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

EYLER, Judge. The central issue presented by this appeal is whether there is substantial evidence to support a decision by the Nursing Home Appeal Board 1 (the Board) that disallowed reimbursement of certain expenses claimed by Glasgow Nursing Home, Inc., appellant, under the Maryland Medical Assistance Program (Medicaid Program). We hold that it was supported by substantial evidence. I. Facts Appellant is a licensed nursing facility located in Dorchester County, and a participant in the Medicaid Program that is administered by the Department of Health and Mental Hygiene, appellee.

Prior to April 1982, appellant’s stock was held entirely by Howard Greenhawk and other members of the Greenhawk family, including Howard’s parents, Norman and Aileen Greenhawk. Appellant operated its nursing home on land owned by Norman and Aileen Greenhawk. In April 1982, John R. Marcello, Jr. purchased all of the stock of appellant. Sometime prior to that transaction, Howard Greenhawk and Marcello had become friends, and Marcel-lo had moved into Howard Greenhawk’s home.

They continued to live in the same home until at least 1991. During that time, Marcello paid no rent. Also in April, 1982, Norman and ⁶⁵³ Aileen Greenhawk sold a portion of the real estate to Howard Greenhawk, and appellant entered into a lease agreement with Norman, Aileen, and Howard Greenhawk for the building and land on which the nursing home was located. Appellant continued to lease the premises from the Greenhawks until January 20,1988.

In March, 1983, Marcello had obtained a loan of $100,000 from Provident State Bank, pledging his stock in appellant as collateral. Provident also required that the real property on which the nursing home was located secure the loan. The Greenhawks assisted Marcello by pledging the real property as collateral. By virtue of the pledge of appellant’s stock, Provident held a proxy, which enabled it to elect appellant’s board of directors.

In February, 1985, Provident exercised its proxy and Howard Greenhawk, who had served as a director prior to that time, was not elected and did not serve on appellant’s board at any time thereafter. In August, 1985, the Greenhawks released Marcello from further liability on a promissory note for $200,000 which Marcello gave to the Greenhawks when he purchased the stock in appellant. This release was executed apparently without consideration. On January 20, 1988, appellant purchased the land and buildings from the Greenhawks for a price of $650,000.

Howard Greenhawk had informed Marcello that he intended to sell the real estate and would sell to a third party if appellant did not wish to purchase it. Appellant financed the purchase with a loan from Maryland National Bank in the amount of $250,-000 and a loan from Howard Greenhawk in the amount of $400,000, secured by mortgages on the property. In 1990, appellant refinanced its indebtedness. A new mortgage was granted to Maryland National Bank securing a loan in the amount of $485,000, and a new mortgage was granted to Howard Greenhawk in the amount of $95,095.51.

As part of the transaction, Howard Greenhawk reduced the principal amount of the debt owed to him by $100,000, without consideration. ⁶⁵⁴ Prior to the events giving rise to this appeal, in proceedings relating to fiscal years 1982 to 1986, the Medicaid Program contended that Howard Greenhawk and appellant were related organizations, and as a result, they were treated as a single entity for purposes of reimbursing lease costs. The Board and the Circuit Court for Dorchester County upheld that position. The events giving rise to this appeal began when appellant submitted cost reports for fiscal years ending December 31, 1988 through December 31,1991, seeking reimbursement from the Medicaid Program for the costs of care of appellant’s patients. The costs included interest payments and depreciation expenses associated with the purchase of the real property from the Greenhawks in 1988.

Appellee’s audit agency, Clifton, Gunderson & Co., initially disallowed costs for both the loan between Howard Greenhawk and appellant and the loan from Maryland National Bank. The audit agency’s position was based on the assertion that the sale was between “related parties” within the meaning of the applicable regulations, and consequently, the costs were not reimbursable. Appellee eventually reimbursed appellant for a portion of the costs incurred in obtaining the loan from Maryland National Bank. Appellant appealed the disallowance of the costs to the Board.

In a decision dated October 18, 1993, the Board affirmed appellee’s decision with respect to the bulk of the disallowed items. Appellant appealed to the Circuit Court for Dorchester County. On October 4, 1994, the circuit court held that certain factors relied upon by the Board were inappropriate, vacated the Board’s decision, and remanded the case to the Board for reconsideration. In doing so, the circuit court explained that it could not tell from the Board’s decision whether its conclusion was premised on the cumulative effect of all the factors, including the ones that the circuit court held to be inappropriate.

