Opinion
K1–2016–004
01-25-2018
In the Matter of the Application of CHAUATAUQUA COUNTY CHAPTER OF NYSARC, INC. dba the Resource Center, Petitioner/Plaintiff, v. Hon. Kerry A. DELANAEY, J.D., as Acting Commissioner of the New York State Office of People with Developmental Disabilities and Hon. Howard A. Zucker, M.D., J.D., as Commissioner of Health of the State of New York, Respondents/Defendants.
James S. Grossman, Margaret Surowka, Eugene M. Laks and Emanuela D'Amboglio, of Counsel, Barclay Damon LLP, Attorneys for Petitioner/Plaintiff. Assistant Attorney General Darren Longo, of Counsel, Office of the New York State Attorney General, Attorneys for Respondents/Defendant.
James S. Grossman, Margaret Surowka, Eugene M. Laks and Emanuela D'Amboglio, of Counsel, Barclay Damon LLP, Attorneys for Petitioner/Plaintiff.
Assistant Attorney General Darren Longo, of Counsel, Office of the New York State Attorney General, Attorneys for Respondents/Defendant.
Frank A. Sedita III, J.
The principal issue before the court is whether Respondents' denial of Petitioner's Medicaid reimbursement appeals was lawful.
Petitioner is a non-governmental agency, located in Chautauqua County, which provides services to those with developmental disabilities. Medicaid reimbursements largely finance these services. Respondents are the Commissioners of the Office for People with Developmental Disabilities (OPWDD) and the Department of Health (DOH). These are New York State governmental agencies that regulate Medicaid-financed programs.
The DOH denied Medicaid reimbursement appeals for various services provided by Petitioner between 2011 and 2014. Petitioner commenced this Article 78 Proceeding/ Declaratory Judgment Action to set aside those determinations. Petitioner principally contends that: (1) lawful authority for reviewing Medicaid reimbursement appeals rests solely with the OPWDD and (2) even if the DOH could review the appeals, their denials were made in an arbitrary, capricious and irrational manner.
The court rejected the first contention—likely advanced to circumvent Petitioner's failure to comply with the applicable statute of limitations—and ruled that several of its claims were time-barred. Those claims were dismissed as a matter of law. The court agreed that further judicial review of the following Medicaid reimbursement appeal denials was warranted: for residential habilitation services in 2012 and 2013; for day habilitation services in 2013 and 2014; and, for respite services in 2014. The court also directed that a fact-finding hearing take place. The court's factual findings are as follows.
Medicaid provides health coverage to millions of Americans, including those with developmental disabilities. The program is funded jointly by the federal and state governments. The latter typically regulates the program—by reimbursing service providers, for example—according to federal requirements.
Under § 1915(c) of the Social Security Act, states are permitted to request waivers of certain federal requirements in order to create alternative care and treatment options. Medicaid Home and Community Based Services (HCBS) waivers afford states, like New York, the flexibility to develop and implement alternatives to placing Medicaid-eligible individuals in costlier institutions. The principal goal of the waiver system is to serve more people with a wider range of community-based services that are more individualized and less expensive.
HCBS waiver agreements have become the primary mechanism for states to provide Medicaid-funded, community-based, long-term care services to the developmentally disabled. The Social Security Act includes habilitation services and respite services as those that may be provided via HCBS waiver programs.
The HCBS waiver agreement most relevant to this litigation was executed in 2009. In it, the state agreed to regulate non-governmental agencies, like Petitioner, that provide residential habilitation services, day habilitation services and respite services to persons with developmental disabilities.
As previously noted, state policies, including those regarding costs and reimbursement, should be consistent with federal requirements. 14 CRR–NY 686.13(b)(ii)(d) provides that, "except where specific rules concerning allowability of costs are stated herein, or in Subpart 635–6 of this Title, the Medicare Provider Reimbursement Manual, commonly referred to as HIM–15 shall be used to determine the allowability of costs as to nature and amount."
