SEWICKLEY VALLEY HOSPITAL; and THE MEDICAL CENTER, BEAVER, PA v. †KATHLEEN SEBELIUS, Secretary of the United States Department of Health

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 08-3360
_____________
SEWICKLEY VALLEY HOSPITAL; and
THE MEDICAL CENTER, BEAVER, PA,
Appellants
v.
†KATHLEEN SEBELIUS, Secretary of the United States
Department of Health and Human Services
(†Kathleen Sebelius is substituted for her predecessor
Michael O. Leavitt, as Secretary of the
United States Department of Health and Human Services,
pursuant to Fed. R. App. P. 43(c)(2))
_______________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 07-cv-869)
District Judge: Honorable Donetta W. Ambrose
_______________
Submitted Under Third Circuit LAR 34.1(a)
May 20, 2009
Before: FUENTES, JORDAN, and NYGAARD, Circuit Judges.
Filed: July 24, 2009
_______________
OPINION OF THE COURT
_______________

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Appraisals of Sewickley’s and the Medical Center’s business assets, excluding1
cash, were conducted after the consolidation.
Following the consolidation, Sewickley and the Medical Center became separate2
divisions of Valley Medical, and Valley Medical began doing business as Sewickley
Valley Hospital and the Medical Center, Beaver, PA.
2
JORDAN, Circuit Judge.
Sewickley Valley Hospital (“Sewickley”) and The Medical Center, Beaver,
Pennsylvania (“the Medical Center”) appeal from an order of the United States District
Court for the Western District of Pennsylvania awarding summary judgment to the
Secretary of Health and Human Services. For the following reasons, we will affirm.
I. Background
This matter arises from the 1996 consolidation of Sewickley and the Medical
Center – two non-profit corporations that operated hospitals – into Valley Medical
Facilities (“Valley Medical”). Sewickley surrendered to Valley Medical its assets, which
consisted of approximately $47 million in monetary assets and $107 million in other
business assets, and Valley Medical assumed Sewickley’s debts, which amounted to
approximately $27 million. Likewise, the Medical Center gave Valley Medical its assets,
approximately $122 million in monetary assets and $125 million in other business assets,
and Valley Medical assumed its debts, approximately $93 million.1
After the consolidation, Sewickley and the Medical Center, both of which were2
Medicare service providers, submitted to the Centers for Medicare and Medicaid Services
(“CMS”) reimbursement claims for loss on depreciable assets resulting from the

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To obtain a reimbursement for reasonable medicare-related costs, a provider must3
file a claim with its fiscal intermediary, a private agency or organization under contract
with Medicare. 42 C.F.R. § 413.24(f). See also 42 U.S.C. §§ 1395h, 1395kk-1.
Because his conclusion as to the lack of a bona fide sale was dispositive, the4
magistrate judge did not reach the “related parties” issue.
3
transaction. Medicare’s fiscal intermediary denied the claims. Sewickley and the3
Medical Center appealed the decision to the Provider Reimbursement Review Board,
which affirmed the intermediary’s decision as to the Medical Center, but reversed as to
Sewickley’s claim. The CMS Administrator reviewed the Board’s decision and ruled that
neither claim was permissible under the operative regulations for two independent
reasons: first, the transaction was not a bona fide sale, and, second, it was a related party
transaction.
After the Secretary of Health and Human Services adopted the Administrator’s
ruling, Sewickley and the Medical Center sought relief in the District Court. The Court
referred the matter to a magistrate judge, who recommended that the Administrator’s
decision be affirmed on the basis that there was no bona fide sale. On June 19, 2008, the4
Court accepted the magistrate judge’s recommendation and entered an order granting
summary judgment to the Secretary and denying the same to Sewickley and the Medical
Center. This timely appeal followed.