On April 10, 1996, the Board, focusing on four factors deemed to be permissible by the circuit court, affirmed its prior decision. The four factors relied upon were: ⁶⁵⁵ 1. The existence of a continuing personal relationship between Howard Greenhawk and Marcello. 2. As security for a pre-1988 loan by Provident State Bank to Marcello, Howard Greenhawk pledged part of the real property on which the nursing home was located. 3.

In August, 1985, the Greenhawks released Marcello from liability on a promissory note for $200,000 executed when Marcello purchased the stock in appellant. 4. In 1990, two years after the sale of the property in January, 1988, Howard Greenhawk agreed to a $100,000 reduction in the purchase price by reducing the principal of the debt owed to him by $100,000. On February 6, 1998, the circuit court affirmed the Board’s decision.

II

Questions Presented 1. Were the parties to the 1998 sale of the building and real estate upon which the nursing home is operated “related parties” under applicable regulations? 2. Does the decision of the Court of Appeals of Maryland in Liberty Nursing Ctr., Inc. v. Department of Health and Mental Hygiene, 330 Md. 433 [ 624 A.2d 941 ] (1993), require that all interest paid to a non-related lender be reimbursed as an allowable cost?

III

Standard of Review Generally, there are two standards of judicial review of the decisions of administrative agencies in Maryland. 2 Co ⁶⁵⁶ lumbia R.C.A. v. Montgomery County, 98 Md.App. 695, 698 , 635 A.2d 30 (1994). When an agency resolves a pure issue of law, a reviewing court will accord no deference to the agency determination and may substitute its judgment for that of the agency. Prince George’s County v. Brown, 334 Md. 650, 658 , 640 A.2d 1142 (1994); Liberty Nursing Ctr., Inc. v. Department of Health and Mental Hygiene, 330 Md. 433, 443 , 624 A.2d 941 (1993); State Election Bd. v. Billhimer, 314 Md. 46, 59 , 548 A.2d 819 (1988). When an agency resolves either issues of fact or mixed issues of law and fact, however, a reviewing court must defer to the factual findings of the agency and to inferences drawn from the facts.

Motor Vehicle Admin. v. Karwacki, 340 Md. 271, 280 , 666 A.2d 511 (1995); Billhimer, 314 Md. at 58-59 , 548 A.2d 819 ; Pemberton v. Montgomery County, 275 Md. 363, 367 , 340 A.2d 240 (1975). An agency’s factual conclusions will not be disturbed on appeal if supported by substantial evidence in the record. Karwacki, 340 Md. at 280 , 666 A.2d 511 ; Liberty Nursing, 330 Md. at 442 , 624 A.2d 941 . While an appellate court normally may affirm appeals from trial court judgments on grounds not explicitly invoked by the court in rendering its decision, an appellate court may only affirm the decision of an administrative agency if the decision is “sustainable on the agency’s findings and for the reasons stated by the agency.” United Steelworkers v. Bethlehem Steel, 298 Md. 665, 679 , 472 A.2d 62 (1984).

With respect to issues of fact, therefore, we ask whether “the evidence before the [agency] was ‘fairly debatable’ such that a reasoning mind could reasonably have reached the same result as did the administrative agency upon a fair consideration of ⁶⁵⁷ the factual picture painted by the entire record before that body.” Pemberton, 275 Md. at 367-68 , 340 A.2d 240 . The first question presented by this case is a mixed question of law and fact, and we must affirm the decision of the Board if supported by substantial evidence. The second question presents a pure issue of law that is subject to plenary review.

IV

Discussion A. Regulatory Scheme Costs associated with interest payments and depreciation may be reimbursed under the Medicaid Program. Such reimbursement generally is governed by Maryland regulations and federal Medicare reimbursement regulations. See 42 C.F.R. § 413 (1997); COMAR 10.09.06.09.B (1998). The federal regulations are amplified in the Provider Reimbursement Manual (PRM), which serves as a guide to reimbursable costs for the Medicare and Medicaid Programs.

