Community Clinic, Inc. v. Department of Health & Mental Hygiene

RODOWSKY, J. In this judicial review of an administrative decision, the appellants, two medical clinics, are aggrieved by the partial disallowance by the appellee, Maryland Department of Health and Mental Hygiene (DHMH), of the appellants’ claims for reimbursement of costs under the Maryland Medical Assistance Program (Medicaid or the Program). 1 See Maryland Code (2000, 2005 RepLVol.), §§ 15-101(h) and 15-102 of the Health-General Article (HG). The disallowance was based upon DHMH’s application of its regulation establishing a monetary cap on a class of costs included in appellants’ requests for reimbursement. Appellants contend that the Maryland regulation does not comply with governing federal law. Theoretically, there are four possible outcomes: (1) the regulation is invalid in any application, (2) the regulation is invalid as applied in this case, (3) the regulation is valid as applied in this case, and (4) the regulation is valid in all applications.

As explained below, we shall hold that the regulation was validly applied in the instant matter, thereby upholding the DHMH decision. The appellants are federally-qualified health centers (FQHCs). 2 Appellant, Community Clinic, Inc. (Community or ⁵³⁰ CCI), operates in Montgomery County; 3 appellant, People’s Community Health Center, Inc. (People’s), operates in Baltimore City and northern Anne Arundel County. The fiscal years (July 1-June 30) and amounts of disallowances involved are: CCI: 1996-$108,370; 1997-$123,559; 1998-$32,875; and 1999-$21,624; People’s: 1997-$62,612 and 1998-$6,939. The four CCI cases in the Office of Administrative Hearings (OAH) were respectively numbered DHMH-MCP-13200000011, 13-200000014, 13-200000015, and 13-1200100037.

In the OAH, the claims by People’s for the years 1997 and 1998 were one appeal, numbered DHMH-MCP-13200000012. 4 General Legal Background States that elect to participate in Medicaid, as did Maryland, are required to submit to the U.S. Department of Health and Human Services a plan detailing how the state will expend federal funds. 42 U.S.C. § 1396a (1994). 5 That statute, entitled, “State plans for medical assistance,” provided in relevant part: “(a) Contents “A State plan for medical assistance must— “(13) provide— ⁵³¹ “(E) for payment for services ... under the plan of 100 percent of costs which are reasonable and related to the cost of furnishing such services or based on such other tests of reasonableness, as the Secretary prescribes in regulations ... or, in the case of services to which those regulations do not apply, on the same methodology used under section 1395Í (a)(3) [relating to Medicare] of this title[.]” Reasonable, and necessary and proper, costs were defined in 42 C.F.R. § 413.9 (1996) as follows: “(b) Definitions — (1) Reasonable cost. Reasonable cost of any services must be determined in accordance with regulations establishing the method or methods to be used, and the items to be included. The regulations in this part take into account both direct and indirect costs of providers of services. The objective is that under the methods of determining costs, the costs with respect to individuals covered by the program will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by the program.

These regulations also provide for the making of suitable retroactive adjustments after the provider has submitted fiscal and statistical reports. The retroactive adjustment will represent the difference between the amount received by the provider during the year for covered services from both Medicare and the beneficiaries and the amount determined in accordance with an accepted method of cost apportionment to be the actual cost of services furnished to beneficiaries during the year. “(2) Necessary and proper costs. Necessary and proper costs are costs that are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs that are common and accepted occurrences in the field of the provider’s activity.” As part of its Program, Maryland adopted regulations for FQHCs. 18 Md. R. Issue 7 at 783 et seq.

(Apr. 5, 1991); 18 Md. R., Issue 13 at 1482 (June 28, 1991). The regulation, ⁵³² entitled, “Reimbursement Principles for FQHC Services Rendered Before and Including June 30, 1999,” is currently codified in COMAR 10.09.08.05.C. As relevant to the issue before us, that regulation provides that “federally qualified health centers shall be paid 100 percent of their reasonable allowable costs, subject to the limitations contained in § C(4)-(7) of this regulation, that are related to the provision of covered services.” Reimbursement of FQHCs is on a per visit basis. Reimbursement during a fiscal year is based on an interim per visit rate, with a final per visit rate determined for the entire year. § C(4)(a), (b), and (c). The regulation further requires that an FQHC’s costs be divided into four categories, called “centers.” These are general service costs, primary care services costs, dental services costs, if applicable, and non-reimbursable costs. § C(4)(e).

