Indiana Dept. of Public Welfare v. Crescent Manor, Inc., 2-1179

CourtCourt of Appeals of Indiana
Citation416 N.E.2d 470
Docket NumberNo. 2-1179,2-1179
PartiesINDIANA DEPARTMENT OF PUBLIC WELFARE, Appellant (Defendant Below), v. CRESCENT MANOR, INC., Appellee (Plaintiff Below). A 333.
Decision Date16 February 1981

Theodore L. Sendak, Atty. Gen. of Ind., Janis L. Summers, Deputy Atty. Gen., Indianapolis, for appellant.

Paul G. Roland, Ruckelshaus, Roland & O'Connor, Indianapolis, for appellee.

YOUNG, Presiding Judge.

The Indiana Department of Public Welfare appeals the trial court judgment holding invalid the Department's action limiting the Medicaid reimbursement rate paid to Crescent Manor Nursing Home for services rendered to publicly assisted patients. Crescent Manor successfully argued in the trial court that the Department's disallowance of part of Crescent Manor's lease costs in setting its reimbursement rate was unsupported by substantial evidence, arbitrary and capricious, in excess of statutory authority, and contrary to law. From the trial court's judgment ordering the Department to include in Crescent Manor's reimbursement rate its full lease costs, the Department appeals. 1 We reverse, holding that the trial court exceeded the limits of judicial review when it reversed the administrative decision of the Department of Public Welfare.

Crescent Manor, Inc. operates an intermediate care 40 bed nursing home in Hancock County, Indiana and participates as a provider of intermediate nursing home services under the federal-state Medicaid Program. The Medicaid Program, enacted as Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., provides for federal-state sharing of costs for medical and rehabilitation services afforded to certain qualified individuals "whose income and resources are insufficient to meet the costs of necessary medical services." 42 U.S.C. § 1396. This program of medical assistance is administered by the states through various plans which were subject to approval by the Secretary of Health, Education and Welfare. Within the boundaries established by the federal Act and its implementing regulations, the state determines the eligibility requirements for medical assistance, the criteria which "providers of services" must meet before the state will enter into a "provider agreement," a condition precedent to provider participation in the program, and the amount of reimbursement that will be made to participating providers for furnishing services to the state's Medicaid recipients.

Crescent Manor, in late 1975, filed a rate request of $17.50 per patient per day with the Department's fiscal agent, Indiana Blue Cross-Blue Shield (IBC-BS), to be effective, if approved, January 1, 1976. As fiscal agent, IBC-BS reviews rate requests by providers participating in the Medicaid program for the Department. Included within the $17.50 per diem figure was Crescent Manor's lease costs broken down to the per diem cost of $3.31 per patient. The Department in the earlier approved rate of $15.75 per diem, had allowed $2.00 per patient per day on the same lease cost figure of $3.31. IBC-BS, using a study of the weighted average of intermediate care nursing homes' ownership costs, concluded that the lease cost was imprudent and unreasonable and denied Crescent Manor's rate request. Instead of the requested rate, IBC-BS granted Crescent Manor a per diem rate of $15.90, allowing only $1.75 towards its lease costs. After the IBC-BS decision was affirmed by the Department, Crescent Manor appealed to the trial court. The trial court reversed the Department, finding that its decision was unsupported by substantial evidence, arbitrary and capricious, and in excess of statutory authority. It remanded to the Department with an order to pay Crescent Manor its full lease costs.

Although the administrative determination under review in this case is not an "administrative adjudication" within the meaning of the Administrative Adjudication Act, the standard of review set out in the Administrative Adjudication Act serves to guide judicial review of the Department's decision. Indiana Department of Public Welfare v. Anderson, (1976) 171 Ind.App. 375, 357 N.E.2d 267. The Administrative Adjudication Act establishes the following standard for judicial review of administrative determinations:

On such judicial review, if the agency has complied with the procedural requirements of this act, and its finding, decision or determination is supported by substantial, reliable and probative evidence, such agency's finding, decision or determination shall not be set aside or disturbed.

