[00:00:01] Speaker 00:
Case number 155089, Via Christi Hospitals, Wachita, Inc., a successor to St.

[00:00:07] Speaker 00:
Francis Regional Medical Center Appellant, V. Sylvia Matthews Burwell, a Secretary of Health and Human Services, Mr. Mazur for the Appellant, and Ms.

[00:00:18] Speaker 00:
Labashian for the Appellee.

[00:01:14] Speaker 04:
Good morning.

[00:01:36] Speaker 01:
May it please the court?

[00:01:38] Speaker 01:
I'm Robert Mazur on behalf of the appellant Via Christi Hospitals Wichita, Inc., which I will refer to as Via Christi.

[00:01:47] Speaker 01:
Before proceeding to the Medicare payment issue, I think I'd like to address a recent decision of this court related to the collateral estoppel issue.

[00:01:57] Speaker 01:
We had argued, Via Christi B. had argued, that the Secretary waived its collateral estoppel argument because when it adjudicated St.

[00:02:07] Speaker 01:
Francis' Law's claim before, I'm sorry, the government had relied on collateral estoppel and Via Christi had argued that it had been waived because the

[00:02:20] Speaker 02:
administrator of CMS had not relied on the earlier decision of... Council, I can't speak for my colleagues, but I know that I see some technical difficulties with the government's issue preclusion argument.

[00:02:36] Speaker 02:
So, I mean, unless they wish to pursue that, I would think you'd do better to move on to the substance.

[00:02:43] Speaker 01:
Thank you, Your Honor.

[00:02:46] Speaker 01:
Well, then this claim involves a Medicare payment dispute involving a loss that St.

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Francis Medical Center incurred when it consolidated with an unrelated entity to create via Christie.

[00:03:00] Speaker 01:
The Secretary disallowed the loss claim on two basic grounds.

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First, that the transaction was between related parties, and second, that the transaction was not a bona fide sale.

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According to the agency, the transaction was not a bona fide sale because St.

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Francis did not receive reasonable compensation.

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The compensation that it received was less than the reproduction cost of the assets and less than the book value of the assets.

[00:03:25] Speaker 02:
Are there independent reasons for classifying it as not an arm's length transaction?

[00:03:30] Speaker 02:
Are there not?

[00:03:32] Speaker 02:
Well, the arm's length transaction... As expressed in the decision.

[00:03:38] Speaker 01:
The arms length transaction issue is part of the definition of bonafide sale.

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And the bonafide sale had a couple of different components.

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One, you didn't get enough money.

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And number two is you didn't, an arms length transaction required you to go out and try to maximize the consideration that you received for the assets.

[00:04:01] Speaker 03:
So you understand the case, I think the framework, the same way that the government does, that either, if there's either a lack of arm's length or a lack of reasonable compensation, that either of those defeats the claim for the adjustment of depreciation?

[00:04:17] Speaker 01:
I understand that to be the secretary's position.

[00:04:19] Speaker 03:
Is that not your position?

[00:04:21] Speaker 03:
That is not... I thought that was just the way you articulated the legal standard just now.

[00:04:25] Speaker 01:
That is not our position.

[00:04:26] Speaker 01:
We believe the reasonable cost.

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That is an issue that has been addressed by this court, upheld.

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It is a requirement.

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The arms length transaction has not been adjudicated by this court, and particularly the issue whether it was necessary for them to take actual steps to go out and maximize consideration.

[00:04:52] Speaker 01:
In this case, whether they took maximum steps to maximize consideration, the record shows that they did receive reasonable consideration for their assets, only a 2% difference between the consideration that they received and the value of the assets that they gave away.

[00:05:10] Speaker 03:
I'm not sure that I follow how you get there on this record.

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It seems that the non-depreciable, the value of the non-depreciable assets that Via Christi received from St.

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Francis exceeded the value of the liabilities of which Via Christi relieved St.

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Francis, and so you basically have a situation in which there's no compensation received for the depreciable assets of St.

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Francis.

[00:05:38] Speaker 01:
Your Honor, we do not agree with that for a couple of different reasons.

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First of all, the Medicare, the long-standing agency interpretation is you take all the consideration and you allocate it proportionately among all of the assets.

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What the government did was take all of the consideration and allocate it to everything besides the hard assets and then say, look, there's nothing left for depreciable assets.

[00:06:09] Speaker 01:
That's not provided for in agency interpretations.

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It's not even provided for in the program memorandum on which the government's case is based.

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They say you take the consideration and you allocate it only to the cash and the cash equivalents.

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They allocated it to everything but hard assets, including assets like unamortized financing costs.

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So that's what left took all the money away from the depreciable assets.

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If you do it like the program memorandum says you should do it, you start with consideration of $215 million.

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Then what you do is you allocate the first

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the cash and current assets against it, which is $116 million, which really leaves around $99 million for other assets, including the property plan and equipment and the depreciable assets.

