Cuppett & Weeks Nursing Home, Inc. v. Department of Health & Mental Hygiene

Couch, J., delivered the opinion of the Court. The appellant, Cuppett & Weeks Nursing Home, Inc., sought reimbursement for certain expenses it had incurred as a participant in Maryland’s Medicaid Program. * 1 In administrative proceedings the State Department of Health and Mental Hygiene (the Department) denied the requested reimbursement, which denial was subsequently affirmed by the Department’s Board of Review. An appeal was thereafter taken by Cuppett & Weeks to the Circuit Court for Garrett County, which sustained the decision of the Board of Review. This appeal ensued.

For the reasons set forth in this opinion, we hold that the circuit court was not in error in sustaining the decision of the Board of Review. Thus, we affirm the Order of the circuit court. The Facts By a deed dated September 18, 1959 certain real property in Garrett County was transferred to Graham Weeks, his wife, Mary Weeks, and his mother, Bessie Cuppett. These persons established the Cuppett & Weeks Nursing Home Partnership (the Partnership) in 1960, and operated the nursing home facility which improved the real property.

At ²⁰¹ that time Bessie Cuppett had a fifty percent interest in the Partnership; Graham and Mary Weeks together shared the remaining fifty percent interest. Based on the advice of their accountant, the partners in 1967 formed the Cuppett & Weeks Nursing Home, Inc. (the Corporation). The Corporation managed the nursing home, and leased that facility from the Partnership. The original incorporators owned stock in the following amounts: Bessie Cuppett 19 shares Graham Weeks 21 shares Robert Weeks 19 shares In 1969, Robert Weeks, another son of Bessie Cuppett and the brother of Graham Weeks, became a member of the Partnership.

According to the terms of an agreement executed on April 11, 1969 the capital was divided in the following proportions: Bessie Cuppett $255,849.34 45.62% Graham Weeks $274,979.96 49.02% Robert Weeks $30,074.37 5.36% The agreement further specified that the partners had equal rights in the management of the Partnership business. In 1971 Graham Weeks withdrew from the Corporation by selling his stock. These shares were bought by other members of the family. Stock was obtained by Thomas Cuppett, another son of Bessie Cuppett; Frances Birge, daughter of Bessie Cuppett; and Jerry Meyers, husband of Bessie Cuppett’s daughter, Carolyn Meyers.

At this time Graham Weeks transferred to Robert Weeks the role of Corporation Administrator. After the withdrawal of Graham Weeks, and following additional transactions, ownership of the corporate stock was divided among six persons, as follows: Bessie F. Cuppett 19 shares 32% Robert Weeks 8 shares 13.56% Thom,as Cuppett 8 shares 13.56% ²⁰² James Cuppett 8 shares 13.56% Frances Birge 8 shares 13.56% Jerry Meyers 8 shares 13.56% 2 The Corporation continued to lease the facility and equipment from the Partnership. In 1971 a written lease covering the period July 1,1971 through June 30,1976 was executed, specifying the rental at $10,155-43 per month for the 155 bed facility, or approximately $721 per bed annually. An expert appraiser engaged by the Corporation in November of 1971, appraised the fair rental value of the facility at $600 per bed annually.

Effective in March of 1974, the total rental payment was increased to $10,409.31 per month. Bessie Cuppett signed the appropriate addendum to the lease on behalf of the lessee Corporation. Graham Weeks signed the addendum on behalf of the lessor Partnership. As a "provider of service,” certified to care for patients under the Medicaid program, the Corporation received interim reimbursement for the cost of providing care for Medicaid recipients.

Among the expenses obtained by the Corporation as reimbursement were the following rental expenses paid to the Partnership for the years 1970 through 1975: 1970 $111,000.00 1971 $102,000.00 1972 $106,415.00 1973 $121,865.00 1974 $122,881.00 1975 $124,912.00 Based on audits conducted by a private contractor, the Hospital Cost Analysis Service, Inc. (HCAS), the Department determined that the Corporation was not entitled to the amounts sought. Specifically, the HCAS reviewed the lease agreement, the tax returns and the records of the Part ²⁰³ nership and the Corporation, and then determined that the Partnership and the Corporation were "related organizations” within the meaning of the applicable Medicaid regulations. 3 By this determination, the Corporation was deemed entitled to reimbursement only for the ownership costs incurred by the Partnership, rather than for the rental expenses as submitted to the Department. These ownership costs included depreciation, amortization of interest incurred during construction, mortgage interest, interest on demand notes, property taxes, insurance and accounting expenses, repairs, and miscellaneous interests, amounting to: 1970 $60,875.00 1971 $57,893.00 1972 $66,847.00 1973 $67,782.00 1974 $65,226.00 1975 $62,239.00 The disallowance of the submitted rental expense meant that the Corporation owed the State the difference between the rent paid to the Partnership and the Partnership’s ownership costs. To arrange a final cost settlement the Department sought the amount of the alleged overpayment, and the Corporation sought full reimbursement of the submitted costs.

An administrative hearing on the controversy was held initially on May 20, 1977 before a hearing officer on behalf of the Department and then was resumed and concluded on July 8, 1977 before the same presiding officer. Based upon his proposed findings of fact and conclusions of law, the Secretary of Health and Mental Hygiene on January 27, 1978 entered an order which affirmed the determination of the Department’s Medical Care Programs unit that the Corporation and the Partnership were related organizations. ²⁰⁴ The Board of Review of the Department of Health and Mental Hygiene, after a hearing on June 1,1978, entered an order on August 10, 1978 which affirmed the decision of the Secretary. By Petition and Order of Appeal filed in the Circuit Court for Garrett County, the Corporation sought judicial review of the ruling by the Department’s Board of Review. After submission of memoranda setting forth the respective positions of the parties, and oral argument of counsel, the circuit court on October 17, 1980 rendered an Opinion and Order which sustained the decision of the Board of Review.

From the Order of October 17, 1980, the Corporation appeals, asking: I. Whether the Corporation and the Partnership are correctly considered as "related organizations” within the meaning of the applicable regulations of the Maryland Medicaid Program?

II

Whether the Medicaid regulations which prohibit reimbursement of any rental expense incurred by a provider to a related organization create an irrebuttable presumption in violation of constitutional due process of law and equal protection of the laws or are repugnant to the statutory purpose of reimbursing providers for their actual costs?

III

Whether the doctrine of equitable estoppel or the corollary doctrine of laches are applicable to preclude recovery by the State of monies paid to Appellant as reimbursement of rental expenses? From our examination of the record and the applicable law we are persuaded that the Corporation and the Partnership were properly determined to be "related organizations,” that the Medicaid regulations are neither unconstitutional nor repugnant to any statutory purpose, and that the equitable doctrines do not apply to the present case. ²⁰⁵ The Law and its Application The Department is authorized by statute to "establish rules and regulations for the reimbursement of providers under the Maryland Medical Assistance Program”, Md. Ann. Code art. 43, § 42 B. Pursuant to this grant of authority, the Department’s Medicaid regulations expressly adopt the reimbursement principles of the Medicare program: Allowable costs shall be determined based upon Medicare publications, entitled Health Insurance Regulations (HIRM-1) and Provider Reimbursement Manual (HIM-15) unless otherwise specified by these regulations. COMAR 10.09.10.09A (1) (a). Included in these regulations governing allowable costs is the related organizations regulation at issue in this case.

The regulation