Gem State Homes, Inc. v. Idaho Dept. of Health and Welfare

• Decision Date: 24 June 1987
• Docket Number: No. 16415,16415
• Citation: 113 Idaho 23,740 P.2d 65
• Parties: , Medicare & Medicaid Guide P 37,060 GEM STATE HOMES, INC., an Idaho corporation, Plaintiff-Appellant-Cross Respondent, v. IDAHO DEPARTMENT OF HEALTH AND WELFARE, Defendant-Respondent-Cross Appellant.
• Court: Idaho Court of Appeals

Page 65

740 P.2d 65

113 Idaho 23, Medicare & Medicaid Guide P 37,060

GEM STATE HOMES, INC., an Idaho corporation, Plaintiff-Appellant-Cross Respondent, v. IDAHO DEPARTMENT OF HEALTH AND WELFARE, Defendant-Respondent-Cross Appellant.

No. 16415.

Court of Appeals of Idaho.

June 24, 1987.

Rehearing Denied Aug. 17, 1987.

Donald Lojek (Lojek & Hall, Ctd.), Boise, for plaintiff-appellant/cross-respondent.

Jim Jones, Atty. Gen., Steven M. Stoddard, Sp. Deputy Atty. Gen., Boise, for defendant-respondent/cross-appellant.

WALTERS, Chief Judge.

Gem State Homes, Inc., sought reimbursement from the state for a portion of its attorney fees and salaries which had been incurred under the Medicaid program. After the Department of Health and Welfare denied the claim, Gem State petitioned the district court for a review of the Department decision. The district court upheld the Department's ruling. Gem State now appeals to this Court. Gem State raises two issues: (1) whether the Department's regulation--which denies attorney fees on departmental review of an auditor's decision disallowing reimbursement of certain costs--is constitutional and consistent with statutory guidelines; and (2) whether the disallowance of salaries for two "unlicensed" employees of Gem State was proper. As part of its decision, the district court remanded the case to the Department for augmentation of the record as it pertained to other disallowances connected with a lease agreement. On cross-appeal, the Department challenges the court's order remanding for augmentation of the record, asserting the lease issue is precluded by res judicata. We affirm the decision and order of the district court.

The following facts, taken from the record, are pertinent to the issues before us. Gem State Homes, Inc., is a corporation operating homes for the mentally retarded under the auspices of the Medicaid program. The Medicaid program is a cooperative federal-state program designed to provide medical services to the needy. The federal government provides the funding, and the state administers the program under a state plan approved by the federal government, specifically by the Secretary of Health and Human Services. As a participant in the Medicaid program, Gem State pays its operating costs, then seeks reimbursement from the state for those costs covered by the Medicaid program. At the end of each year, the Department conducts an audit of the operations by Gem State. The audit determines in part what expenses will be reimbursed, and those expenses not reimbursable.

Following the Department's audit for the year ending June 30, 1982, certain expenses incurred by Gem State as attorney fees and salaries were disallowed. Gem State appealed the disallowances to the Department. The Department upheld the auditor's determination. Gem State then appealed to the district court for a judicial review of the Department's final administrative decision. Gem State was also unsuccessful at the district court, and now appeals the district court ruling to this Court.

In its appeal at the district court level, Gem State renewed a challenge to a Department decision which disallowed certain expenses related to a lease agreement between Gem State and the father of a Gem State administrator. The disallowance initially had been made in respect to a pre-1982 audit, from which Gem State had not appealed. The same determination was made in respect to the lease issue in the 1982 audit. Because the disallowance had been challenged and denied in the previous audit, the Department argued that the matter was res judicata in respect to the 1982 audit. The district court ruled that it could not decide the lease-expense issue without the transcript from the previous disallowance hearing, which was not in the record. Consequently, the court remanded for an augmentation of the record so that, if Gem State wanted to pursue an appeal of the issue, the court could review the matter with a complete record. In this appeal, the Department contests the district court decision ordering augmentation of the record. We discuss each of these questions in turn.

I. Disallowance of Attorney Fees

Gem State specifically challenges a Department regulation regarding attorney fees on appeal. That regulation (number 03.010122,02) states:

Administrative Appeals. In the case of the provider contesting in administrative appeal, the findings of an audit performed by the Department of Health and Welfare, Office of Audit, the costs of the provider's legal counsel will be reimbursed by the Medicaid Program only to the extent that the provider prevails on the issues involved. The extent that the provider prevails will be determined based on the ratio of the total dollars at issue in the hearing to the total dollars awarded to the provider by the hearing officer.