[00:07:04] Speaker 01:
Even if you allocate the board designated funds of $84,000, you've got $15 million attributable to depreciable assets.

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And in fact, the party stipulated that based on the Medicare regulations, this is how the calculation would go, you would have $23 million, which was attributable to the depreciable assets.

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So in coming up with zero for the depreciable assets, the government just takes all the money and shifts it to everything else.

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including things that no one would ever pay for, such as unamortized financing costs, and they'd say, look, there's practically nothing left for depreciable assets.

[00:07:45] Speaker 01:
Well, they can't do that under the regulations.

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They can't do that under their stipulation.

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It's just an accounting mechanism that's used for one purpose and one purpose only, and that is to show that they allegedly got the... I'm way behind you.

[00:08:02] Speaker 03:
I'm sorry, Mr. Maiser.

[00:08:03] Speaker 03:
I was under the impression from what the program memorandum says.

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And I'm looking at Joint Appendix 1033, Example 3, that actually what the program I'm writing says is that liabilities are assumed, no other consideration is exchanged.

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The sales price is allocated, assumed liabilities are allocated first to the cash, cash equivalents and other current assets.

[00:08:35] Speaker 01:
Isn't that the inverse of what you're saying?

[00:08:38] Speaker 01:
The government went way beyond that.

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It took the consideration, it allocated the cash, cash equivalents and other current assets were only $116 million.

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So that would have left 215 less than 116, about $99 million.

[00:09:00] Speaker 01:
The government allocated the consideration to everything other than the property plan and equipment and then said voila, there's nothing left for the property plan and equipment and the perishable assets.

[00:09:13] Speaker 03:
Is there a category in between, I may be missing something here, I thought the cashable loans and other current assets together with depreciable assets was the, that's the whole ballpark, but I'm missing something.

[00:09:28] Speaker 01:
I believe that it's fairly intended that you take the, under the program memorandum, you take the total consideration and you subtract the cash and the cash equivalents and other current assets and you take that right off the top.

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And then you compare it with, you know, and then you see if there's anything left for the depreciable assets and other assets.

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But that's not just what they did.

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They took out the cash, they took out the current assets, they took out everything, you know, and then said there's nothing left for the depreciable assets.

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So there's virtually, there's nothing in this program memorandum with which I agree.

[00:10:12] Speaker 01:
All of it is contrary to the regulations and even contrary to the Provider Reimbursement Manual.

[00:10:17] Speaker 01:
But here, they're not even following the program memorandum.

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They're going way beyond that in trying to reach the conclusion that zero money was paid for the depreciable assets.

[00:10:29] Speaker 03:
I'm sorry.

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Maybe if my colleagues get this, I don't have to hammer on it.

[00:10:37] Speaker 03:
But if the non-depreciable assets were $222 million.

[00:10:41] Speaker 03:
I'm sorry.

[00:10:42] Speaker 03:
$222 million?

[00:10:44] Speaker 01:
The total as... Non-depreciable assets.

[00:10:47] Speaker 03:
I think that's your figure.

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And then the liabilities are 214 million or perhaps less, but that's a high number.

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So that's a high number of what compensation was received.

[00:11:02] Speaker 03:
You don't end up with a big difference there to go to compensation for depreciable assets, which is the issue that we're focusing on.

[00:11:10] Speaker 01:
Now all of the assets together were worth $219 million.

[00:11:17] Speaker 01:
That's what valuation counselors determined.

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The consideration, the total consideration was $215 million.

[00:11:24] Speaker 01:
So we've only got a $4 million difference between the liabilities assumed, which is the consideration received for the assets, and what valuation counselors determined to be the value of the assets.

[00:11:40] Speaker 01:
You know, 2%, 98 cents on the dollar, however you want to characterize it, but it is certainly not a significant gap, which the CMS program memorandum says if in fact there's a significant disparity that may indicate a loss, indicate that it's not bona fide.

[00:12:01] Speaker 01:
It certainly doesn't mean that that's not reasonable consideration when you're getting 98 cents on the dollar, particularly when you have a consolidation

[00:12:10] Speaker 01:
as opposed to a straight asset sale where it's really not a number that can be easily negotiated.

[00:12:16] Speaker 01:
The consideration is the liabilities that go over.

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And the fact that although this court has rejected this analysis to fill big gaps, when you take a consolidation, you take all the assets, all the liabilities known and unknown.

[00:12:34] Speaker 01:
So although there were only whatever $215 million or $212 million in known liabilities, it certainly is something that there would be reasonable to think that there's some other things lurking in the background that could very well eat up the 2%.

[00:12:51] Speaker 01:
So we think that there hasn't been a case, this court hasn't seen a case where in fact the liabilities, the consideration, and the value of the assets are just so close.

