Liberty Nursing Center, Inc. v. Department of Health & Mental Hygiene

BISHOP, Judge. Liberty Nursing Center, Inc., t/a Granada Nursing Home (“Liberty”) appeals from an order of the Circuit Court for Baltimore City (Mitchell, J.) affirming the decision of the Nursing Home Appeals Board (“NHAB”). Md.Health-Gen. Code Ann. § 2-207 (1990) and Md.St.Gov’t Code Ann. § 10-215 (1984).

The NHAB denied reimbursement to Liberty for the cost of interest associated with the purchase of the property and facilities of the Granada Nursing Center from the estate of Margaret Wessels. Throughout this opinion we use “Liberty” to refer to the corporate entity and “Granada Nursing Center” or the “facilities” to refer to the nursing home building and the land on which it sits. ISSUE PRESENTED Liberty presents the following issue: Did the NHAB err in disallowing Liberty Medicaid reimbursement for interest expenses based on the related organization principle? FACTS AND PROCEEDINGS BELOW Liberty and appellee, the Department of Health and Mental Hygiene (the “Department”), have prepared a joint statement of facts for purposes of this appeal.

See Md. Rule 8-501(g). Liberty is the operator of a 112 bed nursing facility located in Baltimore City and is licensed to provide comprehensive care services. Ownership of Liberty currently is divided between two brothers, Michael DeFontes (“De-Fontes”), who owns 55%, and his brother Robert, who owns 45%. Liberty participates in the Maryland Medical Assist ²¹³ anee Program (the “Program” or “Medicaid”), a state and federally funded program that pays for, among other services, comprehensive care services for indigent and medically indigent patients.

Almost 100% of the patients at the Granada Nursing Center receive medical assistance. Margaret Wessels (“Wessels”) owned Liberty until her death on July 23, 1983. She also owned individually the land and the building utilized by Granada Nursing Center. Liberty does not hold title to the nursing center’s building and grounds, instead it leases them.

Wessels leased the building and grounds to Liberty until her death; thereafter, Liberty continued to lease the building from the Wessels estate. Included among the assets of the Wessels estate were Liberty, the land and the building utilized by Granada Nursing Center, a personal residence, a promissory note, and miscellaneous property. During probate, it was determined that the estate owed $373,012.30 in federal estate taxes and $37,522.07 in Maryland estate taxes. Counsel for the estate applied to the Internal Revenue Service (“IRS”) for a postponement and deferral of payment of the federal estate tax; however, the IRS granted only a one year deferral.

DeFontes, Wessels’s grandson, served as personal representative of the estate. Counsel advised DeFontes that it would be necessary to sell the nursing home property to pay the estate taxes and close the estate. Rather than sell the nursing home property to someone else, DeFontes purchased, in his individual capacity, the land and the building from the estate for $1,200,000. The State had appraised the facilities at approximately $2,000,000.

De-Fontes financed the purchase by means of a $1,200,000 loan from First American Bank at 11% interest and secured the loan by a mortgage on the facility. After the purchase by DeFontes, the estate taxes were paid, and the Wessels estate was closed with the approval of the Orphans Court of Baltimore City. During the entire fiscal year ending June 30, 1988, the year at issue here, Liberty leased the facilities from DeFontes. ²¹⁴ Medicaid reimbursement to a provider, i.e. Liberty, is based on certain costs incurred to operate a nursing facility.

When a lease is executed between related parties, the actual costs of ownership of the property are reimbursable, in lieu of reimbursement for the rent paid to the related organization. Because DeFontes is a 55% stockholder in Liberty, the lease between DeFontes and Liberty is between related organizations, and Liberty may be reimbursed the actual cost of ownership of the property, rather than the cost of rent paid to DeFontes. At the end of each fiscal year, Liberty reports its costs to the Program. In the fiscal year ending June 30, 1988, $135,808 was paid in interest on the mortgage loan to First American Bank, and Liberty reported this interest on its cost report.

Clifton, Gunderson & Co. (“Clifton, Gunderson”) is an accounting firm under contract with the State to perform audits of nursing home cost reports. In its audit of Liberty, Clifton, Gunderson disallowed the $135,808 in interest expense on the First American mortgage on the grounds that DeFontes and the Wessels estate were “related organizations” under the Medicare and Medicaid regulations. Clifton, Gunderson issued a proposed cost settlement incorporating this disallowance, and Liberty appealed the cost settlement to NHAB. In a Decision filed February 28, 1991, NHAB affirmed the position of Clifton, Gunderson by a 2 to 1 vote.

