Texas hospital system loses appeal requesting $21.7 million depreciation adjustment

NEW ORLEANS –The Texas-based Memorial Hermann Hospital System lost an appeal in the U.S. Court of Appeals for the Fifth Circuit concerning the district court decision to not classify its merger as a bona fide sale.

When the Herman Hospital and Memorial Hospital merged to create the Memorial Hermann Hospital System, it filed a request for a depreciation adjustment with the administrator for the Centers of Medicare and Medicaid Services in the amount of $21.7 million. The administrator denied the hospital’s request, claiming that the merger was not a bona fide sale and thus not eligible for the adjustment.

The administrator argued that for the merger had to be classified a bona fide sale, no gain or loss could be recognized for Medicare payment purposes. The district court agreed with the claim and decided that the merger did not meet the bona fide sale requirements. Memorial Hermann Hospital appealed the decision.

The Court of Appeals decided that the administrator’s decision to apply the bona fide sale requirement was “not arbitrary, capricious, and abuse of discretion, or in discordance with the law.”

It noted that other circuits have decided that statutory mergers must constitute bona fide sales and saw no reason to deviate from the reasoning of other circuits. It concluded that the merger was not a bona fide sale because “the fair market value of Hermann’s assets was far below the purchase price,” proving that “Memorial paid no consideration for Hermann’s depreciable assets for purposes of calculating a loss payment.”

In a per curiam opinion, Circuit Judges E. Grady Jolly, Charles A. Davis and Edward C. Prado affirmed the district court’s judgment.

Case no. 1-20654.