HIM–15, § 2102.2, provides that administrative costs are to be included in costs related to patient care. HIM–15, § 2102.1, similarly provides that reasonable costs which, "take into account both direct and indirect costs of providers of services," are eligible for reimbursement and further makes clear that:
"It is the intent of the program that providers are reimbursed the actual costs of providing high quality care except where a particular institution's costs are found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization, and other relevant factors. Utilization, for this purpose, refers not to the provider's occupancy rate but rather to the manner in which the institution is used as determined by the characteristics of the patients treated."
Operational costs—including the salaries and benefits of direct support personnel, like nurses and case managers—comprise the lion's share of a service provider's budget. Administrative costs include the salaries and benefits of executive level personnel, like policymakers and supervisors. It is undisputed that Petitioner's administrative costs ranged between six-to-ten percent of its total budget, which was well below the state's fifteen percent cap.
In accordance with the 2009 HCBS waiver agreement, the amount of Medicaid-financed reimbursement was tied to the setting of a "rate." Under this system, the state furnished the service provider with a price or rate sheet, which identified reimbursement levels by categories for an upcoming fiscal year. Administrative costs were one such category and thus eligible for Medicaid-financed reimbursement.
The rate set forth the maximum amount of reimbursement an agency could receive in that category for that fiscal year. As such, it acted as a budget cap for the cost category as well as a budget planning device for the service provider.
The rate can also be understood as a cost for a unit of service provided to a developmentally disabled person. A service provider like Petitioner received revenue by billing the Medicaid Management Information System (MMIS), at the state set rate, contemporaneous to the delivery of the unit of service. In the event of year-end fiscal shortfalls—i.e. when the revenue received did not keep pace with the costs expended—a service provider could file an appeal for additional reimbursement.
Respondents heard categorical appeals—i.e. those based on the reimbursable rate for the particular category—during the first two years of the 2009 HSBC waiver agreement. A surplus/deficit analysis—which required the service provider to demonstrate a deficit in the particular category as well as an aggregate deficit—was conducted as part of the appeal process. According to JoAnne Howard, the OPWDD Director of Fiscal Reporting, a surplus in administration was recognized in the categorical appeal methodology but a deficit was not (Tr. pp. 28–29). Ms. Howard also testified that service providers could "definitely" be reimbursed for administrative costs (Tr. p. 22), but that, "it has "never been our policy to fund administration" (Tr. p. 92) and that administration is not recognized as an appeal category.
Effective July 1, 2011, categorical appeals were discontinued in favor of vacancy appeals. All of the appeals at issue were decided under the vacancy methodology.
Respondents' counsel advised the court that the methodology change was made through an amendment to the 2009 HCBS waiver agreement. When pressed to produce this purported amendment, he could not. Respondents eventually admitted that no such amendment existed and conceded that the change in appeal methodology was purely an internal policy determination, despite the fact that methodology changes are usually done through regulation (see, Tr. pp. 85–86).
Respondents declined to call the person chiefly responsible for the policy/methodology change (see, Tr. p. 122) but Ms. Howard offered testimony in this regard. Enhancing the ability of the OPWDD to make better budget projections, greater provider accountability and the creation of a more efficient and equitable system were the purported goals of the policy/methodology change (Tr. p. 38, 47). Respondents offered no evidence to demonstrate how, in fact, the policy/methodology change accomplished these goals. The proof suggested quite the opposite resulted, as yet another system—rational rate transformation, a/k/a rate rationalization—was implemented when the next scheduled HCBS waiver agreement was executed in 2014.
Under the vacancy methodology, the maximum amount the provider could bill for a fiscal year presupposed "full utilization" or 100% patient or resident occupancy. Ms. Howard stated that vacancy appeals looked at the loss of dollars to a service provider that were specifically related to not having full occupancy at a residence (Tr. p.35), but she eventually admitted that, "there was not a specific identification of the elements of the processing of a vacancy appeal" in the State Registry (Tr. p.91).
