directly or indirectly,
significantly to influence or direct the actions or policies of an
organization or institution.” It argued that no individual or
corporation had such power over UPMC-Braddock, since BMC
no longer existed.
The PRRB adopted the position advocated by UPMC-
Braddock. It found the plain language of the statutory merger
regulation dispositive, stating that the text of the relevant

-- 24 of 44 --

25
regulation is “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 categorically rejected the Secretary’s
position: “the plain language of the regulation bars the
application of the related party principle to the merging parties’
relationship to the surviving entity.” App. 756. In coming to
this conclusion, the PRRB reasoned that the “very nature of a
statutory merger as a combination of entities would likely result
in some overlap of membership on the board of directors of the
merging corporation and the surviving entity, as well as a
continuation of other operations and personnel of the merging
organization. The fact that this occurs does not disqualify a
statutory merger from revaluation and recognition of any gain or
loss under 42 C.F.R. § 413.134(l).” App. 756-57.
2.
The Administrator reversed the PRRB’s decision and
denied UPMC-Braddock’s claim for reimbursement. It did so
in reliance on the interpretation of the “related party” regulations
adopted by the Secretary in the PM, holding as follows:
In applying the related party principles at 42
C.F.R. § 413.17 . . . consideration must be given
as to whether the composition of the new board of
directors of the surviving corporation included

-- 25 of 44 --

26
significant representation by [BMC] . . . its parent
corporation Heritage Health Services; or its
subsidiary Heritage Foundation, and in that way
shows a continuity of control over the surviving
entity UPMC-Braddock.
App. 48.
The Administrator also set a low bar for establishing
“control,” noting that “the term ‘control’ includes any kind of
control, whether or not it is legally enforceable and however it
is exercisable or exercised.” App. 48-49. The Administrator
concluded that BMC had “control” over UPMC-Braddock based
primarily on three facts: (1) that the governing board of UPMC-
Braddock would consist of 6 individuals (out of 18 total board
members) who would be appointed by the Foundation (the
Foundation and BMC were both subsidiaries of Heritage Health
Systems); (2) that BMC’s existing management and medical
staff were retained to help manage UPMC-Braddock; and (3)
that UPMC-Braddock continued “with the same mission as”
BMC.
3.
A reviewing court must defer to the agency’s
interpretation “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.”

-- 26 of 44 --

27
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)
(citation and internal quotation mark omitted). As noted above,
the District Court did not reach the related parties issue. The
question of whether the merger here was between related parties
turns on whether we accept the Secretary’s interpretation of the
regulation—a pure question of law. If we do not accept the
Secretary’s interpretation, it is clear that the merger was not
between related parties, since both parties agree that BMC and
UPMCS were unrelated prior to the transaction on November
30, 1996. Given this, and given that there is no need to remand
the issue of whether the transaction was a bona fide sale unless
we find that the transaction was between unrelated parties, we
will address this issue.
The sole issue before us is whether the post-merger
relationship between BMC and UPMC-Braddock is relevant to
the “related parties” inquiry. As our review of the agency’s
ruling above makes clear, the resolution of the issue will turn on
our interpretation of the regulations referenced above, §§
413.134(l) and 413.17, and our view as to whether the
Secretary’s interpretation of those regulations—as set out in the
PM and the PRM—is contrary to their plain meaning.
As noted above, the relevant regulation states that “[i]f
the statutory merger is between two or more corporations that
are unrelated (as specified in § 413.17), the assets of the merged
corporation(s) acquired by the surviving corporation may be
revalued.” 42 C.F.R. § 413.134(l)(2)(i). We conclude, as did

