674 F.2d 899 | Ct. Cl. | 1982
delivered the opinion of the court:
The question in this case, as will be explained more fully below, is whether it comports with the Medicare statutes for the Secretary to interpret the Medicare regulations
West Seattle General Hospital Corp. (WSGH CORP.) was a Medicare provider in the Seattle area. In mid-1969, General Health Services, Inc. (GHS), a Delaware corporation, entered into an agreement with the sole shareholder of WSGH CORP. to acquire all of the WSGH CORP. stock. It is not disputed that this was an arm’s-length transaction or that it was always the intent of the parties to merge WSGH CORP. into GHS or into a GHS subsidiary. It is also not disputed that the assets of WSGH CORP. were valued at fair market value for the purposes of the stock acquisition.
I
The development of the dispute in this case is involved. Following the standard practice in tax, accounting and business planning, WSGH, INC. treated its purchase of WSGH CORP.’s stock and its subsequent absorption of WSGH CORP. itself as a two-step purchase of WSGH CORP.’s goodwill and assets. Accordingly, WSGH, INC.: (1) considered that its cost for the WSGH CORP. goodwill and assets was its cost for WSGH CORP.’s stock and (2) considered that the stock purchase marked the effective date of the goodwill and asset acquisition. WSGH, INC. then used these premises in calculating its reimbursable Medicare costs for its fiscal years ending in 1971 to 1974.
The Reimbursement and Facility Audit section of Blue Cross of Washington (Blue Cross), WSGH, INC.’s fiscal intermediary, approved this treatment of the transactions. As reflected in a cost report based on an audit which was completed in March 1972, it was the position of the auditors that the purchase of WSGH CORP.’s goodwill and assets occurred at the 100-percent stock purchase, on August 15, 1969, with the price of the stock being the price of the goodwill and assets. The subsequent merger of WSGH CORP. into WSGH, INC. was mechanically necessary but not significant as to date.
The Bureau of Health Insurance of the Department of Health, Education and Welfare took a different position, however. The bureau refused to view the stock purchase and the merger as a two-step purchase of assets and focused on each step independently, assessing its consequences under the Medicare system as if it were the only event that
To understand this position of the bureau, its relationship to the Medicare regulations and the full significance of the bureau’s focus on the merger as the key occurrence, it is necessary to digress. The purchase of a Medicare provider’s stock is not in itself an event that has an effect on the Medicare system. A mere change in stock ownership changes neither the identity nor the operations of a provider, and neither recertification with the Secretary nor a new provider agreement is necessary. 42 C.F.R. § 405.626(c) (1981); cf. 42 C.F.R. § 405.625 (1981) (a change in ownership of a provider otherwise requires recertification). And of course this rule should apply to the bare acquisition of a provider’s stock by another provider. Such an acquisition does not affect the acquiring provider’s own delivery of services and it affects the provider that issued the stock only to the extent of a change in its stockholders, inconsequential in itself.
By contrast, a provider’s purchase of assets or investment in equity is an important event for the Medicare system, reimbursable as a cost of providing Medicare services. 42 C.F.R. §§ 405.415(a) (for buildings and equipment) and 405.429(a) (1981) (for a "reasonable return” on equity capital). These regulations carry out the statutory mandate that providers be paid for their actual costs in providing whatever services are necessary to the efficient delivery of health care. 42 U.S.C. §§ 1395f(b), 1395x(v) (1976). An important qualification in cost reimbursement, however, involves situations in which a provider acquires assets from a related entity. In such situations, a provider’s actual costs for the assets do not include whatever profit is charged by the related entity because that component simply is paid by the provider to another part of itself. It does not represent or replace an actual cost to the related parties and should not be reimbursable. Accordingly, Medicare regulations provide for a carry-over cost basis for assets acquired from a related entity. 42 C.F.R. § 405.427 (1981).
An important variation * * *, however, is where capital stock has been acquired by a corporation, and the acquired corporation is then merged into the acquiring corporation. Such a transaction is classified as an acquisition of capital stock * * * and the subsequent merger is treated as a transaction between related parties * * *. An illustration of this type of transaction is where Corporation A purchases the capital stock of Corporation B, the provider. Immediately after the acquisition of the capital stock of Corporation B, there is a statutory merger of Corporation B and Corporation A, with Corporation A being the surviving corporation.