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The District Court had jurisdiction under 42 U.S.C. 1395oo(f)(1). We have5
jurisdiction under 28 U.S.C. 1291.
4
II. Discussion5
Under the Medicare Act, Medicare service providers such as Sewickley and the
Medical Center are entitled to be reimbursed for “the reasonable cost of such services.”
42 U.S.C. § 1395f(b)(1). The Act empowers the Secretary of Health and Human Services
(“the Secretary”) to promulgate “regulations establishing the method or methods” of
calculating reasonable costs. Id. § 1395x(v)(1)(A).
Of particular relevance here, the controlling regulations stated that a provider may
claim reimbursement for “[a]n appropriate allowance for depreciation on buildings and
equipment used in the provision of patient care ... .” 42 C.F.R. § 413.134(a).
Reimbursement due to depreciation is calculated by prorating “the cost incurred by the
present owner in acquiring the asset” over the asset’s estimated useful life,” id. §
413.134(a)(3), and then estimating a percentage of the depreciation attributable to
providing services to Medicare patients. If assets are disposed of through a statutory
merger, § 413.134(k) provides for a Medicare loss or gain adjustment as long as the
merger was between “unrelated parties,” as defined in 42 C.F.R. § 413.17. In addition,
the merger must constitute a “bona fide sale” in order to trigger an adjustment. See id. §
413.14(f).

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Like the District Court, we need not address appellants’ “related parties”6
arguments because our resolution of the “bona fide sale” issue is dispositive.
5
In a document called “Program Memorandum A-00-76,” dated October 19, 2000,
the Secretary addressed the applicability of the regulations cited above and clarified that a
bona fide sale is a transaction in which parties negotiate at arms’ length and exchange
reasonable consideration. Furthermore, although the “unrelated parties” and “bona fide
sale” provisions apply expressly to statutory mergers and not to consolidations, Program
Memorandum A-00-76 indicates that they apply with equal force to both.
Sewickley and the Medical Center argue that they are entitled to a readjustment for
two reasons. First, they claim that it was improper for the Administrator to deny their
claims on the basis of a program memorandum that was unpublished and inconsistent
with previous interpretations of the operative regulations. Second, they argue that they
fulfill the “bona fide sale” requirement, even if it applies to consolidations. Their first6
argument is foreclosed by our recent decision in Albert Einstein Med. Ctr. v. Sebelius,
566 F.3d 368 (3d Cir. 2009). In that case, we held that Program Memorandum A-00-76
“offered a clarification of the Bona Fide Sale Provision that was not inconsistent with
previous agency policy.” Id. at 378. All that is left for us to decide, then, is whether the
Valley Medical consolidation constituted a bona fide sale.
We must uphold the Administrator’s finding that the consolidation was not a bona
fide sale as long as it is supported by substantial evidence. 5 U.S.C. § 706(2)(E).

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The appellants argue that they and the fiscal intermediary had stipulated that there7
were negotiations regarding the consolidation, and the record evidence they cite (Appx.
284) does indeed say that, but that is all it says. There is no mention of negotiations
relative to the value of assets and liabilities. Given the wide range of issues that could
have been discussed and the appellants’ failure to mention any other evidence indicating
actual negotiations over the value of the entities, the inference drawn by the Secretary is
supported by the record. See Via Christi Reg’l Med. Ctr., Inc. v. Leavitt, 509 F.3d 1259,
1277 (10th Cir. 2007) (“[The provider] had the burden of showing that the transaction fit
within § 413.134(f)’s ‘bona fide sale’ provision.”); Mercy Home Health, 436 F.3d at 380
(“The governing statutes and regulations indicate that the burden of proof remains on the
provider.”).
6
“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)).
Substantial evidence does buttress the Administrator’s conclusion. Beyond the
fact that neither Sewickley’s nor the Medical Center’s assets were placed on the open
market, the lack of an arms’ length transaction can be inferred from the entities’ decision
to not seek a pre-consolidation appraisal and from the paucity of any indication that there
were negotiations over the price of assets or the value of debts. Moreover, a quick7
comparison of the assets surrendered by each entity to the debts assumed by Valley
Medical reveals that neither Sewickley nor the Medical Center received reasonable
consideration. The contributed monetary assets alone appear to dwarf the debts that the
entities shed.

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7
Sewickley and the Medical Center argue that arms’ length bargaining and the
exchange of reasonable consideration are foreign to consolidations, which, by their
nature, do not involve negotiation over the price of assets. That contention amounts to a
disagreement with Program Memorandum A-00-76. As noted above, however, that
Memorandum offers the controlling interpretation of the operative regulations.
III. Conclusion
For the foregoing reasons, we will affirm the District Court’s order granting
summary judgment to the Secretary and denying the same to Sewickley and the Medical
Center.

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