DEPARTMENT OF MED. ASST. v. Beverly Healthcare

• Decision Date: 09 September 2003
• Docket Number: Record No. 0802-02-2.
• Citation: 585 S.E.2d 858,41 Va. App. 468
• Court: Virginia Court of Appeals
• Parties: DEPARTMENT OF MEDICAL ASSISTANCE SERVICES v. BEVERLY HEALTHCARE OF FREDERICKSBURG, Carriage Hill Nursing Home, Heritage Hall-Front Royal, Heritage Hall-King George, Lynn Care Center, Oak Springs Of Warrenton, Rose Hill Nursing Home and Warrenton Overlook Health & Rehabilitation.

585 S.E.2d 858

41 Va. App. 468

DEPARTMENT OF MEDICAL ASSISTANCE SERVICES v. BEVERLY HEALTHCARE OF FREDERICKSBURG, Carriage Hill Nursing Home, Heritage Hall-Front Royal, Heritage Hall-King George, Lynn Care Center, Oak Springs Of Warrenton, Rose Hill Nursing Home and Warrenton Overlook Health & Rehabilitation.

Record No. 0802-02-2.

Court of Appeals of Virginia, Richmond.

September 9, 2003.

Paige S. Fitzgerald, Assistant Attorney General (Jerry W. Kilgore, Attorney General; Francis S. Ferguson, Deputy Attorney General; Siran S. Faulders, Senior Assistant Attorney General, on briefs), for appellant.

Thomas W. McCandlish (Dominic P. Madigan; McCandlish Holton, PC, on brief), Richmond, for appellees.

Present: ELDER, ANNUNZIATA and CLEMENTS, JJ.

CLEMENTS, Judge.

This appeal arises from an order of the Circuit Court of Spotsylvania County (circuit court) reversing the ruling of the Director of the Department of Medical Assistance Services (DMAS) that, pursuant to 12 VAC 30-90-20(C), the appellees, eight nursing home facilities in Virginia that disputed DMAS's calculation of their Medicaid reimbursement payments, were not entitled, for the years at issue, to reimbursement for their Medicaid-related expenses under the higher cost ceiling applicable to Northern Virginia. In reversing the DMAS Director's ruling, the circuit court concluded the DMAS Director's interpretation of 12 VAC 30-90-20(C) was contrary to the plain meaning of the regulation and was, thus, arbitrary and capricious. In that same order, the circuit court also affirmed the DMAS Director's ruling that four of the appellees were time barred from challenging their Medicaid reimbursement payments for five of the years at issue and further held that the appellees were entitled to recover their attorneys' fees and costs subject to a statutory cap of $25,000 applicable to the appellees as a group. On appeal, DMAS contends the circuit court erred (1) in concluding the DMAS Director's interpretation of the relevant Medicaid regulation was arbitrary and capricious and (2) in awarding attorneys' fees and costs to the appellees. On cross-appeal, the appellees contend the circuit court erred (1) in affirming the DMAS Director's decision that four of the appellees were time barred from challenging their Medicaid reimbursement payments for certain years and (2) in ruling the fees and costs awarded to the appellees were capped at $25,000 for the appellees as a group. In addition, the appellees seek an award of appellate attorneys' fees. For the reasons that follow, we affirm the circuit court's judgment that the DMAS Director's interpretation of 12 VAC 30-90-20(C) was arbitrary and capricious, that the appellees were entitled to attorneys' fees and costs, and that certain appellees were time barred from challenging their reimbursement classifications for certain years. We reverse the circuit court's judgment that the fees and costs awarded to the appellees were statutorily capped at $25,000 for the appellees as a group and remand this matter to the circuit court for determination of the appropriate attorneys' fees and costs.

I. BACKGROUND

The facts in this case are not in dispute. At all times relevant to this appeal, the appellees, Beverly Healthcare of Fredericksburg, f/k/a Fredericksburg Nursing Home, located in Spotsylvania County; Carriage Hill Nursing Home, located in Spotsylvania County; Heritage Hall-Front Royal, located in Warren County; Heritage Hall-King George, located in King George County; Lynn Care Center, located in Warren County; Oak Springs of Warrenton, located in Fauquier County; Rose Hill Nursing Home, located in Clarke County; and Warrenton Overlook Health & Rehabilitation, f/k/a Warrenton Overlook Care Center, located in Fauquier County, were nursing home facilities participating in Virginia's Medicaid program.¹ As participants in that program, the appellees were entitled to reimbursement by the Commonwealth for their reasonable and necessary operational and capital costs incurred in providing nursing care and other medical services to Medicaid recipients. DMAS is the state agency responsible for administering Virginia's Medicaid program.

