Commonwealth of Pa. v. U.S. Dep't of Health

• Decision Date: 13 June 2011
• Docket Number: No. 10–2409.,10–2409.
• Citation: 647 F.3d 506
• Parties: Commonwealth of PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, Appellantv.U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; Secretary of the U.S. Department of Health and Human Services, in his official capacity.
• Court: U.S. Court of Appeals — Third Circuit

647 F.3d 506

Commonwealth of PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, Appellant

v.U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; Secretary of the U.S. Department of Health and Human Services, in his official capacity.

No. 10–2409.

United States Court of Appeals, Third Circuit.

Submitted Under Third CircuitLAR 34.1(a) Jan. 13, 2011.Filed June 13, 2011.

Jason W. Manne, Esq., Office of General Counsel, Department of Public Welfare, Pittsburgh, PA, for Appellant.Tony West, Assistant Attorney General (did not enter an appearance), William Kanter, Esq., Peter R. Maier, Esq., United States Department of Justice, Civil Division, Washington, DC, for Appellee.Before: SCIRICA, BARRY and VANASKIE, Circuit Judges.

OPINION OF THE COURT

VANASKIE, Circuit Judge.

The Pennsylvania Department of Public Welfare (“Pennsylvania”) challenges a decision disallowing federal reimbursement of occupancy costs incurred in operating community residential facilities for the developmentally disabled. The District Court, on cross-motions for summary judgment, affirmed the Secretary of Health and Human Services' (“HHS”) determination that reimbursement of occupancy expenses is precluded by the statutory exclusion of room and board set forth in 42 U.S.C. § 1396n(c)(1). Discerning no error in the District Court's well-reasoned decision, we will affirm.

I.

Pennsylvania, like every other state, participates in the Medicaid Program, which was established in 1965 under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. Medicaid is “a cooperative, jointly funded, federal-state program to financially assist low income persons in securing medical care.” Klein v. Califano, 586 F.2d 250, 253 (3d Cir.1978). Under Medicaid, the federal government reimburses between 50% and 83% of state costs for patient care on behalf of eligible low-income individuals. Medicaid is administered by HHS through its Centers for Medicare and Medicaid Services (“CMS”).

As part of Medicaid, states are eligible to receive federal financial participation to assist with medical assistance expenditures for eligible individuals in hospitals, nursing facilities, and intermediate care facilities for the mentally retarded. Federal financial participation was extended in 1981 to cover developmentally disabled individuals receiving care in home- and community-based settings. See 42 U.S.C. § 1396n(c). Pursuant to 42 U.S.C. § 1396n(c)( l ), states can opt-in to this coverage program by obtaining a “waiver” of other provisions of the Medicaid Statute. Section 1396n(c)( l ), in pertinent part, provides:

The Secretary may by waiver provide that a State plan approved under this subchapter may include as “medical assistance” under such plan payment for part or all of the cost of home or community-based services ( other than room and board ) approved by the Secretary which are provided pursuant to a written plan of care to individuals with respect to whom there has been a determination that but for the provision of such services the individuals would require the level of care provided in a hospital or a nursing facility or intermediate care facility for the mentally retarded the cost of which could be reimbursed under the State plan.

42 U.S.C. § 1396n(c)(1) (emphasis added).

HHS has issued regulations implementing the exclusion of expenditures of federal funds for “room and board.” ¹ See 42 C.F.R. § 441.310(a)(2). The State Medicaid Manual, which serves as the official HHS interpretation of the law and regulations, contains the following explanatory statement:

Except for respite care furnished in a State approved facility that is not [a] private residence (see item 4), [federal financial participation] is not available for room and board of the recipient as part of a home and community-based service. Board means three meals a day or any other full nutritional regimen. Room means hotel or shelter type expenses including all property related costs such as rental or purchase of real estate and furnishings, maintenance, utilities, and related administrative services.(A.112a.)

