Department of Health & Mental Hygiene v. Riverview Nursing Centre, Inc.

HARRELL, Judge. This appeal arose from a decision of the Department of Health and Mental Hygiene’s (the Department) to disallow a portion of appellee’s claimed Medicaid reimbursement for nursing home services in the fiscal periods ending 30 June 1989 and 31 December 1989. Pursuant to Md.Code Ann., Health-Gen. § 15-108 (1994 repl. vol.; 1994 Supp.), appellee, Riverview Nursing Centre, Inc. (Riverview), appealed the Department’s decision to the Nursing Home Appeal Board (NHAB). 1 The NHAB affirmed the Department’s decision. Appellee then appealed to the Circuit Court for Baltimore County.

The circuit court reversed, and the Department filed a timely appeal to this Court, arguing that: 1. The Department and the NHAB properly interpreted COMAR 10.09.11.10B and I to deny reimbursement for interest earned by the facilities on its invested funds. 2. The trial court erred in reversing the Department’s interpretation and application of COMAR. ⁵⁹⁸ FACTS Riverview operates a nursing home located in Baltimore County, Maryland. Riverview participates in the Medical Assistance Program of the Department of Health and Mental Hygiene of the State of Maryland.

The Medical Assistance Program (the Program), commonly referred to as Medicaid, is a state program, partially funded by the federal government, which reimburses medical providers, including nursing homes, for medical care rendered to persons who are indigent or medically indigent. 42 U.S.C. § 1396 et seq. Title XIX of the Social Security Act, which created and governs the Medicaid Program, requires each participating state to adopt a plan for administration of medical assistance for the needy, and to designate an agency responsible for administration of the plan. 42 U.S.C. § 1396 et seq. In Maryland, the Department is the designated agency and, pursuant to Md.Code Ann., Health-Gen. § 15-103 (1994 repl. vol.; 1994 Supp.), has a statutory responsibility to adopt rules and regulations for the reimbursement of providers under the Program. Maryland’s federally approved Medicaid reimbursement plan is contained in COMAR 10.09.il. 2 Where COMAR does not specify otherwise, federal Medicare principles of reimbursement, contained in the Medicaid Act, Provider Reimbursement Manual (PRM) 3 , and Medicare regulations control. 4 ⁵⁹⁹ On 1 January 1983, Maryland instituted a new and innovative Medicaid reimbursement plan.

The previous reimbursement scheme was a retrospective payment system based primarily upon Medicare principles of reimbursement. In addition, there was no payment for return on equity, and providers were compensated for depreciation expense, or in the case of leased facilities, rent. See, Roger C. Lipitz and Herbert P. Weiss, Dissecting Maryland’s Medicaid System, Contemporary LTC (Long Term Care), February 1985, at 41. The new and continuing reimbursement system, set forth in COMAR 10.09.11, pays nursing homes a per diem rate for each Medicaid patient receiving services.

The per diem rate is calculated as a composite of four separate cost centers: (1) administrative and routine costs, (2) direct nursing care costs, (3) other patient care costs, and (4) capital costs. COMAR 10.09.11.07. This case arises over a dispute regarding the Department’s method of calculating reimbursement in the capital cost center. Under COMAR 10.09.11.10C, the final per diem costs that are reported in the capital cost center include: (1) property taxes; (2) property insurance; (3) mortgage interest; (4) net capital value rental and (5) central office capital costs.

Under Maryland’s reimbursement system, providers who operate leased facilities, such as Riverview, are not reimbursed for their rent. Instead, they are reimbursed for the physical use of their facilities through the net capital value rental (NCVR) component of the capital cost center. 5 To calculate the NCVR, COMAR 10.09.11.101 sets forth the formula whereby a mortgage debt and interest on that debt are imputed for leased facilities. ⁶⁰⁰ At issue in this case is the method by which the Department establishes a nursing home’s net interest expenses in the capital cost center. Under the Department’s system of reimbursement, the determination of a facility’s allowable interest expense is a two step process that requires the application of both COMAR 10.09.11.101 and 42 C.F.R. § 413.153 (b)(2)(iii). COMAR 10.09.11.101 specifies how an allowable imputed mortgage interest expense is established for a non-investor operated nursing home.

Next, to determine the final reimbursable interest expense, the Department applies the Medicare interest “offset rule” to deduct earned interest income from the imputed mortgage interest. The offset rule, set forth in 42 C.F.R. § 413.153 (b)(2)(iii) (1994), provides that interest expense generally must be “[r]educed by investment income.” 6 The primary purpose of the interest “offset rule” is to prevent the reimbursement of unnecessary borrowing costs. See, P.R.M. § 202.2. Under this formula, the Department maintains that it appropriately reduced Riverview’s imputed interest expense by its earned investment interest income.

Appellee contends, however, that (1) Medicare principles of reimbursement prohibit the Department from applying the interest offset rule to its imputed (“imaginary” or “phantom”) interest costs; (2) the imputed interest is merely a surrogate for rent and interest income cannot be set off against rent; and finally, (3) the application of the interest offset rule to non-investor operated facilities does not further Program purposes. In response, the Department argues that although COMAR regulations do not explicitly call for application of the interest offset rule, the offset of interest income against interest expense is required by Maryland’s Medicaid regulations, and, furthermore, the interest offset rule has been consistently applied to all provid ⁶⁰¹ ers that rent their facilities since the inception of the State’s current reimbursement system in 1983. Standard of Review The limitations on the authority of a court reviewing the final order of an administrative agency are substantial. This Court’s role in reviewing an administrative decision “is precisely the same as that of the circuit court.” Department of Health and Mental Hygiene v. Shrieves, 100 Md.App. 283, 303-04 , 641 A.2d 899, 909 (1994) (citation omitted).

