Hoodkroft Convalescent Center, Inc. v. State of N.H., Div. of Human Services, 89-1083

• Decision Date: 03 May 1989
• Docket Number: No. 89-1083,89-1083
• Citation: 879 F.2d 968
• Parties: , Medicare&Medicaid Gu 37,957 HOODKROFT CONVALESCENT CENTER, INC., et al., Plaintiffs, Appellants, v. STATE OF NEW HAMPSHIRE, DIVISION OF HUMAN SERVICES, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 968

879 F.2d 968

26 Soc.Sec.Rep.Ser. 284, Medicare&Medicaid Gu 37,957

HOODKROFT CONVALESCENT CENTER, INC., et al., Plaintiffs, Appellants, v. STATE OF NEW HAMPSHIRE, DIVISION OF HUMAN SERVICES, et al Defendants, Appellees.

No. 89-1083.

United States Court of Appeals First Circuit.

Heard May 3, 1989.

Decided July 14, 1989.

E. Donald Dufresne with whom Amy L. Ignatius and Devine, Millimet, Stahl & Branch Professional Ass'n were on brief for plaintiffs, appellants.

Gretchen Leah Witt, Asst. U.S. Atty., with whom Peter E. Papps, Acting U.S. Atty., was on brief for defendant, appellee Dr. Otis R. Bowen, M.D., Secretary of the Dept. of Health and Human Services.

Susan S. Geiger, Asst. Atty. Gen., Civ. Bureau, with whom John P. Arnold, Atty. Gen., was on brief for defendant, appellee State of N.H., Div. of Human Services.

Before BOWNES and BREYER, Circuit Judges, and GRAY, ^* Senior District Judge.

BREYER, Circuit Judge.

I. Background

The federal Medicaid program provides money for the states to pay for medical care for needy and disabled people. See Title XIX of the Social Security Act, 42 U.S.C. Sec. 1396. A state receiving federal Medicaid funds must administer them according to a "state plan" that meets federal standards. 42 U.S.C. Sec. 1396a. Under the plan, the state will reimburse nursing homes and other Medicaid facilities for the cost of caring for Medicaid-qualified patients. 42 U.S.C. Sec. 1396a(a)(13). The federal Medicaid statute says that states must

provide for payment ... of ... services provided under the plan through the use of rates ... which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities.

42 U.S.C. Sec. 1396a(a)(13)(A).

The State of New Hampshire, like other states and the federal government, considers that "depreciation" of buildings and equipment is one of the allowable "costs" of providing care. New Hampshire Medical Assistance Manual Sec. 9999.7b(1); cf. 42 C.F.R. Sec. 405.415(a) (corresponding federal Medicare regulation) (now renumbered Sec. 413.134(a)). New Hampshire calculates depreciation according to a standard accounting method, dividing an asset's purchase price (say, $300,000) by its estimated useful life (say, 30 years), and reimbursing the facility for the resulting annual depreciation ($10,000 each year for 30 years). See Medical Assistance Manual Sec. 9999.7b(1)(a); cf. Richey Manor, Inc. v. Schweiker, 684 F.2d 130, 135 (D.C.Cir.1982) (same method of calculating depreciation applies under 42 C.F.R. Sec. 405.415). If the facility sells the asset, New Hampshire, like the federal government and other states, "recaptures" the depreciation it has paid, to the extent that the sale price exceeds the depreciated original cost of the asset (i.e., the original purchase price less all depreciation payments made before the sale). See Medical Assistance Manual Sec. 9999.7b(1)(d); cf. 42 C.F.R. Sec. 405.415(f)(1); Idaho Code 56-104 (1988); Kansas Admin.Reg. 30-10-25(3) (1987); Minn.Stat. Sec. 256B.431(3b) (1988); Ohio Admin.Code 5101:3-3-28 (1988); Va.Code 32.1-329 (1988).

In 1974 the Hoodkroft Convalescent Center began using its building and nursing equipment to participate in the Medicaid program. Over the years New Hampshire paid the Center about $173,000 for depreciation. In 1985 the Center sold the building and equipment, making a profit of about $2 million over the original purchase price. The state would like its depreciation payments back. But, the Center, and its owner, do not wish to pay, and they have brought this declaratory judgment action (removed from state to federal court) attacking the legality of the recapture rule on constitutional and statutory grounds as vague and unfair. We shall consider the Center's basic arguments in turn.