If such court finds such finding, decision or determination of such agency is:

(1) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law; or

(2) Contrary to constitutional right, power, privilege or immunity; or

(3) In excess of statutory jurisdiction, authority or limitations, or short of statutory right; or

(4) Without observance of procedure required by law; or

(5) Unsupported by substantial evidence,

The court may order the decision or determination of the agency set aside. The court may remand the case to the agency for further proceedings and may compel agency action unlawfully withheld or unreasonably delayed.

Ind.Code 4-22-1-18.

The trial court found that the Department's action in disallowing the full lease costs was in excess of statutory authority. We first review, therefore, the operative statutory scheme governing the payment of provider claims. The federal Medicaid Act contained no specific provision governing payment to intermediate care nursing facilities. The only federal statutory provision in 1975 governing payment for provider services rendered by intermediate care nursing facilities such as Crescent Manor generally required the Department "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). This provision prohibited the Department from making excessive payments to nursing homes, it set the "upper limit" for Medicaid payments to nursing homes; it did not, however, require the Department to pay that upper limit. Briarcliff Haven, Inc. v. Department of Human Resources, (N.D.Ga.1975) 403 F.Supp.1355. Rather, reimbursement to nursing homes was to be determined by state-set levels which could include all or part of the cost of nursing home care. See 42 U.S.C. § 1396d(a).

The applicable Indiana statutory provision, Ind.Code 12-1-7-17 provides in part the following:

The fees and charges paid to providers for all medical services rendered or materials supplied shall be the usual and ordinary fees or charges paid in the community for services or materials commensurate with the usual and ordinary standards of service in such counties; however, payment of skilled nursing facility and intermediate care facility services, shall, pursuant to section 1902(a)(13)(E) of the federal Social Security Act (42 U.S.C.A. 1396a(a)(13)(E), 1396a(a)(13)(E)), be in accordance with a prospective prenegotiated payment rate predicated on a reasonable cost related basis, with a growth or profit factor, as determined in accordance with generally accepted accounting principles and methods, and written standards and criteria, as established by the state department of public welfare.

42 U.S.C. § 1396a(a)(13)(E), to which Ind.Code 12-1-7-17 refers, was adopted by Congress in 1972 and required the states effective July 1, 1976 to provide payment to skilled and intermediate nursing care facilities on a "reasonable cost related basis." However, as explained above, at the time the disputed rate was set, the federal Medicaid provisions required only that the state's plan of reimbursement 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). Because we find no conflict between Ind.Code 12-1-7-17 and 42 U.S.C. § 1396a(a)(30), the fact that Ind.Code 12-1-7-17 anticipated 42 U.S.C. § 1396a(a)(13)(E)'s mandate that payment be on a reasonable cost related basis has no adverse legal significance to this case.

At the time Crescent Manor's 1976 reimbursement rate was set, the Department had not promulgated regulations establishing rate setting standards. There was, however, in use a manual, "Medicaid Nursing Home Rate Setting Guidelines and Procedures," formulated by IBC-BS for the Department which established internal guidelines and procedures for determination of rate increase requests. The manual provided on the one hand that "(m)anagement fees and rental or lease payments to a non-related organization entered into with an arm's length transaction are includable in allowable costs at the cost to the provider." The manual also imposed an overall guideline of reasonableness upon reimbursement of all allowable costs. "Reasonable cost for the purposes of rate-setting .... shall include necessary and proper costs incurred in rendering services to patients. Implicit is the expectation that the provider seek to minimize its cost and that its actual costs do not exceed what a prudent and cost-conscious buyer pays for a given item or service." The Department found that Crescent Manor's lease was a product of arms length negotiations between non-related parties. Thus, under manual guidelines, the lease cost was an allowable cost. The Department also found, however, that the lease cost was unreasonable because it was in excess of what a prudent and cost-conscious lessee would pay for the lease. There is nothing in the Department's action inconsistent with the manual guidelines. Full payment of the lease costs merely because an allowable cost is not automatic, but rather, is dependent upon a finding of reasonableness. The manual guidelines themselves we conclude are a reasonable administrative interpretation of the underlying statutes, both federal and state, and violate neither the Indiana statutory directive that payment be...

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