In Fort Washington Care Ctr. Ltd. Partnership v. Department, 80 Md.App. 205 , 560 A.2d 613 (1989), we explained that the standard of review of a NHAB decision, as set forth in the Maryland Administrative Procedure Act, Md.Code Ann., State Gov’t § 10-222(h) (1993 repl. vol; 1994 Supp.), “mandates that the ruling by the board be affirmed if supported by competent, material, and substantial evidence.” Id. at 213, 560 A.2d at 617 . 7 The standard of review to be applied depends on the nature of the agency finding being reviewed. Gray v. Anne Arundel Co., 73 Md.App. 301, 308 , 533 A.2d 1325, 1329 (1987). In Caucus Distributors, Inc. v. Maryland Securities Comm’r, 320 Md. 313 , 577 A.2d 783, 788 (1990), the Court described the ⁶⁰² review process under § 10-215(g), the predecessor to § 10-222(h), as follows: In determining whether an agency’s decision is supported by substantial evidence, we are mindful that substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.

In applying the substantial evidence test, we must not substitute our judgment for the expertise of the agency, for the test is a deferential one, requiring “restrained and disciplined judicial judgment so as not to interfere with the agency’s factual conclusions.” This deference applies not only to agency fact-finding, but to the drawing of inferences from the facts as well. When, however, the agency’s decision is predicated solely on an error of law, no deference is appropriate and the reviewing court may substitute its judgment for that of the agency. Id. at 323-24, 577 A.2d at 788 (citations omitted). To the extent the issues on appeal turn on the correctness of an agency’s findings of fact, such findings must be reviewed under the substantial evidence test.

State Admin. Bd. of Election Laws v. Billhimer, 314 Md. 46, 58-59 , 548 A.2d 819, 825 (1988), cert. denied, 490 U.S. 1007 , 109 S.Ct. 1644 , 104 L.Ed.2d 159 (1989). In contrast to factual challenges, the substituted judgment standard is used with respect to a claim that the agency erred as a matter of law. Liberty Nursing Center, Inc. v. Department of Health and Mental Hygiene, 330 Md. 433 , 624 A.2d 941, 946 (1993); Department of Health and Mental Hygiene v. Reeders Memorial Home, Inc., 86 Md.App. 447, 452 , 586 A.2d 1295, 1297 (1991); Perini Services, Inc. v. Maryland Health Resources Planning, Comm’n, 67 Md.App. 189, 201 , 506 A.2d 1207, 1213 (1986); cert. denied, 307 Md. 261 , 513 A.2d 314 (1986).

A challenge as to a regulatory interpretation is, of course, a legal issue. Perini Services, Inc., 67 Md.App. at 201 , 506 A.2d at 1213 . Upon appellate review, however, courts give special weight to an agency’s interpretation of its own regulations. As this Court explained: ⁶⁰³ [C]ourts bestow special favor on an agency’s interpretation of its own regulation.

Recognizing an agency’s superior ability to understand its own rules and regulations, a “court should not substitute its judgment for the expertise of those persons who constitute the administrative agency from which the appeal is taken.” Reeders Memorial Home, 86 Md.App. 447, 453 , 586 A.2d 1295, 1297 (1991) (citing Bulluck v. Pelham Wood Apartments, 283 Md. 505, 511-13 , 390 A.2d 1119, 1124 (1978)). In particular, we have acknowledged the expertise of the NHAB as an independent body whose members are “knowledgeable in Medicare and Medicaid reimbursement principles” and whose purpose is to decide issues of reimbursement. Reeders Memorial Home, 86 Md.App. at 453 , 586 A.2d at 1297-98 ; Fort Washington Care Ctr. Ltd. Partnership, 80 Md.App. at 213 , 560 A.2d at 613 .

This court has previously reviewed the Department’s system of Medicaid reimbursement. As in the case now before us, Fort Washington Care Ctr. Ltd. Partnership v. Department of Health and Mental Hygiene, 80 Md.App. 205 , 560 A.2d 613 (1989) involved a challenge to the DSeartment’s interpretation of COMAR 10.09.11.07, i.e., the Regulations dealing with capital cost reimbursement. Specifically, at issue in Fort Washington Care Ctr.

Ltd. Partnership was a decision by the NHAB to deny full Medicaid reimbursement for Fort Washington’s mortgage interest expense and acquisition costs. In upholding the Department’s reimbursement decision, we stated that the Department’s interpretation and application of COMAR “not only [found] support in the overall Medicaid reimbursement policy and objectives, but [wa]s also eminently reasonable.” Id. at 212-13 , 560 A.2d at 618 . This Court again examined a Medicaid reimbursement dispute regarding COMAR 11.09.11.07 in Department of Health and Mental Hygiene v. Reeders Memorial Home, 86 Md.App. 447 , 586 A.2d 1295