From this passage came the bureau’s characterization of the transaction between WSGH CORP. and WSGH, INC., that WSGH, INC.’s purchase of WSGH CORP.’s stock merely related the parties and that the merger was WSGH, INC.’s acquisition of assets from a related party, WSGH CORP.
With this background it. can be understood that the bureau’s method of classification has very different cost reimbursement consequences than flow from the standard practice of integrating a stock purchase and a merger such as occurred in this case. Under the bureau’s view, WSGH, INC.’s cost for WSGH CORP.’s goodwill and assets is not the cost to WSGH, INC. of WSGH CORP.’s stock but is WSGH CORP.’s own cost, under the cost carry-over regulation for related entities. Further, the effective date of the goodwill
Blue Cross auditors were reluctant to impose the bureau’s classification, and the results that would flow, on the dealings between WSGH, INC. and WSGH CORP. By a letter of October 23, 1975, the manager of the Blue Cross audit department, defended to the bureau his original characterization of the transaction as one integrated asset and goodwill purchase. The bureau insisted, however, by a letter of November 10, 1975, that WSGH, INC.’s cost reports be reopened, and Blue Cross finally agreed to do so. For its fiscal years ending in 1971 to 1974, WSGH, INC. was allowed reimbursement for the assets acquired from WSGH CORP. only on WSGH CORP.’s carry-over cost, and it was not allowed reimbursement for WSGH CORP.’s goodwill at all.
II
The procedural history of this case is also complicated.
Although four cost reporting fiscal years were reopened, only the first two, for WSGH, INC.’s fiscal years ending in 1971 and 1972, are before this court. Pursuant to a statutory change in review procedures that affected WSGH, INC.’s fiscal years ending in 1973 and 1974, WSGH, INC.’s claims for those years have followed a different course.
Those later claims have already been resolved. Under 42 U.S.C. § 1395oo (1976), WSGH, INC.’s claims were heard first by a Provider Reimbursement Review Board (PRRB), which agreed with Blue Cross’ original characterization and reversed the disallowances. Review by the Secretary
The procedure for reviewing WSGH, INC.’s claims for its fiscal years ending in 1971 and 1972 is determined by 42 U.S.C. § 1395ff (1970) (superseded by 42 U.S.C. § 1395oo (1976)) and by the Tucker Act, 28 U.S.C. § 1491 (1976), as applied to Medicare reimbursement claims by this court in, e.g., Whitecliff, Inc. v. United States, 210 Ct. Cl. 53, 536 F.2d 347 (1976), cert. denied, 430 U.S. 969 (1977). First was a hearing before a Blue Cross Association Medicare Provider Appeal hearing officer who affirmed the disallowances. The hearing officer had before him the record of the PRRB. The Secretary then affirmed the hearing officer, and WSGH, INC. filed here. Prosecution of the action was delayed at the request of the defendant, however, until the Ninth Circuit’s decision in PCME, and further delayed while defendant decided whether or not to seek certiorari review of PCME by the Supreme Court. Defendant did not.
The case is now before us with the accumulated materials of two routes of administrative review, a district court proceeding and a Ninth Circuit decision on a very similar point that was dispositive of WSGH, INC.’s claims for its fiscal years ending in 1973 and 1974. We recognize that none of these decisions is binding on us.
Ill
We come at last to the merits of this case.
At the outset we note that WSGH, INC.’s argument is very strong. It is undisputed that it was always the intention of GHS to follow the stock purchase with a merger, and it is plain that the transactions were planned as a way to acquire WSGH CORP.’s goodwill and assets. Their cost to WSGH, INC. was the cost of the WSGH CORP. stock, and that seems clearly to be the "cost actually incurred” that the Medicare statutes provide is reimbursable. 42 U.S.C. § 1395x(v)(l)(A).
Defendant counters, however, that its position must be upheld, regardless of the force of plaintiffs argument, if defendant’s argument is also found to be reasonable, and we accept this as a fair paraphrase of our standard of review for this case. The Secretary will be affirmed if his actions are in accordance with the governing statutes.