Nursing homes that participate in the Maryland Medicaid Program are paid pursuant to COMAR 10.09.10. 3 The Medicare regulation 42 C.F.R. § 413.17 provides guidelines for determining whether organizations conducting business with a Medicaid provider are related organizations, and limits the reimbursement a provider may claim for transactions with such organizations. Section 413.17 provides in part: (a) Principle. ... [Cjosts applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are ⁶⁵⁸ includable in the allowable cost of the provider at the cost to the related organization. However, such cost must not exceed the price of comparable services, facilities, or supplies that could be purchased elsewhere. (b) Definitions.

(1) Related to the provider. Related to the provider means that the provider to a significant extent is associated or affiliated with or has control of or is controlled by the organization furnishing the services, facilities, or supplies. (2) Common ownership. Common ownership exists if an individual or individuals possess significant ownership or equity in the provider and the institution or organization serving the provider.

(3) Control. Control exists if an individual or an organization has the power, directly or indirectly, significantly to influence or direct the actions or policies of an organization or institution. Cf, COMAR 10.09.10.01.B(44) (1998). Control is further defined in the PRM as “any kind of control, whether or not it is legally enforceable and however it is. exercisable or exercised.” PRM, Part 1, § 1004.3, Medicare & Medicaid Guide (CCH) ¶ 5700 at 1889.

The PRM explains further, “It is the reality of control which is decisive, not its form or the mode of its exercise.” Id. For this reason, control must be determined primarily upon the facts and circumstances of each case. See id. Under § 413.17, the federal government considers services obtained by a provider from a related organization to be “obtained from itself’ for purposes of reimbursement. 42 C.F.R. § 413.17 (c)(2) (1997).

Expenses based on such services are reimbursed, therefore, “at the cost to the supplying organization” or at the market price for such services if lower than the supplier’s cost. Id. In accordance with the above principles, interest expenses generally may be reimbursed under the Medicaid Program only if “incurred on indebtedness established with lenders or lending organizations not related through control, ownership, ⁶⁵⁹ or personal relationship to the borrower.” 42 C.F.R. § 413.153 (c)(1) (1997). The regulation explains that the existence of any of these factors could affect the “bargaining” process that usually accompanies the making of a loan, and could thus be suggestive of an agreement on higher rates of interest or of unnecessary loans____ The intent of this provision is to assure that loans are legitimate and needed, and that the interest rate is reasonable.

Thus, interest paid by the provider to ... related organizations of the provider would not be allowable. Id. The Court of Appeals has held that, for the purpose of determining whether parties to a loan are “related through control” under this regulation, the pertinent transaction is the loan transaction, not the underlying business transaction that gives rise to the need for a loan. See Liberty Nursing, 330 Md. at 447-48 , 624 A.2d 941 .

It is clear, therefore, that loan expenses based on a loan from an unrelated lender may be reimbursed by the Medicaid Program even if the underlying sale is between related organizations. In such cases, however, loan expenses are limited by additional reimbursement principles which hold that interest expenses on loans used to purchase nursing home properties are reimbursable only to the extent that the interest is “[njecessary and proper.” 42 C.F.R. § 413.153 (a)(1) (1997). To be necessary, interest expenses must be “incurred on a loan made to satisfy a financial need of the provider,” and “incurred on a loan made for a purpose reasonably related to patient care.” Id. § 413.153(b)(2). This regulation explicitly limits certain loans under the latter requirement: ⁶⁶⁰ Id. § 413.153(d).

The “cost basis,” which acts as a cap on reimbursement for such loans, is affected by whether the underlying sale was bona fide: “If the purchaser cannot demonstrate that the sale was bona fide ... the purchaser’s cost basis may not exceed the seller’s cost basis, less accumulated depreciation.” Id. § 413.134(g)(4). Although this section does not refer to § 413.17 pertaining to related organizations, a sale between related organizations is not a bona fide sale under § 413.134(g). Liberty Nursing, 330 Md. at 441 , 624 A.2d 941 . See also PRM, Part 1, § 104.15, Medicare & Medicaid Guide (CCH) ¶ 4685 at 1665-14.