-- 27 of 44 --

28
the PRRB, that the only permissible reading of this regulation is
that “between” means “pre-merger.” Our conclusion is
supported by a recent opinion from the Tenth Circuit Court of
Appeals concluding that “the plain language of the regulations
precludes the Secretary’s interpretation.” Via Christi Reg’l Med.
Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1272 (10th Cir. 2007). It is
worth quoting from the opinion at length:
The plain language of this provision
[413.134(l)(3)(ii)], as well as the plain language
of § 413.134(l)(3)(i), indicates that the “related
parties” inquiry of § 413.134(l)(3) focuses solely
on whether the parties to the consolidation were
related prior to the transaction—not on whether
they were related to the newly created entity.
Where the plain language of a regulation is clear,
we cannot torture the language to reach the result
the agency wishes. The agency, after all, could
easily have drafted language to achieve the result
which it now advocates but did not do so. If the
Secretary wants to take a position that is
inconsistent with existing regulations, then the
Secretary must promulgate new regulations under
the notice-and-comment provisions of the APA,
5 U.S.C. § 553. Shalala v. Guernsey Mem’l
Hosp., 514 U.S. 87, 100 (1995).
Via Christi Reg’l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259, 1273
(10th Cir. 2007) (some citations and internal quotation marks
omitted). No other Court of Appeals has discussed the

-- 28 of 44 --

One district court has accepted the Secretary’s12
interpretation, holding that “in a one-time transaction such as a
non-profit-entity merger, related-party analysis under 42 C.F.R.
§§ 413.134 and 413.17 must include not only a review of the
relationship between the merging parties, but also a review of
the relationships between the merging parties and the surviving
entity.” Jeanes Hospital v. Leavitt, 453 F. Supp. 2d 888, 899
(E.D. Pa. 2006). We do not find the arguments for this
conclusion persuasive.
29
Secretary’s interpretation of these related party regulations.12
The language of the regulation, as well as common sense,
compels this reading of the regulation. The regulation states that
“[i]f the statutory merger is between two or more corporations
that are unrelated (as specified in Section 413.17), the assets of
the merged corporation(s) acquired by the surviving corporation
may be revalued.” 42 C.F.R. § 413.134(l)(2)(i) (emphasis
added). The language about relatedness only refers to the
parties to the merger—the corporations that the merger “is
between”—not to the corporation that results from the merger.
This is highlighted by the fact that the regulation explicitly
refers to a “surviving” corporation, indicating that the agency
knew how to refer to the surviving, post-merger entity if it
wanted to. If the drafters had wanted to require that the merging
corporations and the surviving corporation be unrelated, they
could have done so.

-- 29 of 44 --

30
The tense employed in the provision that sets forth what
“related” means, § 413.17, lends further support:
Related to the provider means that the provider to
a significant extent is associated or affiliated with
or has control of or is controlled by the
organization furnishing the services, facilities, or
supplies. . . . Control exists if an individual or an
organization has the power, directly or indirectly,
significantly to influence or direct the actions or
policies of an organization or institution.
42 C.F.R. § 413.17(b) (emphasis added). UPMC-Braddock
persuasively urges that “the use of the words ‘is’ and ‘has,’
rather than the words ‘will have,’ is significant.” Appellant’s
Br. at 42. They continue, “Clearly, the drafters intended
“relatedness” to be determined at the time of the sale.” Id. This
argument is compelling. The use of the present tense shows
that, by its plain language, the regulation requires ‘relatedness’
to be determined at the time of the transaction—not after the
transaction has taken effect. Additionally, the pre-merger entity
(such as BMC here) will typically cease to exist at the time the
surviving corporation (such as UPMC-Braddock) becomes
operational. This means that the language related to
control—requiring that there are two concurrently existing
entities one of which “is associated or affiliated with or has
control of or is controlled by” the other—could never be
satisfied under the Secretary’s recommended interpretation.

-- 30 of 44 --

31
A corporation formed as part of the merger is not a party
to the merger; it is the surviving corporation. Here, UPMC-
Braddock is the surviving corporation. For the related parties
inquiry, the only question is whether BMC and UPMCS were
unrelated prior to the merger. To conclude that the merger
vehicle corporation, UPMC-Braddock, should be considered in
determining whether the merger was “between” two unrelated
corporations is contrary to the plain language of the regulation.
Furthermore, to require the post-merger entity to have no
meaningful association with the pre-merger entities defies
common sense, as the PRRB noted. In merger transactions, the
resulting or surviving corporation will, as a practical matter, be
controlled by one or both of the merging parties. It is hard to
imagine a scenario where this would not be the case. Adherence
to the Secretary’s view would render the loss adjustment
unavailable in most if not all merger situations, regulating it out
of existence.
We conclude, in line with the Tenth Circuit Court of
Appeals, that the Secretary’s interpretation is indeed
unreasonable and contrary to the plain language of §§ 413.134
and 413.17. Contrary to what the Secretary urges, the plain
language of the regulations makes it clear that, for the purposes
of the related parties inquiry under §§ 413.134 and 413.17, the
relevant question is whether the parties were related prior to the