[00:13:05] Speaker 01:
And the only way that they're not close is if the government relies on reproduction costs instead of the valuation on the income approach, which is sort of a

[00:13:16] Speaker 01:
With all due respect, a nonsensical approach to figure out what it would cost to reproduce a 70-year-old facility as it is with all its failings.

[00:13:26] Speaker 01:
The income approach is universally used for gauging the fair market value of these types of hospital assets.

[00:13:34] Speaker 03:
Of the whole package, but not of depreciable assets as a separate category.

[00:13:40] Speaker 03:
I mean, there's a lot of difficulty with that precisely because the assets can't really be desegregated, isn't it?

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Secretary has long recognized that, and we've accepted that in other cases.

[00:13:50] Speaker 01:
Yes, the income approach comes with a number that includes a bundle of assets that does, in this case, include working capital.

[00:14:03] Speaker 01:
And I realize it wasn't so clear in the other case where the language was different, but the language on JA 833 and 835

[00:14:12] Speaker 01:
for the appraisal, it shows it very clear that the $89 million includes working capital of $58 million and fixed assets of $30 million.

[00:14:25] Speaker 01:
And I will apologize, not apologize, but 834 is not a very good copy.

[00:14:31] Speaker 01:
You can't tell whether it's

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It says including or excluding on that second line, but we have a better sheet of paper that we're, and we provided that to the government council very recently, that the value was estimated at $89 million, including working capital of $58 million.

[00:14:51] Speaker 04:
Would you like to submit a copy to the clerk's office so the court has a better copy too?

[00:14:56] Speaker 01:
Yes, we would, Your Honor.

[00:14:57] Speaker 02:
I'd like to ask you a question about the overall background of this.

[00:15:02] Speaker 02:
You argue that the via Christi itself does not, its costs for Medicare purposes do not include anything, is that correct, for the value of these assets?

[00:15:22] Speaker 02:
In other words, it will get no depreciation.

[00:15:26] Speaker 02:
It cannot demand, cannot ask for compensation for depreciation on these buildings.

[00:15:34] Speaker 02:
Is that correct?

[00:15:35] Speaker 01:
Well, we haven't made that statement, but that is essentially true because of the prospective payment system that went into effect, that generally depreciation is no longer recognized as a general cost.

[00:15:47] Speaker 01:
I see.

[00:15:48] Speaker 02:
Depreciation doesn't count anyway.

[00:15:49] Speaker 01:
Right.

[00:15:50] Speaker 02:
Aha, okay.

[00:15:54] Speaker 02:
Take your point.

[00:15:56] Speaker 01:
Your Honor, I'd like to reserve what remaining time I have.

[00:15:59] Speaker 03:
Let me just ask one more question.

[00:16:01] Speaker 03:
The procedural challenges that you make to the application of the bona fide sales rule.

[00:16:07] Speaker 03:
Sorry, Your Honor, I'm just having a little problem here.

[00:16:08] Speaker 03:
I know it sounds lab to me up here, but I gather I'm not using the microphone effectively.

[00:16:13] Speaker 03:
The procedural challenges that you raised to the application of the Bonafide sales rule, are any of those different from the ones that we considered in the St.

[00:16:21] Speaker 03:
Luke case?

[00:16:22] Speaker 01:
The arguments are the same, but they are now applied to rules that are strictly in the program memorandum.

[00:16:31] Speaker 01:
They are not in the bonafide sale provider reimbursement manual.

[00:16:35] Speaker 01:
The provider reimbursement manual says it must be a bonafide sale, including reasonable consideration.

[00:16:43] Speaker 01:
The court has rejected that argument.

[00:16:45] Speaker 01:
including all of the related procedural arguments why it should not be a bona fide sale or not reasonable consideration.

[00:16:53] Speaker 01:
This court has not addressed the requirements that are exclusively in the program memorandum that says that you must go out and try to maximize consideration even if you've

[00:17:05] Speaker 01:
obtained fair market value compensation?

[00:17:09] Speaker 03:
What would you point to as facts that show that they did seek to maximize consideration other than the amount of compensation itself?

[00:17:22] Speaker 03:
Structurally, is there anything?

[00:17:24] Speaker 03:
It doesn't seem...

[00:17:24] Speaker 01:
There's really, the record does not show that they went out and put this thing for sale for the highest bidder.

[00:17:32] Speaker 01:
The record shows that there really was nobody out there.

[00:17:37] Speaker 03:
I'm just saying, is there anything you can point to structurally?

[00:17:40] Speaker 03:
Even if you don't have a market, let's say St.

[00:17:43] Speaker 03:
Francis wanted to get as much cash out of this exchange as it could and go off and do its work elsewhere, that would be something you could point to that would give St.

[00:17:53] Speaker 03:
Francis an interest in achieving the highest value.