Section 413.134(g) is therefore in harmony with § 413.17(c)(2), above, in treating related organizations as one entity for reimbursement purposes. Thus, under the above regulations as they pertain to the present case, reimbursement generally is disallowed for a provider’s interest expenses on a loan from a related lender, and, where the underlying sales transaction is between related organizations, interest expenses on a loan from an unrelated lender generally are reimbursable only to the extent that such expenses are based on that portion of the loan that reflects the seller’s “cost basis,” less accumulated depreciation. ⁶⁵⁹ (d) Loans not reasonably related to patient care. (1) The following types of loans are not considered to be for a purpose reasonably related to patient care: (i) For loans made to finance acquisition of a facility, that portion of the cost that exceeds— (B) The cost basis determined under § 413.134(g).... ⁶⁶⁰ B. Arguments on Appeal Appellant, with respect to the first issue on appeal, contends that the sale of the nursing home property in 1988 was a bona fide transaction because appellant and Howard Greenhawk were not related organizations at any time subsequent to February 1985. 4 Appellant states that, after February 1985, Howard Greenhawk’s involvement was limited to his obligations as a landlord and to supervision of maintenance services performed by his subcontractors. Thus, appellant concludes that the Board’s decision that the parties were related ⁶⁶¹ in 1988 is not supported by substantial evidence.

The four factors above, cited by the circuit court as pertinent to the determination as to whether appellant and Howard Green-hawk were related to one another by control, are not directly addressed by the appellant in its brief. In an apparent reference to these factors, however, appellant claims the Board did not address the method or means of control between it and Howard Greenhawk, even though, according to appellant, overwhelming authority suggests that administrative agencies must identify “clear and concrete indicia of control” before they can consider two organizations related under the regulations. In any event, appellant does not argue that the four factors distilled by the circuit court on the prior appeal of this case are otherwise inapplicable to the issue of control, nor does appellant contest the relevance of the four factors to all of the potential decision points at which a relatedness analysis could be directed throughout the relevant period, 1988 to 1991. 5 Appellee argues that there was competent evidence in the record to support the Board’s conclusion that appellant and Howard Greenhawk were related through control. Appellee emphasizes that a relationship of control may be either direct or indirect under the regulations, that control may be found when a relationship merely renders the exercise of control possible, and that prior cases have endorsed a practical approach to the determination of control, in which the relationship is considered as a whole.

Appellee concludes that the four factors considered by the Board, and the evidence sup ⁶⁶² porting those factors, constituted substantial evidence of a relationship of indirect control between appellant and Howard Greenhawk and that the Board reasonably determined that the two entities were related under the regulations. With respect to the second issue, appellant contends that, even if the underlying transaction was between related parties, interest paid to an unrelated lender is fully reimbursable. Appellant relies on Liberty Nursing, supra. Appellee acknowledges that Maryland National Bank was not related to appellant at the time of the initial loan or during refinancing, but it argues that because appellant was related to Howard Greenhawk during the real property transaction, allowable interest should be limited to that portion of the loan that does not exceed the seller’s cost basis as determined under 42 C.F.R. § 413.134 (g).

C. Analysis (1) Related Organizations We reject appellant’s suggestion that appellee was required to establish either the exact means or method of control between appellant and Howard Greenhawk, or the existence of legal associations between those entities that would facilitate direct control. The cases cited by appellant do not call for such a formal analysis. We conclude that appellee produced substantial evidence of indirect control to support the administrative determination that appellant and Howard Greenhawk were related organizations throughout the relevant time period. The conclusion that the loan and depreciation expenses are not reimbursable in this case flows from the decision that the parties were related from 1988 to 1991.

Section 413.17 has been construed broadly by federal courts to guard against the opportunity for abuse of Medicare funds. The prophylactic nature of the regulation “involves a judgment that the probability of abuse in transactions between related organizations is significant enough that it is more efficient to prevent the opportunity for abuse from arising than it is to try to detect actual incidents of abuse.” Biloxi ⁶⁶³ Reg’l Med. Ctr. v. Bowen, 835 F.2d 345, 350 (D.C.Cir.1987). See also Stevens Park Osteopathic Hosp. v. United States, 225 Ct.Cl. 113, 633 F.2d 1373, 1379 (Ct.Cl.1980).

Thus, the regulation may limit reimbursement between related organizations for transactions that would be reimbursable among unrelated organizations. See Biloxi Reg’l Med. Ctr., 835 F.2d at 350 . Considerations of fairness in this regard are irrelevant.

See Kidney Center v. Shalala, 133 F.3d 78, 86 (D.C.Cir.1998); Stevens Park Osteopathic Hosp., 633 F.2d at 1379 .