The proof made clear that vacancies—occasioned by patient transfers to other programs, for example—arose throughout the course of the fiscal year. Such vacancies often could not be filled quickly for a variety of reasons, including, ironically, bureaucratic red tape in the form of approval delays by the OPWDD. Consequently, the vacancies caused decreases in Petitioner's revenue as the fiscal year progressed.
The proof also established that administrative costs usually remain fixed, regardless of the occupancy rate. Thus, if the service provider budgeted and expended funds on administrative costs assuming full occupancy—as it often did in order to fulfill its obligation to furnish high quality services to the developmentally disabled—shortfalls would occur when revenues, due to increased vacancies, did not keep pace with costs.
Most of Petitioner's vacancy appeals were denied. Donna Cater, the DOH Deputy Director for the Division of Finance and Rule Setting, cited two principal reasons for the denials: (1) some of the appeals were improperly filed as categorical appeals and (2) the agency showed an operating surplus. While Ms. Howard claimed the state has never recognized administrative losses on appeal, regardless of the methodology, Ms. Cater claimed the state would allow for administrative loss so long as there was no operating surplus.
Ms. Cater conceded that the amount of shortfalls in administrative costs were viewed as essentially irrelevant so long as there was any surplus, no matter how small, in operating costs: "So, if you have an operating surplus of one dollar, we don't care if you have a million-dollar loss in your admin, we won't look at it because you have a one dollar operating surplus" (Tr. p. 121). Not surprisingly, CPA Terrence Phillips testified that the surplus/loss analysis used by OPWDD under the vacancy appeal methodology did not meet generally accepted accounting principles (Tr. p. 128).
In an apparent effort to explain why Petitioner's vacancy appeals for administrative losses were denied, Ms. Cater responded in the affirmative when asked, "Is that the way it's always been?" She attributed this to a "policy" given to her by Ms. Howard. (Tr. pp. 113, 121). As for Ms. Howard, she testified that, " administration is not allowable because the focus is on the individual and services. Vacancy administration is not recognized in the appeal process" (Tr. p. 35).
Throughout her testimony, Ms. Howard reiterated that appeals for administrative shortfalls were never permitted, regardless of the methodology used. In contrast, Denise Jones—Petitioner's former Chief Financial Officer and present Chief Executive Officer—testified that Petitioner was "always made whole" when it filed its appeals for administrative losses under the categorical methodology (Tr. p.196). Ms. Jones also testified that one vacancy appeal was, in fact, granted for administrative costs under the vacancy methodology (Tr. pp. 209–210).
Petitioner also offered testimony on the relationship between vacancies and administrative costs.
Mr. Phillips testified that Petitioner transferred "a lot of people" into alternative programs, which saved the state "a significant amount of money." Those transfers also created vacancies, which reduced the Petitioner's incoming revenues. The Petitioner's administrative costs, however, remained the same. Between January 2011 and December 2014, the Petitioner incurred total deficits exceeding eleven million dollars (Tr. pp. 148–153). With respect to the appeals at issue, the purported deficit is approximately $2,241,414.00. The practical effect of Respondents appeal denials has been to bring the Petitioner the brink of financial insolvency.
Joseph Kovler, a management consultant for organizations that serve those with developmental disabilities, explained that Respondents set the rate at the beginning of the fiscal year with the expectation that Petitioner provide full staffing, including administrative staffing, as if there would be full occupancy. Petitioner provided such staffing in good faith and incurred the costs associated with it. Shortfalls were created when revenues did not keep up with the costs because of vacancies.
Mr. Kovler also testified that Petitioner was not seeking "additional" compensation or monies in excess of the rate. Rather, what Petitioner sought was that which was promised to them. In other words, Petitioner's appeals sought the full measure or extent of the rate—which, as previously noted, was tied to 100% occupancy or full utilization—as if there had been no vacancies for that fiscal year (Tr. pp. 181–182).
It is well-settled that the DOH has broad power to regulate in the public interest. Under the Public Health Law, the Legislature has specifically authorized the DOH to regulate the financial assistance granted by the state in connection with all public health activities and to expend funds made available for public health purposes (see , Agencies for Children's Therapy Services, Inc. v. New York State Department of Health , 136 AD3d 122, 128 ). This authority includes the setting of maximum Medicaid reimbursement rates (see , Sigety v. Ingraham , 29 NY2d 110 ).
