Fralin v. Kozlowski
| Decision Date | 26 July 1994 |
| Docket Number | No. 0289-93-3,0289-93-3 |
| Citation | 18 Va.App. 697,447 S.E.2d 238 |
| Parties | W. Heywood FRALIN, Executor of the Estate of Horace G. Fralin, Deceased, et al. v. Bruce U. KOZLOWSKI, Director of Department of Medical Assistance Services, et al. Record |
| Court | Virginia Court of Appeals |
M. Caldwell Butler, Roanoke (Neil V. Birkhoff; Frank K. Friedman; Woods, Rogers & Hazlegrove, on briefs), for appellants.
Roger L. Chaffe, Sr. Asst. Atty. General , for appellees.
Present: COLEMAN, WILLIS and FITZPATRICK, JJ.
The sole issue in this appeal is whether a related third-party builder may recover a return on equity capital invested during the initial construction of a Medicaid provider nursing facility. Fralin argues that the trial court erred in upholding the Virginia Department of Medical Assistance Services ("DMAS") decision to deny Medicaid reimbursement to Medical Facilities of America ("MFA") for return on equity capital used by MFA's related third-party builder, Fralin, in the construction of nursing facilities for MFA between 1982-1986. Finding no error, we affirm.
Fralin is a Virginia corporation related to a number of partnerships that own and operate twelve nursing home and intermediate care facilities under the name of Medical Facilities of America (MFA). Each is a separate partnership, and all are Medicaid providers enrolled under the Virginia State Plan for Medical Assistance. As a Medicaid provider, each MFA partnership is reimbursed by the Commonwealth for its reasonable costs incurred while providing care to Medicaid patients. Among the reasonable costs allowed providers is the cost of acquiring facilities.
The Virginia Medicaid program is authorized under the federal Medicare statute. It is governed by a comprehensive statutory scheme structured to reimburse reasonable costs incurred by qualified providers of health services to Medicare and Medicaid patients. The applicable portion of the federal statute (42 U.S.C. § 1395X(V) )1 is further defined by the implementing regulations (42 C.F.R. § 413 et seq.) developed by the Health Care Financing Administration ("HCFA"), the federal agency responsible for administering the Medicare Program. HCFA also prepares and disseminates the Provider Reimbursement Manual ("the PRM"), which is an interpretive guideline designed to facilitate the management of reimbursement under the Medicare Program. 2
Virginia's Medicaid Program is funded by both the state and federal governments and contracts with individual health care providers such as MFA for needed services. Pursuant to Virginia Code §§ 32.1-323 to 32.1-331.17, DMAS is responsible for developing its own reimbursement system, which must meet specified federal requirements. To fulfill this obligation, DMAS prepares the Nursing Home Payment System ("NHPS"), to establish and outline the Commonwealth's approach to Medicaid reimbursement.
Under Virginia's Medicaid Program, providers are required to submit cost reports to DMAS at the conclusion of each provider's fiscal year. These reports must include in detail the total cost of patient care in the facilities, plant costs, and operating costs. The MFA facilities previously requested and received Medicaid reimbursement as qualifying providers. Each MFA partnership uses all or part of the completed facility for the provision of nursing care to Medicaid patients.
In the initial cost reports filed by MFA for the years at issue, each MFA facility included a monetary claim designated as builder's profit relating to the cost to MFA of acquiring the facilities from Fralin. When DMAS disallowed those claims for builder's profit, MFA then requested reimbursement for return on equity invested by their related builder, Fralin, as part of its reimbursable costs. 3 DMAS also denied this request for reimbursement, relying chiefly on its interpretation of the applicable sections of the PRM.
An informal fact finding conference upheld the DMAS's decision. MFA appealed. After a formal administrative hearing, the hearing officer also recommended that the return on equity reimbursement be denied. On November 27, 1991, the Director of DMAS issued a final agency decision, adopting the hearing officer's recommendations with minor modifications and denying this element of reimbursement. MFA appealed DMAS's final decision to the trial court pursuant to the Virginia Administrative Process Act, Code §§ 9-6.14:1 to 9-6.14:25. The trial court upheld the Director's decision and this appeal followed.
