Development Serv. V. Ind. Fam. Soc. Serv.

• Decision Date: 14 October 2009
• Docket Number: No. 49A02-0904-CV-335.,49A02-0904-CV-335.
• Citation: 915 N.E.2d 169
• Parties: DEVELOPMENTAL SERVICES ALTERNATIVES, INC., Appellant, v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION, Appellee.
• Court: Indiana Appellate Court

915 N.E.2d 169

DEVELOPMENTAL SERVICES ALTERNATIVES, INC., Appellant, v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION, Appellee.

No. 49A02-0904-CV-335.

Court of Appeals of Indiana.

October 14, 2009.

Paul R. Black, Indianapolis, IN, Attorney for Appellant.

Gregory F. Zoeller, Attorney General of Indiana, Frances Barrow, Deputy Attorney General, Indianapolis, IN, Attorneys for Appellee.

OPINION

CRONE, Judge.

Case Summary

Developmental Services Alternatives, Inc. ("DSA"), appeals the trial court's judgment affirming the order of the administrative law judge ("ALJ") in favor of the Indiana Family and Social Services Administration ("FSSA"). We affirm.

Issues

DSA raises five issues, which we reorder, consolidate, and restate as follows:

I. Whether the trial court erred in trying the case de novo; and

II. Whether the ALJ's order is arbitrary, capricious, and otherwise not in accordance with the law or is unsupported by substantial evidence.

Facts and Procedural History

The facts are undisputed. On or about June 10, 2002, DSA purchased sixteen intermediate care facilities for the mentally retarded ("the Providers") for $3,696,000, pursuant to an asset purchase agreement. The purchase was financed with a loan in the amount of $3,696,000. The Providers are participants in the Medicaid Program, which is administered by FSSA.¹ On August 28, 2003, DSA submitted the Providers' Medicaid costs reports to FSSA's rate-setting contractor, Myers & Stauffer, LLC ("Myers"), for the determination of its Medicaid reimbursement rates, effective April 1, 2003.

On January 5, 2004, Myers issued a rate determination that disallowed the cost of the DSA's intangible assets, designated as "business operations," from the calculation of the capital return factor ("CRF"), upon which Medicaid reimbursement rates are based.² These intangible assets include operating licenses and certifications, employment and service and other vendor contracts, software licenses, databases, copyrights, trade names, technology, and all other rights possessed by the seller under which all sixteen of the Providers operated. On February 19, 2004, DSA sent Myers a letter objecting to the disallowance of the cost of intangible assets and related debt and requested reconsideration of the CRF and Medicaid rates. Appellant's App. at 54-58. Myers then requested additional information, which DSA provided.

On May 24, 2004, Myers, by letter, responded to DSA's request for reconsideration, reversed its initial disallowance of the cost of intangible assets and related debt, and recalculated the CRF and Medicaid rates. Id. at 76-79. Subsequently, Clifton Gunderson, LLP, with whom FSSA contracted to audit long-term care facilities, audited DSA. On January 7, 2005, Clifton Gunderson sent FSSA its preliminary audit adjustment for DSA, disallowing the cost of intangible assets as well as the working capital interest expense. The preliminary report provided in relevant part:

Note 1:....

Myers and Stauffer had originally eliminated the [intangible assets] portion of the capital reported on the cost report. However, [DSA] stated Indiana Medicaid Regulation 405 [Indiana Administrative Code] 1-12-16(a), 1-4, as proof that the [intangible assets] are allowable because they are assets with historical cost that are in use, identifiable to patient care, available for physical inspection, and recorded in provider records. In addition, [DSA] provided a list of the legal rights, contracts, agreements, and licensures applicable to each facility. [DSA] has also provided the FAS 141-Business Combinations, stating that amortizable intangible assets may be reported separately for financial accounting purposes. As a result, the rate setter reversed [its] decision and allowed the amounts.

Our response to [DSA's] position is as follows:

The Indiana Medicaid Regulation that [DSA] quoted is in relation to tangible property to be utilized in the computation of the capital return factor. These "business operations" are not depreciable tangible assets; they are amortizable intangible assets. According to the CMS Provider Reimbursement Manual Chapter 12-18(A), we noted that when loans are in excess of the tangible assets acquired, the portion of the loan used to finance the excess is not included in the computation of the provider's equity. The detailed listing of legal rights, contracts, agreements, and licensures noted per facility are all intangible assets. Also, there are allowable expenses related to the items noted which are allowable on the cost report, i.e. licensure fees, salary costs, various contracted service fees, and vendors. If we were to allow these intangible assets to be included on the CRF, the provider would in effect be receiving double reimbursement for the noted items, for example, capitalizing the legal right to the Medicaid Certification of a home on Schedule J and also expensing the certification fees on Schedule E. Furthermore, goodwill is a non-reimbursable intangible asset for Medicaid purposes, and from the documentation received we are unable to determine what, if any, portion of the excess loan amount is attributable to goodwill. We will therefore issue an adjustment to eliminate the entire [intangible assets] amount for the Cost Report on Schedules J and K.

