Independent Nursing Home Ass'n v. Smith

• Decision Date: 16 July 1991
• Docket Number: No. 90-1382,90-1382
• Citation: 936 F.2d 793
• Parties: , Medicare&Medicaid Gu 39,556 INDEPENDENT NURSING HOME ASSOCIATION, Plaintiff-Appellee, v. J. Clinton SMITH, M.D., in his official capacity as Director of the State of Mississippi Division of Medicaid in the Office of the Governor, Defendant-Appellant. MISSISSIPPI HEALTH CARE ASSOCIATION, Plaintiff-Appellee, v. J. Clinton SMITH, M.D. in his official capacity as Director of the State of Mississippi Division of Medicaid in the Office of the Governor, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 793

936 F.2d 793

34 Soc.Sec.Rep.Ser. 16, Medicare&Medicaid Gu 39,556

INDEPENDENT NURSING HOME ASSOCIATION, Plaintiff-Appellee, v. J. Clinton SMITH, M.D., in his official capacity as Director

of the State of Mississippi Division of Medicaid

in the Office of the Governor,

Defendant-Appellant.

MISSISSIPPI HEALTH CARE ASSOCIATION, Plaintiff-Appellee, v. J. Clinton SMITH, M.D. in his official capacity as Director

of the State of Mississippi Division of Medicaid

in the Office of the Governor,

Defendant-Appellant.

No. 90-1382.

United States Court of Appeals Fifth Circuit.

July 16, 1991.

Thomas E. Childs, Jr., Russell & Childs, Fulton, Miss., Mitzi E. Dease, Sp. Asst. Atty. Gen., Jackson, Miss., for J. Clinton Smith, M.D.

Barry K. Cockrell, Richard W. Cowart, Watkins, Ludlam & Stennis, Jackson, Miss., for Independent Nursing Home Ass'n.

John L. Maxey, II, S. Mark Wann, Jackson, Miss., for Mississippi Health Care Ass'n.

Appeal from the United States District Court for the Southern District of Mississippi.

ON PETITION FOR REHEARING ^*

(Opinion April 11, 1991, 5th Cir.1991, 928 F.2d 181)

Before WISDOM, KING, and JOLLY, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

J. Clinton Smith, Director of the Mississippi Division of Medicaid (hereinafter "DOM"), appeals from a judgment below that permanently enjoins him from enforcing a 1984 amendment to Mississippi's state Medicaid plan. The district court issued the injunction on the basis that the 1984 amendment was passed without public notice, ostensibly required under 42 CFR Sec. 447.205(a); Smith argues that the amendment fell within an exception to Sec. 447.205(a) and that, therefore, public notice was unnecessary. We find ourselves in agreement with Smith and thus reverse.

I

The facts that underpin this appeal are somewhat more esoteric than most. DOM is the Mississippi agency responsible for implementing the state's Medicaid program. Like similar agencies in other states, DOM receives a federal subsidy for its Medicaid efforts so long as its Long-Term Care Reimbursement Plan complies with federal requirements. The Health Care Financing Administration division of the Department of Health and Human Services ("HCFA") is the federal agency that oversees state Medicaid plans; as such, HCFA approval of a state's plan--and any amendment thereto--is a prerequisite to the aforementioned federal financial assistance.

In mid-1984, Congress passed the Deficit Reduction Act ("DEFRA"), Sec. 2314 of which modified the federal financial assistance requirements for both Medicare and Medicaid. In the only modification pertinent to this appeal, DEFRA limited the amount of Medicare and Medicaid payments that states could pay out upon the sale or transfer of a nursing home facility. The Medicare amendment took the guise of a subparagraph (O) appended by Sec. 2314 to 42 U.S.C. Sec. 1395x(v)(1) (Supp.1985): It provided (1) that a transferred nursing home must be "re-evaluated" at a cost no higher than the lesser of the acquisition cost paid by the record owner as of July 18, 1984, and the new owner's acquisition cost (i.e., the purchase price); and (2) that when "recapturing" depreciation from the nursing home transferor, the government was to continue to use the method in place as of June 1, 1984. As for the limitations on Medicaid payments, Sec. 2314 effected these by amending 42 U.S.C. Sec. 1396a(a)(13)(B) (Supp.1985) to read as follows:

(a) Contents. A State plan for medical assistance must--

* * * * * *

(13) Provide--

* * * * * *

(B) that the State shall provide assurances satisfactory to the Secretary that the payment methodology utilized by the State for payments to hospitals, skilled nursing facilities, and intermediate care facilities can reasonably be expected not to increase such payments, solely as a result of a change of ownership, in excess of the increase which would result from the application of [42 U.S.C. Sec. 1395x(v)(1)(O).];

Thus, after DEFRA, a state could guarantee federal funding for its Medicaid work only if it could adequately assure that, in the event of a nursing home transfer, its plan would mete out to the new owner no more of a payment increase than was permissible under Medicare generally and 42 U.S.C. Sec. 1395x(v)(1)(O) specifically. ¹

The adjustments brought on by DEFRA spurred HCFA into action. By letter dated August 30, 1984, it advised DOM of DEFRA's passage and recommended that DOM review its plan in order "to ensure [that it] does not result in capital payments that might exceed the new requirements." Unsurprisingly, DOM did just that, concluding that its plan, itself recently amended by Transmittal 84-9, required further modification if it were to comply with the dictates of 42 U.S.C. Sec. 1396a(a)(13)(B). Accordingly, DOM drafted a new plan amendment, Transmittal 84-36, which in November 1984 it submitted to HCFA for approval.

Essentially, Transmittal 84-36 wrought only two changes, both of which were substantively similar to the Medicare changes made by 42 U.S.C. Sec. 1395x(v)(1)(O). First 84-36 recast DOM's "re-evaluation" of assets formula for nursing home transfers. Under Transmittal 84-9, the value of a nursing home to the new owner was, roughly speaking, the lesser of (1) its purchase price, (2) its fair market value, and (3) the sum of its historical depreciable basis prior to sale and a (variable) portion of the difference between that basis and the home's fair market value. The Transmittal 84-36 method--like the new Medicare method--relegated the new owner to the lower of his purchase price and the acquisition cost borne by the July 18, 1984 record owner. Unlike the 42 U.S.C. Sec. 1395x(v)(1)(O) formula, however, 84-36 included a few extra provisions that DOM believed would further restrain any upward re-evaluation in nursing home value, such as a provision that, for purposes of determining a new owner's interest expense, precluded a new owner from treating as indebtedness any amount greater than the indebtedness that saddled the old owner as of the sale date. Second, DOM's Transmittal drastically altered its plan sections that dealt with "recapture of depreciation," junking the 84-9 system in favor of the very method that DEFRA mandated for Medicare.

On December 27, 1984, HCFA made several written "comments" regarding 84-36 and notified DOM that it was suspending review of the Transmittal pending DOM's response to these comments. One such comment presumably was proffered out of concern that DOM had misconstrued the impact of DEFRA on state Medicaid plans:

... The State should be advised that although it may adopt the Medicare provision as specified at section 1861(v)(1)(O), the Medicaid statute only mandates a limit on the increase in the amount a State is allowed to pay for specified capital costs as a result of a change in ownership. The Medicaid statute does not require that the Medicare provisions be adopted by each State and does not mandate a specific methodology that must be used for the revaluation of assets. [Emphasis in original.]

This exhortation notwithstanding, DOM opted to make only minor, unimportant adjustments to its original draft of 84-36. It then submitted this slightly reconstituted version of 84-36 for HCFA sanction, which it received on May 1, 1985.

DOM did not, however, provide public notice before incorporating Transmittal 84-36 into its Medicaid plan. Although a regulation--promulgated and enforced by HCFA--ordinarily requires Medicaid agencies to "provide public notice of any significant change in its methods and standards for setting payment rates for services," 42 CFR Sec. 447.205(a), an HCFA official advised DOM that 84-36 fell within the exception to Sec. 447.205(a) codified at 42 CFR Sec. 447.205(b) and thus demanded no such notice:

(b) When notice is not required. Notice is not required if--

(1) The change is being made to conform to Medicare methods or levels of reimbursement;

(2) The change is required by the court order; or

(3) The change is based on...