-- 31 of 44 --

We note, also, that even using the Secretary’s interpretation,13
there was no evidence presented that the six former directors of
BMC appointed to the UPMC-Braddock board in accord with
the terms Agreement to Merge and Affiliate had “the power,
directly or indirectly, significantly to influence or direct the
actions or policies of an organization or institution” as required
for a finding of relatedness. Additionally, at least one district
court has found that merely having a minority of members of a
board is not enough to establish “significant” control, even if it
does establish “some level of control.” Jeanes Hospital, 453 F.
Supp. 2d at 901-02.
Contrary to the position taken by our dissenting colleague,14
we believe there to be no question that BMC and UPMCS were
unrelated prior to the merger. The Secretary’s attorney, Joel
32
merger. Applying the correct interpretation of the13
regulations to the facts before us, it is clear that the parties were
not related. The Agreement to Merge and to Affiliate was
between “Heritage Health System and its Subsidiaries Braddock
Medical Center and Heritage Health Foundation” and the
“University of Pittsburgh Medical Center System.” App. 772.
As part of the merger agreement, BMC was merged “into a to-
be-formed subsidiary of UPMCS to be named ‘University of
Pittsburgh Medical Center, Braddock.’” App. 774-75.
BMC and UPMCS agreed to a merger. The agreement
was “between” them. It is uncontested that BMC and UPMCS
were unrelated at the time of the merger agreement.14

-- 32 of 44 --

McElvain, so stated without hesitation at oral argument: “They
[BMC and UPMCS] were unrelated before [the merger].”
Transcript of Oral Argument at 45. Additionally, despite
addressing the related parties issue for fourteen pages in her
brief—and previously before the PRRB, the Administrator, and
the District Court—the Secretary has not once suggested that
BMC and UPMCS were in any way related, whether through
association, affiliation, or control, prior to the merger. Surely,
this argument would have been made by the Secretary to defeat
the argument that the merger was not a “related party”
transaction because the parties were unrelated before the merger.
Even the Intermediary’s Supplemental Position Paper noted that
the parties had no relationship prior to the merger:
The mechanics of the affiliation was for UPMCS
to form a subsidiary, UPMC-Braddock and for
BMC to merge into that new subsidiary. That end
was accomplished in accordance with State law.
When BMC and UPMCS were working towards
the affiliation, there was no cross-ownership and
control between and/or among any of the
organizations involved.
App. 742.
33
Accordingly, we find that the transaction was not a “related
party” transaction under §§ 413.134 and 413.17.
4.

-- 33 of 44 --

34
While we would normally remand to the agency for it to
apply the correct law to the facts, INS v. Ventura, 537 U.S. 12,
16 (2002), we need not do so where, as is the case with respect
to the related parties issue here, we conclude that the Secretary’s
interpretation is unreasonable, and there are no further facts to
find—both sides concede that BMC and UPMCS were unrelated
prior to the merger. See, e.g., Fogg v. Ashcroft, 254 F.3d 103,
111-12 (D.C. Cir. 2001) (“In the face of such legal error, we
would normally remand to the court for remand to the agency,
but we do not do so when, as here, remand would be futile.
Only one conclusion would be supportable.” (internal citations
and alterations omitted)); Ruiz-Vidal v. Gonzales, 473 F.3d
1072, 1080 (9th Cir. 2007) (finding that remand for an agency
decision may not be necessary where the record is complete and
no further expertise is required).
Because the parties were not related, the only issue to be
decided on remand is whether the merger was a “bona fide
sale,” since both prongs must be satisfied in order for the merger
to qualify for the depreciation adjustment.
IV.
For the foregoing reasons, we will vacate the District
Court’s order granting summary judgment in favor of the
Secretary, and remand to the District Court for it to remand the
case to the Administrator for further proceedings consistent with
this opinion.