The instant matter concerns the “[gjeneral service cost center” which “is composed of those costs associated with the depreciation of the facility’s building or buildings and equipment, the operation of the plant, the administration and management of the facility, medical records, and those administrative costs associated with pharmacy and EPSDT services which are not reimbursed under a different payment methodology[.r § C(4)(e)(i). The parties have adopted “administrative costs” as the shorthand reference to this cost center. The regulation distinguishes between urban and rural clinics. § C(5)(a) and (b). Appellants’ clinics are classified as urban.

The disallowances at issue here result from the application of COMAR 10.09.08.05.C(5)(d)(i) (the Cap), which in relevant part provides: “(d) Within each area a rate shall be developed for primary care ... using the following method: “(i) Based on the provider’s cost report for the fiscal year end which falls in the calendar year immediately preceding the year in which the rate year begins and other available relevant data, calculate a per visit rate for primary care ⁵³³ services.... In calculating these rates, the amount of general service cost center costs that are eligible for reimbursement is the lesser of the allowable general service costs shown on the cost report or the amount that results from, multiplying the provider’s total adjusted costs by 33 1/3 percent. ” (Emphasis added). OAH Proceedings The Secretary of DHMH referred appellants’ appeal of the disallowances to OAH in order to have an administrative law judge (ALJ) take testimony and make a recommended decision. See COMAR 10.01.03.07.

Each of the parties moved for a summary decision before the ALJ. In support of its motions, DHMH furnished the materials described below. I. A letter dated May 8, 1995, from the U.S. Department of Health and Human Services, Health Care Financing Administration (HCFA) (now the Centers for Medicare and Medicaid Service) to State Medical Directors, responding to “numerous inquiries ... concerning the application of limits on the payment of [FQHCs].” The federal administrator said in part, “[T]he State agency must: 1) determine and assure its system is based upon, and covers, the reasonable costs of providing FQHC (core) and other ambulatory services to Medicaid recipients))]” The letter also said that “the payment requirements [in the federal Medicaid statute and in the State Medicaid Manual] do not, in any way, preclude States (when determining reasonable cost) from establishing limits on the direct and indirect costs of furnishing covered services under the FQHC benefit. Limits on indirect costs are permissible as long as the State appropriately defines and identifies these costs.” II.

A copy of 42 C.F.R. § 405.2468 (d)(1), which recognizes that costs in excess of guideline amounts are not included in costs allowable for reimbursement “unless the clinic or center provides reasonable justification[.]” 42 C.F.R. § 405.2468 is ⁵³⁴ included in a subpart of the HCFA regulations dealing with FQHCs.

III

A copy of § 6303 of the State Medicaid Manual which directs: “Pay 100 percent of the costs which are reasonable.... Irrespective of the type of payment method utilized, the State must determine and assure that the payments are based upon, and cover, the reasonable costs of providing services to Medicaid beneficiaries. Such costs cannot exceed the reasonable costs as determined by the applicable Medicare cost reimbursement principles set forth in 42 C.F.R. Part 413.” IV. An affidavit by a DHMH official affirming that, in 1990, a committee composed of the Maryland Medicaid staff and representatives of FQHCs developed a cost report and that, as part of that process, the Medicaid staff proposed the Cap.

V. A copy of the Maryland Medicaid Plan, as proposed, together with correspondence relating to its ultimate federal approval in September 1991.

