Matter of Park Nursing Center, Inc.
| Decision Date | 21 March 1983 |
| Docket Number | Adv. No. 81-0264-W.,Bankruptcy No. 79-03378-W |
| Citation | 28 BR 793 |
| Parties | In the Matter of PARK NURSING CENTER, INC., a Michigan non-profit corporation, Debtor. PARK NURSING CENTER, INC., Plaintiff, v. MICHIGAN DEPARTMENT OF SOCIAL SERVICES, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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Roger H. Leemis, Detroit, Mich., for plaintiff.
Ronald W. Carlson, Lansing, Mich., for defendant.
In the matter before the Court, Park Nursing Center, Inc. (Park) challenges the plant cost limit component of the prospective reimbursement system of the Michigan Medicaid program as developed and administered by the Michigan Department of Social Services (DSS).
Park is a Michigan non-profit corporation operating as debtor in possssion under Chapter 11 of the Bankruptcy Code. Park is licensed as a skilled Long Term Care Facility (LTCF) by the Michigan Department of Public Health (MDPH). Skilled LTCFs provide the highest level of nursing care for the elderly and chronically ill. LTCFs are reimbursed for services rendered to Medicaid-eligible residents by state money and matching federal funds under the Grants to States for Medical Assistance Programs. Title XIX, § 1901 et seq. Social Security Act of 1935, codified at 42 U.S.C. § 1396 et seq. Facilities entitled to reimbursement for services rendered to Medicaid patients pursuant to Title XIX are also known as "providers".
DSS is a department of the executive branch of government of the State of Michigan. It is the single state agency under the terms of the Social Security Act, 42 U.S.C. § 1396a(a)(5), designated to administer the Medicaid program in Michigan.
To participate in the optional federal funding program, a state must submit a State Plan for Medical Assistance to the United States Department of Health and Human Services (HHS)1 for its approval. 42 U.S.C. § 1396. Provided the state plan conforms to federal regulations, 42 U.S.C. § 1396(a)1-41, the Secretary of HHS must, with certain exceptions, approve the plan. 42 U.S.C. § 1396a(b).
The State Plan reimburses LTCFs based on a method of determining the "allowable costs"2 of medical services up to a limit or ceiling. Prior to July 1, 1978, Michigan employed a "retrospective" method of reimbursement; subsequent to July 1, 1978, Michigan has utilized a "prospective" method.
Park asserts the development and application of the plant cost limit component of the prospective method is contrary to: (1) the Social Security Act, (2) the Michigan Administrative Procedures Act, (3) the Equal Protection and Due Process clauses of the United States Constitution, and (4) its provider agreement.
Upon an in-depth examination of the record herein, the Court adopts the proposed findings of fact and conclusions of law submitted by DSS with the exception of those conclusions relating to lack of jurisdiction. The complexity of the case, however, compels the Court to elaborate further upon such findings and conclusions.
Prior to 1972 Congress had not provided guidance as to how reimbursement rates for nursing care facilities participating in Medicaid should be set. In 1972, however, Congress enacted a standard for reviewing the method of setting state rates:
42 U.S.C. § 1396a(a)(13)(E)(1974) () (emphasis added).
The motivation of Congress in enacting the above standard has been enunciated as follows:
This addition was motivated by Congress\' desire to give guidance to states in setting reimbursement rates which would avoid the then existing problem of flat rates. That type reimbursement methodology had led to overpayment to some facilities, resulting in private profit at public expense, and underpayment to others, providing too little reimbursement to ensure good care for the residents. At the same time, Congress sought to avoid mandating that states follow the cumbersome Medicare reimbursement formula set forth in Title XVIII of the Social Security Act of 1935, which provides for reimbursement of "reasonable costs." 42 C.F.R. § 405.454. The compromise standard of "reasonable cost related basis" was intended to give states the flexibility to experiment with various reimbursement methodologies, including—but not limited to the Medicare method of "retrospective reasonable costs" reimbursement, see 41 F.R. 27300 (July 1, 1976), in order to develop acceptable cost finding techniques while eliminating arbitrary flat rate reimbursement plans.
Coalition of Michigan Nursing Homes v. Dempsey, 537 F.Supp. 451, 455 (E.D.Mich. 1982).
In 1980, Congress replaced the "reasonable cost-related" standard for reimbursement with a new standard which states:
42 U.S.C. § 1396a(a)(13)(E) (), P.L. 96-499 § 962(b), effective October 1, 1980 (enacted December 5, 1980) (emphasis added). The new standard, known as the Boren Amendment, was motivated by Congress' continuing dissatisfaction with the amount of money being expended and the desire to eliminate the paperwork requirements involved in administering the reasonable cost related standard. Dempsey, 537 F.Supp. at 455-456, (citing 46 F.R. 47966 (September 30, 1981); 42 C.F.R. §§ 447.274-447.296 (removed September 30, 1981, 46 F.R. 47971) and the Michigan State Plan Attachment 4.19-D).
Prior to July 1, 1978, DDS, with the approval of the United States Department of Health, Education and Welfare (HEW), utilized the federal Medicare method of retrospective reasonable cost as the sole basis of state Medicaid reimbursement. The retrospective system was constructed of two component parts: the plant cost component and the variable cost component. The plant cost component consisted of a facility's costs for interest, tax, depreciation and finance fees. The variable cost component consisted of the operating costs of the facility. The retrospective reimbursement system required audits at the end of the fiscal year, with adjustments made for allowable costs. Facilities were reimbursed for costs up to a single specified ceiling.3
On July 1, 1978, Michigan instituted the prospective reimbursement plan. The prospective method has two payment limits: one for variable costs and one for plant costs. It is the plant cost limit which is challenged by Park in the present action. The plant costs include interest, depreciation, finance fees and property taxes.4
The conception, development and implementation of the prospective reimbursement system was instituted by direction of the Michigan legislature via Appropriations Acts. See e.g., 1973 P.A. 131, § 18; 1974 P.A. 241, § 22; 1975 P.A. 241, § 23(5). As required by the Appropriations Acts, a governor's task force was formed to develop a reimbursement system. The task force consisted of representatives of the nursing home industry, the DDS, the Department of Health, the Department of Management and Budget, and the legislature.
In 1975, a sub-committee of the third governor's task force5 developed a proposal for a reimbursement rate where the plant cost limit would be set on the basis of a survey of the most recently constructed nursing homes and an analysis of the historical cost of those facilities.6 The proposal was submitted to the governor and the legislature in 1976, and subsequently approved.
In determining the plant cost limit, DSS surveyed 17 nursing homes constructed between January of 1975 and December of 1977.7 The survey was based on unaudited data submitted by the certified public accountants, financial and administrative officers of the various facilities.8
The plant cost limit was calculated by finding the newly constructed nursing home average for interest expense, depreciation expense, finance fees and property taxes.
The calculation of the average interest expense was based on a 75% debt-asset ratio (loan to value ratio) limit to borrowing9 and a 9.54% interest rate weighted average. The calculation of the depreciation expense was based on 40 years straight line depreciation for buildings, 18.9 years for building improvements and 100% patient occupancy. The calculation of the property tax factor excluded non-profit homes for purpose of calculation only and was also based on 100% occupancy.
DSS updated the survey results to July 1, 1978 by use of an adjustment for inflation, based on the United States Department of Commerce Construction Cost Index (USDCCCI). In adjusting for inflation the facilities' costs were updated from their certification for occupancy...
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