[00:17:56] Speaker 03:
But that's not the position that St.

[00:17:58] Speaker 03:
Francis was in in this case.

[00:18:00] Speaker 03:
And so I'm just asking you for any other

[00:18:03] Speaker 03:
circumstances, factors, incentives that you can point to that would make us think that it did have an interest in getting a fair market value for its depreciable assets?

[00:18:16] Speaker 01:
The only thing that I can say is that given the marketplace and what was happening, St.

[00:18:21] Speaker 01:
Francis was very concerned about its long-term viability, that whether it could stand alone and maintain itself

[00:18:29] Speaker 03:
Right, so it was going into the red and it wanted to stop hemorrhaging, which is the situation of a lot of health care facilities.

[00:18:37] Speaker 01:
Thank you.

[00:18:58] Speaker 05:
Good morning, may it please the Court, Deborah Lobosheen on behalf of the Secretary of Health and Human Services.

[00:19:03] Speaker 05:
As the Court has clearly been asking questions of Mr. Mazur, I do not want to

[00:19:11] Speaker 05:
take too much of your time going over the long history that this Court has established as to the reasonableness of the Secretary's interpretation of her regulations.

[00:19:22] Speaker 05:
I believe that the Court has accurately zoned in on the sufficiency of the evidence that the Secretary based her determination that there was no reasonable consideration in this case.

[00:19:39] Speaker 05:
Going off of Judge Pillard's questioning, I think it is evident from the loss calculations that Via Christi submitted in the underlying administrative case that, in fact, all of the assets other than the plant property and equipment of St.

[00:19:59] Speaker 05:
Francis were transferred, consolidated with

[00:20:02] Speaker 05:
St.

[00:20:02] Speaker 05:
Joseph's to create Via Christi, and those assets were valued at $222 million.

[00:20:09] Speaker 05:
And again, these are the figures that

[00:20:12] Speaker 05:
Saint Francis and Via Christi put forth themselves.

[00:20:17] Speaker 05:
And these were the fair market values of their assets.

[00:20:20] Speaker 03:
And is that JA 2239?

[00:20:23] Speaker 03:
Is that where you would look at that table?

[00:20:24] Speaker 05:
It may be there, Your Honor.

[00:20:26] Speaker 05:
The iteration I'm looking at is JA 1065.

[00:20:33] Speaker 03:
And that is, you said, the value of non-depreciable?

[00:20:38] Speaker 05:
Non-depreciable assets and also excluding land.

[00:20:42] Speaker 05:
And that's the $222 million figure.

[00:20:50] Speaker 05:
Comparing that figure to

[00:20:52] Speaker 05:
the consideration that again St.

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Francis in this computation was using was the consideration of $215 million.

[00:21:04] Speaker 05:
So therefore, evaluating those two amounts, it's clear that

[00:21:09] Speaker 05:
all assets other than the depreciable assets of land were consolidated for less than the assets value.

[00:21:19] Speaker 05:
As the administrator found in the lower court considered, was that the, this means that the assets were, those assets were transferred for less than their full value and that there was no depreciation,

[00:21:39] Speaker 05:
No compensation left attributable to the depreciable assets or the loan?

[00:21:45] Speaker 02:
The depreciable cost of the depreciable assets transferred was what?

[00:21:52] Speaker 05:
It depends on what numbers we use.

[00:21:55] Speaker 05:
If we use the reproduction cost determined.

[00:21:59] Speaker 02:
Oh, I see, oh.

[00:22:01] Speaker 05:
The net book value, you know, the net book value I think was $148 million and the, yes, the property and equipment was $148 million as the net book values kept on the hospitals.

[00:22:18] Speaker 03:
But even under the income approach, isn't it 89 million, according to what the number the Via Christi would put forward?

[00:22:24] Speaker 03:
And so you would say, well, put 89 next to the whatever it is, minus 7 million, that they were paid for that.

[00:22:35] Speaker 05:
No, Your Honor, on the $89 million that the appraisal valued, that was for the going concern of the hospital, so it wasn't just the depreciable assets.

[00:22:46] Speaker 03:
That was the income approach?

[00:22:48] Speaker 03:
The going concern of the entire hospital.

[00:22:50] Speaker 05:
Of the entire hospital was $89 million, but to that was added limited use and investment assets and other non-operating assets, which totals the $219 million.

[00:23:04] Speaker 05:
that Mr. Mazur was referencing.

[00:23:07] Speaker 05:
So using the income approach, the total amount that the hospital is valued at is $219 million, of which $89 million of that was the going concern.

[00:23:19] Speaker 03:
And what is the under the income approach?

[00:23:21] Speaker 03:
Was that the $28 million?

[00:23:23] Speaker 03:
What's the under the income approach to the depreciable assets?

[00:23:27] Speaker 05:
The depreciable assets under the income approach was determined as being about $31 million, $30.5 million.