II. Vagueness

The Center argues that the state's recapture rules are so vague and confusing that they violate the Fifth Amendment of the federal Constitution. We shall for the moment postpone consideration of the constitutional basis for the Center's claim and simply assume that the Medicaid statute itself, in directing the states to set rates, implicitly requires that the rules and regulations embodying those rates be coherent and comprehensible to the facilities regulated. Cf. Harris v. McRae, 448 U.S. 297, 311 n. 17, 100 S.Ct. 2671, 2685 n. 17, 65 L.Ed.2d 784 (1980) (quoting Broadrick v. Oklahoma, 413 U.S. 601, 608, 93 S.Ct. 2908, 2914, 37 L.Ed.2d 830 (1973)) (test for unconstitutional vagueness is whether an "ordinary person exercising ordinary common sense can sufficiently understand and comply with" a law).

In our view, New Hampshire's depreciation recapture regulations, while written in a technical style, adequately convey the basic rule. In 1986, when New Hampshire's Division of Human Services, the agency that administers the Medicaid program, see N.H.R.S.A. 161:2, VIII, tried to recapture the depreciation payments here at issue, its recapture rule read as follows:

If any property is sold at a gain for which Medicaid reimbursement for depreciation has been received, such gain shall be subject to recapture. The extent to which any such reimbursement is recaptured shall be determined by the Bureau of Provider Audits and Rate Setting.

He-W [Health-Welfare regulation] 504.18(p)(6)(b)(1)(iii). This general regulation thus refers to the Bureau of Provider Audits and Rate Setting for a more detailed determination of the extent of recapture. That Bureau uses the Division of Human Services' Medical Assistance Manual. That Manual says (and has said at least since 1977, when the state began making the depreciation payments here at issue) that:

If any property is sold at a gain for which Medicaid reimbursement for depreciation has been received, such gain shall be subject to recapture. The extent to which any such reimbursement is recaptured is calculated based on [federal Health Insurance Manual] Section 132, Gains and Losses on Disposal of Depreciable Assets (Excluding Casualty Losses).

Medical Assistance Manual Sec. 9999.7b(1)(d). The state Medical Assistance Manual thus cross-references the federal Health Insurance Manual Sec. 132, which says

The net depreciation adjustment on the disposition of depreciable assets includes: (1) the amount of the gain or loss, (2) indirectly, the depreciation adjustment on those assets acquired prior to entrance into the program, and (3) depreciation taken in excess of straight line depreciation.... With respect to a gain on disposition, the net depreciation adjustment will be limited to the amount of depreciation accumulated for that asset under the program.

Health Insurance Manual Sec. 132(C) (first emphasis added; second emphasis in original) (now renamed Provider Reimbursement Manual Sec. 132(C)). This federal manual goes on to provide several examples showing how to calculate depreciation adjustments. See HIM Secs. 132.1-132.2. These provisions of the federal Health Insurance Manual implement the Medicare regulation analogous to the state's Medicaid recapture rule, which says:

If disposal of a depreciable asset results in a gain or loss, an adjustment is necessary in the provider's allowable cost. The amount of a gain included in the determination of allowable cost shall be limited to the amount of depreciation previously included in Medicare allowable costs. The amount of a loss to be included shall be limited to the undepreciated basis of the asset permitted under the program.

42 C.F.R. Sec. 405.415(f)(1). Although these rules and regulations require the reader to look up various cross-references, taken as a whole they are reasonably clear and specific. They are the kind of rules that the Center's lawyers or accountants ought to understand.

The Center says that confusion arises because the state Medical Assistance Manual uses the word "recapture" of depreciation, while the federal Health Insurance Manual that it cross-references uses the word "adjustment" instead. But the difference simply reflects the fact that the federal Manual governs not only recapture of depreciation payments when the owner sells the property at a gain, but also payment of additional depreciation when the owner sells the property at a loss. See 42 C.F.R. Sec. 405.415(f)(1). The Center also finds confusion in the fact that, from 1976 to 1984, the state's He-W regulation used the same language as the state Manual uses now. In 1984 the state amended it to say that the amount of recapture "shall be determined by the Bureau of Provider Audits," instead of saying that it shall be "calculated based on HIM Section 132." This change, however, does not make the rules vague or contradictory. The state He-W regulation now simply designates the entity responsible for calculating the amount of recapture; the method of calculation to be followed by the Board is still stated in the Manual.

There are two other reasons why the Center should have understood the reimbursement ground rules, including the rules providing for depreciation recapture. First, the Center signed a reimbursement contract with the state. In that contract, it promised to "abide by all rules and regulations promulgated by the Division of Human Services pertaining to the ... claiming of payments." Both the He-W regulation and the Medical Assistance Manual provision on recapture are "rules and regulations promulgated by the Division of Human Services." Second, a substantial body of case law interprets the federal regulations to which New Hampshire's rules refer, making it clear that they provide for depreciation recapture and how they do so. See, e.g., Richey Manor, 684 F.2d at 135 (under 42 C.F.R. Sec. 405.415(f), "if the selling price is higher than the cost basis, a gain is recognized, and Medicare recaptures the amount by which depreciation reimbursements exceeded actual depreciation"); Sumner v. United States...