Pennsylvania obtained a home and community based service (“HCBS”) waiver in 2001. The waiver, which was renewed in 2006, authorized reimbursement of state expenses for “habilitation services” for developmentally disabled individuals in home- and community-based treatment settings.²

Habilitation services are defined by statute as “services designed to assist individuals in acquiring, retaining, and improving the self-help, socialization, and adaptive skills necessary to reside successfully in home and community based settings.” 42 U.S.C. § 1396n(c)(5)(A). The waiver granted to Pennsylvania defined these community habilitation services as follows:

Community Habilitation means services designed to assist individuals in acquiring, retaining, and improving the self-help, socialization, and adaptive skills necessary to reside successfully in home and community-based settings. Habilitation may be provided up to 24 hours a day based on the needs of the individual receiving services. Included are provider training costs, supervisory costs, purchased personnel costs, and costs of necessary supplies, equipment and adaptive appliances. Services may be provided by a qualified family member or relative, independent contractor, or services agency.

(A.62a.)

Pennsylvania provides habilitation services in nearly 2,200 non-profit or county-owned community residential facilities. From 2001 through part of 2006, Pennsylvania did not seek federal reimbursement for occupancy costs for Medicaid recipients living in such facilities. Instead, Pennsylvania paid for residents' room and board in these facilities using a combination of state funds and the residents' Supplemental Security Income.

On March 1, 2006, Pennsylvania began claiming a portion of occupancy costs as reimbursable “habilitation services.” ³ Specifically, Pennsylvania claimed that 54.1667% of its occupancy costs, including rent, utilities, interest, depreciation, building insurance, housekeeping, building repairs, maintenance and renovation, and furnishings and equipment were not, in fact, “room” costs, but were “habilitation costs.” This claim was based on the fact that residents were engaged in “waiver services” on the premises for 13 hours in a typical 24–hour day, and, consequently, room costs for this period actually supported habilitation.

CMS denied the request for inclusion of occupancy costs by a letter dated July 5, 2006, determining that the costs constituted “room and board” expenses and were therefore non-reimbursable under the statute and the State Medicaid Manual. The letter expressly disapproved Pennsylvania's approach, noting that “[Section 4442.3.B.8 of the State Medicaid Manual] requires the clear differentiation between the services covered by the HCBS waiver that are provided in the residence and the cost of room and board, which by law cannot be covered.” (A.80a.) CMS issued a letter dated August 17, 2006, stating that the State could not include the $50,939,457 in occupancy costs in its HCBS Medicaid claims. An additional $9,997,220 was subsequently disallowed. On June 21, 2007, CMS formally disallowed all of Pennsylvania's claims for occupancy costs.

Pennsylvania appealed the disallowance to the HHS Departmental Appeals Board (“DAB”), which upheld the disallowance on February 6, 2008. The DAB explained:

[T]he costs that Pennsylvania is calling “occupancy” (or “facility”) costs today are the same as the costs that Pennsylvania previously has treated as room costs. They have the same component parts: rent, utilities, interest, depreciation, building insurance, housekeeping, building repairs and maintenance, building renovations, furnishings and equipment, and repairs of furnishings and equipment. For all intents and purposes, Pennsylvania's occupancy costs in community residential facilities are room costs; they are the costs of providing housing to the Medicaid recipients who live there.

(A.37a–38a.)

Pennsylvania next brought suit in the U.S. District Court for the Middle District of Pennsylvania, alleging that the DAB's decision violated the Administrative Procedure Act as an action that was arbitrary, capricious, an abuse of discretion, or otherwise unlawful. The District Court awarded summary judgment to HHS on March 31, 2010. The court initially concluded that “[room and board] unambiguously means the provision of living space and meals.” (A.14a.) The court further found that, even if the term “room” was ambiguous, under the deferential Chevron standard of review, the DAB's construction of the statutory term “room and board” was reasonable, supported by the language of the State Medicaid Manual, and entitled to deference.

II.

In this appeal from the decision of an administrative board, ⁴ “we apply de novo review to the district court's ruling, and in turn apply the applicable standard of review to the underlying agency decision.” Cyberworld Enter. Techs., Inc., v. Napolitano, 602 F.3d 189, 195–96 (3d Cir.2010). Under the Administrative Procedure Act, we must determine whether the Board's action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

Our review of whether an administrative board committed an abuse of discretion is governed by Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under Chevron, we follow a two-step analysis. First, we determine “whether Congress has directly spoken to the precise question at issue.” Id. at 842, 104 S.Ct. 2778. If it has, we must effectuate the intent of Congress. If not, we must determine whether the agency's construction of the statute is “permissible.” Id. at 843, 104 S.Ct. 2778. Notably, we “need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court...