[00:23:36] Speaker 05:
But interestingly, the only way that that number is arrived at is by backing out of the $89 million, $58 million in networking capital, which itself, from the appraisal and the documents,

[00:23:54] Speaker 05:
that the hospital produced itself suggests is somewhat of an arbitrary number because $33 million of consideration was used immediately to offset current assets.

[00:24:11] Speaker 05:
So arriving at the $30 million of depreciable assets under the income method is fairly arbitrary because

[00:24:23] Speaker 05:
of that $89 million, $58 million of it was considered networking capital, which was

[00:24:33] Speaker 05:
did not include all of the current assets that were on the books of the hospital at the time.

[00:24:40] Speaker 02:
Can I just explore with you how all this fits in with Medicare's reimbursement?

[00:24:45] Speaker 02:
Mr. Mazur was saying that going forward, this doesn't affect or the way it's treated doesn't affect reimbursement for Viacristi.

[00:24:55] Speaker 05:
Correct.

[00:24:56] Speaker 05:
I mean, there's two things that are going or a couple of things that are going on.

[00:24:59] Speaker 05:
Obviously, Congress changed the loss calculation post-1997.

[00:25:05] Speaker 05:
This transaction happened before that.

[00:25:08] Speaker 05:
As of 2001, depreciation to the extent it is a reimbursable cost of any hospital is factored into the capital prospective payment system.

[00:25:21] Speaker 05:
So to the extent that Via Christi acquired St.

[00:25:24] Speaker 05:
Francis's

[00:25:26] Speaker 05:
assets in this consolidation, those assets were put on via Christie's books at the net book value that they had existed on St.

[00:25:36] Speaker 05:
Francis's books.

[00:25:37] Speaker 02:
So to the extent that... I see, and that's a component for the compensation scheme.

[00:25:44] Speaker 05:
Correct.

[00:25:45] Speaker 02:
Okay.

[00:25:47] Speaker 02:
So if I'm understanding it then, the

[00:25:52] Speaker 02:
Well, there's a loss, obviously, which has occurred.

[00:25:59] Speaker 02:
But that loss, if it's ever realized by a sale or something, would be recouped.

[00:26:08] Speaker 02:
Is this right?

[00:26:08] Speaker 02:
It would be recouped by Via Christi?

[00:26:10] Speaker 02:
No.

[00:26:11] Speaker 05:
I mean, I would disagree with the premise that there's been a loss here.

[00:26:17] Speaker 05:
Via Christi has not demonstrated to the Secretary satisfaction in her

[00:26:22] Speaker 05:
determinations, you know, obviously been upheld by the lower court, that there was not a loss compensable, but recompense.

[00:26:29] Speaker 02:
It's not a realized loss.

[00:26:30] Speaker 05:
It's not a realized loss.

[00:26:31] Speaker 02:
Right, right.

[00:26:32] Speaker 02:
I understand your position on that.

[00:26:34] Speaker 02:
But there is a loss of value.

[00:26:36] Speaker 05:
I don't know how one draws that conclusion.

[00:26:40] Speaker 05:
I can't.

[00:26:41] Speaker 05:
The secretary has not drawn that.

[00:26:42] Speaker 03:
I mean, from Via Christi's perspective, to the extent that there was a loss of value suffered by St.

[00:26:47] Speaker 03:
Francis,

[00:26:49] Speaker 03:
over time that was steeper than the default recognition of depreciation by the government, that actually benefited Via Christi at the point that it absorbed St.

[00:27:03] Speaker 03:
Francis, right?

[00:27:03] Speaker 03:
Because it got a deal, didn't it?

[00:27:06] Speaker 03:
It got the assets cheap.

[00:27:09] Speaker 05:
It got the assets that it got to the extent that it was cheaply.

[00:27:13] Speaker 05:
I will note that the consolidation of the two hospitals into Via Christi

[00:27:18] Speaker 05:
All of the assets from both components were brought into Via Christi's books at the same, all the assets were just pooled.

[00:27:27] Speaker 03:
And you're saying they have the same net book value that they had for St.

[00:27:33] Speaker 03:
Francis at the outset?

[00:27:35] Speaker 05:
Correct.

[00:27:35] Speaker 05:
So the net book values of these depreciable assets that were on St.

[00:27:40] Speaker 05:
Francis's books are now the same as they are on Via Christi's.

[00:27:43] Speaker 05:
And to the extent that depreciation of those assets continued to be reimbursed by Medicare for the years until PPS

[00:27:52] Speaker 05:
came into existence.

[00:27:54] Speaker 05:
Depreciation, according to the Useful Life, you know, the depreciation schedule continued with Via Christi.

[00:28:02] Speaker 02:
Where in the joint appendix do we find this?

[00:28:05] Speaker 02:
Where is that?