VI

An affidavit by a DHMH official stating that the Medicaid programs of five other states “have included in their State plans caps on administrative costs,” at levels of 30 percent and, in one instance, 40 percent of total eligible costs. In théir motions for summary decision, appellants relied on the federal requirement for 100 percent reimbursement of reasonable, allowable costs and on their cost reports. They argued: “Federal cost principles applicable to FQHC costs under Medicaid do not allow a State to adopt an administrative cap such as Maryland’s. The findings called for in HCFA’s May 8, 1995 policy guidance to State Medicaid Directors were never made (and the State therefore cannot make the requisite assurances).” The ALJ denied all of the motions.

She reasoned, in part, that the review of Maryland’s plan by HCFA, which she ⁵³⁵ characterized as “proforma” was not dispositive, on summary decision, that the Cap complied with the federal reasonableness requirement. With respect to the appellants’ motions, the ALJ concluded that they had “to prove by a preponderance of the evidence that the cap, as applied, results in the FQHC not being reimbursed 100 percent of the costs which are reasonable and related to the cost of furnishing services to its Medical Assistance clients.” The claims for reimbursement went to a hearing on the merits before the ALJ. Appellants produced witnesses who described the preparation of their cost reports and the oversight rendered by their auditors and boards of directors. Appellants also explained the salaries of their highest paid employees by reference to the difficulty faced in obtaining qualified people.

DHMH did not present any testimony or documentary evidence. Instead, it asked the ALJ to take judicial notice of certain regulations and of sections of the Medicaid Provider Reimbursement Manual. Thereupon, DHMH moved for the ALJ “to dismiss” appellants’ appeals on the merits. In a written opinion, she denied DHMH’s motion to dismiss.

The ALJ made findings of fact in each of the appeals. In the CCI case, the principal findings are set forth below (transcript references omitted): “6. The largest part of Community’s administrative costs is its salaries and expenses related to operating its centers (rent and utilities). “7. Each Community center has a patient waiting room which is the largest space in each of its centers---- “8.

Patient waiting rooms, as well as patient bathrooms, medical records rooms and the doctor’s offices (but not examining rooms) were all classified under administrative costs (and therefore subject to the cap on administrative expenses) by DHMH’s designee. “9. Salaries are developed and reviewed by the senior staff at Community (Executive Director, Medical Director, Director of Operations, Director of Finance). ⁵³⁶ The salaries are then reviewed and approved by the Board of Directors. “10. The position of Medical Director at Community became open three times during the cost years at issue. At one time the position of Medical Director was open for eight months. “11.

A background in public health is preferred for the position of Medical Director. “12. One candidate for Medical Director during the cost years at issue rejected Community’s offer of the position due to the salary being offered. Approximately six other individuals were not considered for the position after salary was discussed as part of the interviewing process. “13. The Executive Director tries to gauge what salaries are being offered by other non-profit health care centers by talking with his peers.

The Executive Director is also aware of salary reviews conducted by the for-profit sector (by groups such as Medical Group Management Association) but these reviews are not a good indication of the salaries in the nonprofit sector. “14. Community seeks to employ physicians who are bilingual but is not always successful because bilingual physicians can command a higher salary than Community can afford to pay. “15. Physicians have left Community for positions with Kaiser or as an associate in a private practice because those positions provide better benefits and a higher salary. “16. The position of Director of Finance became open two times during the cost years at issue.

Five candidates for Director of Finance rejected Community’s offer of the position due to the salary being offered. “17. Community formerly employed nurse managers but no longer employs nurses, as it can not afford to pay the higher salaries. Instead, Community relies on ⁵³⁷ medical assistants who work under the direct supervision of a physician and are trained in phlebotomy, taking vital signs, and administering immunizations. “18. A national model used by non-profit health centers employs two medical assistants per physician, a patient representative (receptionist) and a manager.

Community has at least one physician at each center but if a center has more than one physician the center does not increase the number of medical assistants. “19. The cost reports submitted by Community for the years in question are prepared from Community’s Financial Statement which is based on its records (salary records, invoices and expense records, etc.) which are maintained by Community using the accrual basis of accounting. “20. These records (salary records, invoices and expense records) are also used by Community to produce an audited Financial Statement. “21. An A-133 Report is required from all State, local governments and non-profit organizations which expend more than $300,000 per year in federal funding; these audits fall within the purview of the Office of Budget and Management. “22.