Pursuant to this regulation, the Department disallowed part of Gem State's legal expenses which had been incurred in administrative appeals.

Gem State, in the terminology of the Medicaid program, is known as a "provider." Under Medicaid and the state program implementing it, all expenses of a provider are not reimbursable. To be reimbursable, the costs must be "reasonable, ordinary, necessary and related to patient care." Idaho Department of Health and Welfare regulation number 03.10100,01. Additionally, providers are expected to incur "costs in such a manner that economical and efficient delivery of quality health care to beneficiaries will result." Id. These regulations reflect the federal mandate that payments be "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities...." 42 U.S.C. § 1396a(a)(13)(A); see Nebraska Health Care Association, Inc. v. Dunning, 575 F.Supp. 176 (D.Neb.1983).

Gem State argues that legal fees for challenging disallowed expenses should be recoverable as a reasonable and ordinary cost of doing business--as long as the challenge is made in good faith. Thus, it submits, a provider should be reimbursed for all legal expenses incurred in contesting a disallowance. Gem State urges that the regulation at issue (03.010122,02) is inconsistent with the statutory scheme and violates its rights of substantive due process and equal protection guaranteed under the fourteenth amendment. We disagree.

Gem State asserts that allowing reimbursement solely on the basis of success on appeal disregards the "reasonable, ordinary, necessary and related to patient care" standards. It likewise argues the regulation is inconsistent with the efficient and economical operation of a provider's facility. Gem State contends that under the regulation the reimbursement is not based on cost, but rather, upon money won at an administrative hearing. However, the relationship between attorney fees reimbursed based on a successful appeal, and the initially incurred expenses which were disallowed must be recognized. This is because the attorney fees won on appeal are reflective of whether the initially incurred expenses were consistent with the applicable standards. If those initial expenditures were in accord with the standards, as shown by a successful appeal, the attorney fees reimbursed will reflect as much. If the original expenditures were inconsistent with those standards, the reimbursement will reflect that situation also.

Gem State continues to urge that if an appeal is brought in good faith, reimbursement is mandatory. Good faith is not the standard by which reimbursement is made. Similarly, the cases cited by Gem State do not support reimbursement of all costs even if incurred in good faith. An expense incurred in good faith is not necessarily reasonable, ordinary, necessary, or related to patient care. The regulation at issue encourages the provider to evaluate, first, the initial expenditure. Second, the provider must evaluate the cost of appealing a disallowance. Thus the regulation encourages efficiency and economy in a provider's operations by providing an incentive to incur costs that are consistent with the standards--whether that consistency is shown in the initial audit or on appeal of a disallowance. We cannot say that such a regulation is inconsistent with the federal or state statutory guidelines.

In State v. Reed, 107 Idaho 162, 686 P.2d 842 (Ct.App.1984), this Court addressed challenges to asserted violations of substantive due process and equal protection. Substantive due process, we noted, embraces the right of citizens to be free "from arbitrary deprivations of life, liberty, or property." Id. at 167, 686 P.2d at 847. We pointed out that statutes which serve a "reasonably conceivable, legitimate [legislative] objective" do not violate those rights protected under the concept of substantive due process. See Williamson v. Lee Optical Co., 348 U.S. 483, 75 S.Ct. 461, 99 L.Ed. 563 (1955). Providing quality health care to the needy, at a cost which recognizes economy and efficiency, is undoubtedly a legitimate legislative objective. Inherent in such an objective is that those costs not reflecting economy and efficiency should generally not be incurred. Such expenses do nothing to further the accomplishment of the legislative objective. If, however, they are incurred, they should remain the responsibility of those who incur them, rather than the responsibility of the taxpayers who ultimately finance programs such as Medicaid. The regulations require that costs be "reasonable, ordinary, necessary, and related to patient care" if they are to be reimbursable. Attorney fees in general are costs which are subject to these standards. As noted, the regulation at issue encourages providers to incur costs which are reimbursable, i.e., consistent with the standards, either initially or as the result of a successful appeal. The regulation thus furthers the objectives of economical and efficient health care. We conclude that the regulation at issue does not violate guarantees of substantive...