-- 34 of 44 --

42 C.F.R. § 413.17 provides that no depreciation is allowed15
if the statutory merger is between two or more related
corporations. The Regulation states, in pertinent part:
Related to the provider means that the provider to a
significant extent is associated or affiliated with or has
control of or is controlled by the organization furnishing
the services, facilities, or supplies. [. . .] Control exists if
an individual or an organization has the power, directly
or indirectly, significantly to influence or direct the
actions or policies or an organization or institution.
42 C.F.R. §413.17(b)(1) & (3) (emphases added).
35
GARTH, Circuit Judge, concurring and dissenting:
Are Braddock Medical Center (“BMC”) and University
of Pittsburgh Medical Center System (“UPMCS”) “related”?
If so—they are not entitled to a depreciation adjustment.
If not—they are.15

-- 35 of 44 --

When providers of covered Medicare services submit claims16
for reimbursement, such claims are initially assessed by private
contractors known as “fiscal intermediaries.” See 42 U.S.C.
§ 1395h.
If a provider is not satisfied with the fiscal intermediary’s17
reimbursement determination, it may file an administrative
appeal with the Provider Reimbursement Review Board
36
I.
Let me begin by reciting the sequence of findings by the
administrative entities and the Magistrate Judge with respect to
the “relatedness” issue.
1. The Intermediary found that the parties were16
related (looking post-merger).
2. The PRRB found that the parties were not17

-- 36 of 44 --

(“PRRB”), a five-person administrative body whose members
are appointed by the Secretary of the Department of Health and
Human Services. See 42 U.S.C. § 1395oo.
The Administrator of the Centers for Medicare and18
Medicaid Services (“Administrator”), may, at his or her
discretion, review a decision of the PRRB. See 42 C.F.R.
§ 405.1875.
37
related (looking pre-merger).
3. The Administrator found that the parties were18
related (looking post-merger).
4. The Secretary (of the Department of Health and
Human Services) found that the parties were
related (adopting the Administrator’s decision).
5. The Magistrate Judge did not reach, and therefore
did not decide, the “relatedness” issue.

-- 37 of 44 --

38
6. The majority members of the this panel, relying in
part on the parties (BMC and UPMCS)
themselves, have now held that the parties are not
related. See Maj. Op. at 21 (“If we do not accept
the Secretary’s interpretation, it is clear that the
merger was not between related parties, since
both parties agree that BMC and UPMCS were
unrelated prior to the transaction on November
30, 1996.”).
Having in mind the language of the Regulation that
defines “related to the provider,” see supra n. 1, I submit that I
cannot—at this point in time—possibly know whether BMC is
indeed “related” to UPMCS or not, because neither the
Magistrate Judge nor any of the Administrative adjudicators
undertook the tasks of fact-finding and applying the facts found
to the requirements of the Regulation. Thus, I cannot agree at
this stage that the parties to the merger were not “related” as that
term is defined in 42 C.F.R. § 413.17(b)(1) & (3).

-- 38 of 44 --

Moreover, to the (limited) extent that the Administrative19
adjudicators below did undertake a substantive “relatedness”
inquiry, three of the four—including the Administrator and the
Secretary—were operating on the premise that the “relatedness”
inquiry implicates post-merger relationships. As we hold today,
see Maj. Op. at 31-32, only pre-merger circumstances are
material for the “relatedness” inquiry. Given that we are
holding that the law applied by three of the four Administrative
adjudicators was incorrect, the obvious course is to remand to
39
II.
I have no problem accepting the majority’s view that we
should confine our decision to pre-merger inquiries. See Via
Christi Reg’l Med. Ctr. v. Leavitt, 509 F.3d 1259, 1273 (10th
Cir. 2007). What concerns me, however, is that the various
Administrative adjudicators below, when addressing the
“relatedness” issue, focused almost entirely on the question of
whether the “relatedness” inquiry looks only at the pre-merger
circumstances, or whether it takes into account the post-merger
relationship between the parties. Virtually no attention was paid
to the substantive portion of the Regulation, i.e., whether BMC
and UPMCS were “associated” or “affiliated” in any way, or
had the ability, directly or indirectly, to “direct” or “influence”
the actions and policies of the other.19