Because Community expends more than $300,000 in federal funding, it must retain the services of an outside auditor to prepare the A-133 Report. “23. The outside auditor uses Community’s Financial Statement in preparing the A-133 Report. In preparing the A-133 Report, the outside auditor does not review Medicaid methodology regulations or consider Medicare cost reimbursement principles. Medicare and Medicaid payments are not considered Federal awards subject to an A-133 report.” In the People’s case, the ALJ found facts as follows (transcript references omitted): ⁵³⁸ “3.

The Federal Bureau of Primary Health Care (BPHC) issues program expectations which are a series of guidelines that People’s Board and staff must follow and a series of required services that must be provided. “4. Every three years People’s is evaluated by the BPHC, which sends three outside experts to review People’s performance in the areas of administrative, clinical, fiscal and MIS operations. This review is called the Primary Care Effectiveness Review. “5. As part of the Primary Care Effectiveness Review, People’s must prove to BPHC how it sets its salary structure. “6.

People’s performs salary comparability studies using data from the Maryland Association of Nonprofits and the National Association of Community Health Centers. The Executive Director has studied every position at People’s (including file clerks) and also obtained information on salaries by talking with her peers. “7. The Executive Director and the Chief Financial Officer gather data concerning salaries and reviews it with the personnel committee of the Board of Directors which makes the final decision on the salary structure. “8. The Board of Directors reviews and approves People’s budget on an annual basis. “9.

People’s federal grant documents must include a global budget which shows every revenue source and every expense, including Medicaid revenue and anticipated Medicaid revenue. “10. Two of People’s health centers are located in high crime areas in Baltimore City. “11. People’s did not have to pay rent until 1999 when it acquired a practice in the Govans Community. ⁵³⁹ “12. The largest part of People’s administrative costs is its salaries.

The second largest expense is the cost of operating the buildings.” The ALJ’s findings Nos. 13 through 17 in the People’s appeal are identical with findings Nos. 19 through 23 in the CCI appeal. In her conclusions of law, the ALJ placed considerable emphasis on the discussion of reasonable costs in the Medicare Provider Reimbursement Manual, Part I, § 2102.1 by quoting, inter alia, the following: “ Tt is the intent of the program that providers will be reimbursed the actual costs of providing high quality care, regardless of how widely they may vary from provider to provider 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. “ ‘[Reasonable costs] do not exceed what a prudent and cost-conscious buyer pays for a given item or service[.]’ ” Applying the above-quoted standards, the ALJ found, in each appeal, that the appellant had shown that its costs were reasonable, because the Clinic was subjected to both internal and external checks on its fiscal practices, and there was no evidence of self-dealing or of any incentive to pay excessive salaries or rent. The ALJ reasoned, in part, that “[t]here was no evidence presented, either through cross examination of the witnesses on behalf of the Appellant or through documents or witnesses for DHMH, that any of [appellants’] costs were ‘substantially out of line.’ “ In each case, the ALJ concluded: “DHMH provided no evidence that it analyzed comparable not-for-profit health centers (or for-profit institutions) in setting its mathematical formula at 33 and 1/3 percent. Despite DHMH’s assertions that the purpose of the cap is to promote efficiency, I am left with the inescapable conclusion that if [the FQHC] somehow managed to cut its ⁵⁴⁰ administrative costs in half, the administrative cap would be nevertheless be [sic] applied exactly as it was in the cost reports at issue in this appeal.

The application of a strict mathematical formula, without any analysis of what constitutes an efficiently operated health center and how the cap achieves that result, is inconsistent with the reasonableness requirements of Federal law. [The FQHC] has persuasively demonstrated a nexus between the cap and not being reimbursed 100 percent of the costs that are reasonable and related to the cost of furnishing services to its Medical Assistance clients. Therefore, Maryland’s regulation providing for the administrative cap, as applied in this case[] conflicts with Federal law and is arbitrary and