Note 2: Per review of the consultant workpaper, we noted that [DSA] has accumulated the land, building, business operations, equipment, and vehicle expense allocated to the facilities and subtracted that sum from the total loan balance of $3,696,000. The remaining $308,921 has been reported as working capital, and the provider has expensed the interest for that portion of the loan on L401—Working Capital Interest of the Medicaid Cost Report. Due to the explanations in note 1, and IRA form 8594 in particular, we do not feel this portion of the loan was obtained for working capital purposes. We will therefore issue an adjustment to eliminate the total working capital expensed on line 401 of the Medicaid Cost Report.

Id. at 84 (citations omitted). Clifton Gunderson provided the final audit report on April 19, 2005, and a rate change notice due to audit adjustment was issued on July 27, 2005. On September 8, 2005, DSA sent Clifton Gunderson a request for reconsideration. Appellee's App. at 233. Clifton Gunderson denied DSA's request.

On October 21, 2005, DSA submitted to FSSA a petition for review and appeal of rate change notice due to audit adjustments and Clifton Gunderson's denial of its request for reconsideration. Id. at 240-41. Both parties moved for summary judgment. In its summary judgment motion, DSA argued that (1) the intangible assets and working capital interest expenses disallowed by the audit were eligible for reimbursement under Medicaid regulations and generally accepted accounting principles ("GAAP"), and (2) Clifton Gunderson inappropriately relied on the CMS Provider Reimbursement Manual, which, according to DSA, governs Medicare and provides no authority for Medicaid reimbursement.³ Id. at 257-58.

On November 7, 2007, the ALJ issued its order on motions for summary judgment in favor of FSSA, which provided in relevant part:

I. Capital Return Factor

The first issue is whether Clifton Gunderson's disallowance of intangible assets designated as "business expenses" in calculating the capital return factor was done in accordance with [FSSA's] promulgated rules. 405 IAC 1-12-12(a) provides in pertinent part:

Providers ... shall be reimbursed for the use of facilities and equipment, regardless of whether they are owned or leased, by means of a capital return factor. The capital return factor shall be composed of a use fee to cover the use of facilities, land and equipment, and a return on equity. Such reimbursement shall be in lieu of the costs of all depreciation, interest, lease, rent, or other consideration paid for the use of the property. This includes all central office facilities and equipment whose patient or resident care-related depreciation, interest, or lease expense is allocated to the facility. (Emphasis added.)

405 IAC 1-12-16 provides in pertinent part:

(a) The basis used in computing the capital return factor shall be the historical cost of all assets used to deliver patient or resident related services, provided the following:

(1) They are in use.

(2) They are identifiable to patient or resident care.

(3) They are available for physical inspection.

(4) They are recorded in provider records. If an asset does not meet all of the requirements prescribed in this section, the cost and any associated property financing(s) or capital lease(s) shall not be included in computing the capital return factor. (b) The provider shall maintain detailed property schedules to provide a permanent record of all historical costs and balances of facilities and equipment.

Reading these provisions together and noting the continuous reference throughout the rules to "facilities and equipment" provides an understanding of the type of assets which are meant to be considered in the Capital Return Factor. The intangible assets that DSA designated as "business operations" were properly removed from the capital return factor calculation. On this issue, therefore, Summary Judgment should be entered for [FSSA].

II. Working Capital Interest Expense

The second issue is whether Clifton Gunderson's adjustment to DSA's rate to eliminate the working capital interest expense claimed by DSA was proper. DSA failed to provide documentation that the loan at issue was an operating loan; therefore, Clifton Gunderson's adjustment to eliminate the working capital interest expenses was not improper.

Appellant's App. at 23-24.

On November 21, 2007, DSA submitted to FSSA an objection to order on motions for summary judgment. On December 31, 2007, FSSA issued its decision of ultimate authority, affirming the ALJ's order. The decision stated:

After reviewing the decision of the [ALJ][] and the submittals from both par...