[00:28:06] Speaker 05:
That is a good question, Your Honor.

[00:28:07] Speaker 05:
I am not sure I can point to where Via Christi's

[00:28:12] Speaker 05:
It is in the appendix, the joint, the audited financials for the, I think the 96 and 97 are in the joint appendix.

[00:28:25] Speaker 05:
I apologize for not having that at my fingertips.

[00:28:30] Speaker 05:
I will note, however, and I can provide that citation for you, my recollection is, however, that it won't be possible to see from that audited financial statement

[00:28:42] Speaker 05:
of Via Christi what the division of the assets from the two hospitals were.

[00:28:48] Speaker 05:
So to the extent that there is a line item for the net value of the depreciable assets held in Via Christi.

[00:28:54] Speaker 02:
No, but it's produced by simply putting together the book value of both hospitals' assets.

[00:29:04] Speaker 02:
Correct.

[00:29:04] Speaker 03:
But we're not going to see it on Via Christi's

[00:29:07] Speaker 03:
accounting, which corresponds to which.

[00:29:11] Speaker 03:
Correct.

[00:29:12] Speaker 05:
You would just see the pooled assets of depreciable assets, PP&E at the net value.

[00:29:19] Speaker 05:
I'm not aware of whether there's anywhere in the record

[00:29:22] Speaker 05:
that demonstrates that breakout.

[00:29:27] Speaker 03:
What's your response to Mr. Mazur's arguments that requiring in the nonprofit consolidation context that the transaction be arm's length just doesn't make any sense?

[00:29:39] Speaker 05:
I mean, I would argue, as this Court has found in the lower courts in St.

[00:29:45] Speaker 05:
Luke's and in Forsyth as well,

[00:29:50] Speaker 05:
as did, you know, the 10th Circuit in Via Christi when looking at the other side of this transaction, that the evidence of an arm's length negotiation is probably more important in a non-profit merger and consolidation than in a for-profit company.

[00:30:07] Speaker 05:
That being because the non-profits, by virtue of not being a profit-maximizing entity, has less,

[00:30:18] Speaker 05:
what the consideration that received is much less indicative of the fair market value of the assets, whereas the attempt to seek out the best value for the assets as one can, which is demonstrated through

[00:30:32] Speaker 05:
arms length negotiations, putting your assets up for sale, getting a pre-transaction appraisal, taking these steps to understand what your assets are worth and going out and trying to achieve maximum value for your assets demonstrates

[00:30:51] Speaker 05:
that in fact the assets may be worth more or less than what the net book value is.

[00:30:57] Speaker 05:
But in this circumstance, that didn't happen.

[00:31:00] Speaker 05:
The only indication of a value that the hospitals put forth is a post hoc valuation.

[00:31:09] Speaker 05:
Clearly the assumption of one's liabilities has no rational connection to the value of the assets.

[00:31:16] Speaker 05:
which is why the secretary, we sort of reasonably found that there was no reasonable consideration here because the consideration received was so much less than the net book value of the assets.

[00:31:28] Speaker 02:
Could I go back to the prospective payment system?

[00:31:31] Speaker 02:
I gather what you say that it is tailored to each hospital, right?

[00:31:37] Speaker 02:
In other words, it's not

[00:31:38] Speaker 02:
as in rate caps, another field we look at from time to time, it's not based on an estimate of costs across the system, is that right?

[00:31:49] Speaker 05:
That is as a general matter and I don't know the intricacies of the PPS system and in this circumstance capital PPS is even different than the

[00:32:04] Speaker 05:
standard inpatient or outpatient PPS systems.

[00:32:07] Speaker 05:
It too is its own body of regulation.

[00:32:11] Speaker 02:
I'm sorry, which is its own?

[00:32:12] Speaker 05:
So my understanding in the current payment of under Part A, there is inpatient prospective payment system, there is the outpatient prospective payment system, and then there's capital prospective payment system, which is aimed at reimbursing

[00:32:31] Speaker 05:
hospitals and other providers for their capital investments that may not be captured, properly captured.

[00:32:40] Speaker 02:
And that at least you're saying is individual to a hospital.

[00:32:44] Speaker 05:
I don't know that I can take that position, Your Honor.

[00:32:48] Speaker 05:
I don't disagree.

[00:32:49] Speaker 05:
I'm just not well enough informed.

[00:32:51] Speaker 05:
But it is my understanding.

[00:32:53] Speaker 02:
That seemed to be implicit in your answer when you said that the book value going over to Via Christi would be a basis for calculating its reimbursable.

[00:33:05] Speaker 05:
It is to the extent that every hospital is reimbursed currently

[00:33:13] Speaker 05:
for capital expenses prospectively and not based on its reasonable cost that it would demonstrate through a cost report.

[00:33:21] Speaker 03:
And there is depreciation is worked into that just kind of in a more standard way.