Under the Virginia Medicaid program, each participating nursing facility must submit an annual cost report to DMAS detailing the actual costs incurred by the facility for the care and services provided to Medicaid patients. DMAS then reviews the nursing facility's cost report and issues a "Notice of Program Reimbursement" to the facility setting forth the costs that are to be reimbursed to the facility and the cost that are disallowed under the Medicaid program and identifying any adjustments in the reimbursement payment amount to reflect DMAS's determination that it has underreimbursed or overreimbursed the facility during the cost year under consideration. If the nursing facility disagrees with DMAS's reimbursement determination, the facility may appeal the matter in accordance with the Administrative Process Act and "the state plan for medical assistance." Code § 32.1-325.1(B).

To control costs, DMAS has instituted cost ceiling limitations, or caps, on the reimbursement of certain costs incurred by nursing facilities in providing service to Medicaid patients. A nursing facility will not be reimbursed for costs that exceed the facility's cap. To ensure that nursing facilities operating in different economic environments in Virginia are reimbursed similarly, DMAS has divided the Commonwealth into three distinct geographic regions or "peer groups," each with its own cap: (1) "the Virginia portion of the Washington DC-MD-VA Metropolitan Statistical Area (MSA)," (2) the "Richmond-Petersburg" MSA, and (3) the "rest of the state." 12 VAC 30-90-20(C). Because the urban area in which they operate is generally more expensive, nursing facilities in the "Virginia portion of the Washington DC-MD-VA" MSA (Northern Virginia MSA) peer group have a higher reimbursement cap than those in the "rest of the state" peer group.

To determine, for Medicaid reimbursement purposes, whether a nursing facility is in one of the MSA peer groups or in the "rest of the state" peer group, DMAS relies on the list of urban-area jurisdictions published in a final rule by the Health Care Financing Administration (HCFA), the federal agency within the United States Department of Health and Human Services that administers the Medicare program. See id. Generally, a facility located in a city or county included on HCFA's list of constituent jurisdictions of the Northern Virginia urban area or the Richmond-Petersburg urban area is considered a member of that respective area's corresponding MSA peer group. See id. Conversely, a facility located in a jurisdiction not included on HCFA's list of jurisdictions in either the Northern Virginia or Richmond-Petersburg urban area is considered a member of the "rest of the state" peer group. See id.

In compiling and revising its list of urban areas, HCFA relies, in turn, on the latest list of MSAs published by the federal Office of Management and Budget (OMB). Applying decennial census data and federal Census Bureau population estimates to various standards, OMB designates certain geographic areas of the country as MSAs. The boundaries of each MSA reflect OMB's judgment that, for statistical purposes, the jurisdictions located within those boundaries constitute metropolitan areas.² OMB periodically revises its MSA designations to reflect changing populations and economic conditions, adding new jurisdictions that, based on the most current data and standards, qualify as metropolitan areas or removing jurisdictions that no longer qualify. When HCFA updates Medicare payment rates, it adopts OMB's latest revised MSA designations, which remain in effect until new MSA designations are adopted by HCFA and published in a final rule.

On June 30, 1993, OMB published an updated list of MSA designations based on data from the 1990 census. As reflected in that list, the Northern Virginia MSA had been expanded to include the jurisdictions in which each of the appellees was located.

On September 1, 1993, HCFA published a final rule adopting OMB's June 30, 1993 revised MSA designations for purposes of Medicare³ reimbursement payments to hospitals, effective October 1, 1993. See Rules and Regulations, 58 Fed. Reg. 46270 (September 1, 1993). HCFA explained its adoption of OMB's new MSA designations for purposes of hospital reimbursement as follows:

Under the Medicare prospective payment system, different payment rates are calculated for hospitals located in rural, urban, and large urban areas. For purposes of the standardized payment amount, section 1886(d)(2)(D) of the Social Security Act requires that we use Metropolitan Statistical Areas (MSAs) as defined by the office of Management and Budget (OMB) to determine whether hospitals are located in rural, urban or large urban areas.

* * * * * *

. . . OMB announced changes [in the MSA designations] and we have adopted those changes in this final rule. Table 4a of the wage index tables in the addendum to this final rule lists the MSAs and their member counties as set forth in OMB's announcement.

Id. at 46291-92. As reflected in Table 4a of HCFA's final rule, the Northern Virginia urban area had been expanded to include the jurisdictions in which each of the appellees was located: Spotsylvania County, Warren County, King George County, Fauquier County, and Clarke County. Id. at 46386.

On January 6, 1994, HCFA published a final notice advising that, because the Omnibus Budget Reconciliation Act of 1993, enacted by Congress on August 10, 1993, required that there be no increases in Medicare cost limits for nursing facilities until October 1, 1995, the revised MSA designations established by OMB on June 30, 1993, would not be adopted for purposes of Medicare reimbursements for nursing facilities until at least October 1, 1995. See Notices, 59 Fed. Reg. 762-64 (...