Hutchison Nursing Home, Inc. v. Burns, 2--57121

• Decision Date: 17 December 1975
• Docket Number: No. 2--57121,2--57121
• Citation: 236 N.W.2d 312
• Parties: HUTCHISON NURSING HOME, INC., et al., Appellees, v. Kevin BURNS, Acting Commissioner of State of Iowa, Department of Social Services, and State of Iowa Department of Social Services, Appellants.
• Court: Iowa Supreme Court

Page 312

236 N.W.2d 312

HUTCHISON NURSING HOME, INC., et al., Appellees, v. Kevin BURNS, Acting Commissioner of State of Iowa, Department of Social Services, and State of Iowa Department of Social Services, Appellants.

No. 2--57121.

Supreme Court of Iowa.

Dec. 17, 1975.

Richard C. Turner, Atty. Gen., and Lorna Lawhead Williams, Asst. Atty. Gen., for appellants.

F. Richard Lyford of Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, for appellees.

Heard by MOORE, C.J., and LeGRAND, REES, REYNOLDSON and McCORMICK, JJ.

McCORMICK, Justice.

This appeal involves Iowa's medical assistance program for the needy, 'Medicaid', established in chapter 249A, The Code. Plaintiff nursing homes brought a certiorari action in district court challenging a decision of defendant commissioner that the department of social services had a right to recapture portions of depreciation taken by the nursing homes when they participated in the Medicaid program. The trial court sustained the writ. We affirm.

The question here, as it was in the trial court, is a legal one. It is whether plaintiffs' participation in the Medicaid program was subject to an unarticulated but implicit condition that if they terminated their participation in the program before exhaustion of the useful life of their depreciable assets they would be obligated to reimburse the State for accelerated depreciation. The State's claim for reimbursement equals the amount by which the depreciation plaintiffs actually took during the period of their participation exceeded the depreciation they would have taken during that period if they had used the straight-line method. The same question is involved in Iowa Department of Social Services v. West Height Manor, Inc., 236 N.W.2d 307, filed separately this date.

The parties are agreed on the amounts of accelerated depreciation involved:

We will first outline the nature and terms of the Medicaid program to put the question in context. Then plaintiffs' participation in the program will be examined. With that background, the question will be answered.

The federal government made grants available to the states for state-administered medical assistance programs by legislation enacted in 1965, effective in 1967. 42 U.S.C. § 1396 et seq. This legislation is Title XIX of the Social Security Act. It requires implementing state legislation, contemplates appropriation of state funds, and provides a number of conditions which states must meet to be eligible for the grants involved. These conditions must be met in a 'state plan' submitted to and approved by the Secretary of Health, Education, and Welfare. The federal medical assistance program differs from Medicare, established in Title XVIII of the Social Security Act, in that Medicare provides medical assistance to the aged and is entirely federally funded and administered. However, the Medicare and Medicaid programs have the purpose of providing the same kinds and quality of medical assistance to those eligible to receive it, and they have a number of administrative similarities because of that common purpose.

Iowa participates in Medicaid by reason of an enabling act which became effective July 1, 1967. Acts 62 G.A. ch. 223. Subsequently, Iowa submitted its state plan to the HEW secretary for approval. One of the federal requirements was that the state plan provide methods and procedures governing payment for Medicaid services to assure that payments were 'not in excess of reasonable charges consistent with efficiency, economy, and quality of care; * * *.' 42 U.S.C. § 1396a(a)(30). In relevant part, the Iowa plan provided:

'Basis of payment for skilled nursing homes is 'reasonable cost' using the same standards and principles and methods of computing payments Currently applicable to extended care facilities under Title XVIII (Medicare).' (Italics added).

The Iowa plan was approved on September 27, 1967. The Medicare 'reasonable cost' formula which was then applicable remained the same until Medicare regulations were changed August 1, 1970. See 20 C.F.R. §§ 405.401--405.454, effective November 12, 1966. Thus, the Iowa plan adopted the Medicare formula as it existed in 1967 and continued to exist until August 1, 1970, as the formula for Iowa Medicaid payments.

This reimbursement principle was included in the Medical Assistance Handbook for Skilled Nursing Homes, prepared and promulgated by the defendant department of social services to plaintiffs and other nursing homes seeking certification to participate in the Medicaid program. This principle was later incorporated in departmental regulation 5.1(223) adopted March 11, 1970. 1971 I.D.R. 944.

Plaintiffs entered the Medicaid program in 1967. The parties agree the relationship between plaintiffs as participants in the Medicaid program and the State as its administrator was a contractual one. Plaintiffs had to meet certain certification standards. Annual licensing was provided for. Plaintiffs had to promise to keep certain records which the State would subject to regular audit to determine reimbursement entitlement.

It is undisputed that at all material times plaintiffs were to provide skilled nursing home services to Medicaid patients in return for payment under the reasonable cost formula employed in the 1967 Medicare regulations.

The Medicaid program was administered by the State through an intermediary, Blue Cross and Blue Shield. The intermediary had the responsibility of computing the Medicaid payments due the nursing homes under the Medicare formula. The computation was made annually after an audit of the financial records of each nursing home. Before that audit, the nursing homes were given tentative payments based upon estimated reasonable charges. After the audit, adjustments were made through refund or additional payment to bring the amounts paid into balance with the amount due under the Medicare formula.

Plaintiff Hutchison Nursing Homes, Inc., terminated its participation in the Medicaid program February 1, 1971. New Haven Rest Home, Inc., terminated October 1, 1970, and Griffin Nursing Center terminated April 1, 1972.

The State, through its intermediary, had made final settlement based on audit of nursing home books for each of the years 1967, 1968, 1969, and 1970, with each of the plaintiffs. For each of those years the intermediary computed payments in accordance with the 1967 Medicare formula. That formula was contained in federal regulations, §§ 405.401--405.454, Subpart D of Part 405, Title 20, Code of Federal Regulations, effective with publication in the Federal Register on November 22, 1966. Under that formula, reimbursement for care was based upon reasonable costs as defined in the regulations, including a fixed rate of return on the equity capital of profit-making proprietary facilities. The regulations expressly provided that in computing allowable costs, 'In general, the options for accelerated depreciation allowed by the income tax laws will be permitted.' § 405.402(d). In addition, the regulations contained this relevant language:

' § 405.415 Depreciation: allowance for depreciation based on asset costs.

(a) Principle. An appropriate allowance for depreciation on buildings and equipment is an allowable cost. The depreciation must be:

(1) Identifiable and recorded in the provider's accounting records;

(2) Based on the historical cost of the asset or fair market value at the time of donation in the case of donated assets, and;

(3) Prorated...