[00:33:26] Speaker 03:
And what we're dealing with here is whether that should be corrected based on a transaction.

[00:33:31] Speaker 05:
Correct.

[00:33:32] Speaker 03:
Prior to 1997, it was hospital-specific and you showed... You could correct based on an actual transaction in the world, but the idea that that transaction might more accurately reflect the value of depreciable assets.

[00:33:45] Speaker 03:
Exactly.

[00:33:46] Speaker 03:
And therefore depreciation than the presumptive rate.

[00:33:50] Speaker 05:
which is established when the asset is acquired and put on your books and depreciated either through a straight line method or some other method which... So they're still getting depreciation.

[00:33:59] Speaker 03:
They're just not getting a correction to it that they want if the secretary's position holds.

[00:34:05] Speaker 03:
Correct.

[00:34:10] Speaker 04:
Anything further?

[00:34:11] Speaker 04:
No, nothing from me.

[00:34:12] Speaker 04:
Thank you, Your Honor.

[00:34:15] Speaker 04:
Council for Appellants?

[00:34:21] Speaker 01:
Your Honor, just a very few points that I would like to make.

[00:34:25] Speaker 01:
We disagree with the thought that an arm's-length transaction means going out and getting every penny that you can get for an asset.

[00:34:34] Speaker 03:
But what about, Mr. Basar, the idea that even caring enough to get a valuation, to get an appraisal of the value of those assets as you go into the transaction, that would be a way, even in the absence of an active market for the assets of St.

[00:34:47] Speaker 03:
Luke's, that might have manifest some

[00:34:51] Speaker 01:
With due respect, if there are no buyers out there besides a consolidation with St.

[00:34:59] Speaker 01:
Joseph, it wouldn't matter.

[00:35:02] Speaker 03:
Well, you might think, are we going to stay doing what we're doing, or are we going to take this deal?

[00:35:07] Speaker 03:
You still have a choice.

[00:35:09] Speaker 01:
But the record does demonstrate the testimony that they had a pretty good idea what the facility was worth based on the prior anticipated cash flow, and there's testimony of that at 281.

[00:35:23] Speaker 01:
So it wasn't that they were completely in the dark.

[00:35:27] Speaker 03:
Can you tell me, when you talk about current assets, are you including non-PPE assets other than cash and cash equivalents?

[00:35:37] Speaker 03:
When we had our exchange before about numbers, I was not entirely following your...

[00:35:42] Speaker 01:
Let me refer you, Your Honor, to Joint Appendix 685, which is one of the balance sheets.

[00:35:48] Speaker 01:
And it's easy to look at because it has a category specifically referred to as current assets.

[00:35:55] Speaker 01:
And it lists those assets that are part of current assets, cash and cash equivalents, short-term investments.

[00:36:03] Speaker 01:
Assets as use is limited, supplies, prepaid expenses comes out at $116 million and $577,000.

[00:36:15] Speaker 01:
It does not include another set of monetary assets that are held by bond trustees or limited use, which is that next category of assets as use is limited.

[00:36:28] Speaker 01:
Obviously, it doesn't include property, plant and equipment.

[00:36:32] Speaker 01:
and then it doesn't include this unamortized financing costs and other non-current assets.

[00:36:38] Speaker 01:
So when the secretary argued that we assign all these assets, all of the consideration of these assets, there's nothing left for the printable equipment.

[00:36:49] Speaker 01:
It not only is used the current assets of $116 million, it used the assets which use as limited for another $86 million.

[00:36:59] Speaker 01:
unamortized financing costs of $19 million and then said, gee, look, there's nothing left for depreciable assets.

[00:37:08] Speaker 01:
And that's not the way it's supposed to go.

[00:37:11] Speaker 03:
I also- Why would you, though, count assets whose use is limited as zero, which it sounds like you're doing?

[00:37:17] Speaker 01:
I'm sorry, Your Honor.

[00:37:18] Speaker 01:
One more time, please.

[00:37:18] Speaker 01:
I didn't hear you.

[00:37:19] Speaker 03:
Assets whose use is limited.

[00:37:21] Speaker 03:
It sounds like you're counting those as zero.

[00:37:23] Speaker 01:
Well, no, they were counting them as if they were regular cash.

[00:37:27] Speaker 03:
They were putting them... I'm asking you how you are treating them.

[00:37:31] Speaker 01:
Oh, no, they certainly have a value.

[00:37:33] Speaker 01:
I'm just saying that that's not part of the test.

[00:37:37] Speaker 01:
And even if you include those, again, starting with $215 million,

[00:37:42] Speaker 01:
If you take away the current assets of $116 million, you know, you've got roughly 99, you take care of the assets whose use is limited, you subtract that, another $84 million, you still have about $15 million attributable to depreciable assets.

