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10/2000 |
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Robert E. Mazer In a Medicare Program Memorandum (PM) dated October 19, 2000 (Transmittal No. A-00-76), HCFA specified requirements that must be satisfied before a loss incurred by a nonprofit provider on a merger or consolidation can be reimbursed. According to HCFA, losses should be denied if (1) the governing board or management team of the entity resulting from the transaction includes significant representation from the previous board(s) or management team(s) of the merged or consolidating entities or (2) there is a large disparity between the sales price (for example, liabilities assumed) and the fair market value of the assets transferred, measured using the "cost approach." HCFA asserts that this is not new policy, but only a "clarification" of previous policy. Therefore, the PM instructs intermediaries to "apply this clarification to all cost reports for which a final notice of program reimbursement has not been issued and to all settled cost reports that are subject to reopening..." HCFA’s most recent "clarification" of Medicare program policy will result in disallowance of numerous loss claims arising from mergers or consolidations. The new requirements are more restrictive than those set forth in draft changes to the Provider Reimbursement Manual on which various intermediaries have relied. They are also more stringent than those included in a draft PM circulated to intermediaries for comment. Loss claims likely to be denied as a result of the PM include those that have already been reimbursed by Medicare intermediaries based on their understanding of Medicare program policy. For those hospitals that have had their loss claims denied, the PM is only the most recent attempt to bolster Medicare’s position through "revisionist" statements of Medicare policy. But for providers which have been reimbursed for losses and have been keeping their fingers crossed until the three-year reopening period has run, the PM’s impact could be more significant—it could lead to reopenings and revised settlements disallowing losses for which reimbursement has already been received. Background The Balanced Budget Act of 1997 deleted the statutory requirement that HCFA "provide for recapture of depreciation in the same manner as provided under the regulations in effect on June 1, 1984." Following this legislative change, HCFA amended Medicare regulations to preclude Medicare’s recognition of gains or losses on transactions that occurred on or after December 1, 1997. Based on recent developments, it could be argued forcefully that HCFA is applying this new rule to transactions that preceded December 1, 1997. It might also be argued that HCFA is violating the statutory requirement that, up until that date, losses incurred on statutory mergers or consolidations be reimbursed based on policies that were in effect in 1984. While the PM is the most comprehensive attempt to require disallowance of loss claims, it is not HCFA’s first attempt to retrospectively "clarify" Medicare policies to disallow loss claims. Notwithstanding previous contrary statements regarding application of generally accepted accounting principles (GAAP), HCFA has recently stated that accounting for a transaction as a "pooling" suggests that the transaction was not a bona fide sale. Similarly, some 20 years after Medicare introduced the term "bona fide sale," HCFA also recently clarified the term to require compensation which was deemed "reasonable" by the Medicare program and "selfish bargaining between the parties." Program Memorandum In the PM, HCFA has further clarified Medicare policy to say that, in determining whether a transaction was between related parties, the parties’ relationship when the transaction was negotiated and consummated was irrelevant—related party principles require disallowance of loss claims when there was "significant" carryover of board members or management from participants in a merger or consolidation transaction to the newly created entity. Additionally, according to HCFA, a loss should be disallowed when there is a significant disparity between the purchase price and the appraised value of the assets. Specifically, HFCA states:
HCFA’s regulations preclude recognition of losses occurring on or after December 1, 1997. It is only HCFA’s often suspect interpretation of legal authorities that requires disallowance of losses on earlier transactions. This means that hospitals whose losses are being disallowed are not at a loss for legal, regulatory, and economic arguments that may be used to challenge HCFA’s position. Had HCFA written the PM on a blank slate, it is much more likely that it would be found persuasive by administrative or judicial authorities. However, the regulations and manual provisions at issue—including Medicare related party principles—have been in existence for 20 years or more. They have often been interpreted in a manner that is inconsistent with how HCFA applied them in the PM. Accordingly, providers may be able to establish that the principles on which HCFA relies are inconsistent with the statute and regulations to which the agency is bound, or that they were not in effect at the time of the transaction, let alone on June 1, 1984, as arguably required by statute. For a copy of the program memorandum, access HCFA’s web site via Ober|Kaler’s web site at www.ober.com. Select "Useful Links," then "Health" to access "Agencies" links. Robert E. Mazer is a principal in Ober|Kaler's Health Law Department. He can be reached by email at remazer@ober.com or 410-347-7359. |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia |
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