When a state agency makes a determination pursuant to a regulation that it promulgated, deference is afforded to that agency's interpretive approach unless it is irrational or unreasonable. Petitioner bears a heavy burden in challenging a Medicaid reimbursement determination and the same must be upheld if it has a rational basis ( Sisters of Charity Hospital v. Daines , 84 AD3d 1757 ).
The promulgating agency's interpretation may not be adjudged irrational simply because other rational constructions of the regulatory provision exist. However, an agency's interpretation of one of its own regulations is not entitled to deference if that interpretation contradicts the plain language of the regulation or is inconsistent with its underlying purposes (see , Benali v. New York State Department of Environmental Conservation , 150 AD3d 986, 988 ; County of Oneida v. Zucker , 147 AD3d 1338 ; Entergy Nuclear Indian Point v. New York State Department of State , 130 AD3d 1190, 1192 ).
Respondents initially suggested its appeal methodology changes were done with federal approval, as there was an amendment to that effect in the 2009 HCBS waiver agreement. In fact, no such amendment ever existed. Instead, the changes—which effectively moved the goalposts in the midst of the agreement—were implemented via an internal policy. Respondents declined to call the person or persons who crafted the policy change. Respondent also failed to factually demonstrate how the changes in appeal methodology accomplished greater efficiency (other than to save the state a significant amount of money) or equity.
Respondents' principal explanation for denying administrative expenses (in contrast to operating expenses) in vacancy appeals, was the claim that they have never been appealable. Setting aside the question of whether such a claim is credible, justifying the denial of reimbursement for such expenses based upon the observation that it has ‘always been done that way’ begs the question of why such denials are reasonable. Similarly, Respondents also failed to reveal the rationale for linking static administrative costs to fluctuating occupancy rates.
Although the court recognizes that Petitioner bears the burden of persuasion, the significant shortcomings and contradictions in Respondents' proof strongly suggest that its policies and/or methodology changes were little more than bureaucratic fiat. More importantly, the absence of persuasive testimony offered by Respondents amplifies Petitioner's most compelling argument as to why Respondents acted irrationally: the policy of denying actual and reasonable administrative costs on appeal is in conflict with state regulation.
New York State regulations clearly provide that HIM–15 shall be used to determine the nature and amount of a service provider's allowable costs. HIM–15, in turn, requires that a service provider's actual and reasonable administrative costs are to be covered by states, like New York, participating in HCBS waiver programs.
HIM–15 also provides instruction as to when reimbursement for administrative costs should be denied: when the service provider is found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization, and other relevant factors. The term "utilization" refers to the manner in which the institution is used, as determined by the characteristics of the patients treated, and not the occupancy rate.
Respondents did not find Petitioner's costs to be substantially out of line with other similarly situated institutions. Indeed, it is undisputed that Petitioner kept its administrative costs well below the state cap. Nor did Respondents consider Petitioner's actual and reasonable administrative costs, up to the rate, on appeal. Instead, Respondents perfunctorily denied the appeals based upon unexplained policy at odds with state regulation and federal requirements.
Respondents policy of denying Medicaid reimbursement to service providers for their actual and reasonable administrative costs, when those costs remain within the state-defined rate, contradicts the plain language of state regulation and is inconsistent with its underlying purpose. It is therefore irrational.
Petitioner has demonstrated that Respondents' denial of Petitioner's Medicaid reimbursement appeals—for residential habilitation services in 2012 and 2013; for day habilitation services in 2013 and 2014; and, for respite services in 2014—was made in an arbitrary and capricious manner. The determinations were unlawful and must be set aside.
The relief requested in the Petition is hereby granted. Respondents would be well-advised to thoughtfully consider the Petitioner's actual and reasonable administrative costs, up to the full measure of the rate for that fiscal year, should it choose to re-file its appeals.
The foregoing shall constitute the decision and order of this court.