NHAB wrote: The Board reviewed the written and oral arguments of both parties, and the majority of the Board agreed with the State that as the Provider purchased the land and building [ ] utilized by the Provider from the late grandmother's estate, this transaction is between related parties and does not constitute a bonafide [sic] purchase. In other words[,] there is no effective change in the ownership/operation which should be recognized for reimbursement purposes, therefore the loan obtained by Mr. De-Fontes is a refinancing. Further, COMAR Regulations state[] that “Refinancing not normally allowed will be permitted as the basis ²¹⁵ for reimbursement calculations if the Department determines that lower cost to the State would result[.]” [T]he financing in question cannot result in lower cost in view of the fact that a $1,200,000 mortgage at 11% exists where prior to July 2, 1987, it did not exist[. Therefore this financing cannot be recognized for reimbursement purposes.

A dissent was filed by one member of NHAB. Liberty appealed the decision of NHAB to the Circuit Court for Baltimore City. The circuit court affirmed the decision of NHAB in an Order dated March 12, 1991 stating that the “decision of the NHAB was both supported by competent, material, and substantial evidence and correct in its interpretation of the law.” Liberty appeals from this Order. DISCUSSION A. Standard of Review The standard for our review of NHAB’s decision, like that of the circuit court, is set forth in the Maryland Administrative Procedure Act.

Md.State Gov’t Code Ann. §§ 10-101 to 10-405 (1984 & Supp.1991). Section 10-215(g) provides: (g) In a proceeding under this section, the court may: (1) remand the case for further proceedings; (2) affirm the decision of the agency; or (3) reverse or modify the decision if any substantial right of the petitioner may have been prejudiced because a finding, conclusion, or decision of the agency: (i) is unconstitutional; (ii) exceeds the statutory authority or jurisdiction of the agency; (iii) results from an unlawful procedure; (iv) is affected by any other error of law; (v) is unsupported by competent, material, and substantial evidence in light of the entire record as submitted; or (vi) is arbitrary or capricious. ²¹⁶ As we stated in Dep’t of Health and Mental Hygiene v. Reeders Memorial Home, Inc., 86 Md.App. 447, 452 , 586 A.2d 1295 (1991): When determining whether an agency’s factual finding violates Section 10-215, the appropriate standard of review is, of course, the substantial evidence test. However, when we consider whether the agency erred as a matter of law, for example, when there is a challenge to a regulatory interpretation, the substituted judgment standard is to be used. We must pay special attention to NHAB’s interpretation of the applicable regulations: Upon appellate review, courts 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 own judgment for the expertise of those persons who constitute the administrative agency from which the appeal is. taken”. Bulluck v. Pelham Wood Apartments, 283 Md. 505, 513 , 390 A.2d 1119 (1978). We have acknowledged the expertise of the NHAB as the independent body whose members are “knowledgeable in Medicare and Medicaid reimbursement principles” and whose sole function is to decide issues of reimbursement. Fort Washington Care Center v. Department, 80 Md.App. 205, 213 , 560 A.2d 613 (1989).

Id. 86 Md.App. at 453 , 586 A.2d 1295 . Moreover, we can rely only upon the findings of NHAB and the rationale it offered for its decision. Judicial review of administrative action differs from appellate review of a trial court judgment. In the latter context the appellate court will search the record for evidence to support the judgment and will sustain the judgment for a reason plainly appearing on the record whether or not the reason was expressly relied upon by the trial court.

However, in judicial review of agency action the court may not uphold the agency order unless it is sustainable on the agency’s findings and for the ²¹⁷ reasons stated by the agency. See Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 167-68 , 83 S.Ct. 239, 245-46 , 9 L.Ed.2d 207, 215-16 (1962); Securities & Exchange Comm’n v. Chenery Corp., 318 U.S. 80, 94 , 63 S.Ct. 454, 462 , 87 L.Ed. 626, 636-37 (1943)[.] United Steelworkers v. Bethlehem Steel Corp., 298 Md. 665, 679 , 472 A.2d 62 (1984). Applying this standard of review to the case sub judice, we conclude NHAB did not err as a matter of law in disallowing Liberty’s interest expenses based on the related organization principle. B. The Related Organization Principle The Department is authorized by statute to “adopt rules and regulations for the reimbursement of providers under the Program.” Md.Health-Gen.Code Ann. § 15-105(a).

Pursuant to this grant of authority, the Department has expressly chosen to adopt federal reimbursement principles: The final per diem rate ... is the sum of: (1) The provider’s allowable per diem costs for covered services according to the principles established under Title XVIII of the