-- 39 of 44 --

the Magistrate Judge to apply the essential facts (once found) to
the correct law. Cf. Hasan v. U.S. Dept. of Labor, 545 F.3d 248,
251 (3d Cir. 2008) (“If an administrative agency makes an error
of law, we must correct the error of law committed by that body,
and after doing so, remand the case to the agency so as to afford
it the opportunity of examining the evidence and finding the
facts as required by law.”) (quoting ICC v. Clyde S.S. Co., 181
U.S. 29 (1901)) (alterations and quotation marks omitted).
In addition, the wholly conclusory nature of the20
Intermediary’s finding on this issue—no factual basis
whatsoever was provided— renders it an inappropriate
40
The Majority Opinion at 32 asserts that “[i]t is
uncontested that BMC and UPMCS were unrelated at the time
of the merger agreement,” and in support cites to the
Intermediary’s Supplemental Position Paper, which states that
“when BMC and UPMCS were working towards the affiliation,
there was no cross-ownership and control between and/or
among any of the organizations involved.” App. 742. I note,
however, that the Intermediary made no factual findings, while
focusing on post-merger influences, and, perhaps most
significantly, addressed only one of the three elements that
comprise “relatedness” under § 413.17 — namely, the element
of “control.” Findings regarding the remaining2 0

-- 40 of 44 --

foundation for a conclusion on the “related” issue.
41
elements—association, affiliation, direction, and influence—are
conspicuously absent not only from the Intermediary’s
determination, but also from the record as a whole.
As examples: if indeed there was—or is—“lurking in the
woods” a common stockholder of both BMC and UPMCS, such
an individual might very well constitute a sufficiently tangible
link between the two entities so as to render them “associated”
or “affiliated”—and therefore “related”—pursuant to § 413.17.
By the same token, if a BMC director is related, by blood or
otherwise, to a UPMCS director, there might very well have
been influence or direction exerted by one over the other that
would render BMC “to a significant extent...associated or
affiliated with” UPMCS. 42 C.F.R. § 413(b)(1). However, I,
for one, cannot ascertain the reality of these—or countless other
hypothetical scenarios—from the record, because the issue of
“relatedness” was never explored by the Magistrate Judge.
We can only assume that the Department of Health and
Human Services used a plethora of terms—association,

-- 41 of 44 --

42 C.F.R. § 413.134(l)(2) states, in pertinent part:21
(i) Statutory merger between unrelated parties. If a
statutory merger is between two or more corporations
that are unrelated (as specified in § 413.17), the assets of
the merged corporation(s) acquired by the surviving
corporation may be revalued . . . .
(ii) Statutory merger between related parties. If the
statutory merger is between two or more related
corporations (as specified in § 413.17), no revaluation of
assets is permitted for those assets acquired by the
surviving corporation.
42
affiliation, control, direction, and influence—in defining
relatedness “because it intended each term to have a particular
nonsuperfluous meaning.” Bailey v. United States, 516 U.S.
137, 146 (1995). In other words, the inclusion of terms other
than “control” must be read as an intention to extend the
category of “relatedness” to scenarios where some connection
or influence exists between the merging entities.
Accordingly, to answer the “related” inquiry, which the
Regulation requires, a factual inquiry must be undertaken that21

-- 42 of 44 --

(emphases added).
43
explores all of the indicia of “relatedness” listed in § 413.17. It
has not been. In the absence of such an inquiry and concomitant
fact-finding, I cannot conclude that the merging parties were
either “related” or “unrelated.” I suggest that neither can my
colleagues in the majority.
I therefore would require that, on remand, (which in any
event the majority is ordering to review the bona fide sale issue,)
we also direct the Magistrate Judge to explore the pre-merger
question of whether there was any affiliation, influence,
direction, or association between BMC and UPMCS, leading to
the ultimate conclusion of “related” or “unrelated.” Only then
can we exercise the review that appellate courts must employ.
Cf. Chalfant v. Wilmington Inst., 574 F.2d 739, 747 (3d Cir.
1978) (Garth, J., dissenting) (“Embarking on its own fact
finding excursion, the majority of this court has . . . acted not as
a reviewing authority but rather as an initial fact finder [. . .] [,]
[thereby] transgress[ing] its fundamental function as an
appellate court . . .”).

-- 43 of 44 --

44
To that extent —and to that extent only—I respectfully
dissent from the holding of the Majority Opinion.

-- 44 of 44 --