[00:37:58] Speaker 01:
It doesn't come out until zero until you start putting other things in there such as this unamortized financing cost of $19 million at the very bottom.

[00:38:11] Speaker 01:
You know, that and other things is what leads them to the, you know, the dubious conclusion that the assets were, that the depreciable assets were provided as a freebie.

[00:38:25] Speaker 01:
I also wanted to note that they said that arms-down transaction does not mean actively trying to get every penny, particularly when they, you know,

[00:38:36] Speaker 01:
The arm's length transaction suggest a maximized consideration.

[00:38:39] Speaker 01:
Well, here what they got was a reasonable consideration as determined by appraiser.

[00:38:44] Speaker 01:
And the board noted that an appraisal was a third party's attempt to derive the price that arm's length bargaining should produce.

[00:38:53] Speaker 01:
And that's at 197, 198.

[00:38:56] Speaker 01:
So there's no reason to believe that even if there was a purchaser out there that was willing to purchase it, that they would get any more than the appraised value of the $219 million.

[00:39:08] Speaker 01:
In fact, there is, you know, there's no evidence to believe that.

[00:39:13] Speaker 01:
Also, there was talk about the via Christi's getting the carryover numbers, the book values.

[00:39:22] Speaker 01:
If a loss isn't recognized, yeah, well, that may be the truth.

[00:39:25] Speaker 01:
But it had no consequence, at least for Medicare, because that book value did not generally play into the capital reimbursement of the hospital.

[00:39:36] Speaker 02:
So it's the opposite of what opposing counsel says.

[00:39:41] Speaker 01:
May we follow up on that?

[00:39:43] Speaker 01:
Sure, of course.

[00:39:45] Speaker 01:
Again, and lastly, there's really no serious question as to the income approach, the way it was done.

[00:39:56] Speaker 01:
There were a few things noted in the Secretary's footnote.

[00:40:00] Speaker 01:
They were also addressed in the Secretary's brief, and we believe that we've addressed them.

[00:40:07] Speaker 01:
You know, the income approach, I would not say is a perfect approach.

[00:40:12] Speaker 01:
Not just like the reproduction cost is not perfect, but this one was done by the book and nobody has shown anything other than this wasn't an income approach as that income approach is supposed to be performed in context like this, nor has anybody been shown that there is a serious basis to say that the income approach is not to be used for not-for-profit hospitals.

[00:40:38] Speaker 01:
Everything in the record is to the contrary.

[00:40:41] Speaker 01:
except the program memorandum that cites not.

[00:40:43] Speaker 03:
Mr. Mazur, as to the, other than the cash and cash equivalents, the non-PPP assets, can the compensation be allocated to those before allocated to depreciable assets or not, in your view?

[00:40:59] Speaker 01:
One more time, Your Honor, please.

[00:41:01] Speaker 03:
So we have the depreciable assets and the value, I'm sorry, the liabilities, and we had this exchange about whether there's anything of the liabilities, i.e.

[00:41:13] Speaker 03:
the purchase price, the assumption of liabilities that is left over to attribute to and to deem having been paid for the depreciable assets, right?

[00:41:24] Speaker 03:
And I questioned you, wasn't it the case that that

[00:41:30] Speaker 03:
the assumption of liabilities was less than the amount of non-depreciable assets that Via Christi acquired.

[00:41:40] Speaker 03:
And you took issue with that.

[00:41:41] Speaker 03:
And I'm still trying to understand the grounds for your disputing of that.

[00:41:46] Speaker 03:
And it sounds like that's partly because you're looking at the non-depreciable assets as having several subcategories.

[00:41:57] Speaker 03:
Is that right?

[00:41:58] Speaker 01:
Well, I'm looking at the total, 219 million versus $215 million.

[00:42:02] Speaker 01:
There's, you know, a little bit of difference, but they're virtually the same.

[00:42:06] Speaker 03:
Right, if they're roughly the same before we even consider depreciable assets, you're out of luck.

[00:42:12] Speaker 01:
I disagree, Your Honor.

[00:42:14] Speaker 01:
$219 million is the value of all of the assets, including depreciable assets.

[00:42:21] Speaker 01:
The $215 million is a consideration paid for all of the assets, including depreciable assets.

[00:42:28] Speaker 01:
Now, we can get down to allocation questions and how much of that $215 million is for depreciable assets.

[00:42:36] Speaker 01:
But the 219 versus 215 is total compared to total.

[00:42:42] Speaker 01:
I'm sorry, I forgot the second part of your question.

[00:42:46] Speaker 03:
No, I think I got you.

[00:42:48] Speaker 03:
Or you got me.

[00:42:51] Speaker 01:
OK.

[00:42:53] Speaker 01:
That's it.

[00:42:53] Speaker 01:
Thank you, madam.

[00:42:54] Speaker 04:
All right, we'll take the case under advisement.