Defendant contends that the reasonability of its position, of its focus on the merger step in the transaction, is in the need to give 42 C.F.R. § 405.427 (1981), the related-entities regulation, its full prophylactic effect. Defendant cites this court’s opinion in Stevens Park Osteopathic Hospital, Inc. v. United States, 225 Ct. Cl. 113, 633 F.2d 1373 (1980), where we stressed the preventive nature of the rule and said:
[42] C.F.R. § 405.427(c)(2) does not call for an inquiry into the fairness or equity of a transaction between related*140 parties. This regulation, like other "related organization” rules, is intended to have a "prophylactic” effect in guarding against bad faith dealing between organizations related through common control without inquiry into particular circumstances.
Id. at 123, 633 F.2d at 1379.
Stevens Park does not give defendant the support that it thinks. That case involved parties whose relatedness was not seriously contested
The relatedness of WSGH, INC. and WSGH CORP. is the core of the dispute before us, and this returns us then to the very question with which we started, whether the stock purchase and the merger should be viewed as integrated or not. We get to the effect of the related entities regulation only if they should not be.
Defendant has advanced no acceptable reason for the Secretary’s position. Patently, WSGH, INC.’s "cost actually incurred” for WSGH CORP.’s goodwill and assets was the cost of WSGH CORP.’s stock. This is consistent with the common understanding in financial fields, see PCME at 132, and we think that it ignores the plain substance of the
We note that defendant has placed much emphasis on this court’s decision in Monterey Life Systems, Inc. v. United States, 225 Ct. Cl. 50, 635 F.2d 821 (1980), and the decision of the Fifth Circuit in Homan & Crimen, Inc. v. Harris, 626 F.2d 1201 (1980), that the purchase of 100 percent of the stock of a provider does not allow revaluation of the provider’s assets for the purposes of Medicare cost reimbursement. Neither of those cases involved a subsequent merger or liquidation, however, and so there was not the integrated transaction that is key to the present case. We repeat that neither WSGH, INC.’s acquisition of WSGH CORP.’s stock nor its subsequent absorption of WSGH CORP. should be viewed apart from the other if the transaction is to be understood properly.
We also note that defendant has asserted that the parties were free at any time after the stock purchase not to carry out the merger, and that the application of the Medicare regulations should not depend so heavily on the following out of something as nonobjective as intent. For this case, we are not bothered by this objection, because whatever possible abuses may exist did not happen. It is an open question whether the Secretary could promulgate regulations to restrict a provider’s acquisition of assets to certain methods or to require the transactions to fit certain time schedules.
It remains only to say that the effect of this opinion is to fix WSGH, INC.’s purchase of WSGH CORP.’s stock as the operative event of the transaction between them, that WSGH, INC.’s cost reimbursement for its fiscal years
Accordingly, based on the foregoing, we hold that plaintiff is entitled to a recalculation of its Medicare reimbursements for its fiscal years ending in 1971 and 1972, in accordance with the characterization of its transaction with WSGH CORP. as explained in this opinion. Plaintiffs motion for summary judgment is granted, defendant’s cross-motion is denied and judgment is entered for plaintiff. The case is referred to the trial division for computation of the amount of recovery.
This opinion was adopted by the court before Judge Kunzig’s death.
Currently designated the Secretary of Health and Human Services. We note at the outset that it is not entirely clear, and it has not been argued, whether appeal to this court of a cost disallowance is most properly taken from the Secretary or from the appeals hearing officer of the Medicare fiscal intermediary (Blue Cross in this case). On the facts before us this question is not important because plaintiffs appeal from either would be timely and our review standard would not be applied differently to either one. For convenience, this opinion is written as if appeal is taken from the Secretary’s decision.
At the time of the events in this case, Medicare regulations were contained in 20 C.F.R. This opinion uses the current citations to 42 C.F.R. except where the current regulation is different.
It is unnecessary to discuss WSGH, INC.’s contention that offensive collateral estoppel effect should flow from PCME since we reach the merits of this case.
See paragraph 1 of this opinion.
The parties had been related by common ownership for almost 20 years. Stevens Park, 225 Ct. Cl. at 115, 633 F.2d at 1374-75.
The Ninth Circuit also recognized the antecedent nature of the relatedness question in PCME, 633 F.2d at 132-33.
For example, the very issue of when a stock purchase should be integrated with a merger that follows it is addressed by I.R.C. § 334(b)(2), allowing that the merger must occur within 2 years.