In Johnston-Willis Ltd. v. Kenley, 6 Va.App. 231, 369 S.E.2d 1 (1988), we outlined the review process of Code § 9-6.14:17 as follows:
These separate standards of review dictate the degree of deference, if any, to be given to an agency's decision on appeal. Where the issue is whether there is substantial evidence to support findings of fact, great deference is to be accorded the agency decision. Where the issue falls outside the specialized competence of the agency, such as constitutional and statutory interpretation issues, little deference is required to be accorded the agency decision. Where, however, the issue concerns an agency decision based on the proper application of its expert discretion, the reviewing court will not substitute its own independent judgment for that of the agency but rather will reverse the agency decision only if that decision was arbitrary and capricious. Finally, in reviewing an agency decision, the courts are required to consider the experience and specialized competence of the agency and the purposes of the basic law under which the agency acted.
Id. at 246, 369 S.E.2d at 9 (emphasis added).
DMAS is the Virginia agency charged with administering the state's Medicaid program. See Code §§ 32.1-323 et seq. DMAS possesses the requisite experience and competence necessary to determine the reimbursement due qualified providers for their reasonable costs incurred while delivering health care services. As such, its interpretations of the statutes and regulations governing Medicaid and Medicare principles of reimbursement are entitled to deference by a reviewing court and should only be overturned when found to be arbitrary and capricious.
INCORPORATION PURSUANT TO CODE § 9-6.15
Fralin first contends that because DMAS failed to incorporate properly the Provider Reimbursement Manual into the NHPS, as required by the Virginia Register Act, Code §§ 9-6.15 to 9-6.22, DMAS's reliance on PRM provisions is impermissible. We agree that DMAS did not fully comply with the procedural requirements of the Virginia Register Act and, thus, failed to incorporate by reference the PRM. 4 However, DMAS's failure to incorporate the PRM is not dispositive of this case.
The Virginia Register Act requires state agencies to file with the Registrar of Regulations copies of textual materials adopted by reference in state regulations and to make such materials available to the public for review and copying. 5 The purpose of these detailed procedural requirements is "to satisfy the need for public availability of information respecting the regulations of state agencies." Code § 9-6.15.
Although DMAS failed to formally incorporate the PRM into its NHPS manual, the language of the manual indicates that the agency intended to utilize the federal policy manual to calculate reimbursements for reasonable costs. The introduction to the NHPS manual states:
The cost report data used in the rate calculation shall be only those allowable, reasonable cost items which are acceptable under the Medicare principles of reimbursement, except as modified herein.
(Emphasis added.) The NHPS manual makes an additional reference to following the "Medicare guidelines" when computing return on equity allowances for proprietary providers. 6
The record establishes that MFA and Fralin were aware of and possessed copies of the PRM. Fralin has, in fact, based portions of its argument on interpretations of specific provisions of the PRM. For example, in its brief Fralin refers to the PRM in support of its position. 7
Moreover, MFA entered into a contract with the Medicaid program and, pursuant to federal and state law, agreed to comply with and accept reimbursement in accordance with DMAS's reimbursement regulations and policies. These regulations are incorporated by reference into each provider agreement and signed annually by each provider. MFA agreed to participate in the program and was fully aware that the PRM was to be utilized.
Finally, the record supports the conclusion that both parties relied on the PRM as a definitive source of information regarding reasonable costs reimbursement questions. A January 1988 letter from the Virginia Attorney General's office to counsel for Fralin, outlining a settlement agreement concerning an earlier reimbursement dispute, makes clear that Fralin recognized the applicability of the PRM provisions as valid interpretive guidelines under Virginia's Medicaid Program. 8
Virginia's 1982 NHPS manual provides no clear guidance on the issue at bar. While the NHPS describes the appropriate return on equity capital as "10% of equity capital computed in accordance with Medicare guidelines," NHPS contains no definitive statement concerning whether return on equity capital invested during initial facility construction may be included as a reimbursable cost. Therefore, in denying payment to MFA, DMAS properly exercised its authority to resolve this question in a manner consistent with Medicare principles of reimbursement by turning to the PRM for clarification.
PRM Chapter X, "Costs to related organizations," delineates the provisions for reimbursing related parties consistent with 42 C.F.R. § 413.17 (). 9 PRM-15 § 1005 provides, in part:
The related organization's costs include all reasonable costs, direct...
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